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Whole Foods Valuation
1. Whole Foods Market Inc.
Group10
0
Dylan Tucker
Gerrit Thurston
Keith Durante
Robyn Hwang
Whitney Fletcher
Will Bergen
Valuation Project
2. 1
Whole Foods is undervalued by 25%; we
recommend an acquisition at $120 per share
• Expand in customer demand
• Cultivated strong brand loyalty
• Well-positioned, giving an operational advantage
_________________________________________________________________
Company Market Financial Analysis Value Drivers Valuation
4. Whole Foods has established a niche in
the natural and organic foods industry
Retail Grocery
Hypermarket
Walmart
Supermarket
Kroger, Safeway
Specialty Stores
Local stores
3Company Market Financial Analysis Value Drivers Valuation
_______________________________________________________
5. 4
Whole Foods has established a niche in
the natural and organic foods industry
Retail
Grocery
Hypermarket
Walmart
Supermarket
Specialty
Stores
Whole
Foods
Company Market Financial Analysis Value Drivers Valuation
_____________________________________________________
6. Mergers, acquisitions, and expansion have
allowed Whole Foods to grow and prosper over
time
SaferWay
1978
Allegro Coffee
(stock merger
complete), 1997
Acquired Wild Oats
Market, 2007Whole Foods
incorporated,
1980
Expansion into U.K
(purchase of Fresh
& Wild, 2004 and
2011
Launched
private
brand, 365
Everyday
Value, 1996
Top 100
company
(FORBES), 14th
consecutive
Year, 2012
Went public on
NASDAQ, 1992
5Company Market Financial Analysis Value Drivers Valuation
7. 6
Whole Foods has an established customer
base and aims to expand it in the future
High Income
Low Income
Health ConsciousNot Health Conscious
Kroger Safeway
Company Market Financial Analysis Value Drivers Valuation
_________________________________________________________
Walmart
Harris
Teete
r
8. 7
Whole Foods has an established customer
base and aims to expand it in the future
High Income
Low Income
Health ConsciousNot Health Conscious
Kroger Safeway
Company Market Financial Analysis Value Drivers Valuation
_________________________________________________________
Walmart
Harris
Teete
r
16. Whole Foods is positioned
to be very profitable in the future
Company Market Financial Analysis Value Drivers Valuation
_______________________________________________________
1. Strong Potential For Store Growth
2. Increase In Sales
3. Operating Margin Will Improve
15
2009 2010 2011 2012 2013 2014 2015 2016 2017
Sales Revenue 80.3 90.1 101.1 113.8 128.5 144.3 162.5 182.9 206.0
Operating
expense 77.4 85.6 95.6 107.2 120.5 135.5 152.5 171.6 193.1
Total Stores 284 299 311 334 364 397 431 465 500
Free Cash Flows 1.5 2.6 2.3 3.0 3.8 4.7 5.3 6.3 7.4
17. Store Growth Projections
Company Market Financial Analysis Value Drivers Valuation
0
100
200
300
400
500
600
2009 2010 2011 2012 2013 2014 2015 2016 2017
16
18. Company Market Financial Analysis Value Drivers Valuation
0
100
200
300
400
500
600
2009 2010 2011 2012 2013 2014 2015 2016 2017
Aggressive Growth Strategy, is it possible?
Favorable leases due to real estate market
Positioned well internally to fund expansion.
Many markets ready to accept new retailers.
