10-Q 1 wfm10qq12017.htm 10-Q Document

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 January 15, 2017; 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
 wfm2017logo1a01.jpg
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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 February 10, 2017 was 318,564,535 shares.



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

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Part I. Financial Information

Item 1. Financial Statements.

Whole Foods Market, Inc.
Consolidated Balance Sheets (unaudited)
(In millions)

Assets
January 15,
2017
 
September 25,
2016
Current assets:
 
 
 
Cash and cash equivalents
$
350

 
$
351

Short-term investments - available-for-sale securities
374

 
379

Restricted cash
125

 
122

Accounts receivable
251

 
242

Merchandise inventories
554

 
517

Prepaid expenses and other current assets
123

 
167

Deferred income taxes
210

 
197

Total current assets
1,987

 
1,975

Property and equipment, net of accumulated depreciation and amortization
3,460

 
3,442

Goodwill
710

 
710

Intangible assets, net of accumulated amortization
72

 
74

Deferred income taxes
111

 
100

Other assets
42

 
40

Total assets
$
6,382

 
$
6,341

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current installments of long-term debt and capital lease obligations
$
3

 
$
3

Accounts payable
288

 
307

Accrued payroll, bonus and other benefits due team members
421

 
407

Dividends payable
45

 
43

Other current liabilities
543

 
581

Total current liabilities
1,300

 
1,341

Long-term debt and capital lease obligations, less current installments
1,048

 
1,048

Deferred lease liabilities
653

 
640

Other long-term liabilities
89

 
88

Total liabilities
3,090

 
3,117

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, no par value, 1,200 shares authorized; 377.0 shares issued; 318.5 and 318.3 shares outstanding at 2017 and 2016, respectively
2,944

 
2,933

Common stock in treasury, at cost, 58.5 and 58.7 shares at 2017 and 2016, respectively
(2,018
)
 
(2,026
)
Accumulated other comprehensive loss
(33
)
 
(32
)
Retained earnings
2,399

 
2,349

Total shareholders’ equity
3,292

 
3,224

Total liabilities and shareholders’ equity
$
6,382

 
$
6,341


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


1


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

 
Sixteen weeks ended
 
January 15,
2017

January 17,
2016
Sales
$
4,918

 
$
4,829

Cost of goods sold and occupancy costs
3,268

 
3,188

Gross profit
1,650

 
1,641

Selling, general and administrative expenses
1,417

 
1,373

Pre-opening expenses
21

 
13

Relocation, store closure and lease termination costs
41

 
3

Operating income
171

 
252

Interest expense
(15
)
 
(7
)
Investment and other income

 
4

Income before income taxes
156

 
249

Provision for income taxes
61

 
92

Net income
$
95

 
$
157

 
 
 
 
Basic earnings per share
$
0.30

 
$
0.47

Weighted average shares outstanding
318.2

 
337.0

 
 
 
 
Diluted earnings per share
$
0.30

 
$
0.46

Weighted average shares outstanding, diluted basis
318.7

 
338.2

 
 
 
 
Dividends declared per common share
$
0.140

 
$
0.135


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


2


Whole Foods Market, Inc.
Consolidated Statements of Comprehensive Income (unaudited)
(In millions)

 
Sixteen weeks ended
 
January 15,
2017
 
January 17,
2016
Net income
$
95

 
$
157

Other comprehensive loss, net of tax:
 
 
 
Foreign currency translation adjustments
(1
)
 
(10
)
Other comprehensive loss, net of tax
(1
)
 
(10
)
Comprehensive income
$
94

 
$
147


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


3


Whole Foods Market, Inc.
Consolidated Statements of Shareholders’ Equity (unaudited)
Sixteen weeks ended January 15, 2017 and fiscal year ended September 25, 2016
(In millions)

 
Shares
outstanding
Common
stock
Common
stock in
treasury
Accumulated
other
comprehensive
loss
Retained
earnings
Total
shareholders’
equity
Balances at September 27, 2015
348.9

$
2,904

$
(1,124
)
$
(28
)
$
2,017

$
3,769

Net income




507

507

Other comprehensive loss, net of tax



(4
)

(4
)
Dividends ($0.54 per common share)




(174
)
(174
)
Issuance of common stock pursuant to team member stock plans
1.1

(23
)
42



19

Purchase of treasury stock
(31.7
)

(944
)


(944
)
Tax benefit related to exercise of team member stock options

3




3

Share-based payment expense

49




49

Other




(1
)
(1
)
Balances at September 25, 2016
318.3

2,933

(2,026
)
(32
)
2,349

3,224

Net income




95

95

Other comprehensive loss, net of tax



(1
)

(1
)
Dividends ($0.14 per common share)




(45
)
(45
)
Issuance of common stock pursuant to team member stock plans
0.2

(3
)
8



5

Share-based payment expense

14




14

Balances at January 15, 2017
318.5

$
2,944

$
(2,018
)
$
(33
)
$
2,399

$
3,292


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


4


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

 
Sixteen weeks ended
 
January 15,
2017
 
January 17,
2016
Cash flows from operating activities
 
 
 
Net income
$
95

 
$
157

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
189

 
147

Share-based payment expense
14

 
16

LIFO expense

 
2

Deferred income tax expense
(24
)
 
(30
)
Excess tax benefit related to exercise of team member stock options

 
(1
)
Accretion of premium/discount on marketable securities

 
1

Deferred lease liabilities
18

 
8

Other
4

 
2

Net change in current assets and liabilities:
 

 
 

Accounts receivable
(9
)
 
6

Merchandise inventories
(37
)
 
(67
)
Prepaid expenses and other current assets
44

 
(7
)
Accounts payable
(19
)
 
(16
)
Accrued payroll, bonus and other benefits due team members
14

 
(25
)
Other current liabilities
(6
)
 
28

Net change in other long-term liabilities
1

 
11

Net cash provided by operating activities
284

 
232

Cash flows from investing activities
 
 
 
Development costs of new locations
(150
)
 
(91
)
Other property and equipment expenditures
(95
)
 
(88
)
Purchases of available-for-sale securities
(200
)
 
