Whole Foods

Whole Foods Market Inc. refers to an American supermarket chain that exclusively feature foods with no artificial preservatives, flavors, hydrogenated fats, colors and sweeteners (Wholefoodsmarket.com. 2016). Whole Food Market is the first organic grocer to be certified in the US, therefore, to National Organic Program standards; it endeavors to ensure organic integrity of the heterogeneous products immediately they arrive at stores until placed in shopping carts. It has over 431 supermarkets in the US, Canada, and the UK. Whole Food market is in the grocery store industry. Being the premier natural foods grocery company, the business model of Whole Food Market focuses on providing high quality, natural foods to its target market, including organic food (Wholefoodsmarket.com. 2016). In order to support the health, well-being, and healing of individuals, Whole Food Market sells high quality, natural, and local-based grocery store products to the increasingly health conscious consumers. It is facing margin pressures due to the growth of small organic food business such as Sprouts which provide lower price alternatives. However, WFM charges premium prices for the store ambience which they transfer to customers.

Whole Food market has positive growth prospects and one of its biggest drivers of growth is its unique value proposition as a retailers who are very committed to organic and natural food as well as environment-friendly operating practices. Therefore, WFM grows through differentiation. In addition, It is well-known for its strong employee-oriented work culture emphasizing transparency, teamwork, empowerment, and autonomy (Wholefoodsmarket.com. 2016). This culture is also a great contributor to the success and growth of the company as it permits it to grow without experiencing the burden of bureaucratic practices. Therefore, the potential for growth of WFM in the foreign market is high. However, it will be faced with currency exchange risks such as translation, economic and transaction risks. They can manage such risks using currency futures, swaps, forwards and options.

This main aim of this report is to analyze the performance of Whole Food Market in comparison Walmart, Costco, and Kroeger to decide on the company that is best positioned to provide the most shareholder value in the future. All the four companies are in the grocery store industry. I chose grocery store industry because it accounts for the US’s largest share of food store sales and there is an increase in market concentration within the segment. Therefore, grocery store industry is increasingly expanding. I selected the companies using market capitalization to ensure that I used top companies in the industry; I chose firms with a market capitalization of over US$30 billion.

Ratio analysis

In the ratio analysis, four ratios will be use namely net margin for profitability, current ratio for liquidity, debt to equity for solvency, and return on equity ratio.

WFM

  2012 2013 2014 2015 2016 IA
Net margin 3.98% 4.27% 4.08% 3.48% 3.22% 1.40%
Current ratio 2.15 1.82 1.40 1.23 1.47 1.59
Debt to equity 0.01 0.01 0.02 0.02 0.33 1.21
ROE 13.71% 14.35% 15.06% 14.14% 14.50% 1.30%

 

Net margin is a profitability ratio measuring the percentage of revenue that remain after the company ahs deduced all operating expenses, taxes, interest and preferred stock dividends (Collier, 2009).  The net margin of WFM has an inconsistent trend, it increased from 3.98% in 2012 to 4.27% in 2013, and it then decreased from that figure to 3.22% in 2016. However, the company is profitable because it can still realize some revenue that can be distributed to investors in the form of dividends. In comparison with the industry average of 1.40%, WFM is more profitable than its competitors. Current ratio is a measure of company’s liquidity, ability to meet short term debts. WFM’s current ratio also indicates an inconsistent trend; it decreased from 2.15 in 2012 to 1.23 in 2015 before increasing to 1.47 in 2016. However, the company is liquid because the value of the ratio is more than one. In comparison with the industry average of 1.59, WFM is relatively less liquid than its competitors in the industry.

Debt to equity ratio measures how leveraged a company is, the proportion of its assets relative to debts (McLaney. and Atrill, 2014). The debt-to equity ratio shows an upward trend, it increased from 0.01 in 2012 to o.33 in 2016. This significantly lower value indicates that WFM uses more equity than debts hence is less risky, it is more financially stable. An industry average of 1.21 indicates that WFM is less leveraged than other firms in the industry. ROE measures the ability of a business entity to generate profits from the shareholders investments. WFM’s ROE fluctuated but remained relatively stable at 14%. It increased from 14.14% in 2015 to 14.50% in 2016 implying an increase in efficiency in which it uses money from shareholders in generating profits and growing the company. The industry average is significantly lower implying WFM is more efficient in its dealings with equity.

