Nov. 3, 2017, 11:57 AM
Reuters
- The stock price of many grocers was hit hard after Amazon bought Whole Foods.
- Sprouts Farmers Market was included in the group affected by Amazon, but lower prices and a focus on produce may save it from Amazon’s death grip.
- Sprouts is one of the best-positioned grocers right now, according to one analyst.
The day Amazon’s $13.7 billion acquisition of Whole Foods went through, grocery stores across the nation watched their share prices tank as the disruptive giant officially entered their domain.
Sprouts Farmers Market was among those grocers affected by the deal. It dropped 17.21% in three days as the Whole Foods deal was finalized and completed. But, the company isn’t standing still. It reported its third-quarter earnings on Thursday, and beat Wall Street’s expectations for earnings and revenue by a wide margin.
Mark Carden, an analyst at UBS, called Sprouts’ report “straight up fresh” and is bullish on the future of the company.
“While one can attribute some of its beat to cycling a very promotional environment last year, we don’t think the improvement was a one-off,” Carden said in a note to clients.
When Carden started his coverage of Sprouts in March, he said that the company’s produce, low prices, and ability to convert the occasional shopper into a regular is driving growth at the company, and he reiterated the importance of those strengths after the company’s report.
Sprouts saw a boost from a stronger than anticipated produce growing season in the third quarter, and in general, the company has a strong produce section that is consistently priced lower than the competition, according to Carden.
Sprouts’ low prices in produce and across the rest of the store strikes at the heart of Whole Foods’ biggest weakness. The minute Amazon took over, it lowered prices for many popular items at Whole Foods, but Sprouts’ competitive price advantage will stay until Amazon can lower prices more aggressively across the entire store, Carden said.
Lower prices allow Sprouts to compete, not only against its organic competitors like Whole Foods, but also against regular grocery stores. It’s what helps Sprouts attract customers from a wide geographic area and convert them to regulars, said Carden.
“We believe its differentiated model supports double digit revenue growth for the next 5 years,” Carden said. He rates the company a “buy” and has a price target of $26, which is 26% higher than the company’s current price of around $20.71 on Friday morning.
Sprouts is up 6.21% this year.