(133
)
Sales and maturities of available-for-sale securities
205

 
220

Payment for purchase of acquired entities, net of cash acquired

 
(11
)
Other investing activities
(4
)
 
(6
)
Net cash used in investing activities
(244
)
 
(109
)
Cash flows from financing activities
 
 
 
Purchases of treasury stock

 
(634
)
Common stock dividends paid
(43
)
 
(45
)
Issuance of common stock
5

 
7

Excess tax benefit related to exercise of team member stock options

 
1

Proceeds from long-term borrowings

 
999

Proceeds from revolving line of credit

 
300

Payments on long-term debt and capital lease obligations

 
(302
)
Other financing activities

 
(7
)
Net cash provided by (used in) financing activities
(38
)
 
319

Effect of exchange rate changes on cash and cash equivalents

 
(1
)
Net change in cash, cash equivalents, and restricted cash
2

 
441

Cash, cash equivalents, and restricted cash at beginning of period
473

 
364

Cash, cash equivalents, and restricted cash at end of period
$
475

 
$
805

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Federal and state income taxes paid
$
76

 
$
137

Interest paid
$
26

 
$


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


5


Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (unaudited)
January 15, 2017


(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 and 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, 2016. 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 year 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 years 2017 and 2016 are 52-week years. 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:
 
Sixteen weeks ended
 
January 15,
2017

January 17,
2016
Sales:
 
 
 
United States
97.1
%
 
97.1
%
Canada and United Kingdom
2.9

 
2.9

Total sales
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:
 
January 15,
2017
 
September 25,
2016
Long-lived assets, net:
 

 
 
United States
97.5
%
 
97.5
%
Canada and United Kingdom
2.5

 
2.5

Total long-lived assets, net
100.0
%
 
100.0
%

(2) Summary of Significant Accounting Policies
Recent Accounting Pronouncements
Effective September 26, 2016, the Company early adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows: Restricted Cash ,” which amends the Accounting Standards Codification Topic 230. The amendments, which require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash, were adopted on a retrospective basis. The adoption of these amendments did not have a significant effect on the Company’s financial statements.


6


The following table provides a brief description of recently issued accounting pronouncements that have not yet been adopted. Early adoption is permitted for all updates unless stated.

Standard
Description
Effective Date
Effect on financial statements and other significant matters
ASU No. 2017-04
Simplifying the Test for Goodwill Impairment (Topic 350)
The amendments eliminate Step 2 from the goodwill impairment test. Instead, an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be recognized; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Income tax effects from any tax deductible goodwill on the carrying amount of the reporting
unit when measuring the goodwill impairment loss should also be considered, if applicable. The amendments should be applied on a prospective basis.
First quarter of fiscal year ending September 27, 2020
We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
ASU No. 2016-13
Measurement of Credit Losses on Financial Instruments(Topic 326)
The amendments guide on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. The amendments require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments also require that credit losses on available-for-sale debt securities be presented as an allowance. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic.
First quarter of fiscal year ending September 29, 2021
We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
ASU No. 2016-09
Improvements to Employee Share-Based Payment Accounting (Topic 718)
The amendments aim to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, and certain classifications on the statement of cash flows. The amendments should be applied on either a prospective, retrospective, or modified-retrospective basis depending on the subtopic.
First quarter of fiscal year ending September 30, 2018
We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
ASU No. 2016-08
Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (Topic 606)
The amendments, which do not change the core principle of the guidance in Topic 606, clarify the implementation guidance on principal versus agent considerations, including how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The amendments may be applied on either a full or modified retrospective basis.
First quarter of fiscal year ending September 29, 2019
We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
ASU No. 2016-07
Simplifying the Transition to the Equity Method of Accounting (Topic 323)
The amendments eliminate the requirement to retroactively apply the equity method of accounting when an investment qualifies for the use of the equity method due to an increase in the level of ownership interest or degree of influence. The amendments should be applied on a prospective basis.
First quarter of fiscal year ending September 30, 2018
We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.
 
 
 
 

7


Standard
Description
Effective Date
Effect on financial statements and other significant matters
ASU No. 2016-04
Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force) (Subtopic 405-20)
The amendments require entities to recognize liabilities related to the sale of prepaid stored-value products redeemable for goods, services or cash as financial liabilities in the scope of ASC 405. Additionally, the new guidance amends ASC 405-20 to include a narrow scope exception requiring entities to recognize breakage for these liabilities in a way that is consistent with how gift card breakage will be recognized under the new revenue recognition standard. The amendments may be applied on either a full or modified retrospective basis.
First quarter of fiscal year ending September 29, 2019
We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
ASU No. 2016-02
Leases (Topic 842)
The amendments require lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The amendments should be applied on a modified retrospective basis.
First quarter of fiscal year ending September 27, 2020
The adoption of this ASU will result in a significant increase to the Company’s Consolidated Balance Sheets for lease liabilities and right-of-use assets, and the Company is currently evaluating the other effects of adoption of this ASU on its Consolidated Financial Statements.

ASU No. 2016-01
Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)
The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet in year of adoption. Early adoption is permitted for only certain amendments of the update.
First quarter of fiscal year ending September 29, 2019
We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
ASU No. 2015-17
Balance Sheet Classification of Deferred Taxes (Topic 740)
The amendments simplify the presentation of deferred income taxes by requiring that all deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. The amendments may be applied on either a prospective or retrospective basis.
First quarter of fiscal year ending September 30, 2018
We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.
ASU No. 2015-11
Simplifying the Measurement of Inventory (Topic 330)
The amendments, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost and net realizable value. The amendments should be applied on a prospective basis.
First quarter of fiscal year ending September 30, 2018
We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.
ASU No. 2014-09
Revenue from Contracts with Customers (Topic 606)
The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized. The amendments may be applied on either a full or modified retrospective basis.
First quarter of fiscal year ending September 29, 2019
We are currently evaluating the timing, method, and impact that the adoption of these provisions will have on the Company’s consolidated financial statements.

8


(3) Fair Value Measurements
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 that 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. Equity interests measured at fair value are based on quoted prices for similar assets in active markets.

