Financial Analysis Case Study of Whole Foods Market for ICCF @ Columbia Business School

This case study is a part of the financial analysis course at ICCF @ Columbia Business School. It focuses on the analysis of Whole Foods Market's 2016 Annual Report and Financial Statements. The case study includes 28 open-form questions and an essay of no more than 300 words. It covers topics such as margins analysis, investments analysis, and financing analysis.

ICCF @ Columbia Business School
3rd Session
Financial Analysis Case Study
I - Instructions
Welcome to the case study portion our financial analysis course. Professor Rajgopal has selected the
US-based company Whole Foods Market for this assignment. The goal of the exercise is to assess the
key concepts and essentials we have learned over the past four weeks.
To begin your case study please download/read the Whole Foods Market 2016 Annual Report and
Financial Statements. This document contains all the information needed to perform this Financial
Analysis Case Study.
There are two sections of your case study assignment. Both sections should be written on the same
text document and then uploaded anonymously, in PDF format, between October 22 and October 28
at 2pm EDT on the course platform.
1) Section I: A series of 28 open-form questions.
 Each answer should include your reasoning and be concise (should not exceeding 75 words
per answer). For all numerical questions please visualize and explain in addition to your
answer briefly your calculation approach.
2) Section II: Once you’ve answered all questions In Section 1, please prepare an essay of no
more than 300 words on the question asked. Please note that your essay must respect the
roadmap of the past four weeks of our Financial Analysis.
3) Peer Assessment: On October 29th, we will issue the guideline answers of the Financial
Analysis Case Study. You will be assigned 3 copies on the platform to review and score, using
guidelines provided, and you will have to have finished these reviews by November 4th. Your
final score will be calculated on a minimum of 2 peer assessment grades. Grades visible on
the platform are preliminary and only indicative, as the teaching team will conduct a
proofreading. The final grades will be sent to you by e-mail.
Please note:
 Discussions around these questions in the forum are allowed but should be of general in
nature
 You are expected to produce your own work on this project
© Copyright 2018 FIRST FINANCE INSTITUTE – All rights reserved

II - Section 1. Open Questions
Part 1 - Margins Analysis
Q1: Sales for fiscal 2016 were $15.724 billion relative to $15.389 billion in fiscal 2015. Is this small
increase in sales primarily due to a) volume effect; b) price effect; or c) the scope effect?
Answer… The increase in the sales from $15.389 Bn to $ 15.724 bn is on account of multiple factors,
one of which is the growth in the volume of sales of about 2.5-4.5% as was shown in the outlook and
properties for the year 2017. Furthermore, the same has been evidentiated in the quarterly results of
the company where it has been stressed on the increase on volume. The main area of growth was
natural and organic foods sector1.
Q2: Net Income for fiscal 2016 were $507 million relative to $536 million in fiscal 2015, a fall of
5.41%. Why did NI fall although sales for WF have increased in fiscal 2016 relative to 2015?
Answer… The net income of for the year 2016 has decreased as compared to 2015 although there
has been an increase in the sales. The main reason for the same is more than proportionate increase
in the cost of goods sold and the occupany costs. The other costs are within the budget and the
target. The same has had an impact on the overall profitability.
Particulars 2016 2015
%
increase
Sales 15724 15389 2.2%
Cost of Goods Sold and Occupancy costs' 10313 9973 3.4%
Q3: Why, in your opinion, does WF close its books for the year on September 25, 2016? Why not on
December 31, 2016?
Answer… It has been clearly stated in the Management Discussion and Analysis report of the
company that the closes its operations on 52 or 53 week fiscal year ending on last Sunday in the
month of September. It is thus the comapny’s internal decision and is allowed and permitted by the
local GAAP and the Australian IFRS rules.
1 (Heminway, 2017)
© Copyright 2018 FIRST FINANCE INSTITUTE – All rights reserved

