Press Release
Whole Foods Market, Inc. Returns to Previous Accounting Practice of Capitalizing Rent during Construction Period; Company will Restate Financials
May 4, 2005. Whole Foods Market, Inc. (NASDAQ: WFMI) today announced that based on new determinations by the SEC, the Company will return to and continue its previous practice of capitalizing rent during the construction period.
On March 25, 2005, subsequent to filing the Company's restated financial statements on March 7, 2005, the Company's independent registered accounting firm notified the Company that the SEC had determined that capitalization of land or building rent during the construction period into the historical cost of constructed assets is acceptable. Subsequent interpretations of this SEC guidance by the Company's and other independent registered accounting firms indicate that a company's previous practice of accounting for rent during the construction period should be followed in the restatement. As this guidance was not available at the time of the Company's first restatement, the Company is hereby restating its previously issued financial statements to return to and continue its previous practice of capitalizing rent during the construction period. The return of the Company to its previous accounting practice reduces the lease accounting charge for the first quarter of fiscal year 2005 from $0.04 to $0.02 per diluted share and the charge for fiscal year 2004 from $0.11 to $0.06 per diluted share. The remaining charge primarily reflects the additional pre-opening costs and depreciation of assets resulting from rent allocated to the construction period.
"We are happy to be able to return to our prior method of accounting for rent incurred during the construction period of new stores as we believe capitalization of such rent is the correct method of accounting and is consistent with the accounting for other costs such as utilities and property taxes also incurred during this period," said Glenda Flanagan, Executive Vice President and Chief Financial Officer of Whole Foods Market. "None of the adjustments have had or will have any impact on cash flow or the underlying economics of the leases. It is unfortunate that the deadline for filing our first quarter Form 10-Q fell prior to the date of the SEC's March determinations, and therefore we completed our filing without the benefit of information that would have enabled us to reflect the capitalization of construction period rent in that filing. We apologize for any confusion these restatements have caused or may cause our shareholders."
As a result of the Company's determination to restate its consolidated financial statements as discussed above, the financial statements included in the Company's Annual Report on Amendment No. 1 to Form 10-K/A for fiscal 2004 and first quarter report for fiscal year 2005 on Form 10-Q should no longer be relied upon. The Company will file Amendment No. 2 to Form 10-K/A for fiscal year 2004 and Form 10-Q/A for the first quarter of fiscal year 2005 with restated consolidated financial statements, and the Company's Forms 10-Q for the second, third and fourth quarters of fiscal 2005 will reflect the restated information for the corresponding quarters in fiscal 2004.
Prior Restatement
On February 7, 2005, the Office of the Chief Accountant of the SEC expressed views regarding certain operating lease accounting issues, including the recognition of rent during rent holidays, and their application under generally accepted accounting principals. Subsequently, Company management made a preliminary determination, in consultation with the Company's independent registered public accounting firm and similar to determinations by many other publicly-held retail and restaurant companies, that its methods of accounting for rent holidays and tenant improvement allowances, and of determining lives used in the calculation of depreciation of leasehold improvements and straight-line rent determination for certain leased properties, were not consistent with the views expressed by the SEC staff letter and other interpretations. On March 2, 2005, the Company filed its first quarter report on Form 10-Q with restated information for the corresponding quarter in fiscal year 2004. On March 7, 2005, the Company filed a form 10-K/A with restated consolidated financial statements for fiscal years 2004, 2003 and 2002. In connection with these restatements, the Company charged to expense rent incurred or allocated during the store construction period. These restatements were based on guidance and interpretations available at that time and reflected charges to earnings which, among other items, expensed rent incurred or allocated during the store construction period.
About Whole Foods Market: Founded in 1980 in Austin, Texas, Whole Foods Market® is a Fortune 500 company and the largest natural and organic foods retailer. The Company had sales of $3.9 billion in fiscal year 2004 and currently has 169 stores in the United States, Canada and the United Kingdom.
