Does Sprouts Have the Recipe for Continued Outperformance?
Stock market performance of supermarket players
Despite Sprouts Farmers Market’s (SFM) strong financial performance, the stock market has not rewarded the company and has treated all organic players alike. SFM is currently trading 37% below its 52-week high.
While Whole Foods Market (WFM) and The Fresh Market (TFM) reported lower sales and falling margins on price perception issues and concerns of competition, SFM was the growth story of 2015. Despite this, the three organic and natural food retailers largely traded in tandem in 2015.
SFM’s stock fell 25% during 2015, Whole Foods Market fell 33%, and The Fresh Market fell 40%. Kroger (KR), on the other hand, outperformed the S&P 500, rising more than 30% by the end of 2015.
2016 has been an equally bad year for SFM. The company has lost around 10% of its share price YTD (year-to-date). WFM has also fallen by more than 7%. TFM has managed to rise about 1% on the news of Kroger’s bidding for the company.
Dividends and share repurchases
Sprouts Farmers Market does not offer dividends to its shareholders. Whole Foods Market and Kroger, however, do offer dividends. The one-year forward dividend yields of Whole Foods and Kroger stand at 1.8% and 1.1%, respectively, as of February 16, 2016.
Recently, SFM announced a share repurchase plan of $150 million, which will happen over a two-year period.
Despite a drastic fall in prices, SFM continues to be the most expensive company in its peer group. As of February 16, 2016, the company is trading at a one-year forward PE (price-to-earnings ratio) of 25.4x.
Kroger (KR) has seen its valuations deteriorating this year as a result of a 6.5% YTD fall in its stock price. It’s currently trading at a one-year forward PE of 17.7x. Whole Foods Market, whose price has crashed by a little over 7% YTD, is trading at a one-year forward PE of 19.8x. SuperValu is the cheapest company, trading at a one-year forward PE of 6.2x. The Fresh Market (TFM) is currently at trading 14.8x.
Those looking to invest in SFM through ETFs can choose to invest in the SPDR S&P Retail ETF (XRT), the Fidelity MSCI Consumer Staples ETF (FSTA), and the Guggenheim S&P MidCap 400 Pure Growth ETF (RFG). SFM has weights of approximately 1.1%, 0.11%, and 1.8%, respectively, in the above-mentioned ETFs.
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