It has been about a month since the last earnings report for Sprouts Farmers (SFM Quick QuoteSFM - Free Report) . Shares have lost about 5.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sprouts Farmers due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Sprouts Farmers Q2 Earnings Beat, Comps Up 2% Y/Y

Sprouts Farmers Market, Inc. maintained its positive earnings surprise streak in second-quarter 2022. The renowned grocery retailer delivered quarterly earnings of 57 cents a share that surpassed the Zacks Consensus Estimate of 52 cents — marking the 12th straight beat. Impressively, the bottom line increased from 52 cents reported in the year-ago period.

Net sales of this Phoenix, AZ-based company were $1,595.5 million, up 5% from the prior-year quarter. The growth was driven by sales from new stores opened in the last 12 months and a jump in comparable store sales. The top line beat the Zacks Consensus Estimate of $1,580 million, following a miss in the preceding quarter. We note that e-commerce sales grew 15%, and represented 11.1% of total sales for the quarter.

Comparable store sales increased 2% during the quarter under review against a decline of 10% witnessed in the year-ago period. Both traffic and comp sales steadily improved through the quarter. Differentiated departments such as Grocery, Dairy and Bakery continue to register year-over-year growth.

Margins

Gross profit rose 6% to $580.4 million due to higher sales volume. We note that gross margin expanded 30 basis points to 36.4%, primarily driven by an improved shrink and lower warehouse and distribution costs, which continued to benefit from the opening of two new distribution centers last year.

The company reported operating income of $86.5 million, up 3% from the year-ago period; however, operating margin shriveled 10 basis points to 5.4%. Meanwhile, EBITDA increased 3% to $118.6 million; however, EBITDA margin shrunk 20 basis points to 7.4%.

SG&A expenses jumped 6% year over year to $462.1 million, while the same, as a percentage of net sales, increased 30 basis points to 29%. The rise in SG&A expenses was driven by new stores opened since the prior-year period and increased store costs due to inflation. Higher credit card fees and e-commerce costs also contributed to the increase.

Store Update

During the quarter, the company opened two new stores and shuttered three, taking the total count to 378 stores in 23 states as of Jul 3, 2022. The company plans to open 15 to 17 new stores in the current financial year. No further closures are planned for the year. The company is gradually heading toward its strategic goal of 10% unit-growth per year, and currently plans to open at least 30 new stores in 2023.

Other Financial Aspects

Sprouts Farmers ended the quarter with cash and cash equivalents of $289 million, long-term debt and finance lease liabilities of $259.2 million and stockholders’ equity of $1,013.7 million. The company’s repurchased 2.4 million shares for a total investment of $65 million in the second quarter. As of Jul 3, 2022, the company had $501 million remaining under its share repurchase authorization.

The company generated cash from operations of $209 million and spent $46 million in capital expenditures, net of landlord reimbursement, year-to-date through Jul 3, 2022. Management anticipates capital expenditures (net of landlord reimbursements) to be $130-$150 million for 2022.

Outlook

Sprouts Farmers envisions net sales growth of 4-5% and comparable store sales increase of 1-2% for 2022. It projected adjusted earnings in the band of $2.18-$2.26 per share for the financial year. This suggests an increase from earnings of $2.10 per share reported in fiscal 2021. Management foresees a marginal increase in gross margins in the full year.

Rate of increase in SG&A expenses in the back half of the year is expected to be marginally higher than the first half due to the timing of new store openings, higher marketing investment in the third quarter, rising supply costs and increased security measures in a number of stores.

For the third quarter, the company expects comparable stores sales growth in the bracket of 1-2% against a decline of 5.4% witnessed in the year-ago period. It guided earnings in the band of 49-53 cents a share, down from 56 cents reported in the year-ago period.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

The consensus estimate has shifted 7.14% due to these changes.

VGM Scores

Currently, Sprouts Farmers has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Sprouts Farmers has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.