- Sprouts Farmers Market reported third quarter results on October 28th. Sales increased on new store growth and comparable store sales growth. Adjusted earnings per diluted share more than doubled year over year.
- The improved performance isn’t solely a result of the pandemic. The natural and organic grocer is executing on its long-term strategy and the strategy is bearing fruit (pun intended).
- But, Sprouts’ share price reflects a multiple significantly lower than the industry. The grocer purports comparisons to peers are not applicable. It’s playing its own game.
Sprouts Farmers Market (SFM) is “playing its own game”. Make no mistake – regardless of the validity or invalidity of comparisons to “peers” or industry averages, Sprouts is only comparing its performance to its tailored game plan. This sets its stock up for mispricing opportunities.
Sprouts’ Long-Term Strategy
Sprouts Farmers Market is a natural and organic grocer offering a differentiated shopping experience operating 356 stores in 23 states. On June 20th, 2019, the grocer announced Mr. Jack Sinclair as its CEO. Mr. Sinclair spent his first months identifying areas where an improved strategy was needed.
Research pinpointed the grocer’s target demographic – health enthusiasts and innovation seekers. And the data determined Sprouts had captured but a fraction of this demographic. While the grocer’s recent history had focused on geographic expansion, Mr. Sinclair tackled the debate over growing store sizes and increased building costs. A discussion on store capacity naturally circles to inventory and private label branding. Talks about inventory and sourcing lead to an analysis of the supply chain network which needed expansion and distribution times which could benefit from efficiencies. Servicing the customer, whether it be through marketing communication or the actual shopping experience both digitally and in person, were also areas ripe (pun intended) for improvement.
In early May 2020, alongside its first quarter results, Sprouts presented its long-term strategy. Its goal is to double its business in five years. It intends to do so by targeting the right customer in the right way with the right products to the right and right-sized place.
The estimated annual spend on “food at home” nationally is $1.2 trillion to $1.3 trillion. Based on Sprouts’ target demographic comprising 16.5% of that spend or at least $200 billion, capturing an additional 3% of that share would equate to $6 billion. Sales in 2019 totaled $5.6 billion. To date in 2020, the grocer has sold $4.87 billion for a run rate of $6.5 billion.
