Whole Food Market Inc. Financial Analysis

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WholeFood Market Inc. Financial Analysis

WholeFoods Market Inc.

Toadequately ascertain whether a company can demonstrate viableinvestment, financier Warren Buffet analyzes a given company in fourways. He seeks to understand the overall motive of the business,ability to achieve favorable long term future prospects, the seniormanagement roles, and organization as well as the attractiveness ofthe stock price. All these components must be satisfying to prove aworthy investment. This paper will focus on the Whole Foods MarketInc. which is a chain of grocery retailers with a presence in the US,UK, and the Canada markets. The paper seeks to analyze the investmentpotential of Whole Foods Market while applying the Buffet’sinvestment analysis framework.

Understandabilityof the Business

WholeFoods Market Inc. (WFM) first ventured into the food industry in theyear 1980 in Austin, Texas (WFM, 2016). The motive of the businesswas to offer consumers with healthy alternatives foods and beveragesto the preservative laden foods. The store initially operated in asmall outlet with less than 20 employees while marketing its productsto mostly women (WFM, 2016). Its increased sales led to its expansionand growth, marked by the acquisition of other natural and organicfood chains which include the wellspring Groceries, the Bread ofLife, Fresh Fields, among others. This contributes to more additionalstaff that stands at around 90,000 and branches adding to a total ofmore than 400 in the regions within the US, UK, and Canada (WFM,2016). Its immense growth is attributed to its provision of uniquebrands and selling proposition that offers products with noadditional artificial preservatives, pesticides, sweeteners, flavors,colors among others, which shows that they have wide knowledge withregards to consumers’ guiltless eating habits and shopping thanmost chain stores (Chrysoulakis et al., 2015). For this reason, thecompany has been certified as the US first natural and organicgrocery store, which implies that it fully satisfies the nationalorganic program canons.

Thecompany mainly supplies and markets a wide range of food typesincluding fresh vegetables, meat, poultry, and seafood, baked andcatered foods which account for more than two thirds of its totalsales. Today, WFM features in the Fortune 500 Company, with it havinga net worth of $ 14 billion. The company also features in theconsumer defensive sector and the grocery stores industry(Morningstar, 2016). Whole foods market has a NAICS classificationcode of 445110 under the supermarket and grocery store, SICclassification of 5411 under the groceries store while excluding thesupermarkets and an ICIC classification code of 4721 under the retailsales in specialized stores. Whole foods market faces competitionfrom competitors in two categories i.e. the traditional and theorganic food retailers. The regular grocery store comprises theWinn-Dixie, Safeway, Kroger`s, etc. whereas the natural and organicfoods retailers which include the Traders Joe`s, Wild Oats Marketsand the GNC.WFM are considered to be the leading natural and organicfoods retailers constituting to remarkable organic and natural foodsales each year. The company enjoys wider sales margin and alsotransacts at valuation premium for both categories of grocery stores.

WholeFoods Inc. has championed the retail store concepts by engaging innatural and organic food retailing. Their core notion was to providea broad range of perishable, fresh, and naturally grown food harvestto a broad customer base. Regarding its design and location, WFM,does not have a customary store design layout. Rather, each retailstore is tailored in a manner to fit the dimensions and outline of aspecific location and the community in which it operates. Thesestores are mainly located in the major metropolitan regions wherequite a good fraction of Whole Foods Market potential consumers aresituated. Whole Foods biggest supplier is the United Natural Foodsdistributor, who represent at least one third of the WFM totalpurchases (UNFI, 2015). Whole Foods Market Inc. procures its productsthrough a combination of suitable wholesalers and directdistributors. The company also operates more than ten distributionhubs that assist in distributing its range of goods to retail storesacross the US, UK, and Canada. The firm directs minimal funds toadvertise and other promotional aspects to immensely rely on the wordof mouth and referrals to sale its products.

Locally,there has been growing consumer concerns in conjunction to the safetyand pureness of the foods eaten because of the increased presence ofartificial ingredients, insecticides residues, growth hormones andother chemicals in food products. As such, as the residents becomewell educated and the increasing of median age each year, thepopulation becomes more aware of the health impact of food productsand are concerned about how these products are grown, in turn,contributing to increased demand for natural and organic foodstuffs.Whole Foods Market Inc. maintains its position as the leader in thenatural and organic food retail industry. It has a strong brandpresence and a broad customer base that are loyal. As a result,product awareness remains to grow through the voices of devotedsupporters and economical word of mouth marketing. Overall impetushas improved, and additional stores are being opened up impactingstronger sales.

