One of the faces of America's transition to healthier eating, Whole Foods Market (WFM), has recently released its first-quarter report and the results disappointed Wall Street. To make things worse, the company also cut its outlook for the year and its shares fell more than 7% after hours. Let's take a thorough look through the report and decide if this decline is our opportunity to buy or if we should put Whole Foods in the penalty box.

The earnings miss
Whole Foods released its first-quarter report after the market closed on Feb 12. Here's an overview of the report and what analysts expected to see:

Metric Reported Expected
Earnings Per Share $0.42 $0.44
Revenue $4.24 billion $4.29 billion

Whole Foods' earnings per share increased 7.7% and revenue rose 9.9% to a record-setting $4.24 billion, but both statistics came up short of expectations. Comparable-store sales increased 5.4%, including a very impressive 19.5% increase in stores that were less than two years old, but this missed expectations as well. The company noted "softer" shopping patterns and "severe winter weather" in December as a primary reason for these weak numbers. Overall, it was a very disappointing quarter, regardless of the record high revenue and the legitimate excuses that were given. However, the disappointment did not stop there, as the company then cut its outlook for fiscal 2014...

The sky darkens
In the report, Whole Foods reduced its earnings and sales outlook for fiscal 2014, adding to the negativity. The company had already decreased its outlook for 2014 in its fourth-quarter report released in November, so it seems as if the company is getting weaker as we go. Here's a complete breakdown of the reductions:

Metric FY '14 Initial Outlook FY '14 Revised Outlook-4Q FY '14 Current Outlook
Earnings per share $1.69-$1.72 $1.65-$1.69 $1.58-$1.65
Sales growth 12%-14% 11%-13% 11%-12%
Comp.-Store Sales 6.5%-8% 5.5%-7% 5.5%-6.2%

As you can see, the low-end of the earnings per share guidance has become the high-end in each of the last two reports. Hopefully this is not a sign of things to come in the second quarter, but investors cannot help but think about the possibility. I believe the dismal outlook was more of a reason for the decline than the miss on earnings, and it may even push shares lower in the days ahead. 

A bright spot in the storm: expansion
During the first quarter, Whole Foods opened 10 new locations, bringing its total store count to 373. The company's co-CEO, Walter Robb, then added, "With a base of 373 stores today and a record 107 stores in our development pipeline, we expect to cross the 500-store mark in 2017. Over the longer term, we see demand for 1,200 Whole Foods Market stores in the U.S. alone."

The projection of 1,200 stores over the long term is up from the 1,000 the company projected in the fourth quarter, which shows that the demand for Whole Foods' stores is only growing. Whole Foods also sees opportunity for expansion in Canada and the United Kingdom, which could easily push its store count beyond 1,500. With the missed earnings and decreased outlook, this was the one thing that truly stood out as a positive for Whole Foods. Regardless of if the company can meet analysts' expectations in the upcoming quarters or not, the company is destined to grow to into an international powerhouse. 

A strong report from the competition
While Whole Foods had a tough time during the quarter, Natural Grocers by Vitamin Cottage (NGVC 1.48%), a fast-growing chain of natural and organic grocery stores in the West, had no such troubles. It released its first-quarter report on Jan. 30, which contained the following results:

Metric Reported Expected
Earnings Per Share $0.13 $0.11
Revenue $120.60 million $121.27 million

Natural Grocers' earnings per share increased 30% and revenue increased 25.8%, as a result of comparable-store sales rising by an impressive 10.6%. The company then reaffirmed its full-year outlook, calling for earnings per share of $0.58-$0.63 for an increase of 20.8%-31.3% over fiscal 2013. Even though the results were mixed versus expectations, Natural Grocers still reported a very strong quarter which caused shares to rise 11.87% in the next trading day. The stock now sits about 12.4% higher, but it is still more than 10% below its 52-week high.

I still believe Whole Foods is the better company in this industry due to its cult-like following, its reputation, and its massive brand awareness, but Natural Grocers should not be underestimated. Investors should look to Natural Grocers if they seek a small-cap way to play the industry or a company that is focused on the Western states. The company's business model is proven and its expansion plans are in place, so its stock appears to be headed much higher.

The Foolish bottom line
Whole Foods has disappointed investors and analysts with its latest quarterly report and the stock has reacted by making a sharp move lower. The decline is warranted when factoring in the miss and reduced outlook, and the weakness could continue for several days, if not weeks. However, Whole Foods will continue its rapid expansion throughout the United States, so investors must stay focused on the big picture and not on the short-term fluctuations in its share price. With this said, investors looking to pick up positions in the company should simply pick a level they consider too low to resist and pull the trigger if the stock falls to that level.