As many consumers have begun to embrace eating healthier, companies like Trader Joe’s and Whole Foods Market (NASDAQ:WFM) have spread across the country, and have captured a decent share of the supermarket space. In fact, the publicly-traded leader in the segment, Whole Foods Market, has grown from a single store in Austin, Texas to a national behemoth with over 360 stores across the nation.
However, as companies like WFM have risen, more traditional grocery stores have begun to take note, while other competitors have cropped up as well. This has made the organic and natural food business far more competitive than it was even a few years ago.
These trends are finally starting to impact WFM stock, which was for many years a high flying growth name. In fact, over the past five years, WFM is up over 700%, though in the past six months, it has seen a flat return. This sluggish trend has now come to a head in the firm’s latest earnings report, as Whole Foods Market both missed estimates, and trimmed guidance as well.
Earnings in Focus
In the most recent report, the company barely missed estimates, reporting earnings of 42 cents a share compared to an estimate of 44 cents a share. This was the first miss for WFM in ages, as the company was riding a streak of four straight beats before this miss.
Guidance was the real issue though, as WFM had already cut guidance late last year, marking another round of slashed expectations. Total sales are now expected to grow between 11%-12%, compared to earlier growth of 11%-13%, with the top end of comparable-store sales projecting falling from 6.2% growth to just 5.5% growth.
With these trimmed figures, earnings are now expected to be in the $1.58-$1.65 per share range for the year, down from the previous forecast of $1.65-$1.69 per share. This has forced analysts to cut their estimates as well, causing nearly universal agreement in terms of earnings estimate revisions as of late.
Now for the current year, 18 estimates have gone lower on WFM in the past month, with not a single one going higher. This has pushed the consensus estimate down from $1.69/share 60 days ago to $1.62/share today, putting it in line with the new management guidance.
Estimates for the following year have also come down a tad thanks to this guidance cut, though double digit growth rates are still baked in for WFM for both the current year and next year. Still, with such another cut in expectations, WFM has definitely fallen out of favor with investors and currently has a Zacks Rank #5 (Strong Sell) as a result, suggesting that investors should definitely avoid this company for the near term.
The retail supermarket industry isn’t looking too great overall, as the space is currently in the bottom 15% of all industries. So, better picks are hard to come by, though a few companies do stand out in the broader natural food space; Natural Grocers (NYSE:NGVC) and Farmer Bros. (NASDAQ:FARM).
Both of these companies also have a focus on natural and organic foods, though they have Zacks Ranks #2 (Buy). So, both should be seeing better earnings estimate revision activity, and thus may be more likely to outperform in the near term than the struggling Whole Foods Market which is facing a period of severe competition that is definitely hurting its short-term stock prospects.