Sprouts (SFM)

Grocery store chain Sprouts Farmers Market (NASDAQ:SFM) missed Wall Street’s revenue expectations in Q3 CY2025, but sales rose 13.1% year on year to $2.2 billion. Its GAAP profit of $1.22 per share was 4.6% above analysts’ consensus estimates.

Company Overview

Playing on the secular trend of healthier living, Sprouts Farmers Market (NASDAQ:SFM) is a grocery store chain emphasizing natural and organic products.

Grocery stores are non-discretionary because they sell food, an essential staple for life (maybe not that ice cream?). Selling food, however, is a notoriously tough business as grocers must deal with the costs of procuring and transporting oftentimes perishable products. Plus, the costs of operating stores to sell everything from raw meat to ice cream and fresh fruit are high. Competition is also fierce because grocers and other peers such as wholesale clubs tend to sell very similar brands and products. On the bright side, grocery is one of the least penetrated categories in e-commerce because customers prefer to buy their food in person. Still, the online threat exists and will likely increase over time rather than dwindle.

Grocery competitors with a total or partial focus on healthier options include Amazon.com’s Whole Foods market (NASDAQ:AMZN), Kroger (NYSE:KR), and private company Trader Joe’s.

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $8.65 billion in revenue over the past 12 months, Sprouts is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale.

As you can see below, Sprouts’s sales grew at a mediocre 7.7% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts), but to its credit, it opened new stores and increased sales at existing, established locations.

This quarter, Sprouts’s revenue grew by 13.1% year on year to $2.2 billion but fell short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 11.1% over the next 12 months, an acceleration versus the last six years. This projection is eye-popping and indicates its newer products will catalyze better top-line performance.

Number of Stores

The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.

Sprouts operated 464 locations in the latest quarter. It has opened new stores at a rapid clip over the last two years, averaging 7% annual growth, much faster than the broader consumer retail sector. This gives it a chance to become a large, scaled business over time.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

Sprouts has been one of the most successful retailers over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 7.7%. This performance suggests its rollout of new stores is beneficial for shareholders. We like this backdrop because it gives Sprouts multiple ways to win: revenue growth can come from new stores, e-commerce, or increased foot traffic and higher sales per customer at existing locations.

In the latest quarter, Sprouts’s same-store sales rose 5.9% year on year. This growth was a deceleration from its historical levels, showing the business is still performing well but losing a bit of steam.

Sprouts has good unit economics for a retailer, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see below, it averaged an impressive 38.6% gross margin over the last two years. That means for every $100 in revenue, $61.43 went towards paying for inventory, transportation, and distribution.

This quarter, Sprouts’s gross profit margin was 38.7%, in line with the same quarter last year. On a wider time horizon, Sprouts’s full-year margin has been trending up over the past 12 months, increasing by 1.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold.

Sprouts was profitable over the last two years but held back by its large cost base. Its average operating margin of 7.1% was weak for a consumer retail business. This result is surprising given its high gross margin as a starting point.

On the plus side, Sprouts’s operating margin rose by 1.4 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, Sprouts generated an operating margin profit margin of 7.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Sprouts has shown impressive cash profitability, driven by its attractive business model that gives it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 5.1% over the last two years, better than the broader consumer retail sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Sprouts’s free cash flow clocked in at $111.4 million in Q3, equivalent to a 5.1% margin. The company’s cash profitability regressed as it was 3 percentage points lower than in the same quarter last year, but we wouldn’t read too much into it because capital expenditures can be seasonal and companies often stockpile inventory in anticipation of higher demand, leading to quarter-to-quarter swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Sprouts has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 14.5%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Sprouts reported $322.4 million of cash and $1.86 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $821.8 million of EBITDA over the last 12 months, we view Sprouts’s 1.9× net-debt-to-EBITDA ratio as safe. We also see its $2.48 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Sprouts beat analysts’ EPS expectations this quarter. On the other hand, its revenue missed and its Q4 same-store sales growth guidance missed significantly. Additionally, full-year EPS guidance fell slightly short of Wall Street’s estimates. Zooming out, we think this quarter could have been better, and shares traded down 18.8% to $85.20 immediately following the results.

Updated: December 4, 2025 at 9:38 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Sprouts, you should also grasp the company’s longer-term business quality and valuation.

We think Sprouts is a good business. First off, its revenue growth was decent over the last three years. And while its gross margins indicate a mediocre starting point for the overall profitability of the business, its marvelous same-store sales growth is on another level. On top of that, its new store openings have increased its brand equity.

Sprouts’s P/E ratio based on the next 12 months is 15.4x. Looking at the consumer retail landscape right now, Sprouts trades at a pretty interesting price. If you believe in the company and its growth potential, now is an opportune time to buy shares.

Wall Street analysts have a consensus one-year price target of $124.29 on the company (compared to the current share price of $85.06), implying they see 46.1% upside in buying Sprouts in the short term.