Consumer staples conventionally stay in demand, regardless of economic conditions. The industry outperformed the broader market last year despite rising input costs.
Investors’ interest in consumer staples stocks is evident from the Consumer Staples Select Sector SPDR Fund’s (XLP) 8.2% returns over the past three months versus the broader S&P 500 index’s 1.6% gains.
Consumer defensive company Sprouts Farmers Market, Inc. (SFM) markets fresh, natural, and organic food products in the United States. It offers perishable as well as non-perishable products.
The company is looking to revamp its business strategy. SFM recently hired Alisa Gmelich as its new senior vice president and chief marketing officer. The company expects its enhanced marketing strategy under Gmelich to expand its customer base.
The stock has gained 20.3% over the past six months and 10% over the past three months to close its last trading session at $30.94. It is trading lower than its 50-day moving average of $32.12 but higher than its 200-day moving average of $29.27.
Here are the factors that could influence SFM’s performance in the upcoming months:
Solid Financials
For the 13-week third ended October 2, 2022, SFM’s net sales increased 5.4% year-over-year to $1.59 billion. Income from operations rose 5.3% from the prior-year quarter to $90.34 million. Net income and net income per share came in at $65.74 million and $0.61, up 2.9% and 8.9% from the prior-year period, respectively.
Cheap Valuation
In terms of its forward P/E, SFM is trading at 14.12x, 29.2% lower than the industry average of 19.94x. The stock’s forward EV/Sales multiple of 0.70 is 58.6% lower than the industry average of 1.69.
In terms of forward Price/Sales, it is trading at 0.51x, 54.6% lower than the industry average of 1.13x. Its forward Price/Cash Flow multiple of 8.24 is 41.3% lower than the 14.04 industry average.
High Profitability
SFM’s trailing-12-month gross profit margin and levered FCF margin of 36.70% and 5.29% are 17% and 106.4% higher than the industry averages of 31.37% and 2.57%, respectively.
Its trailing-12-month ROCE, ROTC, and ROTA of 25.12%, 8.78%, and 8.36% are 137.1%, 42.4%, and 123.9% higher than the respective industry averages of 10.59%, 6.17%, and 3.73%.
POWR Ratings Reflect Promising Prospects
SFM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SFM has an A grade for Quality, consistent with the higher-than-industry profitability ratios. The stock has a Momentum grade of C. This is justified as it is trading above its 200-day moving average but below the 50-day moving average.
In the 39-stock Grocery/Big Box Retailers industry, SFM is ranked #16. The industry is rated A.
Click here to see the additional POWR Ratings for SFM (Growth, Value, Stability, and Sentiment).
View all the top stocks in the Grocery/Big Box Retailers industry here.
Bottom Line
In the era of high-interest rates, the consumer staples industry should benefit due to its non-cyclical demand. Given the company’s efforts to increase its loyal customer base, SFM looks well-positioned to navigate the potential recession. Moreover, given its robust profitability, the stock might be a solid buy now.
How Does Sprouts Farmers Market, Inc. (SFM) Stack up Against Its Peers?
While SFM has an overall POWR Rating of B, one might consider looking at its industry peers, Ingles Markets, Incorporated (IMKTA) and George Weston Limited (WNGRF), which have an overall A (Strong Buy) rating.
SFM shares were trading at $30.44 per share on Thursday morning, down $0.50 (-1.62%). Year-to-date, SFM has declined -5.96%, versus a -0.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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