10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended July 4, 2004; or

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                                  to                                 .

Commission File Number: 0-19797

WHOLE FOODS MARKET, INC.

(Exact name of registrant as specified in its charter)

Texas	74-1989366
(State of incorporation)	(IRS employer identification no.)

601 North Lamar Blvd., Suite 300

Austin, Texas 78703

(Address of principal executive offices)

Registrant’s telephone number, including area code:

512-477-4455

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  x No  ¨

The number of shares of the registrant’s common stock, no par value, outstanding as of August 1, 2004 was 62,263,430 shares.

Whole Foods Market, Inc.

Form 10-Q

Table of Contents

	Page Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, July 4, 2004 (unaudited) and September 28, 2003	3
Condensed Consolidated Income Statements (unaudited), for the twelve and forty weeks ended July 4, 2004 and July 6, 2003	4
Condensed Consolidated Statements of Cash Flows (unaudited), for the forty weeks ended July 4, 2004 and July 6, 2003	5
Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3. Quantitative and Qualitative Disclosures About Market Risk	14
Item 4. Controls and Procedures	14
Part II. Other Information
Item 1. Legal Proceedings	14
Item 6. Exhibits and Reports on Form 8-K	14
Signature	15

2

Part 1. Financial Information

Item 1. Financial Statements

Whole Foods Market, Inc.

Condensed Consolidated Balance Sheets

July 4, 2004 (unaudited) and September 28, 2003

(In thousands)

Assets
	2004		2003
Current assets:
Cash and cash equivalents	$	195,324	$	165,779
Restricted cash		17,939		—
Trade accounts receivable		55,349		45,947
Merchandise inventories		153,793		123,904
Prepaid expenses and other current assets		32,498		28,054
Total current assets		454,903		363,684
Property and equipment, net of accumulated depreciation and amortization		846,923		718,240
Long-term investments		—		2,206
Goodwill		112,072		80,548
Intangible assets, net of accumulated amortization		25,423		26,569
Other assets		19,495		5,573
	$	1,458,816	$	1,196,820
Liabilities and Shareholders’ Equity
	2004		2003
Current liabilities:
Current installments of long-term debt and capital lease obligations	$	5,990	$	5,806
Trade accounts payable		95,953		72,715
Accrued payroll, bonus and other benefits due team members		97,283		70,875
Dividends payable		9,345		—
Other accrued expenses		108,672		90,188
Total current liabilities		317,243		239,584
Long-term debt and capital lease obligations, less current installments		163,088		162,909
Other long-term liabilities		18,871		18,151
Total liabilities		499,202		420,644
Shareholders’ equity:
Common stock, no par value, 150,000 shares authorized, 62,762 and 60,299 shares issued, 62,263 and 60,070 shares outstanding in 2004 and 2003, respectively		527,825		423,297
Accumulated other comprehensive income		1,307		1,624
Retained earnings		430,482		351,255
Total shareholders’ equity		959,614		776,176
Commitments and contingencies
	$	1,458,816	$	1,196,820

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Whole Foods Market, Inc.

Condensed Consolidated Income Statements (unaudited)

(In thousands, except per share amounts)

	Twelve weeks ended						Forty weeks ended
	July 4, 2004			July 6, 2003			July 4, 2004			July 6, 2003
Sales	$	917,355		$	749,043		$	2,937,644		$	2,397,942
Cost of goods sold and occupancy costs		600,404			490,424			1,915,646			1,574,804
Gross profit		316,951			258,619			1,021,998			823,138
Direct store expenses		232,122			186,918			743,487			601,358
General and administrative expenses		27,551			23,930			92,203			78,395
Pre-opening and relocation costs		2,928			2,369			7,260			8,156
Operating income		54,350			45,402			179,048			135,229
Other income (expense):
Interest expense		(1,319	)		(1,907	)		(5,656	)		(6,493	)
Investment and other income		1,782			4,292			4,749			4,389
Income before income taxes		54,813			47,787			178,141			133,125
Provision for income taxes		21,924			19,115			71,256			53,250
Net income	$	32,889		$	28,672		$	106,885		$	79,875
Basic earnings per share	$	0.53		$	0.48		$	1.75		$	1.36
Weighted average shares outstanding		61,951			59,752			61,019			58,749
Diluted earnings per share	$	0.50		$	0.45		$	1.64		$	1.28
Weighted average shares outstanding, diluted basis		68,446			65,811			67,461			65,180
Dividends per share	$	0.15		$	—		$	0.45		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Whole Foods Market, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(In thousands)

