Have They Caught on to Whole Foods?

NEW YORK ( TheStreet) -- Back in 2010, when Whole Foods Market ( WFM) CEO John Mackey was profiled by The New Yorker , most critics focused on his conservative politics.

I focused on something different, his amazement that competitors hadn't caught on to him yet.

Maybe now they have.

Whole Foods announced earnings this week that disappointed the street, causing a 2% drop in overnight trading. The press release focused on positives -- 8.3% growth in same store sales, and 14.1% growth in sales overall.

But traders preferred to focus on the fact that revenue came in short of analyst estimates, by $30 million, and guidance on future earnings that also looked light. So down came the shorts.

In fact, the grocery business is changing rapidly, and most of those changes don't favor Whole Foods' model of premium-priced goods in urban and suburban strip malls, served up by underpaid employees:
  • Wal-Mart (WMT) is continuing to advance in groceries. Trefis estimated their 2011 grocery sales at $145 billion, more than 10 times all of Whole Foods' sales.
  • Warehouses like Costco (COST) have been increasing their share of the fresh food market.
  • Privately-held H.E. Butt in Texas, which is primarily a Texas market but larger than Whole Foods overall, began copying its store concept a few years ago, under the name Central Market.
  • The Fresh Market (TFM) has also copied many aspects of Whole Foods, and while one-tenth its size trades at a similar multiple to earnings.
  • Ethnic superstores like Super H Mart are grabbing the dollars of both immigrants and more adventurous American eaters.

Whole Foods is being squeezed by change on every side. I haven't been to one in years. Even the old-line grocery giants like Kroger ( KR) are raising their game. First in reaction to Wal-Mart but also in order to maintain share against Whole Foods, they're adding more prepared foods close to store entrances.

With a market cap of about $20.6 billion, Whole Foods trades at almost twice its annual sales volume of $11.7 billion. Amazon.com ( AMZN) also trades at about two times sales. While Whole Foods has actual profits, even a small dividend, its stock price is way out of line with those of its competitors. Kroger, with $96 billion in sales over the last year, is also worth $20 billion, for instance.

Whole Foods caters to socially-conscious, high-income consumers who value time over money. It's a niche that has gotten increasingly crowded, with growth increasingly hard to come by. Yet the stock trades as though growth is unlimited.

Wall Street may finally be figuring this out.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.