Store Growth Projections
17
19. Whole Foods Is Building Capital
0
100
200
300
400
500
600
700
800
900
1000
2007 2008 2009 2010 2011
Debt Cash & Invesments
1. Cash/Investments 2. Stock Buy-Backs 3. Dividends 4. Accelerate Growth
Company Market Financial Analysis Value Drivers Valuation
Strategy:
____________________________________________________________
18
20. Revenue Growth is Strong
2009 2010 2011 2012 2013 2014 2015 2016 2017
Sales Revenue 80.3 90.1 101.1 113.8 128.5 144.3 162.5 182.9 206.0
Growth % .98% 12.1% 12.2% 14.0% 16.0% 13.0% 13.0% 13.0% 13.0%
Sales Revenue is comprised of:
1 Identical Store Sales Growth
2 New Store Sales
Increase in Transactions
Increase in Basket Size
Company Market Financial Analysis Value Drivers Valuation 19
25. New Stores Are Performing
Extremely Well
Opened three stores under their new design and EPV specs:
24Company Market Financial Analysis Value Drivers Valuation
26. New Stores Are Performing
Extremely Well
Opened three stores under their new design and EPV specs:
• Smaller in size (14% smaller) Low Occupancy Costs
Company Market Financial Analysis Value Drivers Valuation 25
27. New Stores Are Performing
Extremely Well
Opened three stores under their new design and EPV specs:
• Smaller in size (14% smaller) Low Occupancy Costs
• Experience Growth Team Staffed & Stocked well
Company Market Financial Analysis Value Drivers Valuation 26
28. New Stores Are Performing
Extremely Well
Opened three stores under their new design and EPV specs:
• Smaller in size (14% smaller) Low Occupancy Costs
• Experience Growth Team
• Strong Brand Name
Staffed & Stocked well
High Initial Sales
Company Market Financial Analysis Value Drivers Valuation 27
29. New Stores Are Performing
Extremely Well
Opened three stores under their new design and EPV specs:
• Smaller in size (14% smaller) Low Occupancy Costs
• Experience Growth Team
• Strong Brand Name
Staffed & Stocked well
High Initial Sales
14% higher sales overall
Company Market Financial Analysis Value Drivers Valuation 28
30. 2009 2010 2011 2012 2013 2014 2015 2016 2017
Sales Revenue 80.3 90.1 101.1 113.8 128.5 144.3 162.5 182.9 206.0
Growth % .98% 12.1% 12.2% 14.0% 16.0% 13.0% 13.0% 13.0% 13.0%
Sales Revenue is comprised of:
1 Identical Store Sales Growth
2 New Store Sales
Increase in Transactions
Increase in Basket Size
Average Growth:
4%
3%
7%
2012 2013
Total Stores 334 364
Opened stores 23 30
New Store
Growth:
7% 9%
Company Market Financial Analysis Value Drivers Valuation
Revenue Growth is Strong
29
31. 2009 2010 2011 2012 2013 2014 2015 2016 2017
Sales Revenue 80.3 90.1 101.1 113.8 128.5 144.3 162.5 182.9 206.0
Growth % .98% 12.1% 12.2% 14.0% 16.0% 13.0% 13.0% 13.0% 13.0%
Sales Revenue is comprised of:
1 Identical Store Sales Growth
2 New Store Sales
Increase in Transactions
Increase in Basket Size
Average Growth:
4%
3%
7%
2012 2013
Total Stores 334 364
Opened stores 23 30
New Store
Growth:
7% 9%
7% 7%
14% 16%Total Sales
Growth:
Company Market Financial Analysis Value Drivers Valuation
Revenue Growth is Strong
30
32. 2009 2010 2011 2012 2013 2014 2015 2016 2017
Sales Revenue 80.3 90.1 101.1 113.8 128.5 144.3 162.5 182.9 206.0
Growth % .98% 12.1% 12.2% 14.0% 16.0% 13.0% 13.0% 13.0% 13.0%
Sales Revenue is comprised of:
1 Identical Store Sales Growth
2 New Store Sales
Increase in Transactions
Increase in Basket Size
Average Growth:
4%
3%
7%
2012 2013
Total Stores 334 364
Opened stores 23 30
New Store
Growth:
7% 9%
7% 7%
14% 16%Total Sales
Growth:
Company Market Financial Analysis Value Drivers Valuation
Revenue Growth is Strong
31
33. 2009 2010 2011 2012 2013 2014 2015 2016 2017
Sales Revenue 80.3 90.1 101.1 113.8 128.5 144.3 162.5 182.9 206.0
Growth % .98% 12.1% 12.2% 14.0% 16.0% 13.0% 13.0% 13.0% 13.0%
Sales Revenue is comprised of:
1 Identical Store Sales Growth
2 New Store Sales
Increase in Transactions
Increase in Basket Size
Average Growth:
4%
3%
7%
2012 2013
Total Stores 334 364
Opened stores 23 30
New Store
Growth:
7% 9%
7% 7%
14% 16%Total Sales
Growth:
Company Market Financial Analysis Value Drivers Valuation
Revenue Growth is Strong
32
34. Company Market Financial Analysis Value Drivers Valuation
92.00%
92.50%
93.00%
93.50%
94.00%
94.50%
95.00%
95.50%
96.00%
96.50%
97.00%
2009 2010 2011 2012 2013 2014 2015 2016 2017
Operating expense as a
percentage of revenue
3. Operating margin will improve____________________________________________________________
33
35. Company Market Financial Analysis Value Drivers Valuation
92.00%
92.50%
93.00%
93.50%
94.00%
94.50%
95.00%
95.50%
96.00%
96.50%
97.00%
2009 2010 2011 2012 2013 2014 2015 2016 2017
Operating expense as a
percentage of revenue
Decrease in
COGS
Decrease in
occupancy
costs
3. Operating margin will improve____________________________________________________________
34
36. Company Market Financial Analysis Value Drivers Valuation
Decrease in COGS
3. Operating margin will improve____________________________________________________________
35
37. Company Market Financial Analysis Value Drivers Valuation
Decrease in COGS
Data management
technology
3. Operating margin will improve____________________________________________________________
36
38. Company Market Financial Analysis Value Drivers Valuation
Decrease in COGS
Data management
technology
Relationship with
suppliers
3. Operating margin will improve____________________________________________________________
37
39. Company Market Financial Analysis Value Drivers Valuation
Decrease in
occupancy costs
3. Operating margin will improve____________________________________________________________
38
40. Company Market Financial Analysis Value Drivers Valuation
Decrease in
occupancy costs
Less expensive
leases on new
stores
16% increase
in profits per
sq. ft.
