Morningstar | Sprouts Continues to Post Strong Top-Line Growth in 3Q; Shares Remain Fairly Valued
No-moat Sprouts posted solid third-quarter results, which included net sales growing 10% and a 1.5% increase in comparable store sales. Gross margin held steady at nearly 29%, as higher merchandise margins helped offset increased occupancy costs. Year to date, performance is largely tracking in line with or slightly above our expectations, with net sales up 12% (a touch above our nearly 11% full-year outlook), 2% comparable store sales growth (matching our estimate), and operating margin around 4.9% (versus our 4.4% full-year estimate and around 4.8% in 2017). Management also lifted its full-year diluted EPS outlook to $1.28 to $1.30 (from $1.24 to $1.28 prior, and versus our $1.25 estimate). We plan to slightly lift our full-year expectations to account for higher store productivity and a slightly lower tax rate but are holding steady on our outlook for around 10% sales growth and mid-single-digit operating margins on average over the next five years. We expect this revision combined with the time value of money will lift our $25.50 fair value estimate by about a dollar and continue to view shares as fairly valued.During the quarter, Sprouts opened 12 new stores, including its first stores in Pennsylvania and Washington. We continue to think that the firm's differentiated business model (produce accounts for roughly 15% of a store's selling square footage, which is much higher than its peers, and is placed at the center of the store), should allow for healthy comparable store growth amid store expansion, as this model aligns with consumers' increasing bent toward more natural fare. In this context, our forecast calls for average comp growth around 3% and 20 to 30 new stores added annually. We also think Sprouts' higher-margin private label fare (13% penetration) is poised to benefit from these consumer trends, as management claims more than half of its private-label offerings are organic or non-GMO.
Sprouts Farmers Market operates as a healthy grocery store. The company categorizes the varieties of products it sells as perishable and non-perishable. Perishable product categories include produce, meat, seafood, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care. The company's stores include the following departments: packaged groceries, meat and seafood, deli, vitamins and supplements, dairy and dairy alternatives, bulk items, baked goods, frozen foods, natural health and body care, and beer and wine.
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