Sprout Farmers Market Unveils a $600 Million Share Repurchase – Buyback Wednesdays

The two most important things that sprout in of my mind when I think of Sprouts Farmers Market (SFM), a specialty grocery store focused on natural, organic, and “better for you” products are – its  C-suite personnel with prior experience at companies like Walmart, Target and Safeway and its stock price. This kind of leadership could be a recipe for success and the stock price that has been on a tear for the past 5 years! That’s something to keep an eye on.

Sprouts Farmers Market, Inc. (SFM): $78.35

Market Cap: $7.87B

EV: $7.68B

Key Insights

• Sprouts Farmers Market has had a good run, rising 140% over the past year and nearly 300% over the past 5 years.
• SFM employs around 42,000 team members and operates 414 stores in 23 states nationwide.
• The company’s revenue has more than doubled, growing from $3 billion in 2014 to $7 billion in 2023.
• Q1 results show strong comparable store sales growth of 4%, margin expansion, and an all-time high retention rate.
• SFM has opened  35 new stores in Q1 2024, approximately 10% annual unit growth.
• The company has an extensive pipeline of approximately 100 approved new stores and 70 executed leases.
• Its recent partnership with UberEats, Instacart and  has led to 25% Ecommerce sales growth in Q1 2024.

Founded in 2002 and headquartered in Phoenix, Arizona, SFM engages in the retailing of fresh, natural, and organic food products under the Sprouts brand in the United States. SFM’s product offering covers both perishables and non-perishables (57% of sales are from perishables and the remaining 43% from non-perishables).

The retailer launched around 7,100 new products in 2023 including 400 new Sprouts brand private label products. Ninety percent of their 19,000 healthy products are natural or organic, plus, there are thousands of gluten-free, plant-based, grass-fed, non-GMO and raw items. Organic products constitute 27% of the total company sales while fruits and vegetables constitute 19%.

Distinct Business Model

SFM offers unique products to a different customer base, focusing on health and wellness. Consistent Same Store Sales Growth (SSSG) around 3% demonstrates the effectiveness of SFM’s differentiation strategy. It targets consumers who prioritize health over price, contributing to its margin resilience, unlike traditional retailers targeting budget-conscious shoppers. 

Store Expansion

SFM has significantly increased its store openings over the past three years: 12 in FY21, 16 in FY22, and 30 in FY23, bringing the total to around 414 stores. This is less than Costco’s 580+ locations and well below Walmart’s 4,600+ stores in the US.

SFM stores average 30,000 square feet, nearly the size of a Trader Joe’s, and carry over 18,000 Stock-Keeping Units (SKUs). Recent store sizes have been reduced to 23,000 square feet to cut building and operating costs, making them more efficient. Most Sprouts stores are in California, Texas, and Arizona, with plans to expand eastward into Florida, Georgia, and the Mid-Atlantic.

Affordable Pricing

Whole Foods Market and SFM both focus on providing natural and organic foods. Whole Foods, now owned by Amazon, benefits from the integration with Amazon Prime, offering discounts and same-day delivery for Prime members. Whole Foods is often perceived as more expensive. Sprouts, on the other hand, positions itself as a more affordable option with a significant focus on fresh produce and bulk items, often priced around 14% lower than average grocery stores​. They are known for offering significant discounts on fresh produce and bulk foods, serving customers who prioritize healthy food options.

SFM’s CEO feels optimistic about their pricing and commented:

 “We watch Whole Foods. Amazon have made a lot of statements about food and fresh. We feel our positioning is pretty strong against Whole Foods and we’re in a good place position versus Whole Foods on product and pricing, irrespective of what’s happening on the delivery charges.”

Innovative Steps For Channel Expansion

The retailer’s strategy focuses on targeting two core customer groups: ‘health enthusiasts’ and ‘selective shoppers.’ They aim to increase customer spend and loyalty through their loyalty program and enhanced online marketing. In Q4 2023, Sprouts added Uber Eats to their online channels, which include DoorDash, Instacart, and their website and app. This expansion allows access to a broader customer base.

Sprouts plans to enhance its supply chain by locating distribution centers within 250 miles of most stores. They currently have six produce distribution centers, with a new partnership in Pennsylvania to support Mid-Atlantic stores. Approximately 80% of their stores are within this 250-mile range, improving fresh produce delivery and efficiency.

