Source: Whole Foods.

After two consecutive earnings releases that disappointed investors, shares of Whole Foods (WFM) have lost more than 21% from their historical high in October of last year. Should investors buy the dip or is the worst yet to come for the supermarket chain?

A sour taste
Sales during the fiscal first quarter ended on Jan. 19 came in at $4.2 billion, a solid 10% increase from the same quarter in the previous year, but lower than the $4.29 billion expected on average by Wall Street analysts. Same-store sales grew by 5.8% during the quarter, which was also a deceleration from prior quarters and below expectations.

The quarter saw earnings per share of $0.42, a 7.7% annual increase but lower than the $0.44 per share that analysts had forecast. The company also reduced its guidance for fiscal 2014:

Sales are expected to rise between 11% and 12% versus a previous estimate of 11% to 13%, while same-store sales are expected to grow 5.5% to 6.2% compared to a prior forecast of 5.5% to 7% growth.

Whole Foods is still doing quite well compared to most other companies in the industry, but growth certainly seems to be decelerating lately. Increasing competition could be a risk to monitor.

Competition
Kroger (KR 0.56%) is an industry giant with more than 2,400 stores, which provides a lot of negotiating power with suppliers and considerable cost advantages when it comes to leveraging fixed costs to compete against rivals in price. The company is rapidly expanding into natural and organic food with brands like Simple Truth, and management believes it could double revenue in that business in the coming years.

In addition, smaller and deeply focused competitors including Sprouts Farmers Market (SFM 1.09%) and The Fresh Market (TFM) are rapidly expanding and trying to capitalize on growth opportunities by stealing market share away from Whole Foods

Sprout's slogan "Healthy Living for Less" is quite clear in explaining the company's mission to provide both healthy and affordable alternatives for customers. The company opened 19 new stores in 2013 for a total of 167 locations in eight states, and management is targeting unit growth of 12% annually over the next several years.

The Fresh Market is also running from behind, but it is is not wasting any time when it comes to expansion. The company operates 140 stores in 26 states, and as of September, management planned to deliver store unit growth in excess of 17% by opening a record 22 new locations in fiscal 2013. 

Moving forward
On the other hand, growing competition means that different companies see room for growth in the industry, and the healthy-eating trend is providing a strong secular tailwind for different players.

Whole Foods has been cutting prices and increasing promotions to compete more effectively and expand into areas with lower average income levels. This has negative implications for same-store sales in the short term, but management said it usually improves performance over time as a growing basket size more than compensates for the lower prices. 

From a strategic point of view, the company seems to be doing the right thing by betting on growth opportunities over the next several years as opposed to quarterly financial performance.

Whole Foods has plenty of room for expansion; the company has 107 stores in its development pipeline, and it's on track to have more than 500 stores by 2017 versus 373 today. On a long-term basis, management believes Whole Foods has room to operate more than 1,200 stores in the U.S. alone.

Room for growth
Even if growth is decelerating as the company becomes bigger and competition increases, Whole Foods is still performing strongly and positioned for growth. The company has abundant room for expansion in the coming years, and management is doing the right thing by putting long-term opportunities above short-term profit. Shareholders in Whole Foods have no reason to panic: The lower the stock goes, the higher the future returns for investors.