	Forty weeks ended
	July 4, 2004			July 6, 2003
Cash flows from operating activities:
Net income	$	106,885		$	79,875
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		83,856			74,318
Loss on disposal of fixed assets		1,444			452
Rent differential		407			785
Change in LIFO reserve		2,500			1,840
Interest accretion on long-term debt		5,775			5,632
Tax benefit related to exercise of employee stock options		32,527			24,015
Loss on long-term investments		479			1,412
Issuance of common stock to 401(k) plan		6			3,122
Coop patronage dividends received		—			3,210
Net change in current assets		(41,329	)		(38,496	)
Net change in current liabilities		61,907			48,437
Net cash provided by operating activities		254,457			204,602
Cash flows from investing activities:
Development costs of new store locations		(117,718	)		(64,535	)
Other property, plant and equipment expenditures		(83,385	)		(64,346	)
Acquisition of intangible assets		(584	)		(6,552	)
Payments for purchase of acquired entities, net of cash acquired		(20,542	)		—
Increase in restricted cash		(17,939	)		—
Increase in notes receivable		(13,500	)		—
Proceeds from sale of property, plant and equipment		—			2,709
Proceeds from conversion of long-term investments		—			1,000
Proceeds from the sale of long-term investments		1,815			—
Net cash used in investing activities		(251,853	)		(131,724	)
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		(10,086	)		(6,341	)
Issuance of common stock		55,340			48,295
Dividends paid		(18,313	)		—
Net cash provided by financing activities		26,941			41,954
Cash flows from discontinued operations:
Net cash provided by discontinued operations		—			3,557
Net change in cash and cash equivalents		29,545			118,389
Cash and cash equivalents at beginning of period		165,779			12,646
Cash and cash equivalents at end of period	$	195,324		$	131,035
Supplemental disclosures of cash flow information:
Interest paid	$	1,472		$	1,939
Federal and state income taxes paid	$	48,569		$	8,136
Non-cash transactions:
Common stock issued in connection with acquisition	$	16,375		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Whole Foods Market, Inc.

Notes To Condensed Consolidated Financial Statements (unaudited)

July 4, 2004

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Whole Foods Market, Inc. (“Company”) have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. Examples include accounting for depreciation and amortization, inventory, allowance for doubtful accounts, long-term investments, team member benefit plans, team member health insurance plans, asset impairment charges, store closure costs, goodwill valuation, income taxes and contingencies. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis, the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2003. Our fiscal year ends on the last Sunday in September. The first fiscal quarter is sixteen weeks, the second and third quarters each are twelve weeks and the fourth quarter is twelve or thirteen weeks. Where appropriate, we have reclassified prior year financial statements to conform to current year presentation. We operate in one reportable segment, natural food supermarkets. At July 4, 2004, we had one store in Canada and seven stores in the United Kingdom. All of our remaining operations are domestic.

(2) Restricted Cash

At July 4, 2004, we had approximately $18 million in restricted cash included in current assets on our Condensed Consolidated Balance Sheets. This amount primarily relates to cash held as collateral to support projected workers’ compensation obligations which previously were secured by letters of credit outstanding under our revolving line of credit at September 28, 2003.

(3) Long-Term Investments

During the first quarter of fiscal year 2004, we sold all of our investments in unrestricted and restricted common shares of Gaiam, Inc. for approximately $1.8 million, resulting in a loss of approximately $0.5 million. During the first quarter of fiscal year 2003, our equity interest in Gaiam.com was converted into $1.0 million in cash and 250,000 restricted shares of Gaiam, Inc. common stock pursuant to the merger of a subsidiary of Gaiam, Inc. into Gaiam.com. Subsequent to this transaction, we recognized losses totaling approximately $1.4 million for other-than-temporary impairment of our unrestricted and restricted investments in Gaiam, Inc. common stock due to a sustained decline in market value of the stock below our carrying value. These losses have been included in “Investment and other income” on the accompanying Condensed Consolidated Income Statements in both fiscal years.

(4) Goodwill and Other Intangible Assets

Goodwill and indefinite-lived intangible assets are reviewed for impairment annually, or more frequently if impairment indicators arise. We allocate goodwill to one reporting unit for goodwill impairment testing. During the first and second quarters of fiscal year 2004, we acquired goodwill totaling approximately $31.5 million in connection with the acquisition of Select Fish and Fresh & Wild. There were no impairments of goodwill or indefinite-lived intangible assets during the twelve and forty week periods ended July 4, 2004.