The carrying amounts of accrued payroll, bonuses and other benefits due team members, and other accrued expenses approximate fair value because of their short maturities. Store closure reserves and estimated workers’ compensation claims are recorded at net present value to approximate fair value.

Assets Measured at Fair Value on a Recurring Basis
The Company held the following financial assets measured at fair value on a recurring basis based on the hierarchy levels indicated (in millions):
January 15, 2017
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market fund
$
23

 
$

 
$

 
$
23

Marketable securities - available-for-sale:
 
 
 
 
 
 
 
Municipal bonds

 
31

 

 
31

Variable-rate demand notes

 
343

 

 
343

Total
$
23

 
$
374


$


$
397

September 25, 2016
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market fund
$
62

 
$

 
$

 
$
62

Commercial paper

 
30

 

 
30

Municipal bonds

 
46

 

 
46

Marketable securities - available-for-sale:
 
 
 
 
 
 
 
Commercial paper

 
30

 

 
30

Municipal bonds

 
26

 

 
26

Variable rate demand notes

 
323

 

 
323

Total
$
62

 
$
455

 
$

 
$
517


The estimated fair value of the Company’s long-term debt is included in Note 8 “Long-Term Debt.”

Assets Measured at Fair Value on a Nonrecurring Basis
During the sixteen weeks ended January 15, 2017, the Company recorded fair value adjustments, based on hierarchy level 3 inputs, totaling approximately $34 million related to certain locations for which asset value exceeded expected future cash flows, which were primarily included in the “Relocation, store closure and lease termination cost” line item on the Consolidated Statement of Operations. These impairment charges reduced the carrying value of related long-term assets to an immaterial fair value.

(4) Investments
The Company holds investments primarily in marketable securities that are classified as short-term available-for-sale securities. The Company held the following investments at fair value as of the dates indicated (in millions):
 
January 15,
2017
 
September 25,
2016
Short-term marketable securities - available-for-sale:
 
 
 
Commercial paper
$

 
$
30

Municipal bonds
31

 
26

Variable rate demand notes
343

 
323

Total short-term marketable securities
$
374

 
$
379


Gross unrealized holding gains and losses were not material at January 15, 2017 or September 25, 2016. There were no available-for-sale securities in an unrealized loss position at January 15, 2017. Available-for-sale securities totaling approximately $33 million were in unrealized loss positions at September 25, 2016. The aggregate value of available-for-sale securities in a continuous unrealized loss position for greater than 12 months was not material at September 25, 2016. The Company did not

9


recognize any other-than-temporary impairments during the sixteen weeks ended January 15, 2017 or fiscal year ended September 25, 2016. The average effective maturity of the Company’s short-term available-for-sale securities was less than one month at January 15, 2017 and September 25, 2016.

At January 15, 2017 and September 25, 2016, the Company held approximately $23 million and $19 million in equity interests which were accounted for using the cost method of accounting. Equity interests accounted for using the equity method were not material at January 15, 2017 or September 25, 2016.

(5) Goodwill and Other Intangible Assets
There were no additions or adjustments to goodwill during the sixteen weeks ended January 15, 2017 or January 17, 2016. Additions of other intangible assets were not material during the sixteen weeks ended January 15, 2017 or the same period of the prior fiscal year. The components of intangible assets as of the dates indicated were as follows (in millions):
 
January 15, 2017
 
September 25, 2016
 
Gross carrying
amount
 
Accumulated
amortization
 
Gross carrying
amount
 
Accumulated
amortization
Definite-lived contract-based
$
120

 
$
(57
)
 
$
120

 
$
(55
)
Indefinite-lived contract-based
9

 
 
 
9

 
 
Total
$
129

 
$
(57
)
 
$
129

 
$
(55
)

Amortization expense associated with intangible assets was not material during the sixteen weeks ended January 15, 2017 or the same period of the prior fiscal year. Future amortization expense associated with the net carrying amount of definite-lived intangible assets is estimated to be as follows (in millions):
Remainder of fiscal year 2017
$
4

Fiscal year 2018
5

Fiscal year 2019
5

Fiscal year 2020
5

Fiscal year 2021
4

Future fiscal years
40

Total
$
63


(6) Store and Facility Closures
During the sixteen weeks ended January 15, 2017, the Company announced plans to close nine stores and three commissary kitchens. The Company recorded non-cash charges of approximately $34 million to adjust the long-lived assets of these locations to fair value. These charges are included in the “Relocation, store closure and lease termination cost” line item on the Consolidated Statement of Operations. The Company expects to incur additional charges of approximately $30 million related to these closures in the second quarter of fiscal year 2017 largely relating to lease terminations.

(7) Reserves for Closed Properties
The following table provides a summary of activity in reserves for closed properties during the sixteen weeks ended January 15, 2017 and fiscal year ended September 25, 2016 (in millions):
 
January 15,
2017
 
September 25,
2016
Beginning balance
$
26

 
$
28

Additions
1

 
6

Usage
(2
)
 
(10
)
Adjustments
1

 
2

Ending balance
$
26

 
$
26


(8) Long-Term Debt
Credit Agreement
The Company’s revolving credit facility under a credit agreement dated as of November 2, 2015 (the “Credit Agreement”) provides for an unsecured revolving credit facility in the aggregate principal amount of $500 million, which may be increased from time to time by up to $250 million. The Credit Agreement also provides for a letter of credit subfacility of up to $250 million.


10


At January 15, 2017, the Company had no amounts outstanding under the credit facility. Commitment fees paid on undrawn amounts were not material during the sixteen weeks ended January 15, 2017. At January 15, 2017, the Company was in compliance with all applicable debt covenants.

During the sixteen weeks ended January 17, 2016, the Company borrowed and repaid $300 million under the Credit Agreement.

Senior Notes
The Company has outstanding $1.0 billion of senior notes (the “Notes”). The Notes bear interest at a fixed rate equal to 5.2% per year, payable semiannually, and mature on December 3, 2025. The effective interest rate of the Notes, which includes interest on the Notes and amortization of discount and issuance costs, is approximately 5.28%. At January 15, 2017, the Company was in compliance with all applicable debt covenants. The estimated fair value of the Notes at January 15, 2017, based on observable market prices (Level 2), exceeded the carrying value by approximately $70 million.

