Krause Fund Research Spring 2017 Whole Foods Market, Inc. (NASDAQ: WFM)

Recommendation: SELL

Consumer Staples April 17, 2017

ANALYSTS Yue Li [email protected] Current Price: $34.52 Hannah Hendricks Target Price Range: $25.00 – $28.00 [email protected] Rachel Langholz U.S. LARGEST ORGANIC GROCER [email protected] CHALLENGES COMPANY OVERVIEW • Intensifying Competition: Due to a growing number Whole Foods Market, Inc. (NASDAQ: WFM) is of retailers entering the organic food market, WFM has recognized as the nation’s leading natural and organic experienced a stark decline in store traffic and same-store foods grocer within the broader food retail industry. sales. Considering WFM’s recent sluggish performance, we With the unique designation as the first “Certified forecast fewer new stores openings going forward, Organic” supermarket, WFM primarily operates within decreasing from 24 in 2016 to 18 in the CV year. the continental U.S. with smaller presences in Canada • “365 by Whole Foods Market”: Given a shift in and the United Kingdom. The firm largely competes consumer preferences, we anticipate this lower-cost store within its perishable and non-perishable verticals on the format to be the dominant driver of future revenues, basis of product leadership, which relies on high quality accounting for over 80% of additional stores opening in the standards and strong product differentiation. CV year. However, it may not prove to be a viable source Furthermore, WFM has introduced a newer, low-cost for long-term organic growth. store model “365 by Whole Foods Market” to increase • Stock Underperformance: While the S&P 500 its engagement with a broader customer base and increased 15% over the last 12 months, there was only a 4% rebuild its market share lost to large-scale food retailers. gain in WFM, which lost over 50% of its value since October 2013. STOCK PERFORMANCE HIGHLIGHTS • Increased Stake by Activist Investor: Jana Partners 52 Week High $35.58 built an 8.8% stake in WFM to urge accelerated operational 52 Week Low $27.67 improvements to better compete with large-scale grocers. Beta Value 0.89 The dissemination of this news caused WFM’s price to Average Daily Volume 5.70 m surge over 10% on Monday, April 10, 2017.

SHAREHIGHLIGHTS ONE-YEAR STOCK PERFORMANCE Market Capitalization $11.00 b Shares Outstanding 318.56 m Book Value per share $10.34 EPS (Trailing Twelve Months) $1.38 Trailing P/E Ratio 24.92 Dividend Yield 1.60% Dividend Payout Ratio 39.13%

COMPANY PERFORMANCE HIGHLIGHTS ROA 8.19% ROE 13.58%

Sales $15.81 b Source: Yahoo! Finance EXECUTIVE SUMMARY annual rate of 2.1%, as compared to the prior preliminary estimate of 1.9%. iii This upward revision is largely Our team is issuing a SELL rating for Whole Foods supported by higher-than-expected consumer spending. Market, Inc. (NASDAQ: WFM) for the Krause Fund As the economy continues to grow, we expect real GDP portfolio due to the ambiguous prospects ahead of WFM. to reach an annual growth rate of 2.3% in six months. We As the nation’s first and largest organic food grocer, further believe real GDP will experience slow yet steady WFM has long been facing incremental competition from growth to an average annual growth rate of 2.5% into traditional supermarkets, specialty stores, and online 2020. This would lead to a sustainable economy that is retailers entering this niche market. Especially, the recent favorable for corporate operations and employment deteriorating customer traffic and troubling same-store conditions yet not trigger unnecessary concerns over sales have presented the company with a host of potential inflation. challenges. In addition to refining growth strategy to focus on strengthening customer loyalty, WFM has also As the overall economy is expected to strengthen going launched a value-based smaller-size store format named forward, we believe that moderate real GDP growth 365 by Whole Foods Market aiming to regain market indicates a healthy economic environment where share as a response. Although we expect that the unemployment is low and inflation is minimal. Low implementation of these two tactics would mitigate the unemployment would be translated into higher wages, unsatisfactory performance to some degree, it may not be and thus people would demand higher standards of living. sustainable in the long-term. Incorporating all these Minimal inflation would lead to increased buying power, factors into our valuation model, we generated a target which is viewed postively by both consumers and price range of $25.00 – $28.00. While the recent news of producers. All these factors would create a favorable the activist investor seeking potential takeover of WFM consumption environment, enabling companies within the implies upside potential in share price, we believe WFM sector to achieve higher growth in corporate revenues. is overvalued from a fair market value perspective, leading to our recommendation of selling the stock. Inflation Inflation is the upward movement in prices for goods and services and the corresponding depreciation in purchasing ECONOMIC ANALYSIS power.iv It is an important driver since moderate inflation is healthy for the consumer staples sector. v Consumer Gross Domestic Product Price Index (CPI) and Producer Price Index (PPI) are two Real gross domestic product (GDP) is a measurement of indicators widely used to gauge inflation at the retail level the inflation-adjusted value of all goods and services and the wholesale level, respectively. produced by a country within a year.i Given that more than three-fifths of the total GDP is contributed by personal consumption expenditures, of which 30% is spent on nondurables,ii real GDP is an important indicator to consider when evaluating the consumer staples sector.

Source: Bureau of Labor Statistics

According to the latest news release from the Bureau of Labor Statistics, the CPI is up by 2.4% over the 12-month period ending March 2017, which is higher than the

Source: Federal Reserve Economic Data average of 1.8% over the last decade.vi Despite that the PPI Finished Goods fluctuates for the past few years, it Since the recovery from the financial crisis in 2009, there generally keeps the pace with the CPI, as evidenced by has been a steady growth in the U.S. real GDP. In the the graph above. With that being said, consumer staples fourth quarter of 2016, real GDP has increased at an companies are capable of passing on input price increases

2 to consumers over the last two years, relieving them from income to earn higher interests. Additionally, higher sole cost absorption. interest rates create a more expensive environment for capital expenditures. In view of the growing U.S. economy, we believe that the CPI will continue to increase by 0.2% in six months, Unemployment eventually reaching an annual inflation rate of 2.5% in Although firms operating within the consumer staples two to three years. We interpret this level of inflation as a sector produce fundamental goods and services, a steady good sign for the consumer staples sector. Given that demand for their respective products is largely ensured by food, beverages, tobacco, household and personal a reliable source of discretionary income from consumers. products are necessities that are less price elastic, a Consumers spend more on high-margin products when marginal increase in price would not impose a negative they have a higher proportion of disposable income effect on customer demand. Therefore, companies within available. x Hence, low unemployment serves as an the sector are able to maintain units sold while charging important factor in sector performance, as it translates to more for products, ultimately realizing higher revenues. consumers having additional income. Furthermore, a healthy employment environment can ensure lower input Interest Rate prices and in turn lower product prices for end consumers. The Federal Funds Rate, the interest rate charged on inter- bank overnight loans,vii is used by the Federal Reserve to The U.S. has seen a steady decline in the unemployment influence the U.S. economy through adjusting the money rate since the recessionary period ending in 2009. The supply in the market. It sets the benchmark for the cost of most recent measurement for March 2017 exhibited borrowing, which matters to both businesses and further downward movement on a monthly basis, as rates consumers in the consumer staples sector. fell to 4.5%. This represents an annual 0.5% negative change and a 0.2% decrease from the beginning of 2017.xi The economy is currently close to full employment and continues to steadily expand, which leaves minimal room for downward movement in the unemployment rate in the short term. xii In the next six months, unemployment is expected to remain within 0.3% of the current 4.5% level. On a long-term basis, unemployment may hover between 4.6% and 5.0% aided by protectionist economic policies expected to be implemented by the current federal administration.

Source: Federal Reserve Economic Data

While the Federal Reserve has maintained the rate at record lows since the Great Recession in 2008 as a resort to combat the financial crisis, it appears to slowly recover over the past year, reaching a range of 0.75% to 1.00% currently.viii Based on the optimistic prospect of President Trump’s economic plans, we expect two hikes in the Fed Funds Rate within six months. In the long run, we believe that the rate will continue to hike, but the pace is unforeseeable as a result of uncertainty surrounding the Source: Bureau of Labor Statistics economy outlook under Trump’s governance.ix Additionally, an increasingly stringent immigration A higher Fed Funds Rate is triggered by reducing the stance is expected to impact long-term employment money supply in the open market. From a macroeconomic activity. Furthermore, revised immigration policies may view, a contractionary monetary policy would limit weigh negatively on corporate profits within the economic growth but alleviate inflation. With a higher consumer staples sector. A decreased supply of Fed Funds Rate, the cost of borrowing also rises, which undocumented workers in spaces such as food production creates an unfavorable environment for the consumer coupled with a low unemployment rate could force firms staples sector. Consumer spending weakens since to increase their wages to attract more domestic workers. consumers are more inclined to save their disposable 3 This resulting increase in input costs could put weight on sector profit margins.xiii

Consumer Confidence Consumer confidence measures the public’s optimism regarding the overall state of the economy.xiv Normally, higher sales are realized in tandem with stronger consumer optimism,xv which makes it an important index to evaluate for the consumer staples sector.

Consumer confidence rose to 125.6 at the end of March, the highest reading since December 2000.xvi This surge from February’s measurement of 116.1 indicates that Source: Yahoo! Finance consumers are experiencing greater optimism regarding the short-term outlook for business activity, employment, In the near term, we anticipate that the consumer staples as well as personal income. We anticipate the index sector would underperform since the optimistic economic hovering around 125 in six months. Over a long-term outlook would induce investors to turn to more lucrative horizon, we foresee this index at approximately 115 based sectors, such as information technologies and industrials. on our long-term outlook of a stable economy. In the long run, however, we believe that the sector would continue the historical tendency to outperform the market because of its steady growth and low volatility.

