Sprouts Farmers Market Slows Down and Speeds Up in Q2 2019

Two key metrics are on divergent paths. The new CEO of this upstart grocery chain has his work cut out for him.

Nicholas Rossolillo
Nicholas Rossolillo
Aug 5, 2019 at 2:31PM
Consumer Goods

Sprouts Farmers Market (NASDAQ:SFM) has been a real conundrum for investors. When the stock debuted in 2013, organic and fresh groceries were all the rage -- and they're Sprouts' specialty. But groceries, no matter how fresh and organic, are not a high-growth or high-profit-margin endeavor. Once riding high on optimism, the stock has slowly declined in value for years even as the chain continues to expand and win over consumers.

The trend has continued this year, although investors were pleased with the 2019 second-quarter report card. It was a mixed bag, but there's hope a turnaround could be in store for the fresh grocer.

Sprouts at halftime

Sprouts put up more respectable numbers during the second quarter. Top-line growth was up 7% year over year, driven by a robust pipeline of store openings, including stores opened in new markets like Louisiana and New Jersey. At the end of June, there were 331 locations in 21 states, compared with 313 in 19 states at the start of 2019.

A woman standing in the produce aisle of a grocery store.

Image source: Getty Images.

As with all things brick-and-mortar retail, though, expansion through new real estate is only half the battle. Fostering growth at existing stores is the other half, and that's the metric that has been slowing for Sprouts lately. During Q2, same-store sales (a combination of foot traffic and customer ticket size) were up a meager 0.1%, a big cool-off from the 1.4% climb in Q1 and 2.1% increase during the 2018 calendar year. New CEO Jack Sinclair, former CEO of 99 Cents Only Stores and former executive at Walmart's grocery division, will no doubt make fixing same-store comps a top priority.

Still, growth is growth, and the warm reception new Sprouts Markets are receiving from shoppers is promising. Through the first half of 2019, mixed results can still be viewed as a glass-half-full situation given the solid revenue advance.

Metric

Six Months Ended June 30, 2019

Six Months Ended July 1, 2018

Change

Revenue

$2.83 billion

$2.61 billion

8%

Gross profit margin

33.5%

33.8%

(0.3 pp)

Operating income

$131 million

$141 million

(7%)

Earnings per share

$0.76

$0.82

(7%)

Pp = percentage point. Data source: Sprouts Farmers Market.

Fixing the old and expanding the new

Though the bottom line is under pressure -- due primarily to costs related to expanding -- it is nonetheless promising that Sprouts can successfully roll out new stores given the current grocery landscape. Megachains like Walmart and Kroger are picking up new customers through aggressive e-commerce initiatives, and there's no shortage of smaller rivals -- including the recent IPO of Grocery Outlet and its stated plan to aggressively open its alternative brand of discount grocery stores.

Since Sinclair just took the reins in June, it will likely be at least a couple months before he outlines his strategy for Sprouts. In the meantime, investors are left with a chain that is growing via new openings with a stable (at least for the moment) base of existing stores. Given that the equation currently adds up to negative trajectory for the bottom line, Sprouts' price-to-free cash flow ratio (basic profitability calculated by subtracting operating and capital expenses from sales) and trailing price-to-earnings ratio of 16.4 and 15.3, respectively, aren't exactly a hot deal. However, basic profit as measured by free cash flow is on the rise, up 74% over the trailing three years.

Thus, if Sprouts can pull a few levers and get its existing network of grocery stores back into growth mode, this stock could be due for a rebound after the 17% hit it's taken over the last 12-month stretch. Stay tuned.


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