In 2023, Sprouts reduced road miles by 4% while opening 30 new stores, showing strong growth despite inflationary pressures.

The CEO mentioned the following about their private label efforts:

“We’re trying to be balanced on this. We’re not in the world of private label where it’s about trading down or commoditizing against brands. We’ve got very clear about what our proposition is here. I think we’ve talked about 21% mix of our business, which is a really encouraging number in terms of where we used to be at 16%, but it’s being driven by differentiation as is the branded businesses that are going into the innovation center. And we’ll keep away from those branded items that you can find in traditional supermarkets and traditional and then the mainline Walmart’s and people like that.”

Source: Sprouts Farmers Market (Investor Presentation)

Management

SFM’s management team has extensive retail experience. CEO Jack Sinclair, with over 35 years in retail, has led Sprouts since June 2019 and has a notable background with Walmart and Safeway. At Walmart, he led all aspects of Walmart’s U.S. grocery business at its more than 4,000 stores.

CFO Curtis Valentine, appointed in January 2024, has over 15 years of financial experience, including leadership roles at Sprouts and PetSmart. President and COO Nick Konat, who joined in March 2022, brings over 20 years of expertise from Petco and Target. 

Source: Sprouts Farmers Market (Investor Presentation)

Key Metrics

• Days Sales in Inventory (DSI): Sprouts Farmers Market’s DSI declined from 26.01 in Mar. 2023 to 25.12 in Mar. 2024 which is a green flag for the company. 
• Same Store Sales (SSS) Growth: SFM’s SSS growth increased in Q1 2024, rising to 4% from 3.1% in the prior year quarter. This is positive for a company with 30 new store openings in 2023.
• Customer Retention Rate: SFM’s retention rates are currently at an all-time high, indicating highest percentage of repeat customers.
• Net Promoter Score (NPS): It measures customer loyalty and satisfaction based on their likelihood to recommend the store to others. Among its major competitors, Sprouts Farmers Market is ranked third for NPS after Whole Foods and The Kraft Heinz Company (KHC).

Prospects for Future Growth

According to the U.S. Department of Agriculture (USDA), U.S. organic retail sales increased by an average of 8% per year in the past decade. In 2021, organic retail sales were estimated to be more than $52 billion, about 5.5% of all retail food sales. The industry continued to grow, with organic product sales approaching $70 billion in 2023, a new record for the sector. There is ample room for further growth of organic products considering their single digit market share of total U.S. grocery store sales which is estimated at nearly $884 billion.  Specialty growth retailers like SFM will definitely benefit from this future trend.

Peer Comparison

SFM’s peers, including Walmart (WMT), Albertsons Companies (ACI), Kroger (KR), Grocery Outlet (GO) and Costco (COST), were selected for comparison due to their extensive U.S. operations. Unlike Sprouts, which is a specialty grocery retailer, these are conventional supermarkets but do offer organic products.

The table below shows that Sprouts seems to be trading at a cheaper forward P/E than Costco and Walmart as well as discount grocer Grocery Outlet. It tops the list in terms of forward EPS growth and its gross margin and net margin are the best in its peer group. 

Source: Seeking Alpha

Overall, SFM might not be the rock-bottom bargain on the shelf, but it offers compelling growth potential and impressive profit margins, making it a strong contender in the competitive grocery store industry.

Financials

Over the past decade, revenues have grown at a compound annual growth rate (CAGR) of 10.5%, while levered free cash flows have increased at a 14% CAGR. Earnings per share (EPS) are projected to grow at an average rate of 8.12% over the next four years. The company has steadily increased its profit, with net income more than doubling from $108 million in 2014 to $259 million in 2023. SFM ended the quarter with $312 million in cash and cash equivalents, $125 million outstanding on its $700 million revolver, and $21 million in outstanding letters of credit.  The company holds a net cash position of $187 million, excluding capital leases.

Source: Sprouts Farmers Market (Earnings Presentation)

Share Repurchase

The company currently does not pay dividends and leans on share repurchases to return capital to shareholders. On May 22, 2024, SFM approved a new share repurchase program worth $600 million which represented around 7.5% of its market cap at announcement. In Q1, 2024, the company returned $60 million to its shareholders by repurchasing nearly 1 million shares. SFM has reduced its shares outstanding by 13% over the last three years. Like Costco, which recently announced a special dividend of $15, SFM may also consider declaring a special dividend in future years if it continues to generate substantial cash flow.