The following constitutes a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Except for the historical information contained herein, the matters discussed in this press release are forward-looking statements that involve risks and uncertainties, which could cause our actual results to differ materially from those described in the forward looking statements. These risks include but are not limited to general business conditions, the timely development and opening of new stores, the integration of acquired stores, the impact of competition, and other risks detailed from time to time in the Company's SEC reports, including the report on Form 10-K/A for the fiscal year ended September 26, 2004. The Company does not undertake any obligation to update forward-looking statements.
Following is a summary of the effects of this accounting restatement on the consolidated statements of operations for the fiscal quarter ended January 16, 2005 and the fiscal quarters for the year ended September 26, 2004.
| Fiscal quarter ended January 16, 2005. | Previously Reported on Form 10-Q filed on 3/2/2005 |
Adjustments | Restated | |||
| Sales | $ | 1,368,328 | $ | - | $ | 1,368,328 |
| Cost of goods sold and occupancy costs | 895,486 | - | 895,486 | |||
| Gross profit | 472,842 | - | 472,842 | |||
| Direct store expenses | 348,380 | 664 | 349,044 | |||
| Store contribution | 124,462 | (664) | 123,798 | |||
| General and administrative expenses | 40,401 | - | 40,401 | |||
| Pre-opening and relocation costs | 6,599 | (3,466) | 3,133 | |||
| Operating income | 77,462 | 2,802 | 80,264 | |||
| Other income (expense): | - | |||||
| Interest expense | (1,708) | - | (1,708) | |||
| Investment and other income | 1,194 | - | 1,194 | |||
| Income before income taxes | 76,948 | 2,802 | 79,750 | |||
| Provision for income taxes | 30,778 | 1,121 | 31,899 | |||
| Net income | $ | 46,170 | $ | 1,681 | $ | 47,851 |
| Basic earnings per share | $ | 0.74 | $ | 0.02 | $ | 0.76 |
| Diluted earnings per share | $ | 0.69 | $ | 0.02 | $ | 0.71 |
| Fiscal quarter ended January 18, 2004. | Originally Reported | First Restatement Adjustments |
Previously Reported on Form 10-Q filed on 3/2/2005 |
Second Restatement Adjustments |
Restated | |||||
| Sales | $ | 1,118,148 | $ | - | $ | 1,118,148 | $ | - | $ | 1,118,148 |
| Cost of goods sold and occupancy costs | 733,003 | 718 | 733,721 | - | 733,721 | |||||
| Gross profit | 385,145 | (718) | 384,427 | - | 384,427 | |||||
| Direct store expenses | 281,896 | 700 | 282,596 | 569 | 283,165 | |||||
| Store contribution | 103,249 | (1,418) | 101,831 | (569) | 101,262 | |||||
| General and administrative expenses | 35,869 | - | 35,869 | - | 35,869 | |||||
| Pre-opening and relocation costs | 1,796 | 2,277 | 4,073 | (2,156) | 1,917 | |||||
| Operating income | 65,584 | (3,695) | 61,889 | 1,587 | 63,476 | |||||
| Other income (expense): |
- | - | ||||||||
| Interest expense | (2,478) | - | (2,478) | - | (2,478) | |||||
| Investment and other income | 1,464 | - | 1,464 | - | 1,464 | |||||
| Income before income taxes | 64,570 | (3,695) | 60,875 | 1,587 | 62,462 | |||||
| Provision for income taxes | 25,828 | (1,478) | 24,350 | 635 | 24,985 | |||||
| Net income | $ | 38,742 | $ | (2,217) | $ | 36,525 | $ | 952 | $ | 37,477 |
| Basic earnings per share | $ | 0.64 | $ | (0.03) | $ | 0.61 | $ | 0.01 | $ | 0.62 |