Thecompany enjoys stable earnings with increased earning power asdepicted in its net income of $ 500 million, sales of 15.7 billionand a market capital of 9.9 billion(Morningstar, 2016). Marketanalysts even suggest that the company has a strong financialbackground with fair value estimate of premium taking intoconsideration the costs of substitutes and the production,distribution and the acquisition costs. A 30 day average sales volumeand the net income for the year 2015, WFM has shown competent cashflows. According to NASDAQ, (2016), the company has shown increasingcash flows and fixed assets over the periods between 2012 and 2015.

LongTerm Prospects

WholeFoods Market Inc. has shown a tremendous increase in sales growthcontributing to higher profits. As such, the company has continued toremain profitable for the periods between 2010 and 2015 with an aftertax return on equity being 15.5% in 2015 up from 10.4% in2010.Similarly, Whole Foods has shown a steady increase in the numberof additional store in the US and the UK. Therefore it can be saidthat in the next 10 or so years, the company is more likely to expandits outlets in other local regions and foreign markets. The world isincreasingly growing more globalized as countries’ boundariesbecome less relevant than before in the context of business. It canbe argued that the economies of scale and operational success that acompany enjoys make it dignified and capable of taking on newchallenges and operating in new markets in the near future.

Forso long, effective marketing strategy has guaranteed most companies acompetitive advantage. WFM has a strong brand, both locally andinternationally. There is an increasing demand of consumers who seekto consume food products with no added additive thus, the naturaland organic food products offered by Whole Foods have been seen tosatisfy this social trend. The value of a customer associated with anindividual product offering is linked to his or her personalknowledge and understanding of the pros and cons of the product thatwill impact its consumption. As the value proposition becomes morepersonal, the customer is likely to increase loyalty. As a result,the essential and valuable offerings become more appreciated by theconsumers and the relationship between the consumer and the brandbuilds into an emotional and emblematic attachment (Rintamäki,Kuusela, &amp Mitronen,2007). Thus, as consumers shifts to healthier food productsalternatives to the non-organic products, there exists a strongmarket that may thrive in organic and natural foods markets and anincreased scope for brand loyalty (Cooper, Leifert, &amp Niggli,2007). The core offering of Whole Foods Market is increasinglybecoming valuable to consumers. It can, therefore, be said that itsbrand demonstrates sound long term success associated with theshifting trend towards natural and organic products which will helpthe brand to immensely grow both in market share and buildingstronger bonds with existing customers.

Interestingly,Whole Foods Market Inc. has invested little time and resources inresearch and development programs for the past few years (NASDAQ,2016). As a retailer of natural and organic products, the companyassumes the necessity for research and development. The companyoperates in an increasingly competitive natural food sector and mayrequire the need to make adjustments and improvements in itsoperations. The lack of investment in research and developmentpractices displays a negative feature that may be detrimental forWFM, which is considered by many as a very capable company.Nevertheless, the economies of scale that the firm enjoys, itsexclusive brand image, and the environmental shift in consumer tasteand preference for organic food products, make the company be viewedas a good long term success for the investors.

TheManagement

Thecurrent CEO of whole foods market Inc. is John Mackey. He is also theco-founder of the company, together with Walter Robb (Whole FoodsMarket, 2016). Born and bred in Houston, Mackey studied undergraduateprogram in philosophy but never graduated. Being a college dropout,he sought to find meaning in his life, of which he desired to beunique in character and do what satisfied his inner personality andthe people around him (Whole Foods Market, 2016). As the CEO of WFM,Mackey has more often than not, been criticized for his leadershipstyle which is more of untraditional to the daily business decisions.To him, he believes in doing what is right and that which motivates agood and safe lifestyle and well-being, as well as promotingsatisfaction and moral standards. His leadership style is a blend ofauthoritarian, valuable and servant leadership, an entirely differentcourse from the traditional leadership management style.

