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Sprouts Farmers Market Inc - Fundamental Investment Case

Research

Publication Date: 25 Feb 2019 - By Robert Prather By Robert Prather
Actionable
Differentiated

Equity Fundamental Equity USA UK Consumer

Qualitative Concerns:

  • Amazon (Whole Foods) remains a major competitive problem with many stores near Sprouts. 
  • Amazon, while less aggressive cutting everyday prices, has continued to ramp up Prime member benefits and grown their online grocery business. 
  • Deep discounters, mostly Aldi, continue to invest heavily building new stores in Sprouts' markets (Arizona and Texas), upgrading fresh and organic assortments, and launching national TV advertising. 
  • Wal-Mart, Target, Costco, and Kroger are investing heavily to fend off deep discounters. Lowering prices and increasing convenience with online ordering or pick-up.

Fundamental Concerns:

  • Topline growth already slowing due to decelerating SSS and deli upgrade penetration.
  • Unit growth could be next with Sprouts already having to close locations in fairly new and underpenetrated markets. 
  • Competition appears to be starting to impact and weaken margins. 
  • Operating and free cash flows have weakened even faster than margins.
  • Analysts' estimates appear to model in a long-term growth story with stabilizing margins. 
  • While cheap compared to historical averages, the valuation appears expensive for a grocer. The valuation creates downside and minimizes take out risk.
     

Bottom Line: A well regarded grocery growth story facing increased competition and more limited growth opportunities.

Sprouts Farmers Market Inc

Source: VR Fundamental

Pages: 52

Released: 25 Feb 2019

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The Author

Robert Prather

Equity Analyst

Technology, Consumer, Telecom & Media, Industrials

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London, United Kingdom

info@reachx.co
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