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Whole Foods Market, Inc. Prezi

Business Valuation

Giselle Arbas

on 10 October 2012

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Transcript of Whole Foods Market, Inc. Prezi

Whole Foods Market, Inc. Lourdes Abosaid
Giselle Arbas
Robert Fernandez
Zayda Lima
Patricia Lopez
Zelmar Mendive

October 9, 2012 Our Recommendation: Sell Expected Stock Price: Stock Price: Recommendation and Valuation: REASONS PROF LE Products and Services "Certified Organic" grocer

Natural and organic foods

Focus on perishable products . . VALUATION } Strategic Analysis Competitive Strategy Analysis Financial Statements Financial Analysis: FORECASTING or Buy Forces Analysis 5 Corporate Strategy Analysis ACCOUNTING ANALYSIS Principal Accounting Policies Accounting Flexibility Accounting Distortions Overview Competitors Short-term Forecasts Discounted Abnormal Earnings Valuation Model Whole Foods Market CAPM Beta Risk and Its Effect on Equity Value WHOLE FOODS ANALYSIS Countries of Operation 2011 2010 United States Canada and United Kingdom 97% 3.1% 3% 96.9% Annual Percentage Sales: Commitment to buying from local producers

Promotion of animal welfare

Implementation of seafood sustainability Commitment to Environment & Community Facts Going Public Initial Public Offering: January 1992

Traded on the NASDAQ Global Select Market

Symbol: WFM Founded in 1980

Headquarters: Austin, TX

Acquired Wild Oats Market in 2007 Stock Price Stock Splits: November 30, 1993 (2:1)
June 5, 2001 (2:1)
December 28, 2005 (2:1) Yahoo! Finance Changes in financial statements

Common-size Balance Sheet and Income Statement

Decomposing of profitability

Ratio analysis Provided by Yahoo! Finance Compared 2010 to 2011
Whole Foods Market has stayed consistent Return on Equity: Profit Margin: Debt-to-Equity: Cash Ratio: Asset Turnover: Current Stock Price: $21.25 $101.19 Rivalry Among Existing Firms 1 Supermarkets had growth during recession

The industry is currently experiencing decline

Highly competitive industry

Whole Foods Market only has 1.7% market share! Threat of New Entrants 2 Too much competition

Threat is medium

Face competition from other industries

New entrants face severe disadvantages Threat of Substitute Products 3 Difficult to establish product/ firm differentiation

Identical products from one store to another

Competing with pharmacies and warehouses Bargaining Power of Buyers- LOW 4 Price Sensitivity
Increases chances they will lose customers

Bargaining Power
Can find same products elsewhere for less Bargaining Power of Suppliers 5 Low to medium power

Larger chains= more power
Wal-Mart organic food vs. Whole Foods Market

Change brands and risk losing customers Experienced decline in revenues in 2007

Opposite of industry

Lowered prices, maintained quality

Health Starts Here initiative

Had to stress importance of eating organic Pricing strategy rethought in 2007

The Whole Deal saves customers money!

Lower prices, increase deals, without sacrificing quality SUCCESS

Whole Foods Market makes customers feel like a family

Marketing strategy is GREEN Inventory Valuation
Whole Foods Market uses the LCM
Cost is determined using LIFO

Goodwill and Intangible Asset
Review for impairment annually or more frequently

Derivative Instruments
Used to hedge exposure to changes in interest rates

Reserves for Closed Properties
Whole Foods Market uses operating leases for most of their properties No flexibility in evaluation of inventory and COGS

LCM and LIFO affect the Balance Sheet and Income Statement

Goodwill requires use of judgment and financial estimates

Goodwill and delaying asset impairment provides an area of flexibility Used 5% interest rate to calculate the PV of company’s future operating leases

When converted, the PV of capital lease liability is $3 billion

Current capital leases account for only $17 million in 2011

Conversion would increase liabilities by $2.9 billion dollars

This would affect ratios such as Debt/Equity and Debt Ratio Short-term Forecasted Assumptions Long-term Forecasted Assumptions Sensitivity Analysis Terminal Value Assumptions Whole Foods Market maintains its current level of abnormal earnings forever

We assumed zero sales growth and a constant NOPAT margin All things being equal:

The higher a company’s beta risk the higher its cost of capital discount rate

The higher the discount rate the lower the present value placed on the company’s future cash flows

In conclusion: beta can impact a company’s share valuation Cost of equity = riskless rate of return + beta risk x market risk

8.46 = 2.96 + 1.11 x 5

Riskless rate of return: the yield on a 30-year treasury bond Upside:
Increase in sales in existing stores
Increase in new store openings

Economic conditions that negatively affect consumer spending Overvalued

Small percentage of industry

Economic conditions


Low bargaining power Whole Foods Market consistently provides adequate disclosures of:
Accounting policies
Financial statements
Firm's business strategy

Whole Foods Market provides its stakeholders with the highest quality of information

Whole Foods Market's summary of significant accounting policies is straightforward and easy to understand

Discuss accounting policies related to:
Operating leases
Opening store costs Quality of Disclosures Potential Red Flags Operating leases vs. Capital Leases:
$6.4 billion related to operating
Only $17 million related to capital

Capital leases affect the Balance Sheet

Operating leases have an Income Statement effect

Whole Foods Market’s leases expire or become subject to renewal at various dates from 2012 to 2054.
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