Sprouts Farmers Market Soars 124% In Debut As Natural Foods Take Root

Investor's Business Daily

Sprouts Farmers Market shares more than doubled on their first day of trading Thursday, but dominant natural foods grocer Whole Foods continues to expand and innovate, telling rivals to "bring it on.

Sprouts (SFM) surged 124% to close at 40.25 after an opening gain to 35. The upscale grocer late Wednesday sold 18.5 million shares at $18 each, above the expected $14 to $16, netting $333 million.

Demand for natural foods has grown in recent years as people become more aware of soaring obesity, and new diet trends like juicing have boosted sales of produce and more healthy food options.

Natural Selection

Wal-Mart (WMT) has increased its fruit and veggie offerings as well. Traditional grocers like Kroger (KR) and Safeway (SWY) have boosted their specialty food products with more vegan and gluten-free options. Kroger said last month that it will buy upscale mid-Atlantic grocer Harris Teeter Supermarkets (HTSI).

But Whole Foods Market (WFM) isn't worried about losing its lead in natural foods.

"We don't think we have any new competitors," David Lannon, executive vice president of operations, said in a Wednesday evening earnings conference. Sprouts has been competing with Whole Foods in places like Southern California for years.

"I would just say, we love competition. It makes us better," said co-CEO Walter Robb during the call. "We get to respond and innovate and grow. So bring it on.

Whole Foods Results Mixed

Whole Foods late Wednesday reported a 19% jump in third-quarter earnings to 38 cents a share, topping analysts' estimates by a penny. Sales climbed 12% to $3.06 billion, just below views. The grocer has posted double-digit revenue and EPS growth every quarter since March 2009.

Whole Foods' Q3 sales in stores open at least a year rose 7.5%. But same-store sales are tracking at a slower 5.8% pace in the current quarter.

Still, the company raised its full-year EPS outlook to $1.45 to $1.46 vs. analysts' views for $1.45.

Whole Foods shares fell less than 1% Thursday. Analysts are still bullish.

"Whole Foods is the only national player, and no one has the customer service and store environment that they do," said Brian Yarbrough, a consumer analyst at Edward Jones.

The company remains aggressive and wants to expand to 1,000 stores in the U.S. from 335 now. It also has opportunities to expand its footprint in the U.K. and Canada, Yarbrough said.

Whole Foods already has stores in 40 states across the country. Sprouts is in just eight states, none on the East Coast, though it is in California and Texas.

Another player in the natural foods sector is Fresh Market (TFM), which has more than 129 stores in 25 states. The November 2010 IPO priced shares at $22, and they are now above 53.

Meanwhile, traditional grocery stores have beefed up their organic offerings but continue to struggle with slim margins.

Grocers Doing Well

The Retail-Super/Mini Markets group is ranked No. 27 out of the 197 industries IBD tracks. Kroger and Whole Foods lead in the group with Composite Ratings of 95. Safeway has a 79 rating. Investors should focus on companies with a Composite Rating of 95 or above.

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