INDUSTRY ANALYSIS

Industry Description The food and staples retailing industry within the consumer staples sector is comprised of four sub- industries: drug retail, food distributors, food retail, and hypermarkets & super centers. Hypermarkets and supercenters weigh more than half of the overall industry based on market capitalization, while drug retail claims Source: Federal Reserve Economic Data another one-third. What is more, this industry is largely amalgamated, with Costco Wholesale Corporation As we predict consumers’ optimism to marginally (COST), CVS Health Corp. (CVS), Walgreens Boots diminish in regards to the broader economy in the long Alliance Inc. (WBA), and Wal-Mart Stores Inc. (WMT) run, they will become more conservative in spending their collectively occupying more than 80% of the overall disposable income. While consumers may reduce their industry. expenditures on discretionary products like clothing, they will continue to purchase adequate nondurable goods Industry Trends imperative for living. Consequently, companies in the Online Grocery Shopping: As more people are consumer staples sector will experience stability in sales. surrounded by overloaded schedules, they are turning to online grocery shopping mainly due to its convenience. Capital Market Outlook According to IBISWorld, online grocery sales would Based on the current macroeconomic levels, the U.S grow at 9.5%, reaching $9.4 billion in 2017.xviii Intrigued economy is experiencing moderate growth. xvii By by this lucrative opportunity, Internet companies like extension, the economy is expected to improve and Amazon have entered this emerging market to seize consumer spending will continue to increase. Due to the profits. To safeguard their market share within the defensive safe nature, the consumer staples sector industry, major players like Wal-Mart, Kroger, and generally maintains steady earnings regardless of market Whole Foods have launched comparable online grocery conditions. This nature is attractive to investors during shopping, pick-up, and delivery services.xix Rather than economic downturns, but not during booms. merely using this trend to generate profits, we believe companies should focus on providing satisfactory shopping experience as well.

4 Organic Food Market: The increasing preferences generic products such as WFM’s value-priced brand 365 towards healthy products among consumers has provided Everyday Value. Food retailers also face high competition strong demand for the organic food market. It is projected from mass and discount retailers, which impose additional that the organic food market would continue to grow at downward pressure on pricing. The degree of external 14% annually into 2018, xx encouraging more small competition from supercenters and warehouse clubs has retailers to take advantage of this niche to capture returns. escalated over time since consumers’ preferences for all- Alternatively, mainstream retailers adapt themselves to in-one shopping have increased. Moreover, mass retailers the emerging trend by devoting more shelf space to continue to leverage their economies of scale of their organic products.xxi Furthermore, they are taking steps to operations to offer lower prices for grocery items, a move designate stores exclusively for organic goods. Moving that has and continues to further cut into the market share forward, companies shall seek ways to offer organic of food retailers.xxv products at lower prices that are affordable to more income-restrained individuals, which would help with Threat of New Entrants: Moderate enlarging current customer base. The food retail sub-industry is highly fragmented, with the top three firms accounting for only 30% of industry Mergers and Acquisitions: Nowadays, the intense revenues.xxvi Moderate barriers to enter the sub-industry competition among drugstores, food retailing stores, and exist, primarily in the high level of required initial capital supermarkets has contributed to the prevalence of investments, increasing costs of operation, and pre- acquisitions within the industry. Larger industry players existing distribution relationships among established consider acquisitions as the fast yet reliable approach to retailers and their respective suppliers. These barriers are expand their existing geographic presence and attain only expected to escalate over the long-term. higher earnings. The number of M&A announcements concerning S&P 1500 companies in the food and staples retailing industry has reached 22 for the first half of 2016, as compared to a total of 19 for 2015. xxii Although acquisition provides the easiest way for companies to grow, it is indeed an inorganic type of growth. Studies show that the enormous premiums paid on deals destroy shareholders value most of the times.xxiii Consequently, we anticipate companies relying on utilizing their core competencies and strengths to generate more organic growth.

Industry Climate The current competitive climate within the food retail Source: FactSet sub-industry is high as increasing competition comes from external industry players, including supercenters Moreover, increases in consolidations among U.S. fresh and alternative retailers such as warehouse clubs. produce suppliers and growers further impede new Furthermore, the food retail sub-industry is becoming entrants. However, the lack of necessary licensure to increasingly consolidated as key internal players look to operate within the food retail sub-industry creates entry defend against intense pricing competition.xxiv Specialty opportunities for those looking to engage in the specialty and organic retailers like WFM are seeing their market and organic market. Such entry opportunities played a share decline at the hands of conventional retailers who large role during the 2016 fiscal period when WFM have entered the organic food space and have the capacity realized a low 2.18% year-over-year growth in revenue to offer products at lower prices. within the specialty food retail space due to a combination of new, smaller entrants and existing mass retailers Porter’s Five Forces Analysis entering the organic food space. Over the past five years, Threat of Competition: High "limited assortment" stores have experienced the most Among the leading food retailers, limited product rapid growth. These stores are more compact and efficient differentiation and moderate-to-high consumer mobility than traditional grocery stores and are usually located in create a highly competitive environment. Additionally, populous areas. Sprouts Farmers Market, for instance, accommodative pricing and a wide product selection demonstrated such strong growth behavior with a 21.08% , serve as the primary drivers of competition among major increase in revenues over the 2016 fiscal period.xxvii xxviii players within the food retail sub-industry. Private-label brands have remained popular among consumers following the economic downturn, especially higher-end 5 Threat of Substitutes: Weak satisfies end-consumers, which strengthens supplier Few direct substitutes exist for food retail. Food service power. However, the commodification of retail products is currently the primary alternative; however, in the face by large retailers increases the number of product of increasing obesity and an intensifying focus on healthy substitutes, which can further contract supplier bargaining food choices, it is primarily seen as an accompaniment to power.xxx food retail rather than an absolute replacement. As illustrated by the graphic below, there is a divergence Bargaining Power of Buyers: Moderate between the CPI of food purchased for preparation at Buyers within the food retail sub-industry are comprised home and that for food consumed away from home. The of end-consumers, a stand-alone factor that weakens deflationary pricing environment within the food market buyer bargaining power. The high volume of other buyers for food consumed at home provides additional insight on within the food retail space serves as another factor that why consumers are opting to eat at home and confirms the diminishes individual negotiating power. Price and limited scope of food service as a substitute. convenience continue to be the primary concerns of consumers; however, an increasing emphasis on health- conscious food options has been factored into consumer demand. The need for food retailers to satisfy this unique and dynamic consumer demand marginally increases consumers’ buying power. On the other hand, the implementation of varying types of incentive programs represents a switching cost, which decreases consumer mobility and can reduce long-term buying power. xxxi Specialty and organic retailers can leverage their high- product differentiation to justify high-margin products that, under normal industry standards, would typically be unsustainable. This arguably further weakens buyer bargaining power within the food retail segment. Source: Federal Reserve Economic Data Industry Leaders & Followers Another potential substitute exists in homemade products. We conclude that leaders within the food retail sub- An increasing amount of importance placed on health- industry are mass retailers, such as Kroger who has taken consciousness food options makes this alternative a stake in the organic food market, as well as smaller attractive for consumers who want increased control over specialty retailers like Sprouts Farmers Market who can what they eat. However, this alternative carries proactively react to changes in consumer preferences. On opportunity costs of increased preparation time and the contrary, larger-scale specialty food retailers, such as inconvenience. Many retailers are responding to these WFM, that focus on a smaller segment of consumers with preference changes while offering the benefit of more a higher level of disposable income represent lagging convenient and healthy products, which works to reduce performers in the food retail space. We believe these the threat of homemade substitutes.xxix retailers need to consider alternative growth options to sustain their operational viability. Bargaining Power of Suppliers: Moderate Large retailers typically utilize a wide range of suppliers, Competition which carries various benefits including the mitigation of WFM is distinguished by its high food ingredient risks associated with local sourcing or price volatility and standards, diverse grocery products, and prepared food a lower level of dependency on suppliers. Leading offerings. xxxii The firm primarily focuses on its upper- retailers generally avoid long-term supply contracts and middle class “core-customer” base to sustain its premium depend on established distribution channels to dominate pricing system. This system has been challenged by negotiations. However, specialty and organic retailers’ conventional retailers such as Kroger and Wal-Mart. supply is more limited due to additional quality standards Pressures from these conventional retailers on WFM’s put in place for their products. This product selectivity as pricing structure have translated to weakening store well as the presence of higher switching costs associated traffic accompanied by negative comparable store sales in with seeking out specialty suppliers can weaken such the past six quarters. xxxiii Extended deflationary retailers’ position relative to suppliers. Moreover, conditions in non-organic food products have intensified retailers are increasingly offering their own-brand the competition between WFM and conventional food products in lieu of supplier brands, which can further retailers as well. In a similar manner, an increase in weaken supplier power. Suppliers, on the other hand, can natural and organic food offerings from competing be proactive by having a differentiated product base that conventional retailers has also put downward pressures on 6 WFM’s comparable store sales. The grocer has confirmed underperformance. Despite WFM’s strong gross margin cancellations of two lease agreements and plans to close during 2016, the firm experienced a larger percentage of nine store locations in 2Q 2017.xxxiv This decline in sales negative growth compared to its peers. This relative growth combined with WFM’s high pricing structure, underperformance is due to the intensifying pricing increased marketing expenditures, and continued growth pressures present within the food retail space. WFM efforts have all translated to downward earnings revisions exhibited a higher decrease in gross margin growth for the 2017 fiscal period. xxxv We expect this decline to compared to its peers due to its reliance on premium directly influence management to decrease projected pricing. growth estimates via store expansions in future quarters.

Total Return to Shareholders WFM has realized negative returns during the past 12- month period; however, such behavior in equity pricing within the broader food retail industry is not unfounded. Sprouts Farmers Markets exhibited extremely strong returns the last 12 months, which was attributed in part to its small size, lower price structure, and innate ability to respond quickly to changing customer sentiment. This presents a challenge to WFM as it attempts to penetrate the market where Sprouts Farmers Markets currently dominates through the expansion of its smaller 365 store format. Source: FactSet

As the firm is forced to lower prices to be on par with its more affordable competitors, its gross margin performance has declined accordingly. In the upcoming fiscal periods, we anticipate WFM to marginally decrease its cost of sales as a part of its operational turnaround urged by Jana Partners. With that being said, pricing pressures are only expected to intensify, so the positive net effects of these proposed cost reductions remain uncertain.

