10-Q 1 wfm10qq32012.htm QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) WFM.10Q.Q3.2012

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 quarterly period ended July 1, 2012; 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 Street
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 x  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
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 

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 July 27, 2012 was 184,667,400 shares.


Whole Foods Market, Inc.
Form 10-Q
Table of Contents



 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Part I. Financial Information
 
Item 1. Financial Statements

Whole Foods Market, Inc.
Consolidated Balance Sheets (unaudited)
July 1, 2012 and September 25, 2011
(In thousands)

Assets
2012

 
2011

Current assets:
 

 
 

Cash and cash equivalents
$
135,457

 
$
212,004

Short-term investments - available-for-sale securities
933,486

 
442,320

Restricted cash
104,334

 
91,956

Accounts receivable
178,841

 
175,310

Merchandise inventories
375,713

 
336,799

Prepaid expenses and other current assets
70,208

 
73,579

Deferred income taxes
127,519

 
121,176

Total current assets
1,925,558

 
1,453,144

Property and equipment, net of accumulated depreciation and amortization
2,111,840

 
1,997,212

Long-term investments - available-for-sale securities
282,740

 
52,815

Goodwill
662,938

 
662,938

Intangible assets, net of accumulated amortization
63,527

 
67,234

Deferred income taxes
33,098

 
50,148

Other assets
9,185

 
8,584

Total assets
$
5,088,886

 
$
4,292,075

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 

Current liabilities:
 

 
 

Current installments of capital lease obligations
$
364

 
$
466

Accounts payable
239,579

 
236,913

Accrued payroll, bonus and other benefits due team members
319,989

 
281,587

Dividends payable
25,836

 
17,827

Other current liabilities
371,470

 
342,568

Total current liabilities
957,238

 
879,361

Long-term capital lease obligations, less current installments
18,756

 
17,439

Deferred lease liabilities
418,687

 
353,776

Other long-term liabilities
52,900

 
50,194

Total liabilities
1,447,581

 
1,300,770

 
 
 
 
Shareholders’ equity:
 

 
 

Common stock, no par value, 600,000 and 300,000 shares authorized;
184,900 and 178,886 shares issued; 184,554 and 178,886 shares outstanding
at 2012 and 2011, respectively
2,523,024

 
2,120,972

Common stock in treasury, at cost
(28,599
)
 
—

Accumulated other comprehensive income (loss)
222

 
(164
)
Retained earnings
1,146,658

 
870,497

Total shareholders’ equity
3,641,305

 
2,991,305

Commitments and contingencies


 


Total liabilities and shareholders’ equity
$
5,088,886

 
$
4,292,075


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


3

Whole Foods Market, Inc.
Consolidated Statements of Operations (unaudited)
(In thousands, except per share amounts)

 
Twelve weeks ended
 
Forty weeks ended
 
July 1,
2012

July 3,
2011
 
July 1,
2012
 
July 3,
2011
Sales
$
2,727,279

 
$
2,399,781

 
$
8,788,501

 
$
7,753,954

Cost of goods sold and occupancy costs
1,745,910

 
1,551,101

 
5,659,307

 
5,029,717

Gross profit
981,369

 
848,680

 
3,129,194

 
2,724,237

Direct store expenses
689,917

 
620,827

 
2,242,613

 
2,020,193

General and administrative expenses
87,439

 
73,073

 
277,715

 
237,245

Pre-opening expenses
11,997

 
11,784

 
32,898

 
29,967

Relocation, store closure and lease termination costs
3,828

 
2,371

 
8,059

 
6,520

Operating income
188,188

 
140,625

 
567,909

 
430,312

Investment and other income, net of interest
2,119

 
1,672

 
6,752

 
2,649

Income before income taxes
190,307

 
142,297

 
574,661

 
432,961

Provision for income taxes
73,458

 
53,825

 
221,820

 
165,824

Net income
$
116,849

 
$
88,472

 
$
352,841

 
$
267,137

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.64

 
$
0.50

 
$
1.94

 
$
1.53

Weighted average shares outstanding
183,729

 
176,444

 
181,570

 
174,457

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.63

 
$
0.50

 
$
1.92

 
$
1.51

Weighted average shares outstanding, diluted basis
185,907

 
178,610

 
183,758

 
176,513

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.14

 
$
0.10

 
$
0.42

 
$
0.30


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


4

Whole Foods Market, Inc.
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (unaudited)
Forty weeks ended July 1, 2012 and fiscal year ended September 25, 2011
(In thousands)

 
Shares
outstanding
Common
stock
Common
stock in
treasury
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
shareholders’
equity
Balances at September 26, 2010
172,033

$
1,773,897

$
—

$
791

$
598,570

$
2,373,258

Net income
—

—

—

—

342,612

342,612

Foreign currency translation adjustments
—

—

—

(1,209
)
—

(1,209
)
Reclassification adjustments for amounts included in net income
—

—

—

245

—

245

Change in unrealized gains and losses, net of income taxes
—

—

—

9

—

9

Comprehensive income
 

 

 
 

 

341,657

Dividends ($0.40 per common share)
—

—

—

—

(70,447
)
(70,447
)
Issuance of common stock pursuant to team member stock plans
6,857

301,591

—

—

—

301,591

Excess tax benefit related to exercise of team member stock options
—

18,225

—

—

—

18,225

Share-based payment expense
—

27,259

—

—

—

27,259

Other
(4
)
—

—

—

(238
)
(238
)
Balances at September 25, 2011
178,886

2,120,972

—

(164
)
870,497

2,991,305

Net income
—

—

—

—

352,841

352,841

Foreign currency translation adjustments
—

—

—

524

—

524

Change in unrealized gains and losses, net of income taxes
—

—

—

(138
)
—

(138
)
Comprehensive income
 

 



 

 

353,227

Dividends ($0.42 per common share)
—

—

—

—

(76,680
)
(76,680
)
Issuance of common stock pursuant to team member stock plans
6,014

321,489

—

—

—

321,489

Purchase of treasury stock
(346
)
—

(28,599
)
—

—

(28,599
)
Excess tax benefit related to exercise of team member stock options
—

51,424

—

—

—

51,424

Share-based payment expense
—

29,139

—

—

—

29,139

Balances at July 1, 2012
184,554

$
2,523,024

$
(28,599
)
$
222

$
1,146,658

$
3,641,305


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


5

Whole Foods Market, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)

 
Forty weeks ended
 
July 1,
2012
 
July 3,
2011
Cash flows from operating activities
 

 
 

Net income
$
352,841

 
$
267,137

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

 
 

