Sprouts Farmers Market (SFM, Financial) entered fiscal 2015 with not-so-impressive results in the first quarter. The results improved as compared to the last year’s performance, but the company lost market share, as its results missed consensus estimates, which scared investors away from the stock. The company sales couldn’t meet its expectations, mainly due to harsh weather conditions, and, other challenges associated with the L.A. port. Still, the management is seeing good long-term growth prospects. It is now engaged in aggressive promotional strategies, including other necessary steps to ramp up its performance in 2015. Let us have a look at some of its moves.
Quarterly results and more
Sprouts’ quarterly revenue came in at $857.5 million, which was more than last year’s same quarter but couldn’t meet analysts’ estimates of $870 million. Its net sales grew by 19% as compared to the same period last year. Still, this increase fell short of the company’s expectation by 5% to 6% mainly due to adverse weather and other factors.
Sprouts Farmers Market disappointed investors on the earnings front as well; it posted EPS of $0.25, which fell shy of consensus estimates of $0.27 per share. It is because of this, its shares plunged more than 9% after the company posted results below expectations.
The recent results tell us that Sprouts is definitely in a good shape and has lot of steam to grow. However, it did witness some weakness in comp sales and issues with the quality, mainly under the impact of adverse weather conditions. The company thinks that these are only short-term crunches, which it can overcome in time. Despite these, Sprouts is now focusing on various initiatives that will generate positive traffic. In addition, it is also loaded with aggressive promotional strategies that will contribute well to its growth story in the future.
A look at the action plan
Sprouts is counting on its impressive action plans for 2015. It is now taking initiatives to expand its private label and speciality product assortment. To support this, it is also engaged in testing new and expanded deli offerings. These are some of the wise steps by the company, as it will help it to grow its digital capabilities, while also improving customer service. In addition, Sprouts is also trying to incorporate many of the key offerings from its 2013 prototype into its existing store base.
Moving on, Sprout is planning to strengthen its private labels with the introduction of new products. In this regard, the company has already introduced about 60 new and innovative products, like new sprouts raw food lines, which saw amazing response in the first quarter. Sprouts further has another 150 items in the pipeline, such as non-GMO organic, raw, gluten-free and vegan, which are in high demand by the customers. These products will not only improve its brand awareness but also will result in better customer loyalty.
Sprouts has also expanded its deli offerings this year, and it is now excited about the response it gets in the market. However, the company is optimistic about its performance as it launches new features, such as a salad bar stocked with ready-to-eat healthy and flavored salad. This gives customers a wide range of options with good quality for lunch, dinner and refreshments. Sprouts is now planning to introduce these expanded offerings into a selected group of new and existing stores this year, in which it will determine that how best they can incorporate them into a greater number of stores in 2016 and beyond.
Growing customer engagement is also a key area of focus by the company. Regarding this, Sprouts is focusing on enhancing its digital marketing technologies, to engage with the customers in a more meaningful way.
Conclusion
Now moving to the fundamentals, the stock is reasonable with a trailing P/E of 43.16, but the forward P/E of 27.72 indicates solid earnings growth in the near term. With a decent profit margin of 3.63%, Sprouts is expected to gain good market share in future. The stock can be solid investment option as according to a study carried on U.S. organic food market, the U.S. food market is expected to grow at a CAGR of 10% in future which will give huge opportunities to the companies, such as Sprouts Farmers Market in future. Considering these solid valuation levels, I would like to suggest the investors to definitely pick Sprouts Farmers Market.
