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Courtesy of Sprouts Farmers Market
Sprout farmers market
was a Covid-19 winner, then he was a Covid-19 loser. His October 28 earnings report could make him a winner again.
Almost every food retailer has been boosted this spring by mass pantry storage, and Phoenix-based Sprouts (ticker: SFM), which has about 350 stores in 23 states, was no exception. Its shares have doubled from their low in March to their high in July, with investors betting all grocers would benefit from demand for food.
The reality, however, falls far short of these hopes. After peaking in the March quarter, Sprouts’ same-store sales declined as consumers favored one-stop shops like
Target
(TGT) and
Walmart
(WMT) to reduce the risk of exposure to the virus. Its stock has fallen 22% in the past three months.
Sprouts earnings could help stock prices reverse. The company will release its third-quarter results on Wednesday, October 28, with consensus calling for nearly double year-over-year earnings per share at 36 cents on sales of $ 1.6 billion. Strong numbers are expected across the industry, given people’s new cooking habits, so the focus is on how companies plan to take advantage of the windfall in sustainable growth. If Sprouts can deliver, the stock could go up.
Sprouts shares are unpopular on Wall Street, with less than a third of analysts optimistic about its outlook and further degradation last week.
Nonetheless, there are some trends that are working in favor of the company. Even with the end of the closures – at least for now – and the slow reopening of restaurants, eating at home is not going to go away. Cooking not only reduces the risk of exposure to the virus, it’s much cheaper than restaurant food – a compelling catalyst given high unemployment and uncertainty about further stimulus.
And the amount of money at stake is immense. In 2018, about 46% of the $ 1.7 trillion in food spending in the United States was for home food, observes Scott Mushkin, founder and CEO of R5 Capital. Two more meals at home per week would increase this figure by more than 130 billion dollars, he estimates. For Sprouts, with less than 1% market share, that could mean additional revenue of $ 800 million. “It’s a big deal,” he said.
Due to the virus, buyers are once again focusing on health, which should give a boost as well. “The two main reasons people choose a store are for the quality of the fresh produce and the price. Sprout’s strategy is right at the end of the power aisle here, ”Mushkin says. “This strategy worked before the pandemic, and it will work much better after the pandemic, given where the consumer has migrated.”
Why has Sprouts’ inventory gone down? For starters, there are some tough comparisons ahead in 2021. Analysts have revised third-quarter earnings estimates up sharply this summer, and although Street expects earnings to cool after a record high. $ 2.12 per share this year, they estimate earnings will drop to $ 1.66 in 2021. Still, that’s about a third more than Sprouts’ $ 1.25 recorded in 2019.
Traffic was also a concern, down 13.2% in September. But even that is starting to improve. According to Placer.ai data compiled for Barronvisits improved, from an almost 24% year-over-year decline in April to just 5.4% in August, while traffic fell only 4.8% week of October 5.
“This not only indicates that September’s drop will be short-lived, but that Sprouts is able to generate engagement even when the odds are against it,” the data company notes. “When we compare Sprouts’ performance to other grocers coupled with a healthier approach, we see performance that closely matches that of Trader Joe’s, a brand whose impressive rebound has been widely noted. “
Ernesto Ramos, portfolio manager of BMO low volatility equity fund, highlights Sprouts’ new store openings, which could achieve 10% growth next year, as well as its delivery business – which has climbed 150 % in 2019 “and will likely be even higher in 2020.” This is good news, as online orders “are about 2.5 times larger than physical store purchases” and tend to have a mix of more profitable products, he said.
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Sprouts’ ability to show optimistic traffic and sales trends and detail their growth plans will likely be most important in the next quarter. Announcing a loyalty program would be a positive sign that it is looking to harness valuable customer data.
Sprouts is trading around 11.9 times futures earnings, significantly below its five-year average of 21.6 times, and well below the
S&P 500
index by 21.9 times, even as its return on assets and equity, at around 8.9% and 27.6% for 2020, respectively, increases.
Skeptics may trump the Bulls for now, but if the company can beat lower expectations, that could change.
Write to Teresa Rivas at teresa.rivas@barrons.com
