General

Whole Foods Market, Inc. and its consolidated subsidiaries own and operate the 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 significant 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, as of September 28, 2008, we operated 275 stores: 264 stores in 38 U.S. states and the District of Columbia; six stores in Canada; and five stores in the United Kingdom. We have one operating segment, supermarkets emphasizing natural and organic foods.

Effective August 28, 2007, the Company completed the acquisition of Wild Oats Markets, Inc. ("Wild Oats"), in a cash tender offer of $18.50 per share, or approximately $565 million plus the assumption of approximately $148 million in existing debt. At the date of acquisition, Wild Oats had 109 stores in 23 states and British Columbia, Canada operating under four banners: Wild Oats Marketplace nationwide, Henry's Farmers Market ("Henry's") in Southern California, Sun Harvest in Texas, and Capers Community Market in British Columbia. In connection with the acquisition of Wild Oats, the Company separately entered into an agreement to sell certain assets and liabilities, consisting primarily of fixed assets, inventories and operating leases, related to all 35 Henry's and Sun Harvest stores and a related distribution center. This sale was completed effective September 30, 2007 and the Company received net proceeds totaling approximately $164 million in fiscal year 2008. As of September 28, 2008, the Company had closed 19 Wild Oats stores and had 55 continuing Wild Oats stores, of which 45 had been rebranded as Whole Foods Market stores. The Company currently intends to close one additional store and relocate an additional three stores as existing Whole Foods Market sites in development open through fiscal year 2010. The Company has made investments to raise the Wild Oats stores up to our high standards, including investments in repairs and maintenance of the stores, lower prices, an expanded perishables offering and increased labor. Wild Oats results of operations are included in our Consolidated Statements of Operations for the period beginning August 28, 2007 through September 30, 2007 and for the fiscal year ended September 28, 2008.

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 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.

Sales of a store are deemed to be comparable commencing in the fifty-third full week after the store was opened or acquired. Stores acquired from Wild Oats entered the comparable store sales base effective the fifty-third full week following the date of the merger. Identical store sales exclude sales from relocated stores and remodeled stores with expansions of square footage greater than 20% until the fifty-third full week after the store is relocated or remodeled to reduce the impact of square footage growth on the comparison. Stores closed for eight or more days are excluded from the comparable and identical store base from the first fiscal week of closure until re-opened for a full fiscal week.

The Company reports its results of operations on a 52- or 53-week fiscal year ending on the last Sunday in September. Fiscal years 2008 and 2006 were 52-week years and fiscal year 2007 was a 53-week year.

Overview

Whole Foods Market continues to experience a challenging retail environment caused by a number of ongoing factors including the general economic environment in the United States. Retail sales in the United States declined in September 2008; the third consecutive monthly decline and the first such consecutive three-month decline in more than a decade. For the fourth quarter of fiscal year 2008, our comparable store sales increased 0.4% compared to an increase of 8.2% for the same period of the prior fiscal year, and identical store sales declined 0.5% compared to an increase of 6.0% for the same period of the prior fiscal year. For the first five weeks of the first quarter of fiscal year 2009, comparable store sales decreased 2.1% versus a 9.0% increase for the same period of the prior year, and identical store sales decreased 3.3% versus a 6.7% increase in the same period of the prior year. We believe our customers remain committed to Whole Foods Market, although the unrelenting negative economic news appears to be shifting buying behavior to making fewer trips and to making more value conscious decisions. For comparable stores, our transaction count declined approximately 1.5% and average basket size increased approximately 2% in the fourth quarter of fiscal year 2008.

The Whole Foods Market brand stands for the highest quality, and over the last several years we have worked hard to increase the value choices within our stores without sacrificing our standards. Our "The Whole Deal" program, launched in July 2008, has helped to highlight the values we offer within perishables. The program includes a quarterly in-store guide providing

specially priced product discounts, money-saving coupons and tips, as well as budget recipes. We believe that strengthening our value image throughout the store is the right strategy over the short and long term, and we are making positive strides in differentiating our product selection, with a major emphasis on expanding offerings under our own label, our control brands and exclusive branded products. Our SKU count for offerings under our own label increased 19% year over year to over 2,300. We currently have over 300 exclusive-branded products across the center store.

