Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - WHOLE FOODS MARKET INC | wfmq12017ex322.htm |
| EX-32.1 - EXHIBIT 32.1 - WHOLE FOODS MARKET INC | wfmq12017ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - WHOLE FOODS MARKET INC | wfmq12017ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - WHOLE FOODS MARKET INC | wfmq12017ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended January 15, 2017; or |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________. |
Commission File Number: 0-19797
WHOLE FOODS MARKET, INC.
(Exact name of registrant as specified in its charter)
Texas | 74-1989366 | |
(State of | (IRS employer | |
incorporation) | identification no.) | |
550 Bowie Street
Austin, Texas 78703
(Address of principal executive offices)
512-477-4455
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | |
Non-accelerated filer o | Smaller reporting company o | |
(Do not check if a smaller reporting company) | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s common stock, no par value, outstanding as of February 10, 2017 was 318,564,535 shares.
Whole Foods Market, Inc.
Form 10-Q
Table of Contents
Page | |
Part I. Financial Information
Item 1. Financial Statements.
Whole Foods Market, Inc.
Consolidated Balance Sheets (unaudited)
(In millions)
Assets | January 15, 2017 | September 25, 2016 | |||||
Current assets: | |||||||
Cash and cash equivalents | $ | 350 | $ | 351 | |||
Short-term investments - available-for-sale securities | 374 | 379 | |||||
Restricted cash | 125 | 122 | |||||
Accounts receivable | 251 | 242 | |||||
Merchandise inventories | 554 | 517 | |||||
Prepaid expenses and other current assets | 123 | 167 | |||||
Deferred income taxes | 210 | 197 | |||||
Total current assets | 1,987 | 1,975 | |||||
Property and equipment, net of accumulated depreciation and amortization | 3,460 | 3,442 | |||||
Goodwill | 710 | 710 | |||||
Intangible assets, net of accumulated amortization | 72 | 74 | |||||
Deferred income taxes | 111 | 100 | |||||
Other assets | 42 | 40 | |||||
Total assets | $ | 6,382 | $ | 6,341 | |||
Liabilities and Shareholders’ Equity | |||||||
Current liabilities: | |||||||
Current installments of long-term debt and capital lease obligations | $ | 3 | $ | 3 | |||
Accounts payable | 288 | 307 | |||||
Accrued payroll, bonus and other benefits due team members | 421 | 407 | |||||
Dividends payable | 45 | 43 | |||||
Other current liabilities | 543 | 581 | |||||
Total current liabilities | 1,300 | 1,341 | |||||
Long-term debt and capital lease obligations, less current installments | 1,048 | 1,048 | |||||
Deferred lease liabilities | 653 | 640 | |||||
Other long-term liabilities | 89 | 88 | |||||
Total liabilities | 3,090 | 3,117 | |||||
Commitments and contingencies | |||||||
Shareholders’ equity: | |||||||
Common stock, no par value, 1,200 shares authorized; 377.0 shares issued; 318.5 and 318.3 shares outstanding at 2017 and 2016, respectively | 2,944 | 2,933 | |||||
Common stock in treasury, at cost, 58.5 and 58.7 shares at 2017 and 2016, respectively | (2,018 | ) | (2,026 | ) | |||
Accumulated other comprehensive loss | (33 | ) | (32 | ) | |||
Retained earnings | 2,399 | 2,349 | |||||
Total shareholders’ equity | 3,292 | 3,224 | |||||
Total liabilities and shareholders’ equity | $ | 6,382 | $ | 6,341 | |||
The accompanying notes are an integral part of these consolidated financial statements.
1
Whole Foods Market, Inc.
Consolidated Statements of Operations (unaudited)
(In millions, except per share amounts)
Sixteen weeks ended | |||||||
January 15, 2017 | January 17, 2016 | ||||||
Sales | $ | 4,918 | $ | 4,829 | |||
Cost of goods sold and occupancy costs | 3,268 | 3,188 | |||||
Gross profit | 1,650 | 1,641 | |||||
Selling, general and administrative expenses | 1,417 | 1,373 | |||||
Pre-opening expenses | 21 | 13 | |||||
Relocation, store closure and lease termination costs | 41 | 3 | |||||
Operating income | 171 | 252 | |||||
Interest expense | (15 | ) | (7 | ) | |||
Investment and other income | — | 4 | |||||
Income before income taxes | 156 | 249 | |||||
Provision for income taxes | 61 | 92 | |||||
Net income | $ | 95 | $ | 157 | |||
Basic earnings per share | $ | 0.30 | $ | 0.47 | |||
Weighted average shares outstanding | 318.2 | 337.0 | |||||
Diluted earnings per share | $ | 0.30 | $ | 0.46 | |||
Weighted average shares outstanding, diluted basis | 318.7 | 338.2 | |||||
Dividends declared per common share | $ | 0.140 | $ | 0.135 | |||
The accompanying notes are an integral part of these consolidated financial statements.
2
Whole Foods Market, Inc.
Consolidated Statements of Comprehensive Income (unaudited)
(In millions)
Sixteen weeks ended | |||||||
January 15, 2017 | January 17, 2016 | ||||||
Net income | $ | 95 | $ | 157 | |||
Other comprehensive loss, net of tax: | |||||||
Foreign currency translation adjustments | (1 | ) | (10 | ) | |||
Other comprehensive loss, net of tax | (1 | ) | (10 | ) | |||
Comprehensive income | $ | 94 | $ | 147 | |||
The accompanying notes are an integral part of these consolidated financial statements.
3
Whole Foods Market, Inc.
Consolidated Statements of Shareholders’ Equity (unaudited)
Sixteen weeks ended January 15, 2017 and fiscal year ended September 25, 2016
(In millions)
Shares outstanding | Common stock | Common stock in treasury | Accumulated other comprehensive loss | Retained earnings | Total shareholders’ equity | ||||||||||||
Balances at September 27, 2015 | 348.9 | $ | 2,904 | $ | (1,124 | ) | $ | (28 | ) | $ | 2,017 | $ | 3,769 | ||||
Net income | — | — | — | — | 507 | 507 | |||||||||||
Other comprehensive loss, net of tax | — | — | — | (4 | ) | — | (4 | ) | |||||||||
Dividends ($0.54 per common share) | — | — | — | — | (174 | ) | (174 | ) | |||||||||
Issuance of common stock pursuant to team member stock plans | 1.1 | (23 | ) | 42 | — | — | 19 | ||||||||||
Purchase of treasury stock | (31.7 | ) | — | (944 | ) | — | — | (944 | ) | ||||||||
Tax benefit related to exercise of team member stock options | — | 3 | — | — | — | 3 | |||||||||||
Share-based payment expense | — | 49 | — | — | — | 49 | |||||||||||
Other | — | — | — | — | (1 | ) | (1 | ) | |||||||||
Balances at September 25, 2016 | 318.3 | 2,933 | (2,026 | ) | (32 | ) | 2,349 | 3,224 | |||||||||
Net income | — | — | — | — | 95 | 95 | |||||||||||
Other comprehensive loss, net of tax | — | — | — | (1 | ) | — | (1 | ) | |||||||||
Dividends ($0.14 per common share) | — | — | — | — | (45 | ) | (45 | ) | |||||||||
Issuance of common stock pursuant to team member stock plans | 0.2 | (3 | ) | 8 | — | — | 5 | ||||||||||
Share-based payment expense | — | 14 | — | — | — | 14 | |||||||||||
Balances at January 15, 2017 | 318.5 | $ | 2,944 | $ | (2,018 | ) | $ | (33 | ) | $ | 2,399 | $ | 3,292 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Whole Foods Market, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In millions)
Sixteen weeks ended | |||||||
January 15, 2017 | January 17, 2016 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 95 | $ | 157 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 189 | 147 | |||||
Share-based payment expense | 14 | 16 | |||||
LIFO expense | — | 2 | |||||
Deferred income tax expense | (24 | ) | (30 | ) | |||
Excess tax benefit related to exercise of team member stock options | — | (1 | ) | ||||
Accretion of premium/discount on marketable securities | — | 1 | |||||
Deferred lease liabilities | 18 | 8 | |||||
Other | 4 | 2 | |||||
Net change in current assets and liabilities: | |||||||
Accounts receivable | (9 | ) | 6 | ||||
Merchandise inventories | (37 | ) | (67 | ) | |||
Prepaid expenses and other current assets | 44 | (7 | ) | ||||
Accounts payable | (19 | ) | (16 | ) | |||
Accrued payroll, bonus and other benefits due team members | 14 | (25 | ) | ||||
Other current liabilities | (6 | ) | 28 | ||||
Net change in other long-term liabilities | 1 | 11 | |||||
Net cash provided by operating activities | 284 | 232 | |||||
Cash flows from investing activities | |||||||
Development costs of new locations | (150 | ) | (91 | ) | |||
Other property and equipment expenditures | (95 | ) | (88 | ) | |||
Purchases of available-for-sale securities | (200 | ) | (133 | ) | |||
Sales and maturities of available-for-sale securities | 205 | 220 | |||||
Payment for purchase of acquired entities, net of cash acquired | — | (11 | ) | ||||
Other investing activities | (4 | ) | (6 | ) | |||
Net cash used in investing activities | (244 | ) | (109 | ) | |||
Cash flows from financing activities | |||||||
Purchases of treasury stock | — | (634 | ) | ||||
Common stock dividends paid | (43 | ) | (45 | ) | |||
Issuance of common stock | 5 | 7 | |||||
Excess tax benefit related to exercise of team member stock options | — | 1 | |||||
Proceeds from long-term borrowings | — | 999 | |||||
Proceeds from revolving line of credit | — | 300 | |||||
Payments on long-term debt and capital lease obligations | — | (302 | ) | ||||
Other financing activities | — | (7 | ) | ||||
Net cash provided by (used in) financing activities | (38 | ) | 319 | ||||
Effect of exchange rate changes on cash and cash equivalents | — | (1 | ) | ||||
Net change in cash, cash equivalents, and restricted cash | 2 | 441 | |||||
Cash, cash equivalents, and restricted cash at beginning of period | 473 | 364 | |||||
Cash, cash equivalents, and restricted cash at end of period | $ | 475 | $ | 805 | |||
Supplemental disclosure of cash flow information: | |||||||
Federal and state income taxes paid | $ | 76 | $ | 137 | |||
Interest paid | $ | 26 | $ | — | |||
The accompanying notes are an integral part of these consolidated financial statements.
