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Table of Contents

 

 

 

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 period ended April 11, 2010;

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 St.

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 o 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 (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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 April 11, 2010 was 171,449,065 shares.

 

 

 



Table of Contents

 

Whole Foods Market, Inc.

Form 10-Q

Table of Contents

 

 

Page

 

Number

 

 

Part I. Financial Information

 

 

 

Item 1. Financial Statements

 

Consolidated Balance Sheets (unaudited), April 11, 2010 and September 27, 2009

3

 

 

Consolidated Statements of Operations (unaudited), for the twelve and twenty-eight weeks ended April 11, 2010 and April 12, 2009

4

 

 

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (unaudited), for the twenty-eight weeks ended April 11, 2010 and fiscal year ended September 27, 2009

5

 

 

Consolidated Statements of Cash Flows (unaudited), for the twenty-eight weeks ended April 11, 2010 and April 12, 2009

6

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

21

 

 

Item 4. Controls and Procedures

21

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

22

 

 

Item 5. Other Information

22

 

 

Item 6. Exhibits

23

 

 

Signature

24

 

2



Table of Contents

 

Part I. Financial Information

 

Item 1. Financial Statements

 

Whole Foods Market, Inc.

Consolidated Balance Sheets (unaudited)

April 11, 2010 and September 27, 2009

(In thousands)

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

215,209

 

$

430,130

 

Short-term investments — available-for-sale securities

 

376,242

 

 

Restricted cash

 

87,207

 

71,023

 

Accounts receivable

 

122,531

 

104,731

 

Merchandise inventories

 

316,540

 

310,602

 

Prepaid expenses and other current assets

 

42,631

 

51,137

 

Deferred income taxes

 

98,944

 

87,757

 

Total current assets

 

1,259,304

 

1,055,380

 

Property and equipment, net of accumulated depreciation and amortization

 

1,895,465

 

1,897,853

 

Long-term investments — available-for-sale securities

 

47,112

 

 

Goodwill

 

655,689

 

658,254

 

Intangible assets, net of accumulated amortization

 

70,327

 

73,035

 

Deferred income taxes

 

84,130

 

91,000

 

Other assets

 

10,183

 

7,866

 

Total assets

 

$

4,022,210

 

$

3,783,388

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current installments of long-term debt and capital lease obligations

 

$

400

 

$

389

 

Accounts payable

 

207,441

 

189,597

 

Accrued payroll, bonus and other benefits due team members

 

223,138

 

207,983

 

Dividends payable

 

 

8,217

 

Other current liabilities

 

300,356

 

277,838

 

Total current liabilities

 

731,335

 

684,024

 

Long-term debt and capital lease obligations, less current installments

 

728,566

 

738,848

 

Deferred lease liabilities

 

273,168

 

250,326

 

Other long-term liabilities

 

72,132

 

69,262

 

Total liabilities

 

1,805,201

 

1,742,460

 

 

 

 

 

 

 

Series A redeemable preferred stock, $0.01 par value, 425 shares authorized,
zero and 425 shares issued and outstanding in 2010 and 2009, respectively

 

 

413,052

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, no par value, 300,000 shares authorized, 171,449 and 140,542
shares issued and outstanding in 2010 and 2009, respectively

 

1,746,847

 

1,283,028

 

Accumulated other comprehensive loss

 

(5,181

)

(13,367

)

Retained earnings

 

475,343

 

358,215

 

Total shareholders’ equity

 

2,217,009

 

1,627,876

 

Commitments and contingencies

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

4,022,210

 

$

3,783,388

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

Whole Foods Market, Inc.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share amounts)

 

 

 

Twelve weeks ended

 

Twenty-eight weeks ended

 

 

 

April 11,

 

April 12,

 

April 11,

 

April 12,

 

 

 

2010

 

2009

 

2010

 

2009

 

Sales

 

$

2,106,061

 

$

1,857,550

 

$

4,745,219

 

$

4,324,053

 

Cost of goods sold and occupancy costs

 

1,363,632

 

1,212,233

 

3,096,574

 

2,856,018

 

Gross profit

 

742,429

 

645,317

 

1,648,645

 

1,468,035

 

Direct store expenses

 

551,705

 

500,392

 

1,254,511

 

1,154,366

 

General and administrative expenses

 

62,540

 

56,832

 

138,476

 

139,432

 

Pre-opening expenses

 

11,636

 

13,789

 

24,445

 

27,853

 

Relocation, store closure and lease termination costs

 

(2,688

)

4,651

 

9,724

 

9,728

 

Operating income

 

119,236

 

69,653

 

221,489

 

136,656

 

Interest expense

 

(7,783

)

(7,696

)

(18,336

)

(21,276

)

Investment and other income (expense)

 

1,910

 

(639

)

3,693

 

1,202

 

Income before income taxes

 

113,363

 

61,318

 

206,846

 

116,582

 

Provision for income taxes

 

45,912

 

26,060

 

84,240

 

48,995

 

Net income

 

67,451

 

35,258

 

122,606

 

67,587

 

Preferred stock dividends

 

 

7,934

 

5,478

 

12,467

 

Income available to common shareholders

 

$

67,451

 

$

27,324

 

$

117,128

 

$

55,120

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.39

 

$

0.19

 

$

0.73

 

$

0.39

 

Weighted average shares outstanding

 

170,893

 

140,404

 

161,476

 

140,362

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.39

 

$

0.19

 

$

0.72

 

$

0.39

 

Weighted average shares outstanding, diluted basis

 

171,826

 

140,404

 

170,953

 

140,362

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

Whole Foods Market, Inc.

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (unaudited)

Twenty-eight weeks ended April 11, 2010 and fiscal year ended September 27, 2009

(In thousands)

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

Total

 

 

 

Shares

 

Common

 

comprehensive

 

Retained

 

shareholders’

 

 

 

outstanding

 

stock

 

income (loss)

 

earnings

 

equity

 

Balances at September 28, 2008

 

140,286

 

$

1,266,141

 

$

422

 

$

239,461

 

$

1,506,024

 

Net income

 

 

 

 

146,804

 

146,804

 

Foreign currency translation adjustments

 

 

 

(8,748

)

 

(8,748

)

Reclassification adjustments for amounts included in income, net of income taxes

 

 

 

8,440

 

 

8,440

 

Change in unrealized losses, net of income taxes

 

 

 

(13,481

)

 

(13,481

)

Comprehensive income

 

 

 

 

 

 

 

 

 

133,015

 

Redeemable preferred stock dividends

 

 

 

 

(28,050

)

(28,050

)

Issuance of common stock pursuant to team member stock plans

 

256

 

4,286

 

 

 

4,286

 

Excess tax benefit related to exercise of team member stock options

 

 

54

 

 

 

54

 

Share-based payment expense

 

 

12,795

 

 

 

12,795

 

Other

 

 

(248

)

 

 

(248

)

Balances at September 27, 2009

 

140,542

 

1,283,028

 

(13,367

)

358,215

 

1,627,876

 

Net income

 

 

 

 

122,606

 

122,606

 

Foreign currency translation adjustments

 

 

 

1,794

 

 

1,794

 

Reclassification adjustments for amounts included in income, net of income taxes

 

 

 

7,025

 

 

7,025

 

Change in unrealized losses, net of income taxes

 

 

 

(633

)

 

(633

)

Comprehensive income

 

 

 

 

 

 

 

 

 

130,792

 

Redeemable preferred stock dividends

 

358

 

5,195

 

 

(5,478

)

(283

)

Conversion of preferred stock

 

29,311

 

413,052

 

 

 

413,052

 

Issuance of common stock pursuant to team member stock plans

 

1,238

 

34,400

 

 

 

34,400

 

Excess tax benefit related to exercise of team member stock options

 

 

1,999

 

 

 

1,999

 

Share-based payment expense

 

 

9,173

 

 

 

9,173

 

Balances at April 11, 2010

 

171,449

 

$

1,746,847

 

$

(5,181

)

$

475,343

 

$

2,217,009

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

Whole Foods Market, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

 

Twenty-eight weeks ended

 

 

 

April 11,

 

April 12,

 

 

 

2010

 

2009

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

122,606

 

$

67,587

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

146,795

 

141,815

 

Loss (gain) on disposition of fixed assets

 

(2,172

)

1,378

 

Impairment of long-lived assets

 

1,875

 

15,383

 

Share-based payment expense

 

9,173

 

6,142

 

LIFO expense (benefit)

 

(2,805

)

3,600

 

Deferred income tax expense (benefit)

 

(7,773

)

1,892

 

Excess tax benefit related to exercise of team member stock options

 

(1,844

)

 

Deferred lease liabilities

 

19,954

 

29,406

 

Other

 

(3,895

)

8,413

 

Net change in current assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(17,581

)

(5,570

)

Merchandise inventories

 

(2,734

)

297

 

Prepaid expenses and other current assets

 

10,370

 

29,964

 