Depreciation and amortization
234,901

 
219,082

Loss on disposition of fixed assets
1,529

 
1,478

Share-based payment expense
29,139

 
19,090

LIFO expense
2,000

 
6,500

Deferred income tax expense
10,822

 
45,916

Excess tax benefit related to exercise of team member stock options
(38,858
)
 
(16,934
)
Accretion of premium/discount on marketable securities
8,878

 
4,613

Deferred lease liabilities
58,717

 
42,501

Other
1,827

 
(216
)
Net change in current assets and liabilities:
 

 
 

Accounts receivable
(12,088
)
 
(20,692
)
Merchandise inventories
(40,805
)
 
(30,483
)
Prepaid expenses and other current assets
3,062

 
(29,262
)
Accounts payable
2,549

 
14,600

Accrued payroll, bonus and other benefits due team members
38,338

 
27,766

Other current liabilities
71,812

 
50,191

Net change in other long-term liabilities
2,668

 
(6,427
)
Net cash provided by operating activities
727,332

 
594,860

Cash flows from investing activities
 

 
 

Development costs of new locations
(188,770
)
 
(156,048
)
Other property and equipment expenditures
(137,225
)
 
(115,530
)
Purchase of available-for-sale securities
(2,303,463
)
 
(924,287
)
Sale of available-for-sale securities
1,569,715

 
1,057,312

Decrease (increase) in restricted cash and marketable securities
(8,824
)
 
326

Other investing activities
(2,080
)
 
(4,341
)
Net cash used in investing activities
(1,070,647
)
 
(142,568
)
Cash flows from financing activities
 

 
 

Common stock dividends paid
(68,671
)
 
(34,920
)
Issuance of common stock
325,233

 
210,927

Purchase of treasury stock
(28,599
)
 
—

Excess tax benefit related to exercise of team member stock options
38,858

 
16,934

Payments on long-term debt and capital lease obligations
(221
)
 
(490,258
)
Net cash provided by (used in) financing activities
266,600

 
(297,317
)
Effect of exchange rate changes on cash and cash equivalents
168

 
2,136

Net change in cash and cash equivalents
(76,547
)
 
157,111

Cash and cash equivalents at beginning of period
212,004

 
131,996

Cash and cash equivalents at end of period
$
135,457

 
$
289,107

 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
2,032

 
$
15,060

Federal and state income taxes paid
$
154,245

 
$
144,347


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

6

Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (unaudited)
July 1, 2012

(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 25, 2011. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation. Where appropriate, we have reclassified prior years’ financial statements to conform to current year 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 52- or 53-week fiscal year ending on the last Sunday in September. The first fiscal quarter is 16 weeks, the second and third quarters each are 12 weeks, and the fourth quarter is 12 or 13 weeks. Fiscal year 2012 is a 53-week year and fiscal year 2011 was a 52-week year. The Company has 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 periods indicated:
 
Twelve weeks ended
 
Forty weeks ended
 
July 1,
2012

July 3,
2011
 
July 1,
2012
 
July 3,
2011
Sales:
 
 
 
 
 
 
 
United States
96.7
%
 
96.8
%
 
96.8
%
 
96.9
%
Canada and United Kingdom
3.3

 
3.2

 
3.2

 
3.1

Total sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

The following is a summary of the percentage of net long-lived assets by geographic area as of the dates indicated:
 
July 1,
2012
 
September 25,
2011
Long-lived assets, net:
 

 
 
United States
95.6
%
 
95.9
%
Canada and United Kingdom
4.4

 
4.1

Total long-lived assets, net
100.0
%
 
100.0
%

(2) Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued amended guidance within Accounting Standards Codification (“ASC”) 805, “Business Combinations,” which updates previous guidance on this topic and applies to all material transactions. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) had occurred as of the beginning of the comparable prior annual reporting period only. Additional amendments expand supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The updated guidance is effective for fiscal years beginning after December 15, 2010 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 30, 2012. We do not expect the adoption of these provisions to have a significant effect on our consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of Comprehensive Income,” which amends ASC 220, “Comprehensive Income.” The amended guidance requires that all nonowner changes in stockholders’ equity be presented in either a single statement of comprehensive income or two separate but consecutive statements. The objective of these amendments is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which defers the implementation requirement in ASU No. 2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. The amended guidance specifies that entities should continue to report reclassifications out of accumulated other comprehensive income consistent with presentation requirements in effect before ASU No. 2011-05. The guidance provided in ASU No. 2011-05 and ASU No. 2011-12

7

is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The provisions are effective for the Company’s first quarter of the fiscal year ending September 29, 2013.

In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” which amends ASC 350, “Intangibles - Goodwill and Other.” The amended guidance simplifies how entities test for impairment of indefinite-lived intangible assets. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount as a basis for determining if performing a quantitative test is necessary. The amendments do not change the measurement of impairment losses. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The provisions are effective for the Company’s first quarter of the fiscal year ending September 29, 2013. We do not expect the adoption of these provisions to have a significant effect on our consolidated financial statements.

(3) Fair Value Measurements
Effective January 16, 2012, the Company adopted ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends ASC 820, “Fair Value Measurement.” The adoption of ASU No. 2011-04, which primarily consists of clarification and wording changes to existing fair value measurement and disclosure requirements, did not have an impact on the Company’s consolidated financial statements.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company holds money market fund investments that are classified as cash equivalents that are measured at fair value on a recurring basis based on quoted prices in active markets for identical assets. The Company also holds available-for-sale securities generally consisting of state and local municipal obligations and variable rate demand notes which hold high credit ratings. These instruments are valued using a series of multi-dimensional relational models and series of matrices with standard inputs obtained from readily available pricing sources and other observable market data, such as benchmark yields and base spread. Investments are stated at fair value with unrealized gains and losses, net of related tax effect, included as a component of shareholders’ equity until realized. 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 closure reserves and estimated workers’ compensation claims are recorded at net present value to approximate fair value.