5
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (unaudited)
January 15, 2017
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Whole Foods Market, Inc. and its consolidated subsidiaries (collectively “Whole Foods Market,” “Company,” or “we”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2016. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation. Where appropriate, we have reclassified prior year financial statements to conform to current year presentation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The Company reports its results of operations on a 52- or 53-week fiscal year ending on the last Sunday in September. The first fiscal quarter is 16 weeks, the second and third quarters each are 12 weeks, and the fourth quarter is 12 or 13 weeks. Fiscal years 2017 and 2016 are 52-week years. The Company has one operating segment and a single reportable segment, natural and organic foods supermarkets.
The following is a summary of percentage sales by geographic area for the periods indicated:
Sixteen weeks ended | |||||
January 15, 2017 | January 17, 2016 | ||||
Sales: | |||||
United States | 97.1 | % | 97.1 | % | |
Canada and United Kingdom | 2.9 | 2.9 | |||
Total sales | 100.0 | % | 100.0 | % | |
The following is a summary of the percentage of net long-lived assets by geographic area as of the dates indicated:
January 15, 2017 | September 25, 2016 | ||||
Long-lived assets, net: | |||||
United States | 97.5 | % | 97.5 | % | |
Canada and United Kingdom | 2.5 | 2.5 | |||
Total long-lived assets, net | 100.0 | % | 100.0 | % | |
(2) Summary of Significant Accounting Policies
Recent Accounting Pronouncements
Effective September 26, 2016, the Company early adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows: Restricted Cash ,” which amends the Accounting Standards Codification Topic 230. The amendments, which require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash, were adopted on a retrospective basis. The adoption of these amendments did not have a significant effect on the Company’s financial statements.
6
The following table provides a brief description of recently issued accounting pronouncements that have not yet been adopted. Early adoption is permitted for all updates unless stated.
Standard | Description | Effective Date | Effect on financial statements and other significant matters |
ASU No. 2017-04 Simplifying the Test for Goodwill Impairment (Topic 350) | The amendments eliminate Step 2 from the goodwill impairment test. Instead, an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be recognized; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss should also be considered, if applicable. The amendments should be applied on a prospective basis. | First quarter of fiscal year ending September 27, 2020 | We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements. |
ASU No. 2016-13 Measurement of Credit Losses on Financial Instruments(Topic 326) | The amendments guide on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. The amendments require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments also require that credit losses on available-for-sale debt securities be presented as an allowance. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. | First quarter of fiscal year ending September 29, 2021 | We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements. |
ASU No. 2016-09 Improvements to Employee Share-Based Payment Accounting (Topic 718) | The amendments aim to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, and certain classifications on the statement of cash flows. The amendments should be applied on either a prospective, retrospective, or modified-retrospective basis depending on the subtopic. | First quarter of fiscal year ending September 30, 2018 | We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements. |
ASU No. 2016-08 Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (Topic 606) | The amendments, which do not change the core principle of the guidance in Topic 606, clarify the implementation guidance on principal versus agent considerations, including how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The amendments may be applied on either a full or modified retrospective basis. | First quarter of fiscal year ending September 29, 2019 | We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements. |
ASU No. 2016-07 Simplifying the Transition to the Equity Method of Accounting (Topic 323) | The amendments eliminate the requirement to retroactively apply the equity method of accounting when an investment qualifies for the use of the equity method due to an increase in the level of ownership interest or degree of influence. The amendments should be applied on a prospective basis. | First quarter of fiscal year ending September 30, 2018 | We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements. |
7
Standard | Description | Effective Date | Effect on financial statements and other significant matters |
ASU No. 2016-04 Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force) (Subtopic 405-20) | The amendments require entities to recognize liabilities related to the sale of prepaid stored-value products redeemable for goods, services or cash as financial liabilities in the scope of ASC 405. Additionally, the new guidance amends ASC 405-20 to include a narrow scope exception requiring entities to recognize breakage for these liabilities in a way that is consistent with how gift card breakage will be recognized under the new revenue recognition standard. The amendments may be applied on either a full or modified retrospective basis. | First quarter of fiscal year ending September 29, 2019 | We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements. |
ASU No. 2016-02 Leases (Topic 842) | The amendments require lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The amendments should be applied on a modified retrospective basis. | First quarter of fiscal year ending September 27, 2020 | The adoption of this ASU will result in a significant increase to the Company’s Consolidated Balance Sheets for lease liabilities and right-of-use assets, and the Company is currently evaluating the other effects of adoption of this ASU on its Consolidated Financial Statements. |
ASU No. 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10) | The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet in year of adoption. Early adoption is permitted for only certain amendments of the update. | First quarter of fiscal year ending September 29, 2019 | We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements. |
ASU No. 2015-17 Balance Sheet Classification of Deferred Taxes (Topic 740) | The amendments simplify the presentation of deferred income taxes by requiring that all deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. The amendments may be applied on either a prospective or retrospective basis. | First quarter of fiscal year ending September 30, 2018 | We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements. |
ASU No. 2015-11 Simplifying the Measurement of Inventory (Topic 330) | The amendments, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost and net realizable value. The amendments should be applied on a prospective basis. | First quarter of fiscal year ending September 30, 2018 | We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements. |
ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) | The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized. The amendments may be applied on either a full or modified retrospective basis. | First quarter of fiscal year ending September 29, 2019 | We are currently evaluating the timing, method, and impact that the adoption of these provisions will have on the Company’s consolidated financial statements. |
8
(3) Fair Value Measurements
The Company holds money market fund investments that are classified as cash equivalents that are measured at fair value on a recurring basis based on quoted prices in active markets for identical assets. The Company also holds available-for-sale securities that are valued using a series of multi-dimensional relational models and series of matrices with standard inputs obtained from readily available pricing sources and other observable market data, such as benchmark yields and base spread. Equity interests measured at fair value are based on quoted prices for similar assets in active markets.
The carrying amounts of accrued payroll, bonuses and other benefits due team members, and other accrued expenses approximate fair value because of their short maturities. Store closure reserves and estimated workers’ compensation claims are recorded at net present value to approximate fair value.
Assets Measured at Fair Value on a Recurring Basis
The Company held the following financial assets measured at fair value on a recurring basis based on the hierarchy levels indicated (in millions):
January 15, 2017 | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total | |||||||||||
Cash equivalents: | |||||||||||||||
Money market fund | $ | 23 | $ | — | $ | — | $ | 23 | |||||||
Marketable securities - available-for-sale: | |||||||||||||||
Municipal bonds | — | 31 | — | 31 | |||||||||||
Variable-rate demand notes | — | 343 | — | 343 | |||||||||||
Total | $ | 23 | $ | 374 | $ | — | $ | 397 | |||||||
September 25, 2016 | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total | |||||||||||
Cash equivalents: | |||||||||||||||
Money market fund | $ | 62 | $ | — | $ | — | $ | 62 | |||||||
Commercial paper | — | 30 | — | 30 | |||||||||||
Municipal bonds | — | 46 | — | 46 | |||||||||||
Marketable securities - available-for-sale: | |||||||||||||||
Commercial paper | — | 30 | — | 30 | |||||||||||
Municipal bonds | — | 26 | — | 26 | |||||||||||
Variable rate demand notes | — | 323 | — | 323 | |||||||||||
Total | $ | 62 | $ | 455 | $ | — | $ | 517 | |||||||
The estimated fair value of the Company’s long-term debt is included in Note 8 “Long-Term Debt.”
Assets Measured at Fair Value on a Nonrecurring Basis
During the sixteen weeks ended January 15, 2017, the Company recorded fair value adjustments, based on hierarchy level 3 inputs, totaling approximately $34 million related to certain locations for which asset value exceeded expected future cash flows, which were primarily included in the “Relocation, store closure and lease termination cost” line item on the Consolidated Statement of Operations. These impairment charges reduced the carrying value of related long-term assets to an immaterial fair value.