Q4: Can you quantify the operating costs and net financing costs of WF for the fiscal year ended
September 25, 2016?
Answer… The operating costs and the net finance costs incurred by the company during year ended
September 25. 2016 has been shown below :
Particulars 2016
Operating costs
Cost of Goods Sold and Occupancy costs' 10,313
Selling, general and administrative expenses 4,477
Pre-opening expenses 64
Relocation, store closure and lease termination costs 13
14,867
Net Finance Costs
Interest expense 41
41
Q5: Compute EBITDA for WF for Fiscal Year 2016 and comment on why that might be a misleading
measure of performance.
Answer… The EBITDA for the company for the year 2016 has been shown below. It is not the true
measure of performance and gives only the view of operational performance not how the funding
has been done and how the fixed assets have been used. Thus, it gives incomplete information to the
customers2.
Particulars 2016
Income before income taxes
Less: Other income
827.0
11.0
Add: Interest 41.0
Add: Depreciation 498.0
EBITDA 1,355.0
Q6: What is the cash flow from operations from WF for Fiscal Year 2016 and approximately why does
that number differ from EBITDA?
Answer… The cash flow from operations for WF for the year 2016 is $ 1116 Mn and yes it differs a lot
from EBITDA simply because of the fact that many of the elements which appear in the profit and
loss account do not appear. Cash flow statement is prepared on the cash basis whereas the profit
and loss account is prepared on the accrual basis. For e.g., the payment to creditors and the receipts
from customers in shown in cash flow from operations whereas only sales and cost of goods sold is
shown in profit and loss account.
Q7: WF reports an “adjusted EBITDA” number. How is that number defined by WF and does that
number make sense to you?
2 (Alexander, 2016)
© Copyright 2018 FIRST FINANCE INSTITUTE – All rights reserved

Answer… Yes, the company has reported the adjusted EBITDA of $ 1452 Mn by adding non-cash
share-based payment expense and deferred rent to the EBITDA. It is one of the Non GAAP financial
measure and is a mere reconciliation. It hardly do have any financial implication or analytical aspect
but is considered to be most viable and directly comparable measure as per GAAP3.
Q8: Is the operating cash flow number usually greater or smaller than NI? Why? Show in your answer
NI and operating cash flow for WF for Fiscal Year 2016.
Answer… The net cash inflow from the operating activties and the net income for WF for the year
2016 has been shown below as per which the net cash inflow from operating activity is higher than
the net income as many of the components like those of depreciation, interest expenses, sharebased
payment, impairment and ammortization expenses do not form part of the cash flow statement.
Particulars 2016
Net income 507
Net cash provided by operating activities 1,116
Q9: In our discussion of the scissors’ effect, we described four scenarios: (i) a sudden increase in
costs; (ii) after a period of high growth, the rate of growth slows down or even stops, while the costs
continue to increase; (iii) declining revenues with costs remaining constant or decreasing at a much
lower rate; (iv) companies with a strong position in the market place enjoying some economies of
scale. Which of these situations best describes WF and its decision to sell itself to Amazon?
Answer… In the given case of WF, it can be seen that the sales has increased over period of time as
well as the costs but the rate of increase in costs have been much more than the increase in sales so
it can be said that « option (ii) ) after a period of high growth, the rate of growth slows down or even
stops, while the costs continue to increase » looks to be the most viable situation of the WF.
Particulars 2016 2015 % increase 2014 % increase
Sales 15724
1538
9 2.2%
1419
4 8.4%
Cost of Goods Sold and Occupancy
costs' 10313 9973 3.4% 9150 9.0%
Part 2 - Investments Analysis
Q10: Using the method taught in class, estimate how old WF’s PPE (property plant and equipment) is
at the end of fiscal 2016 and comment on its age.
Answer… The age of the property plant and equipment of the company can be found out by the
formula : Net Assets (PPE) / Gross Assets (PPE) = 3,442 / 6,414 = 53.66%. In the given case th same is
above 50% which means that it is not that old and has been utilised less than 50%. Therefore the
company should be aiming to utilise it fully and also replenishing the fixed assets at the same time4.
3 (Linden & Freeman, 2017)
4 (Jefferson, 2017)
© Copyright 2018 FIRST FINANCE INSTITUTE – All rights reserved

