Sprout Farmers Market (SFM)

Quick Stats

  • Revenue: Steady growth although slowing down
  • Operating margin: Low but constant (competitors have similar or lower, around 2%-5%)
  • EPS: CAGR 30% 
  • Shares: Decreasing for the last 5 years
  • ROI: Stable trying to reach a constant 20%
  • ROE: Increasing through the years




About the Company

SFM offers fresh, natural, and organic food products in the United States. It operates through Healthy Grocery Stores segment. 

Product Offering:
  • Perishables: 57% (produce, meat, seafood, deli, bakery, floral and dairy and dairy alternatives)
  • Non-perishables: 43% (grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care)

Long term Strategy


         

Small store strategy expansion

  • New store cost to build reduced by approximately 20%
  • New store cash-on-cash returns* of approximately 40%
  • At least 20% unit growth annually (2022) - currently operating 360 stores
  • Reduce non-selling space
  • Decrease occupancy and operating cost
*Cash-on-cash return is a rate of return that calculates the cash income earned on the cash invested in a property.

Market 

Although it operates in a highly competitive and fragmented grocery store industry, it is a market where disruptive or radical changes are not likely to be seen in the upcoming future. 
  • Global health & wellness food: CAGR of 6% (2020-2024)
  • Global organic foods: CAGR of 11% (2019-2025)

Market Target

Competitors

  • Conventional supermarkets: Kroger, Albertsons and Safeway
  • Food retailers: Whole Foods (500+ US & UK), Natural grocers by Vitamin Cottage and Trader Joe’s (500 stores 41 states)
  • Discount, online, warehouse membership clubs and other retailers: Walmart, Amazon, Costco, etc.
The other companies are public traded / Period Analysed (2017-2020)

Executives








CEO annual total compensation (8,5M)







Ownership of shares (Executives + Institutions)

Summary Compensation Table

Competitive advantage

  • Rapid & cost effective small store expansion strategy
  • Low costs on Sourcing & Distribution (building strong relationships with local producers)
  • Organic Growth (expected annual 10%)
  • Increasing trend on healthy & organic products

Valuation

Optimistic Scenario (following past trend + company expected growth)
  • Revenue Growth: 10%
  • Operating Margin: 6%
  • Taking into account a conservative five year average for the multiples

Pessimistic Scenario (similar margin to its competitors + lowering multiples)
  • Revenue Growth: 8%
  • Operating margin: 4%

Conclusion

  • Executives' compensations are very high compared to the value of the shares they own, meaning that executives' interests might not be aligned with shareholders' interests. 
  • Stock price has not risen since 2015, but the company's EPS has grown dramatically.
  • Has managed to reduce substantially its debt while growing, while other firms grow by diluting its shareholders.

Sources

https://app.tikr.com/stock/about?cid=6757990&tid=243493496&ref=n8ofk0
Investor Relations SFM
Forbes - Opportunity Is Sprouting At Sprouts Farmers Market
Seeking Alpha - Sprouts Farmers Market: Health Equals Wealth

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