Accounts payable

 

17,565

 

3,827

 

Accrued payroll, bonus and other benefits due team members

 

14,980

 

3,883

 

Other current liabilities

 

33,342

 

8,548

 

Net change in other long-term liabilities

 

5,127

 

(1,469

)

Net cash provided by operating activities

 

342,983

 

315,096

 

Cash flows from investing activities

 

 

 

 

 

Development costs of new locations

 

(110,966

)

(142,462

)

Other property and equipment expenditures

 

(36,055

)

(42,757

)

Purchase of available-for-sale securities

 

(615,492

)

 

Sale of available-for-sale securities

 

192,685

 

 

Increase in restricted cash

 

(16,184

)

(3

)

Other investing activities

 

(1,048

)

(669

)

Net cash used in investing activities

 

(587,060

)

(185,891

)

Cash flows from financing activities

 

 

 

 

 

Preferred stock dividends paid

 

(8,500

)

(11,333

)

Issuance of common stock

 

34,321

 

1,952

 

Excess tax benefit related to exercise of team member stock options

 

1,844

 

 

Proceeds from issuance of redeemable preferred stock, net

 

 

413,052

 

Proceeds from long-term borrowings

 

 

123,000

 

Payments on long-term debt and capital lease obligations

 

(110

)

(320,866

)

Net cash provided by financing activities

 

27,555

 

205,805

 

Effect of exchange rate changes on cash and cash equivalents

 

1,601

 

(3,380

)

Net change in cash and cash equivalents

 

(214,921

)

331,630

 

Cash and cash equivalents at beginning of period

 

430,130

 

30,534

 

Cash and cash equivalents at end of period

 

$

215,209

 

$

362,164

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Interest paid

 

$

28,653

 

$

32,214

 

Federal and state income taxes paid

 

$

78,616

 

$

16,413

 

Non-cash transaction:

 

 

 

 

 

Conversion of redeemable preferred stock into common stock

 

$

418,247

 

$

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

Whole Foods Market, Inc.

Notes to Consolidated Financial Statements (unaudited)

April 11, 2010

 

(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, the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2009. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair 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 fifty-two or fifty-three week fiscal year ending on the last Sunday in September. The first fiscal quarter is sixteen weeks, the second and third quarters each are twelve weeks, and the fourth quarter is twelve or thirteen weeks. Fiscal years 2010 and 2009 are fifty-two week fiscal years. We have 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 twelve and twenty-eight weeks ended:

 

 

 

April 11,

 

April 12,

 

 

 

2010

 

2009

 

Sales:

 

 

 

 

 

United States

 

97.0

%

97.4

%

Canada & United Kingdom

 

3.0

%

2.6

%

Total sales

 

100.0

%

100.0

%

 

The following is a summary of the percentage of net long-lived assets by geographic area:

 

 

 

April 11,

 

September 27,

 

 

 

2010

 

2009

 

Long-lived assets, net:

 

 

 

 

 

United States

 

96.4

%

96.5

%

Canada & United Kingdom

 

3.6

%

3.5

%

Total long-lived assets, net

 

100.0

%

100.0

%

 

(2) Summary of Significant Accounting Policies

Fair Value Measurements

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value in generally accepted accounting principles. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:

 

·                  Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.

·                  Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

·                  Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

The Company holds money market fund investments that are classified as cash equivalents or restricted cash and available-for-sale securities generally consisting of state and local government obligations that are measured at fair value on a recurring basis based on quoted prices in active markets for identical assets. Investments are stated at fair value, based on quoted prices in active markets for identical assets, with unrealized gains and losses included as a component of shareholders’ equity until realized. The carrying amount of the Company’s interest rate swap agreement is measured at fair value on a recurring basis using a standard valuation model that incorporates inputs other than quoted prices that are observable, including interest rate curves. Declines in fair value below the Company’s carrying value deemed to be other than temporary are charged against net earnings.

 

The carrying amounts of trade and other accounts receivable, trade accounts payable, accrued payroll, bonuses and team member benefits, and other accrued expenses approximate fair value because of the short maturity of those instruments. Store

 

7



Table of Contents

 

closure reserves and estimated workers’ compensation claims are recorded at net present value to approximate fair value. The carrying amount of our five-year term loan approximates fair value because it has a variable interest rate which reflects market changes to interest rates and contains variable risk premiums based on the Company’s corporate ratings.

 

Effective September 28, 2009, the Company adopted the provisions of Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” for nonfinancial assets and liabilities. Specifically, the Company measures certain property and equipment, and intangible assets at fair value, resulting from impairment as appropriate. The fair value is determined using management’s best estimate based on a discounted cash flow model based on future store operating results using internal projections. When the Company impairs assets related to an operating location a charge to write down the related assets to fair value is included in the “Direct store expenses” line item on the Consolidated Statements of Operations. When the Company commits to relocate, close, or dispose of a location a charge to write down the related assets is included in the “Relocation, store closure and lease termination costs” line item on the Consolidated Statements of Operations.

 

Effective January 18, 2010, the Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements.” Specifically, the Company assured compliance with clarified guidance related to the determination of a class of assets or liabilities for which separate fair value measurement should be disclosed and the need to disclose valuation techniques used to measure both recurring and nonrecurring Level 2 or Level 3 fair value measurements. Expanded disclosures related to significant transfers in and out of Level 1 and Level 2, nor the requirement related to the presentation of the Level 3 reconciliation are applicable to the Company at April 11, 2010.

 

Details on the fair value of the Company’s assets and liabilities recorded at fair value are included in Note 3 to the consolidated financial statements, “Fair Value Measurements.”

 

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued new guidance within ASC 805, “Business Combinations,” which replaces previous guidance on this topic and applies to all transactions or other events in which an entity obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration. The new provisions establish principles and requirements for how the acquirer recognizes and measures identifiable assets acquired, liabilities assumed, any noncontrolling interest and goodwill acquired, and also provide for disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Additional amendments address the recognition and initial measurement, subsequent measurement, and disclosure of assets and liabilities arising from contingencies acquired as part of a business combination. The newly issued guidance is effective for fiscal years beginning after December 15, 2008 and is applied prospectively to business combinations completed on or after that date. The provisions are effective for the Company’s fiscal year ending September 26, 2010. We do not expect the adoption of these provisions to have a significant effect on our consolidated financial statements.

 

In April 2008, the FASB issued amendments to ASC 350, “Intangibles — Goodwill and Other.” These provisions amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of the position is to improve the consistency between the determination of the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. The amended guidance is effective for fiscal years beginning after December 15, 2008. These provisions are effective for the Company’s fiscal year ending September 26, 2010. We do not expect the adoption of these provisions to have a significant effect on our consolidated financial statements.

 

In March 2010, the FASB issued ASU No. 2010-11, “Derivatives and Hedging,” which amends ASC 815, “Derivatives and Hedging.” The amended guidance clarifies the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. The amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting as well as under which circumstances embedded credit derivative features would not qualify for the scope exception and would be subject to potential bifurcation and separate accounting. The guidance provided in ASU No. 2010-11 is effective at the beginning of the Company’s first fiscal quarter beginning after June 15, 2010. ASU No. 2010-11 is effective for the Company’s fourth quarter of fiscal year ending September 26, 2010. We do not expect the adoption of this provision to affect our future consolidated financial statements.

 

8



Table of Contents

 

(3) Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company holds money market fund investments that are classified as either cash equivalents or restricted cash and available-for-sale marketable securities generally consisting of state and local government obligations that are measured at fair value on a recurring basis, based on current market prices. The Company’s interest rate swap agreement is measured at fair value on a recurring basis using a standard valuation model that incorporates expected interest rate curves.

 

The Company held the following financial assets and liabilities at fair value, based on the hierarchy input levels indicated, on a recurring basis, at April 11, 2010 and September 27, 2009 (in thousands):

 

April 11, 2010

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Money market fund investments

 

$

162,576

 

$

 

$

 

$

162,576

 

Marketable securities — available-for-sale

 

423,354

 

 

 

423,354

 

Total

 

$

585,930

 

$

 

$

 

$

585,930

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

 

$

10,427

 

$

 

$

10,427

 

 

September 27, 2009

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Money market fund investments

 

$

509,395

 

$

 

$

 

$

509,395

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

 

$

20,588

 

$

 

$

20,588

 

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the twelve and twenty-eight weeks ended April 11, 2010, the Company recorded fair value adjustments totaling approximately $0.1 million and $1.9 million, respectively, reducing the carrying value of related property and equipment to zero. Fair value adjustments were included in the following line items on the Consolidated Statements of Operations for the periods indicated (in thousands):

 

 

 

Twelve weeks ended

 

Twenty-eight weeks ended

 

 

 

April 11,

 

April 12,

 

April 11,

 

April 12,

 

 

 

2010

 

2009

 

2010

 

2009

 

Direct store expenses

 

$

33

 

$

12,944

 

$

979

 

$

14,369

 

Relocation, store closure and lease termination costs

 

112

 

82

 

896

 

701

 

Total impairment of fixed assets

 

$

145

 

$

13,026

 

$

1,875

 

$

15,070

 

 

(4) FTC Settlement Agreement

The Federal Trade Commission (“FTC”) challenged the Company’s August 28, 2007 acquisition of Wild Oats Markets, Inc. The Company reached a settlement agreement with the FTC, and received final approval of the settlement agreement by the FTC Commissioners on June 1, 2009 after a 30-day public comment period. Under the terms of the agreement, a third-party divestiture trustee was appointed to market for sale until September 8, 2009:  leases and related assets for 19 non-operating former Wild Oats stores; leases and related fixed assets (excluding inventory) for 12 operating acquired Wild Oats stores and one operating Whole Foods Market store; and Wild Oats trademarks and other intellectual property associated with the Wild Oats stores.

