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Sprouts Farmers (SFM) Q1 Earnings Beat Estimates, Rise Y/Y

Zacks Equity Research

Sprouts Farmers Market, Inc. SFM reported first-quarter 2020 results, wherein both earnings and revenues not only improved year over year but also surpassed the Zacks Consensus Estimate for the third straight quarter. Further, the company sustained its positive comparable store sales trend. The company benefited from spike in demand during the latter part of the quarter as Americans stockpiled essential items in the wake of coronavirus outbreak.

The renowned grocery retailer reported adjusted quarterly earnings of 79 cents a share that surpassed the Zacks Consensus Estimate of 53 cents, and improved considerably from 46 cents in the year-ago period. The quarterly earnings include a benefit of 22 cents a share related with the pandemic. Notably, reduced net interest expense and lower shares outstanding also contributed to the bottom line.

Net sales of this Phoenix, AZ-based company came in at $1,646.5 million, up 16% from the prior-year quarter on account of comparable store sales growth of 10.6% and sturdy performance in new stores opened. Further, net sales outpaced the Zacks Consensus Estimate of $1,600 million.

Impressively, shares of this Zacks Rank #1 (Strong Buy) stock have gained roughly 49% against the industry’s decline of 27% over the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.

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

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

Sprouts Farmers Market, Inc. price-consensus-eps-surprise-chart | Sprouts Farmers Market, Inc. Quote

Margins

Gross profit jumped 23% to $594 million during the quarter, while gross margin expanded 180 basis points to 36.1%. This can be attributed to balanced promotions during the first two months of the quarter under review, and sales mix and shrink benefits during the month of March courtesy of stockpiling by customers.

Adjusted operating income came at $128.8 million, up from $80.1 million reported in the year-ago period. Further, adjusted operating margin increased 210 basis points to 7.8%. We also note that adjusted EBITDA surged 46% to $160.4 million, while adjusted EBITDA margin grew 190 basis points to 9.7%.

SG&A expenses rose 16% to $436.3 million, while as a percentage of net sales the same remained flat at 26.5%. The deleverage in SG&A expenses was due to higher bonuses, rise in e-commerce fees, and increased health care, labor and occupancy costs.

Store Update

During the quarter, Sprouts Farmers opened four new outlets, taking the total count to 344 stores in 23 states.

Other Financial Aspects

Sprouts Farmers ended the quarter with cash and cash equivalents of $247.1 million, long-term debt and finance lease liabilities of $462.2 million and shareholders’ equity of $670.7 million. We note that long-term debt and finance lease liabilities has declined $87.2 million on a sequential basis.

The company generated cash flow from operations of $277.1 million and incurred capital expenditures (net of landlord reimbursements) of $17 million for 13 weeks ended on Mar 29, 2020. The company ended the quarter with a $451 million balance on its revolving credit facility.

Key Things to Note

Sprouts Farmers notified that trends witnessed in the later part of the first quarter continued in the month of April as well. Notably, consumers continued to spend more on groceries. Moreover, as social distancing becomes the norm, consumers have been opting more for e-commerce services. As a result, comparable store sales during April month rose 7.2%, and ecommerce sales represented 13% of net sales.

Looking ahead, management cautioned that the level of operating margin expansion attained in the first quarter may not continue. Sprouts Farmers highlighted that while higher sales and other strategic endeavors have been benefiting operating margin, investments to increase team’s pay and benefits, and expenses on additional safety and cleansing measures will hurt second-quarter results significantly compared with the first quarter.

Considering the current scenario, management refrained from providing any guidance. However, it did highlight long-term targets that include low double-digit earnings growth, low single-digit comps increase and stable to expanding operating margin. It projects at least 10% annual unit growth and cash on cash returns of approximately 40% from new stores. It also expects to lower new store cost to build by about 20%.

Stocks to Consider

Hain Celestial Group HAIN has a trailing four-quarter positive earnings surprise of 7%, on average. The stock sports a Zacks Rank #1.

Campbell Soup Company CPB has long-term earnings per share growth rate of 7.2% and a Zacks Rank #2 (Buy).

Conagra Brands CAG has long-term earnings per share growth rate of 7% with a Zacks Rank #2.

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