The Senior Notes issued on December 3, 2015 and Credit Agreement are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by certain wholly owned domestic subsidiaries of the Company (the “Guarantors”). For additional information regarding the Guarantors see Note 14, Guarantor Financial Statement Information. The components of long-term debt as of the dates indicated were as follows (in millions):
 
January 15,
2017
 
September 25,
2016
5.2% senior notes due 2025
$
1,000

 
$
1,000

Less: unamortized discount and debt issuance costs related to senior notes
(7
)
 
(7
)
Carrying value of senior notes
993

 
993

Capital lease obligations
58

 
58

Total long-term debt and capital lease obligations
1,051

 
1,051

Less: current installments
(3
)
 
(3
)
Total long-term debt and capital lease obligations, less current installments
$
1,048

 
$
1,048


(9) Income Taxes
Income taxes resulted in an effective tax rate of approximately 39.0% for the sixteen weeks ended January 15, 2017 compared to approximately 37.0% for the same period of the prior fiscal year. The lower effective tax rate for the sixteen weeks ended January 17, 2016 is due to the recognition of an environmental tax credit related to the development of a new store.

(10) Shareholders’ Equity
Dividends per Common Share
The following table provides a summary of dividends declared per common share during fiscal year 2017 to date and fiscal year 2016 (in millions, except per share amounts):
Date of declaration
Dividend per
common share
 
Date of record
 
Date of payment
 
Total amount
Fiscal year 2017:
 
 
 
 
 
 
 
November 2, 2016(1)
$
0.14

 
January 13, 2017
 
January 24, 2017
 
$
45

Fiscal year 2016:
 
 
 
 
 
 
 
November 4, 2015
$
0.135

 
January 15, 2016
 
January 26, 2016
 
$
44

March 9, 2016
0.135

 
April 8, 2016
 
April 19, 2016
 
44

June 7, 2016
0.135

 
July 1, 2016
 
July 12, 2016
 
43

September 22, 2016
0.135

 
October 3, 2016
 
October 14, 2016
 
43

(1) Dividend accrued at January 15, 2017

Treasury Stock
As of January 15, 2017, one share repurchase program remains in effect, with prior programs having been fully utilized, expired or cancelled. The following table outlines the share repurchase program authorized by the Company’s Board of Directors (“Board”), and the related repurchase activity as of January 15, 2017 (in millions):
Effective date
Expiration date
 
Amount authorized
 
Cost of repurchases
 
Authorization available
November 4, 2015
Not applicable
 
$
1,000

 
$
557

 
$
443



11


Share repurchase activity for the sixteen weeks ended January 15, 2017 was immaterial. Share repurchase activity for the sixteen weeks ended January 17, 2016 was as follows (in millions, except per share amounts):
 
 
 
January 17,
2016
Number of common shares acquired
21.2

Average price per common share acquired
$
29.96

Total cost of common shares acquired
$
634


The Company reissued approximately 0.2 million treasury shares at cost of approximately $8 million and approximately 0.3 million treasury shares at cost of approximately $11 million to satisfy the issuance of common stock pursuant to team member stock plans during the sixteen weeks ended January 15, 2017 and January 17, 2016, respectively. At January 15, 2017 and September 25, 2016, the Company held in treasury approximately 58.5 million shares and 58.7 million shares, respectively, totaling approximately $2.0 billion.

(11) Earnings per Share
The computation of basic earnings per share is based on the number of weighted average common shares outstanding during the period. The computation of diluted earnings per share 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. A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in millions, except per share amounts):
 
Sixteen weeks ended
 
January 15,
2017
 
January 17,
2016
Net income
(numerator for basic and diluted earnings per share)
$
95

 
$
157

 
 
 
 
Weighted average common shares outstanding
(denominator for basic earnings per share)
318.2

 
337.0

Incremental common shares attributable to dilutive effect of share-based awards
0.5

 
1.2

Weighted average common shares outstanding and
potential additional common shares outstanding
(denominator for diluted earnings per share)
318.7

 
338.2

 
 
 
 
Basic earnings per share
$
0.30

 
$
0.47

 
 
 
 
Diluted earnings per share
$
0.30

 
$
0.46


The computation of diluted earnings per share for the sixteen weeks ended January 15, 2017 and January 17, 2016 does not include share-based awards to purchase approximately 24.5 million shares and 18.7 million shares of common stock, respectively, due to their antidilutive effect.

(12) Share-Based Payments
Share-based payment expense, primarily included in the “Selling, general and administrative expenses” line item on the Consolidated Statements of Operations, totaled approximately $14 million during the sixteen weeks ended January 15, 2017, and totaled approximately $16 million for the same period of the prior fiscal year.

At January 15, 2017 and September 25, 2016, approximately 30.3 million shares and 29.8 million shares of the Company’s common stock, respectively, were available for future stock incentive grants. At January 15, 2017 and September 25, 2016, there was approximately $61 million and $73 million of unrecognized share-based payment expense, respectively, related to unvested stock options, net of estimated forfeitures, related to approximately 10.3 million shares and 10.5 million shares, respectively. The Company anticipates this expense to be recognized over a weighted average period of 2.7 years.

(13) 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. From time to time we are a

12


party to legal proceedings including matters involving shareholder claims, personnel and employment issues, personal injury, product liability, protecting our intellectual property, regulatory practices, acquisitions and other proceedings arising in the ordinary course of business. These matters have not resulted in any material losses to date. Certain litigation cases have been certified as class or collective actions and may seek substantial damages.

Our primary contingencies are associated with insurance and self-insurance obligations and litigation matters. Additionally, the Company has retention agreements with certain members of Company management which provide for payments under certain circumstances including change of control. 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, and is not currently a party to any legal proceeding that management believes could have a material adverse effect on our results of operations. 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.

