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Sprouts Farmers (SFM) Posts In-Line Q2 Earnings, Raises View

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Shares of Sprouts Farmers Market, Inc. (SFM - Free Report) surged more than 12% during the trading session on Aug 2. The bullish run of the stock can be attributed to the company’s decent second-quarter 2018 performance and an upbeat full year view. This organic supermarket chain delivered in line results, wherein both the top and bottom lines continued to increase in double-digits. Cumulatively, these led the shares of this Phoenix, AZ-based company to jump 10% in the past three months compared with the industry’s growth of 14%.

Let’s Delve Deep

The company reported quarterly earnings of 32 cents a share that met the Zacks Consensus Estimate and increased 10% from the year-ago period. Higher net sales, lower effective tax rate and fall in shares outstanding, courtesy of buyback program drove year-over-year growth in the bottom line.

Net sales came in at $1,321.7 million, up 12% from the prior-year quarter on account of comparable store sales growth of 2% and robust performance in new outlets. We note that net sales marginally came ahead of the Zacks Consensus Estimate of $1,319 million, after missing the same in the preceding quarter.

Gross profit jumped 11% to $380 million, however, gross margin contracted 10 basis points to 28.8% due to lower merchandise margins. Operating income declined 3% to $61.7 million, while operating margin shrunk 70 basis points to 4.7%.

Direct store expense climbed 16% to $273 million, while as a percentage of sales the same increased 80 basis points to 20.7%. This can be attributed to planned wage investments, rise in healthcare costs and higher depreciation charges.

SG&A expenses rose 14% to $43 million, while as a percentage of sales the same increased 10 basis points to 3.3%. Higher advertising expenses and strategic investments in technology led to the increase in SG&A expenses.

Sprouts Farmers Market, Inc. Price, Consensus and EPS Surprise

 

Sprouts Farmers Market, Inc. Price, Consensus and EPS Surprise | Sprouts Farmers Market, Inc. Quote

Store Update

During the quarter under review, Sprouts Farmers opened seven new outlets — two in California and one each in Arizona, Georgia, Nevada, North Carolina and first store in the state of South Carolina. So far in the third quarter, the company has opened four more stores. Currently, the company operates 305 stores in 17 states. The company plans to open 30 stores during the year.

Other Financial Aspects

This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $23.2 million, long-term debt of $458 million and shareholders’ equity of $601.2 million.

The company generated cash from operations of $171.1 million year to date through Jul 1, 2018 and incurrent capital expenditures of $92 million. Management plans to invest $165-$170 million in capital expenditures during 2018.

Year to date through Aug 1, 2018, the company has bought back 8.3 million shares of worth $191 million. The company still has $299 million available under its share buyback program.

Guidance

Management raised the lower end of the full-year earnings projection and now expects the same to be in the band of $1.24-$1.28 per share. The current Zacks Consensus Estimate for full year is $1.25. The company had earlier guided earnings in the range of $1.22-$1.28.

Sprouts Farmers continues to expect net sales growth of 10.5-11.5% and comparable store sales increase of 1.5-2.5%.

Stocks to Consider

Chefs' Warehouse (CHEF - Free Report) with a long-term earnings per share growth rate of 22%, carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

B&G Foods (BGS - Free Report) , with a Zacks Rank #2, delivered a positive earnings surprise of 7.8% in the last reported quarter.

Pinnacle Foods has a Zacks Rank #2 and a long-term earnings per share growth rate of 8%.

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