CASE 7: Whole Foods Market: The Deutsche Bank Report
This case examines the decisions of Deutsche Bank research analyst Karen Short in May 2014 while covering the stock of Whole Foods Market, the leading natural and organic food retailer. Having recently issued a “buy” recommendation for the stock backed by a strong financial forecast, Short must reevaluate her decision in the face of a lower-than-expected earnings announcement by Whole Foods management and an associated market price decline.
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Students are invited to scrutinize the analyst’s financial forecast considering the developing industry dynamics and Whole Foods’ competitive position. The forecasting objective focuses on evaluating the appropriateness of Short’s current financial forecast by exposing students to the mechanics of financial statement modeling and sensitivity analysis. The valuation objective focuses on evaluating her buy recommendation using a discounted-cash-flow–or market-multiples–based valuation approach.
Case Report Instructions
This is a “Directly answer a set of questions” case report. For this case study, answer each of the following questions (as per the guidelines in “Learning with Cases and Writing Case Reports”).
The following questions concern issues related to financial forecasting:
1. How would you describe Whole Foods’ strategy?
2. Prepare a competitor analysis. How would you define Whole Foods’ industry? Who are Whole Foods’ competitors?
3. How attractive is Whole Foods’ current market position? Is it sustainable?
4. What do the financial ratios in Exhibit 4 tell you about the past operating performance of Whole Foods? How informative are the historical ratios for Whole Foods’ prospective performance?
5. Examine Exhibit 7 in detail. How important are each of the underlying financial assumptions in the ROA forecast? What assumptions (i.e., margins, asset turnover, growth) play the biggest role in driving the anticipated improvements in ROA?
6. Do you agree with the existing financial assumptions in the Deutsche Bank forecast? If so, why? If not, what adjustments would you make to the model?
The following questions concern issues related to valuation:
7. What evidence is there that Whole Foods has been successful? Do you anticipate that this success will continue?
8. The student spreadsheet for Whole Foods Market located on the student textbook website (file titled: “Case_07_Whole_Foods_Market_F1776X” extends the Exhibit 7 forecast for eight years. As a starting valuation, what do you believe the implied value of Whole Foods’ shares to be, based on this base-case forecast? For your discount rate, please use a market risk premium of 5.0%.
9. What is your assessment of the base-case forecast? Do you believe that it provides a fair representation of the financial prospects for Whole Foods? If not, what changes would you make?
10. What are the primary value drivers underlying the stock price of Whole Foods?
To date, Short’s research report recommends that Whole Foods is undervalued by the market and is a buy. In light of recent events, do you think she should continue to maintain that recommendation? Back up your analysis with a discounted cash flow valuation of Whole Foods that explicitly outlines the assumptions that are important to support your argument