Sprouts Sees Stock Price Jump

Sprouts Farmers Market witnessed a substantial 60% surge in its stock price over the past year. The company has demonstrated robust growth in the fresh, natural, and organic food sectors. Despite commendable earnings expansion and a resilient balance sheet, intensified competition and reduced prospects for consolidation prompted a consideration of profit-taking in Sprouts Farmers Market stock. For those seeking market insights, members of Value-In Corporate Events receive exclusive ideas and guidance to navigate various market conditions. 

Sprouts has gained considerable momentum, evolving from a billion-dollar enterprise in 2008 to a $4 billion entity in 2016, capitalizing on the rapid growth in the fresh food category, historically dominated by Whole Foods Market. In 2016, with reported earnings power of around $0.80 per share on a $4 billion revenue base, the stock was valued at 25 times earnings, buoyed by continuous growth, share buybacks, a robust balance sheet, and the potential for a takeover, making it an intriguing investment. 

Trading within a $20-$30 range for the most part of 2016, a $31 stock in early 2023 appeared attractively valued, considering the significant progress the business had made. In early 2022, the company reported a 6% all-in sales increase for 2021, totaling $6.1 billion, with pandemic-related challenges affecting comparables, yet reflecting a 50% revenue upswing over a five-year period. Operating margins of 5.5% translated to operating earnings of $334 million, showcasing solid margins for a grocery chain. With solid sales growth, margin expansion, and share buybacks, earnings climbed from $0.80 per share to just over $2 per share, resulting in a modest mid-teens multiple. 

By updating its full-year guidance after the third-quarter earnings release in 2022, the company anticipated full-year earnings of $2.34 per share, translating to a valuation of just 13 times earnings at the $31 trading price. The balance sheet remained strong with a modest net cash position before accounting for significant operating lease liabilities. In the subsequent year, Sprouts achieved a 5% uptick in full-year sales to $6.4 billion, with comparable sales growth of 2.2%. Diluted earnings per share increased by twenty-nine cents to $2.39. Despite holding a modest net cash position ahead of lease liabilities, the company issued positive guidance for 2023, projecting 4% to 6% sales growth and adjusted earnings around $2.47 per share, plus or minus six cents. 

As of March 2023, after a favorable first quarter, the midpoint of full-year earnings guidance was raised to $2.63 per share, further increasing to $2.72 per share following second-quarter results. In October, Sprouts reported a 7.6% increase in third-quarter sales. The reported margin was affected by store closures but mitigated by aggressive share buybacks, resulting in full-year earnings now anticipated to be around $2.79 per share. 

Despite the alleviation of inflationary pressures, the company has sustained strong growth, particularly in e-commerce, driven by key partnerships with companies like DoorDash. Notably, the 60% gains in the stock are largely attributed to the inflation of valuation multiples, with the earnings multiple increasing from 13 to nearly 18 times earnings driving the upward trajectory of the stock price.