Is Whole Foods Market Still Wholesome?

Is Whole Foods Market Still Wholesome?

Natural and organic food has been in vogue lately, providing ample opportunities for food retailers to cash in. Health-conscious consumers have largely turned to retailers that provide foods made from natural ingredients. Organic food giant Whole Foods Market was one of the leading beneficiaries of this emerging trend. This is evident from the supermarket giant's performance over the last five years. Its investors were rewarded with a return of 1,075% during the period.

However, Whole Foods' recently reported fourth quarter did not please its investors. It failed to meet analysts' expectations and resulted in the company issuing a lowered guidance.

Hurdles faced
Revenue for the quarter increased slightly to $2.98 billion over last year. Excluding the benefit of an extra week in the last year, however, revenue actually surged 11%. The top line was driven by comparable-store sales growth of 5.9% and the addition of 12 new stores. Earnings stood at $0.32 per share, just beating analysts' expectation of $0.31 per share.

The company has been facing a number of problems which have slowed its growth. The biggest problem for Whole Foods is increased competition from other players. For example, Sprouts Farmers Market , a retailer which provides natural and organic foods, has been able to attract large number of customers.

Although Sprouts Farmers is a much smaller company than Whole Foods, its products are well-liked by customers, as evidenced by its recently reported third-quarter results. Revenue surged 24% and earnings jumped by a whopping 117% over last year. Its same-store sales grew 10.2%, which is much higher than Whole Foods' metric. Sprouts also raised its guidance for fiscal 2013, which further delighted investors .

Supermarket retailers such as Kroger have also been expanding their offerings to include organic foods. In fact, Kroger has a small store within its stores which sells only natural foods. The store-within-a-store is called "Nature's Market" and caters to health-conscious customers' needs . The retail giant has also introduced a natural line of foods called Simple Truth. Simple Truth products are free from ingredients which are harmful to health .

Whole Foods charges a premium for its products as compared to other players. Because of this, it fails to attract lower-income customers, especially during difficult times when consumers are not as willing to open their wallets.

Positives to consider
Although Whole Foods is facing stiff competition, it has been trying to overcome this by various means. It has started providing discounts for its products so that more consumers are attracted to its stores. Despite giving discounts, the company has also managed to expand its gross margins by 37 basis points.

Additionally, the company has been expanding its footprint by adding new stores. Whole Foods Market added 32 stores during the fiscal year and plans to add another 33 to 38 new stores in 2014 . This growing store base will boost its top line further.

Conclusive thoughts
Whole Foods market has been strengthening its position by plugging its holes. Its price cuts should bring in more customers and its expansion plans will also help its revenue grow. The company's stock price returns have been impressive, as has its dividend increase in the recent quarter. Moreover, demand for natural and organic foods has been impressive. This company should fare well in the coming months.

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Pratik Thacker 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.

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