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MBA 520 Accounting and Financial Analysis 16TW1, 3-1 Financial Performance and Health 3-1 Financial Performance and Health of Whole Foods Market Inc. FINANCIAL PEFORMANCE AND HEALTH OF WHOLE FOODS MARKET, INC. (WFM) MBA 520 Accounting and Financial Analysis 16TW1, 3-1 Financial Performance and Health 2 A. Organizational Context of Whole Foods Market, Inc. Whole Foods Market, Inc. (WFM) is an American supermarket chain specializing in natural and organic foods. It first opened on September 20, 1980 in Austin, Texas where it is currently headquartered. Whole Foods is the leading retailer of natural and organic foods, and the nation’s first “Certified Organic” grocer. It has one operating segment, that is, the natural and organic foods supermarkets and operates 431 stores in the United States, Canada and United Kingdom. The company mainly specializes in the retail of natural and organic foods, targeting consumers who are looking for fresh, natural and healthy food choices. Its product offerings are divided into two categories namely perishable and non-perishables (Hellman, 2014). Some key features of WFM’s organization which help set the boundaries for its business decisions include the specialization in organic and natural foods, the marketing focus on higher income households, and the original placing of stores in higher income areas. Whole Foods originally targeted upper and upper middle class households with their premium priced organic products. Whole Foods Market Inc. is organized and managed based on the geographical regions of its prime locations, business function as well as products. The company is organized on a four-tier hierarchy namely the global headquarters, regional offices, facilities and stores and its stores are organized around 12 geographic divisions. Accounting and financial information is always prepared by consolidating the results of operations from all the comparable stores across the geographic regions. Business decisions are made with regards to the four levels of the company’s organizational structure as well as based on the factors affecting the 12 geographic divisions of the company (Whole Foods Market Inc. - AnnualReports.com, 2016). B. Recent Financial Performance MBA 520 Accounting and Financial Analysis 16TW1, 3-1 Financial Performance and Health 3 The financial performance of Whole Foods market Inc. will be analyzed by assessing the main consolidated financial statements of the company for the past three years. Consolidated Income Statements As seen in Appendix 1, the company’s revenue amounts are favorable as per the industry standards and are increasing each year meaning that revenues are growing. The company’s operating income increased from 2013 to 2014 but showed a slight decrease in 2015 and the same trend is seen in the net income (Bloomberg.com., 2016). Generally, the company managed to maintain its level of operations for the past three years. Its Earnings Before Interest, Taxes, Depreciation and Amortization has steadily increased over the years and the adjusted figures show that the company is financially healthy as it is able to generate sufficient amounts of profits from its operations. The graph below shows the movement in the key ratios of the income statements Trend in the Income Statement Ratios 70 60 50 40 30 20 10 0 2013 Gross profit margin Operating profit margin 2014 2015 Net profit margin EPS The gross profit shows some slight improvement over the years but the operating profit and net profit margin have consistently decreased over the past three years. The EPS was MBA 520 Accounting and Financial Analysis 16TW1, 3-1 Financial Performance and Health 4 favorable from 2013 to 2014 but dropped again to unfavorable level in 2015. This shows that Whole Foods Market Inc. is not consistent in generating earnings from its operations (Bloomberg.com., 2016). One item that has stood out in the consolidated income is revenues. The company has been consistent in growing its revenues over the years and this is a good indication of a healthy business. Consolidated Cash Flow Statements From the summary of the consolidated cash flow statements of Whole Foods Market Inc. in appendix 2, it can be seen that the company has recorded relatively strong and positive net cash flows from operating activities, with the amounts increasing over the years, which is a good sign of a healthy company. The movement of cash from investing activities indicate that the company has increased the amount of cash it invests in current and fixed assets. The amounts are neither too high nor too low which means that Whole Foods Market is a generally healthy company as it has shown a remarkable improvement in its investment activities although 2015 recorded a slight drop in cashflows from investing activities. The cash flows from financing activities increased in 2014 but the amount dropped in 2015. Generally, the amounts for each year show that the company borrows funds to finance its activities in moderate amounts meaning that it does not solely depend on debts to finance its operations. The total cash flows from all the activities of the company over the three years are positive although the amounts are not very strong but this is an indication that the company generates sufficient amount of funds to cover it expenses in the near term. The cash flows from operating activities stand out and this is an indication that the company is generating more cash from the sales of its products and services. In addition, the amount of cash from operating activities for the three years are higher the MBA 520 Accounting and Financial Analysis 16TW1, 3-1 Financial Performance and Health 5 company’s net income for the same years, the figures are almost double that of the net income and this indicates that Whole Foods Market is a healthy company (Investor.wholefoodsmarket.com., 2016). The organization’s underlying financial performance is not favorable as the analysis show inconsistent results over the recent years. The inconsistencies in the company’ performance especially in relation to the operating profits and net income is attributed to disparities in comparable store sales as well as the stores that were opened or acquired less than one fiscal year. There is also an ongoing value strategy being undertaken by the company to improve its product offerings and value to customers and this explains the fluctuations in the financial performance across the years. Generally, the business is still struggling in its industry because from the analysis of its financial statements, the company has recorded mixed performances, with some areas showing more strength and others indicating some weaknesses (Shearn, 2012). Current Financial Statements Whole Foods Market Inc. is capitalized on a mixture of debt, equity as well as assets. This proportionate mix in the company’s capital structure shows that it is a healthy company. The ratio of its total debt to capital and total debt to equity as seen in appendix 3 is almost the same, meaning that the company uses a fair mix of debt and equity to obtain capital for its operations. The company has a current ratio of 1.23 meaning that it is able to pay off its current liabilities using its current assets. The company has enough cash to cover all the current obligations (Shearn, 2012). The graph below shows the overall capital structure of the company; MBA 520 Accounting and Financial Analysis 16TW1, 3-1 Financial Performance and Health 6 Capital Structure of Whole Foods Market Inc. LONG-TERM DEBT TO TOTAL CAPITAL 1.62 LONG-TERM DEBT TO EQUITY 1.64 TOTAL DEBT TO TOTAL ASSETS 1.13 TOTAL DEBT TO TOTAL CAPITAL 1.7 TOTAL DEBT TO TOTAL EQUITY 1.72 0 0.5 1 1.5 2 In addition, the company has the right amount of cash, key personnel, reputation and physical assets to fuel future growth and if it has too much cash, its business decisions should be focused on reinvesting the excess funds so as to generate more cash flows. The current market value of the company is 10.19B and has a Price-To-Earnings ratio of 19.97 and these values suggests to an investor that the business is bound to grow in increase its value in future and there a worthy choice of investment (Whole Foods Market Enterprise Value (WFM), 2016). MBA 520 Accounting and Financial Analysis 16TW1, 3-1 Financial Performance and Health 7 References Bloomberg.com., (2016). WFM: NASDAQ GS Stock Quote - Whole Foods Market Inc. Bloomberg.com. Retrieved 19 November 2016, from https://www.bloomberg.com/quote/WFM:US Hellman, J. (2014). Whole Foods Market: A Short SWOT Analysis. Value Line. Retrieved from http://www.valueline.com/Stocks/Highlights/Whole_Foods_Market__A_Short_SWOT_ Analysis.aspx#.VVjmu9HbKM8 Investor.wholefoodsmarket.com., (2016). Whole Foods Market, Inc. - Whole Foods Market Reports Fourth Quarter and Fiscal Year 2016 Results. Investor.wholefoodsmarket.com. Retrieved 19 November 2016, from http://investor.wholefoodsmarket.com/investors/press-releases/press-releasedetails/2016/Whole-Foods-Market-Reports-Fourth-Quarter-and-Fiscal-Year-2016Results/default.aspx Shearn, M. (2012). The investment checklist: The art of in-depth research. Hoboken, NJ: Wiley. Whole Foods Market Enterprise Value (WFM). (2016). Ycharts.com. Retrieved 19 November 2016, from https://ycharts.com/companies/WFM/enterprise_value Whole Foods Market Inc. - AnnualReports.com. (2016). Annualreports.com. Retrieved 19 November 2016, from http://www.annualreports.com/Company/whole-foods-market-inc MBA 520 Accounting and Financial Analysis 16TW1, 3-1 Financial Performance and Health 8 Malcolm, H. (2015, May 7). Whole Foods to open chain for Millennials. USA TODAY. Retrieved from http://www.usatoday.com/story/money/2015/05/07/whole-foods-cheapermillennial-chain/70934302/ MBA 520 Accounting and Financial Analysis 16TW1, 3-1 Financial Performance and Health Appendix 1: Consolidated Income Statement Ratios Gross profit margin Operating profit margin Net profit margin EPS 2013 64.16 6.48 4.27 1.47 2014 64.46 6.58 4.08 1.56 2015 64.81 5.59 3.48 1.48 Appendix 2: Summary of the consolidated cash flows 2013 2014 2015 $1,009 $1,088 $1,129 -289 -484 -455 activities -517 -698 -622 Total cash flows $290 $190 $237 Net Cash flows from operating activities Net cash flows from investing activities Net cash flows from financing 9 MBA 520 Accounting and Financial Analysis 16TW1, 3-1 Financial Performance and Health 10 Appendix 3: Capital Structure of Whole Foods Market