| Diluted earnings per share | $ | 0.60 | $ | (0.03) | $ | 0.57 | $ | 0.01 | $ | 0.58 |
| Fiscal quarter ended April 11, 2004. | Originally Reported | First Restatement Adjustments |
Previously Reported on Form 10-K/A filed on 3/7/2005 |
Second Restatement Adjustments |
Restated | |||||
| Sales | $ | 902,141 | $ | - | $ | 902,141 | $ | - | $ | 902,141 |
| Cost of goods sold and occupancy costs | 582,239 | 358 | 582,597 | - | 582,597 | |||||
| Gross profit | 319,902 | (358) | 319,544 | - | 319,544 | |||||
| Direct store expenses | 229,469 | 526 | 229,995 | 446 | 230,441 | |||||
| Store contribution | 90,433 | (884) | 89,549 | (446) | 89,103 | |||||
| General and administrative expenses | 28,783 | - | 28,783 | - | 28,783 | |||||
| Pre-opening and relocation costs | 2,536 | 1,504 | 4,040 | (1,435) | 2,605 | |||||
| Operating income | 59,114 | (2,388) | 56,726 | 989 | 57,715 | |||||
| Other income (expense): | - | - | ||||||||
| Interest expense | (1,859) | - | (1,859) | - | (1,859) | |||||
| Investment and other income | 1,503 | - | 1,503 | - | 1,503 | |||||
| Income before income taxes | 58,758 | (2,388) | 56,370 | 989 | 57,359 | |||||
| Provision for income taxes | 23,504 | (956) | 22,548 | 396 | 22,944 | |||||
| Net income | $ | 35,254 | $ | (1,432) | $ | 33,822 | $ | 593 | $ | 34,415 |
| Basic earnings per share | $ | 0.58 | $ | (0.03) | $ | 0.55 | $ | 0.01 | $ | 0.56 |
| Diluted earnings per share | $ | 0.54 | $ | (0.02) | $ | 0.52 | $ | 0.01 | $ | 0.53 |
| Fiscal quarter ended July 4, 2004. | Originally Reported | First Restatement Adjustments |
Previously Reported on Form 10-K/A filed on 3/7/2005 |
Second Restatement Adjustments |
Restated | |||||
| Sales | $ | 917,355 | $ | - | $ | 917,355 | $ | - | $ | 917,355 |
| Cost of goods sold and occupancy costs | 600,404 | 557 | 600,961 | - | 600,961 | |||||
| Gross profit | 316,951 | (557) | 316,394 | - | 316,394 | |||||
| Direct store expenses | 232,122 | 527 | 232,649 | 462 | 233,111 | |||||
| Store contribution | 84,829 | (1,084) | 83,745 | (462) | 83,283 | |||||
| General and administrative expenses | 27,551 | - | 27,551 | - | 27,551 | |||||
| Pre-opening and relocation costs | 2,928 | 2,038 | 4,966 | (1,708) | 3,258 | |||||
| Operating income | 54,350 | (3,122) | 51,228 | 1,246 | 52,474 | |||||
| Other income (expense): | - | - | ||||||||
| Interest expense | (1,319) | - | (1,319) | - | (1,319) | |||||
| Investment and other income | 1,782 | - | 1,782 | - | 1,782 | |||||
| Income before income taxes | 54,813 | (3,122) | 51,691 | 1,246 | 52,937 | |||||
| Provision for income taxes | 21,924 | (1,248) | 20,676 | 498 | 21,174 | |||||
| Net income | $ | 32,889 | $ | (1,874) | $ | 31,015 | $ | 748 | $ | 31,763 |
| Basic earnings per share | $ | 0.53 | $ | (0.03) | $ | 0.50 | $ | 0.01 | $ | 0.51 |
| Diluted earnings per share | $ | 0.50 | $ | (0.03) | $ | 0.47 | $ | 0.01 | $ | 0.48 |
| Fiscal quarter ended September 26, 2004. | Originally Reported | First Restatement Adjustments |
Previously Reported on Form 10-K/A filed on 3/7/2005 |
Second Restatement Adjustments |
Restated | |||||
| Sales | $ | 927,306 | $ | - | $ | 927,306 | $ | - | $ | 927,306 |
| Cost of goods sold and occupancy costs | 605,965 | 572 | 606,537 | - | 606,537 | |||||
| Gross profit | 321,341 | (572) | 320,769 | - | 320,769 | |||||
| Direct store expenses | 240,278 | 522 | 240,800 | 480 | 241,280 | |||||
| Store contribution | 81,063 | (1,094) | 79,969 | (480) | 79,489 | |||||
