Sprouts Farmers Market
was a Covid-19 winner, and then it was a Covid-19 loser. Its earnings report on Oct. 28 could make it a winner again.
Almost all food retailers got a boost this spring from mass pantry stocking, and Phoenix-based Sprouts (ticker: SFM), which has about 350 stores in 23 states, was no exception. Its shares doubled from their March low through their July peak as investors bet that all grocers would benefit from demand for food.
Reality fell far short of those hopes, however. After peaking in the March quarter, Sprouts’ same-store sales declined as consumers favored one-stop-shops like
(WMT) to reduce the risk of virus exposure. Its stock has dropped 22% in the past three months.
Sprouts’ earnings could help the stock reverse course. The company will report third-quarter results on Wednesday, Oct. 28, with consensus calling for earnings per share to nearly double year over year to 36 cents on sales of $1.6 billion. Robust numbers are expected across the industry, given people’s new cooking habits, so the real focus is on how companies plan to parlay the windfall into sustainable growth. If Sprouts can deliver, the stock could climb.
Sprouts shares are unpopular on Wall Street, with less than a third of analysts bullish on its prospects and a fresh downgrade this past week.
Nonetheless, there are trends working in the company’s favor. Even with lockdowns over—at least for now—and restaurants slowly reopening, eating at home isn’t going away. Cooking not only reduces the risk of virus exposure, but it’s much cheaper than restaurant food—a compelling catalyst given high unemployment and the uncertainty over further stimulus.
And the amount of money in play is immense. In 2018, about 46% of the $1.7 trillion of U.S. food spending was for food at home, observes Scott Mushkin, founder and CEO of R5 Capital. Just two more food-at-home occasions a week would lift that figure by more than $130 billion, he estimates. For Sprouts, with less than 1% market share, that could mean incremental revenues of $800 million. “It’s a big deal,” he says.
Because of the virus, shoppers have a renewed focus on health, which should provide a boost as well. “The top two reasons people choose a store are the quality of fresh produce and the price. Sprout’s strategy is right down the power alley here,” Mushkin says. “That strategy was working before the pandemic, and it will work much better postpandemic, given where the consumer has migrated.”
Why has Sprouts stock been dropping? For starters, there are tough comparisons coming in 2021. Analysts revised earnings estimates for the third quarter up sharply this summer, and while the Street expects profits to cool after a record $2.12 a share this year, they estimate that earnings will fall to $1.66 in 2021. Still, that’s about a third higher than the $1.25 Sprouts logged in 2019.
Traffic has also been worrisome, falling 13.2% in September. But even that is starting to get better. According to data Placer.ai compiled for Barron’s, visits improved from being down nearly 24% year over year in April to off just 5.4% in August, while traffic was down just 4.8% the week of Oct. 5.
“This not only indicates that the September dip will be short-lived, but that Sprouts is able to drive engagement even when the odds are against it,” the data firm notes. “When comparing Sprouts performance to other grocers associated with a healthier focus, we see performance that lines up closely with Trader Joe’s, a brand whose impressive rebound has been widely noted.”
Ernesto Ramos, portfolio manager at the BMO Low Volatility Equity fund, highlights Sprouts’ new store openings, which may reach 10% growth next year, as well its delivery business—which soared 150% in 2019 “and will probably be even higher in 2020.” That’s good news, as online orders “are about 2½ times bigger than physical store purchases” and tend to have a more profitable product mix, he says.
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Sprouts’ ability to show upbeat traffic and sales trends and detail its growth plans will probably matter most in the coming quarter. Announcing a loyalty program would be a positive sign it’s looking to tap into valuable customer data.
Sprouts trades around just 11.9 times forward earnings, significantly less than its five-year average of 21.6 times, and well below the
index’s 21.9 times, even as its return on assets and equity—at an estimated 8.9% and 27.6% for 2020, respectively—are expanding.
Skeptics may outweigh bulls for now, but if the company can outperform lower expectations, that could change.
Write to Teresa Rivas at firstname.lastname@example.org