What Happened to Whole Foods Market?

Whole Foods Market (NASDAQ: WFM  ) has tumbled over 12% since the beginning of the year. Likewise, other companies in the natural and organic grocery sector like Sprouts Farmers Market (NASDAQ: SFM  ) have endured a similar decline in market value.

In contrast, Kroger (NYSE: KR  )  (the biggest U.S. grocery chain with 9.6% of the grocery market in terms of sales) has seen its share price rise over 14% during the same period. Not coincidentally, traditional grocers like Kroger have been moving into the natural and organic food space.

However, Kroger and other mainstream chains aren't the only obstacles standing in the way of Whole Foods' success.

Source: Whole Foods Market.

Earnings for Whole Foods 
In its first quarter of 2014, Whole Foods revenue increased 10% to a record $4.2 billion and net income rose 8.2% to $158 million. But the main problem was a deceleration in same-store-sales growth. Comparable stores grew 5.4% versus 7.2% last year. Also keep in mind that older stores may not be performing as well. Stores open at least one year (but less than two) were up 19.5%.

Additionally, the positive performance of Sprouts Farmers Market also raises questions about Whole Foods overall dominance. Sprouts Farmers Market revenue soared 27% to $608.2 million, while net income skyrocketed 178% to $9.3 million in its fourth quarter of last year.

Furthermore, comp sales rose 13.8% for the fourth quarter and 10.7% for the full year. This may suggest that Sprouts Farmers Market is growing at the expense of veterans like Whole Foods Market.

A bigger obstacle
In 2013, Kroger mostly beat estimates as revenue increased 4.8% to $23.2 billion. Acquiring Harris Teeter (in its most recent quarter) gives it another chain to compete with natural and organic retailers.

Of the 937 new products Kroger introduced in 2013, 100 were Simple Truth items, which are Kroger's natural and organic brand. Kroger expects Simple Truth to be a $1 billion brand by the end of 2014.

Kroger announced it will be introducing its Marketplace concept. These units will be at least 100,000 square feet (which is massive) and might pull more traffic from Whole Foods.

Source: Whole Foods Market.

Another obstacle facing Whole Foods Market is the competition among other natural and organic chains. As newer chains are introduced, shoppers typically test them out. That may be a big reason for Sprouts recent positive earnings.

Whole Foods may also have a saturation problem in cities like Boston and San Francisco. Both cities have over 20 stores each. It's possible the stores in each city might be taking market share from one another.

Lastly, industry trends offer other pros and cons for Whole Foods' future. The U.S. organic food industry is expected to grow 12% this year. However, the increased fragmentation in this space may continue to hurt Whole Foods, since much of the low-hanging fruit has already been picked. The days of 20% industry growth are gone. 

Additionally, retail food prices are impacting mainstream grocers and restaurants. In fact, the estimated increase in retail food prices of 2.5% to 3.5% in 2014 is likely to carry over to chains like Whole Foods and push its premium prices even higher.

What to watch for
On May 6 Whole Foods will deliver its second-quarter earnings report. Investors should expect revenue and net income to increase. However, keep a close eye on same-store sales. This key metric may dictate how the stock performs for the rest of the year.

Also the news from Whole Foods could foreshadow others in the industry. Sprouts Farmers Market will be reporting its numbers the following day. Bad news from Whole Foods could hurt Sprouts' stock as well.

WFM Total Return Price Chart

Whole Foods total return price data by YCharts.

Bottom line
Whole Foods currently trades at a price-to-earnings ratio that is more than twice that of Kroger. The market has generally treated Whole Foods as a growth stock. However, if Whole Foods can't right the ship, you may need to adjust your expectations. As always, be sure to do your own due diligence before making any investment decisions. 

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Read/Post Comments (12) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 30, 2014, at 3:27 PM, GirlScoutDad wrote:

    Well, this article relevant because it highlights the question of whether Whole Foods has a moat around its brand or not. Does it deliver a unique product or service? Or are the barriers to entry in the upscale/natural grocery business low and easily permeated? I feel a kind of loyalty to Whole Foods (although the anti-snobbery part of my personality sometimes rebels against shopping there regularly), but is customer loyalty fickle? The article doesn't really answer the question; only time will tell. So it's not a question of whether WFM's business is viable, only of whether to continue to value it as a high-growth security.

  • Report this Comment On April 30, 2014, at 4:31 PM, fta9633 wrote:

    The answer is simple. Nobody has any money and the organic food movement has been exposed like global warming to be mostly a fraud.

  • Report this Comment On April 30, 2014, at 5:20 PM, frellmedead wrote:

    Whole Foods should stop being so snobbish when it comes to choosing locations for their stores. Good example is Houston, where they are 40 miles away from an area (Clear Lake) that is highly educated and has a median income that is firmly in the upper middle class. But that isn't good enough for them, as they want to be in only the glamorous/trendy parts of the city.

  • Report this Comment On April 30, 2014, at 6:47 PM, luckyagain wrote:

    Organic food is becoming main stream. Almost every grocery store has an organic food section. So the position of Whole Foods once had for itself is being shared with other grocers. Just simple economics at work.

