Sprouts Farmers (SFM) Down 14.8% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Sprouts Farmers (SFM). Shares have lost about 14.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sprouts Farmers due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Sprouts Farmers Beats on Q3 Earnings, Updates View

Sprouts Farmers delivered a positive earnings surprise of 3.9% in third-quarter 2018. Notably, this was the sixth time in the trailing seven quarters that this organic supermarket chain surpassed expectations. Also, both the top and bottom line continued to increase in double-digits on a year-over-year basis.

The company reported quarterly earnings of 27 cents per share, which exceeded the Zacks Consensus Estimate by a penny and increased 17.4% from the year-ago period number. Higher net sales, lower effective tax rate and decline in shares outstanding owing to buyback program drove the bottom line year over year.

Net sales came in at $1,329.1 million, up 10.2% from the prior-year quarter on account of comparable store sales growth of 1.5% and robust performance in new outlets. We note that net sales marginally came ahead of the Zacks Consensus Estimate of $1,326 million.

Gross profit jumped 10.4% to $382.4 million, while gross margin expanded 5 basis points to 28.8% owing to increased merchandise margins, partly offset by higher occupancy expenses. Operating income declined 0.4% to $52.8 million, while operating margin contracted 40 basis points to 4%.

Direct store expenses in the third quarter climbed 12.5% to $281.4 million, while as a percentage of sales the same increased to 21.2% from 20.7% in the year-ago period. This uptick can be attributed to planned wage investments, rise in healthcare costs and higher depreciation charges. For the full year, the company expects direct store expenses to increase by roughly 35 basis points.

SG&A expenses rose 10% to $43.9 million, while as a percentage of sales the same remained flat to 3.3%. Higher advertising expenses and strategic investments led to the increase in SG&A expenses, partially offset by lower bonus expenses. In addition, pre-opening costs increased by 10 basis points in the quarter under review owing to additional store openings compared with the prior-year quarter.

Store Update

During the quarter under review, Sprouts Farmers opened 12 new outlets — three in California, two in Nevada and one each in Arizona, Oklahoma, North Carolina, Maryland, Texas and first store in the state of Pennsylvania and Washington. So far in the fourth quarter, the company has opened two more stores. As of Nov 1, 2018, the company operates 315 stores in 19 states. The company plans to open 30 stores during the year.

Other Financial Aspects

Sprouts Farmers ended the quarter with cash and cash equivalents of $17.2 million, long-term debt of $435 million and shareholders’ equity of $641.3 million.

In the first three quarters of 2018, the company generated cash from operations of $235.5 million and incurred capital expenditures (net of landlord reimbursements) of $129 million. Management plans to invest $160-$165 million in capital expenditures (net of landlord reimbursements) during 2018 compared with $165-$170 million projected earlier.

Year to date, through Oct 29, 2018, the company has bought back 8.4 million shares worth $193 million. The company still has $283 million available under its share buyback program.

Guidance

Management raised the full-year earnings projection and now expects the same to be in the band of $1.28-$1.30 per share. The company had earlier guided earnings in the range of $1.24-$1.28. Sprouts Farmers raised the lower end of the full-year net sales growth to 11-11.5% compared with 10.5-11.5% anticipated previously. Further, the company lowered the full-year effective tax rate guidance to around 18% from the prior view of 19-20%.

However, the company tightened the full-year comparable store sales projection. It now expects the metric to increase 1.7-2% compared with earlier guidance of 1.5-2.5%.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

At this time, Sprouts Farmers has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Sprouts Farmers has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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