Since 1957, there have been 14 times when it took the S&P 500 index more than a year to return to a new all-time high. This stat is interesting because the index continued higher on 13 of those occasions over the following year.
With this in mind -- and with the S&P 500 setting new highs as we moved from 2023 to 2024 -- it looks like the perfect time to add to some recent winners. One such stock moving higher lately is specialty grocer Sprouts Farmers Market (SFM 1.64%), which has risen over 280% since 2020.
Despite this incredible run, there are multiple reasons to believe the best is yet to come for the lifestyle-friendly grocery chain. Here's what sets the company apart, making it a perfect dollar-cost-averaging candidate today for a $100 investment.
Rethinking traditional grocery stores
Home to 407 better-for-you grocery stores, Sprouts Farmers Market brings specialty food products to the masses. Regardless of what grocery "attribute" a shopper needs, Sprouts most likely has it, sourcing many of its items from over 250 local farmers. Featuring organic, keto, plant-based, gluten-free, vegan, and dairy-free options (among others), the company's health-conscious niche is highly differentiated from traditional grocers.
Maintaining this wide array of groceries, Sprouts holds a Net Promoter Score (NPS) of +57 among its customers, which is exceptional. Rated on a scale of negative 100 to 100, NPS measures how likely a customer is to recommend a company's products to a friend, with a score of +57 showing the vast majority of shoppers would.
Between this high customer satisfaction and a unique selection of items, Sprouts drives consistent repeat visits from shoppers who can't find similar products elsewhere -- at least in one stop.
Growth options abound
While the company has a quickly growing base of loyal customers, 76% of its stores reside in five states: California, Arizona, Colorado, Texas, and Florida. Furthermore, the company only operates in 23 U.S. states, leaving plenty of expansion opportunities. With management targeting a 10% store count growth rate over the longer term, here are four specific areas that should help fuel Sprouts' growth:
1. Saturating existing markets
Currently building a new distribution center in Pennsylvania, the company plans to add to its 12 stores in the region. With the new facility expected to support stores within a 250-mile radius, Sprouts intends to add stores in Pennsylvania, Virginia, New Jersey, Delaware, and Maryland. Between these new locations and continued growth within the company's core markets of California, Texas, and Florida, management believes it can add over 300 stores in these eight states alone.
2. Expanding into new states
With three stores in Washington and Missouri each, all signs point to Sprouts moving north in due time -- but that may be further down the road thanks to its current ambitions in the Northeast.
3. Growing private label sales
Sprouts brand private label sales have risen from 14% of revenue in 2018 to 20% in 2023. This private-label brand is meaningful to the company as it generates higher margins, leaving Sprouts less dependent upon suppliers.
4. Starting a loyalty program
Sprouts plans to test a loyalty program in select markets in 2024. If successful, the company could glean valuable information from its members, potentially finding new private label opportunities and boosting shopper engagement.
Buoyed by these growth drivers, Sprouts should still be in the early chapters of its growth story.
Exceptional profitability
Best yet for investors, the company's high and rising return on invested capital (ROIC) makes these expansion plans even more promising.
SFM Return on Invested Capital data by YCharts
ROIC measures a company's ability to generate net income from its debt and equity. Sprouts' impressive mark of 20% indicates that management has done an exceptional job making capital expenditures as it grew. Thanks to this outsize profitability, the company is armed with ample funds it can use to reward shareholders.
Buying back 4% of its shares annually over the last decade, the company juices its earnings per share (EPS) figures by lowering its total shares outstanding. Thanks to these buybacks, Sprouts' EPS has spiked 414% since 2014, surpassing its net income growth of 279%.
SFM Shares Outstanding data by YCharts
Why dollar-cost averaging is the way to go
As promising as Sprouts' operations are with its loyal customers, in addition to its immense growth potential and solid profitability, its price-to-earnings (P/E) ratio has tripled from 8 in 2021 to 24 today. Growing sales and EPS by 8% and 17% in the fourth quarter of 2023, the company watched its share price rocket to new all-time highs last week.
However, despite rising 24% in 2024, Sprouts' P/E ratio of 24 is very near the S&P 500's average of 23. Thanks to this contrast between Sprouts' booming share price and reasonably fair valuation, the company looks perfect for dollar-cost-averaging buys.
By building a position in small portions of $100 or less at various price points, you can remove some of the volatility surrounding the company's skyrocketing share price while still getting some skin in the game.
Ultimately, Sprouts Farmers Market's future looks brighter than ever, making it a winning investment that I am more than happy to keep adding to -- even at today's slightly more expensive valuation.
