Whole Foods Market, the US natural and organic retailer, has, in the last four years, regained its status as a favourite of Wall Street.

From its inception in 1980 to 2007, Whole Foods enjoyed a buoyant couple of decades, expanding rapidly across the US as organic food boomed.

However, the downturn and the fall in consumer confidence hit Whole Foods in 2008 as it did most of the consumer packaged goods sector; profits in its 2007/08 financial year dropped and its sales growth was slower than its previous five financial years. The retailer’s share price sank.

In 2008/09, Whole Foods’ bottom line improved as it lapped a year when it ran up costs linked to its 2007 acquisition of Wild Oats Markets. However, it was a year when the retailer battled successive quarters of falling underlying sales; annual identical-store sales dropped 4.3% as US consumers searched for value and, as the retailer put it at times during the year, “de-emphasised organic”.

Nonetheless, since then, Whole Foods has enjoyed strong top-line and bottom-line growth and its shares have soared. In 2009, Whole Foods’ share price tripled and, in the three subsequent calendar years, its stock has increased at a double-digit rate. The retailer benefited from the recovery in demand for natural and organic foods in the US but it also worked hard to invest in price.

The most recent results for Whole Foods’ current financial year, for the nine months to 7 July, showed net income up 22%, EBITDA 18% higher, sales rising 13% and identical-store sales increasing 6.9%. There are 355 stores in the Whole Foods network, not just in the US but also in Canada and the UK; when the retailer reported numbers for the first nine months of its last financial year, it had 329 outlets. Whole Foods is a business enjoying growth on growth.

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However, when Whole Foods posted its latest figures last week, its shares fell. Third-quarter sales fell short of analyst expectations. There was also some concern about the short-term outlook for the retailer.

“We remain constructive on the long-term growth outlook for Whole Foods Market,” BB&T Capital Markets analyst Andrew Wolf wrote in a note to investors.

However, Wolf sounded a note of caution on the group’s near-term sales and earnings growth prospects. “Our view [is] that fundamental momentum has peaked in the near term,” he wrote.

A day after Whole Foods published its third-quarter results, another, smaller, US natural and organic retailer Sprouts Farmers Market listed in New York. Sprouts’ shares more than doubled on their first day of trading, prompting some news outlets in the US to make skewed comparisons between its stock and the decline in Whole Foods’ shares.

Sprouts is not the only upscale grocer to list in the US this year. In April, Fairway Group Holdings, the owner of New York-based Fairway Market, listed in April and its shares are 45% higher than on debut. Investor appetite for companies in the health and wellness and natural categories is clear.

And, at the same time, mainstream US retailers like Kroger have continued to invest in the natural and organic categories. But should Whole Foods be worried at the prospect of greater competition?

Its management appears not to think so. “We love competition. It makes us better. We get to respond and innovate and grow. So bring it on,” co-CEO Walter Robb said when one analyst, on a call to discuss Whole Foods’ third-quarter results, asked about the competitive landscape in the sector.

David Lannon, Whole Foods’ executive vice president of operations, was similarly bullish about the retailer’s prospects – and claimed it was the company’s success that had been a factor in encouraging others to go to market.

“We don’t think we have any new competitors. The same people we have been facing for years, possibly because Whole Foods has done so well and our market cap is so high, we are seeing a lot of people raise money, get valuation, more people going public and so there will probably be more capital thrown into the business to be sure. But we continue to gain market share. We just keep rolling along.

“Arguably this is best Whole Foods has ever done in our 34 year history. So great success breeds competition. So I expect that we will see more competition but, again, we have first mover advantages. We are also innovating at a very rapid rate. So it’s the nature of capitalism and I like where Whole Foods is positioned right now.”

Many on Wall Street seem to agree. Mark Miller, analyst at William Blair & Co., last week said Whole Foods’ third-quarter results, including better-than-expected earnings per share and noted it was “timing” that was the likely factor behind sales that were “a bit light on new store contribution”.

He added: “We view the results as solid overall. We continue to be impressed with outperformance on the gross margin line, even while the company continues to sharpen its overall value proposition. Occupancy and buying leverage along with shrink reduction nicely outweighed the company’s price investments in the quarter.

“This should continue to build confidence that management can execute in an investor-friendly way in its ambition to capture a much bigger share of a huge industry. Overall, the longer-term growth trajectory remains on track and we maintain our ‘outperform’ rating.” Elsewhere, Credit Suisse and Deutsche Bank reportedly raised their targets on Whole Foods’ prices.

Reflecting on the competitive landscape in the US, Neil Stern, senior partner at retail consultants MacMillanDoolittle says the likes of Sprouts, Fairway and a third chain, Earth Fare, have grown to “fill a void” left when Whole Foods acquired Wild Oats in 2007.

Stern says they can “offer an alternative” but “are not Whole Foods killers by any extent”.

He explains: “Only Fairway competes assortment-wise. Sprouts succeeds because it is a simpler, stripped down version of a natural store with heavy emphasis on produce but much less in terms of prepared foods offer. Fairway is interesting but very much remains to be seen whether it will have legs beyond the New York metro. My bottom line: Whole Foods is quite secure as long as they continue to execute on such a high level.” 

And, up until now, the signs are Whole Foods is performing well, notwithstanding some concerns over its sales growth in the last quarter. Margins, for example, are pleasing Wall Street. The company is focusing hard on cost items like shrink. And the retailer, which believes it can have 1,000 stores in the US alone, is carefully tweaking its offer in areas like Detroit that are suffering economically. For all the recent headlines on Sprouts and Fairway, Whole Foods remains the one to watch.