Inventory Turnover Inventory turnover is a critical component of evaluating Source: FactSet the short-term asset management efficiencies of food retailers. If firms in this industry fail to improve their On the dividend side, WFM has a relatively high payout inventory management, it can incrementally undercut among its peers and as compared to the industry average future gross margin performance.xxxviii of 1.40%. Although the firm is expected to have moderate growth in its dividend yield, WFM may have to rely more WFM experienced an exceptionally high rate of inventory heavily on share repurchases to effectively return value to turnover of 19.30 during its 2016 fiscal year. This shareholders and fuel share price growth during the turnover indicates that the firm is able to convert its coming fiscal periods.xxxvi inventory to cash in approximately 18.9 days, compared to peer companies which average between 22.9 and 26 Gross Margin days. WFM has historically maintained a turnover ratio For firms within the food retail industry, analyzing between 16.5 and 21.4 times, which translates to an profitability margins serves as an effective method to average days inventory outstanding between 17.1 and evaluate a firm’s product mix and operational 22.1 days. Problematically, WFM exhibited negative efficiencies.xxxvii WFM had a relatively high gross margin annual growth in its inventory turnover during 2016. We during the 2016 fiscal year stemming from its diverse anticipate the firm to realize marginal decreases regarding product offerings and premium-pricing model. The firm’s its inventory management efficiency during the first two primary competitors all have a similarly lower gross years of the forecast horizon with stabilization occurring margin level most likely due to their lower cost structures. in the latter half. However, the larger consumer base that WFM’s competitors’ service make up for their respective 7 the preferences of millennial individuals who are typically characterized as being both health conscious and value driven. Extensive food retail market research shows that 42% of millennial grocery shoppers find private label foods more innovative than branded products, and 70% of millennials believe that the quality of these store brand products has increased in recent years.xxxix Due to these preferences, premium private label brands have gained a growing popularity among the millennial demographic. Furthermore, millennials have popularized stores that sell premium private label foods. We believe that WFM should be proactive in reacting to this preference change Source: FactSet by placing more importance on private-label products in order to embrace more customers. This will enable the Same Stores Sales firm to pivot the focus of its product mix to healthier, The same-store sales metric serves as an industry-specific value-added products and facilitate a resurgence in measurement of the sales in retail locations that have been market share. open for at least one year. Evaluating the growth behaviors of this metric on a year-over-year basis Key Investment Positives/Negatives provides additional insight into the underlying factors of Positives: Overall, the industry is defensive in its non- sales trends for retail companies. Compared to its peers, cyclical movement relative to the broader market. This WFM exhibited negative same-stores sales growth during represents a form of insulation from risks associated with the 2016 fiscal year. This relative underperformance drastic systemic changes in market behavior and provides primarily stems from lower levels of store traffic a haven for investors during economic downturns. compounded by escalating pricing pressures from large- scale retailers like Publix and Kroger. Negatives: As part of its defensive nature, the industry generally underperforms when the overall market is experiencing strong performance. Year to date through April 17, 2017, the S&P 500 Food Retail Index fell 3.28%, compared to a 12.55% rise in the S&P 500. xl Consequently, investors that are more-risk tolerant may find the industry unattractive in a bullish market. Mature food retailers with higher market capitalizations have historically adopted a volatile dividend payout policy, which does not effectively return wealth to shareholders. Firms such as WFM who depend heavily on a small consumer base with a high level of income are subjecting its revenue streams to a corresponding level of risk that investors may want to avoid. Source: FactSet

Smaller, organic retailers, such as Sprouts Farmers COMPANY ANALYSIS Market, also represent a pervasive source of competition to WFM with their ability to generate sales growth though General Overview more affordable pricing models. If WFM is successful in Business Description: As the first and largest certified expanding its lower-priced offerings and executing its organic retailers in the U.S., Whole Foods Market strives operational turnaround to better compete with its peers, to offer products of high quality that differentiate itself we anticipate its same-stores sales to slightly improve in from other stores. Incorporated in 1978 and based in a similar manner as its sales-per-square-foot metric over Austin, Texas, WFM has exerted a substantial influence the forecast horizon. on the natural and organic foods movement throughout the nation, helping organic foods gain increasing Catalysts for Growth/Change popularity among consumers over the past 38 years. Millennial Emergence: Millennials have emerged as the WFM sells a wide range of organic products, with a most populous generation in the U.S. As this group’s primary focus on perishable foods. disposable income rises, industry operators will increasingly augment their services in accordance with 8 Corporate Strategy: Rather than its prior strategy of expanding through new store openings, WFM has recently refined the growth strategy to strengthen core customer loyalty. As WFM places additional emphasis on its customers, it is currently pursuing diversification directed by creating smaller stores with lower-priced products. WFM has become more nimble in the way it responds to millennial demand in the creation of their value-based concept store 365 by Whole Foods Market. Moving towards that goal, the company is enhancing technology applications to understand its customer base more thoroughly. Source: WFM 2016 Form 10-K Recent Earnings and Managerial Guidance Analysis In Q1 of WFM’s fiscal year 2017, total sales grew 1.8% New Initiatives: WFM introduced a new store format, 365 from prior year to a record $4,918 million. A more by Whole Foods Market, in 2016 in accordance with its informative way to analyze the earning release is by growth plan. Three 365 by Whole Foods Market stores are focusing on the “comps,” a metric commonly used by in operation as of 2016, and the company expects to open retail companies to compare same-store sales to the four more in fiscal year 2017. This expansion of the WFM previous year. xli WFM reports a negative 2.4% in brand is expected to increase its market reach in both comparable-store sales, the sixth consecutive decline in existing and new markets. Additionally, the more “comps” since the fourth quarter of fiscal year 2015. In condensed store model will enable the grocer to enter new other words, WFM has been utilizing store additions as its markets with more ease. This brand expansion, along with primary vehicle to sustain growth, which is an inorganic a lower cost model, is expected to help WFM gain access growth strategy The newly-added stores are essentially to incremental customers that are outside of its traditional cannibalizing pre-existing locations for WFM’s own customer base and who have the potential to drive customers.xlii category performance.xliii Moreover, the new brand will allow WFM to compete more effectively in the Realizing the vulnerability of its growth strategy, the increasingly homogenized organic foods environment.xliv management team has provided guidance in terms of re- defining its strategy. The management team is Product Market: As of September 2016, only 20 out of abandoning the goal of operating 1,200 stores nationwide WFM’s 456 total stores are located overseas, specifically along with the relocation of three existing stores to more Canada and the U.K., accounting for a marginal 3% of the favorable destinations. In the meantime, the company will total revenues. Hence, WFM is predominantly a close nine stores in order to re-position itself to better domestic-focused business. While WFM is serve its core customers. These disappointing decisions, geographically widespread in the continental United together with the strategy modification, depict an States, it has a weaker presence in the Midwest. We indeterminate prospect for WFM, and thus we expect its believe a further expansion within this area to attract stock price to fluctuate. latent new customers, rather than clustering new stores around established locations will add more value to the Products & Markets company. Product Lines: WFM operates in one segment – the natural and organic foods supermarkets – with two major Marketing Strategy: In contrast to traditional product categories: perishables, and non-perishables. The supermarkets who invest tremendously in advertising, perishables category is further divided into prepared WFM relies predominantly on word-of-mouth foods and bakery, and other perishables, for example, recommendations and customer testimonials to promote fresh vegetables. As indicated by the following graph, products. Advertising unique products to existing approximately two-thirds of total revenues stem from customers to increase basket size is another typical perishables, fulfilling WFM’s emphasis on perishable marketing tactic of WFM.xlv As millennials are a primary foods. Moreover, these three categories have maintained target market of the company, the investment in social a stable contribution to overall revenues in the last three media exposure will assist in engaging with customers. years, of which we believe to continue in the future. Moreover, WFM devotes itself to environmental sustainability and public welfare, which in turn conveys a positive brand image to customers.

9 Significant Customers: Instead of a particularly large have a higher level of discretionary income and willing to customer base, WFM has a more concentrated customer place a premium on product quality. base. As suggested by the trademark “America’s Healthiest Grocery store,” WFM positions itself towards S.W.O.T. Analysis health-conscious individuals. Studies demonstrate that Strengths millennials and working parents at the ages from 30 to 50 High Quality Standards: WFM believes that its quality represent the most common customers at an average standards set it apart from other supermarkets, which has Whole Foods store.xlvi In comparison to the 65 and older facilitated the company to main a strong customer base. demographic that is projected to grow at a rate of over Banning hundreds of ingredients commonly sold in other 60% between 2014 and 2030, the working-age population stores, WFM is able to attract customers willing to pay a is expected to increase at a much slower rate of 5.09% premium for high quality foods.xlix Although WFM has over the same interval. xlvii Admittedly, WFM faces seen its market share decline at the hands of large-scale challenges as it appears limited to its current customer grocers, we believe the firm’s pioneering of high product base. However, on the basis of this demographic shift, it standards coupled with its loyal customer base would help can realize much more if it tries to target products at the it retain its position within the organic food space. older population in the coming decades as well. Favorable Industry Trends: Over the past fiscal periods, Merchandising Process and Suppliers: WFM is dedicated there has been increased awareness regarding long-term to procuring only quality products from local, regional well-being and the role of healthy eating that contributes and national producers. Most of the procurement takes to overall wellness. Customer concerns regarding ethical place at the regional and national levels, which aids WFM food sourcing and overall environmental health are in negotiating discounts based on volume purchased with becoming increasingly important alongside more major vendors. United Natural Foods is the single largest traditional factors such as price and store ambiance. We supplier of WFM, accounting for roughly 32.5% of believe WFM will continue to lever its existing reputation WFM’s total purchases in 2016. Due to its dependence on of corporate social responsibility to strengthen its market this third-party supplier, WFM has designated United share and maximize its engagement with health-oriented Natural Foods as its primary dry grocery and frozen food consumers. supplier through 2025 to strengthen their long-term relationship. However, a unilateral termination of the Weaknesses agreement from United Natural Foods could still have an “Whole Paycheck” Image: In a study that compared adverse impact on WFM’s operations if an alternative prices of 14 grocery items at WFM with comparable items supplier is not in place. Moreover, any interruption or at rival stores, WFM was the most expensive. inability of United Natural Foods in delivering products Additionally, six out of the eight more costly items at would materially interfere WFM’s normal course of WFM were 40% more expensive than the next cheapest business. option elsewhere.l This quantifiable high-cost of WFM’s products has translated into a negative perception of the Catalysts for Growth/Change firm’s underlying business model and in turn has shut out Potential Takeover: Due to recent headwinds in WFM’s a large segment of end-consumers. growth, Jana Partners LLC has built up an 8.8% stake in the firm on April 10, 2017. The activist investor is urging Declining Same Store Sales: WFM’s comparable store the company to improve its technology and operational sales has decreased year over year by 2.5%, and Q1 2017 efficiencies and is exploring the option of an eventual has witnessed the sixth consecutive quarter of negative sale. Looking forward, this urgency from Jana Partners to same-store sales. This consistent decline in sales growth turn around the firm’s pricing practices and increase is partially attributed to a growing amount of organic outlays in technology are expected to yield operational product offerings by large mainstream retailers such as improvements, and in turn, increase WFM’s ability to Kroger and Costco Wholesale. This data resulted in a compete with its large-scale grocer peers.xlviii downward revision in sales growth forecasts and management voicing a need for the firm to “thin out” its Refining of Growth Strategy: WFM is in the process of presence in certain markets. li We see this continued refining its growth strategy to best serve its core decline in critical same-store sales growth combined with customers as well as adjust its current model utilizing management’s downward earnings guidance for the advanced data analytics. Moreover, the firm is investing remainder of the 2017 fiscal period to be an overall in data management capabilities so as to directly address negative prospect for mid-term operational performance. its customers’ preferences of safety and healthy consumption. Such efforts are expected to help the firm increase its loyalty among its existing customers who 10 Opportunities the increasing competitive organic products market, we Online Grocery Shopping: As WFM’s customer expect WFM to cut down its new store openings moving demographic is shifting and transitioning to participate in forward. Hence, the number of new stores opened is the expanding online market, we believe that providing predicted to be 20 each year for the following two years, online shopping services would be beneficial for the which is then level off to 18 per year in 2020 and beyond. company. WFM has initiated a partnership with the Additionally, with WFM’s emphasis of the 365 concept delivery service provider Instacart to expand its online stores, we believe this concept format would gradually grocery shopping strategy. lii WFM can further expand dominate future new store openings, eventually this capability to the majority of its brick and mortar accounting for 89% of newly opened stores in 2021. stores in order to better compete with online retailers to satisfy consumers who prioritize convenience in their shopping.