3. Operating margin will improve____________________________________________________________
39
41. Company Market Financial Analysis Value Drivers Valuation
3. Operating margin will improve
Decrease in
occupancy costs
Less expensive
leases on new
stores
Renegotiating
current leases
16% increase
in profits per
sq. ft.
____________________________________________________________
40
42. Whole Foods is positioned
to be very profitable in the future
Company Market Financial Analysis Value Drivers Valuation
______________________________________________________
0
50
100
150
200
250
2009 2010 2011 2012 2013 2014 2015 2016 2017
Sales revenue
0.000%
2.000%
4.000%
6.000%
8.000%
2009 2010 2011 2012 2013 2014 2015 2016 2017
Operating margin
0
200
400
600
2009 2010 2011 2012 2013 2014 2015 2016 2017
Number of stores
0
1
2
3
4
5
6
7
8
2009 2010 2011 2012 2013 2014 2015 2016 2017
Free cash flows
41
44. 43Company Market Financial Analysis Value Drivers Valuation
Health conscious living is here to stay
$25,000
$30,000
$35,000
$40,000
2000
2003
2006
2009
2012
2015
Per Capita Disposable Income
Per Capita
Disposable
Income
Conventional
Retail Grocers
Organic Industry
Growth
•Low-cost and
unhealthy
•Older generation
recognizing health
issues
•Younger generation
feels little
connection to retail
grocers
•U.S. disposable
Income Increase
•Baby Boomers are
prioritizing health
•83% organic
purchases for
health reasons
•Millennials
increasing spending
power
•Farmers
markets 17%
growth
45. 44
Whole Foods has cultivated positive image
that connects with their market segment
Company Market Financial Analysis Value Drivers Valuation
__________________________________________________________
Brand Awareness Drivers Program / Initiative
•Company aims to increase
Credibility
•Prioritize social and
environmental compassion
•Ethical codes / quality
standards foster positive
public perception
•Committed to providing a
unique and fresh
experience
•Whole Planet Initiative
•Whole Kids Foundation
•Whole Trade Guarantee
•Shopping at Whole Foods
is part of the “organic”
experience
46. 45
Whole Foods’ is advantageously situated
in regards to its suppliers
• Strong relationships with suppliers
•United Natural Foods Incorporated - 31% of whole foods supplies
•Whole Foods has developed a “buying backwards” supply strategy
•Allegro, Bread of Life, Fresh & Wild
•Effective distribution infrastructure
•Whole Foods has increased relationships with local suppliers
•Project: Local
Company Market Financial Analysis Value Drivers Valuation
_____________________________________________
47. 46
Risks to consider____________________________
Risks Response
New entrants Brand image and market
experience
Larger competitors’ pressure on
suppliers
Good relationship with suppliers
Low switching costs of consumers Brand image and market
experience
Sensitivity to government
regulation and environmental
factors
Knowledgeable and responsive
Importance of brand image Good understanding and history
Company Market Financial Analysis Value Drivers Valuation
49. Scenario analysis suggests stock price value
could fall between $82-206 per share
Pessimistic Base Optimistic
Revenue Growth Rate 9% 13.1% 17 %
Weighted Average Cost of
Capital
6% 5.2% 4.4%
Perpetuity Growth Rate 1.4% 1.8% 2.3%
Equity Value Per Share $82.18 $120.39 $206.10
Current Share Price $95.76
_________________________________________
__________________________________________________
__________________________________________________
Company Market Financial Analysis Value Drivers Valuation 48
50. 49
Whole Foods is undervalued by 25%; we
recommend an acquisition at $120 per share
• Expand in customer demand
• Cultivated strong brand loyalty
• Well-positioned, giving an operational advantage
_________________________________________________________________
Company Market Financial Analysis Value Drivers Valuation
52. Appendix - History
– completed a stock merger with allegro coffee in 1997
– opened in Manhattan in 2001 with a 30,000 square
foot store
– 2002-2011 expanded into the UK and Canada
– launched a premium body care line in 2008
– what started as a small natural foods store with an
initial investment of $45,000 has become a
blossoming company, who placed in the top 100 of
Forbes magazine top companies for its 14th
consecutive year
51
53. Appendix-Matrix
• Whole Foods has an established consumer
