Sprouts (NASDAQ:SFM) Posts Better-Than-Expected Sales In Q3

Grocery store chain Sprouts Farmers Market (NASDAQ:)
reported results ahead of analysts’ expectations in Q3 FY2023, with revenue up 7.68% year on year to $1.71 billion. Turning to EPS, Sprouts made a GAAP profit of $0.64 per share, improving from its profit of $0.61 per share in the same quarter last year.

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Sprouts (SFM) Q3 FY2023 Highlights:

• Revenue: $1.71 billion vs analyst estimates of $1.68 billion (1.96% beat)
• EPS: $0.64 vs analyst estimates of $0.62 (2.71% beat)
• EPS (non-GAAP) Guidance for Q4 2023 is $0.44 at the midpoint, above analyst estimates of $0.43
• Free Cash Flow of $47.9 million, down 31.7% from the same quarter last year
• Gross Margin (GAAP): 36.5%, in line with the same quarter last year
• Same-Store Sales were up 3.9% year on year (beat vs. expectations of up 2.0% year on year)
• Store Locations: 401 at quarter end, increasing by 22 over the last 12 months

“We are pleased to report another solid quarter at Sprouts, with continued increases in both traffic and comparable store sales,” said Jack Sinclair, chief executive officer of Sprouts Farmers Market.

Playing on the secular trend of healthier living, Sprouts Farmers Market (NASDAQ:SFM) is a grocery store chain emphasizing natural and organic products.

Grocery StoreGrocery stores are non-discretionary because they sell food, an essential staple for life (maybe not that ice cream?). Selling food, however, is a notoriously tough business as grocers must deal with the costs of procuring and transporting oftentimes perishable products. Plus, the costs of operating stores to sell everything from raw meat to ice cream and fresh fruit are high. Competition is also fierce because grocers and other peers such as wholesale clubs tend to sell very similar brands and products. On the bright side, grocery is one of the least penetrated categories in e-commerce because customers prefer to buy their food in person. Still, the online threat exists and will likely increase over time rather than dwindle.

Sales GrowthSprouts is larger than most consumer retail companies and benefits from economies of scale, giving it an edge over its competitors.

As you can see below, the company’s annualized revenue growth rate of 4.93% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre, but to its credit, it opened new stores and grew sales at existing, established stores.

This quarter, Sprouts reported solid year-on-year revenue growth of 7.68% and its revenue of $1.71 billion outperformed analysts’ estimates by 1.96%. Looking ahead, the analysts covering the company expect sales to grow 5.89% over the next 12 months.

Number of StoresA retailer’s store count is a crucial factor influencing how much it can sell, and store growth is a critical driver of how quickly its sales can grow.

When a retailer like Sprouts is opening new stores, it usually means it’s investing for growth because demand is greater than supply. Since last year, Sprouts’s store count increased by 22 locations, or 5.8%, to 401 total retail locations in the most recently reported quarter.

Over the last two years, the company has generally opened new stores and averaged 4.05% annual growth in its physical footprint, which is decent and on par with the broader sector. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Same-Store SalesA company’s same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.

Sprouts’s demand within its existing stores has been relatively stable over the last eight quarters but fallen behind the broader consumer retail sector. On average, the company’s same-store sales have grown by 2.25% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, Sprouts is reaching more customers and growing sales.

In the latest quarter, Sprouts’s same-store sales rose 3.9% year on year. This growth was an acceleration from the 2.4% year-on-year increase it posted 12 months ago, which is always an encouraging sign.

Key Takeaways from Sprouts’s Q3 Results
Sporting a market capitalization of $4.42 billion, Sprouts is among smaller companies, but its more than $251.8 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

It was good to see Sprouts beat analysts’ same store sales, revenue, and EPS expectations this quarter. Additionally, guidance for the next quarter and the full year is largely ahead from same store sales to EPS. Overall, the results were solid. The stock is up 1.52% after reporting and currently trades at $44 per share.

The author has no position in any of the stocks mentioned in this report.