Private Label Penetration: One of the firm’s top priorities is increasing the exposure of its private brands.liii WFM’s smaller format store, 365 by Whole Foods Market, is modeled after the firm’s lower-cost, private brand 365 Everyday Value. This venture by WFM is concurrent with Kroger expanding its own corporate brands in addition to general retailers, such as Wal-Mart’s opening smaller “express” locations. We believe that a successful expansion of the 365 store format and private-label brands Source: Forecasted F/S would allow WFM to compete more aggressively with general grocers and potentially reclaim market share lost Average Square Feet per Store: We assume a traditional from said competitors. Whole Foods store and a 365 concept store with a typical size of 45,000 and 30,000 square feet, respectively. We Threats then calculate the total square feet of retail space before Competition: As industry trends show a more health- coming to our estimation of average size per store. The conscious U.S. population, other grocers and companies declining average size in later years is consistent with our have prioritized health-centered products. During the last prediction of 365 concept stores dominating new store few years, WFM has experienced competition from new openings. entrants including Sprouts Farmers Market and Trader Joe’s as well as traditional grocers like Kroger and Costco Sales per Square Feet: The increasing additions of 365 who have been expanding their organic offerings. If the concept store, which produces higher sales with a smaller firm’s lower-cost stores and private label brands do not size, would exert a positive effect on sales per square feet. successfully expand its market reach, WFM may continue Given the existing large base of Whole Foods traditional to see sluggish sales growth stemming from its limited stores, we doubt sales per square feet would improve over consumer base. the five-year horizon. Rather, we anticipate this parameter to continue declining, but with a slower pace year over year. We forecast sales per square feet declining to $848 VALUATION ANALYSIS million in 2017, stabilizing around $820 million beginning in 2019. Key Assumptions Revenue Decomposition: Based on our long-term forecast of the 2.5% real GDP growth and WFM’s historical performance, we anticipate that WFM as an off-cyclical consumer staples company would grow its revenue at a gradual pace, maintaining a rate of 2.47% into the steady growth rate period. We decompose WFM’s revenue by number of stores, average square feet per store, and sales per square feet.

Number of Stores: We derive our forecast of 24 new stores opening, three of which are 365 by Whole Foods Market, in 2017 from the most recent financial report. In view of Source: WFM 2016 Form 10-K, Forecasted F/S 11 Based on our forecast of the above parameters, we derive Weighted Average Cost of Capital (WACC) the resulting total sales and yearly growth rates. Given the Cost of Equity: We estimate the cost of equity for WFM historical stable contribution to the overall revenue from based on the Capital Asset Pricing Model (CAPM). We three different product categories, we allocate revenue to use the current yield to maturity (YTM) of 2.92% on the individual category by applying the corresponding 30-year Treasury bond as the risk-free rate. We derive the average historical percentage to total sales. risk premium of 4.51% from Aswath Domodaran’s implied equity risk premium as of 4/1/2017. liv After Cost of Goods Sold: With more 365 concept stores that examining various unadjusted raw betas produced by provide affordable options in existence, theoretically the Bloomberg, we determine a beta of 0.89 would best gross profit percentage would drop, which in turn implies represent the current risk exposure of WFM. These inputs a larger portion of sales revenue would be consumed by result in a cost of equity of 6.95%. cost of goods sold. However, we believe the technology and distribution improvement impelled by Jana Partners Cost of Debt: We estimate the pre-tax cost of debt for would exert a much stronger impact on lowering the cost WFM by adding a reasonable default premium to the risk- of goods sold. As a result, we forecast cost of goods sold free rate of 2.92%. To derive the default premium, we first as a percentage of sales to decrease by 5 basis points in researched the average default premium within consumer 2017, stabilizing at 62.39% thereafter. staples sector via Bloomberg based on WFM’ current debt rating of BBB-.lv However, there is too few data pertinent Pre-Opening Expenses: As we expect fewer new stores to BBB- rating bonds, and thus we expanded our openings by WFM, it is reasonable to lower our prediction estimation to include all BBB+, BBB, and BBB- bonds to of future pre-opening expenses. We therefore forecast a avoid biased representation. Additionally, we believe drop of 2 basis points in future pre-opening expenses as a averaging the typical default premium for both consumer percentage of sales during years when there is a decline in staples sector and consumer discretionary sector better the number of stores newly opened. portrays the nature of WFM. After taking all these procedures into account, we calculate a default premium Relocation, Store Closure & Lease Termination Costs: of 1.993%, producing a pre-tax cost of debt of 4.91%. Given the stark competition within the organic products With a marginal tax rate of 38.69%, we get an after-tax market and WFM’s recently re-position of its growth cost of debt of 3.01%. strategy, we anticipate additional store relocation and closure in the coming future. As a result, we factor this WACC: We determine WFM’s current market opinion in our forecast by adding 5 more basis points of capitalization to be its market value of equity and we sales every year to relocation, store closure & lease estimate the market value of debt by adding the present termination costs. value of operating leases to the debt value taken from the balance sheet. Consequently, we generate a capital Selling, General & Administrative Expenses: We believe structure comprising of 60.50% equity and 39.50% debt the majority of the operational efficiency urged by Jana for WFM. Our calculation yields a WACC of 5.39%. Partners would be realized in the selling, general and administrative departments. As a result, we forecast Discounted Cash Flow & Economic Profit Models selling, general & administrative expenses as a percentage The discounted cash flow (DCF) and economic profit of sales to decrease by 0.1% to 28.44% in 2017, which is (EP) models utilize the key value drivers of net operating then followed by a decline of 2 basis points annually in profit less adjusted taxes (NOPLAT) and invested capital later years. (IC). These two value drivers are then used to calculate the future free cash flows (FCF) and EP values for each Long-Term Debt: We forecast long-term debt as a respective model during the 5-year horizon. From both constant percentage of prior year’s total non-cash assets models, we calculate an unadjusted intrinsic stock price to maintain a stable capital structure. Since most of of $24.71. An adjustment to bring the price from the WFM’s debt comes from off-balance sheet operating previous fiscal year end to the current date produces a leases, long-term debt, which is comprised of solely target price of $25.44. This adjusted price suggests that capital lease obligations, has been a relatively small WFM is currently overvalued by 35.69% relative to its portion of total liabilities for five years prior to 2016. stock price of $34.52. Given that WFM has just completed the offering of its $1 billion senior note due 2025 last year, we thereby We have taken a more conservative approach with a determine the 18.98% derived from the 2016 figure to be slightly negative outlook when projecting sales growth the proper factor in our estimation of long-term debt. over the five-year forecast horizon. This is primarily based on the firm’s negative comparable store sales realized in the past six quarters as well as management’s 12 Q1 2017 downward revision in store growth. WFM is still These firms are selected on the basis of their market expected to realize consistently positive FCF due to penetration within the food retail space, their relative equally consistent NOPLAT values over its forecast profiles of operations, and their market capitalizations horizon. Additionally, we anticipate the firm’s return on relative to WFM’s $11 billion. Larger, non-organic and invested capital (ROIC) to deteriorate during the first specialty food retailers are included in the analysis, such three years of the forecast horizon due to the continued as Wal-Mart and Kroger, due to being directly capital expenditures in the face of moderate growth. competitive with WFM. Thereafter, ROIC is expected to stabilize at 7.10% facilitated by a recovery in sales growth. We arrive at an intrinsic price between $28.70 and $30.73 based on the two and one-year industry average forward We believe that the DCF and EP valuation methodologies P/E ratios and WFM’s 2018 and 2017 EPS estimates, yield the most accurate intrinsic stock price due in part to respectively. This suggests an overvaluation between the fact that WFM uses the same methodology for its own 12.33% and 20.28% based on the current stock price of valuation purposes.lvi Furthermore, the DCF method takes $34.52. The resulting target stock prices are slightly into consideration multiple operating metrics such as higher than both of those calculated using the DCF/EP comparable store sales growth, underlying economic and DDM valuation methodologies, most likely due to the indicators such as demographic changes, and projected smaller stock of underlying operating metrics built into invested capital (IC) when calculating a final target price. the relative valuation model.

