Is Whole Foods Market Facing Too Much Competition?

Whole Foods Market  experienced a significant decline from around $64.50 per share to only $57.30 per share after it reported a not-so-impressive operating performance in the fourth quarter. Moreover, it also cut its outlook for the new fiscal year. Despite the cloudy outlook, Cantor Fitzgerald rated the company as a buy. Should investors be bearish or bullish about Whole Foods now? 

Reduce new fiscal year outlook
In the fourth quarter, Whole Foods delivered around $3 billion in sales, 11% higher than the same quarter last year. It increased its comparable store sales at a good rate of 5.9%. However, sales at stores opened in the past year experienced the lowest growth in two years.

While diluted earnings per share came in at $0.32, beating Wall Street estimates, its sales missed analysts' expectation of $3.04 billion. In order to be conservative, Whole Foods cut its 2014 outlook from a 1.69-$1.72 range to the $1.65-$1.69 range. 

Offering discounts to attract more shoppers
Whenever consumers think of buying natural and organic foods with good quality, they think of Whole Foods. Nevertheless, as you may be able to gather from its nickname "whole paycheck," it is an upscale grocer with pricey products, so it probably cannot tap into the financially-distressed demographic.

Recently, Whole Foods has been applying traditional retailing discount tactics to attract more consumers. It has several good discount deals, which last for several hours or only one day, on different items such as ice cream, salmon, and organic chicken. In a recent interview (log-in required) with Wall Street Journal, Whole Foods' co-CEO Walter Robb mentioned that the company would also match pricing more aggressively with its competitors, including Kroger and The Fresh Market

Kroger moves into upscale organic retailing
Kroger, one of the largest grocery retailers globally, has increasingly become a threat to Whole Foods and it has made a strategic move into the organic business. Kroger has already created two brands: Simple Truth and Simple Truth Organic Brands, which are free from 101 artificial and not-healthy ingredients.

Moreover, Kroger acquired Harris Teeter Supermarkets to build up its position in the upscale grocery business. Harris Teeter offers fresh produce and prepared meals at a high price, operating around 208 stores in urban areas in eight states, mainly in the Southeastern and mid-Atlantic US. Thus, with this acquisition Kroger is in a better position to compete with Whole Foods. 

The company raised its 2013 identical sales guidance to 3%-3.5% after achieving 3.3% identical supermarket sales growth in its third quarter. 

The Fresh Market's ongoing growth
The Fresh Market is also a great player in the natural and organic produce retailing business. The company focuses on food freshness and the in-store shopping experience. One lady described The Fresh Market's store as "beautifully displayed and enticing with a fresh, organic base, extensive produce, meat and deli selections, and a 'mouth-watering' bakery."She added, "This is not grocery shopping. It is experiencing the joy of food." 

In the second quarter, The Fresh Market delivered 13% growth in sales and 17% growth in EPS, which hit $0.32 per share. However, comparable store sales jumped only 3.4%, less than the comparable store sales growth of Whole Foods. Thus, this impressive earnings growth has mainly come from opening more stores. It opened five new stores in the second quarter and estimates that it will open 21-22 new stores in total during fiscal 2013. 

My Foolish bottom line
For the moment, Whole Foods still outperforms its peers with the highest growth in comparable store sales. However, it is facing more competition in the natural and organic food retailing business from both Kroger and The Fresh Market. Whole Foods is quite expensively priced at 29.4 times its forward earnings, much higher than the forward earnings valuations of Kroger and The Fresh Market at 13.4 and 26.5, respectively. With increasing competition and the high valuation, I would rather wait for more price contraction before initiating a long position.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and 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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