Inc. Total Debt to Total Equity Total Debt to Total Capital Total Debt to Total Assets Long-Term Debt to Equity Long-Term Debt to Total Capital 1.72 1.70 1.13 1.64 1.62 MBA 520 Acctng. and Financial Analysis 16TW1, 5-1 Success Factors, Risk, and Projections 5-1 Final Project Milestone Two: Success Factors, Risk, and Projections MBA 520 Acctng. and Financial Analysis 16TW1, 5-1 Success Factors, Risk, and Projections 2 SUCCESS, RISK FACTORS AND PROJECTIONS FOR WHOLE FOODS MARKET INC. Introduction From the analysis of the financial health of Whole Foods Market Inc., it was evident that the company has a healthy financial performance. However, there are various factors that may impact either negatively or positively on the current and future performance of the company. The aim of this paper is to examine the success factors and well as the risks that may affect the performance of the company and make projections on the company’s future performance. SUCCESS FACTORS AND RISKS a. Success factors: Priorities The first strategic priority of Whole Foods Market Inc. is unit development. The company is striving to open new stores and this year alone, whole Foods has opened 38 new stores and is set to reach a target of 500 stores in 2017. This is so because retail innovation is a key success factor that has seen the company gaining more market share. With new stores, the company will have more comparable stores to account for and an increase in the number of financial statements to be consolidated at the end of every quarter and fiscal year. Another strategic priority is refreshing of the older stores. Remodeled stores have seen the company experiencing an overall boost in comps hence more results of operations (Whole Foods Market Inc. - AnnualReports.com, 2016). Value strategy is an ongoing strategic initiative taken by Whole Foods and has become a success factor in driving sales growth for the company. Whole Foods has been implementing competitive price match on many if its product items at the national level in order to narrow the price gaps on popular value items so as to attract more customers and increase sales. The effect MBA 520 Acctng. and Financial Analysis 16TW1, 5-1 Success Factors, Risk, and Projections 3 of this strategic priority on business decisions is that management has to broaden the selection of the company’s products at entry-level price points as well as increase promotional activities in order to increase sales revenues (Hellman, J. (2014). Whole Foods Market Inc. is also focusing on digital initiatives to drive customer engagement inn its stores. The company has entered into strategic partnerships with other companies through acquisitions of smaller chains to offer home delivery and customer pickup services in major markets as well introduce an online subscription club. This strategy is expected to increase the sales revenues (Whole Foods Market Inc. - AnnualReports.com, 2016). The management of Whole Foods Market is growth-oriented as the company is focused more on opening new stores and signing leases while pursuing acquisitions of smaller chains and relocating in international markets to expand its operations. The organization’s approach to risk is through aversion and minimization. The company has put in place strategies to avoid any risk could have material effect on the results of its operations in the long-term planning horizons and minimize where possible the impact of such risks in the short-term planning horizons (Malcolm, 2015) Success Factors: Non-Financial Factors There are various non-financial factors that are a critical to the success of Whole Foods such as market share, human resources, patents, reputation as well as physical facilities. The company can capitalize on market share by penetrating in new markets and promoting its products aggressively in its existing major markets. Whole Foods can also capitalize on its reputation by opening new stores and penetrating new markets so as to acquire more customers, gain market share and increase its revenues. Human resources can be capitalized by utilizing the MBA 520 Acctng. and Financial Analysis 16TW1, 5-1 Success Factors, Risk, and Projections 4 competencies of expert employees to increase productivity and brain-storm new products and ideas for generating more business returns. The company should hire competent personnel, train and develop them so as to increase their productivity. For the patents, the company should ensure that it obtains copyrights for its patents to avoid duplication and it can also sell outright or license to other parties in different geographical areas to expand its market share. It can also use patents to charge higher prices for its patented goods and reduce competition (Whole Foods Market Inc. - AnnualReports.com, 2016). Success factors: Risks 1. The most significant internal risks to the company’s financial performance include breach of information security and regulations that can lead to litigations and poor reputation hence withdrawal of customers and partners which in turn can lead to financial losses. Loss of key management personnel and inability to recruit and retain competent and qualified team members can lead to loss of goodwill and overall productivity (Whole Foods Market Inc. - AnnualReports.com, 2016). Indebtedness. In 2015, the company entered into a new credit facility that provides for unsecured revolving credit facility amounting to $500 million that has the potential of increasing from time to time thus presenting a risk of high interest expense in future that can eat into profits. The company’s internal control system may fail to detect or prevent misstatements which may lower the degree of compliance with policies and procedures that could result to data breaches and litigations that can lead to serious financial losses. 2. The company is vulnerable to technological changes such as automated inventory management in retailing that could render its machines obsolete as well as increase in cyber-attacks that can lead to huge data breaches and financial implications. Seasonality in productions can disrupt supplies of fresh produce and lower sales especially during summer (Whole Foods Market Inc. - AnnualReports.com, 2016). MBA 520 Acctng. and Financial Analysis 16TW1, 5-1 Success Factors, Risk, and Projections 5 PROJECTIONS Likely Performance The performance of the company is likely to improve in the coming years. Based on the past and current results, it is clear that Whole Foods has been improving on its performance and if the trend continues, the company is likely to achieve a net income of $2,132 million by 2019 compared to current figure of $507 million, with total consolidated revenues increasing from $15, 724 million to $17, 516 million according to the projections in appendix 1. This is in line with the company’s goal of opening new stores each year to increase revenues. Best and Worst Case Scenarios  Best Case Scenario It is assumed that the company will grow its revenues by 4% over the next year. In the best-case scenario, the projections from appendix 2 show that the company will be able to grow its revenues by 8%, from $15,724 to $16,981 totaling to an average of $1,257 million.  Worst Case Scenario In the worst-case scenario, the company will only manage to grow its revenues by 2%, that is from $15,724 to $16,038, totaling to an increase of $314 million only. Discussion My projections are appropriate because the forecasting methodology I used was based on the trends in performance over the past 3 years, which have been showing a consistent improvement. The projections therefore are a reflection of future performances if the same trend continues. The projections were based on the assumption that the company will increase its sales by 4%. This was in line with the projection by the company’ management who forecasted an MBA 520 Acctng. and Financial Analysis 16TW1, 5-1 Success Factors, Risk, and Projections 6 increase in sales of between 2.5% to 4.5% in their 2017 outlook. My assumption and forecasting methodology are aggressive but achievable because they within the results foreseen by the management and in line with their strategic priorities. An increase in the value of my assumptions will increase my projections while a decrease in the value of my assumptions will decrease my projected figures. Conclusion From the analysis of the success factors, risks and projections, it is evident that Whole Foods Market has a chance of experiencing a healthy financial performance if it continues to exhibit the same upward growth trend and to capitalize on its success factors while reducing and mitigating the risks posing a threat to its financial performance. MBA 520 Acctng. and Financial Analysis 16TW1, 5-1 Success Factors, Risk, and Projections 7 References Hellman, J. (2014). Whole Foods Market: A Short SWOT Analysis. Value Line. Retrieved from http://www.valueline.com/Stocks/Highlights/Whole_Foods_Market__A_Short_SWOT_Analysis. aspx#.VVjmu9HbKM8 Whole Foods Market Inc. - AnnualReports.com. (2016). Annualreports.com. Retrieved 19 November 2016, from http://www.annualreports.com/Company/whole-foods-market-inc Malcolm, H. (2015, May 7). Whole Foods to open chain for Millennials. USA TODAY. Retrieved from http://www.usatoday.com/story/money/2015/05/07/whole-foods-cheaper-millennialchain/70934302/ MBA 520 Acctng. and Financial Analysis 16TW1, 5-1 Success Factors, Risk, and Projections Appendix 1 Projections for the Consolidated Income Statement for the year Whole Foods Market Inc. Total revenue Cost of revenue Gross profit Operating Expenses: Research and development Sales, General and Admin Non-Recurring items Other operating items Operating Income Add Income/ expense items Earnings Before Interest and Tax Interest expense Earnings Before Tax Income tax Minority interest Equity earnings Net Income Current Future Projections (in Year Millions 2016 2017 2018 2019 $15,724 $16,352 16,762 $17,516 10,313 10,400 10,420 10,500 5,411 5,952 6,342 7,016 0 4,477 77 0 0 4,480 75 0 0 4,482 70 0 0 4,490 68 0 857 1,397 1,790 2,458 11 868 41 827 320 0 0 12 1,409 0 1,409 280 0 0 10 1,800 0 1,800 300 0 0 14 2,472 0 2,472 340 0 0 $1,129 $1,500 $2,132 $507 8 MBA 520 Acctng. and Financial Analysis 16TW1, 5-1 Success Factors, Risk, and Projections Appendix 2 Scenario Summary Changing Cells: $I$5 $I$21 Result Cells: $A$5 $B$5 $C$5 $D$5 $E$5 $F$5 $G$5 $H$5 Current Values: Best Case Worst Case 5% 30% 8% 50% 2% 20% Total revenue Total revenue Total revenue $15,724 $16,195 16,762 $17,516 $16,981 $17,660 18,102 $18,917 $16,038 $16,518 17,097 $17,866 9 MBA 520 Accounting. and Financial Analysis 16TW1, 7-1 Business Opportunities 7-1 Final Project Milestone Three: Business Opportunities BUSSINESS OPPORTUNITIES FOR WHOLE FOODS MARKET INC. MBA 520 Accounting. and Financial Analysis 16TW1, 7-1 Business Opportunities 2 Introduction Whole Foods Market Inc is a supermarket chain in America that exclusively deals with organic foods and is the first grocery outlet to be certified as an organic grocery under the National Organic Standards. Despite it being a grocery store, it’s a Fortune 500 company with revenues of US$ 15.7 billion as at September 30th, 2016 making it amongst the 30 largest retailers in America. The company was started on September 20th, 1980 in Austin, Texas where it still has its headquarters after the merger of two stores, Safer Way Natural Foods, and Clarksville Natural Grocery. The founders were John Mackey, who is the current CEO, Walter Robb former Co-CEO, Renee Lawson Hardy, Craig Weller and Mark Skiles. It started with a staff base of 19 people but currently has 91,000 employees, with over 431 branches spread across the U.K, Canada and its headquarters, USA. Whole Foods prides itself on its high standards regarding the quality of products it sells with one of their core value stating that they “sell the highest quality natural and organic products available.” It exclusively deals with products that it certifies as being natural and organic. It also sells products that are rated as being eco-friendly including some that have been certified by the US Department of Agriculture. In order to give its customers full transparency over the products they buy, they have collaborated with third party auditors and have employed an in-house rating system which classifies the products it sells; from low to products of high standards depending on the productions standards, sustainability of the product and other factors. Whole Food Market Inc is considering investing in a facility that will add value to the stakeholders of the company and remain true to the core value of the company MBA 520 Accounting. and Financial Analysis 16TW1, 7-1 Business Opportunities 3 Investment Decision Whole Foods Market Inc. has had its share of controversies with a modest research revealing a plethora of class action suits, critics reviews, buyer, and lobbyist protest and published books attacking the ‘false’ notion that it sells ‘natural’ foods. The National Director of the Organic Consumer Association, Ronnie Cummins, has gone as far as publishing a book that states that Whole Foods uses the label organic as a marketing gimmick (Cummins & Lilliston, 2004). Additionally, in her 2006 exposé titled the ‘Big-box swindle:The true cost of megaretailer,’ author Stacey Mitchell states that Whole Food has peddled a lie that it promotes local foods. Besides, in 2004 the Attorney General of California filed a lawsuit against Whole Food for the presence of high levels of carcinogens in its products dealing a huge blow to the repute of the company as an organic campaigner. In light of the controversies the company faces that are aimed at the core their essence and the resultant plummeting stock value of Whole Food Market shares by over 45% from their former highs to a recent 6% dip in 2016, stakeholders at the firm have become increasingly alarmed. Analysts have insisted that the firm’s stock’s price-to-earnings are highly undervalued, trading at 21 times instead of the historical rate of 30 times the expected earnings (Eule, 2016). This, therefore, shows that at the center of the whores that plague Whole Food is the fall of investor and client confidence. The company, therefore, has to invest extensively in ventures that signal their intention to address the above issues of toxins in their products, being false naturalists and importing products instead of promoting local suppliers. Hence, the proposal for the construction of a green roof that is geared towards renewing stakeholder confidence, earning the company increased profits and reducing overhead expenses. MBA 520 Accounting. and Financial Analysis 16TW1, 7-1 Business Opportunities 4 Green Roofs Also known as eco-roofs, living roof or horizontal vegetated complex partitions. Green roofs are the urban solution to global warming, organic living, and environmental sustainability. It is a roof that is covered by vegetation and can incorporate other green technologies such as solar photovoltaic panels or wind turbines to increase the level of eco-consciousness accorded by the roof. The benefits of green roofs are copious in that they not only offer a return on investment but provide an opportunity for Whole Food to offer impactful social, environmental and economic benefits to the cities where the roofs will be installed. Whole Food will, therefore, invest in building green roofs that will have vegetation (greenhouses) at three of their stores located in urban cities; Tribeca (New York), Bethesda (Washington) and Campbell (California). Main Benefits of Green Roofs Organic Food Production and Food Security Green roofs have been noted to provide important benefits in terms of the production of organic food produce. They are known to aid in providing the nutritional needs of the communities that rely on them (Tomalty, et. al., 2010), a fact that is paramount for the project to be of significance to Whole Foods. A researched by Tomalty, revealed that urban agriculture has been found to provide city dwellers with a source of produce that is not only organic but one that is also fresh. Increased Product Perceived Quality A level of confidence and pride is associated with produce farmed in greenhouses as their source and production standards are observable and can be guaranteed. The current interest by MBA 520 Accounting. and Financial Analysis 16TW1, 7-1 Business Opportunities 5 the mass media and the public on environmentally friendly products and services has been on a rapid increase in North America (Tomalty, et. al., 2010). Although green roofs are yet to become a common feature in the US they have become well established in Europe and Whole Foods being a pioneer intends to establish their presence here. Environmental Benefits They have the ability to capture and store carbon dioxide (GHG sequestration); this is because the vegetation planted on them absorbs gaseous pollutants through their leaf stomates (Tomalty, et. al., 2010). The green roofs also reduce the heat island effect, a conundrum related with the amassing of heat in urban areas. They also assist in retaining stormwater thereby reducing peak flows into the storm water systems of urban areas. Property Values and Infrastructure Benefits Green infrastructure investments have been revealed to progressively influence the property value and marketability of the real estate they are installed in (Carter & Keeler, 2008). They also reduce the amount of energy that is consumed by the infrastructure by reducing the temperature and heat loss during cold periods. They also are known to reduce electromagnetic radiation, noise pollution, increase the building’s fire retardation and increase the roofing membrane durability. There is a multitude of other benefits that are associated with green roofs that can't all be exhaustively covered. The current trend of the world in general and that of the majority of consumers of Whole Foods is to lean towards a more eco-conscious view. This, therefore, makes the investment not just a beneficiary one but a necessary one. MBA 520 Accounting. and Financial Analysis 16TW1, 7-1 Business Opportunities Monetary Benefits of the Green Roofs Based on figures obtained from various public sources and other research papers the following are the assumptions of the estimated benefits of the living roofs for the areas in which they will be set-up. S/N o FACTOR BENEFICIARIES BENEFITS Whole Food Market 1 Property Value Inc 4.5% Increase in property value Whole Food Market 2 Productive Garden Product Perceived 3 Quality Inc 4.5% Increase in property value Whole Food Market 11% Increase in perceived Inc quality Whole Food Market 4 Food production Inc $20/m2 of growing month 5 Stormwater retention Municipality & Region $45.82/m2 per year 6 Air quality Municipality & Region $839/ha per year 7 GHG sequestration Municipality & Region $39/ha per year Additionally, based on the estimates presented in the appendices and figures obtained from Whole Foods financial statements, these are the estimated monetary benefits of the green roofs. Description Unit FY 16 Expected Period Ended On (MM/DD/YYYY) 9/25/2016 YR 5 First Reported Date (MM/DD/YYYY) 11/18/2016 Change $ Million Sales 15,724 17,454 $ Million Cost of goods sold and occupancy costs 10,313 9,694 6 MBA 520 Accounting. and Financial Analysis 16TW1, 7-1 Business Opportunities $ Million $ Million $ Million $ Actual Gross profit Selling, Operational and maintenance expenses Net income Basic earnings per share 5,411 6,006 4,477 4,298 507 563 1.55 1.72 7 Cost Implications of the Green Roofs The expenses that are to be incurred in the construction of the green roofs will vary for the three locations but an average estimate has been chosen. The average cost of the project is estimated to be around $3,740,000 and $11,220,000 for the entire project. This is based on the fact that while an intensive green roof, similar to the one that will be set-up in the three locations costs around $2,368/m2 ($220/ft2) with the average size of each roof being 17,000 Sq. Ft. Effect of the Benefits and Cost on Projections The Project offers a positive return after 6 years although it requires a huge initial capital outlay. This means that the project is beneficial and should be implemented. Additionally, as shown in the figures below, most of the benefits of such a project are not tangible but will have ripple effects on the society and community such as the environmental benefits. S/No 1 2 3 PARAMETER Internal Rate of Return (IRR) Payback, years Return on Investment (ROI) MEASURE 4.70% 6 209% It is estimated that Whole Foods will require debt and equity financing in the portions of 30% to 70% respective, for the project to be implemented. This will mean that for the duration of the debt, which is 10 years, the firm will be paying interest and refinancing the investor’s equity. MBA 520 Accounting. and Financial Analysis 16TW1, 7-1 Business Opportunities 8 Additionally, expenditures for the firm will