All of our acquired identifiable intangible assets are subject to amortization. Amortization expense is recorded on a straight-line basis over the life of the related agreement, currently one to 26 years for contract-based intangible assets and one to five years for marketing-related and other identifiable intangible assets. During the first quarter of fiscal year 2004, we acquired intangible assets totaling approximately $0.2 million in connection with the Select Fish acquisition. During the second quarter of fiscal year 2004, we acquired intangible assets totaling approximately $0.4 million in connection with the Fresh & Wild acquisition. During the third quarter of fiscal year 2004, we acquired intangible assets totaling approximately $0.5 million consisting primarily of acquired leasehold rights. Amortization associated with intangible assets totaled approximately $0.7 million and $2.3 million for the twelve and forty weeks ended July 4, 2004, respectively and approximately $0.7 million and $2.2 million, respectively, for the same periods of the prior fiscal year.

6

The components of intangible assets were as follows (in thousands):

	July 4, 2004					September 28, 2003
	Gross carrying amount		Accumulated amortization			Gross carrying amount		Accumulated amortization
Contract-based	$	36,163	$	(12,140	)	$	34,816	$	(10,082	)
Marketing-related and other	$	3,599	$	(2,199	)	$	3,440	$	(1,605	)

Amortization associated with the net carrying amount of intangible assets at July 4, 2004 is estimated to be $0.9 million for the remainder of fiscal year 2004, $3.0 million in fiscal year 2005, $2.4 million in fiscal year 2006, $1.6 million in fiscal year 2007 and $1.4 million in fiscal year 2008.

(5) Comprehensive Income

Our comprehensive income was comprised of net income, unrealized gains and losses on marketable securities and foreign currency translation adjustment, net of income taxes. Comprehensive income, net of related tax effects, was as follows (in thousands):

	Twelve weeks ended					Forty weeks ended
	July 4, 2004			July 6, 2003		July 4, 2004			July 6, 2003
Net income	$	32,889		$	28,672	$	106,885		$	79,875
Unrealized gains (losses), net		(750	)		441		(794	)		308
Reclassification adjustments for losses included in net income, net		—			—		88			280
Foreign currency translation adjustment, net		(24	)		761		389			1,717
Comprehensive income	$	32,115		$	29,874	$	106,568		$	82,180

(6) Earnings Per Share

The computation of basic earnings per share is based on the number of weighted average common shares outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of common shares deemed outstanding from the assumed exercise of stock options and the assumed conversion of zero coupon convertible subordinated debentures. A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in thousands):

	Twelve weeks ended				Forty weeks ended
	July 4, 2004		July 6, 2003		July 4, 2004		July 6, 2003
Net income (numerator for basic earnings per share)	$	32,889	$	28,672	$	106,885	$	79,875
Interest on 5% zero coupon convertible subordinated debentures, net of income taxes		1,092		1,042		3,598		3,429
Adjusted net income (numerator for diluted earnings per share)	$	33,981	$	29,714	$	110,483	$	83,304
Weighted average common shares outstanding (denominator for basic earnings per share)		61,951		59,752		61,019		58,749
Potential common shares outstanding:
Assumed conversion of 5% zero coupon convertible subordinated debentures		3,280		3,285		3,281		3,285
Assumed exercise of stock options		3,215		2,774		3,161		3,146
Weighted average common shares outstanding and potential additional common shares outstanding (denominator for diluted earnings per share)		68,446		65,811		67,461		65,180
Basic earnings per share	$	0.53	$	0.48	$	1.75	$	1.36
Diluted earnings per share	$	0.50	$	0.45	$	1.64	$	1.28

7

The computations of diluted earnings per share for the twelve and forty week periods ended July 4, 2004 include all common stock equivalents. Options to purchase approximately 2,093,000 shares and 955,000 shares of common stock were not included in the computation of diluted earnings per share for the twelve and forty week periods ended July 6, 2003, respectively, because their effect would have been antidilutive.

(7) Dividends

On June 29, 2004, the Company declared a cash dividend of $0.15 per share, for a total of approximately $9.4 million, to be paid July 19, 2004 to shareholders of record as of July 9, 2004. During the second quarter of fiscal 2004, the Company declared a cash dividend of $0.15 per share, for a total of $9.3 million, which was paid during the third quarter. During the first quarter of fiscal year 2004, the Company declared and paid a cash dividend of $0.15 per share, for a total of approximately $9.1 million. The Company will pay future dividends at the discretion of our Board of Directors. The continuation of these payments and the amount of such dividends depend on many factors, including the results of operations and the financial condition of the Company. Subject to such factors and a determination that cash dividends continue to be in the best interest of our shareholders, the current intention of our Board of Directors is to pay a quarterly dividend on an ongoing basis. During the first quarter of fiscal year 2004, we amended our bank credit agreement to allow for the payment of dividends on common stock.

