Whole Foods Stock vs. Sprouts Stock in 3 Key Metrics

When Sprouts Farmers Market (SFM 1.64%) went public just over two years ago, the natural and organic food grocer presented investors in the space an alternative to Whole Foods Market (WFM). While there is a good chance investors in either stock have compared the two companies at some point, the two stocks' recent sell-offs -- Sprouts and Whole Foods are down 22% and 39% during the past 12 months, respectively -- make it a good time to do so again.

Sprouts Farmers Market. Image source: Sprouts Farmers Market.

The two stocks' differences can be better understood with the help of three telling metrics, along with some useful background information on each comparison.

Valuation
Perhaps the most notable difference between the two stocks that investors may glean after a glance at both businesses is in their valuation. At 32 times earnings, Sprouts is undoubtedly priced for more growth than Whole Foods, which is trading at about 20 times earnings.

Price-to-earnings, of course, isn't the only metric in which Sprouts appears to trade at a greater premium than Whole Foods. Sprouts' premium compared to Whole Foods' is also evidenced by a range of valuation metrics. Consider Sprouts' price-to-sales ratio of 1.1 compared to Whole Foods' of 0.7.

Growth
The discrepancy in the premiums the market has awarded these two stocks probably stems from the fact that Sprouts' overall business is growing faster than Whole Foods'. Sprouts TTM revenue is up nearly 20% compared to the year before. This corresponds to an 8% year-over-year revenue growth for Whole Foods during the same period.

But investors should note that the difference in growth for the two companies' earnings per share is even larger than the difference in their revenue growth. Whole Foods' EPS during the last year declined about 5%, while Sprouts' jumped 17%.

Business economics
One clear advantage Whole Foods has going for it is its gross profit margin. With its margin about 570 basis points higher than Sprouts', Whole Foods can put more of its revenue to work in operations and still capture the same net margin. Indeed, this is exactly what Whole Foods is doing. Even though its operating expenses of 29.6% are somewhat higher than Sprouts' at 23%, both companies have a net margin of about 3.5%.

Notably, Whole Foods' higher gross profit margin is evidence of the grocer's greatest strength: pricing power. It's no secret that shopping at Whole Foods will cost more than at Sprouts. An analysis last year by Bloomberg Industries revealed that Sprouts' prices are around 13% lower than Whole Foods' -- a huge difference in the world of groceries. Yes, lower prices mean Sprouts may be able to grow revenue faster, but Whole Foods' ability to charge such significantly higher prices is a sign of the grocer's impressive brand power -- a rare characteristic in food retail.

In short, Sprouts may be growing faster than Whole Foods, but investors will have to pay a higher premium for this growth. Further, Whole Foods' pricing power, which enables it to spend more liberally on operating expenses, could be an advantage for the company over the long haul.