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Will Sprouts Farmers' (SFM) Growth Strategies Revive Stock?

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Shares of Sprouts Farmers Market, Inc. (SFM - Free Report) have not only declined but also underperformed the industry in the past three months. The stock has declined 5.7% against the industry’s increase of 13.8% and the overall sector’s 7.4%.

What Might Have Hurt Shares?

Softer-than-expected comps and deceleration in growth rate overshadowed the fifth straight quarter of earnings beat in first-quarter 2018. Apart from this, lower-than-anticipated net sales after six successive positive surprises, coupled with trimmed sales and comps view for the full year disappointed investors. 

The company has slashed its guidance sales and comps owing to lower inflation and the transition of the home-delivery model. It now expects net sales growth of 10.5-11.5%, down from the earlier projection of 11.5-12.5%. Further, comps are expected to increase 1.5-2.5%, down from the earlier 2.5-3.5%. However, the company reiterated earnings per share guidance at $1.22-$1.28.

 

This Zacks Rank #3 (Hold) company had dissolved the Amazon Prime Now home-delivery partnership effective May 1. It had an 18-month accord with the e-commerce giant for 15 of its stores. Per management, this discontinuation and the transition to Instacart are likely to impact comparable store sales over the next several quarters. This was also one of the reasons behind the company’s trimmed sales forecast.

Further, Sprouts Farmers operates in a highly competitive grocery market. This may result in loss of market share as well as decline in sales and operating margins. Competitors with larger number of stores, greater market presence and better financial resources will continue to weigh on the company’s results. 

Management Assesses Every Nook & Corner

In an effort to expand its customer base and drive revenues, the company is taking several initiatives. It has launched Sprouts.com website and mobile app in February to help customers experience hassle-free shopping. Moreover, the company has partnered with Instacart to offer same-day delivery to customers.

Further, management announced plans to launch more than 200 new items in 2018. The company is trying all means to come up with ready-to-eat, ready-to-heat, and ready-to-cook items. Apart from these, the company is trying to expand private-label offerings in departments under the Sprouts Market Corner Deli, The Butcher Shop at Sprouts and Sprouts Fish Market brands.

We also note that the company opened nine new stores in first-quarter 2018. This includes the first store in Ellicott City, MD; expanding presence to 16 states coast to coast. Management is also optimistic about the pipeline, which includes 47 approved sites and 40 signed leases. The company is trying to tap opportunities in the market of South Carolina. We believe these efforts will boost sales and margins.

3 Retail Stocks Hogging the Limelight

Urban Outfitters (URBN - Free Report) delivered an average positive earnings surprise of 19.8% in the trailing four quarters. The has a long-term earnings growth rate of 12% and carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Burlington Stores, Inc. (BURL - Free Report) has a long-term earnings growth rate of 18.1% and carries a Zacks Rank #2 (Buy) .

Fossil Group (FOSL - Free Report) delivered an average positive earnings surprise of 54.1% in the trailing four quarters. TheZacks Rank #2 company has a long-term earnings growth rate of 5%.

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