Sprouts Farmers Market: Health and Value Driving Profitable Growth

Investors should use the dips in Sprouts Farmers Market to take advantage of a company growing profits.

May 30, 2014 at 9:45AM

In the very competitive organic and fresh food segment, Sprouts Farmers Market (NASDAQ:SFM) continues to outpace the industry by delivering healthy food at a value to the consumer. While the company doesn't focus as much on the expensive side of organic foods, it is delivering huge growth from pulling in everyday grocery shoppers that don't want the more expensive products from Whole Foods Market (NASDAQ:WFM)

Companies in the sector, including The Fresh Market (NASDAQ:TFM), have all been hit hard recently. At these times, investors need to focus more on the substance of the earning reports and less on the headlines and stock gyrations. Large stock dips can offer attractive entry points.

Massive comps
The large sell-off from Whole Foods Market following its earnings results was more due to a misconception of growth rates than actual negative results. The organic leader saw comp sales, sales at stores open at least one year, grow a very solid 4.5%, but this was down from previous higher levels and expectations.

Sprouts Farmers Market continues to see substantial growth driven by a 12.8% increase in same-store sales. The gains for the quarter came almost equally from a combination of more traffic and increased basket size. The ability to obtain a 6% increase in basket size from existing customers while also attracting an expanded customer base bodes well for the future.

Sprouts is only now entering major markets such as Kansas City and Atlanta, and now counts nine states in its store base. The store base sits at only 172 locations, which means it has room to grow considering Whole Foods' forecast for 1,200 stores in the U.S. alone.

Margin squeeze
While the main competitors in the organic space continue to see margin pressure, Sprouts is taking share from traditional grocery stores. The focus on the middle-income customer base is allowing the company to increase margins and grow its basket size, or the amount each customer spends on average.

The company grew its gross margin to 31%, an increase of 70 basis points compared to the same period in 2013. The margins are unfavorable when compared to Whole Foods and even The Fresh Market, but the numbers are heading in the right direction.

Whole Foods saw a small squeeze with gross margins declining to 35.9%, but it's still higher than the same periods in 2010 and 2011. The one reason that Whole Foods' stock plunged 20% following earnings and is now down substantially from the $65 high achieved back in October is the concern that the leading organic grocer will have to continue reducing prices, potentially hurting its margins.

In the last reported quarter that ended in January, The Fresh Market's gross margins declined 50 basis points to 33.5%. The caused the company to close four stores, including three locations in Sacramento, CA. Considering the grocer's relatively young age and its plans to expand aggressively, closing stores is never a good sign.

Bottom line
The competition is heating up in the organic space, considering the growth of both public fresh grocers like The Fresh Market and Sprouts Farmers Market and private firms like Trader Joe's. Based on same-store sales growth and solid margins at Sprouts Farmers Market, the company continues to take market share from traditional grocers.

The company's future is bright, but its stock may continue to struggle in the short term. Typical of a high-growth concept, the story hasn't changed so much as the perception of value. The company will quickly grow into the current valuation with earnings surging over 40% annually.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Mark Holder 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers