Rumors of Whole Foods' Demise Are Greatly Exaggerated

Whole Foods recently released results for the second quarter ended on April 13. The leading organic grocer attributed its disappointing results to seasonal factors as well as increased competition from other grocery chains like Wal-Mart Stores and Sprouts Farmers Market . With the stock down well over 20% during this time, rumors have been circulating over Whole Foods' demise. But don't be fooled, there's plenty of life left in this company and long-term investors would be well advised to scoop up some shares.

Whole Foods' second-quarter numbers
The organic grocer reported that total sales increased by 10% to $3.32 billion, while comparable-store sales grew 4.5% compared to the same period in 2013. Gross profit margin, however, was pressured during the quarter and fell to 35.9% of revenue. Furthermore, earnings per share came in at $0.38, flat from the year-ago period as well as a miss from previous guidance of closer to $0.41 per share.

More importantly, Whole Foods reduced its guidance for the third consecutive quarter. The company now expects sales growth of between 10.5% and 11% in 2014. Previous guidance anticipated a range of 11% to 12%. It also reduced guidance for earnings-per-share growth from a range of 7% to 12% way down to between 3% and 6%. That's what caused many traders to head for the exit door.

More competition in the organic sector
Whole Foods has long been and continues to be a leader in the organic-food retail sector. However, the company's success has also attracted competition from other organic marketers like Sprouts.

Sprouts Farmers Market recently reported earnings for the first quarter of 2014. In short, the company reported an increase of 26% in total revenue to $722.6 million. A healthy 12.8% rise in same-store sales fed this growth.

In other words, Sprouts is staking a bigger claim by positioning itself as a growth story. In this regard, for the first quarter the company reported that it had opened four new stores -- two in California and one each in Kansas and Oklahoma. The company expects to open 23-24 stores for the year.

Moreover, the company is taking the challenge directly to Whole Foods (sometimes affectionately referred to as "Whole Paycheck") by offering lower prices in a play to gain market share.

Meanwhile Wal-Mart recently took another step into the organic-food sector by forming a strategic alliance with Wild Oats, a line of organic-food products that competitively offers lower prices than both Sprouts and Whole Foods.

Wal-Mart contends that shoppers can save about 25% on their grocery bills when they purchase Wild Oats products. This is important to note because the organic sector has had challenges with attracting consumers who might be put off by the historically higher prices of organic goods. That being said, these shoppers are not typical Whole Foods customers.

Whole Foods will grow again
Whole Foods is still the leader in the organic market in the U.S. even with its poor performance since the end of last year. Even before the Wal-Mart announcement, Whole Foods had already revised its guidance for 2014.

The company remains strong in a number of ways. Particularly, it still pays a dividend and plans to continue with previously reported stock repurchases this year to the tune of $300 million which will support earnings growth.

Furthermore, Whole Foods reported that it has added eight stores in six new markets since the end of the first quarter. Most recently, the company completed its acquisition of four New Frontiers Natural Marketplace stores in Flagstaff, Prescott, and Sedona, AZ; and San Luis Obispo, CA.

Going forward, the company intends to open seven additional stores in the third quarter and another 11 to 14 stores in the fourth quarter. Also, the grocer's management argues that sufficient demand exists for 1,200 Whole Foods Market stores in the United States. So Whole Foods believes that its long-term growth prospects remain strong.

In addition to new store openings, the company is also focusing on bringing gross margin down to its 34% to 35% historical range. The organic grocer also plans to invest in new technology in an effort to improve its cost structure.

"We will work to improve our cost structure to offset the impact of our value and technology investments, and expect to produce year-over-year improvement in operating margin in 2015 and beyond," said Walter Robb, co-chief executive officer of Whole Foods Market.

Whole Foods' foolish future
Whole Foods obviously must fend off the competition. However, the company will continue to capitalize on the ever-growing demand for organic and natural foods. The key for Whole Foods is to continue differentiating its brand as it has long boasted a reputation for high quality, not just high prices.

"Whole Foods Market is the premier brand in natural and organic foods, with unparalleled quality standards and the broadest selection," said John Mackey, co-founder and co-chief executive officer of Whole Foods Market.

"As we continue to innovate and evolve at a fast pace, we are confident in our ability to gain market share and expect our sales to approach $25 billion over the next five years," he said.

While past performance does not indicate future results, long-term investors should find these numbers more convincing than short-sighted traders who have opted to pull the trigger. In sum, rumors of Whole Foods' demise are greatly exaggerated. {

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Kyle Colona 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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