base already, as depicted by the matrix above
• successfully targeted Health Conscious
consumers with high income and a high
willingness to pay
• they have used this market share to their
advantage, as it has become an extremely
profitable segment to target
52
54. Appendix-Matrix
• in the future, they hope to target lower income families
and individuals who are still health conscious (organic and
natural food-sensitive purchasers)
• they have moved towards this with various initiatives, most
prominently their Whole Deal Program, which seeks
– value guide available in all stores featuring coupons and budget
conscious recipes with money saving shopping and cooking tips
• issue deals which highlight everyday value pricing on high quality
products
– farm to fork traceability allows customers to make more
informed decisions
• Whole Foods targets its locations specifically by an area’s
demographics
– company targets locations specifically where 40
53
55. Whole Foods has focused on providing
organic products at lower prices
Whole Foods
Market
365
Everyday
Value
(through various
suppliers)
Whole Foods
Market
(private label)
Control brands
(e.g. Columbia River
Organics)
Subsidiaries
(e.g. Allegro Coffee
Co.)
Products
(perishables, household
supplies, body care, etc.)
____________________________________________________________
11% of Whole Foods’
revenue in 2010 and 2011
Private label products in
the U.S. experiencing
increasing popularity
54
59. European Market
Decrease in GM Food Production
2010: Over 148m hectares of GM crops planted in 29 countries
-America largest with 66.8 hectares (2.8 more than 2009)
-European countries subject to severe restrictions for growing GM
crops
• With a proper
business
model, Europ
ean market
shows
potential for
large profits.
• Higher
Demand for
quality
food/greater
restrictions
58
Hypermarket: All-in-one stores selling grocery and household products, appliances, etc.Supermarket: Mainly food and beverage productsSpecialty stores: Focus on select few products
Whole Foods has combined supermarket’s convenience with high-quality products from specialty stores. This is a unique niche that Whole Foods leads.
Talk about how its established a market segment already – pretty self explanatory…maybe work on visual
Talk about how its established a market segment already – pretty self explanatory…maybe work on visual
Whole Foods saw positive growth between 2005-2008, much of their can be attributed to them joining the S&P 500 in 2005. Further increase between 2007-2008 can be attributed to an increase in stores sales of 4%.
2. However, when examining the Natural and Organic Food Industry, it grew by an average of 9.5% between 2010-2011. The future projections for growth of this industry are 11.5% which bods well for whole foods due to its continual growth in a thriving portion of the market.
3. As the Organic Food Industry continues to grow, Whole Foods has benefitted due to its favorable portion within the market. Growth of 12% for the past two years is only expected to continue to grow, our estimates are that for the next two years Whole Foods revenue growth will be 15%.
When comparing Whole Foods to competitors within the grocery retail industry, the gross profit margin for the past 4 years has continued to grow for Whole Foods while major Retail Grocery leaders have been decline. Due to this information as well as the trends for both the Retail Grocery Industry and the Organic Industry, all major companies have began to launch their own product lines.Safeway, for example, announced that their O Organic line generated $100 million dollars in sales revenue between the fourth quarter of 2010 and the beginning of 2011.
John Mackey’s prediction. Recently assumed the slightly lower profile position of “CO” CEO, in light of his attention grabbing behavior. In 2007, he posted anonymously on financial blogs, attacking Whole’s Food’s Acquisition target Wild Oats, made public during the anti-trust suit later that year. Whole world moving towards healthy eating.
John Mackey’s prediction. Recently assumed the slightly lower profile position of “CO” CEO, in light of his attention grabbing behavior. In 2007, he posted anonymously on financial blogs, attacking Whole’s Food’s Acquisition target Wild Oats, made public during the anti-trust suit later that year. Whole world moving towards healthy eating.