initially be high for the first year that the project will be set-up until the eventual commissioning of the project which is expected to be done in the next financial year. After that, minimal additional expenses are expected to be incurred with savings expected to be made on energy usage for the buildings, Investment Implications Whole Foods will focus a huge portion of their cash flow to the realization of the green roof projects meaning that initially there will be a huge but short term capital injection. Cash flow will be prioritized to the projects until their successful completion in the subsequent year. Following that, the successive year will involve less spending that will primarily focus on overhead costs as the green roofs will still be in the developmental stage. Expenditure will, however, go down in later years with savings being accrued as earlier mentioned. The real estate value of the properties is also expected to go up by 4.5% after the 5th year due to the benefits that are associated with green investments. This will be of benefit as the longterm asset value of the firm i.e. portfolio value will be marked up. This will increase the book value of the firm. The company will also experience an increase in the perceived quality of its products coupled by a jump in its stock price. This will mean greater earnings for both the company and investors in general. Additionally, the produce from the green roofs will be sold at the outlet and the earnings from those sales will be a boost in the overall revenue of the firm. In conclusion, the firm should implement the green roof project in the three stores as the benefits of the projects outweigh the costs that will be incurred. The high estimated return on investment combined with the short payback period of the projects makes them worthy investments. As initially stated the benefits of green roofs are copious in that they not only offer MBA 520 Accounting. and Financial Analysis 16TW1, 7-1 Business Opportunities a return on investment but provide an opportunity for Whole Foods to offer impactful social, environmental and economic benefits to the cities where the roofs will be installed. 9 MBA 520 Accounting. and Financial Analysis 16TW1, 7-1 Business Opportunities 10 References Carter, T., & Keeler, A. (2008). Life-cycle cost–benefit analysis of extensive vegetated roof systems. Journal of environmental management, 87(3), 350-363. Cummins, R., & Lilliston, B. (2004). Genetically engineered food: A self-defense guide for consumers. Da Capo Press. Eule, A. (2016). Why a Big Sustainable Investor is Buying Whole Foods. Retrieved from URL: http://www.barrons.com/articles/why-a-big-sustainable-investor-is-buying-whole-foods1481304187?mod=yahoobarrons&ru=yahoo&yptr=yahoo Mitchell, S. (2006). Big-box swindle: The true cost of mega-retailers and the fight for America's independent businesses. Beacon Press. Tomalty, R., Komorowski, B., & Doiron, D. (2010). The monetary value of the soft benefits of green roofs. Canada Mortgage and Housing Corporation, Ottawa. MBA 520 Accounting. and Financial Analysis 16TW1, 7-1 Business Opportunities 11 APPENDICES PROJECTIONS S/No PARAMETER MEASURE 1 Internal Rate of Return (IRR 4.70% 2 Payback, years 3 Return on Investment (ROI) 4 Debt Financing as % of Total Investment 30% 5 Equity Financing as % of Total Investment 70% 6 Interest on Debt 14% 7 Debt Term (Yrs) 10 8 Depreciation of green roofs 9 Corporate Tax 30% 11 COE 25% 12 COD 14% 13 WACC 14 Yr.1-Yr.5 Growth Rate of Earnings 3.1% 14 Yr.1-Yr.5 Growth Rate of Perceived Product Quality 5.0% 15 Initial Premium, $/ft2 of roof (extra cost of installing a green roof) 16 NPV of Installation, Replacement, & Maintenance, $/ft2 of roof 6 209% 5% 20.440% ($8.00) ($17.70) NPV of Stormwater, $/ft2 of roof (savings from reduced infrastructure 17 improvements and/or stormwater fees) 18 NPV of Energy, $/ft2 of roof (energy savings from cooling & heating) $10.20 $8.30 Net Present Value (installation, replacement & maintenance + stormwater + 19 energy NPV) $0.70 20 NPV of CO2e, $/ft2 of roof (emissions, sequestration & absorption) $2.90 21 NPV of Real Estate Effect, $/ft2 of roof (value, rent, absorption & vacancy) $74.10 NPV of Community Benefits, $/ft2 of roof (biodiversity, air quality, heat 22 island, etc.) $30.90 MBA 520 Final Project Guidelines and Rubric Overview Businesses and other organizations must regularly measure their financial performance and health in order to make operational and strategic decisions affecting the organization’s future. Management professionals utilize income statements, balance sheets, cash flow statements, and a limitless variety of other reports and techniques to evaluate an organization. They also work closely with professionals from departments across the organization—including marketing, human resources, and operations—to ensure that the business runs smoothly and that financial decisions are not made in isolation. For this project, you will use the accounting and finance skills you learned in the course to review the past and current financial performance and health of a global, publicly traded company. Based on that analysis, you will create initial financial projections that forecast the company’s performance under different scenarios and identify internal risks and opportunities in order to begin planning future activities. This assessment addresses the following course outcomes:       Assess organizations’ underlying financial performance and health by analyzing relevant financial statements, variances, ratios, and other financial information Draw connections between accounting and financial information and the broader organizational context for making integrated business decisions Assess critical factors driving financial risks and opportunities for informing management priorities Forecast business performance under different assumptions about inputs and processes using simple financial models Evaluate the internal costs and benefits of business opportunities for their impact on budgeting and business decisions Communicate financial analyses clearly and coherently for persuading internal stakeholders of the validity of observations and conclusions Prompt Imagine you are a newly hired manager at a publicly traded, global corporation of your choosing. (Your instructor must approve your choice. You may also choose a non-publicly traded organization, if your instructor verifies that the organization has sufficient financial information available to complete the project.) You have been asked to review the company’s past and current financial performance and health and make initial financial projections in order to begin planning for the upcoming year. Your supervisor is particularly interested in a fresh perspective on what your analysis reveals about potential risks and opportunities, as well as recommendations for next steps. Because you will eventually need to convince internal stakeholders, including senior management, of the feasibility and desirability of your suggested activities, it is important that you justify your projections and recommendations, explaining how they were informed by existing information and modeling different scenarios. Your financial analysis and projection report will include several financial tables, along with a comprehensive narrative describing the organization’s context, financial performance and health, and your analytical approach and conclusions. Your report should be geared toward an executive audience with basic accounting and finance knowledge and should be well organized, clear, concise, convincing, and free of distracting errors. Note that, in addition to the organization’s financial statements and website, other authoritative news sources—such as annual reports and external sites like Bloomberg.com—may offer insights that facilitate analysis or provide information on the organization’s priorities, challenges, and geographic distribution. Specifically, your financial analysis and projection report must include the following critical elements: I. Executive Summary. Clearly and concisely summarize your principal findings, projections, and recommendations with an eye to persuading busy executives to support your ideas and to read further. II. Approach. Provide your intended audience with a solid, but brief, sense of the parameters of your analysis and who else you would consult in refining it further and why. Remember, your goal is to convince readers of the validity of your observations, while recognizing limitations that affect business decisions. III. Financial Performance and Health. In this section, you will evaluate the organization’s recent financial performance and current financial health, given its organizational context. In particular, you must cover: A. Organizational Context 1. What key features of the organization (e.g., major products or services, customers, location, etc.) help set the boundaries for business decisions? In other words, what key goods or services does your organization provide, for whom, where, and why? 2. How is the company organized and managed (e.g., by product groups, geographic region, function, etc.)? How does that affect accounting and financial information and subsequent business decisions? B. Recent Financial Performance 1. Assess what the organization’s consolidated income statements for the last three years say about its financial performance. Use relevant indicators, graphs, and spreadsheets to support your narrative. (Include all spreadsheets in an appendix.) For example, what do the amounts and year-to-year changes in revenue, operating income, net profit or loss, and Earnings Before Interest, Taxes, Depreciation, and Amortization tell you? Do any items stand out? 2. Assess what the organization’s consolidated cash flow statements for the same time period say about its financial performance. Use relevant indicators, graphs, and spreadsheets to support your narrative. For example, what do the amounts and year-to-year changes in cash from operating activities, cash from investing, cash from financing, and total cash flow tell you? Do any items stand out? 3. Assess the organization’s underlying financial performance. Support your answer with the analysis above and relevant research. For example, is recent performance substantially affected by unusual events such as a major acquisition or spin-off? Is the business thriving or struggling in its industry? How do you know? C. Current Financial Health 1. Assess how the organization is capitalized and what that tells you about its financial health. Support your response with relevant graphs, spreadsheets, and indicators such as “cash and cash equivalents,” total debt, shareholders’ equity, current ratio, debt/equity ratio, and Days Sales Outstanding (DSO). For example, does the organization have enough cash for payroll and other bills? Does it have the right mix of debt versus equity (stock)? How do you know? 2. Does the organization have the right amount of cash and other resources (e.g., key people, technologies, reputation, physical assets, etc.) to fuel future growth? What does this suggest for business decisions? For example, if it has too much cash, should it pay a large dividend, repurchase its own shares, or reinvest the excess funds? 