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 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, as of July 6, 2008, we operated 271 stores organized into 11 geographic operating regions: 259 stores in 37 U.S. states and the District of Columbia; six stores in Canada; and six stores in the United Kingdom. We operate in one reportable segment, natural and organic foods supermarkets.

Effective August 28, 2007, the Company completed the acquisition of Wild Oats Markets, Inc. ("Wild Oats"), a leading natural and organic foods retailer in North America, 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 July 6, 2008, the Company has permanently closed 17 Wild Oats stores. The Company currently has 57 continuing Wild Oats stores. The Company is making 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 forty weeks ended July 6, 2008 and are not included in our Consolidated Statements of Operations for the forty weeks ended July 1, 2007.

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.

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. Fiscal year 2008 is a fifty-two week year and fiscal year 2007 was a fifty-three week year.

Overview

Whole Foods Market is experiencing a challenging retail environment caused by a number of ongoing factors including the general economic environment in the United States. Consumer confidence measures in June 2008 hit their lowest levels in more than a decade. We believe American consumers are spending less as they are faced with more expensive fuel and food costs, lower home values and less available credit. Our growth in comparable stores and identical store sales was 2.6 percent and 1.9 percent, respectively, in the third quarter of fiscal year 2008. Our comparable store sales increase for the third quarter was almost entirely driven by increased average basket size with only a slight increase year over year in our transaction count. We believe that the economic hardships consumers are facing are impacting their behavior in various ways, from making fewer trips to making more conscious value decisions.

The Company's business model has been highly successful, and we remain very confident in our growth prospects as the market for natural and organic products continues to grow and as our Company continues to evolve. However, the challenging current economic environment appears to be negatively impacting our sales. Current economic factors, combined with our commitment to maintaining financial flexibility and investing prudently in our long-term growth, have led the Company to take a more conservative approach to our growth and business strategy over the short term. The Company recently announced a conservative growth and fiscal strategy over the short term including the following key components:

† Reducing the number of stores expected to open in fiscal year 2009 to approximately 15 and reducing all discretionary capital expenditure budgets not related to new stores by 50%. The Company is committed to actively managing its capital expenditures and does not intend to access the capital markets for additional funding in the foreseeable future;

† Implementing certain cost containment measures for the remainder of fiscal year 2008 and reducing expected general and administrative expenses to approximately 3.2% of sales in fiscal year 2009; and

† Suspending the Company's quarterly cash dividend for the foreseeable future.

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. D.C. Circuit rules provide that any petition for rehearing or petition for rehearing en banc in this case be made within 45 days after entry of judgment, unless an order shortens or extends the time. Further proceedings in the District Court cannot take place until after issuance of this mandate. Whole Foods Market has not yet determined whether to file a petition for rehearing or petition for rehearing en banc.

On August 8, 2008, the FTC issued an Order rescinding the stay of its administrative proceeding against Whole Foods Market, requiring Whole Foods Market and Complaint Counsel to file a joint case management statement by August 14, 2008, and setting a scheduling conference for August 18, 2008. The FTC had previously filed a complaint commencing its administrative proceeding on June 28, 2007. This complaint included a notice of contemplated relief indicating that, should the FTC prevail in its administrative proceeding, it would seek relief against Whole Foods Market, which could include
(i) an order directing Whole Foods Market to divest Wild Oats in a manner that restores Wild Oats as a viable independent competitor in specified markets,
(ii) a prohibition against any transaction between Whole Foods Market and Wild Oats that combines their operations in specified markets except with prior FTC approval, (iii) a requirement that Whole Foods Market provide prior notice to the FTC of any contemplated acquisition, merger, consolidation or other business combination with a company operating premium and natural organic supermarkets, (iv) the filing by Whole Foods Market of periodic compliance reports with the FTC or (v) any other relief appropriate to remedy the anticompetitive effects of the transaction between Whole Foods Market and Wild Oats. The FTC stayed its administrative proceeding on August 7, 2007 in light of the pendency of the federal court proceedings.

On August 12, 2008, the FTC issued an Order extending the time for submission of the joint case management statement to August 28, 2008 and rescheduling the proposed scheduling conference for September 8, 2008. Whole Foods Market cannot at this time predict the likely outcome of these judicial and administrative proceedings or assess the financial implications of any judgment or order that may arise from them. The Company has not accrued any loss related to the outcome of these proceedings as of July 6, 2008.

Executive Summary

Sales for the third quarter of fiscal year 2008 increased approximately 21.6% to approximately $1.8 billion over approximately $1.5 billion for the same period of the prior fiscal year. Comparable store sales growth was 2.6%. Sales in identical stores increased approximately 1.9% for the twelve weeks ended July 6, 2008 over the same period of the prior fiscal year. Identical store sales exclude two relocated stores and two major store expansions from the comparable calculation to reduce the impact of square footage growth on the comparison.

