whole foods stock pitch

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Whole Foods Market (WFM)Recommendation: Buy

Analyst Carl Schiro cschiro@nd.edu Price Target: $39.15

Source:Company OverviewGeographic BreakdownBackgroundForm 10k, Statista, Whole FoodsHeadquartered in Austin, Texas where it was founded in September 1980Supermarket chain retailer of natural and organic foods that are free of artificial preservatives, sweeteners, and hydrogenated fats5th largest public food retailer in US Has over 91,000 employees and 431 supermarkets in the US, Canada, and the UKReceives an average of 8,000,000 customers per week

Revenue by Offering SectorGeographic Diversity

Number of Stores at End of Year

Growing Market SizeGeographic Diversity

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Financial & Industry Metrics Financial SummaryS&P Capital IQ, www.wholefoods.com, Form 10 Q,, Yahoo Finance

Key MetricWFMIndustryEV/EBITDA7.20x10.95xEV/Revenue0.60x0.70xPrice/Earnings 20.52x17.95x

Financial SummaryStock Charts (1 Year & 5 Year)

Stock Charts (1 Year & 5 Year)

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Financial Performance 2014 Form 10-K, MSN Finance, NDIC Projections, S&P Capital IQ

Operating Cash FlowReturn on Invested CapitalEBITDA and EBITDA MarginRevenue

Source:Strategic PositioningSolutions Offerings and Product Expertise Own brands generated over $2.1 billion in sales during 2015Currently features 5,300 SKUs, which accounted for 14% of total retail sales Approximately 50% of these exclusive brands were either characterized as Certified Organic or Non-GMO Project Verified100 new dietary supplements launched in 2015 alone

Form 10k and 10Q, Yahoo Finance,In 2003, Whole Foods became the first national Certified Organic grocer Remains the only national supermarket with all store departments and operations certifiedSome facilities have been certified through own handling plans, including Allegro Coffee line and 365 Organic Everyday Value product lineStores offer more than 25,000 organic SKUs, comprising about 30% of sales

Company has shown full commitment to buying from local producers whose products have higher quality standardsAllows the supermarket to offer customers the most savory pick of seasonal productsBolsters local economies which gives local consumers a higher disposable incomePurchased locally grown produce from over 1,200 farms (24% of produce sold in stores worldwide)

Certified Organic RetailerExclusive BrandsIn-Store ExperienceStrives to transform ford shopping from a chore into dynamic experience by intentionally designing stores to match stores missionOffers unique product mix that emphasizes high-quality standards and healthy eatingMost stores have bike racks, electric vehicle charging stations, sit-down eating areas and wine bars, customer service bars, and taproomsCEO: Stores can serve as third place where people interact besides home and officeCommitment to Local

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Growth StrategyAcquisitions

In 2015, Whole Foods announced plans to launch second store format called 365 by Whole Foods MarketMission is to target young people nationwide by offering fresh, affordable food through a smaller footprint, curated product selection, convenience, and technologyExpects to open 3 stores in 2016 and another 10 in 2017Partnering with local businesses to help drive traffic to new stores

In February 2016, Whole Foods signed 5-year partnership with $2 billion startup Instacart2014: Whole Foods customers saved more than 970,000 hours using their servicesNow available in over 16 cities which have seen share of sales increase in high single digitsGrocery delivery will expand right alongside E-Commerce

Stock price decline due to high prices that have caused consumers to explore cheaper alternativesPlan on increasing perishables within stores, which will narrow price gaps on value items and broaden selection of products at entry-level price pointsHas been offering discounts and promotions through Whole Foods appDaily downloads of Whole Foods app jumped from 1,000 to 5,000 in periods after coupons were introducedForbes, Form 10K , S&P Cap IQ

365 by Whole Foods MarketDelivery MethodsPrice CompetitionIncreased in Prepared FoodsIn December 2015, Chef Tien Ho was hired as new Global VP of Culinary and HospitalityIndicates desire to strengthen its prepared foods sector$3 billion high-margin business for Whole Foods Ho already announced a food truck test amongst many other creative proposals

Source:RisksAcquisitions

Whole Foods ranked 3rd on list of Americas most reputable retail companies in 2015Recently company had serious PR challenges including overcharging on pre-packaged goods, selling water for $6, and laying off 1,500 employeesHas begun to recover by instituting customer-friendly promotions and other discountsBiggest risk to future is hit to brand

Pillar to growth of company is announcement is 365 by Whole Foods MarketThis projects will be located next to existing store marketsReasonable to believe these more affordable stores will take away business from these highly profitable locations

Has been experiencing low same store-growth compared to the past so new store growth is essentialUltimate goal is 1,200 locationsReal Estate market becoming competitive with competitors announcing plans of growing to over 1,000 locationsMust continue to expand to keep sales high and remain dominant player in natural grocer sectorForbes, Form 10K , S&P Cap IQ

Brand ErosionCannibalization to Existing LocationsFailure to Grow Location BaseOther RisksPossibility of poor economic conditions that would adversely impact consumer spendingChanges in availability of quality natural and organic productsThreat of widespread health epidemic Loss of key management or an increased difficulty in recruiting top talent to firm

Source:Comparable Companies

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Discounted Cash Flow S&P Capital IQ,

Source:DCF Assumptions and ResultsWACC ComponentsS&P Capital IQ, NDIC valuations, Yahoo Finance

WACC ComponentsDCF ResultsDebt Structure

Source:Catalysts & Portfolio Strategy Strong strategic positioning within market that is expected to see double digit increases within the coming yearsStrategies such as 365 by Whole Foods and partnering with Instacart will target millennials who will soon have high discretionary income, which will help drive growth within the companyInnovative management team will keep companys brand intact

If Whole Foods does not continue to expand both same stores sales growth and new store development, the drop in stock price should be expected to continue downwardLarge grocery stores such as Kroger and Wal-Mart have the ability to offer much lower prices than Whole Foods for similar products, so if these operations within these companies continue to grow, expect the stock to dropFailure to restore brand name

Whole Foods, has seen a steep decline in stock price over the last year. This has been attributed to larger supermarkets like Kroger and Wal-Mart expanding their natural grocer sectors, which has shed a negative light on Whole Foods high prices. Furthermore, a plethora of negative publicity has only continued the downfall. However, I believe this will change. In a 2015 Nielson Global Health and Wellness Survey, 88% of Americans said they are willing to pay more for healthy food (this number is even higher amongst millennials). The company will restore itself in the coming years through positive PR campaigns, opening of new, unique stores, and the advancement of technology platforms. Therefore, I recommend the Notre Dame Investment Club purchase a stake in Whole Foods Market at a final implied target price of $39.15.

S&P Capital IQ, NDIC valuations,

UpsideDownsidePortfolio Strategy and Final Recommendation

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Appendix 1: Income StatementS&P Capital IQ

Source:Appendix 2: Balance SheetS&P Capital IQ

Source:Appendix 3: Statement of Cash Flows S&P Capital IQ

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