Sprouts (SFM)

Grocery store chain Sprouts Farmers Market (NASDAQ:SFM) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 18.7% year on year to $2.24 billion. Its non-GAAP profit of $1.81 per share was 16.8% 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 put up a good quarter or two, but the best consistently grow over the long haul.

With $8.07 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 tepid 7.1% 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 reported year-on-year revenue growth of 18.7%, and its $2.24 billion of revenue exceeded Wall Street’s estimates by 1.4%.

Looking ahead, sell-side analysts expect revenue to grow 10.4% over the next 12 months, an acceleration versus the last six years. This projection is eye-popping and suggests its newer products will catalyze better top-line performance.

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Sprouts opened new stores at a rapid clip over the last two years, averaging 5.9% 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.

Note that Sprouts reports its store count intermittently, so some data points are missing in the chart below.

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 6.6%. 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 11.7% year on year. This growth was an acceleration from its historical levels, which is always an encouraging sign.

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 38.1% gross margin over the last two years. That means for every $100 in revenue, $61.90 went towards paying for inventory, transportation, and distribution.

Sprouts produced a 39.6% gross profit margin in Q1, up 1.3 percentage points year on year and exceeding analysts’ estimates by 1.8%. Sprouts’s full-year margin has also been trending up over the past 12 months, increasing by 1.3 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 6.5% 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 1.5 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, Sprouts generated an operating profit margin of 10.1%, up 2.2 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sprouts’s full-year EPS grew at a solid 23% compounded annual growth rate over the last five years, better than the broader consumer retail sector.

In Q1, Sprouts reported EPS at $1.81, up from $1.12 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Sprouts’s full-year EPS of $4.45 to grow 9.1%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because 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.

Taking a step back, we can see that Sprouts’s margin expanded by 2.1 percentage points over the last year. This is encouraging because it gives the company more optionality.

Sprouts’s free cash flow clocked in at $239.6 million in Q1, equivalent to a 10.7% margin. This result was good as its margin was 1.8 percentage points higher than in the same quarter last year, building on its favorable historical trend.

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 14.3%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Sprouts reported $285.7 million of cash and $1.72 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 $725 million of EBITDA over the last 12 months, we view Sprouts’s 2.0× net-debt-to-EBITDA ratio as safe. We also see its $2.10 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.

We were impressed by Sprouts’s optimistic EPS guidance for next quarter, which beat analysts’ expectations. We were also excited its EBITDA outperformed Wall Street’s estimates. Zooming out, we think this was a solid quarter. Despite this, shares traded down 5% to $162.07 immediately after reporting.

Updated: May 21, 2025 at 10:29 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Sprouts.

Sprouts possesses a number of positive attributes. Although its revenue growth was a little slower over the last six years, its growth over the next 12 months is expected to be higher. And while Sprouts’s operating margins are low compared to other retailers, 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 33.9x. This valuation tells us that a lot of optimism is priced in. This is a good one to add to your watchlist - there are better opportunities elsewhere at the moment.

Wall Street analysts have a consensus one-year price target of $183.15 on the company (compared to the current share price of $165.76).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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