(14) Guarantor Financial Statement Information
The Senior Notes issued on December 3, 2015 and Credit Agreement are fully and unconditionally guaranteed, jointly and severally, on an unsecured, unsubordinated basis by certain wholly owned domestic subsidiaries of the Company (the “Guarantors”). Supplemental condensed consolidating financial information of the Company, including such information for the Guarantors is presented below:

13


Consolidated Balance Sheets (unaudited)
(In millions)

 
January 15, 2017
Assets
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Current assets:
 
 
 
 
 
Cash and cash equivalents
$

$
252

$
98

$

$
350

Short-term investments - available-for-sale securities

374



374

Restricted cash

118

7


125

Accounts receivable

229

22


251

Intercompany receivable

695


(695
)

Merchandise inventories

467

87


554

Prepaid expenses and other current assets

106

17


123

Deferred income taxes

210



210

Total current assets

2,451

231

(695
)
1,987

Property and equipment, net of accumulated depreciation and amortization

3,075

385


3,460

Investments in consolidated subsidiaries
4,695

105

474

(5,274
)

Goodwill

703

7


710

Intangible assets, net of accumulated amortization
1

62

9


72

Deferred income taxes

105

6


111

Other assets

15

27


42

Total assets
$
4,696

$
6,516

$
1,139

$
(5,969
)
$
6,382

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current installments of long-term debt and capital lease obligations
$

$
3

$

$

$
3

Accounts payable

209

79


288

Intercompany payable
360


335

(695
)

Accrued payroll, bonus and other benefits due team members

395

26


421

Dividends payable
45




45

Other current liabilities
6

500

37


543

Total current liabilities
411

1,107

477

(695
)
1,300

Long-term debt and capital lease obligations, less current installments
993

48

7


1,048

Deferred lease liabilities

603

50


653

Other long-term liabilities

88

1


89

Total liabilities
1,404

1,846

535

(695
)
3,090

 
 
 
 
 
 
Commitments and contingencies










 
 
 
 
 
 
Total shareholders’ equity
3,292

4,670

604

(5,274
)
3,292

Total liabilities and shareholders’ equity
$
4,696

$
6,516

$
1,139

$
(5,969
)
$
6,382


14


Consolidated Balance Sheets (unaudited)
(In millions)

 
September 25, 2016
Assets
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Current assets:
 
 
 
 
 
Cash and cash equivalents
$

$
254

$
97

$

$
351

Short-term investments - available-for-sale securities

379



379

Restricted cash

114

8


122

Accounts receivable

216

26


242

Intercompany receivable

649


(649
)

Merchandise inventories

441

76


517

Prepaid expenses and other current assets

150

17


167

Deferred income taxes

197



197

Total current assets

2,400

224

(649
)
1,975

Property and equipment, net of accumulated depreciation and amortization

3,063

379


3,442

Investments in consolidated subsidiaries
4,593

103

472

(5,168
)

Goodwill

702

8


710

Intangible assets, net of accumulated amortization
1

63

10


74

Deferred income taxes

94

6


100

Other assets

16

24


40

Total assets
$
4,594

$
6,441

$
1,123

$
(5,817
)
$
6,341

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current installments of long-term debt and capital lease obligations
$

$
3

$

$

$
3

Accounts payable

227

80


307

Intercompany payable
317


333

(650
)

Accrued payroll, bonus and other benefits due team members

381

26


407

Dividends payable
43




43

Other current liabilities
17

536

28


581

Total current liabilities
377

1,147

467

(650
)
1,341

Long-term debt and capital lease obligations, less current installments
993

48

7


1,048

Deferred lease liabilities

592

48


640

Other long-term liabilities

87

1


88

Total liabilities
1,370

1,874

523

(650
)
3,117

 
 
 
 
 
 
Commitments and contingencies










 
 
 
 
 
 
Total shareholders’ equity
3,224

4,567

600

(5,167
)
3,224

Total liabilities and shareholders’ equity
$
4,594

$
6,441

$
1,123

$
(5,817
)
$
6,341


15


Consolidated Statements of Operations (unaudited)
(In millions)

 
Sixteen weeks ended January 15, 2017
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Sales
$

$
4,672

$
314

$
(68
)
$
4,918

Cost of goods sold and occupancy costs

3,110

224

(66
)
3,268

Gross profit

1,562

90

(2
)
1,650

Selling, general and administrative expenses

1,337

80


1,417

Pre-opening expenses

18

3


21

Relocation, store closure and lease termination costs

40

1


41

Operating income

167

6

(2
)
171

Interest expense
(15
)



(15
)
Investment and other expense


(1
)
1


Equity in net income of subsidiaries
104

2

1

(107
)

Income before income taxes
89

169

6

(108
)
156

Provision for income taxes
(6
)
65

2


61

Net income
$
95

$
104

$
4

$
(108
)
$
95


 
Sixteen weeks ended January 17, 2016
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Sales
$

$
4,584

$
289

$
(44
)
$
4,829

Cost of goods sold and occupancy costs

3,029

202

(43
)
3,188

Gross profit

1,555

87

(1
)
1,641

Selling, general and administrative expenses

1,294

79


1,373

Pre-opening expenses

10

3


13

Relocation, store closure and lease termination costs

3



3

Operating income

248

5

(1
)
252

Interest expense
(7
)



(7
)
Investment and other income (expense)

5

(2
)
1

4

Equity in net income of subsidiaries
161

3

6

(170
)

Income before income taxes
154

256

9

(170
)
249

Provision for income taxes
(3
)
93

2


92

Net income
$
157

$
163

$
7

$
(170
)
$
157


16


Consolidated Statements of Comprehensive Income (unaudited)
(In millions)

 
Sixteen weeks ended January 15, 2017
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Net income
$
95

$
104

$
4

$
(108
)
$
95

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation adjustments

(4
)
3


(1
)
Other comprehensive income (loss), net of tax

(4
)
3


(1
)
Comprehensive income
$
95

$
100

$
7

$
(108
)
$
94


 
Sixteen weeks ended January 17, 2016
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Net income
$
157

$
163

$
7

$
(170
)
$
157

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation adjustments

4

(14
)

(10
)
Other comprehensive income (loss), net of tax

4

(14
)

