Shares of Sprouts Farmers Market, Inc. SFM have underperformed the industry in the past six months. We note that shares of this Phoenix, AZ-based company decreased 11.5% in the past six months compared with the industry’s growth of 2.7%.
Dismal second-quarter result contributed to the stock’s bearish run. The company’s earnings beat streak broke in the quarter. The bottom line fell short of consensus mark, after surpassing the same in the preceding three quarters. The top line also came below the estimate.
While net sales continued to rise year over year, earnings slid for the second quarter in a row. This was due to the adoption of the new lease accounting standard and tough sales environment. Definitely, higher cost of sales and increased SG&A expenses also acted as deterrents. Consequently, the company lowered 2019 view.
This triggered a downward revision in the Zacks Consensus Estimate. We note that estimates for current and next year have moved south by 2 cents each to $1.10 per share and $1.18 per share, respectively, over the past 30 days. This downward revision is attributable to the company’s soft guidance for 2019.
This Zacks Rank #5 (Strong Sell) company now projects 2019 earnings between $1.05 and $1.09 per share. In the year-ago quarter, it had reported earnings of $1.29 per share. Sprouts Farmers also informed that the lease accounting standard change will result in a net incremental expense of 4 cents a share for the full year. Earlier, the company had projected earnings of $1.18-$1.24 per share.
Management now envisions net sales growth of 7-8% for the full year with comparable store sales expected to remain flat. Management had previously forecasted net sales growth of 9-10.5% and comparable store sales to improve 1.5-3%. The company had registered 12% improvement in net sales during 2018.
Additionally, the company is grappling with strained gross margin. After shrinking 30 basis points in the first quarter of 2019, gross margin again contracted 35 basis points to 32.8% during the second quarter owing to cost inflation, and marginally higher distribution and transportation expenses. Moreover, management envisions full year gross margin to decrease 20-30 basis points year over year.
We note that operating income came at $51.3 million, down 17% from the year-ago period. Also, operating margin shrunk 110 basis points to 3.6%. Thanks to higher SG&A expenses that are negatively impacting the company’s margins.
During the second quarter of 2019, SG&A expenses rose 9% to $383.1 million, while as a percentage of sales the same increased 60 basis points to 27.1%. Excluding the impact of the adoption of the new lease accounting standard, SG&A deleveraged 20 basis points. SG&A expenses rose on account of investments in new outlets, higher interchange fees and increased costs related to the expansion of the home delivery program. Management expects SG&A expenses for the full year to increase roughly 10.5% year over year.
Nevertheless, the company is taking prudent steps to expand its customer base. The launch of Sprouts.com website and mobile app is testimony to the same. Additionally, the company is trying all means to provide ready-to-eat, ready-to-heat, and ready-to-cook items to customers. However, expectation of gross margin pressure and deleverage in SG&A expenses for the full year raise concern.
Conagra Brands CAG currently has long-term earnings per share (EPS) growth rate of 7% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Ingles Markets, Inc. IMKTA has a long-term earnings growth rate of 14.5% and sports a Zacks Rank #1.
Hershey HSY presently has a Zacks Rank #2 and long-term EPS growth rate of 8%.
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