Sprouts Farmers (SFM) Up 7.2% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Sprouts Farmers (SFM). Shares have added about 7.2% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Sprouts Farmers due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Sprouts Farmers Q1 Earnings Beat Estimates, Rise Y/Y

Sprouts Farmers Market, Inc. reported first-quarter 2020 results, wherein both earnings and revenues not only improved year over year but also surpassed the Zacks Consensus Estimate for the third straight quarter. Further, the company sustained its positive comparable store sales trend. The company benefited from spike in demand during the latter part of the quarter as Americans stockpiled essential items in the wake of coronavirus outbreak.

The renowned grocery retailer reported adjusted quarterly earnings of 79 cents a share that surpassed the Zacks Consensus Estimate of 53 cents, and improved considerably from 46 cents in the year-ago period. The quarterly earnings include a benefit of 22 cents a share related with the pandemic. Notably, reduced net interest expense and lower shares outstanding also contributed to the bottom line.

Net sales of this Phoenix, AZ-based company came in at $1,646.5 million, up 16% from the prior-year quarter on account of comparable store sales growth of 10.6% and sturdy performance in new stores opened. COVID-19 positively impacted sales by $146 million and comparable store sales by 9.6%. E-commerce was 4% of sales during the quarter. Further, net sales outpaced the Zacks Consensus Estimate of $1,600 million.

Margins

Gross profit jumped 23% to $594 million during the quarter, while gross margin expanded 180 basis points to 36.1%. This can be attributed to balanced promotions during the first two months of the quarter under review, and sales mix and shrink benefits during the month of March courtesy of stockpiling by customers.

Adjusted operating income came at $128.8 million, up from $80.1 million reported in the year-ago period. Further, adjusted operating margin increased 210 basis points to 7.8%. We also note that adjusted EBITDA surged 46% to $160.4 million, while adjusted EBITDA margin grew 190 basis points to 9.7%.

SG&A expenses rose 16% to $436.3 million, while as a percentage of net sales the same remained flat at 26.5%. The deleverage in SG&A expenses was due to higher bonuses, rise in e-commerce fees, and increased health care, labor and occupancy costs.

Store Update

During the quarter, Sprouts Farmers opened four new outlets, taking the total count to 344 stores in 23 states. The company remains on track to open about 20 new stores this year.

Other Financial Aspects

Sprouts Farmers ended the quarter with cash and cash equivalents of $247.1 million, long-term debt and finance lease liabilities of $462.2 million and shareholders’ equity of $670.7 million. We note that long-term debt and finance lease liabilities has declined $87.2 million on a sequential basis.

The company generated cash flow from operations of $277.1 million and incurred capital expenditures (net of landlord reimbursements) of $17 million for 13 weeks ended on Mar 29, 2020. The company ended the quarter with a $451 million balance on its revolving credit facility.

Key Things to Note

Sprouts Farmers notified that trends witnessed in the later part of the first quarter continued in the month of April as well. Notably, consumers continued to spend more on groceries. Moreover, as social distancing becomes the norm, consumers have been opting more for e-commerce services. As a result, comparable store sales during April month rose 7.2%, and ecommerce sales represented 13% of net sales. Sprouts Farmers is on track to expand its grocery pickup service with Instacart to all its stores.

Looking ahead, management cautioned that the level of operating margin expansion attained in the first quarter may not continue. Sprouts Farmers highlighted that while higher sales and other strategic endeavors have been benefiting operating margin, investments to increase team’s pay and benefits, and expenses on additional safety and cleansing measures will hurt second-quarter results significantly compared with the first quarter.

Considering the current scenario, management refrained from providing any guidance. However, it did highlight long-term targets that include low double-digit earnings growth, low single-digit comps increase and stable to expanding operating margin. It projects at least 10% annual unit growth and cash on cash returns of approximately 40% from new stores. It also expects to lower new store cost to build by about 20%. Looking forward, the company anticipates to keep capital expenditures in the range of 2.5-3.5% as a percent of sales.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

At this time, Sprouts Farmers has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Sprouts Farmers has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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