Whole Foods Individual Case, Financial Analysis
This report is written in order to perform financial analysis on Whole Foods Market Inc and its competitor Safeway Inc. This in depth report is both to determine which company is doing financially better and how also how they are doing comparing them to their whole industry. The ratios in this report are going to be used to compare WF to its competitior and also to compare its financial performances to the whole Grocery store industry (SIC: 5411) to see how Whole Foods Inc is doing in regards to the whole industry.
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It is crucial to compare a company’s ratios with the industry’s, because they may appear good or bad when comparing with the company’s competitors, however, when comparing these ratios to the industry a different conclusion could be drawn. Another purpose of this paper is to show the trends and relationships of this company which will allow us to assess Whole Foods’ weaknesses and strength. In this report, you will come across profitability ratios, liquidity ratios and asset utilization ratios of both companies and also the industry’s.
Background Both Safeway and Whole Foods Market are major players in the Grocery stores industry and they are both leading the natural organic food field. from a Wall Street perspective, the highest profile player in natural / organic foods is likely Whole Foods (WFMI). The company’s revenues have increased 18% a year, on average (Value line). The company’s merchandise line of over 1,500 items includes organically grown. he company owns about 287 store locations in 38 states and Washington, D. C. , as well as five stores in the U. K and Canada.
From 2010 through 2013, Whole Foods plans to open 53 new stores, including eight relocations(Plunkett research). The original whole foods Market opened in 1980 in Texas with a stuff of 19 only. Safeway Inc opened its first store in 1915 in Idaho. Safeway Stores, is one of the largest food retailers in North America, operating 1,712 stores. The company recently expanded its O Organics line of certified organic foods and beverages to over 300 exclusive products. Exhibit 1: source Industry ratios : retrieved November 4th 2010 from ,Reuters. om | | | |Whole foods | | | | | |2005 |2006 |2007 |2008 |2009 |Industry | |ROA |7. 22% |9. 98% |5. 69% |3. 39% |3. 88% |2. 38 | |Profit Margin |2. 90% |3. 63% |2. 77% |1. 4% |1. 83% |1. 8 | Exhibit 1 | | | |Safeway | | | | |2005 |2006 |2007 |2008 |2009 | |ROA |3. 56% |5. 35% |5. 03% |5. 52% |-7. 78% | |Profit Margin |1. 46% |2. 17% |2. 10% |2. 9% |-2. 69% | In analyzing the profitability ratios, we see that WF had better profit margin than Safeway every year in the last five years, except 2008. However in 2009, WF’s profit margin was 0. 3%lower than the industry’s average. In 2008, safeway outperformed WF’s profit margins 0. 75%. However, in 2009 Safeway had a negative profit margin due to their net income loss. Looking at both company’s profit margins in 2008 and 2009, we can conclude that both companies are struggling to make high profit margins.
WF’s (ROA) suggests a good profitability from 2005 to 2007; however, it started to decline in 2008 and 2009. WF’s (ROA) was 1. 5% higher than the average industry ratio. Safeway’s ROE rations were lower than WF’s every year in the past 5 years, except from 2008 again, where their ROA was 2. 13% higher than WF’s. This shows that WF’s has been doing a better job than Safeway at using its assets to generate a profit. Based on the Profit margin and ROA and we could conclude that WF is doing a better a job than Safeway at managing its assets efficiently in order to generate a profit.
Moreover, we could also conclude that WF has been doing really well comparing it to the other compnay’s in the same industry since all its profitability ratios were higher than the industy’s. | | | | whole foods | |Industry | | |2005 |2006 |2007 |2008 |2009 |2009 | |inventory turover |26. 09 |26. 78 |24. 42 |23. 90 |23,27 |20. | | | | | safeway | | | | |inventory turnover |9. 92 |10. 58 |11. 08 |11. 72 |11. 43 | | Source: Industry ratios from Reuters. com, exhibit 1 Inventory turnover: Comparing inventory turnover is extremely crucial especially for the Grocery industry where it all comes down on how fast you sell your inventory. Every year since 2005, Whole food’s inventory turnover is more than twice.