On July 29, 2008, the United States Court of Appeals for the District of Columbia Circuit reversed the August 16, 2007 decision of the United States District Court for the District of Columbia which had denied the Federal Trade Commission's ("FTC") motion for a preliminary injunction against the acquisition of Wild Oats Markets by Whole Foods Market, and remanded the case to the District Court for further proceedings consistent with the appellate decision. On the same day, the Court of Appeals issued an Order directing the Clerk of the Court of Appeals to withhold issuance of the mandate in the case until seven days after disposition of any timely petition for rehearing or petition for rehearing en banc. On August 26, 2008, Whole Foods Market filed a petition for a rehearing en banc with the Court of Appeals, to which the Court of Appeals ordered the FTC to respond. The FTC opposed the petition. On October 6, 2008, Whole Foods Market filed a motion for leave to file a reply to the FTC's opposition to the petition for rehearing en banc, which motion the FTC also opposed. On November 21, 2008 the Court of Appeals denied Whole Foods Market's petition for a rehearing en banc, amended its earlier opinion and remanded the case to the District Court for further proceedings. On remand the FTC may renew its motion for some preliminary injunctive relief pending resolution of the administrative action.

On August 8, 2008, the FTC issued an Order rescinding the stay of its administrative proceeding against Whole Foods Market. The FTC had previously filed a complaint commencing its administrative proceeding on June 28, 2007 but had stayed the proceeding on its own motion pending resolution of the federal court proceedings related to the merger. On September 8, 2008, the FTC issued an Amended Complaint in its administrative proceeding changing the relevant geographic markets involved and changing the notice of contemplated relief it would seek if it prevails in the administrative trial. On September 10, 2008, the FTC issued the Scheduling Order for this matter. The trial is scheduled to commence on February 16, 2009 and will take no more than thirty full trial days. On October 20, 2008, the FTC designated Acting Chief Administrative Law Judge D. Michael Chappell as the Administrative Law Judge for this matter. On October 27, 2008, Whole Foods Market was served with the complaint in Kottaras v. Whole Foods Market, Inc., a putative class action filed in the United States District Court for the District of Columbia, seeking treble damages, equitable, injunctive, and declaratory relief and alleging that the acquisition and merger between Whole Foods Market and Wild Oats violates various provisions of the federal antitrust laws.

Whole Foods Market cannot at this time predict the likely outcome of these judicial and administrative proceedings or estimate the amount or range of loss or possible loss that may arise from them. The Company had not accrued any loss related to the outcome of these proceedings as of September 28, 2008.

On November 5, 2008, the Company entered into an agreement to issue approximately 425,000 shares of Series A 8% Redeemable, Convertible Preferred Stock, $0.01 par value per share ("Series A Preferred Stock") to Green Equity Investors V, L.P., an affiliate of Leonard Green & Partners, L.P., for $425 million. The Series A Preferred Stock has an 8% dividend, payable quarterly in cash or by increasing the liquidation preference, at the option of the Company, and will be convertible, under certain circumstances, to common stock at an initial conversion rate of $68.9655 per $1,000 of the liquidation preference, or an initial conversion price of $14.50 per common share. The closing and funding of the transaction is subject to certain customary closing conditions, including the receipt of customary regulatory approvals. There can be no assurance that these approvals will be received.

Fiscal Year 2008 Executive Summary

Sales for fiscal year 2008 totaled approximately $8.0 billion, an increase of approximately 20.7% over the prior year. Adjusted to reflect a 52-week period in fiscal year 2007, sales increased 23.6% over the prior fiscal year. The ongoing weakness in the economy and credit market turmoil continue to negatively impact consumer confidence and spending, and Whole Foods Market is not immune to the country's economic issues. For the fourth quarter of fiscal year 2008, comparable store sales increased 0.4% compared to an increase of 8.2% for the same period of the prior fiscal year, and identical store sales declined 0.5% compared to an increase of 6.0% for the same period of the prior fiscal year.

During the fourth quarter of fiscal year 2008, the Company:

† increased store closure reserves for closed Wild Oats stores by a total of approximately $14.7 million, or 27%, to approximately $64.4 million as a result of increased estimated net lease obligations that were required due to the downturn in the real estate market and economy in general;

† recognized approximately $6.1 million in income tax expenses related to the repatriation of approximately $59.8 million in cash from its Canadian subsidiary during the fourth quarter;

† recorded approximately $5.5 million in costs related to 13 lease terminations for stores previously in development; and,

† recognized approximately $2.5 million in legal costs related to the FTC proceedings.

