Investing

As Sprouts Farmers Market Hits 5-Year High on Q1 Update, What's the Quality of Its Growth?

Ben Ward

Published: May 2, 2023 10:35 pm

Last Updated: May 3, 2023 11:58 am

Sprouts Farmers Market (US:SFM) delivered a beat with its first-quarter 2023 earnings report Monday, stoking investor interest with the surprise. Shares of SFM stock surged more than 8% on Tuesday, which carried over into the extended trading.

The shares of the U.S.-based supermarket chain that specializes in fresh and healthy produce are now up 21.9% year to date in 2023 and at the highest price in five years. The Fintel platform gives SFM a momentum score of 72.80 based on recent performance, ranking the stock in the top 12.5% out of 40,553 globally screened stocks.

For the first quarter, SFM recorded a net sales growth of 6% to $1.73 billion with the figure broadly expected by the Street. The company’s comparable store sales growth of 3.1% was a positive surprise against a backdrop of deteriorating consumer spending.

The supermarket chain’s gross margin improved marginally which helped earnings, as well as the buyback program conducted in 2022 which helped versus comps.

A chart from Fintel data shows how cash generated from operating activities has been relatively flat over the past year while cash detracted from financing is growing with interest rates.

Adjusted EPS grew by 24% over the year to 98 cents and was well ahead of market forecasts of around 85 cents per share. SFM also opened eight new stores, closed one store, and acquired two previously licensed stores, bringing the total number of stores to 395 in 23 states.

Jack Sinclair, SFM’s CEO, expressed his satisfaction with the first quarter results and the company’s long-term growth strategy. Sinclair attributed SFM’s positive performance to its commitment to providing fresh and healthy produce at affordable prices.

Effectiveness is a Different Story

While management was happy with the company’s performance, Fintel’s analysis of management effectiveness tells a different story. Cash return on invested capital (CROIC) has turned negative this quarter and Fintel’s proprietary metric operating cash return on investor capital (OCROIC) is showing stability which is a positive in the current environment. OCROIC is a Fintel-created metric that shows the true underlying operating cash flow for a stock.

The supermarket chain’s growth strategy, coupled with its focus on healthy and fresh produce, appears to be paying off. It plans to continue expanding its footprint by adding 30 new stores, closing 11 stores, and acquiring two previously licensed stores in 2023.

SFM’s full-year 2023 outlook includes net sales growth of 5% to 6%, comparable store sales growth of 2% to 3%, adjusted earnings before interest and taxes (EBIT) of $370 million to $385 million, adjusted diluted earnings per share of $2.58 to $2.68, and capital expenditures (net of landlord reimbursements) of $210 million to $230 million.

SFM’s positive Q1 results come at a time when the US economy is experiencing inflationary pressures. Many businesses are struggling to maintain profit margins, and investors are looking for companies that can beat the inflation blues. SFM’s Q1 performance suggests that it is not only resilient but can grow its revenue and earnings despite the inflationary environment.

SFM is also benefiting from the increasing demand for healthy and fresh produce in the US. In recent years, there has been a growing trend towards healthier lifestyles, which has led to increased demand for organic, locally sourced, and fresh produce. SFM’s focus on healthy and fresh produce has positioned it to capitalize on this trend.

Despite the inflationary pressures in the US economy, SFM’s positive Q1 results suggest that it is a natural choice for growth and value seekers alike.

Stock Fairly Valued

UBS analyst Mark Carden thinks that overall SFM’s result was solid with inflation being a double-digit tailwind for the group. The analyst thinks that the current near-term dynamics will continue which is why they believe the stock is fairly valued at current levels. UBS has a ‘neutral’ call on the stock but raised its target price from $37 to $39.

Fintel’s consensus target price of $33.49 suggests that analysts in the market think the stock is currently fully valued and could trade slightly lower over the next year.

One negative point for the stock revealed by the Fintel platform was the significant insider selling activity that has occurred. There have been 11 insiders that have sold shares in the company over the last 90 days equating to around 0.21% of the float.

Fintel’s insider sentiment score of 11.93 is bearish on the company due to the weak insider activity relative to 14,866 other globally screened securities

This article originally appeared on Fintel