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Wednesday was one of the worst sessions in years for the stock of popular supermarket chain Whole Foods Market (WFM - Analyst Report) as shares cratered by nearly 19% on the day. This crash came after the company reported weak earnings of 38 cents a share after the bell on Tuesday, missing the Zacks Consensus Estimate of 41 cents a share.

Key Factors

While the earnings miss was obviously a disappointment, investors also keyed in on some troubling statistics in terms of the company’s same store sales and its margins. Same store sales rose just 4.5% for the quarter, while gross margins slumped by 51 basis points thanks to a higher cost of goods sold.
If that wasn’t enough, Whole Foods management also reduced their guidance yet again for the company’s full year outlook. Now, WFM looks to have sales growth of between 10.5%-11% (down from 11%-12% range) while same store sales growth looks to be in the 5%-5.5% neighborhood, down from a previous forecast of 5.5%-6.2% growth.

These reduced outlooks on the sales front are also trickling down into the earnings guidance for the company, as now this has been reduced as well. And though WFM currently has a Zacks Rank #3 (Hold), one has to expect a flurry of analyst estimate revisions lower in the coming days, suggesting that ‘sell’ territory is pretty likely for this Texas-based company in short order.

The organic grocery market is becoming very competitive for Whole FoodsWhat Happened?

Whole Foods Market is an interesting case because it has long held a dominant position in the organic and natural foods market. It saw great growth for years based on its impressive spot in the industry, but many other companies are starting to get in on the game too.

Privately held Trader Joe’s is a formidable foe, while upstart Sprout Farmers Market (SFM - Snapshot Report) is also making a name for itself too. If that wasn’t enough, more ‘traditional’ grocers like Kroger (KR - Analyst Report) are moving deeper into the natural foods space, while Wal-Mart (WMT - Analyst Report) and Target (TGT - Analyst Report) have also announced initiatives as of late as well.

What this means for Whole Foods is that competition is becoming extremely intense in this market, and that price is starting to be a major concern. No longer can Whole Foods just assume it will have a dominant position in a given market, it must instead do battle with a seemingly ever-increasing number of foes.

“Competition is more intense right now than possibly we’ve ever experienced before,” said John Mackey, CEO of Whole Foods Market. “For a long time Whole Foods had the field to ourselves, pretty much. That was nice. But we don’t any longer.”

Start of the trend?

This isn’t the first time that Whole Foods has disappointed at earnings season though, as it also saw weakness in its previous report. Plus, the stock is now down roughly 30% YTD, which is in-line with SFM, but a far cry from KR’s double digit return so far in 2014.

In other words, while WFM is down a ton in Wednesday’s trading, this isn’t exactly a brand new revelation for shareholders. It shouldn’t be too surprising that competition is heavily increasing either, as any consumer can see that natural and organic foods are increasing in stock at stores, and that there is definitely a big push by Whole Foods’ rivals to get a chunk of this space.

This is particularly true when you consider the profit margins of some of the key players in the space. Kroger has seen net profits that are roughly half of what investors had seen in Whole Foods, and in such a cutthroat, volume-focused industry like groceries, every little bit counts, showing why there has been such a focus by many ‘traditional’ stores on natural foods as of late.

Given this trend, it certainly looks unfavorable for WFM in the near term and that the company is undergoing the often painful transition from a growth stock to a more mature firm that is facing stiffer competition.

Still, WFM has impressive expansion plans and looks to increasing its store count from roughly 400 this year to 1,200 in the U.S. eventually, while it does (arguably) remain the gold standard in the space, so longer term potential is still there for WFM in the future.

Bottom Line

Personally, I think that staying away from Whole Foods in the near term is probably a safe (and best) course of action. This is especially the case if estimates fall as many are expecting them to do, a situation that will probably push WFM to have a ‘sell’ Zacks Rank.

However, to suggest that WFM is somehow ‘doomed’ for the long haul seems a little overblown right now. The company does have big expansion plans, a top brand name, and if it can become more competitive on prices, can stretch into less affluent markets as well.

Either way though, this looks to be a rough transition period as both investors and the company management ‘reset expectations’ and adjust to the more competitive nature of the industry. More pain could definitely be ahead, but if WFM can navigate this turbulence, it could again be an interesting play once the turmoil subsides, but this will definitely take at least a few months, if not longer, to happen.

But what do you think?

Is Whole Foods falling behind or is this a temporary hiccup in the firm’s long term growth trajectory?

Let us know in the comments section below!

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