10-Q 1 wfm10qq32017.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 July 2, 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
 wfm2017logo1a03.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)
 
Emerging growth company o

If an emerging growth company, indicate by the check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

The number of shares of the registrant’s common stock, no par value, outstanding as of July 30, 2017 was 320,251,710 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
July 2,
2017
 
September 25,
2016
Current assets:
 
 
 
Cash and cash equivalents
$
279

 
$
351

Short-term investments - available-for-sale securities
720

 
379

Restricted cash
124

 
122

Accounts receivable
246

 
242

Merchandise inventories
483

 
517

Prepaid expenses and other current assets
117

 
167

Deferred income taxes
222

 
197

Total current assets
2,191

 
1,975

Property and equipment, net of accumulated depreciation and amortization
3,482

 
3,442

Long-term investments - available-for-sale securities
24

 

Goodwill
710

 
710

Intangible assets, net of accumulated amortization
70

 
74

Deferred income taxes
87

 
100

Other assets
46

 
40

Total assets
$
6,610

 
$
6,341

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current installments of long-term debt and capital lease obligations
$
2

 
$
3

Accounts payable
305

 
307

Accrued payroll, bonus and other benefits due team members
391

 
407

Dividends payable
58

 
43

Other current liabilities
568

 
581

Total current liabilities
1,324

 
1,341

Long-term debt and capital lease obligations, less current installments
1,046

 
1,048

Deferred lease liabilities
678

 
640

Other long-term liabilities
104

 
88

Total liabilities
3,152

 
3,117

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, no par value, 1,200 shares authorized; 376.8 and 377.0 shares issued; 320.1 and 318.3 shares outstanding at 2017 and 2016, respectively
2,946

 
2,933

Common stock in treasury, at cost, 56.7 and 58.7 shares at 2017 and 2016, respectively
(1,959
)
 
(2,026
)
Accumulated other comprehensive loss
(30
)
 
(32
)
Retained earnings
2,501

 
2,349

Total shareholders’ equity
3,458

 
3,224

Total liabilities and shareholders’ equity
$
6,610

 
$
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)

 
Twelve weeks ended
 
Forty weeks ended
 
July 2,
2017

July 3,
2016
 
July 2,
2017
 
July 3,
2016
Sales
$
3,725

 
$
3,703

 
$
12,381

 
$
12,227

Cost of goods sold and occupancy costs
2,457

 
2,417

 
8,189

 
8,010

Gross profit
1,268

 
1,286

 
4,192

 
4,217

Selling, general and administrative expenses
1,072

 
1,057

 
3,546

 
3,458

Pre-opening expenses
13

 
18

 
46

 
49

Relocation, store closure and lease termination costs
3

 
2

 
77

 
8

Operating income
180

 
209

 
523

 
702

Interest expense
(11
)
 
(12
)
 
(37
)
 
(30
)
Investment and other income (expense)
4

 
(1
)
 
6

 
8

Income before income taxes
173

 
196

 
492

 
680

Provision for income taxes
67

 
76

 
192

 
261

Net income
$
106

 
$
120

 
$
300

 
$
419

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.33

 
$
0.37

 
$
0.94

 
$
1.27

Weighted average shares outstanding
319.4

 
320.6

 
319.7

 
328.4

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.33

 
$
0.37

 
$
0.94

 
$
1.27

Weighted average shares outstanding, diluted basis
320.3

 
321.2

 
320.2

 
329.3

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.180

 
$
0.135

 
$
0.460

 
$
0.405


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)

 
Twelve weeks ended
 
Forty weeks ended
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Net income
$
106

 
$
120

 
$
300

 
$
419

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
4

 
(1
)
 
2

 
(1
)
Other comprehensive income (loss), net of tax
4

 
(1
)
 
2

 
(1
)
Comprehensive income
$
110

 
$
119

 
$
302

 
$
418


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


3


Whole Foods Market, Inc.
Consolidated Statements of Shareholders’ Equity (unaudited)
Forty weeks ended July 2, 2017 and fiscal year ended September 25, 2016
(In millions)

 
Shares
outstanding
Common
stock
Common
stock in
treasury
Accumulated
other
comprehensive
income (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