 

Pursuant to the settlement agreement, the divestiture period was extended by the FTC until March 8, 2010 to allow for good faith offers that were not finalized for six operating and two non-operating former Wild Oats stores as well as Wild Oats trademarks and other intellectual property associated with the Wild Oats stores. At the conclusion of the divestiture period, the divestiture trustee submitted buyers awaiting FTC approval for a total of two operating and one non-operating former Wild Oats stores, as well as the Wild Oats trademarks and intellectual property. The 11 remaining operating stores and 18 non-operating stores may be retained by the Company without further obligation to attempt to divest.

 

Pursuant to the FTC’s approval of the final consent order, the Company recorded adjustments during the second half of fiscal year 2009 totaling approximately $4.8 million to measure long-lived assets and certain lease liabilities related to certain of the operating stores for which sale and transfer of the assets was determined to be probable or more likely than not at the lower of carrying amount or fair value less costs to sell. The total fair value associated with these locations at April 11, 2010 was approximately $0.1 million. Additionally, the Company recorded adjustments totaling approximately $2.7 million during the twelve weeks ended April 11, 2010 to measure the store closure reserve related to the remaining non-operating store at

 

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fair value. The Company has determined that these locations do not meet the conditions for reporting their results in discontinued operations. Cash expenses relating to legal and trustee fees are not expected to be material. No material charges are expected related to the potential sale of the two operating stores, the one non-operating property for which a lease liability reserve is already recorded, or the trademarks and intellectual property which have been fully amortized.

 

(5) Property and Equipment

Balances of major classes of property and equipment are as follows (in thousands):

 

 

 

April 11,

 

September 27,

 

 

 

2010

 

2009

 

Land

 

$

48,928

 

$

48,928

 

Buildings and leasehold improvements

 

1,764,673

 

1,687,103

 

Capitalized real estate leases

 

24,874

 

24,874

 

Fixtures and equipment

 

1,237,034

 

1,187,195

 

Construction in progress and equipment not yet in service

 

126,918

 

130,068

 

 

 

3,202,427

 

3,078,168

 

Less accumulated depreciation and amortization

 

(1,306,962

)

(1,180,315

)

 

 

$

1,895,465

 

$

1,897,853

 

 

Depreciation expense related to property and equipment totaled approximately $60.7 and $141.3 million for the twelve and twenty-eight weeks ended April 11, 2010, respectively. During the same periods of the prior fiscal year, depreciation expense related to property and equipment totaled approximately $58.7 million and $136.4 million, respectively. Property and equipment included accumulated accelerated depreciation and other asset impairments totaling approximately $8.3 million and $9.6 million at April 11, 2010 and September 27, 2009, respectively. During the twelve weeks ended April 11, 2010, the Company sold certain land and idle buildings that had been held for sale totaling approximately $4.8 million at September 27, 2009. Total proceeds, net of closing costs, were approximately $8.0 million, resulting in a gain on the sale of assets of approximately $3.2 million. The gain was included in the “Relocation, store closure and lease termination costs” line item on the Consolidated Statements of Operations. Additionally, the Company held approximately $2.3 million, net of accumulated depreciation, related to certain buildings and equipment held for sale as of April 11, 2010 in the “Prepaid expenses and other current assets” line item on the Consolidated Balance Sheets.

 

(6) Goodwill and Other Intangible Assets

Goodwill is reviewed for impairment annually at the beginning of the fourth fiscal quarter, or more frequently if impairment indicators arise. We allocate goodwill to one reporting unit for goodwill impairment testing. There were no impairments of goodwill during the twenty-eight weeks ended April 11, 2010 or April 12, 2009. The Company recorded goodwill adjustments of approximately $2.6 million and $2.3 million, related to actual exit costs of certain restructuring reserves related to the Wild Oats acquisition, during the twenty-eight weeks ended April 11, 2010 and April 12, 2009, respectively.

 

Indefinite-lived intangible assets are evaluated for impairment quarterly, or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. There were no impairments of indefinite-lived intangible assets during the twenty-eight weeks ended April 11, 2010 or April 12, 2009.

 

Definite-lived intangible assets are amortized over the useful life of the related agreement. We acquired definite-lived intangible assets totaling approximately zero and $0.5 million, primarily consisting of acquired leasehold rights, during the twelve and twenty-eight weeks ended April 11, 2010, respectively. During the twelve and twenty-eight weeks ended April 12, 2009 we acquired definite-lived intangible assets totaling approximately $0.4 million, primarily consisting of acquired leasehold rights. There were no impairments of definite-lived intangible assets during the twenty-eight weeks ended April 11, 2010. The Company recorded impairment charges related to certain definite-lived intangible assets during the twelve and twenty-eight weeks ended April 12, 2009, totaling approximately $0.1 million and $0.3 million, respectively. Asset impairment charges were included in the “Direct store expenses” line item on the Consolidated Statements of Operations. Amortization associated with intangible assets totaled approximately $1.3 million and $3.2 million for the twelve and twenty-eight weeks ended April 11, 2010, and approximately $1.6 million and $3.7 million, respectively, for the same periods in the prior fiscal year.

 

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The components of intangible assets were as follows (in thousands):

 

 

 

April 11, 2010

 

September 27, 2009

 

 

 

Gross carrying

 

Accumulated

 

Gross carrying

 

Accumulated

 

 

 

amount

 

amortization

 

amount

 

amortization

 

Indefinite-lived contract-based

 

$

1,646

 

$

 

$

1,566

 

$

 

Definite-lived contract-based

 

96,753

 

(28,107

)

96,515

 

(25,105

)

Definite-lived marketing-related and other

 

225

 

(190

)

225

 

(166

)

 

 

$

98,624

 

$

(28,297

)

$

98,306

 

$

(25,271

)

 

Amortization associated with the net carrying amount of intangible assets at April 11, 2010 is estimated to be $2.7 million for the remainder of fiscal year 2010, $5.7 million in fiscal year 2011, $5.7 million in fiscal year 2012, $4.9 million in fiscal year 2013, $4.8 million in fiscal year 2014, and $4.5 million in fiscal year 2015.

 

(7) Reserves for Closed Properties

Following is a summary of store closure reserves activity during the twenty-eight weeks ended April 11, 2010 and fiscal year ended September 27, 2009 (in thousands):

 

 

 

April 11,

 

September 27,

 

 

 

2010

 

2009

 

Beginning balance

 

$

69,228

 

$

69,269

 

Additions

 

2,951

 

8,276

 

Usage

 

(11,626

)

(17,841

)

Adjustments

 

5,805

 

9,524

 

Ending balance

 

$

66,358

 

$

69,228

 

 

Additions to store closure reserves relate to the accretion of interest on existing reserves and new closures. During the twenty-eight weeks ended April 11, 2010, the Company did not record any additional reserves related to new closures. Usage included approximately $4.6 million and $4.2 million in termination fees related to certain idle properties, and approximately $7.0 million and $13.7 million in ongoing cash rental payments during the twenty-eight weeks ended April 11, 2010 and fiscal year ended September 27, 2009, respectively. During the first quarter of fiscal year 2010, the Company recognized charges for adjustments of approximately $10.1 million related to increases in reserves primarily due to changes in certain subtenant income estimates related to the continued depression in the commercial real estate market, which are included on the accompanying Consolidated Statements of Operations under the caption “Relocation, store closure and lease termination costs.” Additionally, during the twenty-eight weeks ended April 11, 2010 the Company recorded goodwill adjustments of approximately $2.6 million.

 

(8) Long-Term Debt

The Company has outstanding a $700 million, five-year term loan agreement that expires in 2012. The loan bears interest at our option of the alternative base rate (“ABR”) plus an applicable margin, currently 0.75%, or LIBOR plus an applicable margin, currently 1.75%, based on the Company’s Moody’s and S&P rating. These applicable margins are currently the maximum allowed under these agreements. The interest period on LIBOR borrowings may range from one to six months at our option. The participating banks hold security interests in certain of the Company’s assets to collateralize amounts outstanding under the term loan. The term loan agreement contains certain affirmative covenants including maintenance of certain financial ratios and certain negative covenants including limitations on additional indebtedness and payments as defined in the agreement. At April 11, 2010 we were in compliance with all applicable debt covenants. On May 12, 2010 the Company repaid the $210 million portion of the term loan that was not subject to an interest rate swap agreement.