The Company held the following financial assets at fair value, based on the hierarchy input levels indicated, on a recurring basis (in thousands):
July 1, 2012
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market fund
$
31,139

 
$
—

 
$
—

 
$
31,139

Municipal bonds
—

 
7,650

 
—

 
7,650

Marketable securities - available-for-sale:
 
 
 
 
 
 
 
Municipal bonds
—

 
875,027

 
—

 
875,027

Corporate bonds
—

 
5,195

 
—

 
5,195

Commercial paper
—

 
2,999

 
—

 
2,999

Variable rate demand notes
—

 
333,005

 
—

 
333,005

Total
$
31,139

 
$
1,223,876

 
$
—

 
$
1,255,015


September 25, 2011
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market fund
$
59,157

 
$
—

 
$
—

 
$
59,157

Municipal bonds
—

 
3,791

 
—

 
3,791

Commercial paper
—

 
12,998

 
—

 
12,998

Marketable securities - available-for-sale:
 
 
 
 
 
 
 
Municipal bonds
—

 
316,662

 
—

 
316,662

Corporate bonds
—

 
5,361

 
—

 
5,361

Commercial paper
—

 
67,964

 
—

 
67,964

Variable rate demand notes
—

 
105,148

 
—

 
105,148

Total
$
59,157

 
$
511,924

 
$
—

 
$
571,081



8

Assets Measured at Fair Value on a Nonrecurring Basis
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances, such as unplanned negative cash flow or short lease life, indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. The fair value, based on hierarchy input Level 3, is determined using management’s best estimate based on a discounted cash flow model based on future store operating results using internal projections. Fair value may also be reduced to zero based on a review of the future benefit the Company anticipates receiving from certain software or intangible assets. Fair value adjustments reduced the carrying value of related long-lived assets to zero and were included in the following line items on the Consolidated Statements of Operations for the periods indicated (in thousands):
 
Twelve weeks ended
 
Forty weeks ended
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
Direct store expenses
$
24

 
$
31

 
$
44

 
$
532

General and administrative expenses
4

 
—

 
1,182

 
—

Relocation, store closure and lease termination costs
1,300

 
76

 
1,300

 
156

Total impairment of long-lived assets
$
1,328

 
$
107

 
$
2,526

 
$
688


(4) Investments
The Company holds investments in marketable securities, generally municipal bonds, corporate bonds, commercial paper and variable rate demand notes, that are classified as either short- or long-term available-for-sale securities. The Company held the following investments as of the dates indicated (in thousands):
July 1, 2012
Adjusted
cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
Short-term marketable securities - available-for-sale:
 
 
 
 
 
 
 
Municipal bonds
$
592,280

 
$
153

 
$
(146
)
 
$
592,287

Corporate bonds
5,170

 
25

 
—

 
5,195

Commercial paper
2,997

 
2

 
—

 
2,999

Variable rate demand notes
333,005

 
—

 
—

 
333,005

Total short-term marketable securities
$
933,452

 
$
180

 
$
(146
)
 
$
933,486

Long-term marketable securities - available-for-sale:
 
 
 
 
 
 
 
Municipal bonds
$
282,639

 
$
240

 
$
(139
)
 
$
282,740

Total long-term marketable securities
$
282,639

 
$
240

 
$
(139
)
 
$
282,740


September 25, 2011
Adjusted
cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
Short-term marketable securities - available-for-sale:
 
 
 
 
 
 
 
Municipal bonds
$
268,945

 
$
279

 
$
(16
)
 
$
269,208

Commercial paper
67,950

 
14

 
—

 
67,964

Variable rate demand notes
105,148

 
—

 
—

 
105,148

Total short-term marketable securities
$
442,043

 
$
293

 
$
(16
)
 
$
442,320

Long-term marketable securities - available-for-sale:
 
 
 
 
 
 
 
Municipal bonds
$
47,387

 
$
77

 
$
(10
)
 
$
47,454

Corporate bonds
5,345

 
16

 
—

 
5,361

Total long-term marketable securities
$
52,732

 
$
93

 
$
(10
)
 
$
52,815


At July 1, 2012 and September 25, 2011, available-for-sale securities totaling approximately $479.6 million and $74.5 million, respectively, were in unrealized loss positions.

At July 1, 2012, the average effective maturity of the Company’s short- and long-term investments was approximately 5 months and 16 months, respectively, compared to approximately 4 months and 15 months, respectively, at September 25, 2011.



9

(5) Intangible Assets
The components of intangible assets were as follows (in thousands):
 
July 1, 2012
 
September 25, 2011
 
Gross carrying
amount
 
Accumulated
amortization
 
Gross carrying
amount
 
Accumulated
amortization
Definite-lived contract-based
$
95,429

 
$
(34,337
)
 
$
96,019

 
$
(31,660
)
Definite-lived marketing-related and other
1,372

 
(1,060
)
 
1,547

 
(420
)
Indefinite-lived contract-based
2,123

 


 
1,748

 


 
$
98,924

 
$
(35,397
)
 
$
99,314

 
$
(32,080
)

Amortization associated with intangible assets totaled approximately $1.3 million and $4.4 million for the twelve and forty weeks ended July 1, 2012, respectively, and approximately $1.6 million and $5.4 million, respectively, for the same periods of the prior fiscal year. Future amortization associated with the net carrying amount of definite-lived intangible assets is estimated to be approximately as follows (in thousands):
Remainder of fiscal year 2012
$
1,326

Fiscal year 2013
4,512

Fiscal year 2014
4,463

Fiscal year 2015
4,338

Fiscal year 2016
4,213

Future fiscal years
42,552

 
$
61,404


(6) Reserves for Closed Properties
Following is a summary of store closure reserve activity during the forty weeks ended July 1, 2012 and fiscal year ended September 25, 2011 (in thousands):
 
July 1,
2012
 
September 25,
2011
Beginning balance
$
44,702

 
$
59,298

Additions
3,225

 
4,706

Usage
(7,676
)
 
(17,805
)
Adjustments
1,866

 
(1,497
)
Ending balance
$
42,117

 
$
44,702


Additions to store closure reserves relate to the accretion of interest on existing reserves and three new closures. Usage included approximately $7.7 million in ongoing cash rental payments during the forty weeks ended July 1, 2012. During the fiscal year ended September 25, 2011, usage included approximately $10.1 million in ongoing cash rental payments and approximately $7.7 million in termination fees related to certain idle properties. Additionally, the Company recorded reserve adjustments of approximately $3.7 million during the fiscal year ended September 25, 2011, offset to goodwill.

(7) Long-Term Debt
The Company has a $350 million revolving line of credit that extends to August 28, 2012. The Company’s obligations under the facility are secured by liens on certain of the Company’s assets, including stock of its subsidiaries. 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 by the agreement. At July 1, 2012, the Company was in compliance with all applicable debt covenants. At July 1, 2012 and September 25, 2011, the Company had no amounts drawn under this agreement. The amount available to the Company under the agreement was $350 million at July 1, 2012. The amount available to the Company at September 25, 2011 was effectively reduced to approximately $348.6 million by outstanding letters of credit totaling approximately $1.4 million. The Company had outstanding a $700 million, five-year term loan agreement due in 2012, with an outstanding balance of $490 million at September 26, 2010, which was repaid during the forty weeks ended July 3, 2011.

(8) Income Taxes
Income taxes for both the twelve and forty weeks ended July 1, 2012 resulted in an effective tax rate of approximately 38.6%, compared to approximately 37.8% and 38.3%, respectively, for the same periods of the prior fiscal year. Income taxes receivable totaled approximately $9.5 million and $14.8 million at July 1, 2012 and September 25, 2011, respectively.


