Starting the lightning round on October 1, when a caller asked about Sprouts Farmers Market, Inc. (NASDAQ:SFM), Mad Money host Jim Cramer said:
That stock has come down so much that it is cheap. I’d love to have them on. You don’t get a quality company like that at 11 times earnings. I think Sprouts is a winner.
Cramer also commented on the stock a year ago.
Store Expansion Keeps Sales Moving Higher
Sprouts Farmers Market, Inc. reported second-quarter sales of approximately $2.33 billion, up 5% year-over-year. Diluted earnings per share increased to $1.37 from $1.35. The company opened seven stores during the quarter, bringing its footprint to 490 locations across 25 states, and expects 42 net new stores for the year.
The expansion pipeline extends beyond those openings. During its earnings call, management reported more than 110 executed leases and 155 approved locations. Sprouts is also developing its distribution network, including a Northern California facility, while nearly 85% of stores receive fresh meat through internal distribution. Those investments offer opportunities to improve purchasing and distribution efficiency as the chain grows.
The current valuation broadly supports the earnings multiple Cramer mentioned. Readings showed Sprouts trading at approximately 11x forward earnings, almost identical to Kroger’s multiple. That puts Sprouts near an established grocery competitor despite its store-expansion opportunities, although the comparison alone does not establish that the shares are undervalued. You can also check out why Kroger (KR) came under pressure.
Customer Traffic Remains the Harder Part
New stores are helping total sales, but performance at existing locations is weaker. Sprouts Farmers Market, Inc. reported a 1% decline in second-quarter comparable-store sales. Its full-year outlook, measured on a 52-week basis, calls for comparable sales between a (0.5%) and 0.5%. That leaves little expectation of meaningful growth from the existing store base.
Management also acknowledged that affordability initiatives improved units sold, but the customer-traffic response was slower than anticipated. Second-quarter gross margin declined 12 basis points to 38.7%, highlighting loyalty investments and higher fuel costs, partly offset by distribution and vendor benefits. These pressures matter because efforts to attract shoppers can cost money before they produce enough additional sales to improve profitability. Nevertheless, we recently discussed if Sprouts is a good stock to buy now.
Rising Fund Participation Meets a Sizable Bearish Position
Insider Monkey tracked 45 hedge funds with positions in Sprouts Farmers Market, Inc. at the end of the second quarter, up from 38 in the previous quarter. Of those, Citadel Investment Group had the most prominent position and increased its holding by 2090% to 2.17million shares. Meanwhile, short interest stood at 16.18% of the public float. More funds entered the shareholder base, but the substantial short position points to the fact that skepticism remains pronounced.
Sprouts has room to open more stores, but a stronger recovery would also require shoppers to return more frequently to its existing locations. For shareholders, improving traffic would be a more convincing sign of progress than sales growth driven primarily by a larger store count.
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