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Sprouts Farmers (SFM) Down 10.7% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Sprouts Farmers (SFM - Free Report) . Shares have lost about 10.7% 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 drivers.

Sprouts Farmers Beats on Q1 Earnings, Revises ’19 View

Sprouts Farmers Market, Inc. delivered a positive earnings surprise of 15% in first-quarter 2019. Notably, this was the eighth time in the trailing nine quarters that this provider of fresh, natural and organic food products has surpassed the Zacks Consensus Estimate. However, net sales came almost in line with the consensus mark. While the top line grew year over year, the bottom line declined from the prior-year period.

The company raised the low-end of the previously provided earnings per share guidance range. Management now expects earnings in the band of $1.18-$1.24 per share versus $1.16-$1.24 projected earlier. However, it is still below $1.29 reported in 2018. The company continues to anticipate net sales growth of 9-10.5% for 2019.

Let’s Delve Deeper

Sprouts Farmers reported quarterly earnings of 46 cents a share that beat the Zacks Consensus Estimate of 40 cents but fell 8% from the year-ago period. This was owing to higher effective tax rate, exercise of a considerable number of expiring pre-IPO stock options and the impact of the adoption of the new lease accounting standard. Definitely, higher cost of sales and increased SG&A expenses also acted as deterrents. We note that even higher net sales and lower shares outstanding failed to act as a savior.

Net sales came in at $1,413.9 million, up 10% from the prior-year quarter on account of comparable store sales growth of 1.4% and robust performance in new outlets. We note that net sales almost met the Zacks Consensus Estimate of $1,412 million. Management continues to project 2019 comparable store sales to improve in the range of 1.5-3%. The company now anticipates full year comparable store sales to be at the lower end of the range.

Gross profit jumped 9% to $484 million. However, gross margin fell 30 basis points to 34.3% owing to cost inflation as well as changes in product mix.  Management envisions full year gross margin to be marginally down year over year on account of first-quarter results and the competitive landscape coupled with increased transportation costs. This is likely to be partially offset by improvements in promotion and pricing optimization.

Operating income came almost flat at $79.6 million, while operating margin shrunk 60 basis points to 5.6%. SG&A expenses rose 11% to $375 million, while as a percentage of sales the same increased 20 basis points to 26.5%.

Management expects deleverage in SG&A expenses of about 55-60 basis points in 2019, including a 35 basis points impact due to the adoption of the new lease accounting standards.

Store Update

During the quarter under review, Sprouts Farmers opened eight new outlets. The company has opened one additional store so far in the second quarter, taking the total count to 322 stores in 19 states as of May 2, 2019. The company plans to open 28 stores in 2019. The company intends to open eight outlets in the second quarter with maximum openings slated for the third quarter.

Other Financial Aspects

Sprouts Farmers ended the reported quarter with cash and cash equivalents of $19.5 million, long-term debt and finance lease liabilities of $512 million and shareholders’ equity of $556.5 million.

The company generated cash flow from operations of $112.6 million and incurred capital expenditures (net of landlord reimbursements) of $24 million during the quarter. Management plans to invest $170-$175 million in capital expenditures (net of landlord reimbursements) during 2019.

The company bought back 4.9 million shares worth of $112 million in the quarter. At the end of the quarter, the company still had $106 million available under its share buyback program. Subsequent to the end of the quarter and through Apr 29, the company bought back 2.4 million shares for a total of $51 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Sprouts Farmers has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Sprouts Farmers has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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