Source: InsideArbitrage

Insider Activity 

Recently, multiple insiders at SFM including the Director, President and Chief Operating Officer, and Chief Human Resources Officer, have been selling a significant number of shares. This is likely due to the substantial increase in the company’s stock value over the past few years. However, this selling activity could also be a warning sign, suggesting that these insiders might believe the company’s shares may not see substantial growth from this point onward.

Source: InsideArbitrage

Q1 2024 Results

SFM delivered strong results for the first quarter. During the quarter, it organized Sprouts brand and organic events, which were highly successful. These events led to positive customer traffic growth with average unit retails and units per basket continuing to stabilize sequentially.

• E-commerce sales grew approximately 25%, representing 14% of its total sales for the quarter. This included incremental sales from their recently launched Uber Eats partnership.
• Gross margin was 38.3%, an increase of approximately 80 basis points from the same period of the prior year. This improvement was primarily due to a significant turnaround in fresh shrink performance, driven by our continued focus on inventory management. 

Full year Outlook

SFM has issued a conservative outlook for the entire year.

Risks

Competitive Risk: Grocery giants like Whole Foods and Walmart may limit Sprouts’ market share gains. Kroger and Albertsons are increasing their organic and natural sections, challenging Sprouts’ niche. 

Execution Risk: Rapid store openings could damage Sprouts’ reputation if the company’s attention is diluted.

Price Wars: Increased competition in organic and natural foods could force Sprouts into price wars, squeezing profit margins.

The proposed Kroger-Albertsons mega-merger could create a grocery Goliath, limiting Sprouts’ room to maneuver. SFM needs to stay innovative and ensure its product selection remains unique and appealing to have an edge in the market.

Bottom Line

SFM’s strategic growth initiatives, including a new loyalty program, digital marketing, and omnichannel expansion, have been successful. Forward revenue and EPS are projected to grow in the coming years.

In summary, while Sprouts competes with larger chains like Whole Foods and Albertsons by focusing on affordability and health-centric products, it distinguishes itself by offering lower prices on fresh and organic produce, attracting health-conscious consumers. In many ways Sprouts reminds me about Trader Joe’s, even if it might not have Trader Joe’s unique and quirky culture. 

Twelve analysts have revised their earnings expectations upward for the upcoming period, indicating optimism about upside potential. With a healthy balance sheet, positive earnings estimate revisions, expanding footprint, and strong market momentum, SFM looks attractive to investors who always wanted to invest in Trade Joe’s but could not because the company is owned by a German family and not listed in the U.S.

Welcome to edition 90 of Buyback Wednesdays, a monthly series that tracks the top stock buyback announcements during the prior month. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

Amidst the earnings season, companies announcing buybacks almost doubled from 68 in the prior month to 112 this month.

Top 5 Stock Buyback Announcements 

1. Coca-Cola Consolidated, Inc. (COKE): $986.39

On May 6, 2024, the Board of Directors of this beverage company approved a new $3.1 billion share repurchase authorization, through both a modified “Dutch auction” tender offer for up to $2 billion of its Common Stock and a separate share purchase agreement with a subsidiary of The Coca‑Cola Company. This equals around 38.5% of its market cap at announcement.

2. Braemar Hotels & Resorts Inc. (BHR): $2.81

On May 3, 2024, the Board of Directors of this REIT announced that it had approved a new $50 million stock repurchase agreement. This represents around 29% of its market cap at announcement.

3. Gen Digital Inc. (GEN): $24.82

On May 9, 2024, the Board of Directors of this cyber safety solutions provider announced that it had approved a new $3 billion share repurchase program, equal to around 23% of its market cap at announcement.

4. Spectrum Brands Holdings Inc. (SPB): $88.63

On May 20, 2024, the Board of Directors of this consumer products company approved a new $500 million share repurchase program, equal to around 18% of its market cap at announcement.

5. Under Armour Inc. (UA): $6.81

 On May 16, 2024, the Board of Directors of this apparel company authorized a new $500 million stock repurchase program, equal to around 17% of its market cap at announcement.

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