Underhis servant leadership, the entire management and the employees atthe company have been provided with several competent resources,education, and training, and benefits to aid in establishing andgrowing their career and personal goals. Similarly, employees areempowered to develop deep values of the brands. They stand to providecustomers with excellent services when selling a wide range of goodquality food products that are fresh and natural with no addedpreservatives, hydrogenated fats, flavors, etc. The modern leadershipapproach tends to focus on the leader and follower relationship whichpromotes satisfying each other`s emotional essentials. Thisleadership style also forms affiliation patterns that rely on thevalues and standards that give social and special personal meaning tothe joint work being done, assist in common decision making process,facilitate plan sharing, and simplify mutual responsibility forsocietal success and growth (Bakker, Demerouti &amp Lieke, 2012).

WholeFoods Market Inc. is a decentralized enterprise whose core goals andvision are to guarantee customer delight and fulfillment and steergroup members’ happiness. Having in place a written standard ofethics in the form of a vision and mission is essential for anycompany. It is important for successful leaders and managers todisplay skills and attributes concerning living according to thecompany`s principles (Tims, Bakker, &amp Xanthopoulou, 2011).Additionally, WFM mostly emphasizes on team work. The large groupsare further subdivided into small sub teams. The culture is not onlymeant for the subordinates but also goes all the way to themanagerial team, the highest level of WFM. The effectiveness of teamsis enhanced when members fully trust the direction they are being ledto and when they feel empowered to work and to accomplish thecompany’s overall objectives and purpose. As such, empowermentcontributes to creativity and innovativeness that accelerates theorganization’s evolution and thus achieving a competitiveadvantage.

Itis also important for organizations to practice ethics of fairnesswhen it comes to employees recruiting, compensation, promotions,punishment, and dismissal. To retain valuable and hardworkingemployees, leaders and managers must inculcate values of love andcare (Bakker, Demerouti &amp Lieke, 2012). When fear dictates in thejob environment, then love and care towards one another will cease toflourish, instead, encourage forgiveness and understanding as opposedto denunciation and judgment. Whole Foods Market organizationalculture is relatively unique as the company has designed written setof rules and policies that help in attaining its vision and mission.Mackey has established unconventional revised norms and policies ofthe business and leadership (Whole Foods Market, 2016). He tends tofocus on the expansions and think outside his comfort zone on what isyet to be achieved and improving processes that will make sense toall the company`s relevant stakeholders. The management of wholefoods has clearly shown that they possess adequate leadership skillsand competence necessary to produce optimum results, and achieve acommon company objective. Most companies believe that the humanresources department is the core function and competency of any givenorganization, as for whole foods market, it can be noted that itsmanagement has the right people with adequate experience for the jobto warrant company`s attractiveness from an investor`s perspective.

Attractivenessand Intrinsic Value

Thecore valuation of Whole Foods Market entailed the use of discountedcash flow model based on the projected income statements and thestatements of financial position through to the year 2021.Additionally, we shall look at the P/E in relation to the plannedportion of the discounted cash flow and the stock price forecastingmodel. The discounted cash flow is typically used as a valuationmodel for determining the intrinsic value of a company. In the P/Evaluation model, this method holds that Whole Foods Market Inc. is afast growing company, but its possibilities to the current datestrictly resemble that of a traditional grocery store thus the useof forecasted period discounted cash flow, and a different terminalvalue is appropriate. The new terminal value will reduce the earningsfor 2021 and multiply the mean industry price-earnings ratio of 21.The resultant figure will then be subjected to sensitivity analysis.

Theintrinsic value of a company is defined as the actual value found onthe underlying understanding of its net worth that is arrived at bytaking into account all the aspects of business. Whole foods markethas shown an enormous capacity to maintain a successful business aswell as the business shrewdness to share its success and growth withits shareholders. In 2015, WFM board authorized a $ 1billion sharerepurchase program and an increase in the quarterly dividend by atleast 4 %, translating to $ 700million as payout dividend toshareholders. Whole foods market Inc. has price valuations estimatesas detailed below:

of Estimated Prices

Model

2016

1

Constant Growth Model

$14.32

2

Residual Income Model

$24.97

3

Free Cash Flow per Share Model

$ 82.15

4

P/E Approach

$ 52.19

5

P/CF Approach

$ 59.83

6

P/S Approach

$ 60.66

7

Buffett Owner Earnings Model I

$ 63.43

8

Sales per Share Model

$ 62.55

9

Dividend per Share Model

$ 60.74

10

Book Value per Share Model

$ 40.20

11

Free Cash Flow per Share Model

$ 7.76

12

Stock Price Forecasting (Income Statement) Model

$ 55.51

13

Combined Dividends and Earnings Model

$ 46.83

14

Relative P/E Model

$ 39.05

15

Goldman Sachs Model

$ 24.46

16

Growth Opportunities Model

$ 32.07

Average

$ 47.87

Standard Deviation

13.78

&nbsp

Price (10/4/2016)