 

The Company also has outstanding a $350 million revolving line of credit that extends to 2012. All outstanding amounts borrowed under this agreement bear interest at our option of the ABR plus an applicable margin, currently 0.875%, or LIBOR plus an applicable margin, currently 1.875%, based on the Company’s Moody’s and S&P rating. These applicable margins are currently the maximum allowed under these agreements. The participating banks hold security interests in certain of the Company’s assets to collateralize amounts outstanding under the revolving credit facility. The credit agreement contains certain affirmative covenants including maintenance of certain financial ratios and certain negative covenants including limitations on additional indebtedness and payments as defined in the agreement. Commitment fees on the undrawn amount, reduced by outstanding letters of credit, are payable under this agreement. At April 11, 2010 and September 27, 2009 the Company had no amounts drawn under this agreement. The amount available to the Company under the agreement was effectively reduced to approximately $337.7 million and $335.2 million by outstanding letters of credit totaling approximately $12.3 million and $14.8 million at April 11, 2010 and September 27, 2009, respectively.

 

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During fiscal year 2008, the Company entered into an interest rate swap agreement, which expires in October 2010, with a notional amount of $490 million to effectively fix the interest rate on $490 million of the term loan at 4.718%, excluding the applicable margin and associated fees, to help manage cash flow exposure related to interest rate fluctuations. The interest rate swap was designated as a cash flow hedge. Hedge ineffectiveness was not material during the twenty-eight weeks ended April 11, 2010 or the same period of the prior fiscal year.

 

The interest rate swap agreement does not contain a credit-risk-related contingent feature. The carrying amount of the Company’s interest rate swap totaled approximately $10.4 million and $20.6 million at April 11, 2010 and September 27, 2009, respectively. The Company had accumulated net derivative losses of approximately $6.2 million and $12.6 million, net of taxes, in accumulated other comprehensive income as of April 11, 2010 and September 27, 2009, respectively, related to this cash flow hedge. These losses are being recognized as an adjustment to interest expense over the same period in which the interest costs on the related debt are recognized. During the twelve and twenty-eight weeks ended April 11, 2010 the Company had reclassified approximately $3.0 million and $7.0 million, respectively, from accumulated other comprehensive income related to ongoing interest payments that was included in the “Interest expense” line item on the Consolidated Statements of Operations. During the twelve and twenty-eight weeks ended April 12, 2009 the Company had reclassified approximately $2.2 million and $3.3 million, respectively, from accumulated other comprehensive income related to ongoing interest payments. The Company expects to reclass approximately $10.4 million from accumulated other comprehensive income to interest expense over the remaining life of the agreement.

 

(9) Redeemable Preferred Stock

During the first quarter of fiscal year 2009, the Company issued 425,000 shares of Series A 8% Redeemable, Convertible Exchangeable Participating Preferred Stock, $0.01 par value per share (“Series A Preferred Stock”) to affiliates of Leonard Green & Partners, L.P., for approximately $413.1 million, net of approximately $11.9 million in closing and issuance costs. The Series A Preferred Stock was classified as temporary shareholders’ equity at September 27, 2009 since the shares were (i) redeemable at the option of the holder and (ii) had conditions for redemption which are not solely within the control of the Company. The holders of the Series A Preferred Stock were entitled to an 8% dividend, payable quarterly on the first day of each calendar quarter in cash. The Company paid cash dividends on the Series A Preferred Stock totaling zero and $8.5 million during the twelve and twenty-eight weeks ended April 11, 2010. During the twelve and twenty-eight weeks ended April 12, 2009 the Company paid cash dividends on the Series A Preferred Stock totaling $8.5 million and approximately $11.3 million, respectively.

 

On October 23, 2009 the Company announced its intention to call all 425,000 outstanding shares of the Series A Preferred Stock for redemption on November 27, 2009 in accordance with the terms governing such Series A Preferred Stock. On November 26, 2009 the holders converted all 425,000 outstanding shares of the Series A Preferred Stock. The Series A Preferred Stock was converted to common stock based on the quotient of (i) the liquidation preference plus accrued dividends and (ii) 1,000, multiplied by the conversion rate of 68.9655. At the conversion date, the liquidation preference of the Series A Preferred Stock of $425 million and accrued dividends of approximately $5.2 million converted into approximately 29.7 million shares of common stock of the Company.

 

(10) Comprehensive Income

Our comprehensive income was comprised of net income; unrealized losses on investments; unrealized losses on cash flow hedge instruments, including reclassification adjustments of unrealized losses to net income related to ongoing interest payments; and foreign currency translation adjustments, net of income taxes.

 

Comprehensive income, net of related tax effects, was as follows (in thousands):

 

 

 

Twelve weeks ended

 

Twenty-eight weeks ended

 

 

 

April 11,

 

April 12,

 

April 11,

 

April 12,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income

 

$

67,451

 

$

35,258

 

$

122,606

 

$

67,587

 

Foreign currency translation adjustments, net

 

(1,312

)

(490

)

1,794

 

(15,701

)

Reclassification adjustments for amounts included in net income, net

 

3,046

 

2,189

 

7,025

 

3,283

 

Unrealized losses, net

 

(183

)

845

 

(633

)

(9,998

)

Comprehensive income

 

$

69,002

 

$

37,802

 

$

130,792

 

$

45,171

 

 

Unrealized loss on investments, net of tax, totaled approximately $50,000 and $60,000 for the twelve and twenty-eight weeks ended April 11, 2010. At April 11, 2010, accumulated other comprehensive loss consisted of foreign currency translation

 

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adjustment gains of approximately $1.0 million and unrealized losses on cash flow hedge instruments and investments of approximately $6.2 million, net of related income tax effect of approximately $4.2 million.

 

(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 for the twelve and twenty-eight weeks ended April 11, 2010 includes the dilutive effect of common stock equivalents consisting of incremental common shares deemed outstanding from the assumed exercise of stock options. Additionally, the computation of diluted earnings per share for the twenty-eight weeks ended April 11, 2010 includes the assumed conversion of Series A Preferred Stock.

 

A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in thousands, except per share amounts):

 

 

 

Twelve weeks ended

 

Twenty-eight weeks ended

 

 

 

April 11,

 

April 12,

 

April 11,

 

April 12,

 

 

 

2010

 

2009

 

2010

 

2009

 

Income available to common shareholders
(numerator for basic earnings per share)

 

$

67,451

 

$

27,324

 

$

117,128

 

$

55,120

 

Preferred stock dividends

 

 

 

5,478

 

 

Adjusted income available to common shareholders (numerator for diluted earnings per share)

 

$

67,451

 

$

27,324

 

$

122,606

 

$

55,120

 

Weighted average common shares outstanding (denominator for basic earnings per share)

 

170,893

 

140,404

 

161,476

 

140,362

 

Potential common shares outstanding:

 

 

 

 

 

 

 

 

 

Incremental shares from assumed exercise of stock options

 

933

 

 

654

 

 

Assumed conversion of redeemable preferred stock

 

 

 

8,823

 

 

Weighted average common shares outstanding and potential additional common shares outstanding (denominator for diluted earnings per share)

 

171,826

 

140,404

 

170,953

 

140,362

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.39

 

$

0.19

 

$

0.73

 

$

0.39

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.39

 

$

0.19

 

$

0.72

 

$

0.39

 

 

The computation of diluted earnings per share for the twelve and twenty-eight weeks ended April 11, 2010 does not include options to purchase approximately 12.2 million shares and 12.3 million shares of common stock, respectively, due to their antidilutive effect. For the twelve and twenty-eight weeks ended April 12, 2009, the computation of diluted earnings per share does not include options to purchase approximately 16.6 million shares and 16.9 million shares of common stock, respectively, or the conversion of Series A Preferred Stock to approximately 29.3 million shares and 19.6 million shares, respectively, of common stock due to their antidilutive effect.

 

(12) Share-Based Payments

Our Company maintains several stock based incentive plans. We grant options to purchase common stock under our Whole Foods Market 2009 Stock Incentive Plan. Under this plan, options are granted at an option price equal to the market value of the stock at the grant date and are generally exercisable ratably over a four-year period beginning one year from grant date and have a five or seven year term. The market value of the stock is determined as the closing stock price at the grant date.  At April 11, 2010 and September 27, 2009 there were approximately 15.8 million and 15.4 million shares, respectively, of our common stock available for future stock option grants.

 

Total unrecognized share-based payment expense related to nonvested stock options, net of estimated forfeitures, was approximately $25.1 million as of the end of the second quarter of fiscal year 2010 and related to approximately 4.7 million shares. We anticipate this expense to be recognized over a weighted average period of approximately 2.4 years.