3. Assess the financial value of the company using relevant indicators. What does your assessment imply for future business health and performance? For example, what is the business’s current market value? What is its price-to-earnings ratio? What do these suggest about investor perceptions of the business’s future? IV. Success Factors and Risks. Use this section to discuss the factors that may affect current and future performance. Specifically: A. How do the organization’s financial and strategic priorities affect accounting procedures and business decisions? How might that affect business success? For example, is management growth-oriented or efficiency-oriented? What is the organization’s approach to risk and short- versus longterm planning horizons? B. How might the organization better capitalize on non-financial factors such as market share, reputation, human resources, physical facilities, or patents? Support your response with relevant research and analysis. C. What are the most significant internal risks to the company’s financial performance? Give evidence to support your response. For example, is the company vulnerable to technological changes or cyber-attacks? Loss of high-talent personnel? Production disruptions? V. Projections. Based on what you know about the organization’s financial health and performance, forecast its future performance. In particular, you should: A. Project the organization’s likely consolidated financial performance for each of the next three years. Support your analysis with an appendix spreadsheet showing actual results for the most recent year, along with your projections and assumptions. Remember, your supervisor is interested in fresh perspectives, so you should not just replicate existing financial statements, but should add other relevant calculations or disaggregations to help inform decisions. B. Modify your projections for the coming year to show a best- and worst-case scenario, based on the potential success factors and risks you identified. As with your initial projections, support your analysis with an appendix spreadsheet, specifying your assumptions and including relevant calculations and disaggregations beyond those in existing financial reports. C. Discuss how your assumptions, forecasting methodology, and information gaps affect your projections. Why are your projections appropriate? For example, are they consistent with the organization’s mission and priorities? Aggressive but achievable? How would changing your assumptions change your projections? VI. Business opportunities. In this section, discuss the incremental impact of a hypothetical, but reasonable, simple new investment project, such as a new product or facility or a cost-cutting investment, as an initial step in thinking about the future. Be sure to address the following: A. Based on your knowledge of this organization, what is a likely investment it would consider and why? Be sure to describe the basic features of the investment as a foundation for considering its potential financial impact. B. Evaluate the approximate costs and benefits of the investment you identified, explaining how these would affect your spreadsheet projections and business decisions. Estimates are sufficient, but should be grounded in common sense and insight into the organization. C. How does the potential investment affect budgeting and related business decisions? For example, does the investment involve significant cash spending this coming year, followed by benefits in the following year? How might that affect short-term and long-term spending priorities? Does the benefit outweigh the cost? VII. Recommendations. What should you and your manager do next? Support your recommendations with evidence from your financial analysis. For example, should the company pursue the new investment you identified? Implement process changes to decrease risks and/or improve performance? Milestones Milestone One: Financial Performance and Health In Module Three, you will submit your first milestone in which you will evaluate the organization’s recent financial performance and current financial health, given its organizational context. This milestone will be graded with the Milestone One Rubric. Milestone Two: Success Factors, Risk, and Projections In Module Five, you will discuss factors that may affect current and future performance. You will then forecast future performance, based on what you know about the organization’s financial health and performance. This milestone will be graded with the Milestone Two Rubric. Milestone Three: Business Opportunities In Module Seven, you will discuss the incremental impact of a hypothetical, but reasonable, simple new investment project, such as a new product or facility or a cost-cutting investment, as an initial step in thinking about the future. This milestone will be graded with the Milestone Three Rubric. Final Submission: Financial Analysis Projection Report In Module Nine, you will submit your final project. It should be a complete, polished artifact containing all of the critical elements of the final product. It should reflect the incorporation of feedback gained throughout the course. This submission will be graded with the Final Product Rubric. Deliverables Milestone 1 Deliverable Financial Performance and Health Module Due Three Grading Graded separately; Milestone One Rubric Five Graded separately; Milestone Two Rubric 2 Success Factors, Risk, and Projections 3 Business Opportunities Seven Graded separately; Milestone Three Rubric Final Submission: Financial Analysis Projection Report Nine Graded separately; Final Product Rubric Final Product Rubric Guidelines for Submission: Your financial analysis and projection report should be approximately 6–8 pages long (excluding title page, spreadsheets and graphs, and references list). It should be double spaced, with 12-point Times New Roman font and one-inch margins, and should use the latest guidelines for APA formatting for references and citations. Please also include your name, course name, and submission date on the title page. Instructor Feedback: This activity uses an integrated rubric in Blackboard. Students can view instructor feedback in the Grade Center. For more information, review these instructions. Critical Elements Executive Summary Exemplary (100%) Meets “Proficient” criteria, and response is especially wellsuited for target audience Proficient (90%) Clearly and concisely summarizes principal findings, projections, and recommendations with an eye to persuading busy executives to support ideas and read further Approach Meets “Proficient” criteria, and response is especially wellsuited for target audience Provides intended audience with a solid, but brief, sense of parameters of analysis and who else would be consulted in refining it Needs Improvement (70%) Summarizes principal findings, projections, and recommendations with an eye to persuading busy executives to support ideas and read further, but summary is lengthy, lacks clarity, omits critical details, or contains inaccuracies Provides intended audience with a sense of parameters of analysis and who else would be consulted, but response is lengthy, lacks clarity, omits critical details, or contains inaccuracies Not Evident (0%) Does not summarize principal findings, projections, and recommendations with an eye to persuading busy executives to support ideas and read further Value 5.33 Does not provide intended audience with a sense of parameters of analysis and who else would be consulted in refining it 5.33 Financial: Context: Key Features Meets “Proficient” criteria and draws particularly insightful connections between organization’s financial and non-financial features and business decisions Describes how key features of organization help set boundaries for business decisions Financial: Context: Organized Meets “Proficient” criteria and demonstrates especially keen insight into relationships between organization’s structure, how financial information is recorded, and impact on business decisions Analyzes how company is organized and managed and effect on accounting and financial information and subsequent business decisions Financial: Performance: Income Meets “Proficient” criteria, and analysis and supporting evidence are particularly wellsuited to drawing meaningful conclusions about financial performance Assesses what consolidated income statements for last three years say about financial performance, supported by relevant indicators, graphs, and spreadsheets Financial: Performance: Cash Flow Meets “Proficient” criteria, and analysis and supporting evidence are particularly wellsuited to drawing meaningful conclusions about financial performance Assesses what consolidated cash flow statements for the same time period say about financial performance, supported by relevant indicators, graphs, and spreadsheets Financial: Performance: Underlying Meets “Proficient” criteria, and assessment is especially nuanced and well supported by relevant analysis and research Assesses underlying financial performance, supported by analysis and relevant research Describes how key features of organization help set boundaries for business decisions, but response is cursory, contains inaccuracies, or links to decision making are weak or illogical Analyzes how company is organized and effect on accounting and financial information and decisions, but response is cursory, contains inaccuracies, or links between organizational structure, finance, and decision making are weak or illogical Assesses what consolidated income statements say about financial performance, supported by indicators, graphs, and spreadsheets, but response is cursory, contains