 

WMT

  2012 2013 2014 2015 2016 IA
Net margin 3.51% 3.62% 3.36% 3.37% 3.05% 1.40%
Current ratio 0.20 0.20 0.20 0.24 0.22 1.59
Debt to equity 0.66 0.54 0.58 0.54 0.55 1.21
ROE 22.45% 23.02% 21.00% 20.76% 18.15% 1.30%

 

WMT’s net margin has an inconsistent trend, but decreased from 3.37% in 2015 to 3.05% in 2016.Despite the fluctuations, WMT is relatively profitable. In comparison to the industry average of 1.40%, WMT is more profitable than its competitors. WFM’s current ratio shows upward trend; it increased from 0.20 in 2012 to 0.22 in 2016. WMT is not liquid because the ratio is less than one. In comparison with the industry average of 1.59, WMT is far less liquid than its competitors in the industry. The debt-to equity ratio shows inconsistent trend, but averaged at 0.55. WMT uses almost equal debts and equity hence relatively less risky. An industry average of 1.21 indicates that WMT is less leveraged than other firms in the industry. WFM’s ROE fluctuated but remained relatively stable at 20%. It decreased to 18.15% in 2016; however, WMT is relatively efficient in using money from shareholders in generating profits and growing the company (Roxas, 2011). The industry average is significantly lower implying WMT is more efficient in its dealings with equity.

COST

  2012 2013 2014 2015 2016 IA
Net margin 1.72% 1.94% 1.83% 2.05% 1.98% 1.40%
Current ratio 1.10 1.19 1.22 1.05 0.98 1.59
Debt to equity 0.11 0.46 0.41 0.46 0.34 1.21
ROE 14.03% 17.58% 17.79% 20.74% 20.71% 1.30%

 

COST’s net margin fluctuated and decreased from 2.05% in 2015 to 1.98% in 2016. However, COST is relatively profitable. It is relatively more profitable compared to its competitors. Is current ratio decreased across the period to 0.98 in 2016, COST was not liquid is 2016, ratio is less than one. It is less liquid than its competitors in the industry. The debt-to equity ratio increased to 0.46, but decreased to 0.34 in 2016; hence COST is less risky as it uses fewer debts than equity. COST is less leveraged than other firms in the industry. ROE increased across the period to 20.71% in 2016, therefore, its efficiency in using money from shareholders in generating profits and growing the company increased. However, COST is more efficient in its dealings with equity (Overview, 2013).

 

KR

  2012 2013 2014 2015 2016 IA
Net margin  0.67% 1.55% 1.54% 1.59% 1.86% 1.40%
Current ratio 0.80 0.72 0.82 0.78 0.76 1.59
Debt to equity 1.72 1.46 1.79 1.81 1.42 1.21
ROE 12.98% 36.57% 31.68% 32.01% 33.34% 1.30%

 

KR’s net margin increased across the period to 1.86% in 2016, implying its profitability increased. It is relatively more profitable than its competitors in the industry. Its current ratio decreased across the period to 0.76 in 2016, implying KR is not liquid; the ratio is less than one. Also, it is less liquid than its competitors in the industry. The debt-to equity ratio decreased to 1.42 in 2016; hence KR is more risky as it uses more debts than equity, the ratio is more than one. KR is more leveraged than other firms in the industry, it is riskier. ROE increased across the period to 33.34% in 2016, therefore, its efficiency in using money from shareholders in generating profits and growing the company increased. However, KR is more efficient in its dealings with equity (Malíková & Brabec, 2012).

Growth projections

The revenue 5 year average growth rate is 3.38% for Walmart, 5.95% for Costco and 7.44% for Kroeger. Therefore in 2017, the revenue will be as follows:

WMT: 482,130*(1+0.0338) = US$500,450.94 million

COST: 118,719*(1+0.0595) = US$125,782.78 million

KR: 109,830*(1+0.0744) = US$118,001.35 million

However, the total assets in 2017 will be as follows:

WMT: 199,581*(1+0.0338) = US$206,326.84 million

COST: 33,163*(1+0.0595) = US$35,136.20 million

KR: 33,897*(1+0.0744) = US$36,418.94 million

Capital structure

Capital structure is how a firm finances its overall operations and growth using many sources of funds (Hickman et al. 2013). Walmart uses more debts than equity in financing its operations. Costco uses more equity than debts in financing its operations and The Kroger Co uses far more debts that equity in its operations hence very risky.

WACC

The companies have different WACC; 3.09% for WMT, 8.5% for COST and 5.43% for The Kroger Co. Therefore, COST has a higher average return for the investors.

Conclusion

The potential takeover target for Whole Food Market is Kroger as a value of $9.7 billion. It can be a friendly takeover because it can be approved by the management of both the company resulting in revenue synergies. The two companies can combine to sell more products due to access to new markets, sharing of distribution channels and reduced competition. Although, both the firms have close financial performance implying they are both positioned to lead the industry, Kroger stands out. Firstly it is more profitable than its competitors in the industry therefore; it has enough cash to meet their daily operations. It is more efficient in using money from shareholders in generating profits and growing the company, it is more efficient in its dealings with equity. On the other hand, it is well-positioned to provide high financial rewards to the investors. It has revenue 5 year average growth rate of 7.44% which is the highest among the competitors implying it has an opportunity to obtain higher revenues that they can offer to their investors.

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