February 18, 2015

Whole Foods Market, Inc. Current Recommendation

NEUTRAL

Prior Recommendation

Underperform

Date of Last Change

05/08/2014

Current Price (02/17/15)

$55.93

Target Price

$59.00

SUMMARY Whole Foods is gaining market share on account of national marketing and branding campaign, home delivery services and product launches. The company registered year-over-year growth of 10.2% and 9.5% across its top and bottom lines, respectively, during first-quarter fiscal 2015. We believe that effective inventory management and improved store-level performance helped the company to generate improved sales. However, we observe that while bottom-line came a penny ahead of the Zacks Consensus Estimate, sales were marginally short of Zacks expectation. Stiff competition and aggressive pricing are the headwinds with which the company is combating. Although, the company has been revamping its pricing strategy and focusing more on value offerings, the pricing technique adopted may hurt margins. Nevertheless, management projects sales growth of over 9% for fiscal 2015. Current, we stay Neutral on the stock.

SUMMARY DATA 52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

$56.30 $36.46 7.97 0.75 4,248,785

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

360 $20,152 8.60 82 1

Annual Cash Dividend Dividend Yield (%)

$0.52 0.93

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

12.4 23.3 49.6

P/E using TTM EPS

35.0

P/E using 2015 Estimate

32.1

P/E using 2016 Estimate

28.7

Zacks Rank *: Short Term 1 3 months outlook

(WFM-NASDAQ)

2 - Buy

Below Avg.,

Risk Level * Type of Stock Industry Zacks Industry Rank *

Large-Growth Retail-Supermarket 168 out of 267

ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $)

2013 2014 2015 2016

Q1

Q2

Q3

Q4

Year

(Dec)

(Mar)

(Jun)

(Sep)

(Sep)

3,856 A

3,027 A

3,058 A

2,976 A

12,917 A

4,239 A

3,322 A

3,377 A

3,256 A

14,194 A

4,671 A

3,699 E

3,751 E

3,630 E

15,751 E

5,194 E

17,613 E

Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1 (Dec)

2013 2014 2015 2016

Q2 (Mar)

Q3 (Jun)

Q4 (Sep)

Year (Sep)

$0.39 A

$0.38 A

$0.38 A

$0.32 A

$1.47 A

$0.42 A

$0.38 A

$0.41 A

$0.35 A

$1.56 A

$0.46 A

$0.42 E

$0.46 E

$0.40 E

$1.74 E

$0.53 E Quarterly figures may not add up to annuals due to rounding off

Projected EPS Growth - Next 5 Years %

* Definition / Disclosure on last page

© 2015 Zacks Investment Research, All Rights reserved.

www.Zacks.com

10 S. Riverside Plaza, Chicago IL 60606

$1.95 E

14

OVERVIEW Incorporated in 1980 and headquartered in Austin, Texas Whole Foods Market, Inc. (WFM) is the world s leading natural and organic foods supermarket, and America s first national Certified Organic grocer. The company offers seafood, grocery, meat and poultry, bakery, prepared foods and catering, coffee and tea, nutritional supplements, and vitamins. It also provides specialty products, such as beer, wine, and cheese; and body care and educational products, such as books, as well as floral, pet, and household products. Whole Foods popular brands include Wellspring, Bread and Circus, Mrs. Gooch s, Fresh Fields, Fresh & Wild, Harry s Farmers Market, Allegro Coffee, Vine Buys, Wild Oats and 365 Everyday Value. The company also owns and operates 11 regional distribution centers, which distribute a full line of products to stores across the U.S., Canada and the United Kingdom; 3 seafood processing and distribution facilities, and a specialty coffee and tea procurement and brewing operation. The company as of February 11, 2015, operated approximately 408 stores in the United States, Canada and the United Kingdom.