inaccuracies, or support is not relevant Assesses what consolidated cash flow statements say about financial performance, supported by indicators, graphs, and spreadsheets, but response is cursory or contains inaccuracies or support is not relevant Assesses underlying financial performance, supported by analysis and research, but response is cursory, contains gaps in accuracy or logic, or is poorly supported by analysis and research Does not describe how key features of organization help set boundaries for business decisions 5.33 Does not analyze how company is organized and managed and effect on accounting and financial information and subsequent business decisions 5.33 Does not assess what consolidated income statements for last three years say about financial performance, supported by relevant indicators, graphs, and spreadsheets 3.6 Does not assess what consolidated cash flow statements for the same time period say about financial performance, supported by relevant indicators, graphs, and spreadsheets 3.6 Does not assess underlying financial performance, supported by analysis and relevant research 3.6 Financial: Health: Capitalized Meets “Proficient” criteria and analysis and supporting evidence are particularly well suited to drawing meaningful conclusions about financial health Assesses how organization is capitalized and what that says about financial health, supported by relevant graphs, spreadsheets, and indicators Financial: Health: Growth Meets “Proficient” criteria and demonstrates extraordinary insight into the connections between financial and nonfinancial resources, resource management strategies, and business decisions related to growth Determines whether organization has right amount of cash and other resources to fuel future growth and what this suggests for business decisions Financial: Health: Financial Value Meets “Proficient” criteria, and assessment and supporting evidence are particularly well suited to drawing meaningful conclusions about future financial health and performance Assesses financial value of company and what it implies for future health and performance using relevant indicators Success Factors and Risks: Priorities Meets “Proficient” criteria, and discussion of how priorities inform management decisions is especially nuanced Determines how organization’s financial and strategic priorities affect accounting procedures and business decisions and the implications for business success Assesses how organization is capitalized and what that says about financial health, supported by graphs, spreadsheets, and indicators, but response is cursory or contains inaccuracies or support is not relevant Determines whether organization has right amount of cash and other resources to fuel future growth and what this suggests for business decisions, but response is cursory or contains inaccuracies or links between different types of resources and business decisions are weak or illogical Assesses financial value of company and what it implies for future health and performance using relevant indicators, but assessment is cursory or contains inaccuracies or links to future health and performance are weak or illogical Determines how organization’s financial and strategic priorities affect accounting procedures and business decisions and the implications for business success, but response is cursory or contains inaccuracies or links between priorities and business decisions and procedures are weak or illogical Does not assess how organization is capitalized and what that says about financial health, supported by relevant graphs, spreadsheets, and indicators 3.6 Does not determine whether organization has right amount of cash and other resources to fuel future growth and what this suggests for business decisions 5.33 Does not assess financial value of company and what it implies for future health and performance using relevant indicators 3.6 Does not determine how organization’s financial and strategic priorities affect accounting procedures and business decisions and the implications for business success 5.33 Success Factors and Risks: Non-Financial Factors Meets “Proficient” criteria and demonstrates extraordinary insight into the ways in which non-monetary factors impact business opportunities Identifies how organization might better capitalize on nonfinancial factors, supported by relevant research and analysis Success Factors and Risks: Risks Meets “Proficient” criteria and provides especially nuanced and well-supported insight into the internal factors that are most significant in driving financial risk Pinpoints most significant internal risks to financial performance, supported by evidence Projections: Likely Performance Meets “Proficient” criteria, and projections are especially nuanced and well-supported by evidence and realistic assumptions Projects likely consolidated financial performance for next three years, supported by spreadsheet showing actual results for most recent year, projections, and assumptions Projections: Best and Worst Case Meets “Proficient” criteria and demonstrates especially keen insight into the range of possible financial projections, based on reasonable and realistic assumptions Modifies projections to show best- and worst-case scenarios for coming year based on success factors and risks identified, supported by spreadsheet with assumptions and relevant information beyond existing financial reports Identifies how organization might better capitalize on nonfinancial factors, supported by research and analysis, but response is cursory, contains inaccuracies, or is poorly supported Pinpoints most significant internal risks to financial performance, supported by evidence, but response is cursory, contains gaps in accuracy or logic, or evidence is weak or irrelevant Projects likely consolidated financial performance for next three years, supported by spreadsheet showing actual results for most recent year, projections, and assumptions, but response contains inaccuracies or faulty assumptions or omits key details Modifies projections to show best- and worst-case scenarios based on success factors and risks identified, supported by spreadsheet with assumptions and additional information, but response contains inaccuracies or faulty assumptions or additional information included is not relevant Does not identify how organization might better capitalize on non-financial factors, supported by research and analysis 5.33 Does not pinpoint most significant internal risks to financial performance, supported by evidence 5.33 Does not project likely consolidated financial performance for next three years, supported by spreadsheet showing actual results for most recent year, projections, and assumptions 5.33 Does not modify projections to show best- and worst-case scenarios based on success factors and risks identified, supported by spreadsheet with assumptions and information beyond existing financial reports 5.33 Projections: Discuss Meets “Proficient” criteria and demonstrates especially keen insight into the sensitivity of financial projections to changing circumstances and assumptions Discusses how assumptions, forecasting methodology, and information gaps affect projections and why projections are appropriate Business Opportunities: Likely Investment Meets “Proficient” criteria, and investment identified is particularly well-aligned with the needs, priorities, and goals of the organization Identifies likely investment to consider and why, describing its basic features as a foundation for considering potential financial impact Business Opportunities: Costs and Benefits Meets “Proficient” criteria, and evaluation is based on realistic estimates and is especially well aligned with decision-making needs Evaluates approximate costs and benefits of investment identified, explaining how these would affect spreadsheet projections and business decisions Business Opportunities: Implications Meets “Proficient” criteria, and discussion of budgeting implications is particularly nuanced and well aligned with decision-making needs Assesses implications of potential investment for budgeting and related business decisions Recommendations Meets “Proficient” criteria, and response is especially wellsuited for target audience Recommends clear and coherent next steps, based on persuasive evidence from financial analysis Discusses how assumptions, methodology, and information gaps affect projections and why projections are appropriate, but discussion is cursory or illogical or contains inaccuracies Identifies likely investment to consider and why, describing its basic features as a foundation for considering potential financial impact, but response is cursory or contains inaccuracies or justification for why investment would be of interest to organization is weak Evaluates approximate costs and benefits of investment identified, explaining how these would affect spreadsheet projections and business decisions, but evaluation is cursory or contains gaps in accuracy or logic, or links to business decisions are weak Assesses the implications of potential investment for budgeting and related business decisions, but evaluation is cursory or contains inaccuracies Recommends next steps, based on evidence from financial analysis, but these are not clear and coherent, or evidence is not persuasive given intended audience Does not discuss how assumptions, forecasting methodology, and information gaps affect projections and why projections are appropriate 5.33 Does not identify likely investment to consider and why, describing its basic features as a foundation for considering potential financial impact 5.33 Does not evaluate approximate costs and benefits of investment identified, explaining how these would affect spreadsheet projections and business decisions 5.33 Does not assess implications of potential investment for budgeting and related business decisions 5.33 Does not recommend next steps, based on evidence from financial analysis 5.33 Articulation of Response Submission is free of errors related to citations, grammar, spelling, syntax, and organization and is presented in a professional and easy-toread format Submission has no major errors related to citations, grammar, spelling, syntax, or organization Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas 2.05 Earned Total 100%
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MBA 520 Accounting and Financial Analysis 16TW1, Final Submission: Financial Analysis and
Projection Report

