Demand for natural and organic food has been on the rise since people are becoming highly health conscious. However, organic food providers such as Whole Foods Market (WFM, Financial) can no more charge a premium for such products because attractiveness of this business has led to the entry of a large number of competitors.
One such competitor is Sprouts Farmers Market (SFM, Financial) which made its debut in August last year and has been performing very well since then. It posted its first quarter results recently which beat the Street’s expectations, enabling its share price to rise.
Performance at Its Best
Revenue jumped a whopping 26% over last year to $722.6 million. This was higher than the estimate of $720 million. The company opened four new stores during the quarter, which added to the top line. However, it was not only the new stores which drove revenue higher. Sales at existing stores also increased as evident from a 13% growth in same store sales. Both customer traffic and average basket size increased by 6.5% and 6%, respectively.
One of the key drivers for growth was higher demand for its organic and fresh products. The retailer’s products are resonating well with the customers. Moreover, these items are offered at a comparatively lower price, as compared to Whole Foods Market. Hence, more customers are getting attracted to Sprouts Farmers’ offerings.
In fact, Whole Foods Market is already feeling the pressure of competition from such retailers. Its recently reported quarter disheartened its investors as it failed to meet the analysts’ estimates. Although revenue rose 10% over the prior year, it was below the analysts’ estimate of $3.34 billion. Its same store sales grew 4.5%, whereas Sprouts Farmers’ metric grew much more. Also, Whole Foods’ bottom line was flat for the quarter as the strategy of reducing product prices hurt earnings as well as the margins.
On the other hand, Sprouts Farmers’ earnings surged a whopping 64% over the previous year’s quarter. The earnings for the quarter stood at $0.23 per share, much ahead of the estimates, helped by higher top line and lower costs. Gross margin also expanded by 70 basis points to 31% as economies of scale helped in getting discounts from vendors.
What Lies Ahead?
The organic food retailer’s remarkable performance enabled the company to revise its guidance for the year upward. The company raised its earnings outlook by $0.05, and is now expected to be in the range of $0.63 per share and $0.65 per share. Also, revenue growth expectations are increased by 2% and now stand between 18% and 20%, along with same store sales growth of 8.5% to 9.5%.
Sprouts Farmers has also been innovating new products, especially in the private label category, which is luring more customers. Its item count under the private labels grew 20% over last year leading to a growth of 30% in private label comps.
The retailer also plans to expand its footprint in order to grow its top line. It will open six new stores in the second quarter, which will help in strengthening its presence. Moreover, it has ramped up its promotional efforts in order to attract customers.
Final Thoughts
Sprouts Farmers Market has been a commendable performer with a growing revenue base because of its quality products at affordable prices. Its recent quarter has been a blockbuster one along with a bright outlook for the year. Additionally, the company’s efforts into expansion and introduction of new products should further lead to higher sales. Therefore, this company is one of the best picks and should not let you down.
