whole foods market: shareholder update · whole foods market: shareholder update may 10, 2017 ....

Whole Foods Market: Shareholder Update MAY 10, 2017

This document is proprietary and confidential. No part of this document may be disclosed in any manner to a third party without the prior written consent of Whole Foods Market. Page 1

Certain statements in this presentation and from time to time in other filings with the Securities and Exchange Commission, news releases, reports, and other written and oral communications made by us and our representatives, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “continue,” “could,” “can,” “may,” “will,” “likely,” “depend,” “should,” “would,” “plan,” “predict,” “target,” and similar expressions, and include references to assumptions and relate to our future prospects, developments and business strategies. Except for the historical information contained herein, the matters discussed in this presentation are forward-looking statements that are based on the Company's current assumptions and involve risks and uncertainties that may cause our actual results to be materially different from such forward-looking statements and could materially adversely affect our business, financial condition, operating results and cash flows. These forward-looking statements may include comments relating to, among other things, future earnings per share and the Company's intention to obtain additional debt in the near term and to make planned share repurchases, some of which are subject to risks and uncertainties relating to general business conditions, conditions in the credit and capital markets, changes in overall economic conditions that impact consumer spending, including fuel prices and housing market trends, the impact of competition and other factors which are often beyond the control of the Company, as well other risks listed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2016 and Quarterly Report on Form 10-Q for the first quarter ended January 15, 2017, and other risks and uncertainties not presently known to us or that we currently deem immaterial. We wish to caution you that you should not place undue reliance on such forward-looking statements, which speak only as of the date on which they were made. We do not undertake any obligation to update forward-looking statements.

Disclaimer on Forward-Looking Statements


Whole Foods Market

Our Mission-Driven Approach Has Resulted in a Loyal Customer Base and Created Substantial Value

Industry leading quality standards across

the store

8M weekly

customer visits

87K team

members

464 stores across

three countries

20 consecutive years on Fortune’s “100 Best

Companies to Work For” list

Highest sales per gross square foot and EBITDA

margin of any public food retailer in the U.S.

$15.7B record revenue

in 2016

30M unique

customers

Premier brand in fastest growing segment

of food retail

Leading “Grocerant” with 19% of sales in prepared

foods & bakery

Differentiated offering with 67% of sales

in fresh foods

13M social media

fol lowers

America’s Healthiest Grocery Store™


Demonstrated Progress on Strategic Plan

On track to realize $300M expense reduction goal ahead of schedule

Unified point-of-sale system in place across all U.S. stores providing tokenized data which is now informing merchandising, pricing and promotional decisions

Expanded affinity pilot program driving incremental trips and larger baskets from core customers

Continually reinforcing our differentiation through an “always on” marketing and media plan

Growing online presence, with annualized digital sales approaching $400M in CY 2017

Broadening customer appeal with WFM 365 value format

Reset growth strategy, including prudent decision to rationalize store base through closures and more aggressive relocation strategy

Utilizing new strategic partnerships to accelerate category management implementation and data analytics capabilities

Initiatives Gaining Traction: Comp Sales Stabilizing, Driven by Improving Traffic Trends


SECTION HEADER

Our Accelerated Path to Delivering Shareholder Value

Board Will Continue Its Comprehensive Review of All Opportunities to Create Value

Clearly defined 2020 financial targets

Accelerated affinity rollout across all U.S. stores by CYE 2017

Purchasing restructure completed by CYE 2017 and category management implemented across all U.S. stores by FYE 2018

Additional $300M in cost savings by FYE 2020, with ~$100M realized by FYE 2018

Return to positive comparable store sales and earnings growth by FYE 2018

Increased commitment to returning capital to shareholders, including increased dividend and new share repurchase authorization

Refreshed and strengthened Board with five new independent directors and new chair

Welcomed new CFO with a proven track record in retail operations

1

2

3

4

5

6

7

8


28.5%

<27.0%

2016 2020

(2.5%)

2016 2020

>2.0%

$1.1B

2016 2020

>$1.2B

8.6%

2016 2020

>9.5%

Operating Cash Flow

Steady Sales Growth and Improved Cost Structure to Deliver Strong EBITDA and Operating Cash Flow

Longer term Vision steady sales growth and improved cost structure delivering Strong EBITDA and OCF

SG&A (% of Sales)

