Valued at $8.37 billion market cap, Sprouts Farmers Market, Inc. (SFM) retails fresh, natural, and organic food products in the United States. The well-known grocery retailer reported first-quarter results that beat Wall Street’s estimates for revenue and EPS. It reported net sales of $1.88 billion, surpassing the analyst estimates of $1.85 billion.

The retailer’s comparable store sales growth was 4% for the quarter. Further, SFM posted an adjusted EPS of $1.12, which exceeded the consensus estimate of $1.01. Notably, the company opened seven new stores, resulting in 414 stores across 23 states as of March 31, 2024.

“We were pleased with our impressive financial results this quarter, with strength in comparable store sales, traffic, and ecommerce,” said Jack Sinclair, CEO of SFM. “These outcomes highlight the effectiveness of our strategy and the exceptional execution by our team members across the country. We are reinforcing our position as a leading specialty food retailer as we build new stores in line with our growth plans.”

For the second quarter, the company expects a comparable sales growth of 3% to 4% and an adjusted EPS between $0.75 and $0.79. For the full year 2024, SFM expects a net sales growth of 7% to 8%, with comparable store sales growth of 2.5%-3.5%. Its adjusted EPS is expected to be $3.05 to $3.13. The company also projects to open 35 new stores in the year.

However, the rapid expansion of new stores will likely increase expenses, potentially impacting SFM’s net margins in 2024. The retailer anticipates capital expenditures for the full year to be $225-$245 million.

Also, the still elevated inflation continues to curb consumer spending. The Commerce Department reported that retail sales grew 0.1% in May, lower than the economists’ estimates of a 0.2% gain. Also, April sales were revised downward from flat to a decline of 0.2%.

Amid inflationary pressures, cost-conscious consumers generally tend to shop at low-price and high-discount grocery outlets like Costco Wholesale Corporation (COST) and Walmart Inc. (WMT) rather than SFM. Until consumer spending stabilizes, SFM faces intense competition from these major players in the grocery/retail market.

Shares of SFM have gained 7% over the month and 64.3% over the past six months to close the last trading session at $83.86.

Let’s look at factors that could influence SFM’s performance in the upcoming months.

Robust Financial Performance

For the first quarter that ended March 31, 2024, SFM’s net sales increased 8.7% year-over-year to $1.88 billion. Its gross profit rose 11.1% from the previous year’s quarter to $722.31 million. The company reported an adjusted EBITDA of $182.79 million, indicating an 8.8% year-over-year rise.

Furthermore, the retailer’s net income came in at $114.10 million, or $1.12 per share, up 49.8% and 14.3% from the prior year’s quarter, respectively. As of March 31, 2024, SFM’s cash and cash equivalents were $312.28 million, compared to $201.79 million as of December 31, 2023.

Solid Historical Growth

Over the past five years, SFM’s revenue has grown at a CAGR of 5.6%. The company’s net income and EPS have improved at CAGRs of 14.9% and 19.9% over the same period, respectively. Further, the company’s EBITDA has grown at a CAGR of 9% over the same timeframe.

Also, SFM’s levered free cash flow has grown at a CAGR of 29.6% over the past five years.

Favorable Analyst Expectations

Analysts expect SFM’s revenue for the second quarter (ended June 2024) to grow 8.3% year-over-year to $1.83 billion. Its EPS for the same period is expected to grow 9.2% year-over-year to $0.78. Moreover, the company has topped consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

For the fiscal year ending December 2024, Street expects SFM’s revenue and EPS to grow 8.1% and 9.3% from the prior year to $7.39 billion and $3.10, respectively. In addition, the company’s revenue and EPS for the fiscal year 2025 are expected to increase 8.9% and 7.1% year-over-year to $8.06 billion and $3.33, respectively.

High Profitability

SFM’s trailing-12-month gross profit margin of 37.38% is 6.7% higher than the 35.03% industry average. Likewise, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 26.24%, 9.11%, and 8.55% are significantly higher than the industry averages of 11.46%, 7.01%, and 4.69%, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, SFM is trading at 26.82x, 55.1% higher than the industry average of 17.29x. Likewise, its Price/Cash Flow of 16.57x is 47.1% higher than the industry average of 11.27x. The stock’s forward EV/EBIT multiple of 23.05 is 55% higher than the industry average of 14.87.

Moreover, the stock’s forward Price/Book multiple of 7.21 is 142.5% higher than the industry average of 2.97. Its forward EV/EBITDA of 17.26x is 61.6% higher than the industry average of 10.68x.

POWR Ratings Reflect Uncertainty

SFM’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 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 has an A grade for Quality, in sync with its high profitability compared to its industry peers. However, the stock has a D grade for Value, consistent with its higher-than-industry valuation.

Within the A-rated Grocery/Big Box Retailers industry, SFM is ranked #32 out of 37 stocks.

Beyond what I have stated above, we have also given SFM grades for Growth, Sentiment, Momentum, and Value. Get all SFM ratings here.

Bottom Line

SFM has demonstrated robust financial performance in the first quarter of 2024, with strength in comparable store sales, traffic, and e-commerce. The company’s strategic expansion, reflected in the opening of new stores, showcases its potential in the grocery sector. However, the rapid store expansion will likely increase expenses, which could impact the company’s net margins.

Additionally, elevated inflation continues to curb consumer spending, posing a challenge for SFM as cost-conscious consumers may opt for lower-priced competitors like Costco and Walmart. Given SFM’s elevated valuation, challenging competitive landscape, and macroeconomic headwinds, waiting for a better entry point in this stock seems wise now.

How Does Sprouts Farmers Market, Inc. (SFM) Stack Up Against Its Peers?

Given its near-term uncertain prospects, the odds of SFM outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A (Strong Buy) or B-rated (Buy) stocks from the Grocery/Big Box Retailers industry:

Marks & Spencer Group Plc (MAKSY)

Walmart Inc. (WMT)

Koninklijke Ahold Delhaize N.V. ADR (ADRNY)

To explore more A or B-rated grocery/retail stocks, click here.

What To Do Next?

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SFM shares fell $1.55 (-1.85%) in premarket trading Wednesday. Year-to-date, SFM has gained 71.09%, versus a 16.14% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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