$ 28.03

Margin Of Safety Price (20%)

22.42

Theprice estimates can be depicted in a bar chart as demonstrated below:

Itis important to take into consideration the impact of recent adversemarketing when determining the intrinsic value. The intrinsic valueis arrived at by computing sales, the EBITDA margin, the EBITmultiple of 13x at low, 14x at the median and 16x at high for thelast five years. Cash flow is then added to the operating value andthe debt subtracted to determine the equity. The two models inhighlighted were left out when determining the average price of thefirm. Thus the average price for Whole Foods Market Inc. based on theintrinsic value is $47.87. With a 20% margin of safety, the resulting20% undervalued price is estimated to be 22.42. With a market stockprice trading at $ 28.03 as at October 4, 2016, Whole Foods MarketInc. is said to be undervalued. The variance of $ 19.84 makes thecompany not to be a viable investment opportunity at the moment.Although WFM is doing well regarding improved sales and incomes, itis important to note that it also has accumulated lots of debt.

TheStock Price Forecasting Model

Sales Growth Rate (2010-15)

11.3%

2016 Sales ($Mill)

$ 15,750.00

Average Net Profit Margin (2010-15)

3.7%

Average P/E Ratio (2010-15)

29.6

Shares Outstanding (2016)

317.5

Dividends (2017)

0.58

1. Forecasted 2017 Sales

$ 17,531.46

2. Forecasted 2017 Net Income

$ 649.98

3. Forecasted 2017 EPS

$ 2.05

4. Forecasted P/E

29.6

5. Forecasted Stock Price

$ 60.56

N

1

R

10.15%

6. Present Value of Stock Price @ 9.45%, 1 year

$ 54.98

Present Value of Dividends @ 9.45%, 1 year

$ 0.53

Estimated P16

$ 55.51

Theincome statement model shows that the Whole Foods projects a stockprice of $ 55.51, which may sound like a favorable future prospectand impressive for most shareholders. Similarly, sales growth ratebetween 2010 and 2015 is given as 11.3% the company continues toestimate 2017 sales of $ 17,531 up from $ 15,750 in the current yearand net profit margins which stand at 3.7% for years between 2010 and2015.

Freecash flow (FCF) model

TheFree cash flow model for WFM is as shown below:

βequityasset*[1+(Debt/Equity)(1-t)]

βasset

0.78333

rNKE

8.98%

FCF2016

$ 709.60

Firm Value0

$ 27,082.22

Equity Value0

$ 26,082.22

P16

$ 82.15

Thefree cash flow is viewed to be the vital element of measuring afirm’s real value translated by $ 27,082.22 by the total value ofinvestors expressed as $ 26,082.22. The FCF model for WFM for theperiod September/October, 2016, has been calculated to be $ 709.60million and the average FCF per share growth rate is 8.98%. With thisinformation, it can be concluded that WFM has the potential to pursuemore opportunities that will enhance shareholder value.

Dividendper share (DPS) model

Inthe dividend per share (DPS) model, the firm’s calculated averageDPS for the 2011-2015 is $0.38 and the estimated growth for the sameperiod is 27%. In the current year, Whole Foods Market share pricehas been estimated to be $60.74, and the predicted DPS for the year2017 is $0.58. WFM share price can be estimated using as follows:

P15= (Average price/Average DPS) (DPS16),in which case

AverageDPS (2011-2015) = $0.38 DPS growth rate (2011-2015) = 27%

EstimatedDPS for 2017 = $0.58 Estimated share price16= $60.74

Fromthe information above, it can be seen that the firm provides itsinvestors with a sound and safe dividend mainly attributed to thegrowth rate and the predicted share price for the subsequent year.

