A shift in consumer-eating habits has been clearly noticeable over the last few years, as many people are increasingly opting for healthier, more organic options. This development is affecting restaurant and fast-food chains but also supermarkets. As a result, organic food markets have been recording some fairly spectacular growth over the last few years. Many analysts have focused on the success of Whole Foods Market (NASDAQ:WFM), but Sprouts Farmers Market (NASDAQ:SFM) seems to be growing even more quickly. Is the stock a good bet going forward?
Sprouts' stock hasn't done much since its recent IPO, but the reported sales figures have been quite formidable. Let's examine some of the highlights from the company's fourth-quarter and full-year results released earlier this year.
For the quarter, net sales were up 27% on a fantastic 13.8% increase in comp store sales. Adjusted earnings before interest, taxes, depreciation, and amortization of $37.7 million soared 31% year over year, while adjusted earnings per share of $0.07 were up from $0.04 in the year-ago period.
For the full year, net sales rose 36% on a comp store sales increase of 10.7%. Adjusted EPS grew to $0.48 compared to $0.31 last year, with adjusted EBITDA up 33%. These are some fairly serious growth figures.
Sprouts' strategy generally focuses on smaller locations, with most stores around half the size of conventional grocery stores. It also focuses exclusively on healthy foods, not really offering any other kind of merchandise. Thirdly, according to management, the store is generally cheaper than its competitors. Due to these factors, it seems to be growing faster than its rivals.
Let's compare these results to those of the competition for some perspective. The company's No. 1 competitor, Whole Foods Market, did not deliver the same kind of growth in its fourth-quarter report. Total quarterly sales were up only 2% year over year, with comp sales growing 5.9%. Diluted earnings per share increased by 7% year over year, clearly trailing Sprouts' performance. For the full year, total sales rose 10% and comp store sales were up 6.9%.
Meanwhile, The Fresh Market (NASDAQ:TFM) seems to be underperforming the industry on most metrics. While net sales were up a huge 15.1% for the fourth quarter, comp store sales rose by only 3.1% in the period. Moreover, they are projected to grow in the low-single digits for fiscal 2014.
For the full year, net income decreased by more than 20%, which was a severe disappointment to investors. Following these rather poor results, the company has undertaken a number of cost-cutting measures including the shuttering of four underperforming locations.
Valuations and metrics
As is usually the case, Sprouts' huge growth comes at a steep premium. The stock trades at around 96 times trailing earnings and more than 44 times forward earnings, which is pricey by any standard. For comparison, Whole Foods Market trades at around 35 times trailing earnings and 27 times forward earnings. Meanwhile, Whole Foods has a higher operating margin, higher return on equity, and a considerably healthier cash position. As such, it may be favored over Sprouts by more conservative investors.
The bottom line
Following a general consumer shift toward healthier foods, organic grocery stores have been recording some spectacular growth in recent times. One of the best performing chains in the industry appears to be Sprouts, the company delivering excellent growth on both the top and bottom lines. The company's comp store sales are especially impressive. However, it is currently trading at a sky-high valuation, making it a proposition more suitable to investors with a high-risk appetite, as its valuation could pave the way for some downside in the future.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Daniel James has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.