Financial Performance of Whole Foods Market - Essay Example

?Contents page Executive summary 3 0 Introduction 3 2.0 Historical background of Whole Foods Market 4 3.0 Market analysis of Whole Foods Market 4 4.0 Financial performance 4 4.1 Determinants of stock prices 5 4.2 Sales and profits 6 5.0 Investment analysis 8 5.1 Money market investment 8 6.0 Risks 8 7.0 Recommendations 9 8.0 Conclusion 10 9.0 References 12 Table 1: Summary of the Company’s annual percentage sales 6 Name Course number/department University Tutor 16 November, 2011 Analysis of financial performance of Wholefoods Market Executive summary Publicly listed companies can trade on the stock exchange and shareholders can invest in these companies. However, there are various factors that affect the performance of publicly listed companies and these have a bearing on the shareholders as they can risk losing their investment in the event of unprecedented changes taking place in the market. As such, this report has been designed to analyse the financial performance of Wholefoods Market which is listed on the New York Stock Exchange. A critical analysis of the financial performance of this organisation shows that despite market forces such as competition, this organisation is performing relatively well given that it has managed to record a steady increase in its profits over a five year period from 2006 to 2010. Against this background, it has been recommended that it is safe for investors to invest in this company given that there are positive indications of positive growth which lowers the chances of risk in the event of unprecedented forces impacting negatively on the economy. 1.0 Introduction According to the World Book Encyclopaedia (2008), a stock is a right to ownership in a corporation. The stakeholders buy shares and they can sell them for a profit in market places called stock exchanges. The financial performance of a listed company is influenced by various factors. As such, this report seeks to critically analyse the financial performance of Whole Foods Market which is a listed on the New York Stock Exchange. The report starts by outlining the historical background of the company as well as the factors that can affect its operations. This section is followed by a critical analysis of the organisation’s financial performance during the 2006 to 2010 fiscal years. Recommendations are given at the end of the report in order to establish if it is feasible for the investors to buy shares in this particular Company. 2.0 Historical background of Whole Foods Market According to its official website, Whole Foods Market was founded in Austin, Texas as a natural foods industry. It specifically focused in offering organic foods in a bid to promote health among the consumers. It was established in 1980 and grew through acquisitions to become a force to reckon with in the organic food segment of the market. This company is regarded as the world’s leading natural and organic foods supermarket in America as well as other parts in the globe. The company completed its initial public offering in January 1992 and it trades its common stock on the NASDAQ Global Select Market under the symbol WFMI. The company is listed on the New York Stock Exchange and its mission is “to promote the vitality and well being of all the individuals by supplying the highest quality, most wholesome foods available.” The mission of the company is primarily concerned with developing organic foods, food safety concerns as well as sustainability of the entire ecosystem. There is growing concern to preserve the environment against the backdrop of rising cases of global warming and other issues related to health of the human beings. This company has managed to lead the organic food industry in the US since its inception about 30 years ago as a result of the fact that it has remained uniquely mission driven. 3.0 Market analysis Like any other industry, this company operates in an e competitive market where there are different players as well. The competitors for this company include local, regional as well as international supermarkets and other organic retailers. The food industry is also characterised by various players which offer both organic and non organic food. The prices of the products differ as a result of various factors. For instance, this organisation offers products which are slightly higher than other foodstuffs as a result of the high degree of quality of organic food products. The operations of the organisation are somehow adversely affected by the fluctuations of the exchange rates. For instance, Whole Foods Markets is also present in the UK and Canada. However, its operations are affected by the fluctuations in exchange rates especially in these countries and this is the reason why sales are lower compared to sales recorded by the stores in the US. The market is also open to other new entrants given that it is gaining significant priority as result of the consumers’ need to eat health foods. 