 

Share-based payment expense recognized during the twelve and twenty-eight weeks ended April 11, 2010 totaled approximately $3.9 million and $9.2 million, respectively. Share-based payment expense recognized during the twelve and twenty-eight weeks ended April 12, 2009 totaled approximately $2.4 million and $6.1 million, respectively. All share-based payment expense consisted entirely of stock option expense. The second quarter of fiscal year 2009 included a $0.5 million credit adjustment to the expense recognized for the acceleration of stock options in September 2005, to adjust for actual

 

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experience. Share-based payment expense was included in the following line items on the Consolidated Statements of Operations for the periods indicated (in thousands):

 

 

 

Twelve weeks ended

 

Twenty-eight weeks ended

 

 

 

April 11,

 

April 12,

 

April 11,

 

April 12,

 

 

 

2010

 

2009

 

2010

 

2009

 

Cost of goods sold and occupancy costs

 

$

165

 

$

49

 

$

385

 

$

172

 

Direct store expenses

 

2,265

 

1,277

 

5,295

 

3,467

 

General and administrative expenses

 

1,502

 

1,027

 

3,493

 

2,503

 

Share-based payment expense before income taxes

 

3,932

 

2,353

 

9,173

 

6,142

 

Income tax benefit

 

(1,587

)

(1,082

)

(3,699

)

(2,513

)

Net share-based payment expense

 

$

2,345

 

$

1,271

 

$

5,474

 

$

3,629

 

 

(13) Commitments and Contingencies

The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability, and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. While we believe that our assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.

 

From time to time we are a party to legal proceedings including matters involving personnel and employment issues, personal injury, intellectual property, real estate and other proceedings arising in the ordinary course of business. The Company has established loss provisions for matters in which losses are probable and the amount of loss can be reasonably estimated. The Company does not believe that any of these proceedings arising in the ordinary course of business, either alone or in the aggregate, will have a material adverse effect on the Company’s results of operations, cash flows or financial condition. Although management does not expect that the outcome in these proceedings will have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we could incur judgments or enter into settlements of claims that could materially impact our results.

 

On October 27, 2008, Whole Foods Market was served with the complaint in Kottaras v. Whole Foods Market, Inc., a putative class action filed in the United States District Court for the District of Columbia, seeking treble damages, equitable, injunctive, and declaratory relief and alleging that the acquisition and merger between Whole Foods Market and Wild Oats violates various provisions of the federal antitrust laws. This case is in the preliminary stages. Whole Foods Market cannot at this time predict the likely outcome of this judicial proceeding or estimate the amount or range of loss or possible loss that may arise from it. The Company has not accrued any loss related to the outcome of this case as of April 11, 2010.

 

(14) Subsequent Events

On May 12, 2010, the Company repaid the $210 million portion of its $700 million term note maturing in 2012 that was not subject to an interest rate swap agreement. The Company evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the date the financial statements were issued.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward-looking statements that we make from time to time in filings with the Securities and Exchange Commission (“SEC”), news releases, reports, proxy statements, registration statements and other written communications, as well as oral forward-looking statements made from time to time by representatives of our Company. These risks and uncertainties include those listed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2009. These risks and uncertainties and additional risks and uncertainties not presently known to us or that we currently deem immaterial may cause our business, financial condition, operating results and cash flows to be materially adversely affected. Except for the historical information contained herein, the matters discussed in this analysis are forward-looking statements that involve risks and uncertainties, including general business conditions, changes in overall economic conditions that impact consumer spending, including fuel prices and housing market trends, the impact of competition, and other factors which are often beyond the control of the Company. The Company does not undertake any obligation to update forward-looking statements except as required by law.

 

General

Whole Foods Market, Inc. is the leading natural and organic foods supermarket and America’s first national “Certified Organic” grocer. Our Company mission is to promote vitality and well-being for all individuals by supplying the highest quality, most wholesome foods available. 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. We opened our first store in Texas in 1980 and, as of April 11, 2010, we operated 292 stores: 281 stores in 38 U.S. states and the District of Columbia; six stores in Canada; and five stores in the United Kingdom. We have one operating segment, natural and organic foods supermarkets.

 

Our results of operations have been and may continue to be materially affected by the timing and number of new store openings. Stores typically open within two years after entering the store development pipeline. New stores generally become profitable during their first year of operation; although some new stores may incur operating losses for the first several years of operation. The Company historically has experienced lower average weekly sales in the fourth quarter, which typically results in lower gross profit and higher direct store expenses as a percentage of sales.

 

Sales of a store are deemed to be comparable commencing in the fifty-third full week after the store was opened or acquired. Identical store sales exclude sales from relocated stores and remodeled stores with changes in square footage greater than 20% from the comparable calculation to reduce the impact of square footage growth on the comparison. Stores closed for eight or more days are excluded from the comparable and identical store base from the first fiscal week of closure until re-opened for a full fiscal week.

 

The Company reports its results of operations on a fifty-two or fifty-three week fiscal year ending on the last Sunday in September. Fiscal years 2010 and 2009 are fifty-two week years.

 

Economic and Industry Factors

Food retailing is a large, intensely competitive industry. Our competition varies across the Company and includes but is not limited to local, regional, national and international conventional and specialty supermarkets, natural foods stores, warehouse membership clubs, smaller specialty stores, farmers’ markets, and restaurants, each of which competes with us on the basis of product selection, quality, customer service, price or a combination of these factors. Natural and organic food continues to be one of the fastest growing segments of food retailing today.

 

As the economy and consumer confidence improves, we are gaining back customers at a faster rate than our competitors. Our value work in perishables clearly has resonated with our customers as evidenced by our strong rebounds in perishable sales. Our 7.7% identical store sales growth was driven by healthy increases in both transaction count and basket size, with about two-thirds of the increase coming from higher transaction counts. With the average price per item remaining flat, our first increase in basket size since the fourth quarter of fiscal year 2008 was driven entirely by our customers putting more items into their basket. We remain focused on continuing to strike the right balance between driving sales, improving our value offerings, and maintaining margin. While many of our competitors have wavered on their pricing strategies, we are committed to our goal of offering competitive prices on known value items, day in and day out, along with robust promotional programs.

 

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Outlook for Fiscal Year 2010

Based on year-to-date results through the second quarter, the Company has raised its sales outlook for the full fiscal year 2010 to sales growth of 11.0% to 12.0%, comparable store sales growth of 6.0% to 7.0%, and identical store sales growth of 5.5% to 6.5%. The Company has no relocations or significant expansions this fiscal year, so after the Lincoln Park store cycles over its opening in May, comparable and identical store sales growth will be the same.

 

The Company expects operating margin of 4.6% to 4.7% for fiscal year 2010. For the third and fourth quarters, the Company does not expect to generate the same high level of year-over-year basis point improvement in gross profit as a percentage of sales, excluding LIFO, that it produced in the first half of the year, as the Company has cycled over the shift in its pricing strategy that occurred in the first half of last year. In addition, the Company is committed to maintaining its relative price positioning which might require a higher level of price investments going forward if favorable buying opportunities are not available to the same extent they have been in the past.

 

The Company expects general and administrative expenses as a percentage of sales for the full fiscal year 2010 to be in line with year-to-date fiscal year 2010 results of 2.9% excluding FTC-related legal fees. The Company expects pre-opening and relocation costs for the full fiscal year 2010 to be in the range of $58 million to $60 million. Capital expenditures for the fiscal year are expected to be in the range of $300 million to $350 million. The Company expects to open 16 new stores this year, nine of which have already opened, translating to a 6.1% increase in ending square footage. The Company expects to produce cash flows from operations in excess of its capital expenditure requirements on an annual basis, including sufficient cash flow to fund the 47 stores in its current development pipeline.

 

The Company expects diluted earnings per share to range from $1.33 to $1.37 for fiscal year 2010.

 

Results of Operations

The following table sets forth the Company’s statements of operations data expressed as a percentage of sales:

 

 

 

Twelve weeks ended

 

Twenty-eight weeks ended

 

 

 

April 11,

 

April 12,

 

April 11,

 

April 12,

 

 

 

2010

 

2009

 

2010

 

2009

 

Sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of goods sold and occupancy costs

 

64.7

 

65.3

 

65.3

 

66.0

 

Gross profit

 

35.3

 

34.7

 

34.7

 

34.0

 

Direct store expenses

 

26.2

 

26.9

 

26.4

 

26.7

 

General and administrative expenses

 

3.0

 

3.1

 

2.9

 

3.2

 

Pre-opening expenses

 

0.6

 

0.7

 

0.5

 

0.6

 

Relocation, store closure and lease termination costs

 

(0.1

)

0.3

 

0.2

 

0.2

 

Operating income

 

5.7

 

3.7

 

4.7

 

3.2

 

Interest expense

 

(0.4

)

(0.4

)

(0.4

)

(0.5

)

Investment and other income (expense)

 

0.1

 

 

0.1

 

 

Income before income taxes

 

5.4

 

3.3

 

4.4

 

2.7

 

Provision for income taxes

 

2.2

 

1.4

 

1.8

 

1.1

 

Net income

 

3.2

 

1.9

 

2.6

 

1.6

 

Preferred stock dividends

 

 

0.4

 

0.1

 

0.3

 

Income available to common shareholders

 

3.2

%

1.5

%

2.5

%

1.3

%

 

Figures may not sum due to rounding.