300

300

Other comprehensive income, net of tax



2


2

Dividends ($0.46 per common share)




(148
)
(148
)
Issuance of common stock pursuant to team member stock plans
1.8

(22
)
67



45

Tax benefit related to exercise of team member stock options

5




5

Share-based payment expense

30




30

Other






Balances at July 2, 2017
320.1

$
2,946

$
(1,959
)
$
(30
)
$
2,501

$
3,458


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)

 
Forty weeks ended
 
July 2,
2017
 
July 3,
2016
Cash flows from operating activities
 
 
 
Net income
$
300

 
$
419

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
417

 
376

Share-based payment expense
30

 
39

LIFO expense
6

 
1

Deferred income tax (benefit) expense
(13
)
 
16

Excess tax benefit related to exercise of team member stock options
(5
)
 
(4
)
Accretion of premium/discount on marketable securities
1

 
1

Deferred lease liabilities
50

 
31

Other
10

 
7

Net change in current assets and liabilities:
 

 
 

Accounts receivable
(2
)
 
(100
)
Merchandise inventories
29

 
(25
)
Prepaid expenses and other current assets
53

 
(39
)
Accounts payable
(2
)
 
(2
)
Accrued payroll, bonus and other benefits due team members
(16
)
 
(27
)
Other current liabilities
28

 
57

Net change in other long-term liabilities
15

 
14

Net cash provided by operating activities
901

 
764

Cash flows from investing activities
 
 
 
Development costs of new locations
(291
)
 
(295
)
Other property and equipment expenditures
(217
)
 
(226
)
Purchases of available-for-sale securities
(767
)
 
(311
)
Sales and maturities of available-for-sale securities
401

 
375

Payment for purchase of acquired entities, net of cash acquired

 
(11
)
Other investing activities
(13
)
 
(12
)
Net cash used in investing activities
(887
)
 
(480
)
Cash flows from financing activities
 
 
 
Purchases of treasury stock

 
(929
)
Common stock dividends paid
(132
)
 
(133
)
Issuance of common stock
43

 
17

Excess tax benefit related to exercise of team member stock options
5

 
4

Proceeds from long-term borrowings

 
999

Proceeds from revolving line of credit

 
300

Payments on long-term debt and capital lease obligations
(3
)
 
(306
)
Other financing activities
(1
)
 
(9
)
Net cash used in financing activities
(88
)
 
(57
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
4

 
4

Net change in cash, cash equivalents, and restricted cash
(70
)
 
231

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

 
364

Cash, cash equivalents, and restricted cash at end of period
$
403

 
$
595

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Federal and state income taxes paid
$
181

 
$
357

Interest paid
$
53

 
$
27


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


5


Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (unaudited)
July 2, 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:
 
Twelve weeks ended
Forty weeks ended
 
July 2,
2017

July 3,
2016
July 2,
2017
 
July 3,
2016
Sales:
 
 
 
 
 
 
United States
97.0
%
 
96.9
%
97.1
%
 
97.1
%
Canada and United Kingdom
3.0

 
3.1

2.9

 
2.9

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 2,
2017
 
September 25,
2016
Long-lived assets, net:
 

 
 
United States
97.4
%
 
97.5
%
Canada and United Kingdom
2.6

 
2.5

Total long-lived assets, net
100.0
%
 
100.0
%

(2) Summary of Significant Accounting Policies
Recent Accounting Pronouncements
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.

6


Standard
Description
Effective Date
Effect on financial statements and other significant matters
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.
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.
 
 
 
 

7


 
 
 
 
Standard
Description
Effective Date
Effect on financial statements and other significant matters
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.

(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.

