Whole Foods is a leading natural and organic supermarket chain with over 400 stores in the US, Canada, and UK. The analyst recommends buying Whole Foods stock with a price target of $39.15. Key points from the analysis include Whole Foods' strategic focus on exclusive brands, commitment to local suppliers, and plans to launch its new 365 by Whole Foods format and partner with Instacart for delivery to drive future growth. A discounted cash flow model values Whole Foods at an implied share price of $40.41.
2. Source:
Company Overview
Geographic BreakdownBackground
Form 10k, Statista, Whole Foods
• Headquartered in Austin, Texas where it was
founded in September 1980
• Supermarket chain retailer of natural and
organic foods that are free of artificial
preservatives, sweeteners, and hydrogenated
fats
• 5th largest public food retailer in US
• Has over 91,000 employees and 431
supermarkets in the US, Canada, and the UK
• Receives an average of 8,000,000 customers
per week
Revenue by Offering Sector Geographic Diversity
Number of Stores at End of Year
311
335
362
399
431
0
50
100
150
200
250
300
350
400
450
500
2011 2012 2013 2014 2015
Growing Market Size Geographic Diversity
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Financial & Industry Metrics
Financial Summary
S&P Capital IQ, www.wholefoods.com, Form 10 Q,, Yahoo Finance
Key Metric WFM Industry
EV/EBITDA 7.20x 10.95x
EV/Revenue 0.60x 0.70x
Price/Earnings 20.52x 17.95x
Financial Summary Stock Charts (1 Year & 5 Year)
Stock Charts (1 Year & 5 Year)
Stock Data
Current Price 30.25
52 Week Price Range 28.07-50.46
50-Day Moving Average 31.94
Estimated Beta 0.817253
Market Cap 9.82B
Shares Out (mil) 324.62
Average Daily Vol (mil) 5.648
Institutional Ownership 80.80%
Insider Ownership 0.81%
Dividend Yield 1.80%
NTM P/E 18.67x
EV/EBITDA 7.20x
Debt/EV 1.60%
Gross Margin (LTM) 35.20%
EBITDA Margin (LTM) 9.10%
4. Source:
Financial Performance
2014 Form 10-K, MSN Finance, NDIC Projections, S&P Capital IQ
Operating Cash Flow
Return on Invested Capital
EBITDA and EBITDA Margin
Revenue
5. Source:
Strategic Positioning
Solutions Offerings and Product Expertise
• Own brands generated over $2.1 billion in
sales during 2015
• Currently features 5,300 SKUs, which
accounted for 14% of total retail sales
• Approximately 50% of these exclusive brands
were either characterized as “Certified
Organic” or “Non-GMO Project Verified
• 100 new dietary supplements launched in
2015 alone
Form 10k and 10Q, Yahoo Finance,
• In 2003, Whole Foods became the first
national “Certified Organic” grocer
• Remains the only national supermarket with
all store departments and operations certified
• Some facilities have been certified through
own handling plans, including Allegro Coffee™
line and 365 Organic Everyday Value™
product line
• Stores offer more than 25,000 organic SKUs,
comprising about 30% of sales
• Company has shown full commitment to
buying from local producers whose products
have higher quality standards
• Allows the supermarket to offer customers
the most savory pick of seasonal products
• Bolsters local economies which gives local
consumers a higher disposable income
• Purchased locally grown produce from over
1,200 farms (24% of produce sold in stores
worldwide)
Certified Organic Retailer
Exclusive Brands
In-Store Experience
• Strives to transform ford shopping from a
chore into dynamic experience by intentionally
designing stores to match store’s mission
• Offers unique product mix that emphasizes
high-quality standards and healthy eating
• Most stores have bike racks, electric vehicle
charging stations, sit-down eating areas and
wine bars, customer service bars, and
taprooms
• CEO: “Stores can serve as third place where