General and administrative expenses as a percentage of sales increased to 3.3% in the third quarter of fiscal year 2008 over 3.2% for the same period of the prior fiscal year. This increase was largely due to the costs of integrating and supporting the Wild Oats stores, as well as front-loaded general and administrative expenditures to support future growth.

Net income for the third quarter totaled approximately $33.9 million and diluted earnings per share was $0.24.

Our capital expenditures for the quarter totaled approximately $124.9 million, of which approximately $109.9 million was for new store development and approximately $15.0 million was for remodels and other additions. During the third quarter, we opened four new stores in Hillsboro, OR; Orlando, FL; St. Louis, MO and Reno, NV and re-opened a remodeled Wild Oats store in Medford, MA. We closed five Wild Oats stores during the third quarter, including two in connection with the opening of new Whole Foods Market stores. We ended the quarter with 271 stores totaling approximately 9.6 million square feet. Subsequent to the end of the quarter, the Company opened two new stores in New York City, NY and Naperville, IL and relocated one store in Rochester Hills, MI.

At the end of the third quarter of fiscal year 2008, the Company had total debt of approximately $840.5 million, including $106 million in borrowings on the Company's revolving line of credit.

On June 11, 2008, the Company's Board of Directors approved a quarterly dividend of $0.20 per share, totaling approximately $28.1 million that was paid subsequent to the end of the third quarter on July 22, 2008 to shareholders of record on July 11, 2008.

Effective August 28, 2007, the Company completed the acquisition of Wild Oats, a leading natural and organic foods retailer in North America. Sales at the Wild Oats stores in operation during the third quarter were $168.3 million, or 9.1% of total sales, and comparable store sales increased 5.4%. The Company closed five Wild Oats stores during the quarter, two of which were in connection with the opening of new Whole Foods Market stores, and re-opened one Wild Oats store that had been closed for a major renovation. Sales for the 57 continuing stores were $164.2 million in the third quarter, and comparable store sales growth was 5.4%. In the 38 stores we have rebranded thus far, sales growth has increased from 6% before rebranding to 12% after.

Results of Operations

The following table sets forth the Company's statements of operations data expressed as a percentage of sales:

                                          Twelve weeks ended     Forty weeks ended
                                          July 6,     July 1,   July 6,     July 1,
                                           2008        2007       2008       2007
Sales                                        100.0 %    100.0 %    100.0 %    100.0 %
Cost of goods sold and occupancy costs        65.6       64.5       65.8       65.1
Gross profit                                  34.4       35.5       34.2       34.9
Direct store expenses                         26.6       26.1       26.5       25.9
General and administrative expenses            3.3        3.2        3.5        3.1
Pre-opening and relocation costs               1.0        1.0        0.8        1.0
Operating income                               3.5        5.3        3.5        4.9
Interest expense                              (0.4 )        -       (0.5 )        -
Investment and other income                    0.1        0.1        0.1        0.2
Income before income taxes                     3.1        5.4        3.1        5.1
Provision for income taxes                     1.3        2.2        1.3        2.0
Net income                                     1.8 %      3.2 %      1.8 %      3.1 %

Figures may not add due to rounding.

Sales increased approximately 21.6% and 27.2% for the twelve and forty weeks ended July 6, 2008, respectively, over the same periods of the prior fiscal year. Comparable store sales increased approximately 2.6% and 6.4% for the twelve and forty weeks ended July 6, 2008, respectively. Perishable product sales accounted for approximately 67% of our total retail sales during the third quarter of fiscal year 2008. Acquired stores will enter the comparable store sales base in the fifty-third full week following the date of the merger. As of July 6, 2008, there were 195 locations in the comparable store base. Identical store sales for the twelve weeks ended July 6, 2008, which exclude two relocated stores and two major expansions, increased approximately 1.9%. Identical store sales for the forty weeks ended July 6, 2008, which exclude five relocated stores and three major expansions, increased approximately 4.9%. The sales increase contributed by stores open less than fifty-two weeks totaled approximately $139.4 million and $549.8 million for the twelve and forty weeks ended July 6, 2008. Sales at Wild Oats stores totaled approximately $168.3 million and $582.5 million for the twelve and forty weeks ended July 6, 2008. For the first four weeks of the fourth quarter of fiscal year 2008, comparable store sales increased 1.5% and identical store sales increased 0.9%. Comparable sales at the 57 continuing Wild Oats stores increased 7.2% over the same period. If the Company's comparable store sales growth for the fourth quarter is in line with or slightly below these results, comparable store sales growth for fiscal year 2008 would be approximately 5%. Total sales growth, on a 52-week to 52-week basis, would be approximately 12% for the fourth quarter and approximately 23% for fiscal year 2008. Sales in the fourth quarter of fiscal year 2007 included five weeks of the continuing Wild Oats stores, all subsequently closed Wild Oats stores, and divested Henry's and Sun Harvest stores.