EBITDA Margin

Comparable Store Sales Growth

1 Longer Term Vision: 2020 Outlook


$15.7B

>$18.0B

2016 2020

Revenue Increases Driven by Strategic Initiatives and Disciplined Organic Growth

1

• Marketing and affinity

• Category management

• Digital sales

• Inflation

• Steady WFM openings combined with aggressive relocation strategy

• Increasing Whole Foods Market 365 openings

Comparable Store Sales Growth

>2.0% by 2020

Annual Square Footage Growth

<5% through 2020

Revenue

Key Growth Drivers


• Through our affinity work and tokenized transactional data, we know our core customers represent approximately 40% of sales

• They are:

• Mission aligned

• Educated, informed shoppers

• Digitally savvy

• Willing to pay for quality

• While they shop with us 4+ times per month, there is still significant opportunity for growth in wallet share

• Expanding categories shopped is the greatest opportunity to grow share of wallet and trips

Refocusing on Our Biggest Sales Opportunity: Core Customers

Just One Additional Item per Trip Represents ~$0.5B Incremental Sales Opportunity for This Segment Alone

2


Accelerating Rollout of Affinity – All U.S. Stores by CYE 2017

Customer Insights from Affinity Will Drive More Trips and Bigger Baskets

Willing o pay for quality

2

• Proven results with three pilot programs driving incremental trips and larger baskets for participants

• New program combining best elements of pilots in all U.S. stores by CYE 2017

• Better value for customers through increased promotional support from suppliers

• A platform that will increase sales through more personalized and relevant communications and digital experiences with our core customers

• Assumptions for incremental sales and trip growth benchmarked off of industry best practices and proven pilot results


1 Team

Robust Analytics, Technology and Processes Will Drive Optimized Assortment and Pricing: Leading to Lower Costs, Lower Prices and Higher Sales

Best-in-Class Data Analytics & Technology

Unified Purchasing Structure & Processes

Strategic Pricing Approach

Improved Product Assortment

The right price points for our customers

Optimize selection while maintaining best-in-class selection and local mix

+

3

Global

Regional & Local

Exclusive Brands

Category Management by FYE 2018 The Right Assortment at the Right Price for Lower Cost

This document is proprietary and confidential. No part of this document may be disclosed in any manner to a third party without the prior written consent of Whole Foods Market. Page 10 1 0 Page 10

Implementation Framework

• Store labor transformation

• Standardization of in-store processes and labor allocation

• Support function efficiencies

• Supply chain optimization

• Acceleration of order-to-shelf rollout to improve in-stock position while also reducing labor, shrink and inventory levels

Key Components of Cost Savings

• $300M total cost savings by FYE 2020

• ~$100M realized in FY 2018

• Partnering with top tier consulting firm and leading subject matter experts

• Focus on maintaining exceptional customer experience

• WFM to provide progress updates to investors

Delivering Additional $300M in Cost Savings by FYE 2020 Driving EBITDA Margin Expansion

4

Focus on Lowering Cost Structure While Maintaining Exceptional Customer Experience


($M)

$508 $170 $184 $177

$125 $578

$513

$944

$633 $748 $697

$1,121

2013 2014 2015 2016

Dividends Share Repurchases

Increased Commitment to Return Capital to Shareholders

A History of Returning Capital to Shareholders

Operating Cash Flow, ($B)

Increased Dividend

• 29% increase in quarterly dividend to $0.18 per share

• Implied yield of 2.0%1

New Stock Repurchase Authorization

• New authorization of $1.25B, replacing existing program

• Intent to opportunistically utilize authority over the next 18 months

Over $3B Returned to Shareholders Since FYE 2012

1Based on share price of $36.57 as of 5/9/17 2Includes a special dividend in FY 2013

$1.01

$1.09

$1.13 $1.12

2013 2014 2015 2016

Supported by Strong Cash Flow Generation

2

6

FY

FY


Scott Powers Former President & CEO, State Street Global Advisors Significant experience as a financial services executive

completing successful turnarounds at SSgA and Old Mutual

Grew AUM by 22% in last 5 years alone at SSgA Brings shareholder perspective

Ron Shaich Founder, Chairman & CEO, Panera Co-founded Au Bon Pain and founded Panera Over 35 years of CEO experience Oversaw Panera’s transformation strategy Panera is the best-performing restaurant stock when

measured over the last 20 years, rising 9,753% from April 18, 1997 to April 24, 2017, compared to 210% for the S&P 500 during the same time period