Dividend Discount Model In summary, the combination of the firm’s inflated stock The dividend discount model yields an intrinsic stock price due to market expectations of a possible takeover price of $26.76. The adjustment from the previous fiscal and all four models yielding relatively low intrinsic stock year end to the current date brings the target price to prices indicates that WFM is currently overvalued. This $27.54. This price from the DDM method suggests that further validates our decision to “sell” WFM and take no WFM is currently overvalued by 25.34% relative to its action on the security. current trading price. This method relies heavily on WFM’s future dividend payout policy, which we have SENSITIVITY ANALYSIS forecasted to increase for the duration of the forecast horizon based on managerial guidance. Although the Beta vs. Risk Premium adjusted price is close to the stock price derived from the We are interested in testing the impact of changes in DCF and EP models, WFM has exhibited a somewhat WACC on the valuation, as both beta and the risk volatile dividend payout policy in the past six fiscal premium are primary components in the WACC periods. This historical dividend behavior makes us calculation. Holding other variables constant, a 0.3% hesitant to rely heavily on the DDM valuation change in the risk premium yields a value from $22.79 to methodology as an accurate calculation of WFM’s $28.41 while a 0.6 change in beta yields a value from intrinsic price. $22.76 to $28.44. Overall, these assumptions have the most significant influence on the final valuation. Relative P/E Valuation Our relative valuation model consists of seven firms WACC vs. CV NOPLAT Growth within the broader food retailing industry, including two In comparing these two metrics, we are interested in organic/specialty retailers that directly compete with observing how a decrease in the cost of borrowing would WFM. affect the share price through sales growth. We forecast the CV NOPLAT growth to be the same as the growth rate Share of sales revenue in the CV year, which is affected by the Company Name P/E 17 P/E 18 Price ability to borrow cheaply. On the upside, a 0.3% increase Costco Wholesale $ 169.70 29.9 26.4 in CV NOPLAT growth, together with a decrease in Kroger $ 30.00 13.6 12.9 WACC of 0.3% generates a value of $34.50, representing Ingles Markets $ 44.40 16.1 15.1 approximately 35.61% increase in the intrinsic value. Natural Grocers $ 10.82 22.1 20.0 %COGS of Sales vs. %SG&A of Sales Sprouts Farmers Market $ 22.94 26.1 22.7 Cost of goods sold (COGS) and selling, general and SpartanNash $ 35.18 15.2 14.3 administrative (SG&A) expenses comprise the largest Wal-Mart Stores $ 73.49 17.0 16.2 proportion of expenses. Since we factor potential cost- Whole Foods Market $ 34.52 22.5 21.9 saving benefits from technology, distribution, and Source: Bloomberg, FactSet operational improvement pressured by Jana Partners into

13 our assumptions for both accounts, we are interested in not a complete compilation of data, and its accuracy is not how variation in these costs would affect the stock price. guaranteed. From time to time, the University of Iowa, its If both costs as percentages of sales are to increase 0.3%, faculty, staff, students, or the Krause Fund may hold a WFM would exhibit a price of $18.98. By contrast, if the financial interest in the companies mentioned in this cost-cutting activities are more effective than we report. anticipate, a 0.3% reduction in both costs would generate a price of $31.90.

Pre-Tax Cost of Debt vs. Marginal Tax Rate In a political environment where tax rates are likely to change, we are interested in the effect of a change in the marginal tax rate and the pre-tax cost of debt. As an average of debt ratings is used in the computation of the default premium, we are aware of the subjectivity in the calculation and how that may impact WFM’s intrinsic value. A $0.23 price increase is realized should both rates decrease 0.3%. Holding other variables constant, a rise in the pre-tax cost of debt to 5.21% would bring the price to $25.59.

Risk-Free Rate vs. CV ROIC Growth As interest rates have been rising in the general economy, we want to test how an equivalent increase in the risk-free rate and CV ROIC growth could impact the company’s intrinsic value. A 0.3% increase in the risk-free rate, accompanied by an equivalent rise in the growth rate of ROIC in the CV year, results in a price of $23.05.

Capital Expenditures vs. %Depreciation of Net PPE Given that the majority of WFM’s capital expenditures are related to new stores openings, we acknowledge that any variation in the number of new stores to be opened would have a significant influence on WFM’s capital investments. Should WFM incur 3% less capital expenditures in 2017, together with a 0.3% change in depreciation as a percentage of net PPE, a price range of $25.48 to $26.04 would be generated.

IMPORTANT DISCLAIMER

This report was created by students enrolled in the Applied Equity Valuation (FIN:4250) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is

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16 Whole Foods Market, Inc. Key Assumptions of Valuation Model

Ticker Symbol WFM Current Share Price $34.52 Current Model Date 4/17/2017 Fiscal Year End Sept.25

Pre-Tax Cost of Debt 4.91% Beta 0.89 Risk-Free Rate 2.92% Equity Risk Premium 4.51% Cost of Equity 6.95% WACC 5.39% CV Growth of NOPLAT 2.47% CV Growth of EPS 2.47% CV Growth of ROIC 7.10% Current Dividend Yield 1.62% Marginal Tax Rate 38.69% Effective Tax Rate 38.70% Whole Foods Market, Inc. Revenue Decomposition (in millions, expect for store number & size data) Fiscal Years Ending Sept.25 2014 2015 2016 2017E 2018E 2019E 2020E 2021CV Retail Store Number of Stores 399 431 456 480 500 520 538 556 Year-Over-Year Growth 10.22% 8.02% 5.80% 5.26% 4.17% 4.00% 3.46% 3.35% Average Sq. Ft. per Store 38,000 38,573 39,035 39,240 39,230 39,106 38,885 38,651 Year-Over-Year Growth -0.17% 1.51% 1.20% 0.52% -0.02% -0.32% -0.57% -0.60% Total Sq. Ft. of Retail Space 15,162,000 16,625,000 17,800,000 18,835,000 19,615,000 20,335,000 20,920,000 21,490,000 Year-Over-Year Growth 10.04% 9.65% 7.07% 5.81% 4.14% 3.67% 2.88% 2.72% Sales per Sq. Ft. 936 926 883 848 831 822 819 817 Year-Over-Year Growth -0.14% -1.12% -4.57% -4.00% -2.00% -1.08% -0.36% -0.24% Total Sales $ 14,194 $ 15,389 $ 15,724 $ 15,972 $ 16,300 $ 16,715 $ 17,133 $ 17,557 Year-Over-Year Growth 9.89% 8.42% 2.18% 1.58% 2.05% 2.55% 2.50% 2.47%

Product Category Perishables: Prepared Foods & Bakery $ 2,725 $ 2,924 $ 2,972 $ 3,035 $ 3,100 $ 3,180 $ 3,253 $ 3,334 Year-Over-Year Growth 11.04% 7.29% 1.64% 2.12% 2.16% 2.57% 2.31% 2.46% Other Perishables 6,756 7,310 7,485 $ 7,568 $ 7,735 $ 7,941 $ 8,136 $ 8,337 Year-Over-Year Growth 10.82% 8.19% 2.39% 1.11% 2.22% 2.66% 2.46% 2.47% Non-Perishables 4,712 5,155 5,268 $ 5,370 $ 5,464 $ 5,594 $ 5,744 $ 5,886 Year-Over-Year Growth 7.94% 9.40% 2.18% 1.94% 1.76% 2.38% 2.67% 2.49% Total Sales $ 14,194 $ 15,389 $ 15,724 $ 15,972 $ 16,300 $ 16,715 $ 17,133 $ 17,557 Year-Over-Year Growth 9.89% 8.42% 2.18% 1.58% 2.05% 2.55% 2.50% 2.47% Whole Foods Market, Inc. Income Statement (in millions, except per share data) Fiscal Years Ending Sept.25 2014 2015 2016 2017E 2018E 2019E 2020E 2021CV Sales $ 14,194 $ 15,389 $ 15,724 $ 15,972 $ 16,300 $ 16,715 $ 17,133 $ 17,557 Cost of Goods Sold 8,773 9,534 9,815 9,965 10,169 10,429 10,689 10,954 Depreciation & Amortization 377 439 498 534 550 573 596 615 Gross Profit 5,044 5,416 5,411 5,473 5,580 5,714 5,848 5,988 Selling, General & Administrative Expenses 4,032 4,472 4,477 4,543 4,633 4,748 4,863 4,980 Pre-Opening Expenses 67 67 64 64 64 65 66 67 Relocation, Store Closure & Lease Termination Costs 11 16 13 14 15 16 17 19 Operating Income 934 861 857 852 869 885 902 922 Interest Expense - - 41 52 56 58 59 61 Investment & Other Income 12 17 11 9 10 10 10 10 Income before Income Taxes 946 878 827 791 803 818 833 851 Provision for Income Taxes 367 342 320 306 311 316 322 329 Net Income $ 579 $ 536 $ 507 $ 485 $ 492 $ 501 $ 510 $ 521

Total Shares Outstanding 360 349 318 316 313 309 306 297 Basic EPS $ 1.57 $ 1.49 $ 1.55 $ 1.54 $ 1.57 $ 1.62 $ 1.67 $ 1.75 Dividends per Share $ 0.48 $ 0.52 $ 0.54 $ 0.56 $ 0.58 $ 0.60 $ 0.64 $ 0.68 Whole Foods Market, Inc. Balance Sheet (in millions) Fiscal Years Ending Sept.25 2014 2015 2016 2017E 2018E 2019E 2020E 2021CV Assets Current Assets: Cash & Cash Equivalents $ 190 $ 237 $ 351 $ 630 $ 741 $ 810 $ 849 $ 757 Short-Term Investments 553 155 379 388 398 408 418 428 Restricted Cash 109 127 122 131 132 134 138 141 Accounts Receivable 198 218 242 248 252 259 265 272 Merchandise Inventories 441 500 517 530 539 554 567 581 Prepaid Expenses & Other Current Assets 97 108 167 171 174 179 183 188 Deferred Income Taxes 168 199 197 212 228 244 259 271 Total Current Assets 1,756 1,544 1,975 2,312 2,463 2,587 2,679 2,638 Net Property & Equipment 2,923 3,163 3,442 3,553 3,698 3,852 3,984 4,071 Long-Term Investments 120 63 ------Goodwill 708 710 710 710 710 710 710 710 Net Intangible Assets 81 79 74 68 63 58 53 49 Deferred Income Taxes 132 144 100 110 123 134 134 132 Other Assets 24 38 40 28 30 32 33 34 Total Assets $ 5,744 $ 5,741 $ 6,341 $ 6,780 $ 7,088 $ 7,372 $ 7,593 $ 7,634