10

(9) Shareholders’ Equity
Dividends per Common Share
During the twelve weeks ended July 1, 2012, the Company’s Board of Directors declared a cash dividend to shareholders of $0.14 per common share, payable on July 10, 2012 to shareholders of record on June 29, 2012. Approximately $25.8 million was included in the “Dividends payable” line item on the Consolidated Balance Sheets at July 1, 2012. During fiscal year 2011, the Company’s Board of Directors declared cash dividends to shareholders totaling $0.40 per common share resulting in dividend payments of approximately $70.4 million, of which approximately $17.8 million was included in the “Dividends payable” line item on the Consolidated Balance Sheets at September 25, 2011.

Common Stock
During the second quarter of fiscal year 2012, the Company’s shareholders approved an increase in the number of authorized shares of the Company’s common stock from 300 million to 600 million.

Treasury Stock
During the first quarter of fiscal year 2012, the Company’s Board of Directors authorized a $200 million stock repurchase program through November 1, 2013. The Company repurchased approximately 289,000 shares and 346,000 shares of the Company’s common stock on the open market during the twelve and forty weeks ended July 1, 2012, respectively. The total cost of shares held in treasury at July 1, 2012 was approximately $28.6 million. The average price per share paid for shares held in treasury was $86.40 and $82.69 from repurchases during the twelve and forty weeks ended July 1, 2012, respectively. The specific timing and repurchase of future amounts will vary based on market conditions, securities law limitations and other factors and will be made using the Company’s available resources. The repurchase program may be suspended or discontinued at any time at the discretion of the Company’s Board of Directors.

Comprehensive Income
The Company’s comprehensive income was comprised of: net income; unrealized gains and losses on investments; foreign currency translation adjustments; and unrealized gains and losses on cash flow hedge instruments, including reclassification adjustments of unrealized losses to net income related to ongoing interest payments, net of income taxes. Comprehensive income was as follows (in thousands):
 
Twelve weeks ended
 
Forty weeks ended
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
Net income
$
116,849

 
$
88,472

 
$
352,841

 
$
267,137

Foreign currency translation adjustments
(2,587
)
 
(1,188
)
 
524

 
4,201

Reclassification adjustments for amounts
included in net income
—

 
—

 
—

 
245

Change in unrealized gains and losses,
net of income taxes
(123
)
 
31

 
(138
)
 
14

Comprehensive income
$
114,139

 
$
87,315

 
$
353,227

 
$
271,597


(10) 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 includes the dilutive effect of common stock equivalents consisting of incremental common shares deemed outstanding from the assumed exercise of stock options and the dilutive effect of restricted stock awards.

11

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
 
Forty weeks ended
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
Net income
(numerator for basic and diluted earnings per share)
$
116,849

 
$
88,472

 
$
352,841

 
$
267,137

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
183,734

 
176,444

 
181,574

 
174,457

Less: Unvested restricted stock
(5
)
 
—

 
(4
)
 
—

Weighted average common shares outstanding
(denominator for basic earnings per share)
183,729

 
176,444

 
181,570

 
174,457

Potential common shares outstanding:
 

 
 

 


 


Incremental shares from assumed exercise of
stock options
2,176

 
2,166

 
2,187

 
2,056

Dilutive impact of restricted stock
2

 
—

 
1

 
—

Weighted average common shares outstanding and
potential additional common shares outstanding
(denominator for diluted earnings per share)
185,907

 
178,610

 
183,758

 
176,513

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.64

 
$
0.50

 
$
1.94

 
$
1.53


 
 
 
 


 


Diluted earnings per share
$
0.63

 
$
0.50

 
$
1.92

 
$
1.51


The computation of diluted earnings per share for the twelve and forty weeks ended July 1, 2012 does not include options to purchase approximately 1.8 million shares and 0.5 million shares of common stock, respectively, due to their antidilutive effect. For the twelve and forty weeks ended July 3, 2011, the computation of diluted earnings per share does not include options to purchase approximately 5.9 million shares and 6.5 million shares of common stock, respectively, due to their antidilutive effect.

(11) Share-Based Payments
Total share-based payment expense before income taxes recognized during the twelve and forty weeks ended July 1, 2012 was approximately $9.4 million and $29.1 million, respectively, compared to approximately $6.2 million and $19.1 million, 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
 
Forty weeks ended
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
Cost of goods sold and occupancy costs
$
352

 
$
308

 
$
1,297

 
$
966

Direct store expenses
4,567

 
3,086

 
14,930

 
9,705

General and administrative expenses
4,461

 
2,848

 
12,912

 
8,419

Share-based payment expense before income taxes
9,380

 
6,242

 
29,139

 
19,090

Income tax benefit
(3,515
)
 
(2,322
)
 
(10,968
)
 
(7,198
)
Net share-based payment expense
$
5,865

 
$
3,920

 
$
18,171

 
$
11,892


Stock Options
At July 1, 2012 and September 25, 2011, approximately 8.3 million shares and 11.7 million shares of the Company’s common stock, respectively, were available for future stock incentive grants.


12

On May 11, 2012, the Company issued its annual grant of options to team members and directors. The following table summarizes option activity during the forty weeks ended July 1, 2012 (in thousands, except per share amounts and contractual lives in years):
 
 
Number
of options
outstanding
 
Weighted
average
exercise price
 
Weighted
average
remaining
contractual life
 
Aggregate
intrinsic
value
Outstanding options at September 25, 2011
 
13,640

 
$
48.99

 
 
 
 
Options granted
 
3,610

 
88.46

 
 
 
 
Options exercised
 
(5,967
)
 
53.37

 
 
 
 
Options expired
 
(49
)
 
52.05

 
 
 
 
Options forfeited
 
(271
)
 
47.59

 
 
 
 
Outstanding options at July 1, 2012
 
10,963

 
$
59.55

 
5.34
 
$
392,140

Vested/expected to vest at July 1, 2012
 
10,101

 
$
58.45

 
5.27
 
$
372,436

Exercisable options at July 1, 2012
 
3,030

 
$
40.32

 
3.40
 
$
166,651


The weighted average fair value per option granted during the forty weeks ended July 1, 2012 was $27.30. The aggregate intrinsic value of stock options at exercise, represented in the table above, was approximately $161.0 million. At July 1, 2012 and September 25, 2011, there was approximately $147.1 million and $97.4 million of unrecognized share-based payment expense, respectively, related to nonvested stock options, net of estimated forfeitures, related to approximately 7.1 million shares and 6.5 million shares, respectively. We anticipate this expense to be recognized over a weighted average period of approximately 3.5 years.