Net income for fiscal year 2008 totaled approximately $114.5 million, and diluted earnings per share totaled $0.82.

Our capital expenditures for fiscal year 2008 totaled approximately $522.0 million, of which approximately $357.5 million was for new store development and approximately $164.5 million was for remodels and other additions. We opened 20 new stores during fiscal year 2008 and we ended the fiscal year with 275 stores. The Company has reduced the number of stores expected to open in fiscal year 2009 to approximately 15, and capital expenditures for fiscal year 2009 are expected to be in the range of $400 million to $450 million.

At the end of fiscal year 2008, the Company had outstanding debt totaling approximately $929.2 million, including a $700 million term loan used to finance the Wild Oats acquisition, $195 million in borrowings on the Company's revolving line of credit, approximately $19.0 million in capital lease obligations, an interest rate swap liability totaling approximately $12.5 million and approximately $2.7 million in convertible debentures.

The Company paid quarterly cash dividends totaling approximately $109.1 million during fiscal year 2008. During the fourth quarter of fiscal year 2008, the Company's Board of Directors suspended the quarterly cash dividend for the foreseeable future.

Results of Operations

The following table sets forth the statements of operations data of Whole Foods Market expressed as a percentage of total sales for the fiscal years indicated:

                                                        2008    2007    2006
Sales                                                   100.0 % 100.0 % 100.0 %
Cost of goods sold and occupancy costs                   66.0    65.2    65.1
Gross profit                                             34.0    34.8    34.9
Direct store expenses                                    26.5    26.0    25.4
General and administrative expenses                       3.4     3.3     3.2
Pre-opening expenses                                      0.7     0.9     0.6
Relocation, store closure and lease termination costs     0.5     0.2     0.1
Operating income                                          3.0     4.5     5.7
Interest expense                                         (0.5 )  (0.1 )     -
Investment and other income                               0.1     0.2     0.4
Income before income taxes                                2.6     4.6     6.1
Provision for income taxes                                1.2     1.8     2.4
Net income                                                1.4 %   2.8 %   3.6 %

Figures may not sum due to rounding.

Sales

Sales totaled approximately $7.95 billion, $6.59 billion and $5.61 billion in fiscal years 2008, 2007 and 2006, respectively, representing increases of 20.7%, 17.6% and 19.3% over the previous fiscal years, respectively. Adjusted to reflect a 52-week period in fiscal year 2007, sales in fiscal years 2008 and 2007 increased 23.6% and 15.3% over the prior fiscal year, respectively. Sales for all fiscal years shown reflect increases due to new stores opened and acquired and comparable store sales increases. Comparable store sales increased approximately 4.9%, 7.1% and 11.0% in fiscal years 2008, 2007 and 2006, respectively. As of September 28, 2008, there were 261 locations in the comparable store base. The number of stores open or acquired 52-weeks or less equaled 20, 102 and 14 at the end of fiscal years 2008, 2007 and 2006, respectively. The sales

increase contributed by stores open or acquired within 52-weeks or less totaled approximately $236.1 million, $421.8 million and $212.6 million for fiscal years 2008, 2007 and 2006, respectively. Sales at Wild Oats stores totaled approximately $743.4 million and $122.1 million during fiscal years 2008 and 2007, respectively. Sales for fiscal year 2007 reflect five weeks of sales from Wild Oats stores. Identical store sales increased approximately 3.6%, 5.8% and 10.3% in fiscal years 2008, 2007 and 2006, respectively. Identical store sales in fiscal years 2008, 2007 and 2006 exclude seven, six and two store relocations, respectively, and three, three and one remodels with major expansions, respectively. For the fourth quarter of fiscal year 2008, comparable store sales increased 0.4% compared to an increase of 8.2% for the same period of the prior fiscal year, and identical store sales declined 0.5% compared to an increase of 6.0% for the same period of the prior fiscal year. The uncertain and rapidly changing current economic environment makes it highly difficult to forecast future results. Assuming no increase in comparable store sales combined with the expectation of opening 15 new stores, of which seven will be relocations, we estimate fiscal year 2009 sales would total approximately $8.3 billion.