(8) Stock-Based Compensation

The Company follows Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for stock option grants. APB No. 25 provides that the compensation expense relative to our team member stock options is measured based on the intrinsic value of the stock option at the date of the grant. As required by Statement of Financial Accounting Standards (“SFAS”) No. 123 and SFAS No. 148, we have determined pro forma net income and pro forma net income per common share as if compensation costs had been determined based on the fair value of the options granted to team members and then recognized ratably over the vesting period. The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes multiple option pricing model. Had we recognized compensation costs as prescribed by SFAS No. 123, net income, basic earnings per share and diluted earnings per share would have changed to the pro forma amounts shown below (in thousands, except per share data):

	Twelve weeks ended						Forty weeks ended
	July 4, 2004			July 6, 2003			July 4, 2004			July 6, 2003
Reported net income	$	32,889		$	28,672		$	106,885		$	79,875
Pro forma expense, net of income taxes		(6,135	)		(4,852	)		(16,693	)		(12,986	)
Pro forma net income	$	26,754		$	23,820		$	90,192		$	66,889
Basic earnings per share:
Reported	$	0.53		$	0.48		$	1.75		$	1.36
Pro forma adjustment		(0.10	)		(0.08	)		(0.27	)		(0.22	)
Pro forma basic earnings per share	$	0.43		$	0.40		$	1.48		$	1.14
Diluted earnings per share:
Reported	$	0.50		$	0.45		$	1.64		$	1.28
Pro forma adjustment		(0.09	)		(0.07	)		(0.23	)		(0.20	)
Pro forma diluted earnings per share	$	0.41		$	0.38		$	1.41		$	1.08

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience. The above pro forma results are not necessarily indicative of future results under the requirements of the proposed share-based payments standard.

(9) Business Combinations

Select Fish LLC

On October 27, 2003, we acquired certain assets of Select Fish LLC (“Select Fish”) in exchange for approximately $3 million in cash plus the assumption of certain liabilities. All assets acquired relate to a seafood processing and distribution facility located in Seattle, Washington. This transaction was accounted for using the purchase method. Accordingly the purchase price has been allocated to tangible and identifiable intangible assets acquired based on their estimated fair values at the date of the acquisition. Total costs in excess of tangible and intangible assets acquired of approximately $1.1 million have been recorded as goodwill. Select Fish results of operations are included in our Condensed Consolidated Income Statements for the period beginning October 27, 2003 through July 4, 2004.

8

Fresh & Wild Holdings Limited

On January 31, 2004, we acquired all of the outstanding stock of Fresh & Wild Holdings Limited (“Fresh & Wild”) for a total of approximately $20 million in cash and approximately $16 million in Company common stock, totaling 238,735 shares. Fresh & Wild owned and operated seven natural and organic food stores in London and Bristol, England. This transaction was accounted for using the purchase method and, accordingly, the purchase price has been allocated to tangible and identifiable intangible assets acquired based on their estimated fair values at the date of acquisition. Total costs in excess of tangible and intangible assets acquired of approximately $30.4 million have been recorded as goodwill. The Company also agreed to an additional purchase price consideration contingent on the market price of Company common stock at January 31, 2006. If the market price of Company stock at January 31, 2006 is less than the market price at acquisition of $68.59 per share, those sellers who received and continuously hold through January 31, 2006 Company common stock are eligible to receive an amount, in stock, cash or any combination thereof, equal to the deficit multiplied by the number of shares continuously held. Fresh & Wild results of operations are included in our Condensed Consolidated Income Statements for the period beginning February 1, 2004 through July 4, 2004. John Mackey, our Chief Executive Officer and Walter Robb, our Co-Chief Operating Officer each owned approximately 0.2% of the outstanding stock of Fresh & Wild and received proceeds totaling approximately $54,000 and $78,000, respectively, as consideration for their ownership interest.

(10) Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) 46 and FIN 46-R, “Consolidation of Variable Interest Entities,” in April 2003 and December 2003, respectively. FIN 46 is effective immediately for variable interest entities (“VIEs”) created or acquired after April 31, 2003. FIN 46 and FIN 46-R shall be applied to VIEs in which an enterprise holds an interest it acquired before February 1, 2003 by the end of the first reporting period ending after March 15, 2004, the second quarter of fiscal year 2004 for the Company. The interpretations provide guidance related to identifying variable interest entities and determining whether such entities should be consolidated. Certain disclosures are required if it is reasonably possible that a company will consolidate or disclose information about a variable interest entity. The Company has no interest in a variable interest entity, and therefore the adoption of FIN 46 did not have any impact on our results of operations or financial condition. However, if the Company enters into any such arrangement with a variable interest entity in the future, the Company’s results of operations and financial condition could be impacted.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Whole Foods Market, Inc. owns and operates the country’s largest chain of natural and organic foods supermarkets. Our Company mission is to promote vitality and well-being for all individuals by supplying the highest quality, most wholesome foods available. Through our growth, we have had a large and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance. We opened our first store in Texas in 1980 and have expanded our operations to 160 stores as of July 4, 2004 both by opening new stores and acquiring existing stores from third parties. We operate in one reportable segment, natural and organic foods supermarkets. As of July 4, 2004 we had one store in Toronto, Ontario, Canada, and seven stores in the United Kingdom. All of our remaining operations are domestic.

