Last week, I was extremely distracted by word the Federal Trade Commission's would seek to block Whole Foods Market's (NASDAQ:WFMI) acquisition of Wild Oats (NASDAQ:OATS). When you get as bent out of shape as I was, funny things happen. For example, I was never all that thrilled with the idea of Whole Foods' acquisition of Wild Oats to begin with, although I could certainly see the logic behind it. I'm just not a big fan of growth by acquisition in general.

Anyway, I was so shocked that when I wrote about the development, I did a very good job of outlining the tough competition in the organic space while neglecting to address why I think Whole Foods will ultimately succeed over the long term. I'd like to do that now.

Grocery stores and grocery wars
I've noticed that some who find Whole Foods too pricey sometimes like to argue that it's just a grocery store. (The FTC apparently doesn't think so, of course.) But it's a grocery store that has been able to produce impressive profits. For example, in 2006, Whole Foods had a gross profit margin of 35%, compared with 28.8% for larger competitor Safeway (NYSE:SWY) and 23.7% for Kroger (NYSE:KR). Over the past four years, its profit margin has averaged 34.8%.

Naturally, competition loves to swoop in where profit margins are high. It's one of the dubious side effects of success. Conventional grocers such as Safeway and Kroger saw organic goods command higher prices and began loading their shelves with such merchandise. And of course, Wal-Mart (NYSE:WMT) has made a high-profile entry, too.  

Whole Foods' margins will be pressured as it tries to offer more affordably priced organic products. In fact, Whole Foods has made it clear that it has to fight the image that has led some to dub it "Whole Paycheck" and to clarify that it also carries some value-priced products. Regardless of the FTC's conviction that a united Whole Foods and Wild Oats would mean higher-priced organic products, Whole Foods' management seems to be aware that a reputation for pricey merchandise will limit how well it's able to increase the appeal of its stores beyond its current customer base.

Another element to bear in mind is something that Chairman, CEO, and co-founder John Mackey has noted in the past: Increased competition from various sources has often helped make consumers more aware of organic products and then venture to Whole Foods Market for the more authentic experience.

Foodie philosophy
This segues right into Whole Foods Market's mission to be the leader in the organic lifestyle. There is a segment of Whole Foods' target demographic that would avoid its stores -- they're simply anti-corporate in general. However, if those people were given the choice between Whole Foods and Wal-Mart, Whole Foods would win hands-down as the lesser of two evils.

Whole Foods, after all, has made no bones about being a green-leaning operation. It has structured its entire philosophy around certain ethical principles, not just limited to food. It champions corporations' responsibilities to communities and to the world. It strives to treat its employees well, and it has established several foundations, such as the Whole Planet Foundation. It also delves into areas such as fair trade and animal-compassion standards.

Because of these actions, Whole Foods most certainly appeals to a growing population of people who are increasingly aware of the ramifications of what they buy -- some of whom may wonder whether cheap food is often cheap for a reason. Whole Foods is well positioned as a brand and a mission that many consumers can get behind.   

While a discount giant like Wal-Mart can try to emulate the success by pushing organics, there's still the possibility that it will fail in its endeavor, especially given the perception that it's simply chasing new niches that make for good business right now. (Just look at its attempts to try to capture some of the Target (NYSE:TGT) magic -- its core customers don't appear open to Wal-Mart as a place for anything other than cut-rate prices.) If Wal-Mart fails -- and accomplishes nothing more than educating more and more people about organic alternatives -- it will be an even more interesting future for a company such as Whole Foods Market.

What's with the loss of appetite?
Investors have responded pretty negatively to Whole Foods Market shares here lately, but let's not forget that it reported a 19% increase in revenues last year, to $5.61 billion, and a 42% increase in earnings. Slower profit growth may be on the menu for the short term as it positions itself for the future, but the company is still expected to report mid- to high-teen percentage increases in revenues over the next several years. It's also known for its ability to keep its stores profitable for many years -- we've noticed that even older stores are highly profitable, a trend that definitely goes against the norm for many retailers. Whole Foods also voluntarily provides certain financial metrics that other companies do not, such as emphasizing economic value added (EVA).

Whole Foods' success belies the fact that it only has 171 stores here in the U.S., with a dusting in Canada and the U.K. It has plenty of room for growth. Compare that with Safeway and Kroger; they may have sales of about $40 billion and $60 billion, respectively, but their store counts also stand at nearly 2,000 for Safeway and about 2,500 for Kroger.

A stock that's trading at 29 times earnings may not sound like a rip-roaring bargain, but Whole Foods' five-year P/E high is 78, lending a bit of perspective to the current situation. (Its shares have decreased by 39% in the past 12 months). However, Whole Foods is a company with a leadership role in a growing niche, it's historically very profitable with a solid balance sheet (and pays a dividend to boot), and it has plenty of room for additional expansion and innovation in growth areas many that retailers don't fully understand -- other than what they probably view as marketing opportunities.

Despite many investors' negative sentiment right now, I believe the glass isn't half empty at Whole Foods.

Dig into some related Foolishness:

  • Last week, I wondered whether Whole Foods is building an evil empire, as the FTC seems to think.
  • Last quarter, I thought investors were missing the big picture at Whole Foods.
  • In January, my Foolish colleague David Meier made a bearish argument about Whole Foods.

Whole Foods Market is a Motley Fool Stock Advisor recommendation. Wal-Mart has been recommended in the pages of Motley Fool Inside Value. You can try out either service free for 30 days.

Alyce Lomax owns shares of Whole Foods Market. The Fool has a disclosure policy.