Gross Profit

Gross profit consists of sales less cost of goods sold and occupancy costs plus contribution from non-retail distribution and food preparation operations. Gross profit totaled approximately $2.71 billion, $2.30 billion and $1.96 billion in fiscal years 2008, 2007 and 2006, respectively. Gross profit as a percentage of sales was 34.0%, 34.8% and 34.9% in fiscal years 2008, 2007 and 2006, respectively. Factors contributing to the decrease in gross profit as a percentage of sales in fiscal year 2008 compared to the prior fiscal years include higher utility costs and property taxes as a percentage of sales and product cost increases greater than the Company's increases in average retail prices. Increases in product costs from our suppliers and increasing occupancy costs may continue in future periods, and to the extent those increases are not reflected in increased retail prices or increased retail prices are delayed, our gross profit will be adversely affected. 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. Relative to existing stores, gross profit margins tend to be lower for new stores and increase as stores mature, reflecting lower shrink as volumes increase, as well as increasing experience levels and operational efficiencies of the store teams. We have many buying initiatives in place that are benefiting our customers. Our strategy is to be competitively priced on a market-by-market basis on commodity-type products and on identical product brands in grocery; however, our perishables may be priced at a premium to reflect the higher quality, broader selection, and better customer service available in our produce, meat, seafood, bakery, specialty and prepared foods departments.

Direct Store Expenses

Direct store expenses totaled approximately $2.11 billion, $1.71 billion and $1.42 billion in fiscal years 2008, 2007 and 2006, respectively. Direct store expenses as a percentage of sales was approximately 26.5%, 26.0% and 25.4% in fiscal years 2008, 2007 and 2006, respectively. Direct store expenses as a percentage of sales tends to be higher for new stores and decrease as stores mature, reflecting increasing operational productivity of the store teams. Increased direct store expenses as a percentage of sales in fiscal year 2008 reflect higher depreciation costs as a percentage of sales.

General and Administrative Expenses

General and administrative expenses totaled approximately $270.4 million, $217.7 million and $181.2 million in fiscal years 2008, 2007 and 2006, respectively. General and administrative expenses as a percentage of sales were 3.4%, 3.3% and 3.2% in fiscal years 2008, 2007 and 2006, respectively. The Company currently expects general and administrative expenses in fiscal year 2009 to be approximately 3.1% of sales. This excludes approximately $15 million to $20 million related to the FTC proceedings that the Company currently expects to incur costs in fiscal year 2009, including approximately $8 million to $10 million in the first quarter and approximately $5 million to $7 million in the second quarter.

Pre-opening Expenses

Pre-opening expenses include rent expense incurred during construction of new stores and other costs related to new store openings, including costs associated with hiring and training personnel, supplies and other miscellaneous costs. Rent expense is generally incurred approximately nine months prior to a store's opening date. Other pre-opening expenses are incurred primarily in the 30 days prior to a new store opening. The Company opened 20, 21 and 13 new store locations during fiscal years 2008, 2007 and 2006, respectively. Pre-opening expenses totaled approximately $55.6 million, $59.3 million and $32.1 million in fiscal years 2008, 2007 and 2006, respectively. Pre-opening expenses as a percentage of sales were 0.7%, 0.9% and 0.6% in fiscal years 2008, 2007 and 2006, respectively.

Relocation, Store Closure and Lease Termination Costs

Relocation costs consist of moving costs, estimated remaining lease payments, accelerated depreciation costs, related asset impairment, and other costs associated with replaced facilities. Store closure costs consist of estimated remaining net lease payments, accelerated depreciation costs, related asset impairment, and other costs associated with closed facilities. Lease termination costs consist of estimated remaining net lease payments for terminated leases and idle properties and associated asset impairments. The Company relocated or closed 21, five and three store locations during fiscal years 2008, 2007 and

2006, respectively. Relocation, store closure and lease termination costs totaled approximately $36.5 million, $10.9 million and $5.4 million in fiscal years 2008, 2007 and 2006, respectively. Relocation, store closure and lease termination costs as a percentage of sales were 0.5%, 0.2% and 0.1% in fiscal years 2008, 2007 and 2006, respectively. Relocation, store closure and lease termination costs for fiscal year 2008 include charges recorded during the fourth quarter totaling approximately $14.7 million to increase store closure reserves for increased estimated net lease obligations for closed Wild Oats stores and approximately $5.5 million in costs related to 13 lease terminations for stores previously in development.