4.0 Financial performance For instance, in fiscal year 2010 the closing market price per share of common stock ranged from $25.00 to $42.50. The financial statement for this fiscal year showed that the cash flow was not consistent as a result of the fluctuations in the market price of share on the stock market. The volatility of the price as well as competition in this industry is a cause for concern given that it negatively impacts on the operations of the company. However, the company has managed to build excellent reputation as a result of its social responsibility policies as well as the unique brand in organic foods. It can also be seen that from the 2007 to 2009 fiscal years, the market share prices fluctuated as a result of the volatility of the global economy which gripped many parts of the world. It reached the highest stage in 2010 as a result of speculations in the market due to the crises. In 2007, the highest price per share was around $30 compared to $42 in 2010. 4.1 Determinants of stock prices Stock prices and indexes fluctuate and change in value as a result of unforeseen circumstances which may lower the price investors are willing to pay for its stock. If the economy of the country is good, stock prices rise and vice versa. As a result of this situation, it can be noted that the financial performance of this company was not consistent. Its financial statement shows that it was negatively impacted by the global economic crisis in 2009 as a result of the bubbles caused by this situation. Bubbles can occur when market prices for assets increase significantly, rapidly and continuously and are fuelled by the investor’s expectations of further increases (Busetti, 2009). Market demand increases leading to strong volumes for stock at a faster rate than the rate at which real money is put into the market. At this stage, prices and production are no longer linked to the fundamentals. US economy is dependent on the stock market. When a critical stage occurs, insiders begin to take profits and leave the market until instability is eventually revealed and the market collapses. 4.2 Sales and profits However, a closer analysis of the company’s financial statements shows that there has been a steady increase in income from 2006 to 2010. For instance, the sales figures for different years were as follows: (2010, $ 9,005), (2009- $ 8,031,620), (2008 $ 7,953,912), (2007 $ 6,591,773), ( 2006- $ 5,607,376). A closer analysis of these figure shows that there has been a steady increase in the volume of sales as well as the income generated. In as far as the operations of this organisation are concerned, it can be noted that the company is in a position to maintain its income generation through sales of various products offered. However, the trend is different with regards to investment and other income as shown in the figures below (2010- 6,854), (2009-3,449), (2008- 6,697), (2007-11,324) and (2006- 20,736). It can be noted that the sale increased by 12 % in the 2010 fiscal year over the previous year to $9,01 billion and this was mainly driven by store sale increase. Table 1 Summary of the Company’s annual percentage sales and net long-lived assets by geographic area: Sales 2010 2009 2008 United States 97.0% 97.2% 96.5% Canada and UK 3.0% 2.8% 3.5% Total sales 100% 100% 100% Long lived assets United States 96.6% 96.5% 96.4% Canada & UK 3.4 % 3.5 % 3.6 % Total long lived assets 100% 100 % 100% It can also be noted that the income available to common shareholders increased by 102 % over the previous year to $240,4 million and the earnings per share increased over 69 % over the previous year. Despite the negative effects of the global economic crisis, it can be seen that its financial position was not severely affected given that it managed to lower general as well as administrative expense as shown by these figures: $272.4 million, $243.7 million and $270.4 million in fiscal years 2010, 2009 and 2008, respectively. The cost containment measure implemented by the company greatly helped in lowering the costs especially in its global and regional offices. Overally, it can be noted that company’s financial statement shows that all the retail sales grew approximately $76 billion in 2009 compared to the previous years. The profitabilities of 4.1 and 4.2 were witnessed during this five year period. A 5 per cent increase was witnessed during this fiscal year. 5.0 Investment analysis The Whole Foods Market maintains several share based incentive plans and these are governed by the legal framework as prescribed by the dictates of the stock exchange controls. The share based incentive plan is meant to appeal to the interests of the shareholders to invest in the company as well as to protect their shares. It can also be observed that the company uses the Black-Scholes multiple option pricing model which needs the use of accounting judgment including the estimated value of the invested stock by the shareholders. It also gauges the price volatility of the shares over the expected term as well as the impact on the operations of the company within the expected period. 