Whole Foods Is Not Alone Anymore

NEW YORK ( TheStreet) -- The recent consumer shift towards organic and natural foods has certainly improved the profile and popularity of Whole Foods Market ( WFM), whose name within the retail sector has always been associated with health and wellness.

While that reputation hasn't exactly changed -- and there is ample evidence that this new healthy-eating lifestyle among Americans is here to stay -- Whole Foods no longer corners the "health market." I fear this fact is not yet reflected in today's share price.

I'm not discounting the fact that Whole Foods is a well-run company, one that operates at a high rate of efficiency. But at the same time I'm not willing to ignore that chains such as The Fresh Market (TFM) and Natural Grocers (NGVC) have done quite well for themselves in a relatively short period of time. Not to mention Sprout's Farmers Market (SFM), which sprouted out of nowhere to post 24% revenue growth and strong margins.

If that was not enough, when you couple these new arrivals with the fact that "regular" retailers including Wal-Mart (WMT) and Target (TGT) have targeted this market by now offering organic and healthy options at discounted rates, I envision that somewhere down the road Whole Foods will be relegated to being "just another organic retailer."

This doesn't mean the company won't still be successful. Without a crystal ball there is really no way for me to say that when that time comes that Whole Foods' management would not have found new growth opportunities. My issue, as I've said, is today the stock -- which trades at a price-to-earnings ratio of close to 40 -- is expensive.

While management has certainly fed the Street's insatiable appetite for growth, there will be a point when, say, Wal-Mart decides it wants to apply more pressure on Whole Foods' margins. Let's assume that I'm slightly overestimating Wal-Mart's capabilities -- there's still Target, which has just as good an infrastructure and resources to squeeze out Whole Foods with competitive market/promotions.

Now, aside from these potentially larger rivals, Whole Foods must still contend with Fresh Market, which is now growing at a faster rate. At this point, when it comes to operational results, the Street has always given the edge to Whole Foods. But the numbers between the two companies tell a much different story, including the fact that Fresh Market outperforms Whole Food in both revenue growth and earnings per share growth.

Now I do understand Whole Foods is a much bigger company, so the disparity between the growth rates are somewhat skewed. But the Street's expectations for Whole Foods are nonetheless higher. The good news is this affirms the Street's belief that the trend towards healthy eating and the demand for fresh/organic foods is not just a fad. But this, too, is an invitation for Wal-Mart and Target to steal some of that market.

To that end, given the strong rate of growth by Fresh Market, it would come as no surprise if, say, Wal-Mart or Target were to make a "fresh offer." I believe this would be the quickest way for either giant to attack Whole Foods by immediately increasing their market presence.

Let's not forget, there's also Amazon (AMZN), which has produce ambitions of its own. With Fresh Market being one-tenth the size of Whole Foods -- not to mention it comes at a much cheaper price -- Amazon might not hesitate to add some freshness within its delivery vans. I believe that a deal for Fresh Market would be just what Amazon needs to announce its presence in produce with some authority.

All of that said, I want to make it known that I am a frequent shopper at Whole Foods. I've always been well-treated when I go there. This, however, doesn't change the fact that the stock is expensive at this level. Given the many new organic/fresh options that have emerged over the past couple of years, I believe it will be hard (not impossible) for management to duplicate its past success. I'm not guaranteeing any sort of outcome -- just some food for thought.

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

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