8


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):
July 2, 2017
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market fund
$

 
$

 
$

 
$

Commercial paper

 

 

 

Municipal bonds

 

 

 

Marketable securities - available-for-sale:
 
 
 
 
 
 
 
Commercial paper

 
45

 

 
45

Municipal bonds

 
144

 

 
144

Variable-rate demand notes

 
555

 

 
555

Total
$

 
$
744


$


$
744

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 forty weeks ended July 2, 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 either short- or long-term available-for-sale securities. The Company held the following investments at fair value as of the dates indicated (in millions):
 
July 2,
2017
 
September 25,
2016
Short-term marketable securities - available-for-sale:
 
 
 
Commercial paper
$
45

 
$
30

Municipal bonds
120

 
26

Variable rate demand notes
555

 
323

Total short-term marketable securities
$
720

 
$
379

Long-term marketable securities - available-for-sale:
 
 
 
Municipal bonds
24

 

Total long-term marketable securities
$
24

 
$


Gross unrealized holding gains and losses were not material at July 2, 2017 or September 25, 2016. Available-for-sale securities totaling approximately $64 million and $33 million were in unrealized loss positions at July 2, 2017 and September 25, 2016, respectively. The aggregate value of available-for-sale securities in a continuous unrealized loss position for greater than 12 months was not material at July 2, 2017 or September 25, 2016. The Company did not recognize any other-than-temporary impairments during the forty weeks ended July 2, 2017 or fiscal year ended September 25, 2016. At July 2, 2017 the average effective maturity of the Company’s short- and long-term available-for-sale securities was one month and twenty months, respectively. The average effective maturity of the Company’s short-term available-for-sale securities was less than one month at September 25, 2016.


9


At July 2, 2017 and September 25, 2016, the Company held approximately $24 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 July 2, 2017 or September 25, 2016.

(5) Goodwill and Other Intangible Assets
There were no additions or adjustments to goodwill during the forty weeks ended July 2, 2017 or July 3, 2016. Additions of other intangible assets were not material during the forty weeks ended July 2, 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):
 
July 2, 2017
 
September 25, 2016
 
Gross carrying
amount
 
Accumulated
amortization
 
Gross carrying
amount
 
Accumulated
amortization
Definite-lived contract-based
$
118

 
$
(57
)
 
$
120

 
$
(55
)
Indefinite-lived contract-based
9

 
 
 
9

 
 
Total
$
127

 
$
(57
)
 
$
129

 
$
(55
)

Amortization expense associated with intangible assets was not material during the twelve weeks ended July 2, 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
$
1

Fiscal year 2018
5

Fiscal year 2019
5

Fiscal year 2020
5

Fiscal year 2021
4

Future fiscal years
41

Total
$
61


(6) Store and Facility Closures
During the first quarter of fiscal year 2017, the Company announced plans to close nine stores and three commissary kitchens and recorded non-cash charges of approximately $34 million to adjust the long-lived assets of these locations to fair value. During the second quarter of fiscal year 2017, the Company closed all nine stores and all three commissary kitchens and recorded additional charges of $30 million primarily related to remaining lease obligations and Team Member severance. The Company did not incur material additional charges related to these closures in the third quarter of fiscal year 2017.

(7) Reserves for Closed Properties
The following table provides a summary of activity in reserves for closed properties during the forty weeks ended July 2, 2017 and fiscal year ended September 25, 2016 (in millions):
 
July 2,
2017
 
September 25,
2016
Beginning balance
$
26

 
$
28

Additions
29

 
6

Usage
(12
)
 
(10
)
Adjustments
1

 
2

Ending balance
$
44

 
$
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.

At July 2, 2017, the Company had no amounts outstanding under the credit facility. Commitment fees paid on undrawn amounts were not material during the forty weeks ended July 2, 2017. At July 2, 2017, the Company was in compliance with its covenants under the Credit Agreement.


10


During the forty weeks ended July 3, 2016, the Company borrowed and repaid $300 million under the Credit Agreement. At July 3, 2016, the Company had no amounts outstanding.

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 July 2, 2017, the Company was in compliance with all covenants under the indenture governing the Notes. The estimated fair value of the Notes at July 2, 2017, based on observable market prices (Level 2), exceeded the carrying value by approximately $164 million.

