Image source: Sprouts.

What happened

Shares of Sprouts Farmer Market Inc. (NASDAQ:SFM) were selling off today after the organic grocer turned in its third-quarter earnings report, missing earnings estimates. As of 12:21 p.m. EDT, the stock was down 10.6%.

So what

In some ways, Sprouts delivered a better report than expected, as comparable sales grew 1.3% in a tough deflationary environment against expectations of flat growth. Most of its competitors, meanwhile, have seen comps fall recently.

However, despite the comparable sales growth, earnings per share fell from $0.21 to $0.16, missing estimates by a penny, as the company made price investments to gain market share. Overall sales were up 15% to $1.04 billion, ahead of expectations at $1.01 billion. Gross margin fell 80 basis points to 28.1% and higher payroll costs and deleveraging due to slowing sales growth.

CEO Amin Maredia noted the "highly deflationary and competitive environment" and that "the core fundamentals of the business remains strong."

Now what

Sprouts held its full-year guidance mostly the same, calling for earnings per share of $0.83-$0.86 and comparable sales growth of 2%-2.5%, up from a previous range 1.5%-2.5%. 

Its shares are priced higher than almost every other grocery chain, carrying a price-to-earnings ratio of 22.5, even after today's slide. With earnings falling sharply, the market seems to be punishing Sprouts for that somewhat higher price tag. Still, its ability to drive comparable sales growth in the current market environment is impressive, and could lead to market share gains when conditions improve. The long-term picture for the company still looks solid.

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