Q11: Compute the (net) fixed asset turnover ratio for WF for fiscal 2016. Are fixed assets of WF used
efficiently? You may compare WF with peers or retailers in general, such as HD.
Answer… The fixed assets turnover ratio for the company for the year 2016 is computed as follows :
Fixed Assets Turnover Ratio = Revenues / Net Fixed Assets = 15,724 / (6,341 – 1,975) = 3.6
Whereas the industry trend or for the retailers in general, the same stands at between 8-10%, which
claerly indicates that the company has not been utilising the fixed assets as efficiently in generating
the sales as the peers or retailers in general.
Q12: Compute capex/depreciation ratio for WF for fiscal 2016 and 2015 and 2014. What does the
trend of this ratio tell you about the investment strategy of WF?
Answer… The ratio for the given 3 years has been shown below for the company WF. It shows that
the company was investing in the capital assets almost twice the rate of yearly depreciation but
offlate in 2016, the same has come down to nearly 144%. This shows that earlier the company was
focusing on increasing the investment in fixed assets to increase the sales which has come down
sharply in 2016.
Particulars 2016 2015 2014
Capex 716 851 710
Depreciation 498 439 377
Capex/Depreciation Ratio 144% 194% 188%
Q13: Compute net working capital for WF, as discussed in class, as of the end of fiscal years 2016 and
2015. How do we interpret these numbers?
Answer… The net working capital is defined by the formula (current assets – current liabilities) /
current liabilities. The same has been computed below in the table. The same has increased and
almost doubled as compared to the last year. It shows that the company has adequate current and
liquid assets to pay off the current liabilities on time and will not default.
Particulars 2016 2015
Current Assets 1,975 1544
Current Liabilities 1341 1252
Net Working capital 634 292
Net Working capital ratio 47.3% 23.3%
Q14: On page 17, WF reports “Net working capital” of $634 million at the end of fiscal 2016. Why
does that number differ from the net working capital computation we discussed in class? Which one
is a more informative number?
Answer… In class, the net working capital was calculated by excluding cash and cash equivalents and
the short term debts and divident payable whereas in the given case in Page 17 of the annual report,
all the current assets and the current liabilities have been used. The one which has been used in the
class is more informative as it takes into account only the operational assets and liabilities and thus is
a true measure of the working capital of the company.
Q15: Compute the cash conversion cycle for WF for fiscal 2016 and comment on that cycle.
© Copyright 2018 FIRST FINANCE INSTITUTE – All rights reserved

Answer… The cash conversion cycle is the measure of the number of days in which the cash is rolled
back and gets converted from inventory to cash.
Mathematically, cash conversion cycle : inventory days + receivable days – payable days
CCC = (Inventories x 365)/Cost of Sales + (Receivables x 365)/Annual Sales - (Payables x 365)/Cost of
Sales = (517x365)/10.313 + (242x365)/15.724 - (307x365)/10.313 = 18.3 + 5.6 – 10.9 = 13
It shows that in case the comhas invested cash in the inventory then the same is converted back to
cash in 13 days. It includes inventory days, the time held with the debtors and deducts the payment
days benefit received from payables5.
Part 3 - Financing Analysis
Q16: Compute Net Financial Debt (Net Debt) for WF at the end of fiscal 2016 and fiscal 2015.
Comment on the change in the net financial debt over those two years.
Answer… The net financial debt for the company for the last 2 years has been shown below. It is
calculated by the formula Net Financial Debt = Long term debt + Short term debt- cash and cash
equivalent. It has increased from $ 722 Mn in 2015 to $ 1551 Mn in 2016. This shows that the
company has been using leveraging and thus trying to get a lower weighted average cost of capital by
increasing proportion of the debt.
Particulars 2016 2015
Long term debt 1,776 720
Short term debt 627 521
Cash and cash equivalents 852 519
Net Financial Debt 1,551 722
Q17: For FY 2016, can you decompose the Cash flows from operations into internally generated
funds (IGF) and net change in working capital? Start your calculations with the cash flow from
operations as shown by WF on page 38.
Answer… The break up of the cash flow from operations into internally generated funds and the net
change in working capital has been shown below :
Particulars 2016
Cash flows from operating activities 507
Depreciation and amortization 498
Impairment of long-lived assets 5
Share-based payment expense 49
LIFO expense (benefit) (7)
Deferred income tax expense (benefit) 47
Excess tax benefit related to exercise of team member stock options (4)
Accretion of premium/discount on marketable securities 1
Deferred lease liabilities 43
Other 11
Internally Generated Funds 643
Net change in current assets and liabilities:
Accounts receivable (24)
Merchandise inventories (11)
5 (Choy, 2018)
© Copyright 2018 FIRST FINANCE INSTITUTE – All rights reserved

