Food businesses have it good, insofar as people will never stop eating. Businesses selling ingredients are starting to do much better than those that sell cooked food, given increasing health concerns of eating junk food, making matters difficult for companies like McDonald’s Corporation (MCD, Financial). Even among those selling ingredients, specialty supermarket chains like Sprouts Farmers Market Inc. (SFM, Financial) and Whole Foods Market Inc. (WFM, Financial) are doing better than others like Walmart Stores Inc. (WMT, Financial) due to their offerings of fresh produce that is natural and organic, the two buzzwords around food that are becoming increasingly popular with an ever-more health conscious population. Let us look at why Sprouts Food Market is a good investment bet in the current scenario.
Healthy eating trends
More and more people are becoming conscious of the benefits of eating organic and naturally produced food that reduces the number of chemicals entering their bodies via the food production process, in terms of fertilisers, pesticides and feed. There are also increased concerns surrounding the consumption of genetically modified foods, with some long-term studies linking them to deleterious effects on the body. Also, consumers now want to find non-allergic food, such as gluten free food, in their supermarkets. All these factors are leading to the increasing popularity of stores such as Sprouts Farmers Market.
The pricing factor
One reason why the company is doing better than many rivals is because of its aggressive pricing. The company has made a smart strategic decision of keeping the price of essential items such as milk low, which in turn generates heavier customer traffic, thereby offsetting any loss in profits.
Opportunity for growth
The company started out with one store in 2002 and right now, has a total of 191 stores across 10 states in the U.S, with its largest presence in Texas, where it started and in California. That means there are 40 more states that the company has no presence in and that gives it a lot of room to grow. The company is looking at having 1,200 stores, more than six times the current number, in the next 15 years, and there is no reason to say that the company won’t get there. In the coming year, 27 new stores are planned for opening.
Not an income stock
Since going public in 2013, the stock has not performed well and hasn’t paid out much in terms of dividends either. So it is not for investors looking for regular income or short-term gains. But for long term investors, it looks to be a solid growth story. This is even more so after the exit of Apollo Global Management which has sold all its stock in the company last month, effectively giving the company more control over its operations.
Conclusion
Being an innovator of products and offering affordable prices to middle class consumers makes this stock a very attractive proposition in the long term. Technical analysis and analyst firms like Morgan Stanley (MS, Financial), both seem to agree that this is a good time to enter the stock. We recommend a Buy on this stock.