Final Submission: Financial Analysis and Projection Report

FINANCIAL ANALYSIS AND PROJECTION REPORT FOR WHOLE FOODS MARKET INC.

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MBA 520 Accounting and Financial Analysis 16TW1, Final Submission: Financial Analysis and
Projection Report

EXECUTIVE SUMMARY
This study aims at the analysis of existing financial performance and position along with
the internal and external environmental factors to point out right investment opportunities given
situation and context of the organization for the Whole Foods Market Inc.
Whole Foods Market Inc., founded on September 20 September 1980 by John Mackey,
Walter Robb, Renee Lawson Hardy, Craig Weller and Mark Skiles, is a supermarket chain in
America that exclusively deals with organic foods with 431 stores in the United States, Canada,
and United Kingdom. Whole Foods originally targets upper and upper middle-class households
with their premium priced organic products. It is organized in a four-tier hierarchy namely the
global headquarter, regional offices, facilities, and stores for operation. The financial
performance of the Whole Foods has improved in the last three years as implied from the
increasing trend of revenue, operation income, net income, and net cash flow from operation
over the last three years. The financial condition of the Whole Foods has improved in the last
three years as implied from increased of assets base and maintenance of lower leverage as
compared to other average companies in the industry over the last three years. The current
market value of the company is 10.19 billion.
Strategic priorities for the financial success of the Whole Foods include unit
development refreshment of the older stores, value strategy, digital initiatives to drive customer
engagement in its stores, and pursuing acquisitions of smaller chains and relocating in
international markets. Other non-financial factors critical to the success of Whole Foods include
market share, human resources, patents, reputation, and physical facilities. The business and
operation of the Whole Foods are subject to both- financial risk and non-financial risk. Financial
risks of the company include credit risk and currency risk. Non-financial risks of the company
include regulatory risk, information and security risk, operational risk, and technology risk.
The performance of the Whole Foods is likely to improve in the next three years. On the
expectation of the continuation of past trend along with other factors, the revenue and net income
of the company likely to be $17, 516 and $2,132 million respectively in 2019 as compared to
current figure of and $15,724 million and $507 million respectively.
In the best-case scenario, the company is assumed to be able to grow its revenues by 8%,
the revenue of the company is expected to increase from $15,724 million to $ 18,917 million and
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MBA 520 Accounting and Financial Analysis 16TW1, Final Submission: Financial Analysis and
Projection Report

in the worst-case scenario, when the revenue of the company is expected to grow by 2%, then the
revenue of the Whole Foods is expected to be $16,038 million from $15,724 million. The
projections made for the company tried to make appropriate by incorporating historical trend of
performance and likely performance in the future based on the study of goals, objectives,
priorities, policies, initiatives of the company. Also, the assumptions applied in the projections
are realistic and consistent with the strategic priorities of the company.
Whole Food Market Inc. has always an active focus on the wealth maximization for its
shareholders, and as a part of that along with consideration of a recent bad issue, it can pursue
construction of a green roof project. Under this project, Whole Food can invest in building green
roofs that will have vegetation (greenhouses) at three of their stores located in urban cities;
Tribeca (New York), Bethesda (Washington) and Campbell (California). The average cost of the
project is estimated to be around $3,740,000 and $11,220,000. The key benefits of this project
include the production of organic foods and ensuring food security, the reflection of ecoconscious view of the company, increasing of product perceive quality and recover customer
confidence, environmental protection benefits, and green infrastructure investment of the
company. From the acceptance of this project, the sales, gross profit, net income, and basic EPS
are expected increase from $15,724 million, $5,411 million, $507 million, and $1.55 to $17,454
million, $6,006 million, $563 million, and $1.72 respectively in the 5th year of project
implementation.
Whole Food Market Inc. has been suggested to accept construction of a green roof
project due to the high estimated return on investment combined with the short payback period
along with consideration of other non-financial benefits (social, environmental, and quality and
image benefits) of the projects. The management of the company is also suggested extensively
focus on penetrating in existing markets, and by promoting products aggressively in the new
markets, and implement proper risk management practice.

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MBA 520 Accounting and Financial Analysis 16TW1, Final Submission: Financial Analysis and
Projection Report