This reveals that whole Foods turns its inventory twice as fast as Safeway. This high inventory turnover demonstrates WF’s strong sales. This could explain the company’s revenues that have been increasing18% a year, on average, so far this decade. By comparison, Kroger and Safeway (SWY) have seen their revenues increase at low single-digit rates over the same stretch( Value line. com). WF fast growth could be also explained by the growth in consumption of organic food, it jumped from 5 Billion $ in 1997 to almost 25 billion in 2008( look at exhibit 5).
Revenue Growth of Whole Foods. Source : Retreived Novermber 4th, from http://www. plunkettresearchonline. com database [pic] We can see from this charts that sales have been constantly growing over the past decade and that is the best growth in sales in the supermarket industry ( Standard and poors). Advanced dupont method Chart3 , exhibit 1 Metric : I belive that there are many important metric in the retail industry, but the most important one is sales per square foot. | | | |Whole foods | | | |2005 |2006 |2007 |2008 |2009 | |RONA |9. 54% |15. 70% |8. 12% |5. 38% |5. 89% | |Spread |2. 76% |15. 71% |7. 78% |3. 21% |3. 14% | |fin lev |1. 38% |0. 61% |50. 67% |61. 67% |48. 15% | |ROE |9. 98% |14. 52% |12. 3% |7. 60% |9. 02% | | | | | | | | | | | |Safeway | | | | |2005 |2006 |2007 |2008 |2009 | |RONA |7. 78% |10. 49% |5. 03% |10. 35% |-7. 78% | |Spread |2. 85% |4. 7% |4. 59% |5. 45% |-16. 53% | |fin lev |109. 83% |88. 88% |69. 50% |69. 27% |88. 16% | |ROE |11. 41% |15. 36% |5. 03% |14. 22% |-22. 19% | Advanced dupont method Chart3 , exhibit 1 [pic] Source : Retreived on November 4th from, http://www. netadvantage. standardandpoors. com The advanced Dupont model is used to separate the effects of operating and financing decisions which was not possible with the old dupont version.
As shown in the formula above ,the higher the RNOA, Spread and Financial leveraged, the higher the ROE will get. Throughout the last 5 years expet from 2008, WF had a higher RONA and higher spread than Safeway, but they end up with a lower ROE in both years( see chart 3). WF’s higher RONA in those 4 years shows that WF uses its assets more efficientely than Safeway It also reveals that WF controls its costs better than Safeway. Looking at Safeway’s Balance sheets and income statement, we can conclude that Safeway has a low RONA( exibit 2, 3 and 4) and it is due to their low Net Operating profit.
This could mean that Safeway has too much fixed assets that is not used efficiently, or it may also indicate that Safeway manages its expenses poorly comparing it to WF. Safeway is planning to reduce the size of its stores when opening new once( Standard & Poors),showing they want to improve their RONA. During 4 out of these 5 last years, WF has been having a better spread than Safeway, because they have been getting a better RONA and because Safeway’s net borrowing cost is really high comparing it to their RONA. In 2009, we can see that Safeway had a negative RONA of -7. 8% due to the negative Net operating profit after tax. This affected their spread negatively since it is directly related to the RNOA. We could see from chart 3 that the reason why Safeway were getting higher ROE during in 2005, 2006. And 2008 is because they were using a lot financial leverage. In 2005 and 2006 Safeway’s Financial leverage was 109,83% and 88,88%, against only 1. 38% and 14. 52% for WF. Even if Safeway had a negative ROE in 2009, they used 88. 16% of financial leverage against only 48. 15%. This shows that the reason why Safeway got better ROE in 2005. 006. and 2008 is because they increased it with they increased it with their high leverage. Therefore we could conclude form the advanced Dupont analysis that WF has been doing better in terms of operating performance and that Safeway relies much more on financial leverage than WF. Conclusion. : We can conclude that after analyzing both companies’ ROA, RONA, Sread, asset turnover and Financial leverage, we can infer that Whole is using its assets better than Safeway and that it is growing its sales at a faster pace than Safeway.
Comparing WF ratios with its industry, It is apparent to see that WF is doing really well against the average of the whole industry. Bibliography Retrieved November 4, 2010 http://www. reuters. com/finance/stocks/financialHighlights? symbol=WFMI. O Retrieved November 4, 2010 http://www. valueline. com/ Retrieved November 4, 2010 http://www. netadvantage. standardandpoors. com Retrieved from November 4, 2010 http://www. mergentonline. com/compsearch. asp Retrieved November 4, 2010 http://www. plunkettresearchonline. com .