(4) Investments
The Company holds investments primarily in marketable securities that are classified as short-term available-for-sale securities. The Company held the following investments at fair value as of the dates indicated (in millions):
January 15, 2017 | September 25, 2016 | ||||||
Short-term marketable securities - available-for-sale: | |||||||
Commercial paper | $ | — | $ | 30 | |||
Municipal bonds | 31 | 26 | |||||
Variable rate demand notes | 343 | 323 | |||||
Total short-term marketable securities | $ | 374 | $ | 379 | |||
Gross unrealized holding gains and losses were not material at January 15, 2017 or September 25, 2016. There were no available-for-sale securities in an unrealized loss position at January 15, 2017. Available-for-sale securities totaling approximately $33 million were in unrealized loss positions at September 25, 2016. The aggregate value of available-for-sale securities in a continuous unrealized loss position for greater than 12 months was not material at September 25, 2016. The Company did not
9
recognize any other-than-temporary impairments during the sixteen weeks ended January 15, 2017 or fiscal year ended September 25, 2016. The average effective maturity of the Company’s short-term available-for-sale securities was less than one month at January 15, 2017 and September 25, 2016.
At January 15, 2017 and September 25, 2016, the Company held approximately $23 million and $19 million in equity interests which were accounted for using the cost method of accounting. Equity interests accounted for using the equity method were not material at January 15, 2017 or September 25, 2016.
(5) Goodwill and Other Intangible Assets
There were no additions or adjustments to goodwill during the sixteen weeks ended January 15, 2017 or January 17, 2016. Additions of other intangible assets were not material during the sixteen weeks ended January 15, 2017 or the same period of the prior fiscal year. The components of intangible assets as of the dates indicated were as follows (in millions):
January 15, 2017 | September 25, 2016 | ||||||||||||||
Gross carrying amount | Accumulated amortization | Gross carrying amount | Accumulated amortization | ||||||||||||
Definite-lived contract-based | $ | 120 | $ | (57 | ) | $ | 120 | $ | (55 | ) | |||||
Indefinite-lived contract-based | 9 | 9 | |||||||||||||
Total | $ | 129 | $ | (57 | ) | $ | 129 | $ | (55 | ) | |||||
Amortization expense associated with intangible assets was not material during the sixteen weeks ended January 15, 2017 or the same period of the prior fiscal year. Future amortization expense associated with the net carrying amount of definite-lived intangible assets is estimated to be as follows (in millions):
Remainder of fiscal year 2017 | $ | 4 | |
Fiscal year 2018 | 5 | ||
Fiscal year 2019 | 5 | ||
Fiscal year 2020 | 5 | ||
Fiscal year 2021 | 4 | ||
Future fiscal years | 40 | ||
Total | $ | 63 | |
(6) Store and Facility Closures
During the sixteen weeks ended January 15, 2017, the Company announced plans to close nine stores and three commissary kitchens. The Company recorded non-cash charges of approximately $34 million to adjust the long-lived assets of these locations to fair value. These charges are included in the “Relocation, store closure and lease termination cost” line item on the Consolidated Statement of Operations. The Company expects to incur additional charges of approximately $30 million related to these closures in the second quarter of fiscal year 2017 largely relating to lease terminations.
(7) Reserves for Closed Properties
The following table provides a summary of activity in reserves for closed properties during the sixteen weeks ended January 15, 2017 and fiscal year ended September 25, 2016 (in millions):
January 15, 2017 | September 25, 2016 | ||||||
Beginning balance | $ | 26 | $ | 28 | |||
Additions | 1 | 6 | |||||
Usage | (2 | ) | (10 | ) | |||
Adjustments | 1 | 2 | |||||
Ending balance | $ | 26 | $ | 26 | |||
(8) Long-Term Debt
Credit Agreement
The Company’s revolving credit facility under a credit agreement dated as of November 2, 2015 (the “Credit Agreement”) provides for an unsecured revolving credit facility in the aggregate principal amount of $500 million, which may be increased from time to time by up to $250 million. The Credit Agreement also provides for a letter of credit subfacility of up to $250 million.
10
At January 15, 2017, the Company had no amounts outstanding under the credit facility. Commitment fees paid on undrawn amounts were not material during the sixteen weeks ended January 15, 2017. At January 15, 2017, the Company was in compliance with all applicable debt covenants.
During the sixteen weeks ended January 17, 2016, the Company borrowed and repaid $300 million under the Credit Agreement.
Senior Notes
The Company has outstanding $1.0 billion of senior notes (the “Notes”). The Notes bear interest at a fixed rate equal to 5.2% per year, payable semiannually, and mature on December 3, 2025. The effective interest rate of the Notes, which includes interest on the Notes and amortization of discount and issuance costs, is approximately 5.28%. At January 15, 2017, the Company was in compliance with all applicable debt covenants. The estimated fair value of the Notes at January 15, 2017, based on observable market prices (Level 2), exceeded the carrying value by approximately $70 million.
The Senior Notes issued on December 3, 2015 and Credit Agreement are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by certain wholly owned domestic subsidiaries of the Company (the “Guarantors”). For additional information regarding the Guarantors see Note 14, Guarantor Financial Statement Information. The components of long-term debt as of the dates indicated were as follows (in millions):
January 15, 2017 | September 25, 2016 | ||||||
5.2% senior notes due 2025 | $ | 1,000 | $ | 1,000 | |||
Less: unamortized discount and debt issuance costs related to senior notes | (7 | ) | (7 | ) | |||
Carrying value of senior notes | 993 | 993 | |||||
Capital lease obligations | 58 | 58 | |||||
Total long-term debt and capital lease obligations | 1,051 | 1,051 | |||||
Less: current installments | (3 | ) | (3 | ) | |||
Total long-term debt and capital lease obligations, less current installments | $ | 1,048 | $ | 1,048 | |||
(9) Income Taxes
Income taxes resulted in an effective tax rate of approximately 39.0% for the sixteen weeks ended January 15, 2017 compared to approximately 37.0% for the same period of the prior fiscal year. The lower effective tax rate for the sixteen weeks ended January 17, 2016 is due to the recognition of an environmental tax credit related to the development of a new store.
(10) Shareholders’ Equity
Dividends per Common Share
The following table provides a summary of dividends declared per common share during fiscal year 2017 to date and fiscal year 2016 (in millions, except per share amounts):
Date of declaration | Dividend per common share | Date of record | Date of payment | Total amount | |||||||
Fiscal year 2017: | |||||||||||
November 2, 2016(1) | $ | 0.14 | January 13, 2017 | January 24, 2017 | $ | 45 | |||||
Fiscal year 2016: | |||||||||||
November 4, 2015 | $ | 0.135 | January 15, 2016 | January 26, 2016 | $ | 44 | |||||
March 9, 2016 | 0.135 | April 8, 2016 | April 19, 2016 | 44 | |||||||
June 7, 2016 | 0.135 | July 1, 2016 | July 12, 2016 | 43 | |||||||
September 22, 2016 | 0.135 | October 3, 2016 | October 14, 2016 | 43 | |||||||
(1) Dividend accrued at January 15, 2017
Treasury Stock
As of January 15, 2017, one share repurchase program remains in effect, with prior programs having been fully utilized, expired or cancelled. The following table outlines the share repurchase program authorized by the Company’s Board of Directors (“Board”), and the related repurchase activity as of January 15, 2017 (in millions):
Effective date | Expiration date | Amount authorized | Cost of repurchases | Authorization available | |||||||||
November 4, 2015 | Not applicable | $ | 1,000 | $ | 557 | $ | 443 | ||||||
11
Share repurchase activity for the sixteen weeks ended January 15, 2017 was immaterial. Share repurchase activity for the sixteen weeks ended January 17, 2016 was as follows (in millions, except per share amounts):
January 17, 2016 | |||
Number of common shares acquired | 21.2 | ||
Average price per common share acquired | $ | 29.96 | |
Total cost of common shares acquired | $ | 634 | |
The Company reissued approximately 0.2 million treasury shares at cost of approximately $8 million and approximately 0.3 million treasury shares at cost of approximately $11 million to satisfy the issuance of common stock pursuant to team member stock plans during the sixteen weeks ended January 15, 2017 and January 17, 2016, respectively. At January 15, 2017 and September 25, 2016, the Company held in treasury approximately 58.5 million shares and 58.7 million shares, respectively, totaling approximately $2.0 billion.
(11) Earnings per Share
The computation of basic earnings per share is based on the number of weighted average common shares outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of incremental common shares deemed outstanding from the assumed exercise of stock options and the dilutive effect of restricted stock awards. A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in millions, except per share amounts):
Sixteen weeks ended | |||||||
January 15, 2017 | January 17, 2016 | ||||||
Net income (numerator for basic and diluted earnings per share) | $ | 95 | $ | 157 | |||
Weighted average common shares outstanding (denominator for basic earnings per share) | 318.2 | 337.0 | |||||
Incremental common shares attributable to dilutive effect of share-based awards | 0.5 | 1.2 | |||||
Weighted average common shares outstanding and potential additional common shares outstanding (denominator for diluted earnings per share) | 318.7 | 338.2 | |||||
Basic earnings per share | $ | 0.30 | $ | 0.47 | |||
Diluted earnings per share | $ | 0.30 | $ | 0.46 | |||
The computation of diluted earnings per share for the sixteen weeks ended January 15, 2017 and January 17, 2016 does not include share-based awards to purchase approximately 24.5 million shares and 18.7 million shares of common stock, respectively, due to their antidilutive effect.
(12) Share-Based Payments
Share-based payment expense, primarily included in the “Selling, general and administrative expenses” line item on the Consolidated Statements of Operations, totaled approximately $14 million during the sixteen weeks ended January 15, 2017, and totaled approximately $16 million for the same period of the prior fiscal year.