The Notes and Credit Agreement are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by certain 100% 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):
 
July 2,
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
55

 
58

Total long-term debt and capital lease obligations
1,048

 
1,051

Less: current installments
(2
)
 
(3
)
Total long-term debt and capital lease obligations, less current installments
$
1,046

 
$
1,048


(9) Income Taxes
Income taxes resulted in an effective tax rate of approximately 39.0% for the twelve and forty weeks ended July 2, 2017 compared to approximately 39.0% and 38.4%, respectively, for the same periods of the prior fiscal year. The lower effective tax rate for the forty weeks ended July 3, 2016 was 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
$
0.14

 
January 13, 2017
 
January 24, 2017
 
$
45

February 17, 2017
0.14

 
April 7, 2017
 
April 18, 2017
 
45

May 10, 2017 (1)
0.18

 
June 30, 2017
 
July 11, 2017
 
58

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 July 2, 2017




11


Treasury Stock
As of July 2, 2017, the May 10, 2017 share repurchase program remained in effect, with prior programs having been fully utilized, expired or cancelled. The Company has $1,250 million remaining available for share repurchases under the current program as of July 2, 2017. Share repurchase activity for the twelve and forty weeks ended July 2, 2017 was immaterial. Share repurchase activity for the twelve and forty weeks July 3, 2016 was as follows (in millions, except per share amounts):
 
Twelve weeks ended
 
Forty weeks ended
 
July 3,
2016
 
July 3,
2016
Number of common shares acquired
6.5

 
31.2

Average price per common share acquired
$
30.01

 
$
29.85

Total cost of common shares acquired
$
195

 
$
929


The Company reissued approximately 1.8 million treasury shares at cost of approximately $67 million and approximately 1.1 million treasury shares at cost of approximately $39 million to satisfy the issuance of common stock pursuant to team member stock plans during the forty weeks ended July 2, 2017 and July 3, 2016, respectively. At July 2, 2017 and September 25, 2016, the Company held in treasury approximately 56.7 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):
 
Twelve weeks ended
 
Forty weeks ended
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Net income
(numerator for basic and diluted earnings per share)
$
106

 
$
120

 
$
300

 
$
419

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
(denominator for basic earnings per share)
319.4

 
320.6

 
319.7

 
328.4

Incremental common shares attributable to dilutive effect of share-based awards
0.9

 
0.6

 
0.5

 
0.9

Weighted average common shares outstanding and
potential additional common shares outstanding
(denominator for diluted earnings per share)
320.3

 
321.2

 
320.2

 
329.3

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.33

 
$
0.37

 
$
0.94

 
$
1.27

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.33

 
$
0.37

 
$
0.94

 
$
1.27


The computation of diluted earnings per share for the twelve and forty weeks ended July 2, 2017 does not include share-based awards to purchase approximately 18.9 million shares and 22.7 million shares of common stock, respectively, due to their antidilutive effect. The computation of diluted earnings per share for the twelve and forty weeks ended July 3, 2016 does not include share-based awards to purchase approximately 23.6 million shares and 20.8 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 $9 million and $30 million, respectively, during the twelve and forty weeks ended July 2, 2017, and totaled approximately $11 million and $39 million, respectively, for the same periods of the prior fiscal year.


12


At July 2, 2017 and September 25, 2016, approximately 26.6 million shares and 29.8 million shares of the Company’s common stock, respectively, were available for future stock incentive grants. At July 2, 2017 and September 25, 2016, there was approximately $71 million and $73 million of unrecognized share-based payment expense, respectively, related to unvested stock options, net of estimated forfeitures, related to approximately 10.0 million shares and 10.5 million shares, respectively. The Company anticipates this expense to be recognized over a weighted average period of 3.1 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 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.

Litigation Relating to the Merger
On June 15, 2017, Amazon.com, Inc. (“Amazon.com”) and Whole Foods Market, Inc. (“Whole Foods Market”) entered into an Agreement and Plan of Merger under which Walnut Merger Sub, Inc., a wholly-owned subsidiary of Amazon.com (“Merger Sub”) will be merged with and into Whole Foods Market, with Whole Foods Market continuing as the surviving company. After the transaction was announced, three putative class action lawsuits - captioned Riegel v. Whole Foods Market, Inc., et al., No. 1:17-cv-00674-LY (W.D. Tex.), Berg v. Whole Foods Market, Inc., et al., No. 1:17-00677-LY (W.D. Tex.), and Gieske v. Whole Foods Market, Inc., et al., No. 1:17-00684 (W.D. Tex.) - were filed by purported Whole Foods Market stockholders in the United States District Court for the Western District of Texas. The complaints in these actions assert claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 in connection with the disclosures contained in the July 7, 2017 preliminary proxy statement filed by Whole Foods Market with the Securities and Exchange Commission. Each suit names Whole Foods Market and the directors of Whole Foods Market as defendants. The Berg suit also names Amazon.com and Merger Sub as defendants. The complaints seek a variety of equitable and injunctive relief including, among other things, enjoining the consummation of the merger, rescinding the transaction if it is consummated, and awarding the plaintiffs costs and attorneys’ fees. Copies of the complaints in these three actions were publicly filed by the Company as Soliciting Material under §240.14a-12 of the Exchange Act on July 21, 2017. Whole Foods Market believes that plaintiffs’ claims are without merit.