 

Sales increased approximately 13.4% and 9.7% for the twelve and twenty-eight weeks ended April 11, 2010, respectively, over the same periods of the prior fiscal year. Comparable store sales increased 8.7% and 5.7% for the twelve and twenty-eight weeks ended April 11, 2010, respectively, and identical store sales increased 7.7% and 4.7%, respectively. As of April 11, 2010, there were 279 locations in the comparable store base. Identical store sales for the twelve weeks ended April 11, 2010 exclude four relocated stores from the comparable calculation to reduce the impact of square footage growth on the comparison. Identical store sales for the twenty-eight weeks ended April 11, 2010 exclude five relocated stores and two major expansions. The number of stores open fifty-two weeks or less equaled 16 at April 11, 2010. The sales increase contributed by stores open less than fifty-two weeks totaled approximately $115.9 million and $235.6 million for the twelve and twenty-eight weeks ended April 11, 2010, respectively.

 

The Company’s gross profit as a percentage of sales for the twelve and twenty-eight weeks ended April 11, 2010 was approximately 35.3% and 34.7%, respectively, compared to approximately 34.7% and 34.0%, respectively, for the same periods of the prior fiscal year. Factors contributing to the increases in gross profit as a percentage of sales include lower cost

 

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of goods sold driven by better purchasing and distribution disciplines, and improved store-level execution, particularly in terms of shrink control and inventory management. For the twelve and twenty-eight weeks ended April 11, 2010, the Company recognized a LIFO credit totaling approximately $3.0 million and $2.8 million, respectively, compared to no charge and a charge of approximately $3.6 million for the same periods of the prior fiscal year, respectively. For the third quarter in a row, year-over-year declines in inventory levels are driving improvements in inventory turns. Our gross profit may vary throughout the year depending on the mix of sales from new stores, seasonality, the impact of weather or a host of other factors, including inflation.

 

Direct store expenses as a percentage of sales for the twelve and twenty-eight weeks ended April 11, 2010 were approximately 26.2% and 26.4%, respectively, compared to approximately 26.9% and 26.7%, respectively, for the same periods of the prior fiscal year. During the second quarter of fiscal year 2009, the Company recorded impairment charges on long-lived assets related to operating locations totaling approximately $13.0 million.

 

General and administrative expenses as a percentage of sales for the twelve and twenty-eight weeks ended April 11, 2010 were approximately 3.0% and 2.9%, respectively, compared to approximately 3.1% and 3.2%, respectively, for the same periods of the prior fiscal year. FTC-related legal costs incurred during the twelve and twenty-eight weeks ended April 11, 2010 totaled approximately $0.8 million and $1.5 million, respectively, compared to approximately $2.8 million and $13.9 million, respectively, for the same periods of the prior fiscal year.

 

Pre-opening expenses as a percentage of sales for the twelve and twenty-eight weeks ended April 11, 2010 were approximately 0.6% and 0.5%, respectively, compared to approximately 0.7% and 0.6%, respectively, for the same periods of the prior fiscal year. Currently, rent expense has generally been incurred beginning approximately nine months prior to a store’s opening date as compared to approximately 13 months for stores opened during fiscal year 2009.

 

Relocation, store closure and lease termination costs as a percentage of sales for the twelve and twenty-eight weeks ended April 11, 2010 were a credit of approximately 0.1% and expense of approximately 0.2%, respectively, compared to expenses of approximately 0.3% and 0.2%, respectively, for the same periods of the prior fiscal year. During the twelve and twenty-eight weeks ended April 11, 2010, the Company recorded additional lease termination costs totaling approximately $1.2 million and $11.3 million, respectively, compared to approximately $1.9 million and $3.8 million during the same periods of the prior year, respectively, to increase reserves for closed properties due to the downturn in the real estate market and actual exit costs. These adjustments during the twelve weeks ended April 11, 2010 were offset by a gain of approximately $3.2 million from the sale of a non-operating property and a reduction of approximately $2.9 million in store closure reserve liabilities related to one store to be sold under the FTC settlement and one early lease termination. During the twelve and twenty-eight weeks ended April 12, 2009, the Company recorded reserves on stores closed during these periods totaling approximately $1.3 million and $2.4 million, respectively. The Company continues to evaluate store closure reserve adjustments primarily related to changes in certain subtenant income estimates driven by the outlook for the commercial real estate market.

 

The number of stores opened and relocated were as follows:

 

 

 

Twelve weeks ended

 

Twenty-eight weeks ended

 

 

 

April 11,

 

April 12,

 

April 11,

 

April 12,

 

 

 

2010

 

2009

 

2010

 

2009

 

New stores

 

3

 

2

 

9

 

5

 

Relocated stores

 

 

1

 

 

3

 

 

Interest expense for the twelve and twenty-eight weeks ended April 11, 2010 totaled approximately $7.8 million and $18.3 million, respectively, compared to approximately $7.7 million and $21.3 million, respectively, for the same periods of the prior fiscal year. The decrease in interest expense for the twenty-eight weeks ended April 11, 2010 compared to the same period of the prior year is due primarily to interest expense related to amounts outstanding on the Company’s revolving line of credit during the first quarter of fiscal year 2009. The Company had no amounts outstanding on its revolving line of credit during the twenty-eight weeks ended April 11, 2010.

 

Investment and other income or expense, which includes investment gains and losses, interest income, rental income and other income, totaled approximately $1.9 million and $3.7 million for the twelve and twenty-eight weeks ended April 11, 2010 compared to net expense of approximately $0.6 million and income of approximately $1.2 million for the same periods of the prior fiscal year. The increases were due primarily to investment income earned on investments in available-for-sale securities during fiscal year 2010.

 

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Income taxes for the twelve and twenty-eight weeks ended April 11, 2010 resulted in an effective tax rate of approximately 40.5% and 40.7%, respectively, compared to approximately 42.5% and 42.0%, respectively, for the same periods of the prior fiscal year.

 

Share-based payment expense was included in the following line items on the Consolidated Statements of Operations for the periods indicated (in thousands):

 

 

 

Twelve weeks ended

 

Twenty-eight weeks ended

 

 

 

April 11,

 

April 12,

 

April 11,

 

April 12,

 

 

 

2010

 

2009

 

2010

 

2009

 

Cost of goods sold and occupancy costs

 

$

165

 

$

49

 

$

385

 

$

172

 

Direct store expenses

 

2,265

 

1,277

 

5,295

 

3,467

 

General and administrative expenses

 

1,502

 

1,027

 

3,493

 

2,503

 

Share-based payment expense before income taxes

 

3,932

 

2,353

 

9,173

 

6,142

 

Income tax benefit

 

(1,587

)

(1,082

)

(3,699

)

(2,513

)

Net share-based payment expense

 

$

2,345

 

$

1,271

 

$

5,474

 

$

3,629

 

 

Liquidity and Capital Resources and Changes in Financial Condition

The following table summarizes the Company’s cash and short-term investments (in thousands):

 

 

 

April 11,

 

September 27,

 

 

 

2010

 

2009

 

Cash and cash equivalents

 

$

215,209

 

$

430,130

 

Short-term investments — available-for-sale securities

 

376,242

 

 

Restricted cash

 

87,207

 

71,023

 

Total

 

$

678,658

 

$

501,153

 

 

We generated cash flows from operating activities totaling approximately $343.0 million during the twenty-eight weeks ended April 11, 2010 compared to approximately $315.1 million during the same period of the prior fiscal year. Cash flows from operating activities resulted primarily from our net income plus non-cash expenses and changes in operating working capital. During the twenty-eight weeks ended April 11, 2010, increased cash flows from operating activities were driven by increased net income and an increase in cash provided by changes in operating working capital.

 

Net cash used in investing activities totaled approximately $587.1 million for the twenty-eight weeks ended April 11, 2010 compared to approximately $185.9 million for the same period of the prior fiscal year. The Company purchased available-for-sale securities of approximately $350.7 million and $615.5 million during the twelve and twenty-eight weeks ended April 11, 2010, respectively. During the twenty-eight weeks ended April 11, 2010, the Company invested approximately $422.8 million, net of sales, in available-for-sale securities, and at April 11, 2010 had short-term investments in available-for-sale securities totaling approximately $376.2 million and long-term investments in available-for-sale securities totaling approximately $47.1 million. Our principal historical capital requirements have been the funding of the development or acquisition of new stores and acquisition of property and equipment for existing stores. 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 twenty-eight weeks ended April 11, 2010 totaled approximately $147.0 million, of which approximately $111.0 million was for new store development and approximately $36.0 million was for remodels and other additions. Capital expenditures for the twenty-eight weeks ended April 12, 2009 totaled approximately $185.2 million, of which approximately $142.5 million was for new store development and approximately $42.7 million was for remodels and other additions. Subsequent to the end of the second quarter of fiscal year 2010, the Company signed an asset purchase agreement for two stores in Chattanooga, TN and Asheville, NC which is expected to close in late May 2010.

