Sprouts Farmers Market, Inc.

SFM Details

In 2002, Sprouts Farmers Market, Inc. (NASDAQ: SFM) opened the first store so that natural foods can be accessible to everyone. The company provides a unique grocery experience featuring an open layout with the fresh produce at the heart of the store.

Results Performance (14-week fourth quarter and 53-week year ended January 3, 2021)  

In the fourth quarter, net sales of the company stood at $1.6 billion, reflecting a 17% rise from the same period in 2019 and it witnessed comparable store sales growth of 3.7% as well as two-year comparable store sales growth of 5.2%, both on the 13-week basis. In fiscal year 2020, net sales of the company stood at $6.5 billion, implying a 15% rise from 2019. In 2020, the company managed to generate record earnings as well as cash flow from the 15% increase in sales while absorbing costs related to the 340% rise in the ecommerce sales, paying record bonuses to the frontline team members, as well as opening 22 new stores.

Key Data (Source: Company Reports)

Recent Updates

In the release dated March 4, 2021, the company made an announcement that its Board of Directors authorized the new share repurchase program on March 3, 2021 of $300 million of the common shares. It was mentioned that the new share repurchase program reflects the commitment towards robust cash flow generation as well as driving shareholder return, while at the same time, deploying capital in order to drive growth over the long term. 

In the release dated March 22, 2021, the company stated that it has opened a new distribution center in Aurora, marking the first center in Colorado as well as sixth throughout the country. The 135,000 square-foot facility was built for Sprouts as well as includes 55°F and 34°F storage and fruit ripening rooms which are ideal for the variety of fresh produce that the company offers.    

Outlook

It was stated that the impact which COVID-19 would be having on the U.S. economy as well as the company’s fiscal 2021 results is uncertain. Notably, adjusted EBIT is expected to be between $295 million to $315 million and adjusted EPS is anticipated to be between $1.78- $1.91.

Valuation Methodology: P/E Based Relative Valuation (Illustrative)

Technical Overview:

Weekly Chart:

(Source: Refinitiv (Thomson Reuters))

Note: The purple color line in the chart depicts RSI (14-period) and the yellow color line represents trend line.

SFM stock price has given a steep rally from the low of US$18.21 made on November 2020 and recently hit a high of US$28.01 level (on 26 March 2021,) a gain of ~54 percent in five months. On the weekly chart, the SFM prices are trading in a horizontal channel formation from past almost 6 years and now prices are approaching towards the upper band of the channel formation which act as resistance zone. Furthermore, the momentum oscillator RSI (14-period) is trading at ~72 levels near to overbought territory, a correction from here may drift the price lower towards the support level. An important support level for the stock, is placed at US$23.50, while the key resistance level is placed at US$29.63.

Stock Recommendation

The company’s stock has made a 52-week low and high of $17.79 and $28.01, respectively. The company has managed to generate cash from operations amounting to $494 million in fiscal 2020 and deployed $96 million in the capital expenditures net of landlord reimbursements, mainly for new stores. During the fiscal year 2020, the company paid down $288 million of the outstanding debt.

The stock is trading near the 52-week high level which is also a multi-year high level for the stock, and, therefore, the market participants can consider booking profits in the stock.

Considering the aforesaid facts, we have valued the stock using P/E multiple-based illustrative relative valuation and there are expectations that the stock price might witness a fall of low double-digit (in % terms). We believe the company can trade at a slight discount to Price/EPS Multiple (NTM) (Peer Average) driven by its lower current ratio, higher operational expenses due to COVID-19, while also taking into consideration historical discounted multiples versus peer average.

Thus, we give a “Sell” rating on the stock at the current price of US$27.96 per share, up by 6.31% on March 26, 2021.  

SFM Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

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