13



(14) Guarantor Financial Statement Information
The $1.0 billion 5.2% Senior Notes due 2025 are fully and unconditionally guaranteed, jointly and severally, on an unsecured, unsubordinated basis by certain 100% 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:

Consolidated Balance Sheets (unaudited)
(In millions)

 
July 2, 2017
Assets
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Current assets:
 
 
 
 
 
Cash and cash equivalents
$

$
172

$
107

$

$
279

Short-term investments - available-for-sale securities

720



720

Restricted cash

118

6


124

Accounts receivable

223

23


246

Intercompany receivable

727


(727
)

Merchandise inventories

422

61


483

Prepaid expenses and other current assets

99

18


117

Deferred income taxes

222



222

Total current assets

2,703

215

(727
)
2,191

Property and equipment, net of accumulated depreciation and amortization

3,088

394


3,482

Long-term investments - available-for-sale securities

24



24

Investments in consolidated subsidiaries
4,916

109

480

(5,505
)

Goodwill

703

7


710

Intangible assets, net of accumulated amortization
1

60

9


70

Deferred income taxes

81

6


87

Other assets

13

33


46

Total assets
$
4,917

$
6,781

$
1,144

$
(6,232
)
$
6,610

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

$
2

$

$

$
2

Accounts payable

212

93


305

Intercompany payable
404


323

(727
)

Accrued payroll, bonus and other benefits due team members

365

26


391

Dividends payable
58




58

Other current liabilities
4

535

29


568

Total current liabilities
466

1,114

471

(727
)
1,324

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

46

7


1,046

Deferred lease liabilities

625

53


678

Other long-term liabilities

103

1


104

Total liabilities
1,459

1,888

532

(727
)
3,152

 
 
 
 
 
 
Commitments and contingencies










 
 
 
 
 
 
Total shareholders’ equity
3,458

4,893

612

(5,505
)
3,458

Total liabilities and shareholders’ equity
$
4,917

$
6,781

$
1,144

$
(6,232
)
$
6,610


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)

 
Twelve weeks ended July 2, 2017
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Sales
$

$
3,551

$
217

$
(43
)
$
3,725

Cost of goods sold and occupancy costs

2,341

158

(42
)
2,457

Gross profit

1,210

59

(1
)
1,268

Selling, general and administrative expenses

1,014

58


1,072

Pre-opening expenses

11

2


13

Relocation, store closure and lease termination costs

4

(1
)

3

Operating income

181


(1
)
180

Interest expense
(11
)



(11
)
Investment and other income (expense)

5

(1
)

4

Equity in net income of subsidiaries
113

3

4

(120
)

Income before income taxes
102

189

3

(121
)
173

Provision for income taxes
(4
)
72

(1
)

67

Net income
$
106

$
117

$
4

$
(121
)
$
106


 
Twelve weeks ended July 3, 2016
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Sales
$

$
3,511

$
229

$
(37
)
$
3,703

Cost of goods sold and occupancy costs

2,293

160

(36
)
2,417

Gross profit

1,218

69

(1
)
1,286

Selling, general and administrative expenses

996

61


1,057

Pre-opening expenses

17

1


18

Relocation, store closure and lease termination costs

2



2

Operating income

203

7

(1
)
209

Interest expense
(12
)



(12
)
Investment and other income (expense)

(1
)
(1
)
1

(1
)
Equity in net income of subsidiaries
127

3

8

(138
)

