September 16, 2014 University Securities Investment Team Whole Foods Market, Inc. NASDAQ: WFM Vishal Bhat Manideep Ravi Connor Ruddick
Recommendation Current Share Price: $38.10 Estimated Upside: 16% Investment Thesis: Continued same store sales growth Market has oversold stock to well below fair value Instacart partnership serves as catalyst
Revenue Drivers and Key Segments Important metrics Sales growth Comparable store sales growth Ending square footage growth Key segments Health-conscious consumers Fast casual consumers Working professionals Tech-savvy consumers
Competitive Positioning Leading natural and organic foods retailer 8 th largest food & drug store Brought corporate buying power to organic industry 394 stores in U.S., Canada, and U.K. Opened 25, 26, and 32 stores in 12, 13, & 14 Differentiates with unique buying experience Dining options & attractive retail space
Competitive Positioning: Online Partnership with Instacart Instant entrance into ecommerce segment Online ordering and delivery First national partner offering in-store pickup Major Online Competitors Amazon Safeway Other startups Peapod, NetGrocer.com
Partnership with Instacart Instant entrance into online market Allows saved grocery lists Access to Whole Foods recipes link to buy ingredients 15 cities Planned growth Instant WFM adoption in new cities
Management CEO s John Mackey Walter Robb Long-term company vision Expansion into areas with lower income customers Instacart partnership Whole Foods Market 2009 Incentive Plan
Sales in million U.S. dollars 487652 487174 495168 519398 534727 546599 557949 571138 584327 597516 610706 Industry Outlook: Typical Grocer Traditionally low-growth, mature industry Low- to mid-single-digit same-store sales growth decent Sales of supermarkets and other grocery stores (NAICS 44511) in the United States from 2008 to 2018 (in million U.S. dollars) 700000 08-12 CAGR = only 2.3% 600000 500000 400000 300000 200000 100000 0 2008 2009 2010 2011 2012 2013 2014* 2015* 2016* 2017* 2018* Source: US Census Bureau, Statista, statista-research.com/
Industry Outlook: Organic Sales Organic food sales in the United States from 2000 to 2012 (in million U.S. dollars)* 08-12 CAGR = 7.3% vs. 2.3% WFM projected = 9.9% sales growth * Based on consumer sales. Data prior to 2012 are taken from the State of Organics Report 2012.** 2012 data has been converted from euros to U.S. dollars using the OANDA currency converter. Source: FiBL, IFOAM, The World of Organic Agriculture 2014 Growth driven by: Heightened awareness of healthy eating and long term wellness Better-educated and wealthier populace Increased consumer concern of food safety and purity Environmental concern
Industry Outlook: Move to Digital Changing consumer attitudes Price hurdle delivery costs Where do you purchase the majority of your foods? Source: National Grocers Association, Website, Consumer Survey Report 2014
Investment Thesis and Catalyst Whole Foods taking number of actions to revitalize store growth Instacart partnership Early adopter of Apple Pay Rewards Program Instacart partnership will show success in key markets by Q1 2015 and fuel comparable growth Catalyst hasn t been priced in because stock price has been flat for the few months as analysts have maligned the stock
Comps Analysis Company Comp Set Company Name TEV/EBITDA LTM - Latest P/TangBV LTM - Latest NTM Forward P/E LTM Return on Capital LTM Return on Assets % CY2013 Inventory Turnover CY2013 Same Store Sales Growth Actual LTM Gross Margin % Safeway Inc. (NYSE:SWY) 6.2x 1.5x 31.28x 6.19 2.6% 11.30x 1.7 27.1% The Kroger Co. (NYSE:KR) 7.7x 11.5x 14.52x 15.94 6.7% 14.37x 3.6 21.2% Wal-Mart Stores Inc. (NYSE:WMT) 8.4x 4.2x 14.47x 18.3 8.2% 8.08x -0.6 24.8% Natural Grocers by Vitamin Cottage, Inc. (NYSE:NGVC) Sprouts Farmers Market, Inc. (NasdaqGS:SFM) 11.1x 4.5x 29.91x 19.13 8.8% 7.41x 21.4x 94.5x 39.32x 16.98 9.0% 15.81x 10.7 30.0% - 29.2% Whole Foods Market, Inc. (NasdaqGS:WFM) 10.0x 4.6x 23.28x 24.08 10.5% 19.96x 7.0 35.6% Summary Statistics TEV/EBITDA LTM - Latest P/TangBV LTM - Latest NTM Forward P/E (Capital IQ) LTM Return on Capital LTM Return on Assets % CY2013 Inventory Turnover CY2013 Same Store Sales Growth Actual LTM Gross Margin % High 21.4x 94.5x 39.32x 19.13x 9.0% 15.8x 10.7 30.0% Low 6.2x 1.5x 14.47x 6.19x 2.6% 7.4x -0.6 21.2% Mean 11.0x 23.2x 25.90x 15.31x 7.1% 11.4x 3.85 26.5% Median 8.4x 4.5x 29.91x 16.98x 8.2% 11.3x 2.65 27.1%
DCF Analysis
Risks & Mitigating Factors Agricultural Price Stability Results from various factors Higher prices cut margins Affects all food retailers Contamination Risk Possibility for any food retailer Not higher for organic Strict quality standards for suppliers Change in Consumer Tastes Could result from economic conditions Affects premium retailers more that discounts Instacart Fails Growth in online significant opportunity Failure would limit growth Require higher investment from WFM
Summary Continued same-store sales growth Recent stock selloff Instacart partnership Estimated Upside: 16%
Questions?
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