Eating Healthy Is Not a Fad, So Consider Sprouts Farmer Market
July 25, 2019 by InvestorDestination Team
Eating healthy may be the new normal, but the excitement of investors for organic grocery retailers are a distant memory. In the past, there were a few public companies in this industry. But now, Sprouts Farmers Market (NASDAQ: SFM) , is the only public company in this sector, and investors are staying away from it. Private equity acquired The Fresh Market. In 2017, Amazon gobbled up Whole Foods. Fairway Market, the poster child for over-enthusiasm of investors for organic grocery players, has recently applied for bankruptcy.
Last November, the CEO of Sprouts has resigned. The company took more than six months to hire a new CEO. For the past eight months, the company had interim co-CEOs. Recently it hired a new CEO with experience in affordable grocery retail business.
Soon after this, the CFO, who was one of the acting co-CEOs, resigned. However, we believe that the reason for his departure was personal and not an indication of the financial troubles facing the company.
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
|---|---|---|---|---|---|---|---|
| Revenue (in Millions) | $1,795 | $2,438 | $2,967 | $3,593 | $4,046 | $4,665 | $5,207 |
| EPS | 0.16 | 0.37 | 0.70 | 0.83 | 0.83 | 1.15 | 1.23 |
| Revenue Growth | 62% | 36% | 22% | 21% | 13% | 15% | 12% |
| Comp Sale | 9.7% | 10.7% | 9.9% | 5.8% | 2.7% | 2.9% | 2.1% |
| Gross Margin | 29.5% | 29.7% | 29.8% | 29.3% | 29.2% | 28.9% | 33.6% |
| Operating Margin | 3.9% | 5.7% | 6.7% | 6.4% | 5.3% | 4.8% | 4.3% |
| Debt to Asset | 38.7% | 26.5% | 18.7% | 11.2% | 17.7% | 22.0% | 27.0% |
| Asset Turnover | 1.6 | 2.1 | 2.2 | 2.5 | 2.8 | 2.9 | 3.1 |
| FCF % Sale | 2.1% | 3.0% | 1.8% | 3.2% | 1.8% | 2.4% | 2.3% |
In recent years, the comp sale of the company is on a downward path. The company has been blaming its comp decline on a deflationary environment. As the demand for organic and healthy food has increased, the competition has also increased. In the past, only specialty retailers offered natural and organic food. Now, almost all grocery providers are offering natural and organic products. Those specialty retailers are expanding and trying to become an everyday destination for groceries. So, the competition has intensified. The new CEO of Sprouts will focus on improving the comp sale, but we believe that it is unrealistic to expect the company’s past days of glory to be back soon.
Healthy eating is not a fad. Therefore, the demand for organic and healthy food is growing. As we mentioned earlier, the competition is also intensifying. However, Sprouts is delivering on its value proposition of becoming an everyday destination for affordable organic and healthy food. It is focusing on increasing basket size by offering deli and expanding private labels. Its emphasis on fresh produce, deli offerings, and focus on customer experience are resonating with customers. It is trying to adapt to the changing grocery retail landscape. It is expanding its geographic presence in a disciplined manner.
The company has a strong balance sheet. Since it focuses on offering affordable food, the recession might be a growth catalyst for this company.
The uncertainties of the management transition have punished its stock. While it is too early to predict the direction which the new CEO will take, he has the relevant experience to lead the company. Hence, there is a high probability that the company will continue with its current value proposition of becoming an everyday destination for affordable and healthy groceries. Considering these factors, we believe that it is a buy.
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