Income before income taxes
115

205

14

(138
)
196

Provision for income taxes
(5
)
79

2


76

Net income
$
120

$
126

$
12

$
(138
)
$
120


16


Consolidated Statements of Operations (unaudited)
(In millions)

 
Forty weeks ended July 2, 2017
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Sales
$

$
11,770

$
752

$
(141
)
$
12,381

Cost of goods sold and occupancy costs

7,783

544

(138
)
8,189

Gross profit

3,987

208

(3
)
4,192

Selling, general and administrative expenses

3,352

194


3,546

Pre-opening expenses

41

5


46

Relocation, store closure and lease termination costs

77



77

Operating income

517

9

(3
)
523

Interest expense
(37
)



(37
)
Investment and other income (expense)

5

(3
)
4

6

Equity in net income of subsidiaries
323

6

8

(337
)

Income before income taxes
286

528

14

(336
)
492

Provision for income taxes
(14
)
204

2


192

Net income
$
300

$
324

$
12

$
(336
)
$
300


 
Forty weeks ended July 3, 2016
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Sales
$

$
11,606

$
741

$
(120
)
$
12,227

Cost of goods sold and occupancy costs

7,611

516

(117
)
8,010

Gross profit

3,995

225

(3
)
4,217

Selling, general and administrative expenses

3,262

196


3,458

Pre-opening expenses

44

5


49

Relocation, store closure and lease termination costs

8



8

Operating income

681

24

(3
)
702

Interest expense
(30
)



(30
)
Investment and other income (expense)

8

(4
)
4

8

Equity in net income of subsidiaries
437

8

23

(468
)

Income before income taxes
407

697

43

(467
)
680

Provision for income taxes
(12
)
265

8


261

Net income
$
419

$
432

$
35

$
(467
)
$
419


17


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

 
Twelve weeks ended July 2, 2017
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Net income
$
106

$
117

$
4

$
(121
)
$
106

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

4



4

Other comprehensive income (loss), net of tax

4



4

Comprehensive income
$
106

$
121

$
4

$
(121
)
$
110


 
Forty weeks ended July 2, 2017
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Net income
$
300

$
324

$
12

$
(336
)
$
300

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

2



2

Other comprehensive income (loss), net of tax

2



2

Comprehensive income
$
300

$
326

$
12

$
(336
)
$
302

    
 
Twelve weeks ended July 3, 2016
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Net income
$
120

$
126

$
12

$
(138
)
$
120

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
$
120

$
122

$
15

$
(138
)
$
119


 
Forty weeks ended July 3, 2016
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Net income
$
419

$
432

$
35

$
(467
)
$
419

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

(10
)
9


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

(10
)
9


(1
)
Comprehensive income
$
419

$
422

$
44

$
(467
)
$
418


18


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

 
Forty weeks ended July 2, 2017
 
Parent/Issuer
Guarantor Subsidiaries
Non-guarantor Subsidiaries
Eliminations
Consolidated Total
Net cash provided by (used in) operating activities
$
(53
)
$
899

$
55

$

$
901

Cash flows from investing activities








 
Purchases of property, plant and equipment

(467
)
(41
)

(508
)
Purchases of available-for-sale securities

(767
)


(767
)
Sales and maturities of available-for-sale securities

401



401

Payment for purchase of acquired entities, net of cash acquired





Intercompany activity
141



(141
)

Other investing activities

(13
)


(13
)
Net cash provided by (used in) investing activities
141

(846
)
(41
)
(141
)
(887
)
Cash flows from financing activities








 
Purchases of treasury stock





Common stock dividends paid
(132
)



(132
)
Issuance of common stock
43




43

Excess tax benefit related to exercise of team member stock options
5




5

Proceeds from long-term borrowings





Proceed for revolving line of credit





Payments on long-term debt and capital lease obligations
(3
)



(3
)
Intercompany activity

(131
)
(10
)
141


Other financing activities
(1
)



(1
)
Net cash used in financing activities
(88
)
(131
)
(10
)
141

(88
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash


4


4

Net change in cash, cash equivalents, and restricted cash

(78
)
8


(70
)
Cash, cash equivalents, and restricted cash at beginning of period

368

105