Sprouts Farmers Market IPO to Be Next Organic Opportunity

Organic produce may be a growing, burgeoning market, but with Sprouts Farmers Market launching its IPO, is it sustainable for an industry already flush with organic grocery stores?

On the surface it certainly seems so. With 37 million hectares devoted to organic growing practices worldwide, the International Federation of Organic Agriculture Movements says organic food is a global, $63 billion industry that between 2002 and 2011 grew at a compounded rate of around 19% annually. The U.S. accounted for approximately half of those revenues, generating $31.5 billion in sales, up 9.5% from the year-ago period.

Yet the analysts at Research and Markets say the pace of expansion will slow to 7.4% through 2016, as the high cost of production of organics remains its biggest roadblock.

Not that it's hurt the market leader in organic produce, Whole Foods Market (NASDAQ: WFM  ) , whose revenues were up almost 16% over the previous 12 months, running well ahead of the 10% annual sales expansion its enjoyed over the trailing five-year period. Similarly, The Fresh Market's  (NASDAQ: TFM  ) trailing revenues were up 17%, with even organic dairy producer WhiteWave Foods seeing 12% growth.

Into this abundance comes Apollo Global Management-controlled Sprouts, which said it will sell 18.5 million shares in an initial public offering, putting a value on the grocer at as much as $296 million at $16 a share.  It expects to open 19 stores this year and 20 next year, and it figures the market can sustain 1,200 Sprouts nationally.

Company Revenues, TTM Stores Rev/Sq. Foot
Sprouts Farmers Market $2 billion 163 $472
Whole Foods Market $12.5 billion 349 $944
The Fresh Market $1.4 billion 131 $500

Yet in addition to those chains that cater specifically to the granola-chewing crowd, your local supermarket has also devoted a large amount of space to organic produce. Kroger (NYSE: KR  ) for example, recently announced it was reducing prices in its stores as a way to encourage shoppers looking for organics to save money, and it recently announced that it's buying regional grocery chain Harris Teeter, which is popular for its own organic selection.

Indeed, shoppers can even find natural and organic produce at Wal-Mart, and with Fairway Group Holdings (NASDAQ: FWM  ) having gone public earlier this year, there's no shortage of places shoppers can choose from to buy their all-natural produce. What is Sprouts offering that differentiates it from all of its rivals? Simply counting on a growth-by-expansion policy entails a lot of risk, so the only thing I see is its claim of better product selection and value. 

Organics may be the cream of the crop at the moment, a popular niche with investors, as Fairway showed after enjoying a 55% gain from its IPO price. Biut whether they can continue sprouting higher or end up wilting on the vine remains to be seen.

I foresee the IPO of Sprouts Farmers Market taking off at the offering, but like a tomato plant in an overcrowded garden plot, it will be starved for its patch of sun. A patient investor will get a better price simply by waiting for the fruit to mature a bit before picking it for his or her portfolio.

There are unique investment opportunities sprouting up all the time, like mushrooms in your lawn. Yet only the most forward-looking and capable companies will survive, and they'll handsomely reward investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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  • Report this Comment On July 25, 2013, at 11:49 PM, 15PlusPercent wrote:

    If you get a chance to read the prospectus the market capitalization will be greater than $2 bln, almost 10 times that stated in the article. One of the advantages Sprouts seems to have, and I have visited the local store a couple months back, is that they have competitive prices to Krogers/HEB rather than the large premiums associated with WFM.

    Same store sales have been growing by 5-9%/yr, which seems to make this a good growth play when including their aspiration for 12%/yr growth in stores over the next 5 years.

    I read the prospectus this evening and plan to participate in the IPO.

  • Report this Comment On July 26, 2013, at 4:55 PM, subwayman wrote:

    Does anyone know when the IPO will take place?

    Also, my two cents. Sprouts often has superior produce and at better prices. Also, they are not 100% organic like Whole Foods.

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