A Few Organic Grocery Players' Bankruptcy Is Spoking Sprouts Farmers Market's Investors
Feb 5, 2020 by InvestorDestination Team
Recently three organic grocery retailers such as Earth Fare, Lucky Market, and Fairway Market have applied for bankruptcy. Lucky Market and Earth Fare are a bit similar to Sprouts Farmers Market, Inc (NASDAQ: SFM) . Like Sprouts, both these players are focused on offering affordable fresh, natural, and organic products. All three of them have a similar value proposition, small-format stores with farmers market feel, and target similar demographics. After these bankruptcies news, investors seem to be concerned about Sprouts Farmers Market, and its stock has lost almost 25% of its value without any news from the company
As the demand for organic food is growing, competition is rising. The existing and the new players want to grab a piece of this growing pie. Florida seems to be the new battleground, and grocery retailers are expanding aggressively into that state.
Lucky Market's motto is organic for the 99%. Its stores are small and offer farmers market feel. It started in 2003, and by 2016 it had seventeen stores. It had a presence mainly in the midwest. Kroger wanted a piece of this growing organic pie and decided to invest in Lucky Market in 2016. Lucky Market has since expanded to 39 stores, most of them in Florida. It expanded aggressively by taking debt and was not profitable. Recently, the company has applied for bankruptcy, and it is closing the majority of its stores.
Earth Fare is another regional natural and organic retailer that started in 1975. By 2012, the company had 26 stores across eight states and got acquired by a private equity firm. Under the new management, the company expanded aggressively. Now it is closing all the stores including 14 stores in Florida,
Aggressive expansion, colossal debt, and unprofitable operations have caused these bankruptcies.
Unlike these players, Sprouts Farmers Market is profitable. It is expanding in a disciplined manner. While the company's new management is assessing its expansion strategy, it has applied a slight break on its 2020 expansion. It generates positive free cash flow, which means its operating cash flow funds its store expansion. In recent years the company has taken debt to repurchase its shares, but it has a relatively strong balance sheet. These weak players' exit might be beneficial to other grocery retailers, including Sprouts Farmers Market.
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