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.

Tmf Blog Network

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.

Tmf Blog Network

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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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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