Sprouts Farmers Market IPO Prices Above Forecasts

Investor's Business Daily

Update: Specialty grocery chain Sprouts Farmers Market late Wednesday priced its initial public offering at $18 a share, above the expected $14-$16 range. It sold 18.5 million shares, raising $333 million. Sprouts will begin trading as SFM on Thursday. It joins a growing field of publicly traded upscale grocers. Whole Foods Market late Wednesday reported better-than-expected earnings growth, but sales just missed and same-store sales growth for the current quarter are coming in lighter.***THE BUZZ

Stocks in the supermarket category have been top performers at No. 21 on IBD's list of 197 industry groups.

The group includes giants such as Kroger (KR) and Whole Foods Market (WFM) as well as last year's IPO of Natural Grocers by Vitamin Cottage (NGVC).

The supermarket category will get a new entrant with the IPO of Sprouts Farmers Market, a retailer of natural and organic food. It sells fresh produce, bulk foods, vitamins, meat and seafood, bakery, dairy, frozen foods, body care and natural household items catering to consumers' growing interest in healthy living. The IPO is expected to launch Thursday.

"I think it will do well in the IPO and aftermarket," said Francis Gaskins, founder of IPOdesktop.com. "The industry group has performed well, so investors who've done well in that group might also want to buy this one.

Sprouts has 163 stores in eight states.

Among comparable IPOs is Fresh Market (TFM), which operates more than 129 stores in 25 states. Fresh Market shares rose 46% on its first day in November 2010. It currently trades near 53, 141% above its IPO price of 22.

Another is Natural Grocers by Vitamin College, which rose 33% on its IPO one year ago.

Sprouts plans to raise $278 million with the sale of 18.5 million shares, giving it a market value of $2.3 billion.

THE COMPANY

It all started with a San Diego fruit stand in 1943 by Henry Boney, who later opened several stores. Two of his sons, Stan and Steve, carried the business forward in 1969, opening more stores under different names.

The first Sprouts market was opened in Chandler, Ariz., in 2002, by Stan Boney, his son and two family friends. They expanded operations into Texas and California.

In 2011, private equity firm Apollo Global Management bought a controlling interest in Sprouts, which had 63 stores at the time. Apollo also acquired the 43-store "Henry's Marketplace," a previous business that the Boney family established and later sold, reuniting the two.

Sprouts expanded further when it merged with Sunflower Farmers Market in May 2012, adding another 37 stores and extending its footprint into New Mexico, Nevada, Oklahoma and Utah.

On a pro-forma basis, combining all entities under one roof, Sprouts reported 2012 sales of $2 billion, up 16% from the prior year.

The company, in its S-1 prospectus, said the cornerstones of its business are "fresh, natural and organic products at compelling prices, an attractive and differentiated shopping experience and knowledgeable team members.

It claims to be one of the largest specialty retailers of natural and organic food in the U.S. According to Nutrition Business Journal, spending on natural and organic food has been growing at a compound annual rate of 10% from 1997 through 2011, when sales reached $43 billion in the U.S. market.

RISK/CHALLENGES

The $600 billion U.S. supermarket industry is highly competitive. Competitors include giant supermarket chains run by Kroger and Safeway (SWY), natural food stores, discount retailers and warehouse membership clubs. They operate on very thin profit margins.

Aggressive expansion, unexpected price cuts and fluctuations on the availability of goods can take a toll.

For the 13-week period ended June 30, for example, Sprouts reported gross margins fell to 30% from 30.4% in the year-ago period due to inflation in certain commodity items, as well as lower margins in vitamins and body-care products due to promotions and inventory adjustments. Its success also depends on the ability to open new stores.

"There is a lot of competition for store sites," said Gaskins.

Sprouts has completed 15 of 19 planned store openings this year. It plans to open another 20 stores in 2014.

"Our proposed expansion will place increased demands on our operational, managerial and administrative resources," the company said in its S-1 statement. "These increased demands could cause us to operate our existing business less effectively, which, in turn, could cause deterioration in the financial performance of existing stores.

Sprouts also sells a significant amount of perishable products. Sales of produce accounted for 25% of net sales in fiscal 2012. Produce is vulnerable to adverse weather and natural disasters, which could reduce the available supply.

THE RESULTS

For the 13-week period ended March 31, Sprouts reported revenue of $574 million, up 16% from the year-ago period, with net income of $19.2 million. Comparable store sales rose 8%. For the 13-week period ended June 30, Sprouts expects to report revenue of $622 million, an increase of 22% compared to the year-ago period. It expects to report same-store sales growth of 10.8%.

Sales in 2012 rose 16% to $2 billion, with net income of $29.2 million and pro-forma adjusted net income of $45 million. Same-store sales rose 10%.

USE OF PROCEEDS

Sprouts estimates net proceeds of $247.6 million, assuming a $15 price, all of which will be used to repay debt. Any remaining proceeds will go to general corporate purposes.

THE MANAGEMENT

J. Douglas SandersChief executive and president

Sanders, 43, joined Sprouts upon its founding in 2002 and became president and CEO last August. He was chief operating officer from 2005 to August 2011. He previously held management and consulting positions in the grocery industry.

Amin Maredia

Chief financial officer

Maredia, 41, has served as CFO since August 2011. He previously held management and finance positions at Burger King Corp. from 2006 through 2010. Prior to that he was assistant treasurer and controller for Dynergy.

James Nielsen

Chief operating officer

Nielsen, 42, has served as COO since August 2011. He has held executive positions at retail stores of the Sprouts operations in earlier years. He also served in various roles for Wild Oats Marketplace, including director of operations.

Sprouts Farmers Market

Phoenix, Ariz.

(480) 814-8016Sprouts.comLead underwriters: Goldman SachsOffering price: $14-$16Expected Date: Thursday, Aug. 1Ticker: SFM

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