Shares of health-conscious grocer Whole Foods Market (WFM) as well as those of smaller competitor The Fresh Market (TFM) have struggled to keep pace with the broad market in recent months. This has been in response to weak earnings results and concerns regarding increasing competition from large-scale supermarket retailers. With shares of both companies now down more than 25% year to date, and with valuation multiples drastically lower, the time seems right for long-term growth investors to at least consider purchasing shares on extreme weakness.

Source: Company Website

Still a viable growth story?
The powerful and fast-moving consumer trend away from processed foods toward more natural alternatives has been the key driver of growth for companies like The Fresh Market and Whole Foods Market. However, the trend is now so successful that it is beginning to hurt the aforementioned companies. After witnessing explosive growth year after year, other competitors, both large and small, are beginning to enter the organic grocery market.

With new competition, even established healthy grocers are starting to feel the pinch. This is resulting is slower sales growth and an inability to further control pricing power. While The Fresh Market has not yet reported its first-quarter results, Whole Foods Market's disappointing Q1 results seem to confirm the slowdown for the healthy grocers is very real and ongoing.

Whole Foods missed both top- and bottom-line estimates in the recently reported quarter, and management reduced guidance for fiscal 2014. Management now expects the company to grow net sales in a range of 10.5%-11% in 2014, which is down from the previously issued range of 11%-12%. Additionally, the company now expects comparable sales growth to be in a lower range of 5%-5.5%, down from the previously issued range of 5.5%-6.2%.

Co-CEO Walter Robb explained during the question-and-answer portion of the company's recent earnings call:

I think it's important to understand that competition has accelerated. There's no question about it. We've seen the conventional supermarket companies like Kroger and Wegmans and HEB, they certainly have upped their game in natural and organic foods. We've seen new entrants get public money such as Sprouts, Fresh Market, Natural Grocer, they're expanding more rapidly. Trader Joe's continues to expand.

Robb continued rather bluntly, "So I'd say competition is more intense right now than possibly we've ever experienced before."

Growth opportunities
An important takeaway from Whole Foods' earnings call was that management believes that growth in the overall natural grocery market is still strong enough to allow the company to continue growing at robust levels. Obviously, growth is no longer as rapid as it used to be; but through an expansion strategy that focuses on aggressive new store openings and calculated investments, the company should continue to lead a rapidly expanding market.

Growth for Whole Foods is still expected to be solid. According to Yahoo! Finance, analysts on average expect the company to grow revenue 10.7% and EPS 4.8% in fiscal 2014. Additionally, the company is expected to fare much better in 2015, growing revenue 12.7% and EPS 13%.

The Fresh Market is also expected to grow going forward. For the year ended in January 2015, revenue is estimated to grow 15% and EPS is projected to increase 12.9%. The following year, estimates call for revenue growth of 15.2% and EPS growth of 17.1%.

The valuation multiples of both companies are also much lower than they have been in a while. Whole Foods' P/E of 25 and Fresh Market's P/E of 28 are basically lower than the companies' historical average price-to-earnings ratios in the last five years.

(The Fresh Market. Source: Company Website)

Bottom line
The major takeaway from Whole Foods' latest earnings report is that competition in the natural grocery segment is indeed ramping up as it inevitably had to. However, the overall market is still growing strong, and it should be enough for industry leaders to maintain their edge.

All that is needed is a reset of expectations on the part of investors. With shares of Whole Foods Market and The Fresh Market plunging in recent months, it is safe to assume investors expect a lot less from these two companies going forward. This makes both healthy grocers intriguing considerations for long-term growth at current levels.