At January 15, 2017 and September 25, 2016, approximately 30.3 million shares and 29.8 million shares of the Company’s common stock, respectively, were available for future stock incentive grants. At January 15, 2017 and September 25, 2016, there was approximately $61 million and $73 million of unrecognized share-based payment expense, respectively, related to unvested stock options, net of estimated forfeitures, related to approximately 10.3 million shares and 10.5 million shares, respectively. The Company anticipates this expense to be recognized over a weighted average period of 2.7 years.
(13) Commitments and Contingencies
The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters in a manner that we believe best serves the interests of our stakeholders. From time to time we are a
12
party to legal proceedings including matters involving shareholder claims, personnel and employment issues, personal injury, product liability, protecting our intellectual property, regulatory practices, acquisitions and other proceedings arising in the ordinary course of business. These matters have not resulted in any material losses to date. Certain litigation cases have been certified as class or collective actions and may seek substantial damages.
Our primary contingencies are associated with insurance and self-insurance obligations and litigation matters. Additionally, the Company has retention agreements with certain members of Company management which provide for payments under certain circumstances including change of control. Estimation of our insurance and self-insurance liabilities requires significant judgments, and actual claim settlements and associated expenses may differ from our current provisions for loss. We have exposures to loss contingencies arising from pending or threatened litigation for which assessing and estimating the outcomes of these matters involve substantial uncertainties.
The Company evaluates contingencies on an ongoing basis and has established loss provisions for matters in which losses are probable and the amount of loss can be reasonably estimated, and is not currently a party to any legal proceeding that management believes could have a material adverse effect on our results of operations. Insurance and legal settlement liabilities are included in the “Other current liabilities” line item on the Consolidated Balance Sheets. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities.
(14) Guarantor Financial Statement Information
The Senior Notes issued on December 3, 2015 and Credit Agreement are fully and unconditionally guaranteed, jointly and severally, on an unsecured, unsubordinated basis by certain wholly owned domestic subsidiaries of the Company (the “Guarantors”). Supplemental condensed consolidating financial information of the Company, including such information for the Guarantors is presented below:
13
Consolidated Balance Sheets (unaudited)
(In millions)
January 15, 2017 | |||||||||||||||
Assets | Parent/Issuer | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||
Current assets: | |||||||||||||||
Cash and cash equivalents | $ | — | $ | 252 | $ | 98 | $ | — | $ | 350 | |||||
Short-term investments - available-for-sale securities | — | 374 | — | — | 374 | ||||||||||
Restricted cash | — | 118 | 7 | — | 125 | ||||||||||
Accounts receivable | — | 229 | 22 | — | 251 | ||||||||||
Intercompany receivable | — | 695 | — | (695 | ) | — | |||||||||
Merchandise inventories | — | 467 | 87 | — | 554 | ||||||||||
Prepaid expenses and other current assets | — | 106 | 17 | — | 123 | ||||||||||
Deferred income taxes | — | 210 | — | — | 210 | ||||||||||
Total current assets | — | 2,451 | 231 | (695 | ) | 1,987 | |||||||||
Property and equipment, net of accumulated depreciation and amortization | — | 3,075 | 385 | — | 3,460 | ||||||||||
Investments in consolidated subsidiaries | 4,695 | 105 | 474 | (5,274 | ) | — | |||||||||
Goodwill | — | 703 | 7 | — | 710 | ||||||||||
Intangible assets, net of accumulated amortization | 1 | 62 | 9 | — | 72 | ||||||||||
Deferred income taxes | — | 105 | 6 | — | 111 | ||||||||||
Other assets | — | 15 | 27 | — | 42 | ||||||||||
Total assets | $ | 4,696 | $ | 6,516 | $ | 1,139 | $ | (5,969 | ) | $ | 6,382 | ||||
Liabilities and Shareholders’ Equity | |||||||||||||||
Current liabilities: | |||||||||||||||
Current installments of long-term debt and capital lease obligations | $ | — | $ | 3 | $ | — | $ | — | $ | 3 | |||||
Accounts payable | — | 209 | 79 | — | 288 | ||||||||||
Intercompany payable | 360 | — | 335 | (695 | ) | — | |||||||||
Accrued payroll, bonus and other benefits due team members | — | 395 | 26 | — | 421 | ||||||||||
Dividends payable | 45 | — | — | — | 45 | ||||||||||
Other current liabilities | 6 | 500 | 37 | — | 543 | ||||||||||
Total current liabilities | 411 | 1,107 | 477 | (695 | ) | 1,300 | |||||||||
Long-term debt and capital lease obligations, less current installments | 993 | 48 | 7 | — | 1,048 | ||||||||||
Deferred lease liabilities | — | 603 | 50 | — | 653 | ||||||||||
Other long-term liabilities | — | 88 | 1 | — | 89 | ||||||||||
Total liabilities | 1,404 | 1,846 | 535 | (695 | ) | 3,090 | |||||||||
Commitments and contingencies | |||||||||||||||
Total shareholders’ equity | 3,292 | 4,670 | 604 | (5,274 | ) | 3,292 | |||||||||
Total liabilities and shareholders’ equity | $ | 4,696 | $ | 6,516 | $ | 1,139 | $ | (5,969 | ) | $ | 6,382 | ||||
14
Consolidated Balance Sheets (unaudited)
(In millions)
September 25, 2016 | |||||||||||||||
Assets | Parent/Issuer | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||
Current assets: | |||||||||||||||
Cash and cash equivalents | $ | — | $ | 254 | $ | 97 | $ | — | $ | 351 | |||||
Short-term investments - available-for-sale securities | — | 379 | — | — | 379 | ||||||||||
Restricted cash | — | 114 | 8 | — | 122 | ||||||||||
Accounts receivable | — | 216 | 26 | — | 242 | ||||||||||
Intercompany receivable | — | 649 | — | (649 | ) | — | |||||||||
Merchandise inventories | — | 441 | 76 | — | 517 | ||||||||||
Prepaid expenses and other current assets | — | 150 | 17 | — | 167 | ||||||||||
Deferred income taxes | — | 197 | — | — | 197 | ||||||||||
Total current assets | — | 2,400 | 224 | (649 | ) | 1,975 | |||||||||
Property and equipment, net of accumulated depreciation and amortization | — | 3,063 | 379 | — | 3,442 | ||||||||||
Investments in consolidated subsidiaries | 4,593 | 103 | 472 | (5,168 | ) | — | |||||||||
Goodwill | — | 702 | 8 | — | 710 | ||||||||||
Intangible assets, net of accumulated amortization | 1 | 63 | 10 | — | 74 | ||||||||||
Deferred income taxes | — | 94 | 6 | — | 100 | ||||||||||
Other assets | — | 16 | 24 | — | 40 | ||||||||||
Total assets | $ | 4,594 | $ | 6,441 | $ | 1,123 | $ | (5,817 | ) | $ | 6,341 | ||||
Liabilities and Shareholders’ Equity | |||||||||||||||
Current liabilities: | |||||||||||||||
Current installments of long-term debt and capital lease obligations | $ | — | $ | 3 | $ | — | $ | — | $ | 3 | |||||
Accounts payable | — | 227 | 80 | — | 307 | ||||||||||
Intercompany payable | 317 | — | 333 | (650 | ) | — | |||||||||
Accrued payroll, bonus and other benefits due team members | — | 381 | 26 | — | 407 | ||||||||||
Dividends payable | 43 | — | — | — | 43 | ||||||||||
Other current liabilities | 17 | 536 | 28 | — | 581 | ||||||||||
Total current liabilities | 377 | 1,147 | 467 | (650 | ) | 1,341 | |||||||||
Long-term debt and capital lease obligations, less current installments | 993 | 48 | 7 | — | 1,048 | ||||||||||
Deferred lease liabilities | — | 592 | 48 | — | 640 | ||||||||||
Other long-term liabilities | — | 87 | 1 | — | 88 | ||||||||||
Total liabilities | 1,370 | 1,874 | 523 | (650 | ) | 3,117 | |||||||||
Commitments and contingencies | |||||||||||||||
Total shareholders’ equity | 3,224 | 4,567 | 600 | (5,167 | ) | 3,224 | |||||||||
Total liabilities and shareholders’ equity | $ | 4,594 | $ | 6,441 | $ | 1,123 | $ | (5,817 | ) | $ | 6,341 | ||||
15
Consolidated Statements of Operations (unaudited)
(In millions)
Sixteen weeks ended January 15, 2017 | |||||||||||||||
Parent/Issuer | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||
Sales | $ | — | $ | 4,672 | $ | 314 | $ | (68 | ) | $ | 4,918 | ||||
Cost of goods sold and occupancy costs | — | 3,110 | 224 | (66 | ) | 3,268 | |||||||||
Gross profit | — | 1,562 | 90 | (2 | ) | 1,650 | |||||||||
Selling, general and administrative expenses | — | 1,337 | 80 | — | 1,417 | ||||||||||
Pre-opening expenses | — | 18 | 3 | — | 21 | ||||||||||
Relocation, store closure and lease termination costs | — | 40 | 1 | — | 41 | ||||||||||
Operating income | — | 167 | 6 | (2 | ) | 171 | |||||||||
Interest expense | (15 | ) | — | — | — | (15 | ) | ||||||||
Investment and other expense | — | — | (1 | ) | 1 | — | |||||||||
Equity in net income of subsidiaries | 104 | 2 | 1 | (107 | ) | — | |||||||||
Income before income taxes | 89 | 169 | 6 | (108 | ) | 156 | |||||||||
Provision for income taxes | (6 | ) | 65 | 2 | — | 61 | |||||||||
Net income | $ | 95 | $ | 104 | $ | 4 | $ | (108 | ) | $ | 95 | ||||
Sixteen weeks ended January 17, 2016 | |||||||||||||||