Ken Hicks Former Chairman, President & CEO, Foot Locker Over 29 years of senior marketing and operational

experience in the retail industry Turnaround expert – joined Foot Locker after downturn and

launched turnaround plan to trim store count, consolidate management and set ambitious five-year revenue goals

573% total shareholder return during tenure at Foot Locker compared to 117% total return for the S&P 500 over the same period

Joe Mansueto Founder & Executive Chairman, Morningstar Founder and former CEO of Morningstar, valued at over $3B Successfully completed over 30 strategic acquisitions during

his tenure as CEO and grew revenue by ~250% from 2005, the first year as a public company, to 2015

281% total shareholder return during tenure at Morningstar compared to 106% total return for the S&P 500 over the same period

Sharon McCollam Former CFO & CAO, Best Buy Nearly two decades of experience as a senior leader in retail

and e-commerce Executed a successful financial turnaround plan at Best Buy

and championed a rigorous cost agenda while improving supply chain, technology and customer care

300% total shareholder return during tenure at Best Buy compared to 62% total return for the S&P 500 over the same period

Adding Experienced Value Creators to Board

Our Highly Qualified New Directors

LEADERSHIP INDUSTRY / OPERATIONS

INVESTOR / INVESTMENT FINANCE TECHNOLOGY RISK MANAGEMENT

Note: Total return assumes reinvestment of dividends on the ex-date. Market data as of 5/4/17

7


• 5 new independent directors

• 10 of 12 directors are independent

• 7 years average tenure

• 9 current or former CEOs or CFOs

• 4 female directors

Gabrielle Sulzberger To Become New Chair Mary Ellen Coe to Lead Nominating and Governance Committee

CEO / CFO

Retail / Brand Expertise

Investor Perspective

Financial / M&A Expertise

Tech Expertise

Gabrielle Sulzberger (Chair)

Mary Ellen Coe

Hass Hassan

Ken Hicks

Stephanie Kugelman

John Mackey

Joe Mansueto

Sharon McCollam

Scott Powers

Walter Robb

Ron Shaich

Jonathan Seiffer

World-Class Board with Diverse Skill Sets to Drive Value 7


Kohl’s SVP, Digital Finance, Strategy Management and

Business Transformation

Nike Global Vice President and CFO, Direct to Consumer

Welcoming New CFO, Keith Manbeck

Key Criteria for CFO Selection Proven Record Leading Change

Led efforts to optimize operational effectiveness within the omnichannel organization

Successfully lowered inventory and evolved SKU rationalization

Improved margin in the company’s digital business unit

8

Over $5B in sales with double digit comp growth each year

Grew profit by 30% each year

Delivered significant gross margin expansion

• Track record of success • History of driving value as a finance leader

at Kohl’s, Nike, Victoria’s Secret and Pepsi

• Operational and retail expertise • Significant retail experience including

large P&L finance roles at Nike and Victoria’s Secret

• Led strategy and finance corporate roles at Kohl’s

• Transformational leader • Institutionalized Enterprise

Transformation during his tenure at Kohl’s, creating value through business process redesign and strategic transformation

• Experience in digital commerce

This document is proprietary and confidential. No part of this document may be disclosed in any manner to a third party without the prior written consent of Whole Foods Market. Page 15 1 5 This document is proprietary and confidential. No part of this document may be disclosed in any manner to a third party without the prior written consent of Whole Foods Market.

Q2 Results and FY 2017 Updated Outlook


• Record total sales of $3.7B

• Adjusted EBITDA margin of 8.5%

• Adjusted earnings per share of $0.37

• $340M in cash flow from operations

• Adjusted ROIC (LTM) of 11.1%

• $1.4B of total available capital

Q2 Highlights

Q2 Results and FY 2017 Updated Outlook

8.0%

8.5%

Adjusted EBITDA, ($M)

& EBITDA Margin, (%)

$316

$690

2017 Q2 2017 YTD

$3,737

$8,656

2017 Q2 2017 YTD

Net Sales, ($M)

Operating Cash Flow, ($M)

$340

$624

2017 Q2 2017 YTD

Free Cash Flow, ($M)

$209

$248

2017 Q2 2017 YTD

8.0%

8.5%

FY 2017 Updated Outlook

• Sales growth of 1.0% or greater

• Comps of approximately -2.5% or better

• 5% ending square footage growth

• Diluted EPS of $1.30 or greater

• EBITDA margin of approximately 8%

• Capex of approximately 4% of sales

• ROIC of approximately 11%

Note: See Non-GAAP reconciliation in appendix


Our Promise to Shareholders


Roadmap to Shareholder Value Creation

Financial performance Announced clearly defined targets

2018: Positive comps and earnings growth 2020 Targets: - Comps of >2.0% - Revenue of >$18B - SG&A % of sales <27% - EBITDA margin >9.5% - Operating cash flow of >$1.2B