Prepaid expenses and other current assets (59)
Accounts payable 13
Accrued payroll, bonus and other benefits due team members (29)
Other current liabilities 62
Net change in other long-term liabilities 14
Net change in the working capital (34)
Net cash provided by operating activities 1,116
Q18: For FY 2016, look at the cash flow statement. You will see that WF has spent $944 million on
stock / share buybacks. Simultaneously, WF has borrowed $999 million. Comment on why WF
appears to be borrowing funds to repay its shareholders.
Answer… This is because the company wants to make use of lower cost det instead of high cost
equity. Therefore, the intent of the company is to use the more of debt and less of equity.
Furthermore, the proportion of debt was much lower than this in the capital structure last year
therefore the company had the cushion of using more of leveraging benefit6.
Particulars 2016 2015
Equity 3224 3769
Debt 1688 649
Debt- Equity
Ratio 52% 17%
Q19: Does WF generate enough cash to meet its necessary investment needs?
Answer… The net cash flow during the year has been shown below for the year 2016 as per which the
split has been given for
Particulars 2016
Net cash provided by operating activities 1,116
Net cash provided by investing activities (895)
Net cash provided by financing activities (113)
Net cash flow during the year 108
Q20: Comment on the level of debt (solvency analysis) of WF for FY 2016?
Answer… The debt ratio of the company has been shown below. It shows that the debt level in the
overall capital has increased from 15% to 34%, which is an indication that the company wants to take
the advantage of leveraging and cheaper cost of capital.
Particulars 2016 2015
Equity 3224 3769
Debt 1688 649
Total Capital 4912 4418
Debt Ratio 34% 15%
6 (Goldmann, 2016)
© Copyright 2018 FIRST FINANCE INSTITUTE – All rights reserved

Q21: Comment on the liquidity (liquidity analysis) of WF for FY 2016?
Answer… The liquidity of the company cane be seen from the current and the liquid ratio of the
company. As per the industry trend, the same should be near to 2 times. For WF, the same has
increased from 1.23 times to 1.47 times and hence it shows that the company has enough of current
assets to cover the current liabilities.
Particulars 2016 2015
Current Assets 1,975 1544
Current Liabilities 1341 1252
Current Ratio 1.47 1.23
Part 4 - Profitability Analysis
Q22: Compute the capital employed at the end of FY 2016 and FY 2015.
Answer… The capital employed by the company for the year 2015 and 2016 has been shown below.
Particulars 2016 2015
Long term debt 1,776 720
Short term debt 627 521
Total shareholders’
equity 3,224 3,769
Total capital employed 5,627 5,010
Q23: Compute the after-tax return on capital employed (ROCE) at the end of FY 2016.
Answer… The return on capital employed is calculated by the formula profit after tax divided by
capital employed. The same has been shown below.
Particulars 2016 2015
Profit After tax 507 536
Total capital employed 5,627 5,010
Return on capital
employed 9.0% 10.7%
Q24: Compute return on equity (ROE) at the end of FY 2016.
Answer… The return on equity is calculated by the formula profit after tax divided by equity capital.
The same has been shown below.
Particulars 2016 2015
Profit After tax 507 536
Total shareholder's
equity 3,224 3,769
Return on equity 15.7% 14.2%
© Copyright 2018 FIRST FINANCE INSTITUTE – All rights reserved