| General and administrative expenses | 27,597 | - | 27,597 | - | 27,597 | |||||
| Pre-opening and relocation costs | 3,199 | 2,370 | 5,569 | (1,900) | 3,669 | |||||
| Operating income | 50,267 | (3,464) | 46,803 | 1,420 | 48,223 | |||||
| Other income (expense): | - | - | ||||||||
| Interest expense | (1,593) | - | (1,593) | - | (1,593) | |||||
| Investment and other income | 1,707 | - | 1,707 | - | 1,707 | |||||
| Income before income taxes | 50,381 | (3,464) | 46,917 | 1,420 | 48,337 | |||||
| Provision for income taxes | 20,153 | (1,386) | 18,767 | 568 | 19,335 | |||||
| Net income | $ | 30,228 | $ | (2,078) | $ | 28,150 | $ | 852 | $ | 29,002 |
| Basic earnings per share | $ | 0.48 | $ | (0.03) | $ | 0.45 | $ | 0.02 | $ | 0.47 |
| Diluted earnings per share | $ | 0.46 | $ | (0.03) | $ | 0.43 | $ | 0.01 | $ | 0.44 |
| Fiscal year ended September 26, 2004. | Originally Reported | First Restatement Adjustments |
Previously Reported on Form 10-K/A filed on 3/7/2005 |
Second Restatement Adjustments |
Restated | |||||
| Sales | $ | 3,864,950 | $ | - | $ | 3,864,950 | $ | - | $ | 3,864,950 |
| Cost of goods sold and occupancy costs | 2,521,611 | 2,205 | 2,523,816 | - | 2,523,816 | |||||
| Gross profit | 1,343,339 | (2,205) | 1,341,134 | - | 1,341,134 | |||||
| Direct store expenses | 983,765 | 2,275 | 986,040 | 1,957 | 987,997 | |||||
| Store contribution | 359,574 | (4,480) | 355,094 | (1,957) | 353,137 | |||||
| General and administrative expenses | 119,800 | - | 119,800 | - | 119,800 | |||||
| Pre-opening and relocation costs | 10,459 | 8,189 | 18,648 | (7,199) | 11,449 | |||||
| Operating income | 229,315 | (12,669) | 216,646 | 5,242 | 221,888 | |||||
| Other income (expense): | - | - | ||||||||
| Interest expense | (7,249) | - | (7,249) | - | (7,249) | |||||
| Investment and other income | 6,456 | - | 6,456 | - | 6,456 | |||||
| Income before income taxes | 228,522 | (12,669) | 215,853 | 5,242 | 221,095 | |||||
| Provision for income taxes | 91,409 | (5,068) | 86,341 | 2,097 | 88,438 | |||||
| Net income | $ | 137,113 | $ | (7,601) | $ | 129,512 | $ | 3,145 | $ | 132,657 |
| Basic earnings per share | $ | 2.24 | $ | (0.13) | $ | 2.11 | $ | 0.05 | $ | 2.16 |
| Diluted earnings per share | $ | 2.09 | $ | (0.11) | $ | 1.98 | $ | 0.05 | $ | 2.03 |
About Whole Foods Market: Founded in 1980 in Austin, Texas, Whole Foods Market® is a Fortune 500 company and the largest natural and organic foods retailer. The Company had sales of $5.6 billion in fiscal year 2006 and currently has 188 stores in the United States, Canada and the United Kingdom.
The following constitutes a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Except for the historical information contained herein, the matters discussed in this press release are forward-looking statements that involve risks and uncertainties, which could cause our actual results to differ materially from those described in the forward looking statements. These risks include but are not limited to general business conditions, the timely development and opening of new stores, the impact of competition, and other risks detailed from time to time in the Company's SEC reports, including the reports on Form 10-K and 10-K/A Amendment No. 1 for the fiscal year ended September 25, 2005. The Company does not undertake any obligation to update forward-looking statements.