Even the most dominant companies stumble sometimes, and the highly popular natural and organic foods retailer Whole Foods Market (Nasdaq: WFM) is no exception. 

Long the most recognizable name in the health food business, Whole Foods saw its stock plummet nearly 20% on May 6 because it failed to meet analysts’ expectations for the latest quarter. All told, the stock is off about 32% so far this year.

This naturally raises the question of whether the pullback presents an uncommon opportunity to invest in a great company while it’s down.

I don’t think so.

#-ad_banner-#Whole Foods has been losing ground to the competition for a while, and it’s beginning to affect the company’s performance. In the short term, I suspect its stock may have quite a bit further to fall, and in the long run, I don’t see Whole Foods leading the pack anything like it has in the past.

For starters, the company now has two earnings misses in a row. In the most recent quarter, it reported earnings per share (EPS) of $0.38, 7% below the consensus estimate of $0.41. The quarter before that, Whole Foods’ EPS of $0.42 missed the Street’s estimate by 5%.

Looking back further, sales have remained solid, climbing about 12% a year since 2011 from $10.1 billion to the current level of $13.3 billion. But earnings growth, while still relatively quick, has been downshifting substantially. Whereas EPS increased 33% annually from 2008 to 2011, it’s up more like 20% a year since 2011.

That may not seem so bad. But to me it’s a huge red flag — especially when you consider Whole Foods was growing the bottom line a lot faster during the worst recession in decades than it is now with the economy noticeably stronger.

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	Flickr/ginapina
	Almost every food retailer now has at least a small natural and organic section — a space once dominated by Whole Foods.

More intense competition is a key culprit, and it’s coming from all directions. Indeed, newer rivals like The Fresh Market (Nasdaq: TFM) and Sprouts Farmers Market (Nasdaq: SFM) have become serious threats. The latter has been expanding especially fast, more than quintupling revenue since 2010 from $517 million to $2.6 billion currently. During the same period, Fresh Market’s revenue climbed almost 90% from $798 million to $1.5 billion.

Direct competitors like these used to be Whole Foods’ biggest concern. But now, almost every food retailer — including traditional grocers like Safeway (NYSE: SWY) and Kroger (NYSE: KR), big discounters such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT), and wholesale clubs like Costco (NYSE: COST) — has at least a small natural and organic section.

Because Whole Foods is playing on a much more crowded field, it’s at high risk of losing a good portion of the pricing power it enjoyed when there were fewer competitors. And this isn’t something that might take place sometime down the road. It’s happening now.

The latest sign of this: Wal-Mart’s new line of organic products, roughly 100 different items offered since early April through an exclusive arrangement with Wild Oats (an organic food company Whole Foods had previously acquired but then had to relinquish after lengthy antitrust proceedings with the Federal Trade Commission).

Prices for the products in the new Wal-Mart line are about 25% below what the typical competitor charges.

Target is starting an even bigger push into the natural and organics space, too, with its own new line of grocery, health care, household, infant, and personal care items. In light of the competitive landscape, I expect pricing will typically be roughly comparable to Wal-Mart’s. And it probably won’t be long before Whole Foods either has to drop its prices or bleed market share.

Risks to Consider: Along with red-hot competition, Whole Foods faces the risk of a major decline in natural and organic foods consumption if household incomes erode or the economy slows way down again. Such factors might push many consumers who prefer natural and organic to much cheaper competitors or cause them to switch back to lower-priced non-organic products.

Action to Take –> I doubt Whole Foods can keep growing earnings at anywhere near the blistering 33%-a-year pace it maintained for the past five years. I suspect it’ll be lucky even to achieve the far slower 13% growth rate that analysts are projecting for the coming five years.

Don’t get me wrong, Whole Foods should remain an industry leader. It’s just unlikely to dominate like it used to. What’s more, I wouldn’t buy the stock at the current price of about $39, even though it looks cheap next to the 52-week high of nearly $66. That’s because the stock still trades for 26 times trailing-12-month EPS of $1.50 — far higher than the industry average price-to-earnings (P/E) ratio of 11.

Essentially, the market is still seeking the right price for the stock in light of Whole Foods’ changing circumstances, and I believe the most likely outcome is for its earnings multiple to move closer to the industry average. Thus, the stock price could go quite a bit lower.

For instance, even a relatively modest near-term drop in the P/E to, say, 22 would put it 15% below current levels. So if you’re thinking of buying Whole Foods, I suggest waiting at least a couple months to see how things shake out and then re-evaluate if prices hit more reasonable levels (perhaps somewhere around $30 a share).

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