Parent/Issuer | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||
Sales | $ | — | $ | 4,584 | $ | 289 | $ | (44 | ) | $ | 4,829 | ||||
Cost of goods sold and occupancy costs | — | 3,029 | 202 | (43 | ) | 3,188 | |||||||||
Gross profit | — | 1,555 | 87 | (1 | ) | 1,641 | |||||||||
Selling, general and administrative expenses | — | 1,294 | 79 | — | 1,373 | ||||||||||
Pre-opening expenses | — | 10 | 3 | — | 13 | ||||||||||
Relocation, store closure and lease termination costs | — | 3 | — | — | 3 | ||||||||||
Operating income | — | 248 | 5 | (1 | ) | 252 | |||||||||
Interest expense | (7 | ) | — | — | — | (7 | ) | ||||||||
Investment and other income (expense) | — | 5 | (2 | ) | 1 | 4 | |||||||||
Equity in net income of subsidiaries | 161 | 3 | 6 | (170 | ) | — | |||||||||
Income before income taxes | 154 | 256 | 9 | (170 | ) | 249 | |||||||||
Provision for income taxes | (3 | ) | 93 | 2 | — | 92 | |||||||||
Net income | $ | 157 | $ | 163 | $ | 7 | $ | (170 | ) | $ | 157 | ||||
16
Consolidated Statements of Comprehensive Income (unaudited)
(In millions)
Sixteen weeks ended January 15, 2017 | |||||||||||||||
Parent/Issuer | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||
Net income | $ | 95 | $ | 104 | $ | 4 | $ | (108 | ) | $ | 95 | ||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Foreign currency translation adjustments | — | (4 | ) | 3 | — | (1 | ) | ||||||||
Other comprehensive income (loss), net of tax | — | (4 | ) | 3 | — | (1 | ) | ||||||||
Comprehensive income | $ | 95 | $ | 100 | $ | 7 | $ | (108 | ) | $ | 94 | ||||
Sixteen weeks ended January 17, 2016 | |||||||||||||||
Parent/Issuer | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||
Net income | $ | 157 | $ | 163 | $ | 7 | $ | (170 | ) | $ | 157 | ||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Foreign currency translation adjustments | — | 4 | (14 | ) | — | (10 | ) | ||||||||
Other comprehensive income (loss), net of tax | — | 4 | (14 | ) | — | (10 | ) | ||||||||
Comprehensive income (loss) | $ | 157 | $ | 167 | $ | (7 | ) | $ | (170 | ) | $ | 147 | |||
17
Condensed Consolidated Statements of Cash Flows (unaudited)
(In millions)
January 15, 2017 | |||||||||||||||
Parent/Issuer | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||
Net cash provided by (used in) operating activities | $ | (26 | ) | $ | 293 | $ | 17 | $ | — | $ | 284 | ||||
Cash flows from investing activities | |||||||||||||||
Purchases of property, plant and equipment | — | (226 | ) | (19 | ) | — | (245 | ) | |||||||
Purchases of available-for-sale securities | — | (200 | ) | — | — | (200 | ) | ||||||||
Sales and maturities of available-for-sale securities | — | 205 | — | — | 205 | ||||||||||
Payment for purchase of acquired entities, net of cash acquired | — | — | — | — | — | ||||||||||
Intercompany activity | 64 | — | — | (64 | ) | — | |||||||||
Other investing activities | — | (4 | ) | — | — | (4 | ) | ||||||||
Net cash provided by (used in) investing activities | 64 | (225 | ) | (19 | ) | (64 | ) | (244 | ) | ||||||
Cash flows from financing activities | |||||||||||||||
Purchases of treasury stock | — | — | — | — | — | ||||||||||
Common stock dividends paid | (43 | ) | — | — | — | (43 | ) | ||||||||
Issuance of common stock | 5 | — | — | — | 5 | ||||||||||
Excess tax benefit related to exercise of team member stock options | — | — | — | — | — | ||||||||||
Proceeds from long-term borrowings | — | — | — | — | — | ||||||||||
Proceed for revolving line of credit | — | — | — | — | — | ||||||||||
Payments on long-term debt and capital lease obligations | — | — | — | — | — | ||||||||||
Intercompany activity | — | (66 | ) | 2 | 64 | — | |||||||||
Other financing activities | — | — | — | — | — | ||||||||||
Net cash provided by (used in) financing activities | (38 | ) | (66 | ) | 2 | 64 | (38 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | — | — | ||||||||||
Net change in cash, cash equivalents, and restricted cash | — | 2 | — | — | 2 | ||||||||||
Cash, cash equivalents, and restricted cash at beginning of period | — | 368 | 105 | — | 473 | ||||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | — | $ | 370 | $ | 105 | $ | — | $ | 475 | |||||
18
Condensed Consolidated Statements of Cash Flows (unaudited)
(In millions)
January 17, 2016 | |||||||||||||||
Parent/Issuer | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||
Net cash provided by operating activities | $ | — | $ | 219 | $ | 13 | $ | — | $ | 232 | |||||
Cash flows from investing activities | |||||||||||||||
Purchases of property, plant and equipment | — | (156 | ) | (23 | ) | — | (179 | ) | |||||||
Purchases of available-for-sale securities | — | (133 | ) | — | — | (133 | ) | ||||||||
Sales and maturities of available-for-sale securities | — | 220 | — | — | 220 | ||||||||||
Payment for purchase of acquired entities, net of cash acquired | — | — | (11 | ) | — | (11 | ) | ||||||||
Intercompany activity | (319 | ) | — | — | 319 | — | |||||||||
Other investing activities | — | (6 | ) | — | — | (6 | ) | ||||||||
Net cash used in investing activities | (319 | ) | (75 | ) | (34 | ) | 319 | (109 | ) | ||||||
Cash flows from financing activities | |||||||||||||||
Purchases of treasury stock | (634 | ) | — | — | — | (634 | ) | ||||||||
Common stock dividends paid | (45 | ) | — | — | — | (45 | ) | ||||||||
Issuance of common stock | 7 | — | — | — | 7 | ||||||||||
Excess tax benefit related to exercise of team member stock options | 1 | — | — | — | 1 | ||||||||||
Proceeds from long-term borrowings | 999 | — | — | — | 999 | ||||||||||
Proceeds from revolving line of credit | 300 | — | — | — | 300 | ||||||||||
Payments on long-term debt and capital lease obligations | (302 | ) | — | — | — | (302 | ) | ||||||||
Intercompany activity | — | 305 | 14 | (319 | ) | — | |||||||||
Other financing activities | (7 | ) | — | — | — | (7 | ) | ||||||||
Net cash provided by financing activities | 319 | 305 | 14 | (319 | ) | 319 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | (1 | ) | — | (1 | ) | ||||||||
Net change in cash, cash equivalents, and restricted cash | — | 449 | (8 | ) | — | 441 | |||||||||
Cash, cash equivalents, and restricted cash at beginning of period | — | 261 | 103 | — | 364 | ||||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | — | $ | 710 | $ | 95 | $ | — | $ | 805 | |||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Disclaimer on Forward-looking Statements
Certain statements in this report and from time to time in other filings with the Securities and Exchange Commission, news releases, reports, and other written and oral communications made by us and our representatives, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by words such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “see,” “continue,” “could,” “can,” “may,” “will,” “likely,” “depend,” “should,” “would,” “plan,” “predict,” “target,” and similar expressions, and include references to assumptions and relate to our future prospects, developments and business strategies. Except for the historical information contained herein, the matters discussed in this analysis are forward-looking statements that involve risks and uncertainties that may cause our actual results to be materially different from such forward-looking statements and could materially adversely affect our business, financial condition, operating results and cash flows. These risks and uncertainties include general business conditions, changes in overall economic conditions that impact consumer spending, the impact of competition and other factors which are often beyond the control of the Company, as well other risks listed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2016 and risks and uncertainties not presently known to us or that we currently deem immaterial. We wish to caution you that you should not place undue reliance on such forward-looking statements, which speak only as of the date on which they were made. We do not undertake any obligation to update forward-looking statements.
19
This information should be read in conjunction with the consolidated financial statements and the accompanying notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2016.
Overview
Whole Foods Market is the leading natural and organic foods supermarket, the first national “Certified Organic” grocer, and uniquely positioned as America’s Healthiest Grocery Store™. We are a mission-driven company that aims to set the standards of excellence in food retailing. Our success is measured by customer satisfaction, team member happiness and excellence, return on invested capital, active environmental stewardship, service in our local and global communities, and win-win supplier partnerships, among other things. Through our growth, we have had a significant and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance. The Company incorporated in 1978, opened the first Whole Foods Market store in 1980, and as of January 15, 2017, operated 467 stores: 446 stores in 42 U.S. states and the District of Columbia; 12 stores in Canada; and 9 stores in the United Kingdom. We have one operating segment, natural and organic foods supermarkets.
