Will the Whole Foods Turnaround Outperform in 2015?

Earlier in 2014, downward guidance and a report of poor margins seemed to dig an inescapable hole for the company to get out of for nearly five months. One key issue is new competition from the many new organic and natural food competitors, as well as the continued threat from established grocers and superstores wanting their slice of the organic and natural pie.

In May the company guided sales growth for the year down from a previous range of 10.5% to 11.0% to a new range of 9.6% to 9.9%, missing even the low end of the old range. Full-year same-store sales growth previously forecast at 5.0% to 5.5% was trimmed to a new range of 4.1% to 4.4%. Operating margin was also trimmed, from a prior range of 6.5% to 6.6% to a new range of 6.4% to 6.5%.

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Despite the turnaround that the company has had since that report, this is still not a full recovery from its fall. Year to date, shares of Whole Foods are still down over 15%. However, since the fall shares have taken an uptick in the first quarter of more than 25%.

Closing out the calendar year, it looks more fruitful for Whole Foods. A key factor in its performance this coming year will be in the second-quarter earnings, to see if the company can keep this turnaround alive.

Whole Foods has had to lower some prices to better compete with Kroger Co. (NYSE: KR) and Wal-Mart Stores Inc. (NYSE: WMT), which both now tout their own natural and organic foods. By doing so, however, the company forfeits its place at the high-end of the market. Its recent Responsibly Grown fresh-produce ranking system is likely aimed at returning to the store some pricing power for produce grown under more demanding conditions.

The Fresh Market Inc. (NASDAQ: TFM) and Sprouts Farmers Market Inc. (NASDAQ: SFM) both took the plunge with Whole Foods in early May. Whole Foods announced at that time that its margins were suffering due to the rise of other competitors in the market.

At first glance, one might assume that because Whole Foods guided down for margins, its competitors would see an uptick. However, this is more indicative of the competition’s margins likely being lower and as traditional grocers’ margins are already very slim. It seems safe to say that Whole Foods, as an industry leader, set the standard for the original sector stock drop — or that it was a victim of the newer entrants or smaller organic and natural foods chains that want their slice of the pie.

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Sprouts closed Monday at $32.96, in a 52-week trading range of $25.76 to $40.09. And Fresh Market closed at $41.60, against a 52-week range of $28.60 to $42.12.

Shares of Whole Foods closed Monday up 2.7% at $49.71. The consensus analyst price target is $44.90, and the 52-week range is $36.08 to $57.97. The market cap is nearly $18 billion.