Shares of Sprouts Farmers Market (SFM) rose after the company reported favorable results for the final quarter of 2020, observes Taesik Yoon, growth stock expert and editor of Forbes Investor.
Boosted by comparable store sales growth of 3.7% and solid performance from its new stores driven by the continuation of elevated demand during the pandemic, as well as contributions from an extra week versus 2019, Q4 net sales climbed 17.4% year-over-year to $1.60 billion.
While this was about $20 million higher than expected, it was on the bottom line where SFM really shined.
Indeed, further bolstered by a material rise in gross margin resulting from the positive sales leverage and the benefits of strategic actions taken to improve profitability before COVID-19 arrived — such as more disciplined promotional spending and efforts to reduce shrink levels — adjusted earnings more than doubled to 59 cents per share from 27 cents in the prior year period and trounced the 39-cent consensus estimate.
The good news doesn’t end there. Specifically, SFM sees net sales being flat to up slightly this year versus what proved to be a much stronger 2020 than anyone initially imagined due to COVID-19 as contributions from new stores offset the decline in the pandemic-boosted demand that’s likely to continue.
This indicates net sales of at least $6.47 billion, which is slightly above the $6.46 billion analysts were forecasting. Similarly, while profitability will be hurt by the deleveraging of sales, many of the contributors to the higher gross margins SFM enjoyed in 2020 were also from strategic actions where the benefits should be sustainable.
We believe this is a big reason why the company’s full-year adjusted earnings per share outlook of $1.78-1.91 compares even more favorably to the consensus estimate of $1.75.
With this implying SFM’s post-pandemic fortunes are likely to hold up better-than-expected in 2021 before resuming growth next year, we think there’s plenty of upside left in its stock even after nice post-earnings move up.