Accelerated affinity plan rollout My 365 Rewards program and two pilots

All US stores by CYE 2017

Purchasing evolution and category management

Accelerated implementation of category management through new strategic partnership

Purchasing evolution complete by CYE 2017 Category management implemented by FYE 2018

Previously announced cost savings program

$270M $300M in total by FYE 2017

Additional $300M in cost savings N/A $300M by FYE 2020; with ~$100M by FYE 2018

Increased commitment to return capital Over $3B since FYE 2012

- Increased share repurchase authorization to $1.25B - intend to opportunistically utilize authority over the next 18 months

- Increase quarterly dividend by 29% to $0.18

Board refreshment Five new independent directors and new chair

New CFO Keith Manbeck named CFO effective May 17

Value creation Continue comprehensive review of all opportunities

Complete as of Q2 To Come


SECTION HEADER

• Laser-focused on maximizing value for all of our shareholders

• Continue executing our plan to evolve our business, while retaining our high quality customer experience and team member culture

• Provide transparency and regular updates as we execute our plan

• Deliver accountability and oversight through a world-class Board

• Continue to actively seek and incorporate investor feedback

Our Promise to Shareholders


Appendix


Broad Geographic Footprint Over-Indexed to Highest Population and Education MSAs

464 Stores Across Three Countries

United Kingdom


• Highest sales per gross square foot and EBITDA margin of any public food retailer in the U.S.

• Generating strong operating cash flow, with four consecutive years over $1B

• Demonstrated commitment to return capital to shareholders, with over $3B returned since FYE 2012

$1.8 $4.7

$9.0

$15.7

2000 2005 2010 2016

20

15

E

Proven Track Record of Excellence in Food Retail

Sales, ($B)

$165 $364

$714

$1,355

2000 2005 2010 2016

EBITDA, ($M)

$124

$411 $585

$1,116

2000 2005 2010 2016

Operating Cash Flow, ($M)

A Long History of Steady Growth

1As reported, prior to subsequent restatements

1


Reconciliation of Non-GAAP Financial Information

Adjusted Diluted EPS

12 weeks ended 28 weeks ended

April 9, 2017 April 10, 2016 April 9, 2017 April 10, 2016

Net income 99$ 142$ 194$ 299$

Store and facility closures, net of tax 18 - 38 -

Mr. Robb's separation agreement, net of tax - - 8 -

Adjusted Net Income 117$ 142$ 240$ 299$

Weighted average shares outstanding 318.9 325.4 318.7 332.7

Adjusted Diluted Earnings per Share 0.37$ 0.44$ 0.75$ 0.90$

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides information regarding Adjusted Diluted Earning per Share ("EPS"), Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), Adjusted EBITDA and Free Cash Flow in the presentation as additional information about its operating results. These measures are not in accordance with, or an alternative to, GAAP. The Company’s management believes that these presentations provide useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses these measures for reviewing the financial results of the Company as well as a component of incentive compensation. The Company defines Adjusted Diluted EPS as net income plus charges for store and facility closures and Mr. Robb's separation agreement divided by the weighted average shares outstanding and potential additional common shares outstanding. Below is a tabular reconciliation of the non-GAAP financial measure Adjusted Diluted EPS to GAAP Diluted EPS, which the Company believes to be the most directly comparable GAAP financial measure.



EBITDA and Adjusted EBITDA



Net income 99$ 142$ 194$ 299$

Provision for income taxes 63 93 124 185

Interest expense 11 11 26 18

Investment and other income (2) (5) (1) (9)

Operating income 171 241 343 493

Depreciation and amortization 116 112 305 259

EBITDA 287$ 353$ 648$ 752$

Mr. Robb's separation agreement - - 13 -

Store and facility closures, excluding accelerated

depreciation29 - 29 -

Adjusted EBITDA 316$ 353$ 690$ 752$

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides information regarding Adjusted Diluted Earning per Share ("EPS"), Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), Adjusted EBITDA and Free Cash Flow in the presentation as additional information about its operating results. These measures are not in accordance with, or an alternative to, GAAP. The Company’s management believes that these presentations provide useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses these measures for reviewing the financial results of the Company as well as a component of incentive compensation.