Our continued growth depends on our ability to increase sales in our comparable stores and open new stores. Our growth strategy includes opening new stores in existing and new areas and operating those stores successfully. The Company’s average weekly sales and gross profit as a percentage of sales are typically highest in the second and third fiscal quarters, and lowest in the fourth fiscal quarter due to seasonally slower sales during the summer months. Gross profit as a percentage of sales is typically lower in the first fiscal quarter due to the product mix of holiday sales.
Sales of a store are deemed to be comparable commencing in the fifty-seventh full week after the store was opened or acquired. The calculation of comparable store sales excludes sales from relocated and remodeled stores with square footage changes greater than 20% to reduce the impact of square footage changes on the comparison. Stores closed for eight or more days are excluded from the comparable store base from the first fiscal week of closure until re-opened for a full fiscal week. Comparable store sales growth is calculated on a same-calendar-week to same-calendar-week constant currency basis. Companies define comparable store sales differently; thus growth rates across companies may not be comparable.
The Company reports its results of operations on a 52- or 53-week fiscal year ending on the last Sunday in September. Fiscal years 2017 and 2016 are 52-week years.
Economic and Industry Factors
Food retailing is a large, intensely competitive industry and is evolving at an incredibly fast pace. Consumers have more options than ever before. Our competition includes but is not limited to local, regional, national and international conventional and specialty supermarkets, natural foods stores, warehouse membership clubs, online retailers, smaller specialty stores, farmers’ markets, restaurants and home delivery, and meal solution companies, each of which competes with us on the basis of store ambiance and experience, product selection and quality, customer service, price, convenience or a combination of these factors.
We offer the broadest selection of high-quality natural and organic products, with a strong emphasis on perishable foods. We believe our high quality standards differentiate our stores from other supermarkets and enable us to attract and maintain a broad base of loyal customers. Our groundbreaking quality standards ban hundreds of ingredients commonly found in products sold by other retailers, as well as products grown or produced by manufacturing, farming, fishing and ranching practices that don’t measure up.
First Quarter of Fiscal Year 2017 Summary
• | Record sales of $4.9 billion, a 1.9% increase over the prior year |
• | Comparable store sales decrease of 2.4% |
• | Net income of $95 million, or 1.9% of sales |
• | Diluted earnings per share of $0.30 |
• | EBITDA of $360 million, or 7.3% of sales |
• | Return on Invested Capital (“ROIC”) of 11.0% |
Results include a non-cash charge of $34 million, or $0.06 per diluted share, related to store and facility closures and a charge of $13 million, or $0.03 per diluted share, associated with Mr. Robb’s separation agreement. Excluding these charges, net income was $123 million, or 2.5% of sales; diluted earnings per share were $0.39; EBITDA margin was 7.6%; and ROIC was 11.7%. Please refer to the reconciliation of GAAP measures to non-GAAP measures included in this Management’s Discussion and Analysis. During the sixteen weeks ended January 15, 2017, we produced approximately $284 million in cash flows from
20
operations and returned approximately $43 million in quarterly dividends to common shareholders. At January 15, 2017, we had approximately $1.1 billion in total debt and approximately $1.2 billion in total available capital.
Fiscal Year 2017 Updated Outlook
The Company is updating its outlook primarily to reflect lower expected sales growth and new costs associated with accelerating the implementation of category management. In the first quarter of fiscal year 2017, the Company incurred a charge of approximately $47 million, or $0.09 per diluted share, related to Mr. Robb’s separation agreement as well as store and facility closures. In the second quarter of fiscal year 2017, the Company expects to incur an additional charge related to these closures of approximately $30 million, or $0.06 per diluted share. The Company’s outlook excludes these charges and potential share repurchases. The Company remains focused on the metrics it believes are key to the long-term health of its business and for fiscal year 2017 is targeting:
• | Sales growth of 1.5% of greater |
• | Comps of approximately -2.5% or better |
• | Ending square footage growth of approximately 5% net of closures, reflecting approximately 30 new stores, including up to six relocations and three 365 stores |
• | Diluted EPS of $1.33 or greater |
• | EBITDA margin of approximately 8% |
• | Capital expenditures of approximately 4% of sales |
• | ROIC of approximately 11% |
The Company has updated its sales outlook primarily to reflect year-to-date sales trends and lost sales related to the store closures. While the Company remains hopeful that comps improve as sales-building initiatives gain traction and comparisons get easier, the competitive landscape continues to be very dynamic, two-year comps have continued to moderate, and it is uncertain how long the deflationary environment will continue.
The Company plans to reduce its cost structure this fiscal year but expects these savings to be more than offset by investments in marketing, value and technology, as well as higher occupancy, depreciation and other costs. In addition, the Company is estimating additional costs of approximately $14 million, or $0.03 per diluted share, related to its recent decision to accelerate the implementation of category management, the majority of which it expects to incur in the fourth quarter. Therefore, the Company now expects a decline in operating margin of up to approximately 85 basis points for the year, with greater declines of up to 115 basis points in the second and fourth quarters due in part to the negative Easter shift and higher year-over-year marketing expense in the second quarter, and to costs associated with category management in the fourth quarter. The Company also notes a LIFO credit of $9 million in the fourth quarter last year as compared to charges of $2 million in the first and second quarters and a credit of $2 million in the third quarter last year.
Results of Operations
The following table sets forth the Company’s consolidated statements of operations data expressed as a percentage of sales:
Sixteen weeks ended | |||||
January 15, 2017 | January 17, 2016 | ||||
Sales | 100.0 | % | 100.0 | % | |
Cost of goods sold and occupancy costs | 66.4 | 66.0 | |||
Gross profit | 33.6 | 34.0 | |||
Selling, general and administrative expenses | 28.8 | 28.4 | |||
Pre-opening expenses | 0.4 | 0.3 | |||
Relocation, store closure and lease termination costs | 0.8 | 0.1 | |||
Operating income | 3.5 | 5.2 | |||
Interest expense | (0.3 | ) | (0.1 | ) | |
Investment and other income | — | 0.1 | |||
Income before income taxes | 3.2 | 5.2 | |||
Provision for income taxes | 1.2 | 1.9 | |||
Net income | 1.9 | % | 3.2 | % | |
Figures may not sum due to rounding
21
Sales for the sixteen weeks ended January 15, 2017 totaled approximately $4.9 billion, increasing 1.9% over the same period of the prior fiscal year. Comparable store sales during the sixteen weeks ended January 15, 2017 and the same period of the prior fiscal year are reflected in the table below.
Sixteen weeks ended | |||||
January 15, 2017 | January 17, 2016 | ||||
Comparable store sales | (2.4 | )% | (1.8 | )% | |
Change in transactions | (3.9 | )% | (1.6 | )% | |
Change in basket size | 1.5 | % | (0.2 | )% | |
We have seen stability in our comps over the last three quarters, with some modest traffic improvement from the fourth quarter of fiscal year 2016 to the first quarter of fiscal year 2017. During the quarter, we saw wide swings in comps on a weekly basis, as is frequently the case in the first quarter due to weather and holiday shifts. After a strong start for the first five weeks, comps dropped off sharply in the pre- and post-election weeks, and then showed nice lifts over Thanksgiving and Christmas weeks. Comparable stores contributed approximately 95.1% of total sales for the sixteen weeks ended January 15, 2017, compared to approximately 93.7% for the same period of the prior fiscal year. As of January 15, 2017, there were 434 locations in the comparable store base compared to 404 locations at January 17, 2016.
The Company’s gross profit as a percentage of sales for the sixteen weeks ended January 15, 2017 was approximately 33.6% compared to approximately 34.0% for the same period of the prior fiscal year. Gross margin for the sixteen weeks ended January 15, 2017 declined 43 basis points to 33.6%, as compared to the sixteen weeks ended January 17, 2016, driven by increases in occupancy costs and cost of goods sold as a percentage of sales.
Selling, general and administrative expenses as a percentage of sales were approximately 28.8% for the sixteen weeks ended January 15, 2017 compared to approximately 28.4% for the same period of the prior fiscal year. During the sixteen weeks ended January 15, 2017, selling, general and administrative expenses included a charge of $13 million associated with the separation
agreement for Walter Robb, our former Co-Chief Executive Officer. Excluding this charge, selling, general and administrative expenses increased 12 basis points year over year for the sixteen weeks ended January 15, 2017 driven by an increase in marketing and depreciation expenses as a percentage of sales.
Pre-opening expenses totaled approximately $21 million for the sixteen weeks ended January 15, 2017 compared to approximately $13 million for the same period of the prior fiscal year.
Relocation, store closure and lease termination costs totaled approximately $41 million for the sixteen weeks ended January 15, 2017 compared to approximately $3 million for the same period of the prior fiscal year. Relocation, store closure and lease termination costs for the sixteen weeks ended January 15, 2017 includes approximately $34 million in charges related to the decision to close nine stores and three commissary kitchens.
The numbers of stores opened and relocated were as follows:
Sixteen weeks ended | |||||
January 15, 2017 | January 17, 2016 | ||||
New stores | 11 | 3 | |||
Relocated stores | 2 | — | |||
Interest expense, primarily related to the Company’s $1.0 billion offering of 5.2% senior notes completed on December 3, 2015, totaled approximately $15 million and $7 million for the sixteen weeks ended January 15, 2017 and January 17, 2016, respectively.
Investment and other income, which includes gift card breakage, interest income and investment gains and losses, and other income, was not material for the sixteen weeks ended January 15, 2017 compared to approximately $4 million for the sixteen weeks ended January 17, 2015.
Income taxes resulted in an effective tax rate of approximately 39.0% for the sixteen weeks ended January 15, 2017 compared to approximately 37.0% for the same period of the prior fiscal year. The lower effective tax rate for fiscal year 2016 was due to the recognition of an environmental tax credit related to the development of a new store. The effective tax rate for fiscal year 2017 is expected to be 39.0%.
22
Non-GAAP measures
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides information regarding adjusted diluted Earnings per Share (“EPS”), Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), adjusted EBITDA, Return on Invested Capital (“ROIC”) and adjusted ROIC as additional information about its operating results. These measures are not in accordance with, or an alternative to, GAAP. We believe that these presentations provide useful information to management, analysts and investors regarding certain additional financial and business trends relating to our results of operations and financial condition. In addition, management uses these measures for reviewing the financial results of the Company as well as a component of incentive compensation. Management believes ROIC and adjusted ROIC are useful to investors and analysts because each measures how effectively we are deploying our assets.
The Company defines adjusted diluted EPS as net income plus charges for store and facility closures and Mr. Robb’s separation agreement divided by the weighted average shares outstanding and potential additional common shares outstanding. The following is a tabular reconciliation of the non-GAAP financial measures adjusted diluted EPS to GAAP diluted EPS, which the Company believes is the most directly comparable GAAP financial measure. Adjusted diluted EPS was as follows (in millions):
Sixteen weeks ended | |||||||
Adjusted Diluted EPS | January 15, 2017 | January 17, 2016 | |||||
Net income | $ | 95 | $ | 157 | |||
Store and facility closures, net of tax | 20 | — | |||||
Mr. Robb's separation agreement, net of tax | 8 | — | |||||
Adjusted Net income | $ | 123 | $ | 157 | |||
Adjusted Diluted Earnings per Share | $ | 0.39 | $ | 0.46 | |||
Weighted average shares outstanding | 318.7 | 337.0 | |||||
The Company defines adjusted EBITDA as EBITDA plus charges for Mr. Robb’s separation agreement. The following is a tabular reconciliation of the non-GAAP financial measures EBITDA to GAAP net income, which the Company believes is the most directly comparable GAAP financial measure. EBITDA was as follows (in millions):
Sixteen weeks ended | |||||||
January 15, 2017 | January 17, 2016 | ||||||
Net income | $ | 95 | $ | 157 | |||
Provision for income taxes | 61 | 92 | |||||
Interest expense | 15 | 7 | |||||
Investment and other income | — | (4 | ) | ||||
Operating income | 171 | 252 | |||||
Depreciation and amortization | 189 | 147 | |||||
EBITDA | 360 | 399 | |||||
Mr. Robb’s separation agreement | 13 | — | |||||
Adjusted EBITDA | $ | 373 | $ | 399 | |||
23
The Company defines ROIC as ROIC earnings divided by average invested capital. ROIC earnings and adjustments to ROIC earnings are defined in the following tabular reconciliation. Invested capital reflects a trailing four-quarter average. ROIC and adjusted ROIC were as follows (in millions):
Fifty-two weeks ended | |||||||
January 15, 2017 | January 17, 2016 | ||||||
Net income | $ | 445 | $ | 525 | |||
Interest expense, net of tax | 30 | 4 | |||||
ROIC earnings | 475 | 529 | |||||
Total rent expense, net of tax (1) | 289 | 268 | |||||
Estimated depreciation on capitalized operating leases, net of tax (2) | (193 | ) | (178 | ) | |||
ROIC earnings, including the effect of capitalized operating leases | $ | 571 | $ | 619 | |||
Average working capital, excluding current portion of long-term debt | $ | 695 | $ | 529 | |||
Average property and equipment, net | 3,355 | 3,121 | |||||
Average other assets | 967 | 1,075 | |||||
Average other liabilities | (714 | ) | (651 | ) | |||
Average invested capital | 4,303 | 4,074 | |||||
Average estimated asset base of capitalized operating leases (3) | 3,816 | 3,486 | |||||
Average invested capital, including the effect of capitalized operating leases | $ | 8,119 | $ | 7,560 | |||
ROIC | 11.0 | % | 13.0 | % | |||
ROIC, including the effect of capitalized operating leases | 7.0 | % | 8.2 | % | |||
Fifty-two weeks ended | |||||||
January 15, 2017 | January 17, 2016 | ||||||
Net income | $ | 445 | $ | 525 | |||
Interest expense, net of tax | 30 | 4 | |||||
Adjustments, net of tax (4) | 30 | 48 | |||||
Adjusted ROIC earnings | 505 | 577 | |||||
Total rent expense, net of tax (1) | 289 | 268 | |||||
Estimated depreciation on capitalized operating leases, net of tax (2) | (193 | ) | (178 | ) | |||
Adjusted ROIC earnings, including the effect of capitalized operating leases | $ | 601 | $ | 667 | |||
Average working capital, excluding current portion of long-term debt | $ | 695 | $ | 529 | |||
Average property and equipment, net | 3,355 | 3,121 | |||||
Average other assets | 967 | 1,075 | |||||
Average other liabilities | (714 | ) | (651 | ) | |||
Average invested capital | 4,303 | 4,074 | |||||
Average estimated asset base of capitalized operating leases (3) | 3,816 | 3,486 | |||||
Average invested capital, including the effect of capitalized operating leases | $ | 8,119 | $ | 7,560 | |||
Adjusted ROIC | 11.7 | % | 14.2 | % | |||
Adjusted ROIC, including the effect of capitalized operating leases | 7.4 | % | 8.8 | % | |||
(1) Total rent includes minimum base rent of all tendered leases
(2) Estimated depreciation equals two-thirds of total rent expense
(3) Estimated asset base equals eight times total annualized rent expense
(4) Adjustments include charges related to Mr. Robb’s separation agreement in Q1 2017, store and facility closures and asset impairments
24
Liquidity and Capital Resources and Changes in Financial Condition
The following table summarizes the Company’s cash and short-term investments as of the dates indicated (in millions):
January 15, 2017 | September 25, 2016 | ||||||
Cash and cash equivalents | $ | 350 | $ | 351 | |||
Short-term investments - available-for-sale securities | 374 | 379 | |||||
Total | $ | 724 | $ | 730 | |||
Additionally, the Company had $500 million available under its revolving credit facility at January 15, 2017.
We generated cash flows from operating activities totaling approximately $284 million during the sixteen weeks ended January 15, 2017 compared to approximately $232 million during the same period of the prior fiscal year. The increase in cash flows from operating activities resulted primarily from increased non-cash expenses and changes in operating working capital. Depreciation and amortization was the primary non-cash expense included in cash flows from operating activities totaling approximately $189 million and $147 million for the sixteen weeks ended January 15, 2017 and January 17, 2016.
Net cash used in investing activities totaled approximately $244 million for the sixteen weeks ended January 15, 2017 compared to approximately $109 million for the same period of the prior fiscal year. Net sales and maturities of available-for-sale securities totaled approximately $5 million during the sixteen weeks ended January 15, 2017 compared to approximately $87 million for the same period of the prior fiscal year. Our principal historical capital requirements have been the funding of the development or acquisition of new stores, the acquisition of property and equipment for existing stores, and technology investments. The required cash investment for new stores varies depending on the size of the new store, geographic location, degree of work performed by the landlord and complexity of site development issues. Capital expenditures for the sixteen weeks ended January 15, 2017 totaled approximately $245 million, of which approximately $150 million was for the development of new locations. Capital expenditures for the sixteen weeks ended January 17, 2016 totaled approximately $179 million, of which approximately $91 million was for the development of new locations. As of January 15, 2017 the Company has 93 stores, or 3.9 million square feet, in development.
We believe we will produce operating cash flows in excess of the capital expenditures needed to open the 93 stores in our current store development pipeline. We have a disciplined, opportunistic real estate strategy, opening stores in existing trade areas as well as new areas, including international locations. Our growth strategy is to expand primarily through new store openings, and while we may pursue acquisitions of smaller chains that provide access to desirable geographic areas and experienced team members, such acquisitions are not expected to significantly impact our future store growth or financial results.
Net cash used in financing activities totaled approximately $38 million for the sixteen weeks ended January 15, 2017 compared to approximately $319 million provided by financing activities for the same period of the prior fiscal year.
The Company’s revolving credit facility under a credit agreement dated as of November 2, 2015 (the “Credit Agreement”) provides for an unsecured revolving credit facility in the aggregate principal amount of $500 million. For the sixteen weeks ended January 15, 2017, the Company had no amounts outstanding on the Credit Agreement. During the first quarter of fiscal year 2016, the Company borrowed and repaid $300 million under the Credit Agreement. At January 15, 2017, the Company was in compliance with all applicable debt covenants.
The Company has outstanding $1.0 billion aggregate principal amount of its 5.2% senior notes due 2025 (the “Notes”). The Notes will mature on December 3, 2025. At January 15, 2017, the Company was in compliance with all applicable debt covenants.
