Zacks Industry Outlook Highlights Sprouts Farmers Market, Sovos and SpartanNash
For Immediate Release
Chicago, IL – July 27, 2023 – Today, Zacks Equity Research discusses Sprouts Farmers Market, Inc. SFM, Sovos Brands, Inc. SOVO and SpartanNash Co. SPTN.
Industry: Natural Foods
Link: https://www.zacks.com/commentary/2127487/3-natural-food-stocks-to-watch-on-thriving-demand-innovation
Consumers’ growing health consciousness and resultant inclination toward nutritious and healthy offerings have been working well for companies in the Zacks Natural Foods Products industry. Industry participants are boosting their portfolio strength through effective innovations and acquisitions. Some players are also making increased investments in augmenting digital capacities.
However, industry players have been struggling with the challenges related to input cost inflation and surging operating expenses. However, natural food companies are taking proactive measures to address the issue of rising cost inflation through pricing strategies. These upsides offer companies like Sprouts Farmers Market, Inc., Sovos Brands, Inc. and SpartanNash Co. a favorable position.
About the Industry
The Zacks Natural Foods Products industry comprises companies that manufacture and sell a wide range of organic and natural fruits, vegetables, dairy products, flour, bakery items, meat and seafood, as well as spices and condiments. These also offer packaged ready-to-eat meals, snacks, cereals and frozen food. Some companies offer comfort food items like ice cream and soups. A few players provide personal care products as well as health supplements.
The firms operating in this space sell their products mostly through wholesalers, distributors, large retail organizations, grocery chains, mass merchandisers, drug stores and e-commerce service providers. Some also cater to food service channels, including restaurants, cafes and hotels. Others offer services to schools, hospitals and industry caterers. Some players operate through independent retail stores.
Major Trends Shaping the Future of the Natural Food Industry
Growing Emphasis on Healthier Food Choices: The increasing preference among consumers for healthy and nourishing food has sparked a surge in demand for organic and fresh food products. This trend works well for businesses operating in the natural food product industry. While outdoor dining has been picking up, a significant number of individuals are maintaining their habit of consuming natural and organic food at home to support their overall well-being.
These shifting preferences are expected to sustain the demand for fresh, natural, and organic food products. Even while dining out, customers are showing a preference for healthier food options. As a result, restaurants and cafes are inclined to incorporate more natural and wholesome ingredients into their menus to cater to this growing health-conscious consumer base. Industry experts foresee a continued focus on healthier food choices, which is likely to keep fueling the popularity of fresh and organic offerings.
Efforts to Strengthen Portfolio & Market Reach: Companies have been expanding their portfolio and market presence through strategic partnerships, acquisitions and store expansions. Players in this space have also been focusing on research and development to introduce products that can be cooked easily at home and develop formulations that are low on preservatives without compromising on flavors.
Plant-based, gluten-free and keto-friendly ingredient-based food products are gaining prominence. Companies have been ramping up production capacity to meet the rising demand for fresh and organic products.
Moreover, some companies in the natural food industry have been benefiting from higher e-commerce sales due to consumers’ growing inclination toward online shopping. As a result, companies are investing more in digital transformation, including online product offerings, delivery systems and marketing.
Elevated Input Costs: The natural food industry players have been grappling with escalating input costs. The prices of essential commodities such as cooking oil, vegetables, dairy products and animal feed have been climbing. Additionally, supply-chain disruptions have exacerbated expenses related to warehousing, packaging and logistics. Nevertheless, companies are proactively implementing strategies to address these cost-related hurdles. They are focusing on streamlining operational structures, maximizing manufacturing capacity and implementing effective pricing policies to navigate these challenges.
Surging Operating Costs: Companies have been bearing the brunt of increases in operating expenses. The mounting costs linked to higher volumes, including personnel expenditures such as salaries, wages, commissions and benefits, as well as escalated repair and maintenance outlays, have significantly impacted their operational budgets. Additionally, certain companies are experiencing elevated costs due to the establishment of new stores and higher marketing expenditures. These factors pose concerns about maintaining healthy profit margins.
Zacks Industry Rank Indicates Robust Prospects
The Zacks Natural Foods Products industry is housed within the broader Zacks Retail - Wholesale sector. The industry currently carries a Zacks Industry Rank #121, which places it in the top 48% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since the beginning of May 2023, the industry’s earnings estimate for 2023 has risen 2.1%.
We present a few stocks that you may want to consider for your portfolio. However, before that, it’s worth taking a look at the industry’s performance and current valuation.
Industry vs. Broader Market
The Zacks Natural Foods Products industry has outperformed the broader Zacks Retail - Wholesale sector as well as the Zacks S&P 500 over the past year.
The industry has surged 26.8% over this period compared with the broader sector’s growth of 11.5% and the S&P 500’s increase of 16.4%.
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing Retail-Wholesale stocks, the industry is currently trading at 14.42X compared with the S&P 500’s 20.08X and the sector’s 23.41X.
Over the past five years, the industry has traded as high as 20.31X and as low as 11.82X, with the median being 15.87X.
3 Natural Food Stocks to Keep a Close Eye On
Sovos Brands: This Zacks Rank #1 (Strong Buy) stock has increased 33.2% in a year. The consumer-packaged food company’s focus on brand building, along with its strong distribution network, bodes well. Further, Sovos Brands has been benefiting from robust momentum in Rao’s Megabrand. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Sovos Brands’ top and bottom lines for the current fiscal year suggests growth of around 8% and 6.7%, respectively, from the figure reported in the year-ago period. The consensus mark for SOVO’s fiscal 2023 earnings per share (EPS) has dropped by a penny over the past 30 days.
Sprouts Farmers: This renowned grocery retailer has been experiencing significant advantages due to its commitment to product innovation, the prioritization of e-commerce, the expansion of private-label selections, targeted marketing and competitive pricing. SFM has been making steady strides in establishing a stronger presence in the natural organic market, capitalizing on the considerable demand within this segment. Additionally, Sprouts Farmers has been actively enhancing its same-day delivery capabilities and store pickup services to provide greater convenience to customers across its locations.
The Zacks Consensus Estimate for Sprouts Farmers’ sales and earnings for the current fiscal year suggests growth of 5.8% and 12.1%, respectively, from the figure reported in the year-ago period. The consensus mark for earnings has remained unchanged over the past 30 days. Shares of this Zacks Rank #3 (Hold) company have soared 43.4% in a year.
SpartanNash: This food solution company has been benefiting from the execution of the “Our Winning Recipe” plan amid an evolving operational environment. This strategic plan has been instrumental in aiding sustainable growth by improving the supply chain network, unlocking incremental cost savings and delivering exceptional customer service with increased offerings. SPTN’s supply-chain transformation initiative and merchandising transformation initiatives bode well.
The Zacks Consensus Estimate for SpartanNash’s current fiscal-year sales indicates a rise of 3.5% from the prior-year reported figure. The consensus mark for EPS has decreased from $2.28 to $2.24 per share over the past 30 days and implies a decline of 3.9% from the year-ago period reported figure. Shares of this Zacks Rank #3 company have tumbled 29% in the past year.
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SpartanNash Company (SPTN) : Free Stock Analysis Report
Sprouts Farmers Market, Inc. (SFM) : Free Stock Analysis Report
Sovos Brands, Inc. (SOVO) : Free Stock Analysis Report