Our goal is to produce 15% weighted average square footage growth in fiscal 2005 and beyond. This goal is dependant upon being able to find suitable store locations. The following table provides information about the Company’s stores under development:

	July 28, 2004		July 30, 2003
Stores	49		29
Average store size (gross square feet)	47,800		44,800
As a percentage of existing store average size	153	%	145	%
Total square footage under development	2,351,000		1,335,000
As a percentage of existing square footage	47	%	30	%

Our results of operations have been and may continue to be materially affected by the timing and number of new store openings. Stores typically open within 12 to 24 months after entering the store development pipeline. New stores generally become profitable during their first year of operation, although some new stores may incur operating losses for the first several years of operation.

9

The Company reports its results of operations on a fifty-two or fifty-three week fiscal year ending on the last Sunday in September. The first fiscal quarter is sixteen weeks, the second and third quarters each are twelve weeks and the fourth quarter is twelve or thirteen weeks.

Executive Summary

Sales for the third quarter increased 22% to $917 million over $749 million in the prior year, driven by 9% weighted average square footage growth and comparable store sales growth of 14.1%. All of our regions across the country produced double- digit comparable store sales growth, and 38 of our stores, or 24% of all stores, set weekly sales records during the third quarter.

Net income for the third quarter increased 15% to $32.9 million over $28.7 million in the prior year, and diluted earnings per share increased 10% to $0.50 from $0.45 in the prior year. Income for the third quarter of the prior year includes a pre-tax gain of approximately $3 million, or $0.03 per share, related to the distribution of proceeds from the sale of Blooming Prairie Cooperative.

Cash flow from operations totaled $57 million for the quarter and $254 million year to date. Our capital expenditures for the quarter totaled $62 million, including $37 million for new stores. Year to date our capital expenditures totaled $201 million, including $118 million for new stores.

During the third quarter, we opened five new stores in Fort Collins, Colorado; White Plains, New York; Charleston, South Carolina; Glendale, California and Bellevue, Washington.

Year over year, total assets increased 27% to $1.5 billion, total liabilities increased 25% to $499 million, and shareholders’ equity increased 29% to $960 million. At the end of the third quarter, we had $168 million in long-term debt and $213 million in total cash and cash equivalents, including restricted cash.

On June 29, 2004 we declared our third quarterly cash dividend of $0.15 per share, for approximately $9 million. We are hopeful that our continued success will allow us to steadily increase our dividend over time.

Results of Operations

Sales increased approximately 22% and 23% for the twelve and forty weeks ended July 4, 2004, respectively, over the same periods of the prior fiscal year. These increases were driven by comparable store sales growth of approximately 14.1% and 15.2%, respectively, and weighted average year-over-year square footage growth of approximately 9% and 8%, respectively. Sales of a store are deemed to be comparable commencing in the fifty-third full week after the store was opened or acquired. Sales in identical stores, which exclude relocated stores and major store expansions, increased approximately 13.7% and 14.9% for the twelve and forty weeks ended July 4, 2004, respectively. Our new stores continue to perform above our projections, with the nine new stores opened this fiscal year producing average weekly sales of approximately $595,000 year to date. The Company believes its comparable store sales growth and the ability to open successful stores in diverse markets are due to the broad appeal of our stores, natural and organic products entering the mainstream consciousness, improvements in overall store execution and the growing awareness of our brand.

In Southern California, members of the United Food and Commercial Workers union at conventional grocery store retailers were on strike during the last fourteen weeks of our sixteen-week first quarter and for the first six weeks of our twelve-week second quarter. Nineteen of the Company’s stores experienced an increase in sales due to the strike, 18 of which were in the comparable store base during those periods. Excluding the stores positively impacted by the strike, comparable store sales increased 12.8% for the first quarter and 16.4% for the second quarter.

