Morningstar | Sprouts' Sales Grow 10% in 1Q as Productivity Remains Robust; Shares Undervalued
No-moat Sprouts Farmers Market began the year on solid footing, with first-quarter sales growing around 10% (matching our full-year outlook) on a 1.4% lift in comparable-store sales (about 130 basis points below our full-year estimate), primarily driven by the deli, grocery, frozen, and meat categories. However, profitability remains hampered by cost inflation, which caused gross margin to contract 30 basis points to 34.3%. Management attributed this inflation to weather-related cost spikes for certain items, suggesting that this is a transitory rather than structural headwind. We're encouraged that Sprouts has started to bolster pricing for nonperishable items (which faced elevated costs toward the end of last year), which should help stabilize profitability.This top-line performance suggests to us that Sprout's unique business model (focusing on produce in the center of the store, versus traditional retailers that typically place dry goods in this area, and typically pricing produce 10%-20% lower than its peers) continues to drive traffic to its stores. As evidence, new store productivity remains in the low 80s, higher than the 60%-70% seen by many peers. Moreover, we think Sprouts' efforts to expand its selection of private-label fare (which now contributes around 14% of sales) should benefit comparable-store sales (management alluded to comp growth for these products that outpaced its consolidated results) as well as profitability.
Our full-year earnings per share estimate of $1.21 remains comfortably within the $1.18-$1.24 range management expects. As such, we're not anticipating a material change to our $26.50 fair value estimate and are reiterating our longer-term outlook for high-single-digit sales growth, low-single-digit comparable-store sales growth, and around 4% operating margin on average over our forecast. We continue to view the shares as undervalued, even after their 3%-4% uptick on the earnings announcement.
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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