Share prices of organic grocer Sprouts Farmers Market, Inc (SFM - Snapshot Report) more than doubled after the company debuted on NASDAQ on Aug 1 as investors rushed for a stake in the fast-growing health food industry. The share price soared 122.8% and eventually closed at $40.11 on Aug 1.
The surge in share prices came after the company raised $333 million from its initial public offering (IPO) by offering 18.5 million shares at a price of $18 per share, well above the expected range of $14-$16 per share.
Based in Arizona, Sprouts Farmers Market is a specialty retailer of natural and organic food and operates more than 160 stores across the U.S. As per other media reports, Sprouts was acquired by a private equity firm Apollo Global Management in 2011 and merged with another Apollo holding Henry's Farmers Market.
Sprouts was again merged with grocer Sunflower Farmers Market last year. Post-IPO, Apollo's stake in Sprouts has been diluted to 45.4% from 51.8%.
We believe that the big gain of Sprouts Farmers Market comes from the rising demand of healthy and organic food products. Demand for healthy, nutritious and natural foods has grown in recent years as people are more concerned about obesity and other health problems. The rising health problems have boosted sales of healthy food options and organic food.
The demand for specialty and organic food has increased despite the pullback in consumer spending. This is evident from the strong third quarter results of one of the leaders in the natural foods sector Whole Foods Market, Inc (WFM - Analyst Report).
On Thursday, Whole Foods reported a 20% jump in third-quarter earnings to 38 cents a share, beating the Zacks Consensus Estimate by a penny. Sales climbed 12% to $3.06 billion. Moreover, the grocer has posted double-digit revenue and earnings per share growth every quarter since Mar 2009, on the back of growing demand of organic food. Currently, the company has 355 stores and plans to open 1,000 stores in the long run, as the company envisions increased consumer demand for natural and organic products.
In order to tap the growing demand for organic and health foods, other grocers are also beefing up their organic offerings. While retail giant Wal-Mart Stores Inc (WMT - Analyst Report) has increased its fruit and veggie offerings, traditional grocers like Kroger Co. (KR - Analyst Report) and Safeway Inc. have boosted their specialty food products with more vegan and gluten-free products. Last month, Kroger agreed to buy grocer Harris Teeter Supermarkets to expand in the health food business.
We believe that the changing consumer preference toward health and wellness and “good-for-you” products is here to stay. Consumers have now become conscious regarding obesity and other weight related problems.
The American Heart Association estimates that currently about one-third of U.S. adults are obese. If the current obesity growth trends continue, total healthcare costs attributable to obesity could account for as high as 16% to 18% of US health expenditure. As a result, Americans are gradually spending more toward high-priced organic and specialty food products despite overall decline in consumer spending.