With health awareness growing among consumers, the organic food market in the US is gaining widespread popularity. Higher demand for natural products has enticed major retailers to add more organic foods to their product portfolios. As a result, Whole Foods Market (NASDAQ:WFM) is facing intense competition from peers Wal-Mart (NYSE:WMT) and Kroger (NYSE:KR). Let's see where Whole Foods is heading in comparison to its rivals.
Whole Foods Market's second-quarter earnings and revenue came in below analysts' expectations, as it reported earnings per share of $0.38 on revenue of $3.32 billion. Analysts polled by Zacks had expected EPS of $0.41 on revenue of $3.35 billion. Along with missing on both the top and bottom lines, the company's comparable sales also fell short of expectations; it posted comps growth of 4.5% as opposed to analysts' estimates of 5.2%.
What is Whole Foods up to?
After the earnings release, the supermarket chain attributed its disappointing performance to rising competition in the market. With more competitors present, the company is now lowering its prices to remain competitive in the natural and organic grocery sector. The retailer also urged investors to lower their expectations. "We were overly optimistic, particularly in light of the rapidly competitive landscape," said John Mackey, Whole Foods co-CEO.
As CNBC rightly pointed out, more and more Americans have become curious to know how their food is made and where it comes from. These are customers who have received more formal education and are willing to spend more money on locally grown foods. Whole Foods has been a pioneer at selling organic foods, and it has enjoyed huge success since it came into the market. However, with retailers like Wal-Mart, Kroger, The Fresh Market, and Trader Joe's now catching up, Whole Foods' market share has dropped slightly.
With more customers becoming conscious about their food, the market for organic foods is growing at a rapid pace. The new US Organic Food Market Forecast & Opportunities, 2018 report says that the US organic food market is expected to grow at a compound annual growth rate, or CAGR, of 14% until 2018. Therefore, apart from decreasing its prices, Whole Foods is investing heavily to bring more natural foods to its stores. For instance, it has announced that it will be the first US supermarket to eliminate foods made from genetically modified ingredients.
After it posted a lackluster performance in the second quarter, Whole Foods lowered its earnings guidance for fiscal 2014 from $1.58-$1.65 per share to $1.52-$1.56 per share. It expects same-store sales growth of around 5%-5.5%, down from 5.5%-6.2% earlier.
In order to expand its organic food segment, Wal-Mart's US division plans to launch 100 Wild Oats organic products in the coming months. The new items will cost at least 25% less than the organic foods which are on the retailer's shelves right now. According to Wild Oats CEO Tom Casey, the production and distribution of organic foods remains fragmented. By delivering organic items through its world-class distribution system, Wal-Mart can give manufacturers a chance to operate on a broader and more efficient scale.
On the other hand, Kroger has stopped offering double coupons in Cincinnati and Columbus. The move came after the company realized that less than 2% of its Columbus-area customers are in fact "heavy coupon users." Instead, the grocer is slashing prices on more than 2,000 items, including vegetables and fresh fruits. Kroger's Ralphs markets in Southern California have already been selling items like organic kale and Aidells artisan sausages for less than the prices of Whole Foods. Moreover, the company is also adding more and more organic products to Simple Truth, the company's natural line of foods.
Whole Foods Market's second-quarter earnings missed expectations, as the company was over-optimistic about its growth and underestimated its rivals. While the organic food business continues to grow in the US, more companies are moving in to capture substantial chunks of the market. Therefore, Whole Foods has made the right decision by lowering its prices, as otherwise it would have continued to lose customers to its competitors. This also means that Whole Foods won't be able to generate abnormal profits like it did before. However, Whole Foods still has the lion's share of a rapidly growing market.
After the company reported weak results, Whole Foods' share price plummeted by more than 10%, which has created a buying opportunity for investors. At the moment, its price is hovering at around $40, which makes it a valuable buy. Considering this and the above discussion, I still think Whole Foods is a good investment choice.
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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Zahid Waheed has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and 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.