It has been about a month since the last earnings report for Sprouts Farmers (SFM). Shares have lost about 1.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Sprouts Farmers due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Sprouts Farmers Q2 Earnings Miss Estimate, Decline Y/Y
Sprouts Farmers Market, Inc.’s positive earnings surprise streak came to an end with second-quarter 2019 results. The bottom line fell short of the Zacks Consensus Estimate, after surpassing the same in the preceding three quarters. The top line also came below the consensus mark. While net sales continued to increase year over year, earnings declined for the second straight quarter. Following the results, the company also revised full year guidance.
Let’s Delve Deeper
Sprouts Farmers reported quarterly earnings of 30 cents a share that missed the Zacks Consensus Estimate by a penny and fell 6% from the year-ago period. This was owing to the adoption of the new lease accounting standard and a tough sales environment. Definitely, higher cost of sales and increased SG&A expenses also acted as deterrents. We note that even lower shares outstanding failed to act as a savior.
Management now projects 2019 earnings in the band of $1.05-$1.09 per share, which is below the prior-year reported figure of $1.29. The company 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 in the range of $1.18-$1.24 per share.
Net sales came in at $1,415.7 million, up 7% from the prior-year quarter on account of comparable store sales growth of 0.1% and robust performance in new outlets. We note that net sales missed the Zacks Consensus Estimate of $1,445 million.
Management now envisions net sales growth of 7-8% for the full year with comparable store sales expected to remain flat. The company had previously forecast net sales growth of 9-10.5% and comparable store sales to improve in the range of 1.5-3%.
Gross profit jumped 6% to $464.8 million during the quarter. However, gross margin contracted 35 basis points to 32.8% owing to cost inflation, and marginally higher distribution and transportation expenses. Management envisions full year gross margin to decrease 20-30 basis points year over year.
Operating income came at $51.3 million, down 17% from the year-ago period. Further, operating margin shrunk 110 basis points to 3.6%. While adjusted EBITDA declined 8% to $81.5 million, adjusted EBITDA margin shriveled 90 basis points to 5.8%.
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 to increase roughly 10.5% year over year.
During the quarter under review, Sprouts Farmers opened six new outlets. The company has opened five more stores so far in the third quarter, taking the total count to 331 stores in 21 states as of Aug 1, 2019. The company plans to open about 28 stores in 2019.
Other Financial Aspects
Sprouts Farmers ended the reported quarter with cash and cash equivalents of $58.6 million, long-term debt and finance lease liabilities of $526.9 million and shareholders’ equity of $531.6 million.
The company generated cash flow from operations of $249.2 million and incurred capital expenditures (net of landlord reimbursements) of $84 million during 26-week period ended on Jun 30, 2019. Management plans to invest $170-$175 million in capital expenditures (net of landlord reimbursements) during 2019.
The company bought back 2.4 million shares of worth $163 million during the aforementioned period. At the end of the quarter, the company still had $55 million available under its share buyback program.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -19.3% due to these changes.
Currently, Sprouts Farmers has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Sprouts Farmers has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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