Gross profit consists of sales less cost of goods sold and occupancy costs plus contribution from non-retail distribution and food preparation operations. The Company's gross profit as a percentage of sales for the twelve and forty weeks ended July 6, 2008 was approximately 34.4% and 34.2%, respectively, compared to approximately 35.5% and 34.9%, respectively for the same periods of the prior fiscal year. Factors contributing to these decreases in gross profit for the twelve and forty weeks ended July 6, 2008 compared to the same periods of the prior fiscal year include some delays in passing on higher commodity

costs to consumers, higher utility costs and increased promotional activity year over year. We are continuing to make selective price investments. We believe that strengthening our price image on commodity-type branded products to broaden our appeal is not only the right long-term strategy, but the right short-term strategy particularly in today's market. We are fortunate that we continue to find many opportunities to lower our cost of goods sold to help offset these price investments and minimize the gross margin impact. Additionally, our gross profit may increase or decrease slightly depending on the mix of sales from new stores, seasonality, the impact of weather or a host of other factors, including inflation. Due to seasonality, the Company's gross profit margin is typically lower in the first quarter than the remaining three quarters of the fiscal year. 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.

Direct store expenses as a percentage of sales were approximately 26.6% and 26.5% for the twelve and forty weeks ended July 6, 2008, respectively, compared to approximately 26.1% and 25.9%, respectively, for the same periods of the prior fiscal year. Factors contributing to these increases in direct store expenses for the twelve and forty weeks ended July 6, 2008 compared to the same periods of the prior fiscal year include relatively higher percentages of sales from new and acquired stores, which have a lower contribution than existing stores, investments in labor and benefits at the acquired stores and increases in health care costs as a percentage of sales. Direct store expenses as a percentage of sales tend to be higher for new and acquired stores and decrease as stores mature, reflecting increasing operational productivity of the store teams.

General and administrative expenses as a percentage of sales were approximately 3.3% and 3.5% for the twelve and forty weeks ended July 6, 2008, respectively, compared to approximately 3.2% and 3.1%, respectively, for the same periods of the prior fiscal year. This year-over-year increase is due mainly to the costs of integrating and supporting the Wild Oats stores, including an increase in headcount in the global and regional offices related primarily to the cost of fully staffing the Company's three smallest regions which gained the greatest number of stores in the merger as a percentage of their existing store base; and an increase in legal and professional fees as a percentage of sales. In connection with the Company's recently announced conservative growth and fiscal strategy over the short term, the Company has implemented certain cost containment measures for the remainder of fiscal year 2008 and reducing expected general and administrative expenses to approximately 3.2% of sales in fiscal year 2009.

Pre-opening costs include rent expense incurred during construction of new stores and other costs related to new store openings, which include costs associated with hiring and training personnel, supplies and other miscellaneous costs. Rent expense is generally incurred for six to 12 months prior to a store's opening date. Other pre-opening costs are incurred primarily in the 30 days prior to a new store opening. Relocation costs consist of moving costs, remaining lease payments, accelerated depreciation costs and other costs associated with replaced stores or facilities. Store closure costs, including interest accretion related to store closing reserves of approximately $1.0 million and $4.2 million for the twelve and forty weeks ended July 6, 2008, respectively, are also included in relocation costs. Pre-opening and relocation costs as a percentage of sales were approximately 1.0% and 0.8% for the twelve and forty weeks ended July 6, 2008, respectively, compared to approximately 1.0% for each of the same periods of the prior fiscal year. The numbers of stores opened and relocated were as follows:

                    Twelve weeks ended     Forty weeks ended
                    July 6,     July 1,   July 6,     July 1,
                     2008        2007       2008       2007
New stores                 4          2         12         10
Relocated stores           -          1          -          3

Interest expense for the twelve and forty weeks ended July 6, 2008 increased approximately $8.1 million and $28.1 million, respectively, over the same periods of the prior fiscal year due primarily to interest expense related to the $700 million term loan to finance the acquisition of Wild Oats Markets and increased borrowings on the Company's revolving line of credit. Investment and other income for the twelve and forty weeks ended July 6, 2008 totaled approximately $1.5 million and $5.4 million, respectively, compared to approximately $2.2 million and $8.8 million, respectively, for the same periods of the prior fiscal year.

