whole foods case analysis11
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Whole Foods Financial analysisTRANSCRIPT
Whole Food Market Inc. was founded in Austin, Texas by John Mackey, Rene Hardy, Craig
Weller and Mark Skile in 1980. Mackey and Hardy started a grocery business named SaferWay
in 1978 with a $45,000 loan from friends and family. In just two years, they turned it into one of
the most successful grocery stores in Austin, generating over 1 million dollars in annual revenue
out of a humble space of just 1,100 square feet. In 1980, they partnered with Craig Weller and
Mark Skiles, owners of Clarksville Natural Grocery, another Austin-based grocery store
specializing in natural foods. The two companies joined forces and merged to form Whole Foods
Market Inc. and opened their first store in September of 1980. The company enjoyed almost
instant success as this market was virtually untapped with less than half a dozen natural food
grocery stores in the country. In 1984 the company began to expand; opening stores in Dallas,
Houston and New Orleans and then went to the West Coast, opening a store in Palo Alto,
California in 1989.
Whole Foods is a food market that prides itself on providing its customers with the
highest quality of natural and organic foods. Through the acquisition of a number of other
companies, Whole Foods have grown to become the largest natural food supermarket in the
United States. Staying true to their mission statement and original ideals is the formula to which
the company credits their success.
The company has come a long way since the first store opened in Austin, Texas over 30
years ago; subsequently, so has the organic food industry in its entirety. Expansion of the natural
foods industry has brought with it increased demand for organic food and new competition. With
such demand on the rise, supply has now become a concern for Whole Foods. The solution to a
shortage in the organic food supply for Whole Foods could be to establish contracts with known
farmers that ensure delivery of organic products to Whole Foods creating their own farms to
ensure supply demands are met.
Inventory turnover, Sales per Square foot and Current Ratio have fundamental
importance, especially in the retail subset of this sector. It should be noted that Whole Foods
dominates the niche market of organic and natural foods and has a slightly different demographic
and target market than the companies to which it is being compared. Following these three
metrics are the basic financial analysis ratios, Price to Earnings ratio (P/E), Free Cash Flow and
Profit Margin. These metrics will aid in further measuring Whole Foods Market Inc’s
performance both in their industry as well as for their shareholders, giving us further insight into
whether this company is a solid investment choice.
This table details these metrics for Whole Foods and the three large chains, Safeway,
Costco and The Kroger Co. for the past year including industry averages.
The inventory turnover ratio reflects a company’s ability to sell their inventory and is
calculated by dividing their total sales by a total inventory to obtain the number of times
inventories are sold and restocked throughout a time period. This number is then usually
compared to an industry benchmark and the higher the number, the more efficient a company is
at turning this asset into profits. Whole Foods most recent Inventory turnover ratio is 21.2 times
Date Ratio Costco SafeWayCOST SWY
(Bloomberg Businessweek) Inventory Turnover Ratio 12.5x 12.3x
(Bloomberg Businessweek) Current Ratio 1.20x 0.80x
Date Ratio Costco SafeWayCOST SWY
(Bloomberg Businessweek) Price-to-Earnings Ratio 24.9 13.56 (Bloomberg Businessweek) Profit Margin 1.35% 1.54%
Whole Foods Market Inc. The Kroger Co. Industry Average WFM KR21.2x 14.1x -
WFMThe Kroger Co.Whole Foods Market Inc. Industry Average
2.2x 0.80x 1.4x
KR38.19 19.9 26.073.87% 1.42% 1.50%
per year, at least 50% more than its competitors. This indicates that they are very effective at
moving product in and out of their stores, optimizing their revenue generating potential.
Current Ratio is calculated by dividing a company’s total current assets by their total
current liabilities. This ratio gives an investor insight into whether or not a company is able to
meet its short-term debt obligations and be able to remain a viable organization. Whole Foods
Current Ratio of 2.2 times assets to debt exceeds the industry average of 1.4 and is ahead of each
of the competitors. This tells a prospective investor that the financial health of Whole Foods is
quite well and they have very little risk of default in any short-term obligation.
The Price-to-Earnings Ratio (P/E), could be the most often looked at ratio for prospective
investors and measures how much per dollar of reported profits investors are willing to pay. It is
calculated by dividing the Price per Share of common stock by the Earnings per Share and is
used to indicate the anticipated growth and relative risk of investing in a company. Whole Foods
P/E ratio of 38.19 as of 1/30/2013 situates the company ahead of its competitors by an
unchallenged margin.
The last ratio to analyze is Whole Foods Profit Margin, with a profit margin of 3.87% for
Sept 2012, Whole Foods Market Inc. is performing well ahead of its competition and industry
averages, indicating that the company is a great investment.
Below is a table measuring the current betas of Whole Foods and its competitors giving us a
simple but effective indication of Whole Food’s relative risk among its competitors.
Company January 31, 2013 Beta Coefficient (MSN Money)
WFM 1.03
SWY .76
COST .70
KR .37
As indicated by the above data, Whole Foods’ stock prices are more volatile than those
for its competition. A beta coefficient of 1.0 would indicate that a stock’s price changes at the
same pace as the market overall, making the risk of investing in that particular stock average.
The higher above 1.0, the riskier the stock and a beta coefficient of less than 1.0 is considered to
be less risky than average. Although Whole Foods’ beta is only slight greater than the 1.0
average, it is 25% - 175% riskier than its competitors. The particular investor’s goals and risk
aversion would therefore need to be taken into consideration on an individual basis when
deciding whether or not to invest in Whole Foods Market Inc.
After this analysis of Whole Foods using some key ratios and metrics along with a brief
company history on how the company came to be, where it is now and how it will try to move
along in the future, with solid dividends distribution for the last 5 years averaging around $.15
per share shows that the company is relatively stable. According to my research it can be safe to
say that Whole Foods Market Inc. is a safe investment. Whole Foods surpasses industry averages
in most of the categories we looked at and has a growing more conscience demographic as U.S.
culture continues to shift toward a more environmentally friendly and health conscious
consumer, which is Whole Foods target market. The company’s annual report shows a clear
defined vision and strategy for expansion, showing promise for future growth. For an investor
who is looking for a long-term investment with average to slightly above average risk and
historically above average returns, Whole Foods Market is a valuable addition to any investor
portfolio.
References
Fundamentals of Financial Management (13th edition), Brigham & Houston; South-Western,
Mason, OH, 2009
http://ycharts.com/companies/WFM/profit_margin
http://www.annualreports.com.
http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=WFM
http://www.wholefoodsmarket.com/company-info
http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=WFM