GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Is Whole Foods Market a Good Investment Despite the Competition?

August 08, 2014 | About:



Whole Foods Market (WFM) has left a lot to be desired. Despite plying its trade in the fast-growing organic food industry, Whole Foods has failed to deliver the growth that investors have been expecting. As a result, the stock has declined in recent times. However, Whole Foods expects its gross margin to return to a healthy range of 34% to 35% over the next several years, as it follows its value strategy to expand its appeal and drive sales growth over the longer term.

Management expects to produce year-over-year improvement in operating margin in 2015 and beyond. Whole Foods Market should continue gaining share with an increasing demand for fresh, healthy foods that outperforms rising competition, creating millions and millions of new customers for the food retailer.

Trying to get better

Whole Foods Market has signed 56 new leases for the past 12 months and currently has a record 114 stores in its development pipeline, which illustrates that the company is moving at a rapid pace to take advantage of the enormous growth opportunity.

The food retailer expects to exit the year with approximately 400 stores and pass the 500-store mark in 2017. Further, there’s robust demand for 1,200 Whole Foods Market stores in the United States alone over the longer term.

The increasingly growing demand for fresh, healthy foods supports the company’s mission for the last 36 years and signifies the rapidly growing growth opportunity for Whole Foods Market, going forward.

Whole Foods Market is quite confident about its ability to gain market share and expect its sales to reach approximately $25 billion over the next five years with its continued innovation and evolution at a rapid pace.

Concerns to watch

Kelly Bania, the analyst for BMO Capital Markets cuts the share rating to market perform on the account that the nature of the accelerating competitive environment has likely been underestimated.

Chris Graja, the analyst for Argus, actually upgraded the stock to buy from hold, citing his conservativism in the estimates all through and believes that a 12% growth rate remains achievable and a solid driver of valuation, despite the management’s initiative to reduce prices.

Whole Foods is struggling to catch up with lower cost competitors in the market for organic produce and healthy packaged foods. Its margins are badly hurt by increased competition and lower prices.

In addition, with the health food market expanding, Whole Foods no longer remains the only grocery chain catering to the specific needs of elite foodies and yoga moms. Consumers are now picking tofu and granola at an attractive price.

Sprouts Farmers Market (SFM), which is a brand for low cost health foods, went public last year. Moreover, big discount chains like Wal-Mart (WMT) and Target (TGT) have plans to foray into the market for fresh produce and healthy packaged food which further threatens the Whole Foods future prospects.

To counter this threat, Whole Foods has started experimenting with lower prices for attracting more cost-conscious customers. At the same time, Whole Foods is focused on differentiating its product offerings to narrow the gap for its loyal customers, who demand responsibly farmed seafood.

Whole Foods has plans to expand in upscale urban neighborhoods as a part of its strategy to counter the increasing competition. The company has plans to expand beyond its comfort zone in new areas such as poorer neighborhoods, smaller cities and suburbs. It has recently opened stores in Detroit and West Des Moines, Iowa, and plans to open one in Chicago's South side next year. It has also lowered its high prices and profit margins to defend increasingly new competition and attract customers in new markets.


Whole Foods is facing stiff competition, but the company is trying to overcome it with its positive moves. Hence, investors should consider taking advantage of Whole Foods' recent drop as the company can deliver growth in the long run on the back of its development moves.

Rating: 3.0/5 (1 vote)



Please leave your comment:

Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial