Sprouts Farmers Lags Industry Mark: Will Strategies Aid?

Shares of Sprouts Farmers Market, Inc. SFM have inched up 1.7% in the past six months compared with the industry’s 14.7% rise. The sluggish performance was caused by softness in the bottom line stemming from deleveraged SG&A expenses and strained margins. Sprouts Farmers witnessed third straight quarter of year-over-year decline in earnings per share during third-quarter 2019.

Deleverage in SG&A expenses due to increased investments in new outlets and expansion of home delivery program has exerted pressure on operating margin. This in turn is affecting the company’s bottom line. In the third quarter, rise in SG&A expenses was caused by the adoption of new lease accounting standard and higher healthcare expenses. In fact, management had envisioned a net incremental expense of 4 cents a share due to the lease accounting standard change for the full year.

Sprouts Farmers had earlier projected full-year earnings in the range of $1.10-$1.13 per share, which indicates a decline of 12-15% from the prior-year figure. Also, fourth-quarter earnings are projected in the range of 12-15 cents a share that suggests a decline from 19 cents in the year-ago quarter.

Furthermore, stiff competition in the grocery segment and from other renowned food retailers like Amazon AMZN, Walmart WMT and Kroger KR is a concern. This may further strain the company’s margins and profits.

Fresh Item Management & Other Efforts

Management is focused on investments to improve operating efficiencies. The company is implementing Fresh Item Management Technology system in all its departments to lower operational complexity, optimize production, improve in-stock position and drive incremental sales. Also, the company implemented Workday Financials that will streamline finance process, integrate with operational systems and offer in time, actionable financial information throughout the store network. These factors are expected to improve bottom-line performance, going forward.

In addition, Sprouts Farmers is leaving no stone unturned to drive revenues. Its focus on product innovation, emphasis on e-commerce, expansion of private label assortment and enhancement of technology is likely to pay off. The company launched a mobile app to help customers experience hassle-free shopping. Moreover, Sprouts Farmers partnered with Instacart to offer same-day delivery to customers. The home delivery business is available in more than 200 stores.  Additionally, the company is trying all means to provide ready-to-eat, ready-to-heat and ready-to-cook items to customers.

We expect initiatives like Fresh Item Management Technology and cost containment to aid Sprouts Farmers’ bottom-line performance in the upcoming days. All the aforesaid endeavors are likely to enable the Zacks Rank #3 (Hold) stock revive its lost sheen. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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