 

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The following table provides information about the Company’s store development activities during fiscal year 2009 and fiscal year-to-date through May 12, 2010:

 

 

 

 

 

 

 

Properties

 

Total

 

 

 

Stores opened

 

Stores opened

 

tendered

 

leases signed

 

 

 

during Fiscal

 

during Fiscal

 

as of

 

as of

 

 

 

Year 2009

 

Year 2010

 

May 12, 2010

 

May 12, 2010(1)

 

Number of stores (including relocations)

 

15

 

12

 

13

 

47

 

Number of relocations

 

6

 

 

1

 

10

 

Number of lease acquisitions, ground leases and owned properties

 

4

 

 

4

 

4

 

New areas

 

1

 

4

 

1

 

5

 

Average store size (gross square feet)

 

53,500

 

42,300

 

40,200

 

42,900

 

Total square footage

 

801,800

 

507,500

 

522,600

 

2,064,700

 

Average tender period in months

 

12.6

 

9.1

 

 

 

 

 

Average pre-opening expense per store(2)

 

$

3.0 million

 

$

2.5 million

 

 

 

 

 

Average pre-opening rent per store

 

$

1.3 million

 

$

0.8 million

 

 

 

 

 

(1)Includes leases for properties tendered

(2)Includes rent

 

The following table provides additional information about the Company’s estimated store openings for the remainder of fiscal year 2010 through 2013 based on the Company’s current development pipeline. We believe we will produce operating cash flows in excess of the capital expenditures needed to open the 47 stores in our store development pipeline. We believe the investments we are making in our new, acquired and existing stores will result in substantial earnings growth in the near future. These openings reflect estimated tender dates which are subject to change and do not incorporate any potential new leases, terminations or square footage reductions:

 

 

 

 

 

 

 

Average

 

 

 

Ending

 

 

 

 

 

 

 

new store

 

Ending

 

square

 

 

 

Total

 

 

 

square

 

square

 

footage

 

 

 

openings

 

Relocations

 

footage

 

footage(1)

 

growth

 

Fiscal year 2010 remaining stores in development

 

4

 

 

42,400

 

11,209,100

 

6.1

%

Fiscal year 2011 stores in development

 

17

 

5

 

38,700

 

11,796,000

 

5.2

%

Fiscal year 2012 stores in development

 

15

 

1

 

44,300

 

12,382,700

 

5.0

%

Fiscal year 2013 stores in development

 

11

 

4

 

47,700

 

12,747,300

 

2.9

%

Total

 

47

 

10

 

42,900

 

 

 

 

 

(1)Reflects year-to-date store openings and closures in 2010 and three major expansions in development in 2011.

 

Net cash provided by financing activities was approximately $27.6 million for the twenty-eight weeks ended April 11, 2010 compared to approximately $205.8 million for the same period of the prior fiscal year. Net proceeds from the issuance of redeemable preferred stock for the twenty-eight weeks ended April 12, 2009 totaled approximately $413.1 million. The Company made no borrowings on its revolving line of credit for the twenty-eight weeks ended April 11, 2010 compared to $123.0 million for the same period of the prior fiscal year. Payments on debt and capital lease obligations totaled approximately $0.1 million for the twenty-eight weeks ended April 11, 2010 compared to approximately $320.9 million for the same period of the prior fiscal year.

 

On December 2, 2008, the Company issued 425,000 shares of Series A 8% Redeemable, Convertible Exchangeable Participating Preferred Stock, $0.01 par value per share (“Series A Preferred Stock”) to affiliates of Leonard Green & Partners, L.P., for approximately $413.1 million, net of approximately $11.9 million in closing and issuance costs. On October 23, 2009 the Company announced its intention to call all 425,000 outstanding shares of the Series A Preferred Stock for redemption in accordance with the terms governing such Series A Preferred Stock. Subject to conversion of the Series A Preferred Stock by its holders, the Company planned to redeem such Series A Preferred Stock on November 27, 2009 at a price per share equal to $1,000 plus accrued and unpaid dividends. In accordance with the terms governing the Series A Preferred Stock, at any time prior to the redemption date, the Series A Preferred Stock could be converted by the holders thereof. On November 26, 2009 the holders converted all 425,000 outstanding shares of Series A Preferred Stock into approximately 29.7 million shares of common stock of the Company. The Company paid cash dividends on the Series A Preferred Stock totaling $8.5 million during the first quarter of fiscal year 2010.

 

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The Company has outstanding a $700 million, five-year term loan agreement due in 2012. Subsequent to the end of the second quarter of fiscal year 2010, the Company repaid the $210 million portion of the term loan that was not subject to an interest rate swap agreement. The Company also has outstanding a $350 million revolving line of credit, secured by a pledge of substantially all of the stock in our subsidiaries, that extends to 2012. No amounts were drawn under the agreement at April 11, 2010 and September 27, 2009. The amount available to the Company under the agreement at April 11, 2010 was effectively reduced to approximately $337.7 million by outstanding letters of credit totaling approximately $12.3 million. Standard & Poor’s credit rating agency currently rates the Company BB- with a positive rating outlook, and Moody’s credit rating agency currently rates the Company Ba3 with a positive rating outlook.

 

Net proceeds to the Company from team members’ stock plans for the twenty-eight weeks ended April 11, 2010 totaled approximately $34.3 million compared to approximately $2.0 million for the same period of the prior fiscal year. At April 11, 2010 and September 27, 2009 there were approximately 15.8 million and 15.4 million shares, respectively, of our common stock available for future grants. 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 per share 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 per share 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.

 

On July 31, 2008, the Company’s Board of Directors approved a $100 million increase in the Company’s stock repurchase program, bringing the total authorization to $400 million through November 8, 2009. During fiscal year 2008, the Company retired approximately 4.5 million shares held in treasury that had been repurchased for a total of approximately $200 million. The Company’s remaining authorization under the stock repurchase program at September 27, 2009 was approximately $200 million. On November 8, 2009, the Company’s stock repurchase program expired in accordance with its terms.

 

The Company is committed under certain capital leases for rental of certain equipment, buildings and land. These leases expire or become subject to renewal clauses at various dates through 2054.

 

The effect of exchange rate changes on cash included in the Consolidated Statements of Cash Flows resulted in an increase in cash and cash equivalents totaling approximately $1.6 million for the twenty-eight weeks ended April 11, 2010 compared to a decrease totaling approximately $3.4 million for the same period of the prior fiscal year. These changes reflect the relative strengthening or weakening of the Canadian and United Kingdom currencies compared to the U.S. dollar during these periods, respectively.

 

Our principal historical sources of liquidity have been cash generated by operations, available cash and cash equivalents, short-term investments and amounts available under our revolving line of credit. Absent any significant change in market condition, we expect planned expansion and other anticipated working capital and capital expenditure requirements for the next twelve months will be funded by these sources. There can be no assurance, however, that the Company will continue to generate cash flows at or above current levels or that our revolving line of credit and other sources of capital will be available to us in the future.

 

Contractual Obligations

The following table shows payments due by period on contractual obligations as of April 11, 2010 (in thousands):

 

 

 

 

 

Less than 1

 

1-3

 

3-5

 

More than 5

 

 

 

Total

 

year

 

years

 

years

 

years

 

Long-term debt obligations

 

$

700,000

 

$

 

$

700,000

 

$

 

$

 

Estimated interest on long-term debt obligations

 

45,690

 

28,811

 

16,879

 

 

 

Capital lease obligations (including interest)

 

38,020

 

2,064

 

4,170

 

4,224

 

27,562

 

Operating lease obligations(1)

 

5,950,067

 

275,731

 

629,600

 

656,760

 

4,387,976

 

Total

 

$

6,733,777

 

$

306,606

 

$

1,350,649

 

$

660,984

 

$

4,415,538

 

(1)Amounts exclude taxes, insurance and other related expense

 

Gross unrecognized tax benefits and related interest and penalties at April 11, 2010 were approximately $18.1 million. These amounts have been excluded from the contractual obligations table because a reasonably reliable estimate of the period of cash settlement with the respective taxing authorities cannot be determined due to the high degree of uncertainty regarding the timing of future cash outflows associated with these liabilities.

 

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Table of Contents

 

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.

