Wfm
Image: Whole Foods Market.

The organic and natural foods movement has made big strides over time, and until recently, Whole Foods Market (NASDAQ: WFM) had arguably been the biggest beneficiary of the grocery industry's transformation. Now, though, Whole Foods faces competition from companies like Kroger (NYSE:KR) and Trader Joe's, and coming into Wednesday's fiscal first-quarter financial report, Whole Foods investors aren't sure whether the company will be able to reverse its earnings slump over the past several quarters. Let's take a closer look at what's been happening with Whole Foods since their last report and whether it's reasonable to expect the company to bounce back in 2016.

Stats on Whole Foods Market

Analyst EPS Estimate

$0.40

Change From Year-Ago EPS

(13%)

Revenue Estimate

$4.81 billion

Change From Year-Ago Revenue

3%

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

Whole Foods looks for some earnings success
In recent months, investors have further reduced their views on Whole Foods earnings, cutting their fiscal first-quarter projections by a penny per share and slicing a nickel off their full-year fiscal 2016 projections. The stock has made no progress toward a recovery, falling another 1% since late October.

Whole Foods' fiscal fourth-quarter results in November showed just how big a hole the natural-foods specialist has dug itself into lately. Revenue rose 6%, but all of that came from store-count expansion, and Whole Foods saw its comparable-store sales fall 0.2% from the year-ago quarter. Gross margins remained under pressure, and falling traffic figures overcame a small increase in the average amount that customers spent per transaction. That compared extremely unfavorably to Kroger's 5.4% growth in comps, as the traditional grocer tapped into Whole Foods' home market by adding more organics and natural foods to Kroger shelves. Even worse, Whole Foods said it expected a 2% drop in comps for the fiscal first quarter and projected a potential rebound only to a 3% gain by the end of the fiscal year.

Whole Foods continues to look to its new-store initiatives to bolster its growth. The new 365 concept is moving forward, but one potential roadblock could come from the real-estate market. Along with Whole Foods, both Kroger and Trader Joe's are looking to expand extensively, and smaller players in the natural and organic market are also hungry to eat into Whole Foods' market share with more extensive store networks of their own. The resulting search for suitable locations could produce local bidding wars for the best available space and raise Whole Foods' operating costs.

Moreover, Whole Foods appears to be looking at boosting its prepared-food output to try to bolster profits. The recent hire of well-known chef Tien Ho in December signaled Whole Foods' emphasis on food quality and culinary prowess. By offering a premium dining experience for those who frequent Whole Foods' in-store buffets, the grocery chain hopes to give customers every excuse to visit its stores.

In the Whole Foods earnings report, investors should keep focusing on how the company can restore its reputation in the aftermath of high-profile scandals that called its character into question. If comparable-store sales don't manage to get back to the levels that Whole Foods enjoyed during the past, then it could signal real trouble ahead even as the company seeks to put Kroger and Trader Joe's back in their respective places. Even long-term investors can't afford to ignore the challenges to Whole Foods Market's viability go unanswered for very long, or else they risk even bigger losses than they've already suffered.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of Whole Foods Market. The Motley Fool owns shares of and recommends 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.