Gone from nearly 1 billion in debt, to 850 million in Cash & Equivalents since 2007.{Whole Foods Market, Not Whole Foods Incorporated.}
Within operating expense:Direct store (salaries and benefits, supplies, marketing, depreciation) General and administrative (salaries and benefits, occupancy, corporate/regional admin costs) Pre-opening (rent, construction, hiring and training) Relocation, store closure, lease termination costs (Wild Oats – had 17/20 stores leased but unused as of Sept 2011)
Within operating expense:Direct store (salaries and benefits, supplies, marketing, depreciation) General and administrative (salaries and benefits, occupancy, corporate/regional admin costs) Pre-opening (rent, construction, hiring and training) Relocation, store closure, lease termination costs (Wild Oats – had 17/20 stores leased but unused as of Sept 2011)
Data management technology – optimization of distribution and inventoryfaster, more efficient storing and shippingReduction of waste
Data management technology – optimization of distribution and inventoryfaster, more efficient storing and shippingReduction of waste
Data management technology – optimization of distribution and inventoryfaster, more efficient storing and shippingReduction of waste
Data management technology – optimization of distribution and inventoryfaster, more efficient storing and shippingReduction of waste
Data management technology – optimization of distribution and inventoryfaster, more efficient storing and shippingReduction of waste
Data management technology – optimization of distribution and inventoryfaster, more efficient storing and shippingReduction of waste
Store expansion as the key strategy is working well, and existing stores performance is solid.Revenue growth is strong, partly as a result of a lower operating margin, which comes from improved efficiency while maintaining quality.On the whole, Whole Foods is positioned to be profitable in the near future, and as Will and Whitney will explain in more detail, this short term performance should continue into the long term as well.
83% of consumers buy organic food for health reasonsFarmer’s markets have grown 17% from 2010-2011-Current dietary trends in the United states indicates a socio-economic shift towards the consumption of organic products that will increase demand for Whole Foods.-Per capita disposable income is often viewed as a pivotal indicator in gauging the state of a countries economy. As the U.S. continues to crawl its way out of the after effects of the recession people are beginning to increase the amount of disposable income they possess. Since organic food can be considered expensive, and somewhat of a luxury, this influx of disposable cash should increase demand for organic products. -Baby boomers will eventually represent the largest senior population in the history of the United States. As they continue to age their interest in healthy eating will continue to grow. One statistic that is indicative of this is that currently 83% of consumers assert that they purchase organic foods for health reasons.-As the Millennial generation increases in age, and spending power, it is certain to drive up demand for organic foods. The Millennial generation has grown up around the “fad” of organic culture and has chosen to embrace it. As Millennials make their way into the working world and increase their spending power they will contribute to the increased demand for organic products.
Intangible initiatives that increase whole foods value within their target margetInitiatives such as “Whole Planet” have increased Whole Foods credibility with their market segment. Whole Foods customers are globally minded, progressive, individuals. The “Whole Planet” initiative seeks to alleviate poverty through microfinancing projects in communities around the world that supply Whole Foods with products. Whole Foods also connects with it’s customers by exuding a sense of social and environmental responsibility, this comes in the form of the Whole Trade guarantee. The Whole Trade Guarantee is essentially Whole Food’s stamp of approval that asserts their products are up to the highest standards of quality in the eyes of the company, its suppliers, shareholders, customers, and the environment. Adoption of the Whole Foods Whole Trade guarantee has allowed Whole Foods to foster a positive image among anyone associated with the company
, Extended through 2020, purchase prices are extremely competitiveWhole Foods has been able to maintain a strong relationship with its suppliers. In particular Whole Foods has maintained it’s relationship with the organic food providing giant the United Natural Food Company.Whole Foods has been attempting to implement a system in which it will be able to “buy backwards” in regards to supply. This system allows Whole Foods to utilize it’s self produced, brand name products, (365 Everyday) Utilizing this strategy will allow Whole Foods to decrease its dependence upon suppliers. Have also made a concerted attempt to buy smaller suppliers in order to command their supply lines. Allegro Coffee. Whole Foods has maintained, and increased, its relationships with local suppliers in order to maintain the public perception that Whole Foods is a company that supports naturally produced “home grown” products. Initiatives such as the Project: Local program in the midwest have allowed Whole Foods to reinforce it’s image as a brand name that supports local farmers and industry.xs111
Whole Foods focuses on high quality organic and natural products, but there is a perception that they are expensive. Also, studies have shown that consumers are more and more likely to buy private label products, aka store brand products. So Whole Foods has focused on ways to reduce their prices for a portion of their products. Here you see differently named, differently priced brands that end up on Whole Foods’ shelves. 365 Everyday Value is still certified organic, but it is a less expensive option because it is a generic brand that is sourced through Whole Foods’ suppliers. They also have a Whole Foods Market private label brand, which is supplied by Whole Foods-owned facilities. On the right, there are control brands and subsidiaries that Whole Foods owns and controls, but may offer more expensive products. The bottom line: Whole Foods wants to appeal to a wider consumer base who are willing to pay different prices.
