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Sprouts Farmers Market's Q1 Report Looked Bad. Here's Why Investors Shouldn't Be Concerned

By Brett Schafer - May 12, 2021 at 8:56AM

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The year-over-year comparisons cloud the long-term trajectory of this healthy foods grocer.

The onset of the COVID-19 pandemic last spring was a boon to the grocery store industry. As consumers rushed to stock their pantries ahead of potential food shortages and mandated lockdowns, the industry saw a huge rise in sales. However, this has also led to tough year-over-year comparisons as companies release their first-quarter 2021 results.

Sprouts Farmers Market (SFM 2.83%), a healthy foods grocery chain headquartered in Arizona, is no exception to this trend. The company just reported first-quarter earnings and the top-line numbers have troubled some investors. But first glances can be deceiving.

Here's how Sprouts Farmers Market performed in the first quarter, why its Q1 headline numbers looked bad, and why investors shouldn't be concerned.

Two people chopping vegetables on a wooden counter.

Image source: Getty Images.

Sprouts first-quarter results 

Sprouts released its Q1 results on May 6. Net sales were $1.6 billion in the quarter, down 4% year over year, with comparable-store sales down 9.8%. Comparable-store sales, or comp sales, is the difference in revenue generated by stores that have been open for a full calendar year. It is an important metric for evaluating the financial health of any physical retail concept, so a 10% decline is a worrying trend, even if it was just for one quarter. 

Sprouts saw a decline in earnings as well. Net income in Q1 was $83 million, down from the $92 million it generated in Q1 2020. This is a decline of only $9 million, so it is not like the company is suddenly in dire circumstances. Yet the difference in profits, even with more stores opened up in the back half of 2020, shows the impact of consumers returning to more normal shopping habits as we come out of the COVID-19 pandemic.

Looking forward, management is guiding for 2021 sales to be flat or slightly up (due to new store openings), comp sales to be down low to mid-single digits, and adjusted earnings per share (EPS) to be in the range of $1.87 to $2.00. For reference, Sprouts had an adjusted EPS of $2.49 in 2020. On paper, these headline numbers make it look like Sprouts Farmers Market is a struggling business. But that couldn't be further from the truth.

Pay attention to two-year comps 

Since all grocers got a one-time boost from the panic buying last spring, it can be illuminating to compare Sprouts' 2021 results to 2019, which is a more apples-to-apples operating environment. Comp sales were up 2.2% this quarter versus 2019, a huge difference from the 9.8% decline compared to 2020. Expect this dichotomy to continue throughout 2021. As long as Sprouts shows it can grow 2019 comp-store sales, there's no reason to panic just because its quarterly numbers are down year over year.  

In 2020, we also saw Sprouts' management team execute nicely by expanding its e-commerce strategy. Delivery and pick-up solutions were 12.5% of sales in Q1 and have stayed above 11% of sales for the past four quarters. While not crucial to the long-term plans of this business, especially once in-person shopping gets back to normal, the success in expanding the e-commerce offering (it was only 3.7% of sales in Q1 of 2020) shows that Sprouts' management is able to navigate the change in consumer preferences that the pandemic generated.

The stock is still cheap

At a current per-share price of $26.92 and a market cap of $3.2 billion, Sprouts Farmers Market stock trades at a dirt-cheap valuation. Assuming it can generate EPS of $1.87 in 2021 (the low end of its guidance), the stock trades at a forward P/E of 14.4. Investors should remember that the company also plans to open 20 new stores in 2021 and grow its store count by 10% every year. With only 362 stores in 23 states, Sprouts has plenty of room to grow its store count before worrying about market saturation.

Of course, for Sprouts stock to perform well, the company will need to execute its proposed expansion strategy. But with this grocer at a forward P/E of only 14.4 and having a clear runway for growth, there's no reason to think it is in trouble just because one-year comp sales look bad. In fact, at its current valuation, Sprouts Farmers Market could be a great buy-and-hold stock for long-term investors.

Brett Schafer owns shares of Sprouts Farmers Markets. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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