 

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements at April 11, 2010 consist of operating leases disclosed in the above contractual obligations table and outstanding letters of credit discussed in Note 8 to the consolidated financial statements, “Long-Term Debt.” 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 Part I. Item 1. Note 2 to the consolidated financial statements, “Summary of Significant Accounting Policies.”

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk

The Company holds money market fund investments that are classified as cash equivalents and restricted cash. Additionally, the Company holds available-for-sale securities generally consisting of state and local government obligations. We had cash equivalent investments and restricted cash investments totaling approximately $75.4 million and $87.2 million at April 11, 2010, respectively. We had short-term investments totaling approximately $376.2 million and long-term investments totaling approximately $47.1 million at April 11, 2010. The Company had no available-for-sale securities at September 27, 2009. Interest rate fluctuations would affect the amount of interest income earned on these investments. All investments are recorded at fair value and are generally short-term in nature, and therefore changes in interest rates would not have a material impact on the valuation of these investments.

 

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 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 Co-Chief Executive Officers (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 Co-Chief Executive Officers 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Co-Chief Executive Officers and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective of the end of the period covered by this report.

 

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 recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

From time to time we are a party to legal proceedings including matters involving personnel and employment issues, personal injury, intellectual property and other proceedings arising in the ordinary course of business which have not resulted in any material losses to date. Although management does not expect that the outcome in these proceedings will have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we could incur judgments or enter into settlements of claims that could materially impact our results.

 

The Federal Trade Commission (“FTC”) challenged the Company’s August 28, 2007 acquisition of Wild Oats Markets, Inc. The Company reached a settlement agreement with the FTC, and received final approval of the settlement agreement by the FTC Commissioners on June 1, 2009 after a 30-day public comment period. Under the terms of the agreement, a third-party divestiture trustee was appointed to market for sale until September 8, 2009:  leases and related assets for 19 non-operating former Wild Oats stores; leases and related fixed assets (excluding inventory) for 12 operating acquired Wild Oats stores and one operating Whole Foods Market store; and Wild Oats trademarks and other intellectual property associated with the Wild Oats stores.

 

Pursuant to the settlement agreement, the divestiture period was extended by the FTC until March 8, 2010 to allow for good faith offers that were not finalized for six operating and two non-operating former Wild Oats stores as well as Wild Oats trademarks and other intellectual property associated with the Wild Oats stores. At the conclusion of the divestiture period, the divestiture trustee submitted buyers awaiting FTC approval for a total of two operating and one non-operating former Wild Oats stores, as well as the Wild Oats trademarks and intellectual property. The 11 remaining operating stores and 18 non-operating stores may be retained by the Company without further obligation to attempt to divest.

 

Pursuant to the FTC’s approval of the final consent order, the Company recorded adjustments during the second half of fiscal year 2009 totaling approximately $4.8 million to measure long-lived assets and certain lease liabilities related to certain of the operating stores for which sale and transfer of the assets was determined to be probable or more likely than not at the lower of carrying amount or fair value less costs to sell. The total fair value associated with these locations at April 11, 2010 was approximately $0.1 million. Additionally, the Company recorded adjustments totaling approximately $2.7 million during the twelve weeks ended April 11, 2010 to measure the store closure reserve related to the remaining non-operating store at fair value. The Company has determined that these locations do not meet the conditions for reporting their results in discontinued operations. Cash expenses relating to legal and trustee fees are not expected to be material. No material charges are expected related to the potential sale of the two operating stores, the one non-operating property for which a lease liability reserve is already recorded, or the trademarks and intellectual property which have been fully amortized.

 

On October 27, 2008, Whole Foods Market was served with the complaint in Kottaras v. Whole Foods Market, Inc., a putative class action filed in the United States District Court for the District of Columbia, seeking treble damages, equitable, injunctive, and declaratory relief and alleging that the acquisition and merger between Whole Foods Market and Wild Oats violates various provisions of the federal antitrust laws. This case is in the preliminary stages. Whole Foods Market cannot at this time predict the likely outcome of this judicial proceeding or estimate the amount or range of loss or possible loss that may arise from it. The Company has not accrued any loss related to the outcome of this case as of April 11, 2010.

 

Item 5. Other Information

 

Whole Foods Retention Agreements

On May 20, 2010, the Board of Directors of Whole Foods Market Inc. approved a plan and form of retention agreement (the “Agreement”) for certain members of the Company’s management, including one of the Company’s Co-Chief Executive Officers, Chief Financial Officer and the two other most highly compensated executive officers of the Company for fiscal 2009 (the “named executive officers”).  The Agreement provides certain benefits to covered persons in exchange for a “non-compete” agreement and other obligations, and also provides certain benefits to the covered persons in the event of a “change of control” (as defined in the Agreement). We believe these “non-compete” arrangements are beneficial to the Company and its shareholders because they will discourage the covered persons from competing with the Company.  We believe the “change of control” arrangements are beneficial to the Company and its shareholders because they will help provide the Company with the continued dedication of its leadership team; should a change of control be threatened, the covered persons’ compensation and benefits expectations will not thereby be called into question, allowing the leadership team to fully focus on the best interest of the Company and its shareholders.

 

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In keeping with his voluntary decision to reduce his annual salary to $1 and forgo earning any future cash compensation, stock awards and/or options awards, John Mackey, Co-Chief Executive Officer, has opted not to execute such Agreement.

 

Pursuant to the Agreement, if at any time after the earlier to occur of a change of control or March 1, 2012, a covered person’s employment is terminated (a) other than for “cause” (as defined in the Agreement) or (b) by the covered person, and, within 45 days of such termination, the covered person signs a release, then, subject to the covered person’s continued compliance with the confidentiality provisions and non-compete restrictions of the Agreement, the covered person will receive the following:

 

·                  up to a designated amount, for a maximum of 5 years, paid in equal semiannual installments; provided that if the covered person voluntarily terminates employment without “good reason” (as defined in the Agreement), then unless the covered person has held his current position or one of several other designated positions with the Company for 15 years or more, such payment will be reduced by 20% for each year below 15 years of employment;

·                  all stock options granted to the covered person will vest and become immediately exercisable and remain exercisable until the earlier of the fifth anniversary of termination or the original expiration date of the stock option; and

·                  reimbursement by the Company of COBRA premiums paid by the covered person.

 

For each of Walter Robb, Co-Chief Executive Officer, and A.C. Gallo, President and Chief Operating Officer, the semiannual payment in exchange for a non-compete referred to in the first bullet above equals $800,000.  For each of Glenda Chamberlain, Executive Vice President and Chief Financial Officer, and Jim Sud, Executive Vice President of Growth and Business Development, the semiannual payment in exchange for a non-compete referred to in the first bullet above equals $600,000.

 

The Agreement also provides that for the two-year period following a change of control:

 

·                  the covered persons’ annual base salary will be at least equal to 12 times the highest monthly base salary rate applicable to the covered person in the one-year period immediately preceding the month in which the change of control occurs;

·                  the covered person’s annual bonus will be calculated according the formula used to calculate the covered person’s last annual bonus paid prior to the change of control (unless any comparable bonus under the Company’s successor plan would result in a higher payment to the covered person);

·                  the covered person will be entitled to participate in all long-term cash incentive, equity incentive, savings and retirement plans, practices, policies and programs applicable generally to similarly titled persons of the Company or affiliated companies, in each case not less favorable, in the aggregate, than most favorable of those provided by the Company and affiliated companies for such persons under such plans, practices, policies and programs as in effect prior to the change of control;

·                  the covered person will be eligible to participate in the Company’s medical, dental, disability, life and other insurance programs; and

·                  the covered person will receive certain other benefits consistent with those provided prior to the change of control.

 

In addition, during such two-year period, if the covered person is terminated other than for “cause” (as defined in the Agreement) or that if the covered person voluntarily terminates employment with “good reason” (as defined in the Agreement), then the covered person will be entitled to receive a lump sum amount equal to three times the sum of (a) the covered person’s annual base salary and (b) the average of the last three bonuses paid to the covered person.

 

Item 6. Exhibits

 

Exhibit      22.1               Submission of Matters to a Vote of Security Holders (1)

Exhibit      31.1               Certification of Co-Chief Executive Officer Pursuant to 17 CFR 240.13a — 14(a)

Exhibit      31.2               Certification of Co-Chief Executive Officer Pursuant to 17 CFR 240.13a — 14(a)

Exhibit      31.3               Certification of Chief Financial Officer Pursuant to 17 CFR 240.13a — 14(a)

Exhibit      32.1               Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

Exhibit      32.2               Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

Exhibit      32.3               Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

 

(1)          Filed as Item 5.07 in Registrant’s Form 8-K filed March 8, 2010 and incorporated herein by reference.

 

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Table of Contents

 

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:

May 21, 2010

 

By:

/s/ Glenda Chamberlain

 

 

Glenda Chamberlain

 

 

Executive Vice President and Chief Financial Officer

 

 

(Duly authorized officer and principal financial officer)

 

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