Can Whole Foods Market Get Its Growth Back?

Image: Whole Foods Market

Grocery giant Whole Foods Market pioneered the organic and natural foods space, revolutionizing the grocery industry and demonstrating that it could produce sustained wide margins and find profit growth that many of its traditional grocery counterparts could only dream of achieving. Recently, though, Whole Foods has run into some problems, as competition has finally caught up and given the company a run for its money. With the company slated to release its fiscal third-quarter financial report on Wednesday afternoon, Whole Foods needs to demonstrate to investors that it can find a new path to prosperity and overcome the obstacles that it has had to face over the past year. Let's take a closer look at Whole Foods and what investors should expect to see from the company when it issues its latest news on its financial performance.

Stats on Whole Foods Market

Source: Yahoo! Finance

What Whole Foods earnings need to show investors In recent months, investors have been lukewarm about their views on Whole Foods earnings, cutting their fiscal third-quarter projections by a penny per share and reducing full-year fiscal 2015 and 2016 forecasts by 1% to 2%. The stock has suffered much more dramatically, with a decline of 17% since late April.

Much of the drop in Whole Foods' stock came following the release of its fiscal second-quarter results in early May. Slowing comparable-store sales growth of just 3.6% was not only slower than the previous quarter but also failed to meet investors' expectations for a significant rebound. Expansion of its store network continued, helping to produce record revenue, but even double-digit percentage growth on the bottom line wasn't enough to overcome concerns about sluggish future performance and shrinking gross profit margins.

Even more importantly, investors seem less than convinced about Whole Foods' new concept to appeal to value-oriented millennial shoppers. The company hasn't given many details about the new concept, but many believe that the new stores, dubbed "365 by Whole Foods Market," will be smaller than the typical footprint for a current Whole Foods location. Those who favor the measure argue that a new, smaller Whole Foods offering could compete with the highly successful Trader Joe's franchise and actually lead to further growth, but skeptics worry that a lower-margin option would simply cannibalize sales from existing Whole Foods stores and continue the trend to thinner margins.

Whole Foods will also have to keep doing damage control for an attack on its reputation during the quarter. Recently, regulators in New York City found that the company had systematically mislabeled prepackaged products, with labels incorrectly stating the weights of certain items and leading to overcharging of as much as $6 for some items. After initially denying the allegations, Whole Foods had to reverse course and admit that it had made mistakes, and the solution will involve costly training and a promise to give customers any future mislabeled products for free. Nevertheless, for a company that has traditionally relied on its reputation for social awareness, the lapse could be a longer-term problem for Whole Foods to overcome in its efforts to brand itself as the premier grocery store for health-conscious shoppers.

In the Whole Foods earnings report, be sure to watch for new details on the 365 store concept, as well as how the company is faring at fending off competition and keeping its margins as wide as possible. The toughest strategic obstacle that Whole Foods faces right now is how to keep its core grocery concept growing even as it divides its attention trying to appeal to a new source of potential customers. Few companies have the capacity to work in multiple directions successfully, but if Whole Foods can pull it off, then investors could see a return to the growth rates that they used to take for granted from the natural-food specialist.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of Whole Foods Market. 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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