Q25: Decompose ROCE into operating margin and asset turnover at the end of FY 2016 and comment
on the decomposition?
Answer… The ROCE can be decomposed into the operating margin and the asset turnover ratio. The
same has been shown below. It indicates that the operating margin from sales of goods and services
has been almost constant at 5.6% whereas the turnover generated out of sales has decreased from
2.68 times to 2.48 times.
Particulars 2016 2015
Net Sales 15,724 15,389
Operating Profit 857 861
Operating Margin 5.5% 5.6%
Total Assets 6341 5741
Assets Turnover ratio 2.48 2.68
Q26: Assume WF’s cost of capital is 10%. Is WF’s economic value added (EVA) is positive or negative?
Answer… The economic value added is calculated by the formula Operating Profit After Taxes
(NOPAT) - Invested Capital * Weighted Average Cost of Capital (WACC)
= (507+498) – (4912*10%) = 1005 – 491.2 = 13.8
Hence, as per the calculation above, the EVA is positive.
Q27: Is WF’s ROCE higher or lower than its ROE? Why?
Answer… As per the calculation below, the ROCE is lower than the ROE and therefore, it can be
concluded that the return on debt capital has been on the lower side as compared to the return on
the equity employed by the company.
Particulars 2016 2015
Return on equity 15.7% 14.2%
Return on capital employed 9.00% 10.70%
Q28: Compute self-sustainable growth for WF as of end of FY 2016. For your calculations please rely
on WFs Statements of Cash Flows, page 38.
Answer… The self sutainable growth rate of the company is calculated by multiplying the return on
equity of company with the payout ratio. The same has been computed below.
SSGR = 0.1570*33% (derived as dividend declared per common share divided by earning per share)
SSGR = 5.19%.
© Copyright 2018 FIRST FINANCE INSTITUTE – All rights reserved

III - Section II. Essay
Can you combine everything we have analyzed so far and provide an overall summary of WF’s
financial situation? Your essay should respect the roadmap of the past four weeks of our Financial
Analysis. (no more than 300 words)
Answer… From the indepth analysis and discussion on the Annual Report of the company, we can see
that the company been performing well in terms of the growth and profitability. It has grown in
terms of both bottomline as well as the topline. Though the sales has been below target, the cost has
been near to the budgeted numbers. The company has also earned a good operating cash-flow in
order to meet the outflow requirements of investing and the financing activity. During the year, it
was seen that the company has increased the proportion of debt and reduced the proportion of
equity in the capital structure in order to have the benefit of leveraging and lower weighted average
cost of capital. The company also has had a healthy return on equity as well as return on capital
employed indicating that the expectations of the shareholders has been met. In terms of the liquidity
the company has improved on the current and liquid ratio indicating that it has enough of the current
assets to meet the current liabilities and other short term obligations. IN terms of solvency, the
company has had an increase in the debt equity ratio but the same is under control and well below
the industry trend of 2 times and hence it can be said that the company has been liquid enough and
has not diluted the ownership. When all the financial statements including profit and loss account,
the balance sheet and the cash-flow statement is being analysed, it can be seen collectively that the
company has performed well and the EVA is positive for the company and thus is creating value.
Furthermore, the sustainable growth rate of the company as has been computed above is more than
5% thus it can be concluded that it is viable company to invest in.
For 2 points extra credit: We would like to bridge this Financial Analysis course and the upcoming
Corporate Valuation course. Looking at the results and conclusions of your financial analysis for WF
and the WF stock performance before and after the Amazon takeover, in your opinion, what financial
characteristics and data could have supported Amazons decision to takeover WF?”
Answer… In case of mergers and acquisitions, takeovers, etc, there are various financial parameters
which are taken into consideration like the growth and the sustainability pattern of the company,
whether or not the company creates value. Therefore some of the factors which could have played a
major role in the Amazon’s decision of takeover of WF are solvency and liquidty ratios, current and
future performance, valuation of the company, the turnover, efficiency and the profitability ratios of
the company. Furthermore, since there is an increased focus on corporate governance and
sustainability of the companies offlate, so the same would also have been taken into consideration.
© Copyright 2018 FIRST FINANCE INSTITUTE – All rights reserved

Bibliography
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, p. 145.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, pp. 353-354.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making.
Business Ethics Quarterly, 27(3), pp. 353-379.
© Copyright 2018 FIRST FINANCE INSTITUTE – All rights reserved