Whole Foods Financial Recommendation - Research Paper Example

?Whole foods is a giant retailer in the food industry with sales volume reaching several billion dollars. Its earnings have been growth oriented in the past couple of years. It dipped after 2006 when its operating profit margin dropped from 5.69% to 4.51% and saw a further decrease to 2.97% in 2008. However, since then whole foods have been on the rise by achieving a margin of 4.9% by the end of 2010. Net profit margins have shown a similar trend as well as operating profits. In 2006, the industry performed well and recorded 3.63% of net profit margin. However, since then it dropped significantly and reached a low point in 2008 where it recorded a net profit margin of only 1.43%. Whole foods has since then performed well to reach up to 2.7% in 2010. All profitability ratios show a similar trend with a downward moving slope till 2008 and a positive flow from there on. Return on equity is a measure of profitability for contributors of equity capital. ROE helps in determining the firm’s rate of growth of earnings (Besley and Brigham, 2000). Basically, ROE can be computed by dividing the net income by the shareholders equity. ROE dropped from 13.5% in 2006 to 7.6% in 2008. From there on, Whole foods issues preferred stock to invest in the business to recover from the dull patch. ROE for 2009 was 9.77% and it further grew to 10.12% in 2010. Like other profitability indicators, earning per share has been consistent throughout. The year 2006, being a highly profitable for the investors, showed EPS of $1.46. It dipped all the way to $0.82 in 2008 and then it steadily grew to record $1.45 EPS in 2010. When liquidity is taken into consideration, Whole foods has been parabolic in nature. In 2006, the company had $1.46 to pay off each dollar of current obligations. Current ratio dropped to 0.85 in 2007 but since then it has shown an upward trend. In 2009, it recorded 0.85 and in the last year it stated $1.45 of current asset to pay off current liabilities. Debt to asset ratio measures the amount of debt financing done to get a dollar of asset (Levinson 2006). It has shown a consistent rise since 2006 till 2008. In 2006, debt to asset ratio was 31.27% which climbed to 55.54% in 2008. In 2009, when equity was issued, the ratio dropped to 46% and further down to 40% in 2010. Similar trend was witnessed in Debt to equity. Company initially preferred leverage over equity till 2008 where a huge shift to equity took place. Company paid back $748 million of long-term debt in 2009 which could be seen in its improving ratios in 2009-2010. Asset management has been steady for Whole foods. Inventory turnover rate measures the rate at which your inventory circles in a year (Ehrhardt& Brigham 2004). It is an indicator of whether the company holds large amount of inventory or not. The turnover rate has oscillated between 22 times in a year to 27.5 times since 2006. In 2007 the inventory turned over 22.88 times in a year. The rate dropped to 24.89 in 2008 but since then it has increased to 25.86 times in 2009 and 27.84 times in 2010 which shows controlled sales and less excess inventory. TREND For whole foods, the past 5 years have shown a parabolic trend. Since sales fluctuate greatly with consumer buying habits and state of the economy, Whole foods has struggled in this regard. Recession and certain acquisitions have taken whole foods to bite the dust till 2008. But since then it has started to prosper all over again. Sales grew by 17.5% from 2006 to 2007; however, the increase did not show up as profitable as expected in the earnings. High interest payments nullified all penny earned in 2007. In the year 2008, the sales grew but eventually yielding lower profit margins due to high discounted sales caused by recession. Food industry works on low margins and it was struck immensely by recession. In the year 2009, when Whole foods paid back majority of their long term debt, it was time to show better results at year end. The earnings grew parallel to the sales. Year 2010, was marked highly lucrative for the company with growth by 12% to take stock price to new heights. Since the start of 2006, Whole Foods stock has been eroding, from a high of 77 to a low of 19 in 2008. It further dropped to $10 at the year end. Recession marked its presence by shattering profits for Whole foods and with it investor’s confidence on the company. Since then Whole foods has performed extremely well by paying off huge amount of debt and relying more on equity. In 2009 the average stock price was $27. In 2010, along with the sales growth the stock price touched $60 in June which is about 300% increase from 2008. Since the start of the year 2011, shares of Whole foods have performed well. It has produced a return of 30% and a return of 80.9% for a full 12 months. The returns have generally been positive, long term shareholders would be satisfied with the performance and will hold up shares for now. The pro-forma earnings for the current year 2011 is favorable for the investors. Analysts expect the company’s sales to grow by 10% in 2011 and 12% in the year to follow. Mixed reviews for the stocks for now however, popular view is a Hold. Lastly, Whole foods has for long maintained its strong brand image which has offered its investors increased confidence in the industry. The stock of Whole foods is predicted to increase which is associated with increased demand for natural and organic products. By looking at excess cash reserves and the expansion to new stores, I would suggest whole foods to buy back some of the stocks so that they could increase their ROE and add more wealth to their shareholder’s account. Furthermore, they should raise their dividends as well to provide shareholders a sense of hard cash return as well. References: Besley, S., & Brigham, E. F. (2000).Essentials of managerial finance. Washington, DC: South-Western College. Levinson, M. (2006).Guide to Financial Markets. New York, NY: Bloomberg Press. Ehrhardt,C.E., & Brigham, E. F. (2004). Financial Management: Theory and Practice .Washington, DC: South-Western College. Read More