Sprouts Farmers Market (SFM, Financial) continued to be focused on offering natural and organic, fresh, supreme-quality products at extremely competitive and affordable prices. In addition, Sprouts has become a store in demand for health-conscious customers and, thus, driving significant revenue growth for the company.
Adding customers with smart moves
Sprouts successfully added new customers and enhanced the existing customer visits to its stores. It reported 4% growth in traffic and 4.5% expansion in average basket size from last year.
The company’s keen focus on providing natural foods at lower prices and maintaining top-quality standards for its food offerings is expected to attract several new customers while maintaining the already strong base of existing customers.
Sprouts is continually exciting its customers with a diverse range of fresh produce, top-quality natural beef straight from the butcher shop and a variety of organic and natural packaged foods. The demand for its specialty added products is expanding rapidly and driving accelerated sales growth.
Improving its offerings
During the quarter, Sprouts reported healthy comp growth across all the specialty categories such as allergy-free, non-GMO, organic and raw and much better than the company’s average with sales expansion exceeding current industry trends. The product varieties that witnessed this significant growth included its Sprouts private-label products, which are continually experiencing solid comp and sales expansion with the growing consumer demand for hygienic foods variety.
The significant customer traction for a well-diversified product portfolio of Sprouts is expected to hugely expand the company’s new customer base and hence provide solid top-line growth.
Additionally, the company’s earlier Sunflower stores performed exceedingly well and above the company’s average during the quarter coupled with robust category and traffic growth adding nearly 80 basis points to its general comp in the quarter.
Moving towards the end of 2014 and with the changing season transitioning further south, Sprouts is witnessing some enhancements in supply and produce quality and lowering inflation, which is forecast to improve the company margin decline that it had been continually witnessing in the middle of this year also including the third quarter. Sprouts continues to focus on offering improved healthy foods at competitive prices even in this inflationary environment and continual ly provide enhanced traffic and comp expansion throughout its stores.
The improvement in the company’s produce quality, volume and decline in inflation along with rising customer footfall at Sprouts Sunflower stores is forecast to enable Sprouts in leading the highly competitive marketplace with better farming products.
Sprouts introduced 14 new stores during the third quarter including four stores opened in its two fresh markets in Atlanta and Kansas City. In this quarter, Sprouts also concluded its remodel program for 2014 and concluded the year with15 of its stores optimized.
Going forward, Sprouts targets on entering its 11th innovative market, Alabama, during the first quarter of 2015. It expects to continually declare strategic store sites for 2015 with time and targets on further growth in the Southeast. The company’s present real estate expansion schedule includes 41 signed leases and 64 pre-sites in the coming years, keeping it in line with its expansion strategy and lasting 14% unit development objective.
The accelerated expansion of Sprouts stores in numbers and uniquely offered product assortments is forecast to significantly expand the company’s top and bottom lines, driving improved long-term shareholder returns going forward.
Sprouts plans to add a greater variety of holiday grocery items during this year that include specialty attribute and private label items, enabling its customers to lead a healthy holiday season. Actually, many of its fresh Sprouts private-label pumpkin items such as its pumpkin gelato and pumpkin seed tortilla chips are present in stores and rapidly gaining popularity.
Sprouts has attractive growth compared to peers, but is hugely overvalued and extremely vulnerable to risks. The highest risk of Sprouts include decline of their pricing gain to its key competitors like Whole Foods Market (WFM, Financial) and/or Walmart (WMT, Financial).
Standard & Poor reiterated a BB- corporate credit rating for Sprouts Farmers Market Inc., tagging it positive from being stable. The analysts expect the company to continually improve profits and expand credit metrics with a successful execution of its robust expansion strategy into new markets and thus delivering solid top-line growth.
Conclusion
Overall, investors are advised to invest in Sprouts Farmers Market, Inc. looking at the healthy growth levels with PEG ratio of 1.88 and comparable to the industry’s average of 1.77. The profit margin of 3.49% is also satisfactory. However, the company looks overvalued with trailing P/E and forward P/E ratios of 60.85 and 42.53 respectively compared to better industry’s average of 30.88 and also needs to optimize its operations and lower the debt levels on its balance sheet with total debt of huge $384.51 million against total cash of $118.45 million only.
