This holiday season brought a welcome boost to sales as Americans navigated elevated prices on groceries and other essentials. According to Mastercard SpendingPulse, holiday sales between early November and Christmas Eve rose 3.8%, surpassing last year’s 3.1% growth. In fact, the last five days of the season accounted for 10% of total spending.

In this article, we’ll compare the fundamentals of two grocery chain retailers, Sprouts Farmers Market, Inc. (SFM) and Dollar General Corporation (DG), to ascertain which one is more appetizing for your portfolio.

Retailers faced added pressure to drive early and bulk purchases this year, given the five fewer shopping days between Thanksgiving and Christmas. New data from the National Retail Federation (NRF) and Prosper Insights & Analytics shows that 197 million consumers shopped during the five-day holiday weekend, including Thanksgiving and Cyber Monday. This figure, the second highest in the survey’s history, exceeded NRF’s initial forecast of 183.4 million shoppers.

In addition, the U.S. online grocery market recorded $9.6 billion in monthly sales in November 2024, reflecting a year-over-year growth of 17.8%. Looking ahead, the global food and grocery retail market is projected to hit $14.78 trillion by 2030, expanding at a CAGR of 3.2%.

With a market cap of over $13 billion, SFM operates as a retailer of fresh, natural, and organic food products under the Sprouts brand in the United States. Meanwhile, DG, with a market cap of $16.31 billion, is a discount retailer of consumable products, packaged food items, and perishables that include milk, eggs, bread, refrigerated and frozen food, beer, and wine.

The fourth-quarter results for both SFM and DG are due for revelation soon. SFM’s revenue and EPS are expected to increase 15.1% and 47.3% year-over-year to $1.95 billion and $0.72 in the fiscal fourth quarter ended December 2024. On the contrary, DG’s EPS for the fourth quarter (ending January 2025) is expected to decline by 18% year-over-year to $1.50. However, its revenue estimate of $10.26 billion indicates an increase of 4.1% from the same period last year.

In terms of price performance, SFM has gained 23.1% over the past three months, while DG declined 12.1%. Moreover, over the past year, SFM has gained 182.4% to close the last trading session at $138.94, whereas DG has lost 45.4% to close the last trading session at $74.17. SFM is a clear winner here.

Here are the reasons why I think SFM might perform better in the near term:

Recent Financial Results

SFM’s net sales for the fiscal third quarter that ended September 29, 2024, came at $1.95 billion, up 13.6% year-over-year, while its adjusted EBITDA grew 28.2% from the prior-year quarter to $158.58 million.

The company’s adjusted net income and adjusted EPS rose 36.5% and 40% from the prior-year quarter to $91.61 million and $0.91, respectively. For the nine months that ended September 30, 2024, its cash, cash equivalents, and restricted cash increased 22.8% year-over-year to $311.73 million.

On the other hand, DG’s net sales came to $10.18 billion during the fiscal third quarter ended November 1, 2024, reflecting an increase of 5% year-over-year. However, its operating profit fell 25.3% from the year-ago value to $323.80 million. The company’s net income and EPS stood at $196.53 million and $0.89, down 28.9% and 29.4%, respectively, from the previous year’s quarter.

However, as of November 01, 2024, DG’s cash and cash equivalents stood at $537.26 million, compared to $365.45 million as of November 03, 2023.

Profitability

SFM’s trailing-12-month gross profit margin of 38% is higher than DG’s 29.61%. In addition, SFM’s trailing-12-month Return on Total Capital of 10.20% is higher than DG’s 5.07%. Moreover, SFM’s trailing-12-month Return on Total Assets of 9.79% is higher than DG’s 4.25%.

Thus, SFM seems more profitable.

POWR Ratings

SFM has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, DG has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SFM’s Quality grade of A is in sync with its higher-than-industry profitability metrics. Its trailing-12-month net income margin of 4.73% is 13.4% higher than the industry average of 4.17%. Moreover, its trailing-12-month Return on Common Equity (ROCE) of 28.56% is 169% higher than the industry average of 10.62%.

Conversely, DG’s C grade for Quality justifies its mixed profitability. Its trailing-12-month EBIT margin of 4.99% is 47.6% lower than the industry average of 9.53%. However, its trailing-12-month ROCE of 19.37% is 82.5% higher than the industry average of 10.62%.

Within the A-rated Grocery/Big Box Retailers industry, SFM is ranked #27 out of 37 stocks, while DG is ranked #36.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, Stability, and Sentiment. Click here to view SFM ratings. Get all DG ratings here.

The Winner

As consumer spending remains robust both online and in-store, the grocery and big-box retail sector is poised for sustained growth. High food prices are set to bolster this performance further, potentially boosting profitability for those within the sector. Industry players SFM and DG could benefit from these industry tailwinds.

However, SFM stands out notably due to its profitability, promising outlook, vigorous financial health, and encouraging bottom-line forecasts, making it the more advantageous pick now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Grocery/Big Box Retailers industry here.

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DG shares . Year-to-date, DG has declined -1.41%, versus a 0.44% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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