The Company defines Adjusted EBITDA as EBITDA plus charges for Mr. Robb's separation agreement. Below is a tabular reconciliation of the non-GAAP financial measure Adjusted EBITDA to GAAP net income, which the Company believes to be the most directly comparable GAAP financial measure.



Free Cash Flow



Net cash provided by operating activities 340$ 343$ 624$ 575$

Development costs of new locations (77) (106) (227) (197)

Other property and equipment expenditures (54) (53) (149) (141)

Free Cash Flow 209$ 184$ 248$ 237$

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides information regarding Adjusted Diluted Earning per Share ("EPS"), Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), Adjusted EBITDA and Free Cash Flow in the presentation as additional information about its operating results. These measures are not in accordance with, or an alternative to, GAAP. The Company’s management believes that these presentations provide useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses these measures for reviewing the financial results of the Company as well as a component of incentive compensation.

The Company defines Free Cash Flow as net cash provided by operating activities less capital expenditures. Below is a tabular reconciliation of the Free Cash Flow non-GAAP financial measure.



ROIC and Adjusted ROIC

52 weeks ended

April 9, 2017 April 10, 2016

Net income 402$ 509$

Interest expense, net of tax 29 11

ROIC earnings 431$ 520$

Adjustments, net of tax (1) 50 47

Adjusted ROIC earnings 481$ 567$

Total rent expense, net of tax (2) 295 273

Estimated depreciation on capitalized operating leases, net of tax (3) (197) (182)

ROIC earnings, including the effect of capitalized operating leases 529$ 611$

Adjusted ROIC earnings, including the effect of capitalized operating leases 579$ 658$

Average working capital, excluding current portion of long-term debt 692$ 584$

Average property and equipment, net 3,409 3,177

Average other assets 950 1,048

Average other liabilities (731) (666)

Average invested capital 4,320$ 4,143$

Average estimated asset base of capitalized operating leases (4) 3,882 3,553

Average invested capital, including the effect of capitalized operating leases 8,202$ 7,696$

ROIC 10.0% 12.6%

ROIC, including the effect of capitalized operating leases 6.5% 7.9%

Adjusted ROIC 11.1% 13.7%

Adjusted ROIC, including the effect of capitalized operating leases 7.1% 8.6%

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides information regarding Return on Invested Capital (“ROIC”) and Adjusted ROIC as additional information about its operating results. These measures are not in accordance with, or an alternative to, GAAP. The Company’s management believes this presentation provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses this measure for reviewing the financial results of the Company as well as a component of incentive compensation. The Company defines ROIC as Net Income less Interest Expense (“ROIC earnings”) divided by average invested capital. ROIC earnings and adjustments to ROIC earnings are defined in the below tabular reconciliation. Invested capital reflects a trailing four-quarter average.

(1) Adjustments include charges related to Mr. Robb’s separation agreement, store and facility closures, and asset impairments, as well as the Q4 2015 restructuring charge (2) Total rent includes minimum base rent of all tendered leases (3) Estimated depreciation equals two-thirds of total rent expense (4) Estimated asset base equals eight times total rent expense



Historical EBITDA

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides information regarding Adjusted Diluted Earning per Share ("EPS"), Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), Adjusted EBITDA and Free Cash Flow in the presentation as additional information about its operating results. These measures are not in accordance with, or an alternative to, GAAP. The Company’s management believes that these presentations provide useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses these measures for reviewing the financial results of the Company as well as a component of incentive compensation. The Company defines EBITDA as net income before interest, income taxes, other income (expense), and depreciation and amortization. EBITDA is a non-GAAP financial measure. The following table provides a reconciliation of EBITDA during the periods presented:

52 weeks ended

2000 1 2005 2010

Net income (5)$ 136$ 246$

Plus:

Provision for income taxes 35 101 166

Other adjustments 2 48 - -

Less:

Investment and other income, net of interest expense (23) 7 (26)

Operating income 101$ 230$ 438$

Plus:

Depreciation and amortization 64 134 276

EBITDA 165$ 364$ 714$

(1) As reported, prior to subsequent restatements (2) Includes cumulative effect of accounting principle, net of taxes; loss from discontinued operations, net of taxes; and equity in losses of unconsolidated affiliates

whole foods market: shareholder update · whole foods market: shareholder update may 10, 2017 ....

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