Plump Profits May Be Whole Foods Market, Inc. Downfall

Updated on

Whole Foods Market, Inc. (NASDAQ:WFM) shares have been falling in recent days after the company failed to meet expectations in the first quarter. The company’s shares have fallen by nearly 50% since last fall, and if recent data suggests anything, it’s that the company’s slide may not be over.

While Whole Foods Market, Inc. (NASDAQ:WFM) has long dominated the organic food market, more companies are entering the sector, which will likely drive profits down. Without high gross profit margins and ever increasing sales, it’s fair to wonder if Whole Foods can sustain its growth.

Whole Foods high gross profits have fueled growth

Whole Foods Market, Inc. (NASDAQ:WFM) has enjoyed an astounding period of growth, growing from a small specialty chain into a major national food retailer worth nearly $15 billion dollars. This growth, however, has depended largely on profit margins. Whereas Wal-Mart Stores, Inc. (NYSE:WMT) struggles to produce profit margins in excess of 3%, Whole Foods has been able to profit margins in excess of 4% with little difficulty.

Whole Foods has relied on gross margins far above industry standards in order to generate profits and fuel growth. Gross margins essentially refer to the markup on goods sold in stores. Whereas The Kroger Co. (NYSE:KR) has a gross margin of only 19% and Wal-Mart Stores, Inc. (NYSE:WMT) has a gross margin of about 25 percent, Whole Foods enjoys a gross margin of 35%.

In some cases, Whole Foods has been able to enjoy gross margins in excess of 100 percent, but it appears that those days could be coming to a close.

Increased competition means decreased profits

These higher margins, however, are attracting competition. It’s economics 101, where there are profits, there will be suppliers and sellers, and as more sellers enter the market, profit margins will decline. With the organic food market promising higher profit margins than traditional foods and goods, companies have been looking to ramp up their organic offerings

And that will almost certainly bite into Whole Foods Market, Inc. (NASDAQ:WFM) sales. Walmart, for example, just inked a deal with Wild Oats that should allow the company to sell organics at a 25 percent discount when compared comparable Whole Foods products. Krogers has also been increasing its organic food offerings and upstarts, such as Sprouts, have been gobbling up market share.

So far, Whole Foods Market, Inc. (NASDAQ:WFM) had declined to engage in a price war with its competitors. This might preserve profit margins, but it has been slowing sales growth and could eventually even result in stagnation. As such, it should come as no surprise that Whole Foods is seeing its stock values decline.

Leave a Comment

Signup to ValueWalk!

Get the latest posts on what's happening in the hedge fund and investing world sent straight to your inbox! 
This is information you won't get anywhere else!