25
Share repurchase activity for the sixteen weeks ended January 15, 2017 was immaterial. Share repurchase activity for fiscal year 2016 was as follows (in millions, except share per share amounts):
Number of common shares acquired (1) | Average price per common share acquired | Total cost of common shares acquired | ||||||||
Fiscal year 2016: | ||||||||||
First Quarter | 21.2 | $ | 29.96 | $ | 634 | |||||
Second Quarter | 3.5 | 28.88 | 100 | |||||||
Third Quarter | 6.5 | 30.01 | 195 | |||||||
Fourth Quarter | 0.5 | 27.98 | 15 | |||||||
Total fiscal year 2016 | 31.7 | $ | 29.82 | $ | 944 | |||||
(1) Number of shares may not sum due to rounding
As of January 15, 2017, one share repurchase program remains in effect, with prior programs having been fully utilized, expired or cancelled. The following table outlines the share repurchase program authorized by the Company’s Board of Directors (“Board”), and the related repurchase activity as of January 15, 2017 (in millions):
Effective date | Expiration date | Amount authorized | Cost of repurchases | Authorization available | |||||||||
November 4, 2015 | Not applicable | $ | 1,000 | $ | 557 | $ | 443 | ||||||
During the first quarter of fiscal year 2017, the Board increased the Company’s quarterly dividend to $0.140 per common share from $0.135 per common share. The following table provides a summary of dividends declared per common share during fiscal year 2017 to date and fiscal year 2016 (in millions, except per share amounts):
Date of declaration | Dividend per common share | Date of record | Date of payment | Total amount | |||||||
Fiscal year 2017: | |||||||||||
November 2, 2016 (1) | $ | 0.140 | January 13, 2017 | January 24, 2017 | $ | 45 | |||||
Fiscal year 2016: | |||||||||||
November 4, 2015 | $ | 0.135 | January 15, 2016 | January 26, 2016 | $ | 44 | |||||
March 9, 2016 | 0.135 | April 8, 2016 | April 19, 2016 | 44 | |||||||
June 7, 2016 | 0.135 | July 1, 2016 | July 12, 2016 | 43 | |||||||
September 22, 2016 | 0.135 | October 3, 2016 | October 14, 2016 | 43 | |||||||
(1) Dividend accrued at January 15, 2017
The Company will pay future dividends at the discretion of the Board. The continuation of these payments, the amount of such dividends, and the form in which dividends are paid (cash or stock) depend on many factors, including the results of operations and the financial condition of the Company. Subject to these qualifications, the Company currently expects to pay dividends on a quarterly basis.
Net proceeds to the Company from the exercise of stock options by team members for the sixteen weeks ended January 15, 2017 totaled approximately $5 million compared to approximately $7 million for the same period of the prior fiscal year. The Company intends to keep its broad-based stock option program in place, but also intends to limit the number of shares granted in any one year so that annual earnings dilution from share-based payment expense will not exceed 10%. The Company believes this strategy is best aligned with its stakeholder philosophy because it limits future earnings dilution from options and at the same time retains the broad-based stock option plan, which the Company believes is important to team member morale, its unique corporate culture and its success. At January 15, 2017 and September 25, 2016, approximately 30.3 million shares and 29.8 million shares of our common stock, respectively, were available for future stock incentive grants.
26
In addition to the Company’s debt obligations referenced above, the Company is committed under certain capital leases for rental of certain equipment, buildings and land, and certain operating leases for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates through 2054. The following table shows payments due by period on contractual obligations as of January 15, 2017 (in millions):
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Capital lease obligations (including interest) | $ | 91 | $ | 6 | $ | 10 | $ | 10 | $ | 65 | |||||||||
Operating lease obligations (1) | 9,223 | 315 | 1,070 | 1,153 | 6,685 | ||||||||||||||
Total | $ | 9,314 | $ | 321 | $ | 1,080 | $ | 1,163 | $ | 6,750 | |||||||||
(1) Amounts exclude taxes, insurance and other related expense
Gross unrecognized tax benefits and related interest and penalties at January 15, 2017 were not material. Although a reasonably reliable estimate of the period of cash settlement with respective taxing authorities cannot be determined due to the high degree of uncertainty regarding the timing of future cash outflows associated with the Company’s unrecognized tax benefits, as of January 15, 2017, the Company does not expect tax audit resolution will reduce its unrecognized tax benefits in the next 12 months.
We periodically make other commitments and become subject to other contractual obligations that we believe to be routine in nature and incidental to the operation of the business. Management believes that such routine commitments and contractual obligations do not have a material impact on our business, financial condition or results of operations.
Our principal historical sources of liquidity have included cash generated by operations, available cash and cash equivalents, and short-term investments. Absent any significant change in market conditions, we expect planned expansion and other anticipated working capital and capital expenditure requirements for the next 12 months will be funded by these sources.
The Company intends to maintain an investment-grade profile and a balance sheet that provides the financial flexibility to pursue its strategic growth initiatives. There can be no assurance, however, that the Company will continue to generate cash flows at or above current levels or that other sources of capital will be available to us in the future.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements at January 15, 2017 consist of operating leases disclosed in the above contractual obligations table, as well as the Credit Agreement discussed above. Additionally, we enter into forward purchase agreements for certain products in the ordinary course of business. Purchase commitments do not exceed anticipated use within an operating cycle. We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our consolidated financial statements or financial condition.
Recent Accounting Pronouncements
Recent accounting pronouncements are included in Note 2 of the Notes to Consolidated Financial Statements.
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our direct exposure to financial market risk results from fluctuations in foreign currency exchange rates and interest rates. There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K, for the fiscal year ended September 25, 2016.
Item 4. Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Other than as described above, there have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
28
Part II. Other Information
Item 1. Legal Proceedings.
Information related to the Company’s legal proceedings is discussed in Note 13 of the Notes to Consolidated Financial Statements in Part I of this report.
Item 1A. Risk Factors.
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 25, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information about the Company’s share repurchase activity during the sixteen weeks ended January 15, 2017.
Period (1) | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs (2) | Approximate dollar value of shares that may yet be purchased under the plans or programs (2) | |||||||||
September 26, 2016 - October 23, 2016 | — | $ | — | — | $ | 443,504,390 | |||||||
October 24, 2016 - November 20, 2016 | 16,200 | 27.95 | 16,200 | 443,051,523 | |||||||||
November 21, 2016 - December 18, 2016 | — | — | — | 443,051,523 | |||||||||
December 19, 2016 - January 15, 2017 | — | — | 443,051,523 | ||||||||||
Total | 16,200 | $ | 27.95 | 16,200 | |||||||||
(1) | Periodic information is presented by reference to our fiscal periods during the first quarter of fiscal year 2017. |
(2) | On November 4, 2015, the Board authorized a share repurchase program whereby the Company may make up to $1.0 billion in stock purchases of outstanding shares of common stock of the Company. The repurchase program does not have an expiration date. Under the share repurchase programs, purchases can be made from time to time using a variety of methods, which may include open market purchases. The specific timing, price and size of purchases will depend on prevailing stock prices, general economic and market conditions, and other considerations. Purchases may be made through a Rule 10b5-1 plan pursuant to pre-determined metrics set forth in such plan. The Board’s authorization of the share repurchase program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or discontinued at any time at the Company’s discretion. |
29
Item 6. Exhibits.
3.1 | Amended and Restated Articles of Incorporation of the Registrant, dated September 15, 2015 (1) |
3.2 | Amended and Restated Bylaws of the Registrant adopted June 26, 2015 (2) |
4.1 | Amended and Restated Indenture, dated as of September 8, 2016, between the Registrant and U.S. Bank National Association, as Trustee (3) |
4.2 | First Supplemental Indenture, dated December 3, 2015, among the Registrant, the Guarantors, and U.S. Bank National Association (4) |
4.3 | Form of 5.2000% Senior Notes due 2025 (included in Exhibit 4.2) (4) |
10.1 | Separation, Advisory, and Noncompetition Agreement, dated as of November 2, 2016, by and between Whole Foods Market, Inc. and Walter Robb (5) |
10.2 | Amendment to the Whole Foods Executive Retention Plan and Non-Compete Arrangement, dated as of November 2, 2016, by and between Whole Foods Market Services, Inc. and Walter Robb (5) |
31.1 | Certification of Chief Executive Officer Pursuant to 17 CFR 240.13a -14(a) (6) |
31.2 | Certification of Chief Financial Officer Pursuant to 17 CFR 240.13a - 14(a) (6) |
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 (7) |
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (7) |
101 | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended January 15, 2017 formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements (5) |
(1) | Filed as an exhibit to Registrant’s Form 10-K for the period ended September 27, 2015 filed November 13, 2016 and incorporated herein by reference. | |
(2) | Filed as an exhibit to Registrant’s Form 8-K filed June 29, 2015 and incorporated herein by reference. | |
(3) | Filed as an exhibit to Registrant’s Form 8-K filed September 9, 2016 and incorporated herein by reference. | |
(4) | Filed as an exhibit to Registrant’s Form 8-K filed December 4, 2015 and incorporated herein by reference. | |
(5) | Filed as an exhibit to Registrant’s Form 8-K filed November 2, 2016 and incorporated herein by reference. | |
(6) | Filed herewith. | |
(7) | Furnished herewith. | |
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WHOLE FOODS MARKET, INC. | ||||
Date: | February 16, 2017 | By: | /s/ Glenda Flanagan | |
Glenda Flanagan | ||||
Executive Vice President and Chief Financial Officer | ||||
(Duly authorized officer and principal financial officer) | ||||
31