In any given quarter, our gross profit may increase or decrease slightly depending on the mix of sales from new stores or the impact of weather or a host of other factors, including inflation. While we always have initiatives in place to drive better purchasing, we usually pass those savings on to our customers as lower prices. Our pricing strategy continues to be market driven in grocery and Whole Body (nutritional supplements, vitamins, and body care), in which we aim to be competitively priced on the same or similar items. Our perishables may be priced at a premium to reflect the higher quality of product available in our stores.

Although there may be more variability between quarters, we expect our gross profit, direct store expenses and general and administrative expenses as a percentage of sales to be generally consistent over time absent any sustained changes in market conditions. Our three-year historical averages for gross profit, direct store expenses and general and administrative expenses, as a percentage of sales were 34.6%, 25.2% and 3.5%, respectively.

10

Gross profit, direct store expenses and general and administrative expenses as a percentage of sales for twelve and forty week periods of the current year and prior year were as follows:

	Twelve weeks ended				Forty weeks ended
	July 4, 2004		July 6, 2003		July 4, 2004		July 6, 2003
Gross profit	34.6	%	34.5	%	34.8	%	34.3	%
Direct stores expenses	25.3	%	25.0	%	25.3	%	25.1	%
General and administrative expenses	3.0	%	3.2	%	3.1	%	3.3	%

Pre-opening and relocation costs associated with stores opened and under development were approximately $2.9 million and $7.3 million during the twelve and forty weeks ended July 4, 2004, respectively, and approximately $2.3 million and $8.2 million, respectively, for the same periods of the prior fiscal year. The number of stores and facilities opened and relocated were as follows:

	Twelve weeks ended		Forty weeks ended
	July 4, 2004	July 6, 2003	July 4, 2004	July 6, 2003
New stores	4	1	7	9
Relocated stores and facilities	1	—	1	2

Net interest expense for the twelve and forty weeks ended July 4, 2004 totaled approximately $1.3 million and $5.7 million, respectively, compared to approximately $1.9 million and $6.5 million, respectively, for the same periods of the prior fiscal year. These decreases were primarily due to an increase in capitalized interest associated with new store development. Capitalized interest for the twelve and forty weeks ended July 4, 2004 was approximately $0.8 million and $1.6 million, respectively, compared to approximately $0.3 million and $1.0 million, respectively, for the same periods of the prior fiscal year.

Investment and other income for the twelve and forty weeks ended July 4, 2004 totaled approximately $1.8 million and $4.7 million, respectively, compared to approximately $4.3 million and $4.4 million, respectively, for the same periods of the prior fiscal year. Interest income has increased due primarily to an increase in the balance of cash and cash equivalents. During the first quarter of fiscal year 2004, we sold all of our investments in unrestricted and restricted common shares of Gaiam, Inc. for approximately $1.8 million, resulting in a loss of approximately $0.5 million. During the first quarter of fiscal year 2003, the Company recognized a pre-tax impairment charge of approximately $1.4 million on our investments in Gaiam, Inc. due to a sustained decline in the market value of our investments below our carrying value. During the third quarter fiscal year 2003, the Company recognized a pre-tax gain of approximately $3 million as the result of a distribution of proceeds from the sale of Blooming Prairie Cooperative, a cooperative natural foods distributor in which the Company was a member.

Liquidity and Capital Resources and Changes in Financial Condition

We generated cash from operating activities of approximately $57.1 million and $254.5 million for the twelve and forty weeks ended July 4, 2004, respectively, compared to approximately $64.5 million and $204.6 million, respectively, in the same periods of the prior fiscal year. Cash flows from operating activities resulted primarily from our net income plus non-cash expenses, income tax benefits resulting from the exercise of team member stock options and changes in operating working capital.

We have a $100 million revolving line of credit available through October 1, 2004. The credit agreement contains certain restrictive and affirmative covenants, including maintenance of certain financial ratios as defined in the agreement. At July 4, 2004, no amounts were drawn and the amount available was effectively reduced to approximately $91.3 million by approximately $8.7 million in outstanding letters of credit. At September 28, 2003, no amounts were drawn and the amount available was effectively reduced to approximately $80.2 million by approximately $19.8 million in outstanding letters of credit. In connection with the Fresh & Wild acquisition, we assumed a three-year $5.3 million revolving bank credit facility due June 1, 2004, with a balance of approximately $4.2 million outstanding at acquisition. During the third quarter we paid the outstanding balance and retired the facility.

The Company has outstanding zero coupon convertible subordinated debentures which had a carrying amount of approximately $157.6 million at July 4, 2004 and $151.4 million at September 28, 2003, respectively. For the twelve and

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forty week periods ended July 4, 2004, approximately 139 and 560 debentures, respectively, were converted, at the option of the holder, into approximately 1,500 and 6,000 shares, respectively, of Company common stock.

