The food industry can never go out of vogue, for obvious reasons. Also, people are becoming increasingly conscious of their health and wellness. Hence, they now look for food that's made from fresh and organic ingredients. In fact, a recent study by AlixPartners showed that consumers would rather pay as much as 10% extra for organic and natural food than have low-priced inorganic food.
This has helped retailers such as Whole Foods Market (NASDAQ: WFM) to prosper. However, this organic food retailer could not match investors' expectations for the first quarter, which led to a declining stock price.
The details therein
Revenue surged 10% year over year to approximately $4.2 billion, driven by more purchases in customers' every trip. However, the top-line estimate was approximately $4.3 billion. The company blamed colder weather as one of the reasons for lower sales, as this led to fewer shopping trips by customers. Also, increased discounts, in order to keep pace with competitors and attract more customers, hampered overall revenue. Providing discounts was also important since consumers are still very calculated about their spending. Hence, it was important to lure them in by sacrificing on price.
Whole Foods' earnings jumped to $0.42 per share from $0.39 per share last year, missing on the expectation of $0.44 per share. Although the organic food retailer could not match the Street's estimates, its overall performance was good.
It opened 10 stores during the period, which helped to drive sales north. Moreover, the growth was not only a result of additional stores; same-store sales growth of 5.4% also contributed.
Whole Foods Market also faces stiff competition from other players such as Kroger (NYSE:KR), which offers organic food at lower prices. Hence, it is able to attract middle class consumers who are price-sensitive. The September 2012 launch of Simple Truth, the retailer's organic food brand, helped to attract more health-conscious customers.
Additionally, Kroger's recent acquisition of Harris Teeter will strengthen its presence in the natural food space and will also add to its store count and total sales. In fact, Kroger has also expanded its apparel business, which gives customers more reasons to visit its stores.
Whole Foods also faces competition from new players such as Natural Grocers by Vitamin Cottage (NYSE:NGVC), a natural foods retailer. The company went public in August 2012, and its stock price has more than doubled since then.
The company recently posted its first-quarter results, which were ahead of expectations. Driven by same-store sales growth of 10.8%, revenue grew 25.8% to $120.6 million for the quarter. Great demand for its products has enabled the company to plan for the rapid expansion of its stores. It plans to add 15 new stores during 2014; the company also provided a bright outlook, which pleased investors. Thus, Whole Foods Market must strengthen its market presence to combat competition.
Things might get better
Nonetheless, the organic food giant has been attempting a number of moves, which should attract more customers. Since the competition's lower prices have been hampering sales, Whole Foods resorted to heavy discounting during the holiday season, and this is expected to continue in the future. Also, its reward-card program is an added attraction. The reward card offers a discount of 10% on the company's private-label products.
The food retailer is also planning to expand its footprint by opening more stores. Whole Foods Market announced plans to increase its store count to 400 locations by the end of 2014 and to 1,200 units in the long run. Hence, this company looks prepared to grow in the future.
Also, Whole Foods entered into an agreement with Square for an iPad-based payment system. The payment system will be used at Whole Foods' checkout lanes for ready-to-consume items such as beer, sandwiches, and pizzas. This will make it easier for customers to pay without standing in queue at the conventional checkout lanes. Consumers can not only pay through cash or credit card but also through the Square wallet app available on smartphones.
Summing it up
Whole Foods Market is trying to take care of its customers in more ways than one. It not only provides healthy food to consumers but addresses of other factors such as price and time taken at the checkout lanes. Moreover, its store expansion program will make Whole Foods easily accessible to consumers. However, its lowered outlook is a point of concern. Also, stiff competition from other players can hamper its growth. Hence, it will be prudent to wait for the right time to invest in this food retailer.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Pratik Thacker 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.