REASONS TO BUY Strong Brand Image: Being one of the leading natural and organic foods supermarkets, Whole Foods with a strong brand image, and marketing and merchandising expertise, offers investors one of the strongest growth profiles in the industry. The stock is poised to surge once the economy revives and demand for healthier and natural food improves. The company is focusing on cost-control measures, effective inventory management, and improved store-level performance. The company also has been revamping its pricing strategy and concentrating more on value offerings. The company has been gaining market share on account of national marketing and branding campaign, home delivery services and product launches. The company also introduced labelling system in case of products suggesting Good, Better and Best. The company has been spurring its sales through new store openings, adoption of digital route, acquisitions and comparable-store sales growth. Whole Foods revenue during first-quarter fiscal 2015 increased 10.2% year over year. Store Expansion Strategy: Whole Foods has been prudent in opening new stores, having opened and acquired 18 stores in both fiscal 2010 and 2011, respectively, it opened and acquired 25 stores in fiscal 2012, 32 outlets in fiscal 2013 and 38 in fiscal 2014. Whole Foods had earlier hinted that it wants to accelerate its pace of store openings in the coming years and plans to open 38-42 stores in fiscal 2015. The company believes that there exists a room for 1,200 stores in the long run, and expects to cross the count of 500 stores in fiscal 2017. Active Management of Cash Flows: Whole Foods has been also actively managing its cash flows, by generating significant free cash and making prudent capital investments. The company has been utilizing its cash flow for opening new stores, paying down debt and returning cash to shareholders through dividends and share repurchases. The company during the first quarter of fiscal 2015 generated cash flow from operations of $387 million and incurred capital expenditures of $252 million, resulting in free cash flow of $135 million. The company paid $43 million in quarterly dividends and bought back $43 million worth of shares.

Equity Research

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REASONS TO SELL Stiff Competition May Weigh Upon the Company s Performance: The grocery business is highly competitive and fragmented, and Whole Foods Market faces intense competition from big players, such as Safeway, Kroger and Supervalu, and other conventional retailers and specialty gourmet retailers in respect to price, aggressive store expansion, and promotional activities to drive traffic. This may dent the company s sales and margins. Heightened competition and aggressive pricing may weigh upon the company s top-line performance as an increasing number of companies are entering as well as expanding their presence in the Organic & Natural food business. Adverse Currency Fluctuation May Dent Sales: Whole Foods Market has operations in international markets too, and is therefore highly vulnerable to exchange rate volatility. The weakening of the British Pound and Canadian dollar vis-à-vis the U.S. dollars, may negatively affect sales. Macroeconomic Headwinds: The company s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their disposable income triggering a shift in focus from higher priced organic products to cheaper private label brands. This may adversely affect Whole Foods top-line growth.

RECENT NEWS Whole Foods Rises on Q1 Earnings Beat; Revenues Up Y/Y

February 11, 2015

Whole Foods Market, Inc. posted better-than-expected first-quarter fiscal 2015 bottom-line results, wherein earnings of $0.46 per share came a penny ahead of the Zacks Consensus Estimate, and rose 9.5% from the year-ago quarter. This is the third consecutive quarter that the company has outperformed the Zacks Consensus Estimate. Management hinted that national marketing and branding campaigns, home delivery services, product launches and increasing consumer confidence were the reasons behind the company s impressive performance. We believe that Whole Foods is leaving no stone unturned to reach its target customers, whether through store expansion or adopting a digital route. The company, in collaboration with Instacart, has started online delivery services. This natural and organic foods supermarket chain operator delivered sales of $4,671 million which increased 10.2% year over year. We believe that effective inventory management and improved storelevel performance helped it generate higher sales. However, sales were slightly below Zacks expectation of $4,676 million. The company has been revamping its pricing strategy and concentrating on value offerings in view of heightened competition as more companies are entering and expanding their presence in the Organic & Natural food business. These companies include The Kroger Co. (KR), Sprouts Farmers Market, Inc. (SFM) and Wal-Mart Stores Inc. (WMT). Whole Foods stated that comparable-store sales (comps) rose 4.5% in the reported quarter. For the first three weeks of the second quarter of fiscal 2015, comps jumped 4.9%. Management highlighted that comps in the second quarter would be favorably impacted by Easter as this year it falls in the said quarter as against the third quarter last year. Consequently, comps growth in the third quarter is expected to be adversely impacted by 50 to 60 basis points. Equity Research

