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Sprouts Farmers (SFM) Q3 Earnings Top Estimates, Sales Fall Y/Y

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Sprouts Farmers Market, Inc. (SFM - Free Report) maintained its positive earnings surprise streak in third-quarter 2021. The renowned grocery retailer posted quarterly earnings of 56 cents a share that surpassed the Zacks Consensus Estimate of 40 cents, thus marking the ninth straight beat. Impressively, the bottom line increased from 52 cents reported in the year-ago period. Decline in SG&A expenses and lower interest expense favorably impacted the bottom line.

Net sales of this Phoenix, AZ-based company were $1,509.6 million, down 4% from the prior-year quarter. The drop in sales was primarily due to a 5.4% decline in comparable store sales as a result of cycling the impact of the ongoing pandemic, partly offset by sales contribution from new stores opened. The top line fell short of the Zacks Consensus Estimate of $1,569 million, thus marking the third straight miss.

Shares of this Zacks Rank #3 (Hold) company have fallen roughly 12.6% in the past six months compared with the industry’s decline of 17.2%.

Margins

Gross profit fell 7.7% to $539.7 million due to lower sales volume. Gross margin shrunk 131 basis points to 35.8%. The contraction in gross margin was primarily due to cycling heightened demand in the prior-year quarter owing to the COVID-19 pandemic and the balancing of cost inflation and retail pricing during the quarter.

Adjusted EBIT was $85.8 million, up 6.2% from the year-ago period. Adjusted EBIT margin increased 60 basis points to 5.7%. Meanwhile, adjusted EBITDA rose 4.1% to $117.1 million, while adjusted EBITDA margin expanded 70 basis points to 7.8%.

SG&A expenses declined 11% to $423.4 million, while the same, as a percentage of net sales, leveraged 210 basis points to 28%. The decline in the metric was predominantly driven by lower COVID-related costs including payroll and bonus expense coupled with lower marketing and e-commerce fees.

Store Update

During the quarter under review, Sprouts Farmers opened three new outlets and had one relocation with its new store format, taking the total count to 366 stores in 23 states as of Oct 3, 2021. The company also remodeled one store in the new format. Management informed that due to sustained challenges in procuring essential equipment from third parties because of supply chain delays, roughly six planned new store openings in the final quarter of 2021 may be delayed until 2022. The company’s store opening plans for 2021 includes 14 new stores, comprising one relocation.

Other Financial Aspects

Sprouts Farmers ended the quarter with cash and cash equivalents of $260.2 million, long-term debt and finance lease liabilities of $259.9 million and stockholders’ equity of $968.1 million. The company ended the quarter with a $250 million balance on its revolving credit facility, $28 million of letters of credit outstanding under the facility and $163 million available under the current share buyback program.

The company generated cash from operations of $297 million year-to-date through Oct 3, 2021 and incurred capital expenditures (net of landlord reimbursements) of $53 million, principally for new stores. Management projects capital expenditures (net of landlord reimbursements) to be $95-$105 million for 2021.

Through Oct 3, the company has repurchased 5.4 million shares for a total of $137 million. Year-to-date through Nov 1, it has repurchased 6.3 million shares for a total investment of $157 million.

Outlook

Sprouts Farmers envisions fourth-quarter 2021 net sales between $1,450 million and $1,475 million versus $1,601.8 million reported in the year-ago period. The company anticipates comparable stores sales decline of 3-5%. It also guided fourth-quarter adjusted earnings between 26 cents and 30 cents a share, which suggests a decrease from prior-year quarter’s tally of 59 cents.

For 2021, management forecast net sales in the range of $6,055-$6,080 million compared with $6,468.8 million reported last year. Sprouts Farmers expects comparable store sales to decline between 7% and 7.5%.

The company guided adjusted EBIT between $325 million and $330 million for 2021 compared with $400.5 million last year. It also projected earnings in the band of $2.04-$2.08 per share, which suggests a sharp decline from earnings of $2.49 in 2020.

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