people interact besides home and office”
Commitment to Local
6. Source:
Growth Strategy
Acquisitions
• In 2015, Whole Foods announced plans to
launch second store format called 365 by
Whole Foods Market
• Mission is to target young people
nationwide by offering fresh, affordable food
through a smaller footprint, curated product
selection, convenience, and technology
• Expects to open 3 stores in 2016 and
another 10 in 2017
• Partnering with local businesses to help
drive traffic to new stores
• In February 2016, Whole Foods signed 5-year
partnership with $2 billion startup Instacart
• 2014: Whole Foods customers saved more
than 970,000 hours using their services
• Now available in over 16 cities which have
seen share of sales increase in high single
digits
• Grocery delivery will expand right alongside
E-Commerce
• Stock price decline due to high prices that
have caused consumers to explore cheaper
alternatives
• Plan on increasing perishables within stores,
which will narrow price gaps on value items
and broaden selection of products at entry-
level price points
• Has been offering discounts and promotions
through Whole Foods app
• Daily downloads of Whole Foods app jumped
from 1,000 to 5,000 in periods after coupons
were introduced
Forbes, Form 10K , S&P Cap IQ
365 by Whole Foods Market
Delivery Methods
Price Competition
Increased in Prepared Foods
• In December 2015, Chef Tien Ho was hired as
new Global VP of Culinary and Hospitality
• Indicates desire to strengthen its prepared
foods sector
• $3 billion high-margin business for Whole
Foods
• Ho already announced a food truck test
amongst many other creative proposals
7. Source:
Risks
Acquisitions
• Whole Foods ranked 3rd on list of America’s
most reputable retail companies in 2015
• Recently company had serious PR challenges
including overcharging on pre-packaged
goods, selling water for $6, and laying off
1,500 employees
• Has begun to recover by instituting
customer-friendly promotions and other
discounts
• Biggest risk to future is hit to brand
• Pillar to growth of company is announcement
is 365 by Whole Foods Market
• This projects will be located next to existing
store markets
• Reasonable to believe these more affordable
stores will take away business from these
highly profitable locations
• Has been experiencing low same store-growth
compared to the past so new store growth is
essential
• Ultimate goal is 1,200 locations
• Real Estate market becoming competitive
with competitors announcing plans of
growing to over 1,000 locations
• Must continue to expand to keep sales high
and remain dominant player in natural grocer
sector
Forbes, Form 10K , S&P Cap IQ
Brand Erosion
Cannibalization to Existing Locations
Failure to Grow Location Base
Other Risks
• Possibility of poor economic conditions that
would adversely impact consumer spending
• Changes in availability of quality natural and
organic products
• Threat of widespread health epidemic
• Loss of key management or an increased
difficulty in recruiting top talent to firm
8. Source:
Comparable Companies
LTM 2015E LTM 2015E LTM 2015E
KR The Kroger. Co $37.86 $36,439.50 $48,246.50 0.4x 0.4x 8.4x 9.0x 18.0x 19.1x
UNFI United Natural Foods, Inc. 35.99 1811.50 2255.30 0.3x 0.5x 7.4x 12.9x 13.9x 13.6x
TFM The Fresh Market Inc. 28.43 1336.80 1308.20 0.7x 0.9x 6.9x 8.1x 17.9x 18.1x
SFM Sprouts Farmers Market, Inc. 28.56 4300.10 4454.50 1.2x 1.4x 14.9x 16.0x 32.6x 28.6x
75th Percentile 36.46 12334.95 15402.50 0.83 1.03 10.03 13.68 21.65 21.48
Mean 32.71 10971.98 14066.13 0.65 0.80 9.40 11.50 20.60 19.85
Median 32.28 3055.80 3354.90 0.55 0.70 7.90 10.95 17.95 18.60
25th Percentile 28.53 1692.83 2018.53 0.38 0.48 7.28 8.78 16.90 16.98