Interest Expense

Interest expense, net of amounts capitalized, was approximately $36.4 million, $4.2 million and $32,000 in fiscal years 2008, 2007 and 2006, respectively. The increase in net interest expense in fiscal year 2008 over the prior fiscal years includes interest expense on the $700 million term loan we entered into on August 28, 2007 to finance the acquisition of Wild Oats Markets. The Company had $195 million and $17 million outstanding on its revolving line of credit at September 28, 2008 and September 30, 2007, respectively. Company made the final principal payment of approximately $5.7 million to retire its senior notes on May 16, 2006. The Company expects interest expense, net of investment and other income, to range from approximately $35 million to $40 million in fiscal year 2009.

Investment and Other Income

Investment and other income includes investment gains and losses, interest income, rental income and other income totaling approximately $6.7 million, $11.3 million and $20.7 million in fiscal years 2008, 2007 and 2006, respectively. The decreases in investment and other income in fiscal years 2008 and 2007 primarily resulted from lower average investment balances. Investment and other income for fiscal year 2006 includes approximately $2.1 million of insurance proceeds related to Hurricane Katrina losses.

Income Taxes

Our effective tax rate on income was approximately 44.5% in fiscal year 2008 and approximately 40.0% in fiscal years 2007 and 2006. The increase in our effective tax rate for fiscal year 2008 resulted primarily from the repatriation of cash during the fourth quarter. The Company expects it annualized effective tax rate for fiscal year 2009 to be in the range of 41% to 42%.

Share-Based Payments

Share-based payment expense before income taxes recognized during fiscal years 2008, 2007 and 2006 was approximately $10.5 million, $13.2 million and $9.4 million, respectively. Share-based payment expense was included in the following line items on the Consolidated Statements of Operations for the periods indicated (in thousands):

                                                   2008      2007      2006
Cost of goods sold and occupancy costs            $   233   $   475   $   264
Direct store expenses                               5,300     7,093     3,555
General and administrative expenses                 4,972     5,607     5,613
Share-based payment expense before income taxes    10,505    13,175     9,432
Income tax benefit                                 (4,815 )  (4,114 )  (2,724 )
Net share-based payment expense                   $ 5,690   $ 9,061   $ 6,708

Liquidity and Capital Resources

We generated cash flows from operating activities of approximately $325.8 million, $399.3 million and $452.7 million in fiscal years 2008, 2007 and 2006, respectively. Cash flows from operating activities resulted primarily from our net income less non-cash expenses, income tax benefits that resulted from the exercise of team member stock options and changes in operating working capital.

Net cash used in investing activities was approximately $365.1 million, $895.7 million and $569.3 million for fiscal years 2008, 2007 and 2006, respectively. For fiscal year 2007, net cash used in investing activities includes approximately $596.2 million paid for the purchase of Wild Oats. 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. Capital expenditures for fiscal years 2008, 2007 and 2006 totaled approximately $522.0 million, $529.7 million and $340.2 million, respectively, of which approximately $357.5 million, $389.3 million and $208.6 million, respectively, was for new store development and approximately $164.5 million, $140.3 million and $131.6 million, respectively, was for remodels and other property, plant and equipment expenditures. For fiscal year 2009, the Company expects capital expenditures to be in the range of approximately $400 million to $450 million.

The following table provides information about the Company's store development activities:

                                                                           Properties            Total
                                 Stores Opened       Stores Opened          Tendered         Leases Signed
                                 During Fiscal       During Fiscal           as of               as of
                                   Year 2007           Year 2008        November 5, 2008    November 5, 2008
Number of stores (including
relocations)                                 21                  20                   11                  66
Number of relocations                         5                   6                    2                  13
Number of lease
acquisitions, ground leases
and owned properties                          4                   4                    6                   8
New areas                                     3                   3                    2                   8
Average store size (gross
square feet)                             56,500              53,000               46,400              49,100
As a percentage of existing
store average size                          167 %               146 %                128 %               135 %
Total square footage                  1,185,800           1,060,700              510,900           3,293,900
. . .