Here's Why Investors Should Continue Avoiding Whole Foods Market

Aug.13.14 | About: Whole Foods (WFM)


Whole Foods has reduced its revenue forecast four times in the last nine months.

Whole Foods is under tremendous pressure from bigger and more established rivals in the organic foods space.

Whole Foods is making investments to turn the business around, and this will keep its bottom line under pressure.

Whole Foods Market (NASDAQ:WFM) just can't stop disappointing investors. Already down almost 35% this year, Whole Foods cut its outlook once again when it reported its third-quarter results. In fact, the company has cut its annual revenue estimate four times in the past nine months, and looking ahead, the bad times look set to continue.

Under pressure

Whole Foods' results were not great either. The company reported a 10% increase in sales to a record $3.38 billion, but missed consensus estimates. Its net income increased to $151 million from $142 million last year, slightly ahead of expectations. Moreover, its comparable store sales rose 3.9%, driven by a late Easter. But, going forward, Whole Foods has lowered its comps expectation to a range of 4.1%-4.4% from its previous estimate of 5%-5.5%.

Whole Foods seems to be wilting under the pressure of intense competition, and this is clear from its reduced outlook. Established players such as Wal-Mart (NYSE:WMT) and Kroger (NYSE:KR) have entered the organic food market, and have made organic food cheap. Even Whole Foods CEO Walter Robb accepts this fact, when he says that "there is at least one competitive store opening every other day," according to The Wall Street Journal.

In addition, Wal-Mart is making organic food cheap. Recently, Wal-Mart announced that it will be carrying items from Wild Oats, a supplier of affordable organic food. According to a Wal-Mart press release:

"Originally introduced in 1987, Wild Oats will relaunch at Walmart starting this month with a new, more affordable price point on quality products covering a broad variety of categories - from salsa and pasta sauce to quinoa and chicken broth. Customers will save 25 percent or more when comparing Wild Oats to national brand organic products."

Now, this will has further intensified competition in the organic food space. With 11,000 stores across the globe, Wal-Mart is a way bigger entity than Whole Foods, which has less than 400 stores. Hence, Wal-Mart's wide reach and lower pricing will be a thorn in Whole Foods' side going forward.

Trying to stage a comeback

Management, however, is taking various initiatives to arrest Whole Foods' slide. It has lowered the prices of its packaged goods, especially in its budget 365 line, according to Bloomberg. In the beginning of this year, it experimented with the pricing of seafood and lowered the prices of salmon. This was a huge hit, as the company saw a rise in the amount of salmon sold during that period. Whole Foods' President A. C. Gallo told Bloomberg, "We're really happy with that experiment and plan to expand on that some more this coming year."

But, while the lowering of prices will indeed bring more customers to Whole Foods' locations, this will also weigh on its earnings. In addition, to lure more customers, the retailer is planning to launch its first national marketing campaign in a bid to increase awareness among consumers. Along with this, to differentiate itself from peers, Whole Foods will partner with a logistics firm to offer home delivery service to its customers. Now, moves such as these will need investments, and continue keeping Whole Foods' bottom line under pressure.

Moreover, the success of its online move is not guaranteed. Wal-Mart has also started testing a home delivery service, and probably other retailers will also catch in on the trend. Since Wal-Mart is looking to offer cheaper organic food, it might win over more online customers than Whole Foods.

New store strategy

Whole Foods also plans to deliver growth by investing in its new and existing stores. It has opened 33 new stores in the past four quarters, and all are performing well as per management. Looking forward, Whole Foods plans to roll out 116 new stores that are currently in its development pipeline. In fact, over the long run, it has envisioned a total of 1,200 stores in U.S. alone.

Apart from investing in new stores, Whole Foods also plans to revamp existing stores that are more than 10 years old. Although this will take time, management believes that this will boost its comps. It also plans to roll out a new service that will enable customers to make informed buying choices regarding important sustainable farming practices, including pest management, farm worker welfare, and pollinator protection.


Whole Foods is under pressure, and to improve its performance, it is making investments in the business. The company's growth has already slowed down, and further sluggishness cannot be ruled out as the guidance tells us. Moreover, there is no guarantee that Whole Foods' turnaround moves will succeed, as the company faces competition from bigger and more established rivals. So, it is a good idea for investors to avoid Whole Foods as more downside cannot be ruled out.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.