INTRODUCTION AND OVERALL APPROACH
The future performance of the company largely depends upon the effectiveness of the
strategic and operational decisions made within the organization. The strategic and operational
decisions made by the company should be supported with appropriate analysis of organization
existing financial performance and potion along with the internal and external environmental
factors. Analysis of organization's existing financial performance and position along with the
internal and external environmental factors helps to point out right opportunities given situation
and context of the organization.
This study aims at conducting a comprehensive analysis on the financial performance and
position, strategic priorities and associated risks of operation, making of financial projections of
the next three years based on assessed historical financial performance and position, and
priorities and associated risks identified, and identification and suggestion of the investment
opportunities to realize the financial projection made for the Whole Foods Market Inc., founded
in September 20 September1980 by John Mackey, Walter Robb, Renee Lawson Hardy, Craig
Weller and Mark Skiles.
The financial performance and position of the Whole Foods Market Inc. have been made
based on the data and information has been collected from the financial statements comprising of
the income statement, balance sheet, and cash flow statement, and annual reports, websites, and
other periodicals of the company. After analysis of the financial performance and position of the
company, the underlying success factors and associated risk of the company have been analyzed
to understand the future prospect of the company. In this case, strategic priorities, and nonfinancial performance factors can be carefully assessed along with the consideration of the
financial and non-financial risks that can barricade the success of the company. Based on the
analysis of consideration of past performance and likely prospect & priorities, financial
projections of the next three years has been made. Several opportunities that can be captured by
the company in the future as a part of the realization of projected performance have been pointed
out. Finally, the recommendation to the management of the Whole Foods Market Inc. has been
made in the light of identified business opportunities and associated risks and priorities. The
undertaking of the business decision based on the current financial performance and future
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MBA 520 Accounting and Financial Analysis 16TW1, Final Submission: Financial Analysis and
Projection Report

prospects along with other company-wide factors will reduce the risk of making an inappropriate
decision.
FINANCIAL PERFORMANCE AND HEALTH OF WHOLE FOODS MARKET INC.
(A) Organizational Context
Whole Foods Market, Inc. (WFM) is an American supermarket chain specializing in
natural and organic foods. The company is the first ‘Certified Organic' grocer of USA (Whole
Foods Market, 2016). It first opened on September 20, 1980, in Austin, Texas. Currently, Whole
Foods Market, Inc. is operating with 431 stores in the United States, Canada and United
Kingdom (Whole Foods Market, 2016). The company mainly specializes in the retailing of
natural and organic foods. It targets to serve those consumers who are looking for fresh, natural
and healthy foods are willing to the premium price for good products. Whole Foods originally
targets upper and upper middle-class households with their premium priced organic products
(Whole Foods Market, 2016).
Whole Foods Market Inc. is organized and managed based on the geographical regions of
its prime locations, business function as well as products. The company is organized in a fourtier hierarchy namely the global headquarter, regional offices, facilities, and stores. Accounting
and financial information are always prepared by consolidating the results of operations of all the
comparable stores across the geographic regions. Strategic business decisions are mainly made
on the headquarters. Operational decisions are made on the regional offices, facilities and stores
level based on the needs and situation (Whole Foods Market Inc. - AnnualReports.com, 2016).
(B) Recent Financial Performance
The financial performance of the Whole Foods has improved in the last three years as
implied from the increasing trend of revenue, operation income, and net income over the last
three years. The revenue of the company has been consistently increased over the last three years
(Appendix 01). The company’s operating income was increased from 2013 to 2014 but was
decreased in 2015 and the same trend is seen in the net income (Appendix 01). Earnings before
Interest, Taxes, Depreciation and Amortization have been steadily increased over the years and
the adjusted figures show that the company is financially healthy as it is able to generate
sufficient amounts of profits from its operations (Appendix 01). Gross profit margin, operating

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MBA 520 Accounting and Financial Analysis 16TW1, Final Submission: Financial Analysis and
Projection Report

profit margin, net profit margin, and EPS of the company have been increased in 2016
(Morningstar, 2016).
Whole Foods Market Inc. has generated positive net cash flows from operating activities
over the last three years (Appendix 01). The amount of net cash flows from operating activities
has been increased in every last three years which is a good sign of a healthy company. The
movement of cash from investing activities indicates increased cash investment in the current
and fixed assets to support the expansion projects (Appendix 01). The cash flows from financing
activities increased in 2014 but the amount dropped in 2015 (Appendix 01). The total cash flows
from all the activities of the company over the three years are positive although the amounts are
not very strong but this is an indication that the company generates sufficient amount of funds to
cover its expenses in the near term.
The organization’s underlying financial performance is good. The consistency of the
improved performance in relation to the operating profits and net income is in the line of the
comparable store sales increase. Even though newly opened and acquired stores have not
generated expected sales, the sales from some stores were beyond the expectation (Whole Foods
Market Inc. - AnnualReports.com, 2016). The ongoing value strategy being undertaken by the
company has also helped to improve its product offerings and sustain consistent financial
performance across the years.
(C) Current Financial Health
Whole Foods Market Inc. relies on both debt and equity in the financing of its assets.
This proportionate mix of debt and equity in the capital structure shows that it is a healthy
company as compared to other companies in the industry. Over the last three years the
debt/equity ratios of the company were 0.02, 0.02, and 0.33 (for 2014, 2015, and 2016) as
compared to industry average debt/equity ratio of 0.42, 0.45, and 0.43 respective for the same
period (Morningstar, 2016). Low leverage is an indication of the low financial risk exposure of
the company. Total assets size of the company has been increased over the last two years
(Appendix 01). Total equity of the company has been decreased to due high repurchase attempt
from the part of the company to bring a positive impact on the share price of the company. Total
liabilities has largely increased due to the arrangement of large amount revolving credit facility.

Page | 6

MBA 520 Accounting and Financial Analysis 16TW1, Final Submission: Financial Analysis and
Projection Report

The liquidity condition of the Whole Foods is very good. The current ratio and quick
ratio of the company for 2016 are 1.42, and 0.72 respectively (Appendix 01). The company has
enough cash to meet up its financial obligation when these become due. As compared to last
year, overall cash balance of the company has been increased. Whereas in 2015 total cash and
cash equivalents of the company was $6.83 million, in 2016 total cash and cash equivalents of
the company was $11.51 million (Appendix 01).
The current market value of the company is 10.19 billion based on the current share price
of $31.73 (NASDAQ, 2016). The Price-To-Earnings ratio of the company on the market is 19.97
times (Yahoo Finance, 2016). The share price of the company can be increased from the rising of
earnings triggered by the worthy choice of investment (Whole Foods Market Enterprise Value
(WFM), 2016).
SUCCESS FACTORS AND RISKS OF WHOLE FOODS MARKET INC.
(A) Success Factors
Financial and Strategic Priorities
For the financial success, the first strategic priority of Whole Foods Market Inc. is the
unit development. The number of stores is considered as one of the most critical success factors
of the retailer store. The company is striving to open new stores. By 2017, the company has the
target to set up 500 stores (Whole Foods Market Enterprise Value (WFM), 2016). In the last
year, it has opened 38 new stores. With new stores, the company will have more comparable
stores to account for and an increase in the number of financial statements to be consolidated at
the end of every quarter and fiscal year.
Another strategic priority for the company is the refreshment of the older stores.
Recently, remodeled stores have experienced an overall boost up of the improvement of
operational and financial performance (Whole Foods Market Inc. - AnnualReports.com, 2016).
The company considers retail innovation as a key success factor of gaining more market share.
Value strategy is a success factor in driving sales growth for the company. Whole Foods
prefers to charge competitive prices for matching the prices at the national level and narrowing
the price gaps on popular value items (Whole Foods Market Enterprise Value (WFM), 2016).
This helps to attract more customers and increase sales in the store of the company. Promotional
offer is an active sales strategy of it in order to increase sales revenues.
Page | 7

MBA 520 Accounting and Financial Analysis 16TW1, Final Submission: Financial Analysis and
Projection Report

Whole Foods Market Inc. has extensively focused on digital initiatives to drive
customer engagement in its stores. The company has entered into strategic partnerships with
other companies through acquisitions of smaller chains to offer home delivery and customer
pickup services in major markets as well introduce an online subscription club. The sales
revenues of the company are expected to increase in the upcoming years (Whole Foods Market
Inc. - AnnualReports.com, 2016).
Whole Foods Market is a growth-oriented company (Whole Foods Market Enterprise
Value (WFM), 2016). It has a strong focus towards pursuing acquisitions of smaller chains and
relocating in international markets to expand its operations. Diversification of the business base
results in a reduction of overall risk exposure of the company.
(B) Non-Financial Factors
Other non-financial factors critical to the success of Whole Foods include market share,
human resources, patents, reputation, physical facilities etc. The company has the option to play
with both- ‘red ocean strategy', and ‘blue ocean strategy'. It can increase market share by
penetrating in existing markets, and by promoting its products aggressively in the new markets.
The existing employees are one of the key and value drove asset of the company. It can
capitalize this resource more by utilizing t...


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