Analyst: Sprouts 'Underperformance Creates Opportunity'

In a report published Friday, Cowen and Company analysts maintained an Outperform rating on Sprouts Farmers Markets Inc (NASDAQ: SFM), with a target price of $40.

Sprouts is expected to report robust 1Q results, driven mainly by strong new store productivity. The company's focus on price leadership in produce is expected to help it attract more value conscious shoppers in the near future.

"Our estimate assumes that gross margin expands 10bps, which is above consensus of -10bps, as we expect promotions to be relatively lower given worse produce availability relative to Q1:14 - as produce is SFM's key promotional vehicle," the analysts mentioned.

The company continues to benefit from robust demand for fresh healthy food at a great value and its stock has underperformed its peer group in the recent months. The analysts believe that the recent underperformance has been "largely driven by softer Retail Sales data from the Census Bureau and concerns about the impact of slower food inflation on pricing."

"While we do expect slower inflation to hurt SFM's SSS growth by ~100bps in FY15, we still see considerable potential for SSS to accelerate as the year progresses and for earnings outperformance relative to consensus expectations," the analysts stated.

The EPS estimate for FY15 has been raised from $0.90 to $0.92 to reflect lower interest expenses.