Wfm Photo

Source: Whole Foods Market

Whole Foods Market (NASDAQ:WFM) stock is trading at worrisome levels for some investors -- about 45% below its 52-week high -- largely due to fierce competition in the natural and organic foods industry and the resulting investor skepticism regarding the company's long-term prospects. Major retailers have caught on to Whole Foods' profitable business model, and as they've moved in to grab a piece of the organic food pie, the company has suffered. Let's take a closer look at the trends, and what they mean for the organic grocer in the long-term.

Shifting consumer taste
A survey by the Organic Trade Association, released in April, noted that organic food sales in the U.S increased 11% to reach $35.9 billion in 2014. That growth is expected to continue, fueled by drivers including:

  • Better educated and wealthier consumers demanding healthier foods. Consider the recent contrasting fortunes of Chipotle with its focus on natural ingredients and McDonald's with its reputation for unhealthy fare.
  • The purity and safety of foods becoming a larger concern. The rising consumer demand for GMO labeling, for instance, has triggered a nationwide debate.

While the above noted statistics are favorable for companies like Whole Foods, it also breeds a whole new issue which brings us to our next point.

Not the only player in town
Whole Foods remains a leading retailer of natural and organic foods as the company's annual sales nearly tripled over the past decade to over $14 billion. However, investors have been spooked by the trend of decreasing same-store sales -- one of the most important metrics to consider when evaluating retailers.

The company previously enjoyed impressive same-store sales growth, but fierce competition has seen this metric decelerate:

Css Whole Foods Market
Source: 2014 Annual Report

In 2014, comparable store sales fell to some of their lowest levels. Management outlook for fiscal 2015 has comparable store sales continuing to grow in the low to mid-single digits as the company moves forward with its turnaround plans.

Competition in this space has become quite fierce and comes from all angles. Not only did Costco become the largest seller of organic goods by revenue earlier this year, but companies like Wal-Mart and Target have been including organic offerings in their grocery aisles for some time.

Just this year, Target announced a complete reorganization of their grocery unit to include healthier alternatives to accommodate the demands of their health-conscious customers, especially millennials. We also can't forget the strict competitors such as Trader Joe's, Sprouts,  and other supermarkets gaining popularity in urban areas such as ALDIs -- which has been increasing offerings of organic and natural products at impressive low prices thanks to their lean operating business model.. Competition is gaining traction, and there are no signs of this slowing down.

Righting the organic ship

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Source: Whole Foods Market

Whole Foods has also created a leading brand and forged a strong relationship with its customers. Many of its devoted shoppers are concerned not only with buying organic and natural food but also with making sure what they buy helps create a better world. On the back of this mission, the company intends to increase its store count from 373 U.S. locations to a long-term goal of 1,200 stores. Most importantly, it is also investing in a strategy targeting a younger, more price-conscious consumer.

Earlier this year, co-CEO John Mackey announced a new store concept, named 365, with a focus on innovative technology, a streamlined design, and more affordable prices. The concept seems to be specifically geared toward millennial shoppers. In a July press release, the company confirmed the signing of its first five leases. 365 will makes its debut in the Silver Lake neighborhood of Los Angeles during the second half of 2016 with additional openings scheduled through 2017 when the number of locations is expected to double. While it has been important for the company to shed its "Whole Paycheck" image, I am concerned that these new stores may cannibalize sales at its larger Whole Foods locations. This will be something investors should keep a close eye on as 365 expands its coverage.

The Foolish bottom line
Shares have shed nearly half their value since hitting fresh 52-week highs in February. The stock now trades at less than 20 times expected 2015 earnings, and its price-to-earnings ratio has fallen dramatically from a historical average of over 30 times. I am keeping this ticker on hold until we see a solid turnaround and ongoing progress in comparable-store sales for at least a few consecutive quarters. Even with average store sales growth of 8% over the past 15 years, it is unrealistic to expect the company to achieve the type of same-store sales numbers it did in its pioneering years.

As a consumer, Whole Foods may be one of my favorite companies, but despite long-term opportunities, investors cannot overlook challenges as it expands operations, fights competition, and establishes a new store concept. If the company's plans prove successful, I see a bright future ahead. Existing investors can still enjoy the 1.6% yield the company offers while watching its progress.

Mabel Nunez has no position in any stocks mentioned. John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. The Motley Fool owns and recommends Chipotle Mexican Grill, Costco Wholesale, and 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.