Conclusion

Inexamining the industry regarding environmental factors includingsupplier network, market share, demographic trends, and consumerchanges in tastes and preferences, these elements have been favorablefor the natural and organic foods industry compared to the overallgrocery industry. These increase customer awareness as well as thedesires for health and wellness benefits that are linked to awell-to-do customer base who are willing and able to purchase theproducts at a premium price. The Whole Foods Market has a fair shareof the food retail market as such, it is well positioned to takeadvantage of the attractiveness of the industry’s fundamentals forconsumption of natural and organic food products.

Thesuccess of Whole Foods Market is a direct reflection of the company’sapplication of modern leadership style. The management understandsthe important factors that contribute to a viable workforce and forthis reason the WFM has gone to the extent of designing andimplementing a robust mission, vision and values that regulate theoverall processes, direction, and culture. The value leadership styleadopted has also enabled the managers to overcome most of theorganization’s structural and communal pathologies, e.g. highemployee turnover rates, micro-management, and tyranny. Theleadership style has also enabled to recognize the needs required todevelop and nurture employees, and allowing them to expressthemselves and to thrive independently while promoting the normalexecution of roles and responsibilities that help to accomplish thecompany’s overall goals and objectives.

Fromthe above valuations, it can be noted that Whole Foods Market Inc.has a great deal of potential in viable investments. Since itsinception, the company has tremendously grown, not only locally butalso internationally, with an extensive presence in Canada and the UKmarkets, making it acquire desirable market share. As portrayed inthe company`s intrinsic value which is slightly higher compared tothe current market value, it can be seen that Whole Foods has astrong investment potential. This can also be attributed to the factthat it is a financially sound company. However, it is also importantto note that the attractiveness of the company may be reducedfollowing the company’s increased debts (NASDAQ, 2016). Debts mayrepresent a systematic failure to plan and regulate spendingefficiently.

Itcan also be argued that debt is an integral part of any large andglobalized company therefore, the consistent growth of brandrepresents viable financial development. The brand image of WholeFoods Market is sound and thus represents a substantial investmentopportunity. Despite the fact that flaws and inefficiencies may existin the operations of the company, WFM achievement, opportunities andstrengths remain notable. It can, therefore, be concluded that thecompany has a good understandability, represents favorable futurelong-term success, is operated efficiently by competent andexperienced management, and has an attractive price. As such, it isevident that, based on the Warren Buffet analysis framework, WholeFoods Market Inc. represents a viable investment opportunity andtherefore can be termed as a good investment for interested investorsto capitalize on.

References

WFM.(n.d.). Whole Foods Market History.http://www.wholefoodsmarket.com/company-info/whole-foods-market-history

UNFI.(2015). Despite a 25% Decline, United Natural Foods May Not Yet Be AnAttractive Buy.http://seekingalpha.com/article/3345735-despite-a-25-percent-decline-united-natural-foods-may-not-yet-be-an-attractive-buy

WholeFoods Market. (2016). Executives. WholeFoods Market.Retrieved from http://media.wholefoodsmarket.com/experts/executives

NASDAQ.(2016). WFM company financials. NASDAQ. Retrieved fromhttp://www.nasdaq.com/symbol/wfm/financials?query=ratios

Morningstar.(2016). Whole Foods Market Inc. Morningstar. Retrieved fromhttp://financials.morningstar.com/company-profile/c.action?t=WFM

Chrysoulakis,Nectarios., De Castro, Eduardo A., Moors, Eddy J. (2015).UnderstandingUrban Metabolism: A Tool for Urban Planning.NY: Routledge.

Cooper,J., Leifert, C., Niggli, U. (2007). Handbookof Organic Food Safety and Quality.Boston: Woodhead Publishing.

Rintamäki,T., Kuusela,H., Mitronen,L. (2007). Identifying competitive customer value propositions inretailing. Managing Service Quality: AnInternational Journal,17(6), p. 621- 634.

Bakker,A. B., Demerouti, E., &amp Lieke, L. (2012). Work Engagement,Performance, and Active Learning: The Role of Conscientiousness.Journal of Vocational Behavior, 80(2), p. 555-564.

Tims,M., Bakker, A. B. &amp Xanthopoulou, D. (2011). Do TransformationalLeaders Enhance their Followers Daily Work Engagement? TheLeadership Quarterly,22(1), p. 121-131

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