Liabilities and Shareholders' Equity Current Liabilities: Current Installments of Long-Term Debt $ 2 $ 3 $ 3 $ 3 $ 3 $ 3 $ 4 $ 4 Accounts Payable 276 295 307 325 325 335 341 351 Accrued Compensation 379 436 407 430 442 449 460 468 Dividends Payable 43 45 43 44 45 46 49 51 Other Current Liabilities 557 473 581 603 632 652 651 677 Total Current Liabilities 1,257 1,252 1,341 1,406 1,448 1,486 1,504 1,551 Long-Term Debt 60 62 1,048 1,137 1,167 1,204 1,245 1,280 Deferred Lease Liabilities 548 587 640 686 709 727 753 772 Other Long-Term Liabilities 66 71 88 76 81 85 89 91 Total Liabilities 1,931 1,972 3,117 3,305 3,405 3,503 3,591 3,694 Shareholders' Equity: Common Stock 2,863 2,904 2,933 3,181 3,429 3,677 3,925 3,967 Common Stock in Treasury, at Cost (711) (1,124) (2,026) (2,330) (2,679) (3,054) (3,482) (3,900) Accumulated Other Comprehensive Income (Loss) (7) (28) (32) (32) (32) (32) (32) (32) Retained Earnings 1,668 2,017 2,349 2,656 2,965 3,279 3,591 3,905 Total Shareholders' Equity 3,813 3,769 3,224 3,475 3,683 3,870 4,002 3,940 Total Liabilities and Shareholders' Equity $ 5,744 $ 5,741 $ 6,341 $ 6,780 $ 7,088 $ 7,372 $ 7,593 $ 7,634 Whole Foods Market, Inc. Cash Flow Statement (in millions) Fiscal Years Ending Sept.25 2014 2015 2016 Cash Flows from Operating Activities Net Income $ 579 $ 536 $ 507 Adjustments to reconcile net income to net cash provided by operating activities: Add: Depreciation & Amortization 377 439 498 (Increase)/Decrease in Deferred Income Taxes Assets (78) (43) 47 Increase/(Decrease) in Deferred Lease Liabilities 36 32 43 Other, Net 121 130 76 Change in Working Capital Accounts: (Increase)/Decrease in Accounts Receivable (14) (21) (24) (Increase)/Decrease in Merchandise Inventories (25) (60) (18) (Increase)/Decrease in Prepaid Expenses & Other Current Assets (4) (9) (59) Increase/(Decrease) in Accounts Payable 30 20 13 Increase/(Decrease) in Accrued Compensation 12 58 (29) Increase/(Decrease) in Other Current Liabilities 54 47 62 Net Cash Provided by Operating Activities 1,088 1,129 1,116 Cash Flows from Investing Activities (Increase)/Decrease in Restricted Cash 2 (19) 4 Sale/(Purchase) of Available-For-Sale Securities 334 434 (162) Capital Expenditures (710) (851) (716) Purchases of Intangible Assets (20) (3) (2) Payment for Acquisition (73) (4) (11) Other, Net (17) (12) (8) Net Cash Used for Investing Activities (484) (455) (895) Cash Flows from Financing Activities Issuance of Short-Term Debt - - 300 (Payment)/Issuance of Long-Term Debt (1) - 693 Payment of Dividends (170) (184) (177) Issuance of Common Stock 42 66 19 Repurchase of Common Stock (578) (513) (944) Other, Net 9 9 (4) Net Cash Used for Financing Activities (698) (622) (113)

Effect of Exchange Rate Changes on Cash (6) (5) 6

Net Increase/(Decrease) in Cash (100) 47 114 Cash, Beginning of Year 290 190 237 Cash, End of Year $ 190 $ 237 $ 351 Whole Foods Market, Inc. Cash Flow Statement (in millions) Fiscal Years Ending Sept.25 2017E 2018E 2019E 2020E 2021CV Cash Flows from Operating Activities Net Income $ 485 $ 492 $ 501 $ 510 $ 521 Adjustments to reconcile net income to net cash provided by operating activities: Add: Depreciation & Amortization 534 550 573 596 615 (Increase)/Decrease in Deferred Income Taxes Assets (25) (29) (26) (15) (10) Increase/(Decrease) in Deferred Lease Liabilities 46 22 18 26 19 Change in Working Capital Accounts: (Increase)/Decrease in Accounts Receivable (6) (4) (7) (6) (7) (Increase)/Decrease in Merchandise Inventories (13) (8) (15) (13) (14) (Increase)/Decrease in Prepaid Expenses & Other Current Assets (4) (3) (5) (4) (5) Increase/(Decrease) in Accounts Payable 18 (0) 10 6 10 Increase/(Decrease) in Accrued Compensation 23 11 7 11 8 Increase /(Decrease) in Dividends Payable 1 1 1 2 2 Increase/(Decrease) in Other Current Liabilities 22 29 20 (1) 27 Net Cash Provided by Operating Activities 1,082 1,062 1,077 1,112 1,167 Cash Flow from Investing Activities Increase in Restricted Cash (9) (1) (2) (4) (3) Purchase of Short-Term Investments (9) (10) (10) (10) (10) Capital Expenditures (639) (691) (721) (724) (698) Sale/(Purchase) of Other Assets 12 (2) (1) (1) (1) Net Cash Used for Investing Activities (646) (703) (734) (739) (712) Cash Flow from Financing Activities Payment of Current Installments (3) (3) (3) (3) (4) Issuance of Long-Term Debt 92 34 41 44 38 Proceeds from Other Long-Term Liabilities (12) 5 4 3 3 Payment of Dividends (178) (183) (188) (198) (208) Issuance of Common Stock 248 248 248 248 42 Repurchase of Common Stock (304) (349) (375) (428) (418) Net Cash Used for Financing Activities (157) (249) (273) (333) (547) Net Increase/(Decrease) in Cash 279 111 70 39 (92) Cash, Beginning of Year 351 630 741 810 849 Cash, End of Year $ 630 $ 741 $ 810 $ 849 $ 757 Whole Foods Market, Inc. Common Size Income Statement (% of sales) Fiscal Years Ending Sept.25 2014 2015 2016 2017E 2018E 2019E 2020E 2021CV Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of Goods Sold 61.81% 61.95% 62.42% 62.39% 62.39% 62.39% 62.39% 62.39% Depreciation & Amortization 2.66% 2.85% 3.17% 3.34% 3.38% 3.43% 3.48% 3.51% Gross Profit 35.54% 35.19% 34.41% 34.27% 34.24% 34.19% 34.13% 34.11% Selling, General & Administrative Expenses 28.41% 29.06% 28.47% 28.44% 28.42% 28.40% 28.38% 28.36% Pre-Opening Expenses 0.47% 0.44% 0.41% 0.40% 0.39% 0.39% 0.38% 0.38% Relocation, Store Closure & Lease Termination Costs 0.08% 0.10% 0.08% 0.09% 0.09% 0.10% 0.10% 0.11% Operating Income 6.58% 5.59% 5.45% 5.34% 5.33% 5.30% 5.26% 5.25% Interest Expense - - 0.26% 0.32% 0.34% 0.34% 0.35% 0.35% Investment & Other Income 0.08% 0.11% 0.07% 0.06% 0.06% 0.06% 0.06% 0.06% Income before Income Taxes 6.66% 5.71% 5.26% 4.95% 4.93% 4.89% 4.86% 4.84% Provision for Income Taxes 2.59% 2.22% 2.04% 1.92% 1.91% 1.89% 1.88% 1.87% Net Income 4.08% 3.48% 3.22% 3.04% 3.02% 3.00% 2.98% 2.97% Whole Foods Market, Inc. Common Size Balance Sheet (% of sales) Fiscal Years Ending Sept.25 2014 2015 2016 2017E 2018E 2019E 2020E 2021CV Assets Current Assets: Cash & Cash Equivalents 1.34% 1.54% 2.23% 3.94% 4.54% 4.85% 4.96% 4.31% Short-Term Investments 3.90% 1.01% 2.41% 2.43% 2.44% 2.44% 2.44% 2.44% Restricted Cash 0.77% 0.83% 0.78% 0.82% 0.81% 0.80% 0.81% 0.80% Accounts Receivable 1.39% 1.42% 1.54% 1.55% 1.55% 1.55% 1.55% 1.55% Merchandise Inventories 3.11% 3.25% 3.29% 3.32% 3.30% 3.31% 3.31% 3.31% Prepaid Expenses & Other Current Assets 0.68% 0.70% 1.06% 1.07% 1.07% 1.07% 1.07% 1.07% Deferred Income Taxes 1.18% 1.29% 1.25% 1.33% 1.40% 1.46% 1.51% 1.54% Total Current Assets 12.37% 10.03% 12.56% 14.47% 15.11% 15.48% 15.64% 15.02% Net Property & Equipment 20.59% 20.55% 21.89% 22.24% 22.69% 23.04% 23.25% 23.19% Long-Term Investments 0.85% 0.41% ------Goodwill 4.99% 4.61% 4.52% 4.45% 4.36% 4.25% 4.14% 4.04% Net Intangible Assets 0.57% 0.51% 0.47% 0.43% 0.39% 0.35% 0.31% 0.28% Deferred Income Taxes 0.93% 0.94% 0.64% 0.69% 0.76% 0.80% 0.78% 0.75% Other Assets 0.17% 0.25% 0.25% 0.18% 0.19% 0.19% 0.19% 0.19% Total Assets 40.47% 37.31% 40.33% 42.45% 43.49% 44.10% 44.32% 43.48%

