Sprouts Farmers (SFM) Q3 Earnings Beat Estimates, Rise Y/Y

Sprouts Farmers Market, Inc. SFM sustained its positive earnings surprise streak in third-quarter 2020. Notably, both the top and the bottom lines continued to improve year over year. Further, the company maintained its comparable store sales growth trend. Clearly, strategic endeavors undertaken and coronavirus-induced demand spike contributed to the company’s impressive performance. With people largely staying at home, thanks to rising number of coronavirus cases, demand for grocery is here to stay for now.

The renowned grocery retailer posted adjusted quarterly earnings of 52 cents a share that surpassed the Zacks Consensus Estimate of 35 cents, thus marking the fifth straight beat. The bottom line also improved significantly from 22 cents reported in the year-ago period. We note that higher net sales and reduced net interest expense drove the bottom line.

Net sales of this Phoenix, AZ-based company were $1,577.6 million, up 10% from the prior-year quarter on account of comparable store sales growth of 4.2% and sturdy performance in new stores opened in the past 12 months. However, the top line fell short of the Zacks Consensus Estimate of $1,633 million, after beating the same in the preceding four quarters.

Notably, consumers continued to spend more on groceries. Moreover, as social distancing becomes the new normal, they have been opting more for e-commerce services. For the quarter, e-commerce accounted for 11% of sales, and soared 337% compared with the last year.

Management said, “As customers continue to consume much of their food at home due to the COVID-19 pandemic, grocery spend and ecommerce penetration have remained at elevated levels, as do additional company expenses.”

Shares of this Zacks Rank #3 (Hold) stock have gained roughly 5.1% so far in the year against the industry’s decline of 16.3%.

Margins

Gross profit jumped 23% to $584.8 million owing to higher sales volume. We note that gross margin expanded 400 basis points to 37.1%. This can be attributed to strategic changes in promotional activities, efforts to lower shrink, and positive leverage from increase in sales due to the ongoing pandemic.

Adjusted operating income came in at $80.8 million, up from $39.6 million reported in the year-ago period. Further, adjusted operating margin increased 240 basis points to 5.1%. We also note that adjusted EBITDA surged 59% to $112.4 million, while adjusted EBITDA margin grew 220 basis points to 7.1%.

SG&A expenses rose 18% to $475.1 million, while the same, as a percentage of net sales, increased 200 basis points to 30.1%. The deleverage in SG&A expenses was due to increased bonuses and rise in store operating expenses on account of the pandemic. Additionally, the company incurred higher e-commerce fees as more customers opted for home delivery and curbside pickup. Management informed that additional costs related to COVID-19 were about $34 million during the quarter under review.

Store Update

During the quarter under review, Sprouts Farmers opened six new outlets, taking the total count to 356 stores in 23 states as of Sep 27, 2020. As of Oct 28, the company has opened 20 new stores, and plans to open two more stores later this year. Considering the ongoing crisis, the company intends to open an equivalent number of stores next year as in 2020. Beyond 2021, the company is aiming for at least 10% annual unit growth rate in markets with growth potential and supply chain support.

Other Financial Aspects

Sprouts Farmers ended the quarter with cash and cash equivalents of $137.5 million, long-term debt and finance lease liabilities of $285.7 million and stockholders’ equity of $807.9 million.

The company generated cash flow from operations of $410.3 million during 39-week period ended on Sep 27, 2020 and incurred capital expenditures (net of landlord reimbursements) of $76 million. After paying down $176 million of outstanding debt, the company ended the quarter with $275 million in loans and $34 million of letters of credit outstanding under its revolving credit facility.

Outlook

Sprouts Farmers envisions comparable store sales to be in the low single digits and adjusted earnings in the band of 36-40 cents a share in the fourth quarter. It anticipates full-year adjusted earnings between $2.26 and $2.30 per share, on a 53-week basis. The current consensus estimates for the final quarter and full year are pegged at 32 cents and $2.12, respectively. For 2021, management projected earnings before interest and taxes to be $285-$305 million.

Stocks to Consider

Grocery Outlet GO has a trailing four-quarter earnings surprise of 33.6%, on average. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Kroger KR, with a Zacks Rank #2, has an estimated long-term earnings growth rate of 6.2%.-

Albertsons Companies ACI, with a Zacks Rank #2, has an estimated long-term earnings growth rate of 10.9%.

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Click to get this free report Albertsons Companies, Inc. (ACI) : Free Stock Analysis Report The Kroger Co. (KR) : Free Stock Analysis Report Sprouts Farmers Market, Inc. (SFM) : Free Stock Analysis Report Grocery Outlet Holding Corp. (GO) : Free Stock Analysis Report To read this article on Zacks.com click here.