In its latest quarter, Whole Foods Market (NASDAQ:WFM) missed Wall Street's expectations with revenue of $3.3 billion and earnings per share of $0.38. The consensus estimates on Wall Street called for Whole Foods to report revenue of $3.34 billion and earnings per share of $0.41. The miss resulted from increased competition from traditional grocers such as Wal-Mart (NYSE:WMT) and Kroger (NYSE:KR) that are increasingly foraying into the organic-foods space.
Wal-Mart's plan to conquer the organic market
Wal-Mart is making a splash in organic foods with its upcoming roll-out of Wild Oats. Wal-Mart formed a partnership with the Wild Oats brand in order to offer consumers discount prices on organic foods, which usually cost more than non-organic foods. Wal-Mart hopes to sell some of its organic products under the Wild Oats name at discounts of up to 25% compared to other organic brands.
The market for organic foods continues to grow as people choose to eat healthier, so a wholehearted trek into the organic space is a smart move for Wal-Mart.
In its 2015 first quarter, Wal-Mart reported earnings per share of $1.10, a decrease of 3.5% compared to 2014's first quarter. Additionally, it reported revenue of $114.2 billion, an increase of almost 1%. Like many other retailers, Wal-Mart was negatively affected by the harsh winter and stated that the weather brought down its earnings by $0.03 per share. Regardless, like Whole Foods, Wal-Mart missed Wall Street's earnings and revenue estimates of $1.15 per share and $116.3 billion, respectively.
The retailer's sales on a same-store basis were flat within the U.S. in the quarter, and the traffic to its U.S. stores fell by 1.4%. So the organic foods initiative could not have come at a better time. Wal-Mart could drive not only increased traffic to its stores but increased sales as well as a result of the initiative with Wild Oats.
Kroger making a push into the organic space
Daniel Jennings, in his recent article about the grocery chains, gives a good synopsis of Kroger's foray into organic foods. The chain has a line of organic-food products under the name Simple Truth, and Kroger markets its Simple Truth products as being free from over 100 artificial ingredients found in other non-organic food products. Further, Kroger is redesigning some of its stores to look more like Whole Foods locations in order to attract organic shoppers. The company is stocking more organic products in the redesigned stores and cooking more food in-store to provide the impression of freshness.
Kroger's push into organic foods worked well for it in its recent quarter. The company reported adjusted earnings per share of $0.78 on revenue of $23.22 billion, which beat the Wall Street estimates of $0.72 and $23.14 billion, respectively. Kroger's sales declined by 4% in the fourth quarter, but the decline occurred because 2013's fourth quarter contained one more week. Adjusting for the extra week and excluding fuel sales, Kroger's sales actually increased by 4.4% in the quarter. Furthermore, excluding fuel sales, Kroger's sales on a same-store basis increased by 4.3% in the fourth quarter.
The future of Whole Foods
Whole Foods has a tough road ahead as Wal-Mart, Kroger, and a slew of other grocery chains encroach on its turf. Wal-Mart is attempting to undercut the market with lower prices while Kroger is attempting to recreate Whole Foods' atmosphere in its own stores. Whole Foods will have to innovate and differentiate itself more as the competition heats up. If it chooses to compete with Wal-Mart on price, Whole Foods' investors could suffer tremendously from falling profits. The upcoming quarters will reveal whether Whole Foods is up to the challenge.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Andrew Sebastian 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.