Liabilities and Shareholders' Equity Current Liabilities: Current Installments of Long-Term Debt 0.01% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% Accounts Payable 1.94% 1.92% 1.95% 2.04% 2.00% 2.01% 1.99% 2.00% Accrued Compensation 2.67% 2.83% 2.59% 2.69% 2.71% 2.68% 2.69% 2.67% Dividends Payable 0.30% 0.29% 0.27% 0.28% 0.28% 0.28% 0.29% 0.29% Other Current Liabilities 3.92% 3.07% 3.69% 3.78% 3.88% 3.90% 3.80% 3.86% Total Current Liabilities 8.86% 8.14% 8.53% 8.80% 8.88% 8.89% 8.78% 8.83% Long-Term Debt 0.42% 0.40% 6.66% 7.12% 7.16% 7.21% 7.27% 7.29% Deferred Lease Liabilities 3.86% 3.81% 4.07% 4.30% 4.35% 4.35% 4.40% 4.40% Other Long-Term Liabilities 0.46% 0.46% 0.56% 0.48% 0.50% 0.51% 0.52% 0.52% Total Liabilities 13.60% 12.81% 19.82% 20.69% 20.89% 20.95% 20.96% 21.04% Shareholders' Equity: Common Stock 20.17% 18.87% 18.65% 19.92% 21.04% 22.00% 22.91% 22.59% Common Stock in Treasury, at Cost -5.01% -7.30% -12.88% -14.59% -16.44% -18.27% -20.32% -22.21% Accumulated Other Comprehensive Income (Loss) -0.05% -0.18% -0.20% -0.20% -0.20% -0.19% -0.19% -0.18% Retained Earnings 11.75% 13.11% 14.94% 16.63% 18.19% 19.62% 20.96% 22.24% Total Shareholders' Equity 26.86% 24.49% 20.50% 21.76% 22.59% 23.15% 23.36% 22.44% Total Liabilities and Shareholders' Equity 40.47% 37.31% 40.33% 42.45% 43.49% 44.10% 44.32% 43.48% Whole Foods Market, Inc. Value Driver Estimation (in millions) Fiscal Years Ending Sept.25 2014 2015 2016 2017E 2018E 2019E 2020E 2021CV NOPLAT Computation Net Sales 14,194 15,389 15,724 15,972 16,300 16,715 17,133 17,557 - Cost of Goods Sold 8,773 9,534 9,815 9,965 10,169 10,429 10,689 10,954 - Selling, General & Administrative Expenses 4,032 4,472 4,477 4,543 4,633 4,748 4,863 4,980 - Deprectiation & Amortization 377 439 498 534 550 573 596 615 - Other Operating Expenses 78 83 77 78 79 81 83 86 + Implied Interest on Operating Leases 242 269 290 301 319 333 346 358 EBITA 1,176 1,130 1,147 1,153 1,188 1,218 1,248 1,280 Less: Adjusted Taxes Provision for Income Taxes 367 342 320 306 311 316 322 329 + Tax Shield on Interest Expense - - 16 20 22 22 23 24 - Tax on Investment & Other Income 5 7 4 4 4 4 4 4 + Tax Shield on Implied Lease Interest 94 105 112 116 124 129 134 139 Total Adjusted Taxes 456 440 444 439 452 464 475 487 Plus: Change in Deferred Taxes (77) (43) 46 (25) (29) (26) (15) (10) NOPLAT 643 647 749 689 706 729 757 783

Invested Capital Computation Operating Current Assets: Normal Cash 242 262 268 272 278 285 292 299 Accounts Receivable 198 218 242 248 252 259 265 272 Inventory 441 500 517 530 539 554 567 581 Prepaid Expenses & Other Current Assets 97 108 167 171 174 179 183 188 Operating Current Liabilities: Accounts Payable 276 295 307 325 325 335 341 351 Accured Expenses 379 436 407 430 442 449 460 468 Dividend Payable 43 45 43 44 45 46 49 51 Net Operating Working Capital 280 312 437 422 430 446 457 471 Plus: Net Property, Plant & Equipment 2,923 3,163 3,442 3,553 3,698 3,852 3,984 4,071 Plus: Other Operating Assets Net Intagible Assets 81 79 74 68 63 58 53 49 Capitalized PV of Operating Leases 5,477 5,909 6,123 6,503 6,774 7,045 7,289 7,532 Total Other Operating Assets 5,558 5,988 6,197 6,571 6,837 7,103 7,342 7,581 Less: Other Operating Liabilities Deferred Lease Liabilities 548 587 640 686 709 727 753 772 Total Other Operating Liabilities 548 587 640 686 709 727 753 772 Invested Capital 8,212 8,876 9,436 9,859 10,256 10,674 11,030 11,351

Return on Invested Capital Computation NOPLAT 643 647 749 689 706 729 757 783 / Beginning Invested Capital 7,178 8,212 8,876 9,436 9,859 10,256 10,674 11,030 ROIC 8.95% 7.88% 8.44% 7.30% 7.16% 7.10% 7.10% 7.10%

Free Cash Flow Computation NOPLAT 643 647 749 689 706 729 757 783 - Change in Invested Capital 1,034 663 560 424 397 418 356 321 FCF (392) (17) 189 265 310 311 401 462

Economic Profit Computation Beginning Invested Capital 7,178 8,212 8,876 9,436 9,859 10,256 10,674 11,030 * (ROIC - WACC) 3.56% 2.48% 3.05% 1.91% 1.77% 1.71% 1.70% 1.70% EP 255 204 271 180 175 175 182 188 Whole Foods Market, Inc. Weighted Average Cost of Capital (WACC) Estimation (in millions, expect share price data) Cost of Equity Risk-Free Rate 2.92% Risk Premium 4.51% Beta 0.89 Cost of Equity 6.95%

Cost of Debt Pre-Tax Cost of Debt 4.91% Marginal Tax Rate 38.69% After-Tax Cost of Debt 3.01%

Value of Equity Share Price $34.52 Shares Outstanding 318 Value of Equity 10,988

Value of Debt BV of Short-Term Debt 3 BV of Long-Term Debt 1,048 PV of Operating Leases 6,123 Value of Debt 7,174

Weights Equity 60.50% Debt 39.50%

WACC Calculation Cost of Equity 6.95% * Weight of Equity 60.50% After-Tax Cost of Debt 3.01% * Weight of Debt 39.50% WACC 5.39% Whole Foods Market, Inc. Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models (in millions, expect share price data) Key Inputs: CV Growth 2.47% CV ROIC 7.10% WACC 5.39% Cost of Equity 6.95%

Fiscal Years Ending Sept.25 2016 2017E 2018E 2019E 2020E 2021CV 2016 2017E 2018E 2019E 2020E 2021CV

Discounted Cash Flow Model Economic Profit Model Free Cash Flow 265 310 311 401 Economic Profit 180 175 175 182 Continuing Value 17,466 Continuing Value 6,436 Future Cash Flows 265 310 311 401 17,466 Future Cash Flows 180 175 175 182 6,436 Discount Periods 1 2 3 4 4 Discount Periods 1 2 3 4 4 Discounted Cash Flows 252 279 266 325 14,155 Discounted Cash Flows 171 157 150 147 5216

PV of Economic Profit 5,841 Beginning Invested Capital 9,436 Value of Operating Assets 15,277 Value of Operating Assets 15,277 Excess Cash 83 Excess Cash 83 Short-Term Investments 379 Short-Term Investments 379 Restricted Cash 122 Restricted Cash 122 Other Assets 40 Other Assets 40 Current Installments of Long-Term Debt (3) Current Installments of Long-Term Debt (3) Long-Term Debt (1,048) Long-Term Debt (1,048) Other Current Liabilities (581) Other Current Liabilities (581) Other Long-Term Liabilities (88) Other Long-Term Liabilities (88) PV of Operating Leases (6,123) PV of Operating Leases (6,123) PV of Employee Stock Options Plan (191) PV of Employee Stock Options Plan (191) Value of Equity 7,867 Value of Equity 7,867 Shares Outstanding 318 Shares Outstanding 318 Intrinsic Stock Price $ 24.71 Intrinsic Stock Price $ 24.71

Today 4/17/2017 Today 4/17/2017 Fiscal Year Ending 9/25/2016 Fiscal Year Ending 9/25/2016 Elapsed Fraction 0.559 Elapsed Fraction 0.559 (Cost of Equity - Annual Dividend Yield) 5.33% (Cost of Equity - Annual Dividend Yield) 5.33% Adjusted Stock Price $ 25.44 Adjusted Stock Price $ 25.44 Whole Foods Market, Inc. Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Key Inputs: CV Growth 2.47% CV ROE 6.57% Cost of Equity 6.95%

Fiscal Years Ending Sept.25 2016 2017E 2018E 2019E 2020E 2021CV EPS 1.54 1.57 1.62 1.67 1.75 Future Cash Flows P/E Multiple (CV Year) 13.92 EPS (CV Year) 1.75 Future Stock Price 24.41 Dividends Per Share 0.56 0.58 0.60 0.64 Future Cash Flows 0.56 0.58 0.60 0.64 24.41 Discount Periods 1 2 3 4 4 Discounted Cash Flows 0.52 0.58 0.60 0.64 24.41

Intrinsic Stock Price $ 26.76

Today 4/17/2017 Fiscal Year Ending 9/25/2016 Elapsed Fraction 0.559 (Cost of Equity - Annual Dividend Yield) 5.33% Adjusted Stock Price $ 27.54 Whole Foods Market, Inc. Relative Valuation Models

EPS EPS Ticker Company Price 2017E 2018E P/E 17 P/E 18 COST Costco Wholesale Corporation $169.70 5.67 6.42 29.9 26.4 KR The Kroger Co. $30.00 2.20 2.33 13.6 12.9 IMKTA Ingles Markets, Incorporated $44.40 2.75 2.95 16.1 15.1 NGVC Natural Grocers by Vitamin Cottage, Inc. $10.82 0.49 0.54 22.1 20.0 SFM Sprouts Farmers Market, Inc. $22.94 0.88 1.01 26.1 22.7 SPTN SpartanNash Company $35.18 2.32 2.46 15.2 14.3 SVU SUPERVALU Inc. $3.85 0.40 0.44 9.6 8.8 WMT Wal-Mart Stores, Inc. $73.49 4.32 4.55 17.0 16.2 Average 20.0 18.2

WFM Whole Foods Market, Inc. $34.52 1.54 1.57 22.5 21.9

Implied Value: Relative P/E (EPS17) $30.73 Relative P/E (EPS18) $28.70 Whole Foods Market, Inc. Key Management Ratios

