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Sprouts Farmers (SFM) Beats on Q1 Earnings, Revises '19 View

Zacks Equity Research

Sprouts Farmers Market, Inc. SFM delivered a positive earnings surprise of 15% in first-quarter 2019. Notably, this was the eighth time in the trailing nine quarters that this provider of fresh, natural and organic food products has surpassed the Zacks Consensus Estimate. However, net sales came almost in line with the consensus mark. While the top line grew year over year, the bottom line declined from the prior-year period.

Shares of this Phoenix, AZ-based company were up roughly 5.4% during the trading session on May 2. This can primarily be attributed to the third straight quarter of positive earnings surprise and the company’s revised view for 2019. The company raised the low-end of the previously provided earnings per share guidance range.

Management now expects earnings in the band of $1.18-$1.24 per share versus $1.16-$1.24 projected earlier. However, it is still below $1.29 reported in 2018. The current Zacks Consensus Estimate for the full year stands at $1.19. The company continues to anticipate net sales growth of 9-10.5% for 2019.

We note that this Zacks Rank #3 (Hold) stock has declined roughly 15% in the past six months against the industry’s growth of 4.5%.

Sprouts Farmers Market, Inc. Price, Consensus and EPS Surprise


Sprouts Farmers Market, Inc. Price, Consensus and EPS Surprise | Sprouts Farmers Market, Inc. Quote

Let’s Delve Deeper

Sprouts Farmers reported quarterly earnings of 46 cents a share that beat the Zacks Consensus Estimate of 40 cents but fell 8% from the year-ago period. This was owing to higher effective tax rate, exercise of a considerable number of expiring pre-IPO stock options and the impact of the adoption of the new lease accounting standard. Definitely, higher cost of sales and increased SG&A expenses also acted as deterrents. We note that even higher net sales and lower shares outstanding failed to act as a savior.

Net sales came in at $1,413.9 million, up 10% from the prior-year quarter on account of comparable store sales growth of 1.4% and robust performance in new outlets. We note that net sales almost met the Zacks Consensus Estimate of $1,412 million. Management continues to project 2019 comparable store sales to improve in the range of 1.5-3%. The company now anticipates full year comparable store sales to be at the lower end of the range.

Gross profit jumped 9% to $484 million. However, gross margin fell 30 basis points to 34.3% owing to cost inflation as well as changes in product mix.  Management envisions full year gross margin to be marginally down year over year on account of first-quarter results and the competitive landscape coupled with increased transportation costs. This is likely to be partially offset by improvements in promotion and pricing optimization.

Operating income came almost flat at $79.6 million, while operating margin shrunk 60 basis points to 5.6%. SG&A expenses rose 11% to $375 million, while as a percentage of sales the same increased 20 basis points to 26.5%.

Management expects deleverage in SG&A expenses of about 55-60 basis points in 2019, including a 35 basis points impact due to the adoption of the new lease accounting standards.

Store Update

During the quarter under review, Sprouts Farmers opened eight new outlets. The company has opened one additional store so far in the second quarter, taking the total count to 322 stores in 19 states as of May 2, 2019. The company plans to open 28 stores in 2019. The company intends to open eight outlets in the second quarter with maximum openings slated for the third quarter.

Other Financial Aspects

Sprouts Farmers ended the reported quarter with cash and cash equivalents of $19.5 million, long-term debt and finance lease liabilities of $512 million and shareholders’ equity of $556.5 million.

The company generated cash flow from operations of $112.6 million and incurred capital expenditures (net of landlord reimbursements) of $24 million during the quarter. Management plans to invest $170-$175 million in capital expenditures (net of landlord reimbursements) during 2019.

The company bought back 4.9 million shares worth of $112 million in the quarter. At the end of the quarter, the company still had $106 million available under its share buyback program. Subsequent to the end of the quarter and through Apr 29, the company bought back 2.4 million shares for a total of $51 million.

Stocks to Consider

General Mills GIS has a long-term earnings per share growth rate of 7.5% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lamb Weston Holdings LW, with a Zacks Rank #2, delivered a positive earnings surprise of 15.9% in the last reported quarter.

McCormick & Company MKC has a Zacks Rank #2 and a long-term earnings per share growth rate of 9%.

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