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Sprouts Farmers Down 18% in 6 Months: Will it Decline Further?

Zacks Equity Research

Shares of Sprouts Farmers Market, Inc. SFM have not only declined but also underperformed the industry in the past six months. This Zacks Rank #4 (Sell) stock has slumped 18.1% in the said time frame compared with the industry’s decline of 7.1%.

Analyst are also growing bearish on the stock as apparent from downward revision in the Zacks Consensus Estimate. We note that the Zacks Consensus Estimate for earnings in 2019 and 2020 has moved south by 6 cents and 5 cents in the past 30 days to $1.20 and $1.35, respectively. Although, the consensus mark for first-quarter 2019 earnings has moved down by 4 cents to 41 cents in the past 60 days.

What’s Hurting the Stock?

The decline in the Zacks Consensus Estimate can be attributed to muted 2019 guidance provided by the company. Despite delivering better-than-expected fourth-quarter 2018 results, Sprout Farmers projects the bottom line to be $1.16-$1.24 per share in 2019, which is way below $1.29 reported in 2018. Further, the company anticipates net sales growth of 9-10.5% for 2019, while it had registered net sales increase of 12% in 2018.

Adding to the woes, the company is witnessing elevated SG&A costs for quite some time now. The metric rose 11% during the final quarter of 2018, following an increase of 10%, 14% and 29% in the third, second and first quarters. The rise was mainly due to planned wage investments, increased occupancy and advertising expenses. Management expects deleverage in SG&A expenses in 2019 due to wage investment, increased training regarding the fresh item management and other systems implementations, and rise in health and benefit costs.

Moreover, Sprout Farmers is also grappling with high debt level. The company ended the fourth quarter with long-term debt of $453 million, which showcased an increase of $18 million from the preceding quarter. Certainly, high debt level would lead to rise in interest expenses, which in turn may hurt the bottom line to an extent. We note that interest expenses climbed 29.5% in the fourth quarter, following a rise of 32.3%, 28.3% and 28% in the third, second and first quarters of 2018.

Management Looking Every Nook & Cranny

Management is looking into every corner for growth prospects. In this regard, the company is undertaking several initiatives focused on product innovation, and enhancement of customer experience and technology. Further, Sprout Farmers has partnered with Instacart to offer same-day delivery to customers. The home delivery business, which is now available in more than 200 stores, will be offered in all markets by the end of 2019. The company is trying all means to provide ready-to-eat, ready-to-heat and ready-to-cook items to customers. Apart from these, the company is making efforts to expand private-label offerings in departments under the Sprouts Market Corner Deli, The Butcher Shop at Sprouts and Sprouts Fish Market brands.

All said, we hope that the above-mentioned initiatives will provide some cushion to the stock and help it return to growth trajectory.

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