Fiscal Years Ending Sept.25 2014 2015 2016 2017E 2018E 2019E 2020E 2021CV

Liquidity Ratios Current Ratio Current Assets/Current Liabilities 1.40 1.23 1.47 1.64 1.70 1.74 1.78 1.70 Quick Ratio (Current Assets - Inventories)/Current Liabilities 1.05 0.83 1.09 1.27 1.33 1.37 1.40 1.33 Cash Ratio (Cash + Marketable Securities)/Current Liabilities 0.15 0.19 0.26 0.45 0.51 0.55 0.56 0.49

Activity or Asset-Management Ratios Receivables Turnover Sales/Avg. Accounts Receivable 73.54 73.99 68.37 65.16 65.15 65.38 65.33 65.34 Inventory Turnover Cost of Good Sold/Avg. Inventory 20.52 20.26 19.30 19.03 19.03 19.09 19.08 19.08 Asset Turnover Sales/Avg. Total Assets 2.52 2.68 2.60 2.43 2.35 2.31 2.29 2.31

Financial Leverage Ratios Debt Ratio Total Liabilities/Total Assets 0.34 0.34 0.49 0.49 0.48 0.48 0.47 0.48 Debt to Equity Ratio Total Debt/Shareholder's Equity 0.02 0.02 0.33 0.33 0.32 0.31 0.31 0.33 Interest Coverage Ratio Operating Income/Interest Expense - - 20.90 16.51 15.51 15.39 15.20 15.03

Profitability Ratios Operating Margin Operating Income/Sales 6.58% 5.59% 5.45% 5.34% 5.33% 5.30% 5.26% 5.25% Cash Flow Margin Operating Cash Flow/Sales 7.67% 7.34% 7.10% 6.77% 6.52% 6.44% 6.49% 6.65% Return on Assets Net Income/Avg. Total Assets 5.13% 4.67% 4.20% 3.70% 3.55% 3.47% 3.41% 3.42% Return on Equity Net Income/Avg. Shareholders Equity 7.53% 7.07% 7.25% 7.24% 6.88% 6.64% 6.48% 6.57%

Payout Policy Ratios Payout Ratio Dividends Per Share/EPS 0.31 0.35 0.35 0.36 0.37 0.37 0.38 0.39 Dividend Coverage Ratio EPS/Dividends Per Share 3.27 2.87 2.87 2.74 2.72 2.70 2.61 2.58 Total Payout Ratio (Dividends + Repurchases)/Net Income 1.29 1.30 2.21 0.99 1.08 1.12 1.23 1.20 Whole Foods Market, Inc. Sensitivity Analysis

Share Price Beta Share Price Pre-Tax Cost of Debt $ 25.44 0.83 0.85 0.87 0.89 0.91 0.93 0.95 $ 25.44 4.61% 4.71% 4.81% 4.91% 5.01% 5.11% 5.21% 4.21% 31.54 30.45 29.41 28.41 27.44 26.51 25.60 38.39% 25.67 25.72 25.77 25.82 25.87 25.91 25.96 4.31% 30.46 29.40 28.37 27.38 26.43 25.51 24.62 38.49% 25.54 25.59 25.64 25.69 25.74 25.79 25.83 4.41% 29.43 28.38 27.37 26.39 25.45 24.55 23.67 38.59% 25.41 25.46 25.52 25.57 25.62 25.66 25.71 Risk Marginal 4.51% 28.44 27.40 26.40 25.44 24.52 23.62 22.76 38.69% 25.28 25.34 25.39 25.44 25.49 25.54 25.59 Premium Tax Rate 4.61% 27.48 26.46 25.47 24.52 23.61 22.73 21.88 38.79% 25.15 25.21 25.26 25.32 25.37 25.41 25.46 4.71% 26.55 25.54 24.57 23.64 22.74 21.87 21.04 38.89% 25.02 25.08 25.14 25.19 25.24 25.29 25.34 4.81% 25.66 24.66 23.71 22.79 21.90 21.04 20.22 38.99% 24.89 24.95 25.01 25.06 25.11 25.17 25.21

Share Price WACC Share Price Risk-Free Rate $ 25.44 5.09% 5.19% 5.29% 5.39% 5.49% 5.59% 5.69% $ 25.44 2.62% 2.72% 2.82% 2.92% 3.02% 3.12% 3.22% 2.17% 28.75 26.93 25.24 23.65 22.15 20.74 19.42 6.80% 28.27 26.88 25.58 24.36 23.22 22.15 21.15 2.27% 29.54 27.64 25.86 24.21 22.65 21.19 19.81 6.90% 28.68 27.27 25.96 24.73 23.58 22.50 21.49 2.37% 30.38 28.39 26.54 24.80 23.18 21.66 20.23 7.00% 29.08 27.66 26.33 25.09 23.93 22.84 21.82 CV NOPLAT CV ROIC 2.47% 31.30 29.20 27.25 25.44 23.75 22.17 20.68 7.10% 29.46 28.03 26.69 25.44 24.27 23.17 22.14 Growth Growth 2.57% 32.28 30.07 28.03 26.13 24.36 22.70 21.16 7.20% 29.84 28.39 27.04 25.78 24.60 23.49 22.45 2.67% 33.34 31.01 28.86 26.86 25.00 23.28 21.66 7.30% 30.20 28.74 27.38 26.11 24.92 23.80 22.75 2.77% 34.50 32.03 29.75 27.65 25.70 23.89 22.21 7.40% 30.56 29.09 27.72 26.43 25.23 24.11 23.05

Share Price COGS (% of Sales) Share Price 2017 Capital Expenditures (in millions) $ 25.44 62.09% 62.19% 62.29% 62.39% 62.49% 62.59% 62.69% $ 25.44 620 626 632 639 645 652 658 28.14% 31.90 30.82 29.74 28.66 27.58 26.50 25.42 15.05% 26.04 25.94 25.83 25.73 25.62 25.52 25.41 28.24% 30.83 29.75 28.67 27.59 26.51 25.42 24.34 15.15% 25.95 25.84 25.74 25.63 25.53 25.42 25.32 28.34% 29.76 28.68 27.60 26.51 25.43 24.35 23.27 15.25% 25.85 25.75 25.64 25.54 25.43 25.32 25.22 SG&A Depreciation 28.44% 28.69 27.60 26.52 25.44 24.36 23.28 22.20 15.35% 25.76 25.65 25.55 25.44 25.34 25.23 25.12 (% of Sales) (% of Net PPE) 28.54% 27.61 26.53 25.45 24.37 23.29 22.21 21.13 15.45% 25.67 25.56 25.45 25.35 25.24 25.14 25.03 28.64% 26.54 25.46 24.38 23.30 22.22 21.13 20.05 15.55% 25.58 25.47 25.36 25.26 25.15 25.04 24.94 28.74% 25.47 24.39 23.31 22.22 21.14 20.06 18.98 15.65% 25.48 25.38 25.27 25.17 25.06 24.95 24.85 Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014)

Operating Operating Operating Fiscal Years Ending Sept.25 Leases Fiscal Years Ending Sept.25 Leases Fiscal Years Ending Sept.25 Leases 2017 433 2016 430 2015 401 2018 522 2017 493 2016 458 2019 557 2018 525 2017 481 2020 568 2019 530 2018 491 2021 569 2020 536 2019 493 Thereafter 6485 Thereafter 6388 Thereafter 5948 Total Minimum Payments 9134 Total Minimum Payments 8902 Total Minimum Payments 8272 Less: Interest 3011 Less: Interest 2993 Less: Interest 2795 PV of Minimum Payments 6123 PV of Minimum Payments 5909 PV of Minimum Payments 5477

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.91% Pre-Tax Cost of Debt 4.91% Pre-Tax Cost of Debt 4.91% Number Years Implied by Year 6 Payment 11.4 Number Years Implied by Year 6 Payment 11.9 Number Years Implied by Year 6 Payment 12.1

Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 433 412.7 1 430 409.9 1 401 382.2 2 522 474.3 2 493 447.9 2 458 416.1 3 557 482.4 3 525 454.6 3 481 416.5 4 568 468.8 4 530 437.5 4 491 405.3 5 569 447.7 5 536 421.7 5 493 387.9 6 & beyond 569 3837.1 6 & beyond 536 3737.1 6 & beyond 493 3468.6 PV of Minimum Payments 6123.0 PV of Minimum Payments 5908.7 PV of Minimum Payments 5476.7 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 26,300,000 Average Time to Maturity (years): 4.17 Expected Annual Number of Options Exercised: 6,310,580

Current Average Strike Price: $ 39.31 Cost of Equity: 6.95% Current Stock Price: $34.52

2017E 2018E 2019E 2020E 2021CV Increase in Shares Outstanding: 6,310,580 6,310,580 6,310,580 6,310,580 1,057,682 Average Strike Price: $ 39.31 $ 39.31 $ 39.31 $ 39.31 $ 39.31 Increase in Common Stock Account: 248,080,158 248,080,158 248,080,158 248,080,158 41,579,366

Change in Treasury Stock 303,900,000 349,485,000 375,113,900 427,629,846 417,855,450 Expected Price of Repurchased Shares: $ 34.52 $ 36.92 $ 39.48 $ 42.23 $ 45.16 Number of Shares Repurchased: 8,803,592 9,466,256 9,500,213 10,126,484 9,252,035

Shares Outstanding (beginning of the year) 318,300,000 315,806,987 312,651,311 309,461,677 305,645,773 Plus: Shares Issued Through ESOP 6,310,580 6,310,580 6,310,580 6,310,580 1,057,682 Less: Shares Repurchased in Treasury 8,803,592 9,466,256 9,500,213 10,126,484 9,252,035 Shares Outstanding (end of the year) 315,806,987 312,651,311 309,461,677 305,645,773 297,451,420 VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol WFM Current Stock Price $34.52 Risk Free Rate 2.92% Current Dividend Yield 1.62% Annualized St. Dev. of Stock Returns 29.38%

Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 1,600,000 20.49 1.62 $ 14.39 $ 23,025,661 Range 2 11,000,000 33.00 4.78 $ 9.36 $ 102,979,947 Range 3 9,200,000 43.73 3.98 $ 5.32 $ 48,979,506 Range 4 4,500,000 52.40 3.96 $ 3.59 $ 16,149,502 Total 26,300,000 $ 39.31 4.17 $ 7.98 $ 191,134,616