A summary of options outstanding and exercisable at July 1, 2012 follows (share amounts in thousands):
Range of Exercise Prices
 
Options Outstanding
 
Options Exercisable
From
 
To
 
Number
of options
outstanding
 
Weighted
average
exercise price
 
Weighted average
remaining
life (in years)
 
Number
of options
exercisable
 
Weighted
average
exercise price
$
11.12

 
$
25.30

 
1,322

 
$
18.60

 
3.78
 
750

 
$
18.53

27.62

 
36.97

 
610

 
27.88

 
1.04
 
590

 
27.66

40.83

 
56.99

 
2,219

 
40.85

 
5.40
 
716

 
40.83

62.49

 
66.81

 
3,228

 
63.07

 
5.09
 
974

 
64.40

81.62

 
88.54

 
3,584

 
88.46

 
6.84
 
—

 
—

Total
 
 
 
10,963

 
$
59.55

 
5.34
 
3,030

 
$
40.32


The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
 
 
2012
 
2011
Expected dividend yield
 
0.800
%
 
0.698
%
Risk-free interest rate
 
0.58
%
 
1.76
%
Expected volatility
 
40.89
%
 
43.84
%
Expected life, in years
 
4.14

 
4.18


Risk-free interest rate is based on the U.S. Treasury yield curve on the date of the grant for the time period equal to the expected term of the grant. Expected volatility is calculated using a ratio of implied volatility based on the Newton-Raphson method of bisection, and four or six year historical volatilities based on the expected life of each tranche of options. The Company determined the use of implied volatility versus historical volatility represents a more accurate calculation of option fair value. Expected life is calculated in two tranches based on weighted average percentage of unexpired options and exercise-after-vesting information over the last five or seven years. Unvested options are included in the term calculation using the “mid-point scenario” which assumes that unvested options will be exercised halfway between vest and expiration date. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience. In addition to the above valuation assumptions, the Company estimates an annual forfeiture rate for unvested options and adjusts fair value expense accordingly. The Company monitors actual forfeiture activity and adjusts the rate from time to time as necessary.


13

Restricted Stock
During the forty weeks ended July 1, 2012, the Company awarded 5,700 shares of restricted common stock pursuant to the Whole Foods Market 2009 Stock Incentive Plan. Fair value of the restricted share issuances on grant date totaled approximately $0.4 million and vests over a three-year term. The Company recorded approximately $0.1 million of share-based payment expense related to this transaction, included in the “General and administrative expenses” line item on the Consolidated Statements of Operations.

(12) Commitments and Contingencies
The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters in a manner that we believe best serves the interests of our stakeholders. Our primary contingencies are associated with insurance and self-insurance obligations and litigation matters. Estimation of our insurance and self-insurance liabilities requires significant judgments, and actual claim settlements and associated expenses may differ from our current provisions for loss. We have exposures to loss contingencies arising from pending or threatened litigation for which assessing and estimating the outcomes of these matters involve substantial uncertainties.

The Company evaluates contingencies on an ongoing basis and has established loss provisions for matters in which losses are probable and the amount of loss can be reasonably estimated. Insurance and legal settlement liabilities are included in the “Other current liabilities” line item on the Consolidated Balance Sheets. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities.

(13) Related Party Transactions
The Company provides ongoing support to two independent non-profit organizations: Whole Planet Foundation and Whole Kids Foundation (the “Foundations”). Whole Planet Foundation’s mission is to empower the poor through microcredit, with a focus on developing-world communities that supply the Company’s stores with product. Whole Kids Foundation is a non-profit organization dedicated to improving children’s nutrition through partnerships with schools, educators, and other organizations. Members of the Company’s management comprise the Board of Directors of each of the Foundations. Additionally, the Company provides administrative support and covers all operating costs and the overhead budget of the Foundations.


14

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

Forward-looking Statements
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 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 25, 2011. 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.

This information should be read in conjunction with the consolidated financial statements and the accompanying notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2011.

General
Whole Foods Market, Inc. is the world’s leading retailer of natural and organic foods and America’s first national “Certified Organic” grocer. Our Company mission is to promote the vitality and well-being of 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. As of July 1, 2012, we operated 328 stores: 315 stores in 38 U.S. states and the District of Columbia; 7 stores in Canada; and 6 stores in the United Kingdom. We have one operating segment, natural and organic foods supermarkets.

Our results of operations may be impacted by the timing of new store openings, construction and pre-opening expense, store closures and relocations, and the range of operating results generated from newly opened stores. The Company’s average weekly sales and gross profit are typically highest in the second and third fiscal quarters, and lowest in the fourth fiscal quarter. Average weekly sales and gross profit are typically lower in the first fiscal quarter due to the product mix of holiday sales, and in the fourth fiscal quarter due to the seasonally slower sales during the summer months.

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 expansions 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 52- or 53-week fiscal year ending on the last Sunday in September. Fiscal year 2012 is a 53-week year and fiscal year 2011 was a 52-week year.

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 store ambiance and experience, 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. Our commitment to natural and organic products, high quality standards, emphasis on perishable product sales, healthy eating products and education, range of choices based on price, and empowered team members who focus on unparalleled customer service differentiate us from the competition and have created a loyal customer base.

We have worked very hard over the last couple of years to successfully improve our price image, particularly in perishables, and we are focused on improving our relative price positioning in the marketplace. We are hopeful we can continue to strike the right balance between rising product costs and our retail pricing based on our contracts, distribution, and tools to manage value.


15

Highlights for the Third Quarter of Fiscal Year 2012
In an economic environment that is proving to be difficult for many retailers, we are thriving and pleased to report another quarter of strong growth and excellent results for our stakeholders. For the twelve weeks ended July 1, 2012:

•
Sales increased 13.6% over the same period of the prior year to $2.73 billion driven by an 8.2% comparable store sales increase. Identical store sales increased 8.0% over the prior year;
•
Gross profit as a percentage of sales was 36.0%;
•
Operating income as a percentage of sales totaled 6.9%;
•
Diluted earnings per share increased 26.9% over the same period of the prior year to $0.63;
•
Return on invested capital increased 192 basis points to 15.2%;
•
We produced $211.3 million in cash flow from operations and invested $112.7 million in capital expenditures; and
•
We had cash, restricted cash and investments totaling $1.46 billion.

Updated Outlook for Fiscal Year 2012 and Initial Outlook for Fiscal Year 2013
Based on our strong results for the twelve weeks ended July 1, 2012 and our higher expectations for the fourth fiscal quarter, we have raised our fiscal year 2012 guidance for operating margin to 6.4% and our diluted earnings per share range by $0.05 to $0.07. Our new fiscal year diluted earnings per share range of $2.51 to $2.52 includes the estimated impact on earnings from the extra week in the fourth fiscal quarter of approximately $0.06 per diluted share. The following table provides additional information on the Company’s results through July 1, 2012 and updated expectations for the remainder of fiscal year 2012.
 