5.1 Money market fund investment The company also holds money market fund investment that is classified as cash equivalent as well as restricted cash which total to approximately $25.8 million and $86.6 million, respectively. These are often seen as short term based strategies that are primarily meant to cushion the investors in the event that there have been some changes in the interest rates. There would be no material impact on the valuation of these investments. Such short term investments are secure given that they are not negatively affected by the fluctuations in the interest rates. Given such as scenario, the shareholders investments will be secured by this short term bond. 6.0 Risks The operations of the organization are somehow affected by various risks such as fluctuations in forex exchange rates. Given that the company is also present in other countries such as Canada and the UK, it can be seen that the sales from the retail stores in different geographical areas are not uniform as a result of various factors. There are also uncertainties in the economic conditions as well as political factors in which the company operates in different geographical areas. The operations of different companies are impacted by the policies that are put in place by the respective governments in the countries they will be operating in. 7.0 Recommendations A critical analysis of the financial performance of this company shows that it has favourable financial conditions that can make it possible to invest in shares in this organisation. Regardless of the other negative aspects discussed above, it can be noted that the advantages of investing in this particular country outweigh the disadvantages of not doing the same thing. As such, this section of the report gives recommendations to the consumers about why they should not be sceptical in investing in this particular company. It can be seen that there are positive indications for market growth in this particular organic food market. Though there is competition in the food industry, it can be noted that organic food industry shows positive signs of steady growth as reflected by the financial results of its fiscal years from 2006 to 2010. There is growing concern by various consumers to shift their consumption patterns of food after realising the importance of the role played by food and nutrition in their long term health. It is therefore recommended for the stakeholders to invest in this publicly listed company given that it operates in an industry that is characterised by stead growth. There are positive signs that this market segment of business has positive signs of growth which may not expose the investors to risk. Another important aspect is that a better-educated and wealthier populace is increasing each year and there is also concern about safety of food as a result of pesticides used in other foods. As such, it can be noted that this market is still capable of growing and it is likely to attract a lot of investors in the long run compared to other food markets. It is therefore recommendable to invest in this particular company given that it is still growing from strength to strength. This particular market is still viable given that a critical analysis of the company’s financial performance showed a steady growth despite the negative impact of the global economic crisis which gripped the whole world in 2007 to 2009. Another important consideration why investors can invest in this particular company is that they will also be contributing towards the cause of the natural environment. The need to protect the environment is everyone’s concern hence investors should take a leading role in promoting this noble cause through buying shares from a company that is enjoying relative stability in its operations. 8.0 Conclusion A publicly listed company is affected by various factors in its operations. As such, this report sought to critically analyse the financial performance of Whole Foods Market in a bid to establish the extent to which it can be recommendable for the stakeholders to invest in it. Regardless of factors such as competition, fluctuations in the interests rates as well as foreign currency exchange rates and the global economic crisis, the financial performance of Whole Foods Markets from fiscal years 2006 to 2010 shows that it has been enjoying a steady growth in income as a result of different factors. One of the main reasons for this positive growth is that the organic food sector is constantly gaining priority hence the steady growth in its market share. It is therefore recommendable for investors to invest in it given that there are few threats to their shares. 9.0 References Busetti, F 2009, The Effective Investor, Pan McMillan Northcliff. Henschel, H 15 November 2005, Talk: Beyond Behavioural Finance- The Neuroscience of Investment Behaviour. Pearson, NY. Hirsch, B 2005, Personal Finance, Spearhead, Cape Town. United States Securities and Exchange Commission Washington, D.C. 20549, 30 September, 2010, Annual report pursuant to section 13 Or 15(D) Of The Securities Exchange Act Of 1934 for the fiscal year ended September 26, 2010 for Whole Foods Market, Inc, viewed 06 November, 2011, . Whole Foods Market, 06 November, 2011, Whole Foods Market Annual reports, Viewed 06 November, 2011, . Read More