Sprouts Farmers (SFM) Q4 Earnings Beat, Soft View Hurts Stock

Sprouts Farmers Market, Inc. (NASDAQ:SFM) delivered a positive earnings surprise of 5.6% in fourth-quarter 2018. Notably, this was the seventh time in the trailing eight quarters that this organic supermarket chain surpassed the Zacks Consensus Estimate. Net sales also came ahead of the consensus mark for the third quarter in row. Further, both the top and bottom line continued to increase in double-digits on a year-over-year basis.

In spite of reporting better-than-expected results, shares of this Zacks Rank #3 (Hold) company fell 3.5% during the trading session on Feb 21. This can primarily be attributed to the company’s 2019 view, which was not well received by investors. It is to be noted that the company's projection is below analysts’ expectations.

Management guided net sales growth of 9-10.5% for 2019, which is below the consensus estimate of roughly 11% increase. Further, earnings are projected in the range of $1.16-$1.24 per share, which is way below the consensus estimate of $1.32 and also down from $1.29 reported in 2018.

Meanwhile, the stock has declined 15% in the past three months against the industry’s meager growth of 0.2%.

Let’s Delve Deep

Sprouts Farmers reported quarterly earnings of 19 cents a share that beat the Zacks Consensus Estimate by a penny and increased 19% from the year-ago period. Higher net sales, lower effective tax rate and fall in shares outstanding, courtesy of buyback program drove year-over-year earnings growth.

Net sales came in at $1,269.3 million, up 11% from the prior-year quarter on account of comparable store sales growth of 2.3% and robust performance in new outlets. We note that net sales marginally came ahead of the Zacks Consensus Estimate of $1,266 million. Management expects 2019 comparable store sales to improve in the range of 1.5-3%.

Gross profit jumped 11% to $421 million, however, gross margin fell 15 basis points to 33.2%. Higher promotional activity and rising distribution and transportation expenses weighed on margins. Operating income plunged 22% to $28.8 million, while operating margin shrunk 90 basis points to 2.3%.

SG&A expenses rose 11% to $352.7 million, while as a percentage of sales the same contracted 10 basis points to 27.8%. This improvement was due to fall in workers compensation expenses and payroll tax benefit for California team members. This was partly offset by planned wage investments, and increased occupancy and advertising expenses.

Store Update

During the quarter under review, Sprouts Farmers opened two new outlets, one each in Florida and Nevada. During 2018, the company opened 30 new outlets and shuttered two locations, thereby resulting in 313 stores in 19 states as of Dec 30, 2018. The company plans to open 28 stores during the year.

Other Financial Aspects

Sprouts Farmers ended the reported quarter with cash and cash equivalents of $1.6 million, long-term debt of $453 million and shareholders’ equity of $589.2 million.

The company generated cash from operations of $294.4 million in 2018 and incurred capital expenditures (net of landlord reimbursements) of $154 million. Management plans to invest $170-$175 million in capital expenditures (net of landlord reimbursements) during 2019.

The company bought back 11.1 million shares worth of $258 million in 2018. At the end of 2018, the company still had $218 million available under its share buyback program. Subsequent to the end of the year and through Feb 18, 2019, the company bought back 850,000 for a total of $20 million.

Stocks to Consider

General Mills, Inc. (NYSE:GIS) has a long-term earnings per share growth rate of 7.3% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lamb Weston Holdings, Inc. (NYSE:LW) , with a Zacks Rank #2, delivered a positive earnings surprise of 14.3% in the last reported quarter.

Nomad Foods Limited (NYSE:NOMD) has a Zacks Rank #2 and a long-term earnings per share growth rate of 11%.

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