Why Sprouts Farmers Market Rose 18% in November

Despite a tough year, the natural foods grocer had some positive news for shareholders to digest during the month.

Asit Sharma
Asit Sharma
Dec 12, 2015 at 3:00PM
Consumer Goods

Sprouts' current December specials flyer. Source: Sprouts Farmers Market.

What: Shares of Sprouts Farmers Market (NASDAQ:SFM) shot up 18.4% during the month of November, according to data from S&P Capital I.Q.

So what: Sprouts released a healthy third-quarter 2015 earnings report on Nov. 5, exhibiting tangible revenue revenue growth of 18% over the previous year, as well as comparable-store sales growth of 5.8%. The company booked $31.9 million in net income during the quarter, an increase of 23% from the same quarter last year.

Reaction to the quarterly report was quite positive, as investors quickly bid the company's stock up 15.7% on the day of the earnings announcement. Part of the enthusiasm can be traced to the disparity between Sprouts' earnings and those of rival Whole Foods Market (NASDAQ:WFM), which reported a day before on Nov. 4, but confounded the market with a disappointing same-store sales decline of 0.2%.

In the previous sequential quarter, Sprouts' management had reduced full-year guidance for revenue growth to a range of 19%-21%, and trimmed same-store sales guidance by 1.5%, to between 4%-5%. Perhaps most disappointing to shareholders at the time was a reduction in full-year net income growth, which was scaled back to a range of 13%-15% over 2014, as compared to an estimate earlier in the year of 18%-22%.

With the third-quarter report, management fine-tuned its 2015 guidance by reaffirming total revenue growth of between 19%-21%. It also bumped up its same-store sales target slightly, to 5%-5.5%. Finally, Sprouts partially restored its aggressive profit objective, promising year-over-year net income growth of 16%-18%.

Now what: One of the negative pressures on Sprouts' stock from the summer seems to have abated: the fear that increased cannibalization might dilute same-store sales growth in 2015 and 2016, as new stores eat into the existing customer bases of nearby established locations.

During the company's third-quarter earnings call, both CEO Douglas Sanders and CFO Amin Maredia indicated that the effect of cannibalization in metropolitan areas such as Atlanta had moderated versus the second quarter and appeared to be heading back to rates the company has experienced historically.

As investors have become more comfortable this fall that Sprouts is still on track to expand at an annual unit growth rate of 14%, the contrast with a business like Whole Foods, a much larger rival facing slower expansion, has grown more apparent. Stabilization in the company's stock since the Q3 report hints that investors might be starting to compare Sprouts not so much to its own historical growth percentages but to that of its competitors' future growth potential. In that context, shareholders may more readily appreciate what they see.