(10
)
Comprehensive income (loss)
$
157

$
167

$
(7
)
$
(170
)
$
147



17


Condensed Consolidated Statements of Cash Flows (unaudited)
(In millions)

 
January 15, 2017
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Net cash provided by (used in) operating activities
$
(26
)
$
293

$
17

$

$
284

Cash flows from investing activities
 
 
 
 
 
Purchases of property, plant and equipment

(226
)
(19
)

(245
)
Purchases of available-for-sale securities

(200
)


(200
)
Sales and maturities of available-for-sale securities

205



205

Payment for purchase of acquired entities, net of cash acquired





Intercompany activity
64



(64
)

Other investing activities

(4
)


(4
)
Net cash provided by (used in) investing activities
64

(225
)
(19
)
(64
)
(244
)
Cash flows from financing activities
 
 
 
 
 
Purchases of treasury stock





Common stock dividends paid
(43
)



(43
)
Issuance of common stock
5




5

Excess tax benefit related to exercise of team member stock options





Proceeds from long-term borrowings





Proceed for revolving line of credit





Payments on long-term debt and capital lease obligations





Intercompany activity

(66
)
2

64


Other financing activities





Net cash provided by (used in) financing activities
(38
)
(66
)
2

64

(38
)
Effect of exchange rate changes on cash and cash equivalents





Net change in cash, cash equivalents, and restricted cash

2



2

Cash, cash equivalents, and restricted cash at beginning of period

368

105


473

Cash, cash equivalents, and restricted cash at end of period
$

$
370

$
105

$

$
475



18


Condensed Consolidated Statements of Cash Flows (unaudited)
(In millions)

 
January 17, 2016
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Net cash provided by operating activities
$

$
219

$
13

$

$
232

Cash flows from investing activities
 
 
 
 
 
Purchases of property, plant and equipment

(156
)
(23
)

(179
)
Purchases of available-for-sale securities

(133
)


(133
)
Sales and maturities of available-for-sale securities

220



220

Payment for purchase of acquired entities, net of cash acquired


(11
)

(11
)
Intercompany activity
(319
)


319


Other investing activities

(6
)


(6
)
Net cash used in investing activities
(319
)
(75
)
(34
)
319

(109
)
Cash flows from financing activities
 
 
 
 
 
Purchases of treasury stock
(634
)



(634
)
Common stock dividends paid
(45
)



(45
)
Issuance of common stock
7




7

Excess tax benefit related to exercise of team member stock options
1




1

Proceeds from long-term borrowings
999




999

Proceeds from revolving line of credit
300




300

Payments on long-term debt and capital lease obligations
(302
)



(302
)
Intercompany activity

305

14

(319
)

Other financing activities
(7
)



(7
)
Net cash provided by financing activities
319

305

14

(319
)
319

Effect of exchange rate changes on cash and cash equivalents


(1
)

(1
)
Net change in cash, cash equivalents, and restricted cash

449

(8
)

441

Cash, cash equivalents, and restricted cash at beginning of period

261

103


364

Cash, cash equivalents, and restricted cash at end of period
$

$
710

$
95

$

$
805


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

Disclaimer on Forward-looking Statements
Certain statements in this report and from time to time in other filings with the Securities and Exchange Commission, news releases, reports, and other written and oral communications made by us and our representatives, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by words such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “see,” “continue,” “could,” “can,” “may,” “will,” “likely,” “depend,” “should,” “would,” “plan,” “predict,” “target,” and similar expressions, and include references to assumptions and relate to our future prospects, developments and business strategies. Except for the historical information contained herein, the matters discussed in this analysis are forward-looking statements that involve risks and uncertainties that may cause our actual results to be materially different from such forward-looking statements and could materially adversely affect our business, financial condition, operating results and cash flows. These risks and uncertainties include general business conditions, changes in overall economic conditions that impact consumer spending, the impact of competition and other factors which are often beyond the control of the Company, as well other risks listed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2016 and risks and uncertainties not presently known to us or that we currently deem immaterial. We wish to caution you that you should not place undue reliance on such forward-looking statements, which speak only as of the date on which they were made. We do not undertake any obligation to update forward-looking statements.


19


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, 2016.

Overview
Whole Foods Market is the leading natural and organic foods supermarket, the first national “Certified Organic” grocer, and uniquely positioned as America’s Healthiest Grocery Store™. We are a mission-driven company that aims to set the standards of excellence in food retailing. Our success is measured by customer satisfaction, team member happiness and excellence, return on invested capital, active environmental stewardship, service in our local and global communities, and win-win supplier partnerships, among other things. 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. The Company incorporated in 1978, opened the first Whole Foods Market store in 1980, and as of January 15, 2017, operated 467 stores: 446 stores in 42 U.S. states and the District of Columbia; 12 stores in Canada; and 9 stores in the United Kingdom. We have one operating segment, natural and organic foods supermarkets.

Our continued growth depends on our ability to increase sales in our comparable stores and open new stores. Our growth strategy includes opening new stores in existing and new areas and operating those stores successfully. The Company’s average weekly sales and gross profit as a percentage of sales are typically highest in the second and third fiscal quarters, and lowest in the fourth fiscal quarter due to seasonally slower sales during the summer months. Gross profit as a percentage of sales is typically lower in the first fiscal quarter due to the product mix of holiday sales.

Sales of a store are deemed to be comparable commencing in the fifty-seventh full week after the store was opened or acquired. The calculation of comparable store sales excludes sales from relocated and remodeled stores with square footage changes greater than 20% to reduce the impact of square footage changes on the comparison. Stores closed for eight or more days are excluded from the comparable store base from the first fiscal week of closure until re-opened for a full fiscal week. Comparable store sales growth is calculated on a same-calendar-week to same-calendar-week constant currency basis. Companies define comparable store sales differently; thus growth rates across companies may not be comparable.

The Company reports its results of operations on a 52- or 53-week fiscal year ending on the last Sunday in September. Fiscal years 2017 and 2016 are 52-week years.