Share-based payments expense recognized during the twelve and forty weeks ended July 6, 2008 totaled approximately $2.2 million and $7.6 million, respectively compared to approximately $4.2 million and $10.7 million respectively, for the same periods of the prior fiscal year. Included in total share-based payments expense during the forty weeks ended July 1, 2007 is a $4.4 million charge related to the acceleration of stock options in September 2005 to adjust for actual experience.

Share-based payments expense was included in the following line items on the Consolidated Statements of Operations for the periods indicated (in thousands):

                                              Twelve weeks ended          Forty weeks ended
                                            July 6,       July 1,       July 6,       July 1,
                                              2008          2007          2008          2007
Cost of goods sold and occupancy costs     $       49    $      209    $      148    $      424
Direct store expenses                             982         2,339         3,899         5,790
General and administrative expenses             1,216         1,620         3,552         4,473
Share-based payments expense before
income taxes                                    2,247         4,168         7,599        10,687
Income tax benefit                                735         1,245         2,871         3,168
Net share-based payments expense           $    1,512    $    2,923    $    4,728    $    7,519

The Company expects share-based payments expense of approximately $3 million to $4 million in the fourth quarter of fiscal year 2008.

The Company intends to keep its broad-based stock option program in place, but also intends to limit the number of shares granted in any one year so that annual earnings per share dilution from share-based payments expense will not exceed 10%. The Company believes this strategy is best aligned with its stakeholder philosophy because it limits future earnings per share dilution from options and at the same time retains the broad-based stock option plan, which the Company believes is important to team member morale, its unique corporate culture and its success.

Liquidity and Capital Resources and Changes in Financial Condition

We generated cash flows from operating activities totaling approximately $267.2 million during the forty weeks ended July 6, 2008 compared to approximately $302.0 million during the same period of the prior fiscal year. Cash flows from operating activities resulted primarily from our net income plus non-cash expenses and changes in operating working capital. During the forty weeks ended July 6, 2008, cash flows from operating activities were driven by a decline net income, offset by higher non-cash expenses and changes in operating working capital.

Net cash used in investing activities was approximately $251.7 million for the forty weeks ended July 6, 2008 compared to approximately $181.1 million for the same period of the prior fiscal year. During the forty weeks ended July 6, 2008 the Company received net proceeds totaling approximately $163.9 million from the sale of certain assets and liabilities related to the 35 Henry's and Sun Harvest stores and a related distribution center in Riverside, CA acquired in 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 the forty weeks ended July 6, 2008 totaled approximately $392.2 million, of which approximately $282.5 million was for new store development and approximately $109.7 million was for remodels and other additions. Capital expenditures for the forty weeks ended July 1, 2007 totaled approximately $382.9 million, of which approximately $272.9 million was for new store development and approximately $110.0 million was for remodels and other additions. The Company expects capital expenditures in the range of $160 million to $165 million in the fourth quarter of fiscal year 2008, resulting in a range of $552 million to $557 million for the full fiscal year, below the Company's prior full-year estimated range of $575 million to $625 million due primarily to certain measures implemented in the third quarter to reduce discretionary capital expenditures not related to new stores. In connection with the Company's recently announced conservative growth and fiscal strategy over the short term, the Company is reducing the number of stores expected to open in fiscal year 2009 to approximately 15 and reducing all discretionary capital expenditure budgets not related to new stores by 50%. The Company is committed to actively managing its capital expenditures and does not intend to access the capital markets for additional funding in the foreseeable future.

The following table provides additional information about the Company's store openings in fiscal year 2007 and fiscal year-to-date through August 5, 2008, leases currently tendered but not opened, and total leases signed for stores scheduled to open through fiscal year 2012:

                                      Stores          Stores      Leases     Total Leases
                                      Opened          Opened     Tendered       Signed
                                      During          Through      as of        as of
                                    Fiscal Year      August 5,   August 5,    August 5,
                                       2007            2008        2008        2008(1)
Number of stores (including
relocations)                                  21            14          20             80
Number of relocations                          5             -           5             18
Number of lease acquisitions,
ground leases, and acquired
properties                                     4             4           7             10
New markets                                    3             -           4             14
Average store size (gross square
feet)                                     56,500        54,400      47,600         51,000
As a percentage of existing
store average size                           167 %         153 %       134 %          143 %
Total square footage                   1,185,800       761,500     952,000      4,135,000
As a percentage of existing
square footage                                13 %           8 %        10 %           43 %
Average tender period, in months             8.8          10.0
Average pre-opening expense per
store (incl. rent)                  $2.6 million (2)
Average pre-opening rent per
store                               $0.9 million (2)
. . .