  • Report this Comment On April 30, 2014, at 7:08 PM, booshame wrote:

    LMAO! Whole Paycheck is a good label even tho used as an old joke. Folks are waking up that pesticide and other nasty chemical laden foods are so yesterday. Humanely-raised and healthy beef/chicken/dairy are preferred but all were only affordable by the upper middle class (gone!) and wealthy (even wealthier now) shoppers. Now the Big Boxers have jumped on the same wagon...Wally World included. WFoods just MIGHT (but never will) have to lower it's over-prices? It's a "wait and see" methinks.

  • Report this Comment On April 30, 2014, at 7:25 PM, Denver52 wrote:

    Responding to GirlScoutDad and luckyagain:

    I don't know if WFM ever could claim to really have a moat. Margins in the grocery business are razor-thin; in the company's early days WFM had a somewhat unique product and could charge a premium, but naturally, the competition (Sprouts and now even giant Kroger) are catching up. As luckyagain points out, you can still charge more for the organic and higher-quality stuff, but so can anybody else. So maybe the big growth phase is over. It's no longer a "niche" part of the market.

    One thing I doubt Kroger will do, even if it could, is offer anywhere near the variety of things you can get in Whole Foods or Sprouts. So (I'm guessing) a lot of people will keep going to WFM or Sprouts for the important stuff, and run in to Kroger or Safeway when they need to stock up on sandwich bags or something.

  • Report this Comment On April 30, 2014, at 7:26 PM, SkepikI wrote:

    ^ Just do a price check at your local WFM and at most 3 other grocers. Make one of them an "organic grocer" you will find as I did that they are 10 to 50%!!!!! higher. Some things even more. This is fine when they can cherry pick the Tiffany and Co set (which is why they are SNOBS as you put it frelimedead about siting) They are Genius at siting stores to cream the well heeled set as customers, but the rest of us cannot afford to shop there regularly. I give them great credit for targeting their customer group, but that also means they are NOT able to site everywhere. Which will limit their growth unless and until they find a cheaper road.

    To answer your question possibly Michael: I wonder if reality has caught up with WFM and Alyce Lomax hype of "conscious capitalism" as just a cover for Tiffany & Co of the Grocery set conning their customers....and ultimately their investors.

  • Report this Comment On April 30, 2014, at 7:38 PM, humbletothecore wrote:

    As a fellow Houstonian I would have to agree with frellmedead. As a former resident of the Clear Lake area it always boggled my mind as to why Whole Foods couldn't win a bid to set up a store there. Clear Lake is where Nasa/Johnson Space Center is located. Technically it is "Houston, TX' due to tax annexation. Suburbs Friendswood and Pearland are also close by and there are plenty of Whole Food lovers in those zip codes. My friends and I would have to drive 30 to 40 minutes to reach the most well stocked Whole Foods in the city. When Whole Foods opened a new store in nearby suburb Sugar Land, TX, it was a head scratcher.

  • Report this Comment On April 30, 2014, at 8:18 PM, MsT wrote:

    Whole Foods was a place where I could easily find body products without chemicals that irritate my sensitive skin. Now I read the labels as thoroughly as I would at a "regular" grocery store because ingredients I avoid are in more of the products they carry. After finishing a bottle of shampoo I have to read a dozen labels to find a replacement because the one I bought last is no longer stocked because "it's not selling well enough." To me they've become just another place more concerned with the bottom line than with retaining customers.

  • Report this Comment On April 30, 2014, at 11:06 PM, Martha13 wrote:

    What does "organic" mean to your nutrition?

  • Report this Comment On May 01, 2014, at 2:11 AM, ellen76 wrote:

    I used to shop at Whole Foods when I lived in Virginia, and I really enjoyed the access it offered to fine cheeses, great fish, freshly baked bread and a selection of prepared foods, like artichoke spinach dip and ratatouille, that were as good as if I made them from scratch.

    So I was excited to hear that the chain was finally coming to my new town of Tucson. Alas, the store here is not the same, not even close. It seems to cater to vegans, gluten fanatics, and others seeking various substitutes for real food. Even the spinach dip that I used to love is made with vegan "mayonnaise." The produce department is tiny, and the fresh food selections are limited; most of what they sell is prepared food on steam tables. The bakery is pathetic, and good luck getting one of the clerks to help you. They'd rather hang out in the back and fiddle with their phones.

    To add insult to injury, they no longer accept checks for payment.

    I used to spend several hundred dollars a week at Whole Foods in Virginia. These days, I hardly ever drop a dime at the local one.

  • Report this Comment On May 01, 2014, at 2:53 AM, Inlalaland wrote:

    I love Whole Foods, but they are really picky about where they put their stores. Right now I would have to travel about an hour to get to the nearest store. That means I probably won't shop there more than a few times per year. A friend told me recently that they are opening up another store in a location that would be much closer to me. If so, I will shop there at least 2 times per month to pick up all the items that I wish I could by elsewhere.

    But Kudos to Kroger. I have been able to find a lot of the items I usually buy at WF's, at Kroger, thereby saving me a long trip. The one thing I can't seem to find at either Publix or Kroger is a decent tasting, preservative free whole wheat bread for my son. He loves bread and I like to give him the best. Kroger and Publix only have very overpriced, tiny loaves of bland frozen bread. Whereas, Wholefoods has their own brand, which is delicious and fairly fresh. They do freeze it first, but it's much softer and tastier than anything you can buy already frozen. But I have to say, if Kroger keeps adding more higher quality, organic foods to their stores, I will keep shopping there.

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