Economic and Industry Factors
Food retailing is a large, intensely competitive industry and is evolving at an incredibly fast pace. Consumers have more options than ever before. Our competition includes but is not limited to local, regional, national and international conventional and specialty supermarkets, natural foods stores, warehouse membership clubs, online retailers, smaller specialty stores, farmers’ markets, restaurants and home delivery, and meal solution companies, each of which competes with us on the basis of store ambiance and experience, product selection and quality, customer service, price, convenience or a combination of these factors.

We offer the broadest selection of high-quality natural and organic products, with a strong emphasis on perishable foods. We believe our high quality standards differentiate our stores from other supermarkets and enable us to attract and maintain a broad base of loyal customers. Our groundbreaking quality standards ban hundreds of ingredients commonly found in products sold by other retailers, as well as products grown or produced by manufacturing, farming, fishing and ranching practices that don’t measure up.

First Quarter of Fiscal Year 2017 Summary

Record sales of $4.9 billion, a 1.9% increase over the prior year
Comparable store sales decrease of 2.4%
Net income of $95 million, or 1.9% of sales
Diluted earnings per share of $0.30
EBITDA of $360 million, or 7.3% of sales
Return on Invested Capital (“ROIC”) of 11.0%

Results include a non-cash charge of $34 million, or $0.06 per diluted share, related to store and facility closures and a charge of $13 million, or $0.03 per diluted share, associated with Mr. Robb’s separation agreement. Excluding these charges, net income was $123 million, or 2.5% of sales; diluted earnings per share were $0.39; EBITDA margin was 7.6%; and ROIC was 11.7%. Please refer to the reconciliation of GAAP measures to non-GAAP measures included in this Management’s Discussion and Analysis. During the sixteen weeks ended January 15, 2017, we produced approximately $284 million in cash flows from

20


operations and returned approximately $43 million in quarterly dividends to common shareholders. At January 15, 2017, we had approximately $1.1 billion in total debt and approximately $1.2 billion in total available capital.

Fiscal Year 2017 Updated Outlook
The Company is updating its outlook primarily to reflect lower expected sales growth and new costs associated with accelerating the implementation of category management. In the first quarter of fiscal year 2017, the Company incurred a charge of approximately $47 million, or $0.09 per diluted share, related to Mr. Robb’s separation agreement as well as store and facility closures. In the second quarter of fiscal year 2017, the Company expects to incur an additional charge related to these closures of approximately $30 million, or $0.06 per diluted share. The Company’s outlook excludes these charges and potential share repurchases. The Company remains focused on the metrics it believes are key to the long-term health of its business and for fiscal year 2017 is targeting:

Sales growth of 1.5% of greater
Comps of approximately -2.5% or better
Ending square footage growth of approximately 5% net of closures, reflecting approximately 30 new stores, including up to six relocations and three 365 stores
Diluted EPS of $1.33 or greater
EBITDA margin of approximately 8%
Capital expenditures of approximately 4% of sales
ROIC of approximately 11%

The Company has updated its sales outlook primarily to reflect year-to-date sales trends and lost sales related to the store closures. While the Company remains hopeful that comps improve as sales-building initiatives gain traction and comparisons get easier, the competitive landscape continues to be very dynamic, two-year comps have continued to moderate, and it is uncertain how long the deflationary environment will continue.

The Company plans to reduce its cost structure this fiscal year but expects these savings to be more than offset by investments in marketing, value and technology, as well as higher occupancy, depreciation and other costs. In addition, the Company is estimating additional costs of approximately $14 million, or $0.03 per diluted share, related to its recent decision to accelerate the implementation of category management, the majority of which it expects to incur in the fourth quarter. Therefore, the Company now expects a decline in operating margin of up to approximately 85 basis points for the year, with greater declines of up to 115 basis points in the second and fourth quarters due in part to the negative Easter shift and higher year-over-year marketing expense in the second quarter, and to costs associated with category management in the fourth quarter. The Company also notes a LIFO credit of $9 million in the fourth quarter last year as compared to charges of $2 million in the first and second quarters and a credit of $2 million in the third quarter last year.

Results of Operations
The following table sets forth the Company’s consolidated statements of operations data expressed as a percentage of sales:
 
Sixteen weeks ended
 
January 15,
2017
 
January 17,
2016
Sales
100.0
 %
 
100.0
 %
Cost of goods sold and occupancy costs
66.4

 
66.0

Gross profit
33.6

 
34.0

Selling, general and administrative expenses
28.8

 
28.4

Pre-opening expenses
0.4

 
0.3

Relocation, store closure and lease termination costs
0.8

 
0.1

Operating income
3.5

 
5.2

Interest expense
(0.3
)
 
(0.1
)
Investment and other income

 
0.1

Income before income taxes
3.2

 
5.2

Provision for income taxes
1.2

 
1.9

Net income
1.9
 %
 
3.2
 %
Figures may not sum due to rounding


21


Sales for the sixteen weeks ended January 15, 2017 totaled approximately $4.9 billion, increasing 1.9% over the same period of the prior fiscal year. Comparable store sales during the sixteen weeks ended January 15, 2017 and the same period of the prior fiscal year are reflected in the table below.
 
Sixteen weeks ended
 
January 15,
2017
 
January 17,
2016
Comparable store sales
(2.4
)%
 
(1.8
)%
Change in transactions
(3.9
)%
 
(1.6
)%
Change in basket size
1.5
 %
 
(0.2
)%

We have seen stability in our comps over the last three quarters, with some modest traffic improvement from the fourth quarter of fiscal year 2016 to the first quarter of fiscal year 2017. During the quarter, we saw wide swings in comps on a weekly basis, as is frequently the case in the first quarter due to weather and holiday shifts. After a strong start for the first five weeks, comps dropped off sharply in the pre- and post-election weeks, and then showed nice lifts over Thanksgiving and Christmas weeks. Comparable stores contributed approximately 95.1% of total sales for the sixteen weeks ended January 15, 2017, compared to approximately 93.7% for the same period of the prior fiscal year. As of January 15, 2017, there were 434 locations in the comparable store base compared to 404 locations at January 17, 2016.