We also had outstanding at July 4, 2004 and September 28, 2003 approximately $11.4 million and $17.1 million, respectively, of senior unsecured notes that bear interest at 7.29% payable quarterly. An annual principal installment of approximately $5.7 million was paid during the third quarter.

Proceeds from the exercise of stock options for the twelve and forty week periods ended July 4, 2004 was approximately $23.2 million and $54.4 million, respectively, related to the exercise of approximately 0.7 million and 1.9 million stock options, respectively.

The following table shows payments due by period on contractual obligations as of July 4, 2004 (in thousands):

	Total		Less than 1 Year		1-5 Years		After 5 Years
Convertible debt	$	157,015	$	—	$	—	$	157,015
Senior notes		11,428		5,714		5,714		—
Capital lease obligations (including interest)		692		272		420		—
Operating lease obligations		1,755,191		96,399		420,750		1,238,042
The following table shows expirations per period on commercial commitments as of July 4, 2004 (in thousands):
	Total		Less than 1 Year		1-5 Years		After 5 Years
Credit facilities	$	100,000	$	100,000	$	—	$	—

We periodically make other commitments and become subject to other contractual obligations that we believe to be routine in nature and incidental to the operation of the business. Management believes that such routine commitments and contractual obligations do not have a material impact on our business, financial condition or results of operations.

On June 29, 2004, the Company declared a cash dividend of $0.15 per share, for a total of approximately $9.4 million, to be paid July 19, 2004 to shareholders of record as of July 9, 2004. During the second quarter of fiscal 2004, the Company declared a cash dividend of $0.15 per share, for a total of $9.3 million, which was paid during the third quarter. During the first quarter of fiscal year 2004, the Company declared and paid a cash dividend of $0.15 per share, for a total of approximately $9.1 million. The Company will pay future dividends at the discretion of our Board of Directors. The continuation of these payments and the amount of such dividends depend on many factors, including the results of operations and the financial condition of the Company. Subject to such factors and a determination that cash dividends continue to be in the best interest of our shareholders, the current intention of our Board of Directors is to pay a quarterly dividend on an ongoing basis. During the first quarter of fiscal year 2004, we amended our bank credit agreement to allow for the payment of dividends on common stock.

Net cash provided by financing activities was approximately $4.3 million and $26.9 million for the twelve and forty weeks ended July 4, 2004, respectively, as compared to approximately $5.3 million and $42.0 million, respectively, for the same periods of the prior fiscal year.

Our principal historical capital requirements have been the funding of the development or acquisition of new stores and acquisition of property and equipment for existing stores. The required cash investment for new stores varies depending on the size of the new store, geographic location, degree of work performed by the landlord and complexity of site development issues. Over the past three fiscal years, our new store investment has averaged approximately $8.6 million per location. This excludes new store inventory of approximately $700,000, a portion of which is financed by our vendors. During the second quarter of fiscal year 2004, we completed the acquisition of Fresh & Wild, which operated seven natural and organic food stores in London and Bristol, England, for approximately $20 million in cash and approximately $16 million in Company common stock. We will incur additional capital expenditures during the remainder of fiscal year 2004 in connection with ongoing equipment upgrades and resets at existing stores and continued development of management information systems. During the second quarter of fiscal year 2004, the Company loaned $13.5 million to a third-party real estate developer in connection with the construction of a new Company store. Net cash used in investing activities was approximately $62.5 million and $251.9 million for the twelve and forty weeks ended July 4, 2004, respectively, as compared to approximately $36.2 million and $131.7 million, respectively, for the same periods of the prior fiscal year. Absent any significant cash

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acquisition or change in status of the Company’s outstanding zero coupon convertible bond issue, we expect planned expansion and other anticipated working capital and capital expenditure requirements will be funded by cash generated from operations. We continually evaluate the need to establish other sources of working capital and will seek those considered appropriate based upon the Company’s needs and market conditions.

Critical Accounting Policies

The preparation of our financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Actual results may differ from these estimates. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances.

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 2 of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2003. We believe that the following accounting policies are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

Insurance and Self-Insurance Reserves

The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. While we believe that our assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences if claims differ from these assumptions and historical trends.