Forty weeks
ended
July 1, 2012
 
Implied
fourth quarter of
fiscal year 2012
 
Estimated
fiscal year 2012
Sales growth
13.3%
 
22.9% - 23.9%
 
15.6% - 15.8%
Comparable store sales growth
8.8%
 
7.8% - 8.8%
 
8.6% - 8.8%
Identical store sales growth
8.4%
 
7.6% - 8.6%
 
8.2% - 8.4%
General and administrative expenses
3.2%
 
3.2%
 
3.2%
Diluted earnings per share
$1.92
 
$0.59 - $0.60
 
$2.51 - $2.52
Diluted earnings per share growth
26.9%
 
40.0% - 43.0%
 
30.0% - 31.0%

Fiscal year 2012 is a 53-week fiscal year, with the extra week falling in the fourth fiscal quarter. On a 52-week to 52-week basis, excluding the impact of the extra week in the fourth fiscal quarter, the Company expects total sales growth of 13% to 14% and earnings per share growth of 27%.

The Company expects ending square footage growth of 7% in fiscal year 2012. The Company expects capital expenditures for fiscal year 2012 to be in the range of approximately $440 million to $450 million, which includes the opening of 25 new stores.

For fiscal year 2013, on a 52-week to 52-week basis, the Company expects sales growth approximately in line with fiscal year 2012, comparable store sales growth of 6.5% to 8.5%, identical store sales growth of 6.0% to 8.0%, and diluted earnings per share of $2.83 to $2.87, a year-over-year increase of 16% to 17%. The Company expects ending square footage growth of 7% to 8%, based on the opening of 28 to 32 new stores, four to six of which will be relocations.



16

Results of Operations
The following table sets forth the Company’s statements of operations data expressed as a percentage of sales:
 
Twelve weeks ended
 
Forty weeks ended
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
Sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of goods sold and occupancy costs
64.0

 
64.6

 
64.4

 
64.9

Gross profit
36.0

 
35.4

 
35.6

 
35.1

Direct store expenses
25.3

 
25.9

 
25.5

 
26.1

General and administrative expenses
3.2

 
3.0

 
3.2

 
3.1

Pre-opening expenses
0.4

 
0.5

 
0.4

 
0.4

Relocation, store closure and lease termination costs
0.1

 
0.1

 
0.1

 
0.1

Operating income
6.9

 
5.9

 
6.5

 
5.5

Investment and other income, net of interest
0.1

 
0.1

 
0.1

 
—

Income before income taxes
7.0

 
5.9

 
6.5

 
5.6

Provision for income taxes
2.7

 
2.2

 
2.5

 
2.1

Net income
4.3
%
 
3.7
%
 
4.0
%
 
3.4
%
Figures may not sum due to rounding.

Sales for the twelve and forty weeks ended July 1, 2012 totaled approximately $2.73 billion and $8.79 billion, respectively, increasing 13.6% and 13.3%, respectively, over the same periods of the prior fiscal year. Comparable store sales increased 8.2% and 8.8% during the twelve and forty weeks ended July 1, 2012, respectively. As of July 1, 2012, there were 307 locations in the comparable store base. Identical store sales, excluding six relocations and two expansions, increased 8.0% during the twelve weeks ended July 1, 2012. During the forty weeks ended July 1, 2012, identical store sales increased 8.4% and excluded six relocations and three expansions. Relocations and expansions are removed from the comparable calculation to reduce the impact of square footage growth on the comparison. Comparable and identical store sales for the twelve weeks ended July 1, 2012 include a negative impact of 62 basis points resulting from the shift of Easter from the third fiscal quarter of the prior year to the second fiscal quarter of the current year. At July 1, 2012, there were 24 stores that were opened or acquired fifty-two weeks or less which contributed approximately $121.7 million and $262.6 million to total sales during the twelve and forty weeks ended July 1, 2012, respectively. During the twelve weeks ended July 1, 2012, our transaction count in identical stores moderated to 6.4%, including a negative impact of three basis points resulting from the shift of Easter from the third fiscal quarter of the prior year to the second fiscal quarter of the current year.

The Company’s gross profit as a percentage of sales for the twelve and forty weeks ended July 1, 2012 was approximately 36.0% and 35.6%, respectively, compared to approximately 35.4% and 35.1%, respectively, for the same periods of the prior fiscal year. Gross margin increased 62 basis points and 47 basis points for the twelve and forty weeks ended July 1, 2012, respectively, compared to the same periods of the prior fiscal year. The increase in gross profit as a percentage of sales for the twelve weeks ended July 1, 2012 was driven primarily by equal improvements in occupancy costs and cost of goods sold as a percentage of sales, while the increase in the forty weeks ended July 1, 2012 was primarily driven by occupancy cost improvements. Occupancy costs continue to be leveraged through strong disciplines through lease negotiation and were benefited by milder weather through much of the United States during the third fiscal quarter. Improved cost of goods sold during the twelve weeks ended July 1, 2012 reflect a focus on stronger buying and inventory management, including better shrink control and lower days inventory is on hand. We are confident that we will continue to see leverage in occupancy expenses, improvement in shrink control, and incremental leverage on the buy side. However, we think that leverage will be offset with our price investments as we continue to try to make ourselves more competitive relative to the marketplace.

Direct store expenses as a percentage of sales for the twelve and forty weeks ended July 1, 2012 were approximately 25.3% and 25.5%, respectively, compared to approximately 25.9% and 26.1%, respectively, for the same periods of the prior fiscal year. The 57 basis point and 54 basis point decrease in direct store expenses as a percentage of sales for the twelve and forty weeks ended July 1, 2012, respectively, primarily reflects leverage in healthcare expense and wages.

General and administrative expenses as a percentage of sales were consistent for the twelve and forty weeks ended July 1, 2012 at approximately 3.2% compared to approximately 3.0% and 3.1%, respectively, for the same periods of the prior fiscal year. The 16 basis point and 10 basis point increase in general and administrative expenses as a percentage of sales for the twelve and forty weeks ended July 1, 2012, respectively, was impacted by our higher stock price, resulting in increases in share-based payment related expenses.


17

Pre-opening expenses totaled approximately $12.0 million and $32.9 million for the twelve and forty weeks ended July 1, 2012, respectively, and approximately $11.8 million and $30.0 million, respectively, the same periods of the prior fiscal year.

Relocation, store closure and lease termination costs totaled approximately $3.8 million and $8.1 million for the twelve and forty weeks ended July 1, 2012, respectively, compared to approximately $2.4 million and $6.5 million, respectively, for the same periods of the prior fiscal year.