The Company’s gross profit as a percentage of sales for the sixteen weeks ended January 15, 2017 was approximately 33.6% compared to approximately 34.0% for the same period of the prior fiscal year. Gross margin for the sixteen weeks ended January 15, 2017 declined 43 basis points to 33.6%, as compared to the sixteen weeks ended January 17, 2016, driven by increases in occupancy costs and cost of goods sold as a percentage of sales.

Selling, general and administrative expenses as a percentage of sales were approximately 28.8% for the sixteen weeks ended January 15, 2017 compared to approximately 28.4% for the same period of the prior fiscal year. During the sixteen weeks ended January 15, 2017, selling, general and administrative expenses included a charge of $13 million associated with the separation
agreement for Walter Robb, our former Co-Chief Executive Officer. Excluding this charge, selling, general and administrative expenses increased 12 basis points year over year for the sixteen weeks ended January 15, 2017 driven by an increase in marketing and depreciation expenses as a percentage of sales.

Pre-opening expenses totaled approximately $21 million for the sixteen weeks ended January 15, 2017 compared to approximately $13 million for the same period of the prior fiscal year.

Relocation, store closure and lease termination costs totaled approximately $41 million for the sixteen weeks ended January 15, 2017 compared to approximately $3 million for the same period of the prior fiscal year. Relocation, store closure and lease termination costs for the sixteen weeks ended January 15, 2017 includes approximately $34 million in charges related to the decision to close nine stores and three commissary kitchens.

The numbers of stores opened and relocated were as follows:
 
Sixteen weeks ended
 
January 15,
2017
 
January 17,
2016
New stores
11

 
3

Relocated stores
2

 


Interest expense, primarily related to the Company’s $1.0 billion offering of 5.2% senior notes completed on December 3, 2015, totaled approximately $15 million and $7 million for the sixteen weeks ended January 15, 2017 and January 17, 2016, respectively.

Investment and other income, which includes gift card breakage, interest income and investment gains and losses, and other income, was not material for the sixteen weeks ended January 15, 2017 compared to approximately $4 million for the sixteen weeks ended January 17, 2015.

Income taxes resulted in an effective tax rate of approximately 39.0% for the sixteen weeks ended January 15, 2017 compared to approximately 37.0% for the same period of the prior fiscal year. The lower effective tax rate for fiscal year 2016 was due to the recognition of an environmental tax credit related to the development of a new store. The effective tax rate for fiscal year 2017 is expected to be 39.0%.


22


Non-GAAP measures
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides information regarding adjusted diluted Earnings per Share (“EPS”), Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), adjusted EBITDA, Return on Invested Capital (“ROIC”) and adjusted ROIC as additional information about its operating results. These measures are not in accordance with, or an alternative to, GAAP. We believe that these presentations provide useful information to management, analysts and investors regarding certain additional financial and business trends relating to our 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. Management believes ROIC and adjusted ROIC are useful to investors and analysts because each measures how effectively we are deploying our assets.

The Company defines adjusted diluted EPS as net income plus charges for store and facility closures and Mr. Robb’s separation agreement divided by the weighted average shares outstanding and potential additional common shares outstanding. The following is a tabular reconciliation of the non-GAAP financial measures adjusted diluted EPS to GAAP diluted EPS, which the Company believes is the most directly comparable GAAP financial measure. Adjusted diluted EPS was as follows (in millions):
 
Sixteen weeks ended
Adjusted Diluted EPS
January 15, 2017
 
January 17, 2016
Net income
$
95

 
$
157

Store and facility closures, net of tax
20

 

Mr. Robb's separation agreement, net of tax
8

 

  Adjusted Net income
$
123

 
$
157

 
 
 
 
Adjusted Diluted Earnings per Share
$
0.39

 
$
0.46

Weighted average shares outstanding
318.7

 
337.0


The Company defines adjusted EBITDA as EBITDA plus charges for Mr. Robb’s separation agreement. The following is a tabular reconciliation of the non-GAAP financial measures EBITDA to GAAP net income, which the Company believes is the most directly comparable GAAP financial measure. EBITDA was as follows (in millions):
 
Sixteen weeks ended
 
January 15,
2017
 
January 17,
2016
Net income
$
95

 
$
157

Provision for income taxes
61

 
92

Interest expense
15

 
7

Investment and other income

 
(4
)
Operating income
171

 
252

Depreciation and amortization
189

 
147

EBITDA
360

 
399

Mr. Robb’s separation agreement
13

 

Adjusted EBITDA
$
373


$
399



23


The Company defines ROIC as ROIC earnings divided by average invested capital. ROIC earnings and adjustments to ROIC earnings are defined in the following tabular reconciliation. Invested capital reflects a trailing four-quarter average. ROIC and adjusted ROIC were as follows (in millions):
 
Fifty-two weeks ended
 
January 15,
2017
 
January 17,
2016
Net income
$
445

 
$
525

Interest expense, net of tax
30

 
4

ROIC earnings
475

 
529

Total rent expense, net of tax (1)
289

 
268

Estimated depreciation on capitalized operating leases, net of tax (2)
(193
)
 
(178
)
ROIC earnings, including the effect of capitalized operating leases
$
571

 
$
619

 
 
 
 
Average working capital, excluding current portion of long-term debt
$
695

 
$
529

Average property and equipment, net
3,355

 
3,121

Average other assets
967

 
1,075

Average other liabilities
(714
)
 
(651
)
Average invested capital
4,303

 
4,074

Average estimated asset base of capitalized operating leases (3)
3,816

 
3,486

Average invested capital, including the effect of capitalized operating leases
$
8,119

 
$
7,560

 
 
 
 
ROIC
11.0
%
 
13.0
%
ROIC, including the effect of capitalized operating leases
7.0
%
 
8.2
%
 
Fifty-two weeks ended
 
January 15,
2017
 
January 17,
2016
Net income
$
445

 
$
525

Interest expense, net of tax
30

 
4

Adjustments, net of tax (4)
30

 
48

Adjusted ROIC earnings
505

 
577

Total rent expense, net of tax (1)
289

 
268

Estimated depreciation on capitalized operating leases, net of tax (2)
(193
)
 
(178
)