Inventory Valuation

We value our inventories, both retail and wholesale, at the lower of cost or market. Cost is principally determined by the last-in, first-out (“LIFO”) method. LIFO cost was determined using the retail method for approximately 48% and 55% of inventories at July 4, 2004 and September 28, 2003, respectively, and was determined using the item cost method for approximately 47% and 42% of inventories at July 4, 2004 and September 28, 2003, respectively. The excess of estimated current costs over LIFO carrying value was approximately $11.6 million and $9.1 million at July 4, 2004 and September 28, 2003, respectively. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories. Inherent in the retail inventory method calculations are certain management judgments and estimates, including shrinkage, which could impact the ending inventory valuation at cost as well as the resulting gross margins. Costs for the balance of inventories, are determined by the first-in, first-out (“FIFO”) or average cost method. We believe we have the appropriate inventory valuation controls in place to minimize the risk that inventory values would be materially misstated.

Goodwill and Intangible Assets

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill is no longer amortized but is reviewed for impairment on a reporting unit level annually, or more frequently if impairment indicators arise. We allocate goodwill to one reporting unit for goodwill impairment testing. We determine fair value utilizing both a market value method and discounted projected future cash flows compared to our carrying value for the purpose of identifying impairment. Our evaluation of goodwill and intangible assets with indefinite useful lives for impairment requires extensive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different results.

Risk Factors

We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward-looking statements that we make from time to time in filings with the Securities and Exchange Commission, news releases, reports, proxy statements, registration statements and other written communications, as well as oral forward-looking statements made from time to time by representatives of our Company. These risks and uncertainties include, but are not limited to, those listed in the Company’s Annual Report on Form 10-K for the year ended September 28, 2003. These risks and uncertainties and additional risks and uncertainties not presently known to us or that we currently deem

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immaterial may cause our business, financial condition, operating results and cash flows to be materially adversely affected. Except for the historical information contained herein, the matters discussed in this analysis are forward looking statements that involve risks and uncertainties, including but not limited to general business conditions, the timely development and opening of new stores, the impact of competition, and other factors which are often beyond the control of the Company. The Company does not undertake any obligation to update forward-looking statements except as required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Except as discussed below, there have been no material changes in the Company’s market risk exposures from those reported in our Annual Report on Form 10-K for the year ended September 28, 2003.

Market Risk

During the first quarter of fiscal year 2004, we sold all of our investments in unrestricted and restricted common shares of Gaiam, Inc. for approximately $1.8 million, resulting in a loss of approximately $0.5 million.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has performed an evaluation of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Report.

Management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter. Based on that evaluation, management, the Chief Executive Officer and the Chief Financial Officer of the Company have concluded that there has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company’s management does not expect that the outcome in the current proceedings, individually or collectively, will have a material adverse effect on the Company’s financial condition, operating results or cash flows.

Item 6(a). Exhibits

Exhibit 31.1	Certification of Chief Executive Officer Pursuant to 17 CFR 240.13a – 14(a)
Exhibit 31.2	Certification of Chief Financial Officer Pursuant to 17 CFR 240.13a – 14(a)
Exhibit 32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

Item 6(b). Reports on Form 8-K

The Company furnished a report on Form 8-K dated May 4, 2004 regarding the announcement of the results of operations for the fiscal quarter ended April 11, 2004.

The Company filed a report on Form 8-K dated June 29, 2004 announcing that its Board of Directors had declared a dividend of $0.15 per share, payable July 19, 2004 to shareholders of record as of July 9, 2004.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Whole Foods Market, Inc.

Registrant

Date: August 13, 2004	By: /s/ Glenda Flanagan
	Glenda Flanagan Executive Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer)

15

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to 17 CFR 240.13a – 14(a)

I, John P. Mackey, certify that:

1. I have reviewed this report on Form 10-Q of Whole Foods Market, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosures controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosures controls and procedures, as of the end of the period covered by this report on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 13, 2004	By:    /s/ John P. Mackey
	John P. Mackey Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to 17 CFR 240.13a – 14(a)

I, Glenda Flanagan, certify that:

1. I have reviewed this report on Form 10-Q of Whole Foods Market, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosures controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosures controls and procedures, as of the end of the period covered by this report on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 13, 2004	By:    /s/ Glenda Flanagan
	Glenda Flanagan Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

In connection with the Quarterly Report of Whole Foods Market, Inc. (the “Company”) on Form 10-Q for the period ending July 4, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John P. Mackey, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, that:

(1) The Report fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John P. Mackey

John P. Mackey

Chief Executive Officer

August 13, 2004

This certification accompanies this report pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002 be deemed to be filed by the Company pursuant to Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

In connection with the Quarterly Report of Whole Foods Market, Inc. (the “Company”) on Form 10-Q for the period ending July 4, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Glenda Flanagan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, that:

(1) The Report fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Glenda Flanagan

Glenda Flanagan

Chief Financial Officer

August 13, 2004

This certification accompanies this report pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002 be deemed to be filed by the Company pursuant to Section 18 of the Securities Exchange Act of 1934, as amended.