WFM | Page 3

During the quarter under review, EBITDA rose 8.2% to $396 million, while EBITDA margin shrunk 10 basis points to 8.5%. Operating income grew 6.3% to $271 million, whereas operating margin contracted 20 basis points to 5.8%. Stores Update Whole Foods currently operates 408 stores. The company opened 9 new outlets during the quarter under review. So far in the second quarter, the company has opened 3 new outlets, and plans to open 8 more stores. Moreover, it believes that there exists room for 1,200 stores in the long run in the U.S., and expects to surpass the count of 500 in fiscal 2017. The company continues with its store expansion program in Western Canada and plans to open 3 new locations. This includes Greater Victoria, British Columbia; Edmonton and Calgary, Alberta. Other Financial Details Whole Foods ended the quarter with cash and cash equivalents of $266 million, long-term capital lease obligations of $61 million, and shareholders equity of $3,926 million. Return on invested capital for the trailing four quarters was 15%. During the quarter, Whole Foods generated cash flow from operations of $387 million and incurred capital expenditures of $252 million, resulting in free cash flow of $135 million. The company paid $43 million in quarterly dividends and bought back $43 million worth of shares. The company has been utilizing its cash flow for opening new stores, paying down debt and returning cash to shareholders through dividends and share repurchases. Guidance at a Glance Whole Foods now projects an escalation of over 9% in sales for fiscal 2015 on the back of low-to-mid single-digit growth in comps. Management anticipates EBITDA margin of about 9% and ROIC of over 14%. Moreover, management expects earnings per share growth to remain even with or marginally higher than the rate of increase in sales.

Equity Research

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VALUATION Whole Foods Market s current trailing 12-month earnings multiple is 35.0X, compared with 20.1X, the industry average and 19.3X for the S&P 500. Over the last five years, Whole Foods shares have traded in a wide range of 24.4X to 42.9X trailing 12-month earnings. The stock is also trading at a premium to the industry average, based on forward earnings estimates. Our target price of $59.00, 33.9X 2015 EPS, reflects this view.

Key Indicators

P/E F1

P/E F2

Est. 5-Yr EPS Gr%

P/CF (TTM)

P/E (TTM)

P/E 5-Yr High (TTM)

P/E 5-Yr Low (TTM)

Whole Foods Market, Inc. (WFM)

32.1

28.7

13.4

21.2

35.0

42.9

24.4

Industry Average S&P 500

18.0 16.7

20.4 15.6

10.3 10.7

9.3 15.3

20.1 19.3

40.4 19.4

11.4 12.0

Cencosud S.A. (CNCO) 15.4 12.0 17.4 17.1 30.6 Roundy s, Inc. (RNDY) 65.4 1.8 32.7 37.2 Ingles Markets, Incorporated (IMKTA) 15.4 13.0 17.2 5.7 16.3 16.4 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow

16.7 4.0 8.8

P/B Last Qtr.

P/B 5-Yr High

P/B 5-Yr Low

ROE (TTM)

D/E Last Qtr.

Div Yield Last Qtr.

EV/EBITDA (TTM)

Whole Foods Market, Inc. (WFM)

4.9

6.1

2.4

14.8

0.0

1.0

14.7

Industry Average S&P 500

2.2 5.3

2.2 9.8

2.2 3.2

7.7 25.5

0.1

2.0 2.1

9.8

Equity Research

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Earnings Surprise and Estimate Revision History

Equity Research

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DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of WFM. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform - 15.6%, Neutral - 76.5%, Underperform 7.3%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each th stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

Equity Research

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