Demand for organic food has been robust since the early 2000s, with sales rising 16.5% a year in the decade leading up to 2010 and rising by 7.3% last year. Organic-food grocers have fared well in this environment, with their sales and profits rising by double-digit percentages during the last couple of years. Whole Foods Market, (WFM +0.00%), The Fresh Market, (TFM +0.00%) and Natural Grocers by Vitamin Cottage are among the main beneficiaries of the growth trend. Now, there is a new player you should consider in this field: Sprouts Farmers Market (SFM +1.30%).
Sprouts Farmers Market is a specialty retailer of natural and organic food that focuses on health and wellness. The company offers a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries and other items that cater to consumers' growing interest in eating and living healthier. Since its founding in 2002, the company has grown rapidly, with increasing earnings, sales and store count. Sprouts currently has 163 stores in eight states and more than 13,000 employees, and it is one of the largest specialty retailers of natural and organic food in the United States.
Organic is the way to go
Organic-food sales in the United States have grown exponentially in the last 20 years. Sales have grown from just $1 billion in 1990 to $27 billion in 2012 (according to Nutrition Business Journal). While the market's annual growth rate fell from double digits since 2008 as the economy experienced difficulties, its 7.4% growth rate in 2012 was more than double the annual growth rate for all food sales. The outlook for the next several years remains upbeat, with the global organic food industry projected to grow 9.37% annually in the 2012-2016 period.
As the past numbers and future expectations show, this market has ample room for growth in the future. Awareness of the benefits of organic food is growing rapidly, and the potential health risks from eating genetically modified food are becoming more evident. Organic sales account for a very small portion of total U.S. food sales (just over 3.5% in 2012), so growth opportunities are abundant.
Sprouts' growth is on track
Sprouts reported second-quarter earnings recently. Revenue grew 22% to $622.4 million. Diluted earnings per share came in at $0.10, a 100% increase over last year's quarter. There were no comparable analyst estimates, and the results came roughly inline with the company's guidance. Pro-forma comparable- store sales rose 10.8%, up from 8% in the first quarter. These are robust numbers, and ahead of most of the competition.
Whole Foods reported a 19% jump in Q3 EPS on a 12% revenue increase. Same-store sales rose 7.5%, but are running at 5.8% in the fourth quarter. Co-CEO Walter Robb said "bring it on" to rivals, including Sprouts, on the late-July conference call.
Fresh Market's earnings and revenue rose 17% and 13%, respectively, while same-store sales grew 3.4%.
Some issues need to be addressed
Shares of Sprouts have more than doubled since the IPO. That leaves its valuation higher than the competition. Sprouts' price-to-sales ratio now stands at 3, as opposed to Whole Foods' 1.5 ratio and Fresh Market's 1.9 ratio. However, Sprouts is delivering more robust earnings, revenue and same-store sales growth than Whole Foods and Fresh Market.
Sprouts' profit margins could be pressured as the competition ramps up. With Whole Foods creating pricing pressure, and Wal-Mart and Kroger boosting their organic product offerings, Sprouts' profit margins could shrink.
Bottom line
Sprouts is delivering the goods. As the organic food market continues to expand, Sprouts is expected to keep benefiting. People are becoming more aware of the benefits of organic food, and this will drive demand in the future. Sprouts' valuation is an issue right now. It is important to pay attention to Sprouts' profit margins, overall earnings and revenue growth, and same-store sales growth to get a grasp of how the company is being managed.
