For a long time, Whole Foods Market (WFM) had a near-monopoly over the organic and natural foods space, with its only competitors typically being small locally based stores serving a niche customer base. Yet after soaring to prominence, Whole Foods attracted plenty of attention from its more mainstream grocery-chain rivals, and now, the natural-foods pioneer is facing new challenges that have slowed its rate of growth and caused some skeptical investors to question its ability to maintain its stranglehold over the industry. Coming into Wednesday afternoon's fiscal second-quarter financial report, Whole Foods investors wanted to see further evidence of a rebound in comparable-store sales and earnings growth, but the company was only able to deliver on about half of those wishes, and the immediate result was a big decline for the stock. Let's look more closely at Whole Foods Market's latest results and what investors are focusing on in the report.

Record results are not enough for Whole Foods
On the whole, Whole Foods didn't post terrible numbers, even though they clearly fell short of what investors wanted to see. Sales growth came in at nearly 10%, rising to a record $3.65 billion. As impressive as that was, though, those following the stock had wanted to see a figure closer to $3.7 billion. On the earnings front, Whole Foods did better, with net income climbing 11% to $158 million and resulting in earnings of $0.44 per share, a penny better than expected.

The main problem with the results, though, came from Whole Foods' slowing growth in comparable-store sales. Comps for the quarter only grew 3.6%, slower than last quarter's 4.5% growth and well below the 5.3% figure that marked the consensus among analysts of the grocery-store chain. Even worse, when you take out the impact of Easter's timing in both years, comps grew only 3.1%. Overall, customer counts picked up by only 0.8%, while average ticket size grew by 2.8% compared to the year-ago quarter.

Whole Foods continued to expand its store network during the quarter, with 11 new stores including three relocations and three former locations of the Dominick's chain. One thing that has changed dramatically in the past year, though, is that nearly all of the new stores that Whole Foods is opening are in markets where the company already has a presence. By contrast, more than half of the 38 stores the company opened in fiscal 2014 were in new markets.


Image: Whole Foods Market.

Co-CEO John Mackey indicated no long-term concerns. "Our Whole Foods Market brand has helped lead the shift in consciousness toward fresh, healthy foods by offering the highest quality, broadest selection, and best customer service." Mackey believes that Whole Foods can keep growing toward a store count of as much as 1,500 in the U.S. alone over time.

Whole Foods' big new plan to bounce back
Unfortunately, the troubling results could hang around for a while. So far in the fiscal third quarter, same-store sales are only up 2.8%, pointing to further sluggishness in growth opportunities. Whole Foods did reiterate most of its past guidance, including sales growth of 9%, comps in the low- to middle-single digit percentage range, and returns on invested capital of around 14%. Yet it also pointed out that same-store sales in the fiscal third quarter will take about a 1-percentage-point hit because of the Easter shift.

Yet the big news for Whole Foods came from co-CEO Walter Robb, who revealed a new value-based store concept that will presumably be independent of the existing Whole Foods brand. According to Robb, "Offering our industry-leading standards at value prices, this new format will feature a modern, streamlined design, innovative technology, and a curated selection. It will deliver a convenient, transparent, and values-oriented experience geared toward millennial shoppers, while appealing to anyone looking for high-quality fresh food at great prices."

For long-term investors, the new proposal has some big potential rewards but also huge risk. On one hand, one of Whole Foods' biggest assets has been its ability to charge high markups on its offerings, maintaining profit margins that are well in excess of its grocery-chain competitors. The suggestion of a value-priced store concept suggests that Whole Foods will earn a smaller margin there, and if the new stores cannibalize existing business rather than appealing to a new segment, the strategy could backfire. On the other hand, if the new store concept brings in shoppers who would otherwise never set foot in a Whole Foods location, it could meet a different need for a brand-new set of customers, bolstering the company's overall results.

Between disappointing comps and uncertainty about the new store concept, Whole Foods shares plunged about 10% in the first half-hour of after-market trading following the announcement. With tough times calling for radical measures, Whole Foods is clearly looking forward even as investors express their nervousness at the uncertainty in the company's future.