Sprouts Farmers' (SFM) Stock Up On Q3 Earnings & Sales Beat

Sprouts Farmers Market, Inc. (NASDAQ:SFM) reported robust third-quarter 2019 results, wherein both the top line and the bottom line surpassed the Zacks Consensus Estimate. While net sales continued to increase year over year, earnings declined for the third straight quarter. Notably, the company sustained with its solid trend of positive comparable store sales (comps). Management raised its full-year earnings guidance.

Following the quarterly results and upbeat view, this Phoenix, AZ-based stock has gained more than 10% during the after-market trading session on Oct 30. We note that shares of the company have increased 3.2% in the past three months outperforming the industry’s growth of 1.4%.

Let’s Delve Deeper

Sprouts Farmers reported quarterly earnings of 22 cents a share that surpassed the Zacks Consensus Estimate by a couple of cents. However, the bottom line decreased 18.5% from the year-ago period, owing to deleverage of SG&A, including impacts of the adoption of new lease accounting standard, partially offset by lower shares outstanding.

Net sales came in at $1,440.2 million, up 8.4% from the prior-year quarter on account of comparable store sales growth of 1.5% and robust performance in new outlets. Also, net sales surpassed the Zacks Consensus Estimate of $1,422 million.

Sprouts Farmers Market, Inc. Price, Consensus and EPS Surprise

Margins

Gross profit increased 8% to $476.7 million during the quarter. However, gross margin contracted 25 basis points to 33.1% owing to higher distribution and transportation expenses. Management expects fourth-quarter gross margin to be flat to slightly negative compared with the same period last year.

Operating income came totaled $39.6 million, down 22.5% from the year-ago period. Further, operating margin shrunk 130 basis points to 2.7%. While adjusted EBITDA declined 12.5% to $70.9 million, adjusted EBITDA margin shriveled 120 basis points to 4.9%.

SG&A expenses rose 12% to $404.3 million, while as a percentage of sales the same increased 80 basis points to 28.1%. The deleverage in SG&A expenses was due to the adoption of the new lease accounting standard, investments in new outlets, expansion of home delivery program and increased healthcare expenses.

Store Update

During the reported quarter, Sprouts Farmers opened nine new outlets, taking the total count to 335 stores in 21 states. The company is on track to open about 28 stores in 2019.

Other Financial Aspects

Sprouts Farmers, which carries a Zacks Rank #4 (Sell), ended the reported quarter with cash and cash equivalents of $79.9 million, long-term debt and finance lease liabilities of $526.7 million and shareholders’ equity of $559.9 million.

The company generated cash flow from operations of $323.3 million and incurred capital expenditures (net of landlord reimbursements) of $130 million for 39 weeks ended on Sep 29, 2019. Management plans $150-$160 million in capital expenditures (net of landlord reimbursements) during 2019.

The company bought back 7.3 million shares worth $163 million during the 39 weeks ended on Sep 29, 2019. At the end of the quarter, the company still had $55 million available under its share buyback program.

Guidance

Management now projects 2019 earnings in the band of $1.10-$1.13 per share compared with the prior forecast of $1.05-$1.09. In the prior year, Sprouts Farmers reported earnings of $1.29 per share. Currently, the Zacks Consensus Estimate is pegged at $1.08. The company also informed that the lease accounting standard change will result in a net incremental expense of 4 cents a share for the full year.

For the fourth quarter of 2019, management envisions net sales growth of 6.5-7.5% with comparable store sales expected to be flat to up 1%. Earnings are anticipated in the range of 12-15 cents. In the prior-year period, the company posted earnings of 19 cents a share. The Zacks Consensus Estimate for the quarter currently stands at 13 cents.

Stocks to Consider

US Foods Holding Corp. (NYSE:USFD) has a long-term earnings growth rate of 9.3% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

McCormick & Company (NYSE:MKC) delivered positive earnings surprises in the last three reported quarters. It carries a Zacks Rank #2 (Buy).

Beyond Meat (NASDAQ:BYND) , with a Zacks Rank #2, has delivered positive earnings surprise in the last two reported quarters.

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