The numbers of stores opened and relocated were as follows:
 
Twelve weeks ended
 
Forty weeks ended
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
New stores
8

 
4

 
17

 
9

Relocated stores
1

 
3

 
1

 
4


Investment and other income, net of interest expense, which includes interest income, investment gains and losses, rental income and other income, totaled approximately $2.1 million and $6.8 million for the twelve and forty weeks ended July 1, 2012, respectively, compared to approximately $1.7 million and $2.6 million, respectively, for the same periods of the prior fiscal year. The increase is primarily related to a reduction in interest expense due to the repayment of our term loan in fiscal year 2011.

Income taxes for the twelve and forty weeks ended July 1, 2012 resulted in an effective tax rate of approximately 38.6% compared to approximately 37.8% and 38.3%, 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
 
Forty weeks ended
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
Cost of goods sold and occupancy costs
$
352

 
$
308

 
$
1,297

 
$
966

Direct store expenses
4,567

 
3,086

 
14,930

 
9,705

General and administrative expenses
4,461

 
2,848

 
12,912

 
8,419

Share-based payment expense before income taxes
9,380

 
6,242

 
29,139

 
19,090

Income tax benefit
(3,515
)
 
(2,322
)
 
(10,968
)
 
(7,198
)
Net share-based payment expense
$
5,865

 
$
3,920

 
$
18,171

 
$
11,892


Non-GAAP measures
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides information regarding Return on Invested Capital (“ROIC”) as additional information about its operating results. This measure is not in accordance with, or an alternative to, GAAP. We believe that ROIC provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses these measures for reviewing the financial results of the Company as well as a component of incentive compensation.

18

The Company defines ROIC as annualized adjusted earnings divided by average invested capital. Earnings are annualized on a 52-week basis. Adjustments to earnings are defined in the following tabular reconciliation. Invested capital represents a trailing four-quarter average.
 
Twelve weeks ended
 
Forty weeks ended
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
Net income
$
116,849

 
$
88,472

 
$
352,841

 
$
267,137

Interest expense, net of taxes
86

 
165

 
130

 
2,395

Adjusted earnings
116,935

 
88,637

 
352,971

 
269,532

Total rent expense, net of taxes (1)
48,200

 
45,084

 
156,983

 
146,565

Estimated depreciation on capitalized operating leases, net of tax (2)
(32,133
)
 
(30,056
)
 
(104,655
)
 
(97,710
)
Adjusted earnings, including interest related to operating leases
133,002

 
103,665

 
405,299

 
318,387

 
 
 
 
 
 
 
 
Annualized adjusted earnings
$
506,718

 
$
384,094

 
$
458,862

 
$
350,392

Annualized adjusted earnings, including interest related to operating leases
$
576,342

 
$
449,215

 
$
526,889

 
$
413,903

 
 
 
 
 
 
 
 
Average working capital, excluding current portion of long-term debt
$
817,921

 
$
453,139

 
$
817,921

 
$
453,139

Average property and equipment, net
2,041,235

 
1,922,665

 
2,041,235

 
1,922,665

Average other assets
915,603

 
896,410

 
915,603

 
896,410

Average other liabilities
(438,285
)
 
(377,486
)
 
(438,285
)
 
(377,486
)
Average invested capital
$
3,336,474

 
$
2,894,728

 
$
3,336,474

 
$
2,894,728

Average estimated asset base of capitalized operating leases (3)
2,640,875

 
2,451,152

 
2,640,875

 
2,451,152

Average invested capital, adjusted for capitalization of operating leases
$
5,977,349

 
$
5,345,880

 
$
5,977,349

 
$
5,345,880

 
 
 
 
 
 
 
 
ROIC
15.2%

 
13.3%

 
13.8%

 
12.1%

ROIC, adjusted for capitalization of operating leases
9.6%

 
8.4%

 
8.8%

 
7.7%

(1) Total rent includes minimum base rent of all tendered leases
(2) Estimated depreciation equals two-thirds of total rent expense
(3) Estimated asset base equals eight times total rent expense

Liquidity and Capital Resources and Changes in Financial Condition
The following table summarizes the Company’s cash and short-term investments as of the dates indicated (in thousands):
 
July 1,
2012
 
September 25,
2011
Cash and cash equivalents
$
135,457

 
$
212,004

Short-term investments - available-for-sale securities
933,486

 
442,320

Restricted cash
104,334

 
91,956

Total
$
1,173,277

 
$
746,280


Additionally, the Company had long-term investments in available-for-sale securities totaling approximately $282.7 million and $52.8 million at July 1, 2012 and September 25, 2011, respectively.

We generated cash flows from operating activities totaling approximately $727.3 million during the forty weeks ended July 1, 2012 compared to approximately $594.9 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.

Net cash used in investing activities totaled approximately $1.07 billion for the forty weeks ended July 1, 2012 compared to approximately $142.6 million for the same period of the prior fiscal year. Net purchases of available-for-sale securities totaled approximately $733.7 million during the forty weeks ended July 1, 2012 compared to net sales of approximately $133.0 million in the same period of the prior fiscal year. 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

19

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 forty weeks ended July 1, 2012 totaled approximately $326.0 million, of which approximately $188.8 million was for new store development and approximately $137.2 million was for remodels and other additions. Capital expenditures for the forty weeks ended July 3, 2011 totaled approximately $271.6 million, of which approximately $156.0 million was for new store development and approximately $115.5 million was for remodels and other additions.

The following table provides information about the Company’s store development activities:
 
Stores
opened
during fiscal
year 2011
 
Stores
opened
during fiscal
year 2012
 
Properties
tendered as of
July 25, 2012
 
Total leases
signed as of
July 25, 2012 (1)
Number of stores (including relocations)
18

 
19

 
20

 
76

Number of relocations
6

 
1

 
2

 
9

New markets
—

 
6

 
9

 
23

Average store size (gross square feet)
39,400

 
34,900

 
34,600

 
36,100

Total square footage
708,700

 
662,600

 
691,900

 
2,764,500

Average tender period in months
12.5

 
8.5

 
 

 
 

Average pre-opening expense per store
$2.5 million

 
 

 
 

 
 

Average pre-opening rent per store
$1.2 million

 
 

 
 

 
 

(1) Includes leases for properties tendered

The Company expects to open six additional stores during the remainder of fiscal year 2012. We believe we will produce operating cash flows in excess of the capital expenditures needed to open the 76 stores in our store development pipeline. The following table provides information about the Company’s estimated store openings through fiscal year 2014:
 
Estimated
openings
 
Relocations
 
Average
new store
square footage
 
Ending square
footage growth
Fiscal year 2012
25
 
1
 
34,000

 
7%
Fiscal year 2013
28 - 32
 
4 - 6
 
35,000

 
7% - 8%
Fiscal year 2014
33 - 38
 
2 - 3
 
37,000

 
8% - 9%

Over the long term, the Company considers 1,000 stores to be a reasonable indication of its market opportunity in the United States as the Whole Foods Market brand continues to strengthen, consumer demand for natural and organic products continues to increase, and the Company’s flexibility on new store size opens up additional market opportunities. The Company believes significant opportunities exist in Canada and the United Kingdom as well.