WFM WHOLE FOODS MARKET $30.25 $9,819.80 $10,065.80 0.60x 1.00x 7.20x 10.30x 20.52x 21.30x
Implied EV (mean) $10,105.55 $12,437.60 $13,150.60 $16,065.50 $11,498.60 $11,104.10
Implied EV (median) $8,550.85 $10,882.90 $11,052.10 $15,297.15 $10,104.70 $10,446.60
Implied Market Cap (mean) $9,442.55 $11,648.20 $12,487.60 $15,425.50 $10,835.60 $10,441.10
Implied Market Cap (median) $7,887.85 $10,109.30 $10,389.10 $14,656.05 $9,441.70 $9,783.60
Ticker Company Name LTM Revenue
2015E
Revenue
LTM EBITDA
2015E
EBITDAExp. Revenue Growth Exp. EBITDA Growth Margins
1 Year 2 Year 1 Year 2 Year EBITDA
KR The Kroger. Co $109,830.00 $108,872.00 $5,762.00 $5,599.00 1.3% 6.0% 10.1% 7.3% 5.2%
UNFI United Natural Foods, Inc. 8,300.00 8,269.00 302.80 307.70 9.9% 2.2% -1.2% -6.2% 3.6%
TFM The Fresh Market, Inc. 1,857.00 1,818.00 190.80 192.70 5.9% 5.4% 0.3% 2.3% 10.2%
SFM Sprouts Farmers Market, Inc. 3,593.00 3,397.00 299.90 281.50 21.1% 16.8% 13.5% 12.2% 8.3%
WFM WHOLE FOODS MARKET $15,547.00 $15,389.00 $1,399.00 $1,397.00 3.7% 6.1% -2.3% 2.6% 9.1%
Ticker Company Name
Latest Close
Price
Market Cap
(USDmm)
Enterprise
Value (USDmm)
EV/Revenue EV/EBITDA Price/Earnings
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DCF Assumptions and Results
WACC Components
S&P Capital IQ, NDIC valuations, Yahoo Finance
Cost of Equity
Risk-free Rate(1)
4.00%
Market Risk Premium(2)
5.00%
Levered Beta 0.71
Cost of Equity 7.55%
WACC 7.09%
Enterprise Value
Cumulative Present Value of FCF $1,713.8
Terminal Value
Terminal Year EBITDA $1,807.7
Exit Multiple 9.4x
Terminal Value $16,992.24
Discount Factor 71.01%
Present Value of Terminal Value $12,066.4
% of Enterprise Value 87.6%
Enterprise Value $13,780.1
Implied Equity Value and Share Price
Enterprise Value $13,780.1
Less: Total Debt $1,055.0
Plus: Cash & Cash Equivalents $392.0
Implied Equity Value $13,117.1
Implied Share Price $40.41
Shares Outstanding 324.62
Short Term Debt: $3.00
Long Term Debt: $1052.00
Total Debt: $1055.00
Credit Rating: BBB-
WACC Components DCF Results
Debt Structure
11. Source:
Catalysts & Portfolio Strategy
Strong strategic positioning within market
that is expected to see double digit increases
within the coming years
Strategies such as 365 by Whole Foods and
partnering with Instacart will target
millennials who will soon have high
discretionary income, which will help drive
growth within the company
Innovative management team will keep
company’s brand intact
If Whole Foods does not continue to expand
both same stores sales growth and new store
development, the drop in stock price should
be expected to continue downward
Large grocery stores such as Kroger and Wal-
Mart have the ability to offer much lower
prices than Whole Foods for similar products,
so if these operations within these companies
continue to grow, expect the stock to drop
Failure to restore brand name
Whole Foods, has seen a steep decline in stock price over the last year. This has been attributed to larger supermarkets like
Kroger and Wal-Mart expanding their natural grocer sectors, which has shed a negative light on Whole Foods high prices.
Furthermore, a plethora of negative publicity has only continued the downfall. However, I believe this will change. In a 2015
Nielson Global Health and Wellness Survey, 88% of Americans said they are willing to pay more for healthy food (this number
is even higher amongst millennials). The company will restore itself in the coming years through positive PR campaigns,
opening of new, unique stores, and the advancement of technology platforms. Therefore, I recommend the Notre Dame
Investment Club purchase a stake in Whole Foods Market at a final implied target price of $39.15.
S&P Capital IQ, NDIC valuations,
Upside Downside
Portfolio Strategy and Final Recommendation