What: Shares of Sprouts Farmers Market Inc. (SFM 3.25%) were shriveling up last month, sliding 10% according to data from S&P Capital IQ, in part due to an analyst downgrade.
So what: Half of the organic grocer's decline for the month came on June 8, when it was slapped with a downgrade by the brokerage firm Wolfe Research, which lowered its rating to market perform. Analyst Scott Mushkin sounded bearish on the organic grocery sector in general, saying that increased competition from conventional retailers like Kroger and Wal-Mart is hampering natural and organic specialists like Sprouts. A survey by Wolfe revealed that fewer natural/organic stores were seeing increased levels of traffic and spending, and found a softening trend at Sprouts.
Like Whole Foods Market, the dominant player in the sector, Sprouts shares have struggled recently and are down nearly a third since hitting a 52-week high in February. As the chart below shows, the two stocks have been trading nearly in tandem since Sprouts' IPO two years ago.
Now what: Sprouts will need to emerge from Whole Foods' shadow in order to find success. Its larger competitor recently announced that it would target the value market that Sprouts focuses on with its new 365 by Whole Foods chain, which will only make the space more competitive. Sprouts' recent growth has been strong, but its valuation at a P/E of 37 is demanding.
In its most recent quarter, the company delivered moderate same-store sales growth of 4.6% and a 19% increase in overall sales. It's opening stores rapidly with plans to add 27 this year, increasing the base by 14%. As long as same-store sales are moving in the right direction, the company should be able to justify that expansion, but keep a close eye on comparable sales because if that number flattens out, the stock will likely take a hit.