Net cash provided by financing activities was approximately $266.6 million for the forty weeks ended July 1, 2012 compared to net cash used in financing activities of approximately $297.3 million for the same period of the prior fiscal year.

Net proceeds to the Company from team members’ stock plans for the forty weeks ended July 1, 2012 totaled approximately $325.2 million compared to approximately $210.9 million for the same period of the prior fiscal year. 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 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 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. At July 1, 2012 and September 25, 2011, approximately 8.3 million shares and 11.7 million shares of our common stock, respectively, were available for future stock incentive grants.


20

During the first quarter of fiscal year 2012, the Company’s Board of Directors announced a 40% increase in the quarterly dividend to $0.14 per common share. Following is a summary of dividends declared per common share during fiscal years 2012 and 2011 (in thousands, except per share amounts):
Date of declaration
Dividend per
common share
 
Date of record
 
Date of payment
 
Total amount
Fiscal year 2012:
 
 
 
 
 
 
 
November 2, 2011
$
0.14

 
January 13, 2012
 
January 24, 2012
 
$
25,230

March 9, 2012
0.14

 
April 5, 2012
 
April 17, 2012
 
25,614

May 30, 2012 (1)
0.14

 
June 29, 2012
 
July 10, 2012
 
25,836

Fiscal year 2011:
 
 
 
 
 
 
 
December 8, 2010
$
0.10

 
January 10, 2011
 
January 20, 2011
 
$
17,348

February 27, 2011
0.10

 
April 12, 2011
 
April 22, 2011
 
17,572

June 7, 2011
0.10

 
June 24, 2011
 
July 5, 2011
 
17,700

September 8, 2011
0.10

 
September 19, 2011
 
September 29, 2011
 
17,827

(1) Dividend accrued at July 1, 2012

The Company will pay future dividends at the discretion of the Company’s Board of Directors. The continuation of these payments, the amount of such dividends, and the form in which dividends are paid (cash or stock) depend on many factors, including the results of operations and the financial condition of the Company. Subject to these qualifications, the Company currently expects to pay dividends on a quarterly basis.

During the first quarter of fiscal year 2012, the Company’s Board of Directors authorized a share repurchase program in the amount of $200 million through November 1, 2013. During the first quarter of fiscal year 2012, the Company repurchased approximately 57,000 shares of Company common stock on the open market for a total of approximately $3.6 million. Additionally, the Company repurchased approximately 289,000 shares totaling approximately $25.0 million during the twelve weeks ended July 1, 2012. The specific timing and repurchase of future amounts will vary based on market conditions, securities law limitations, and other factors and will be made using the Company’s available resources. The repurchase program may be suspended or discontinued at any time at the discretion of the Company’s Board of Directors.

The Company has a $350 million revolving line of credit that extends to August 28, 2012. We currently do not intend to renew our revolving line of credit upon expiration. The Company’s obligations under the facility are secured by liens on certain of the Company’s assets, including stock of its subsidiaries. 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 by the agreement. At July 1, 2012, the Company was in compliance with all applicable debt covenants. At July 1, 2012 and September 25, 2011, the Company had no amounts drawn under this agreement. The amount available to the Company under the agreement was $350 million at July 1, 2012. The amount available to the Company at September 25, 2011 was effectively reduced to approximately $348.6 million by outstanding letters of credit totaling approximately $1.4 million. The Company had outstanding a $700 million, five-year term loan agreement due in 2012, with an outstanding balance of $490 million at September 26, 2010, which was repaid during the forty weeks ended July 3, 2011.

The Company is committed under certain capital leases for rental of certain equipment, buildings and land, and certain operating leases for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates through 2054. The following table shows payments due by period on contractual obligations as of July 1, 2012 (in thousands):
 
Total
 
Less than 1
year
 
1-3
years
 
3-5
years
 
More than 5
years
Capital lease obligations (including interest)
$
39,125

 
$
2,114

 
$
4,289

 
$
4,099

 
$
28,623

Operating lease obligations (1)
6,444,453

 
310,130

 
724,093

 
754,710

 
4,655,520

Total
$
6,483,578

 
$
312,244

 
$
728,382

 
$
758,809

 
$
4,684,143

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

Gross unrecognized tax benefits and related interest and penalties at July 1, 2012 were approximately $10.4 million. Although a reasonably reliable estimate of the period of cash settlement with respective taxing authorities cannot be determined due to the high degree of uncertainty regarding the timing of future cash outflows associated with the Company’s unrecognized tax benefits, as of July 1, 2012, the Company does not expect tax audit resolution will reduce its unrecognized tax benefits in the next twelve months.


21

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.

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 $0.2 million for the forty weeks ended July 1, 2012 compared to an increase of approximately $2.1 million for the same period of the prior fiscal year. These changes principally reflect the relative strengthening of the Canadian dollar and pound sterling compared to the U.S. dollar during these periods.

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.

Off-Balance Sheet Arrangements
Our off-balance sheet arrangements at July 1, 2012 consist of operating leases disclosed in the above contractual obligations table and outstanding letters of credit discussed in Note 7 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 Note 2 to the consolidated financial statements, “Recent Accounting Pronouncements.”

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 officers) 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 as 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.


22

Part II. Other Information

Item 1. Legal Proceedings

The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters in a manner that we believe best serves the interests of our stakeholders. We have exposures to loss contingencies arising from pending or threatened litigation for which assessing and estimating the outcomes of these matters involve substantial uncertainties.

The Company evaluates contingencies on an ongoing basis and has established loss provisions for matters in which losses are probable and the amount of loss can be reasonably estimated. Legal settlement liabilities are included in the “Other current liabilities” line item on the Consolidated Balance Sheets. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. However, resolution of contingencies resulting in amounts that vary materially from the Company’s current estimates could have a material adverse effect on the Company’s results of operations, cash flows, or financial condition.

Item 6. Exhibits

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
Exhibit  101
The following financial information from the Company’s Quarterly Report on Form 10-Q, for the quarterly period ended July 1, 2012, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows, (v) Notes to Consolidated Financial Statements


23

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:
August 3, 2012
 
By:
/s/ Glenda Flanagan
 
 
 
Glenda Flanagan
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Duly authorized officer and principal financial officer)

24