Sprouts Farmers Market Neutral At JPMorgan On Aggressive Estimates

Although Sprouts Farmers Market Inc (NASDAQ: SFM) has a superior store concept, there is downside to near-tem comp estimates and its margins could erode over time, JPMorgan’s Ken Goldman said in a report. He initiated coverage of the company with a Neutral rating and a price target of $24.

Sprouts Farmers Market is a fast-growing, specialty grocer and its main competitive advantage is that its produce prices are highly attractive, analyst Ken Goldman mentioned. He added that although the stores were well designed and “appealing to a broad range of consumers,” there were three reasons that prevented a more constructive rating.

Comp Estimates Appear Aggressive

Goldman expects deflation to weigh on Sprouts Farmers Market’s comps for at least a couple of more quarters. He estimated comps of 4.2 percent for 2Q16, versus consensus expectations of 4.6 percent. Comp estimates for FY16 and FY17 are at 4.0 percent and 4.8 percent, respectively, versus the Street’s 4.9 percent and 5.1 percent.

Related Link: Citi Forecasts Food Price Inflation For Food Retailers

Pressure On Margins

Sprouts Farmers Market’s EBITDA margins may be slightly eroded over time by increasing competition, the analyst stated. He added that operating margins could also come under pressure due to higher distribution costs as the company increases its presence beyond the Southwest.

Valuation

At the current level, valuation appears to be “more-or-less appropriate,” Goldman commented.

Did you like this article? Could it have been improved? Please email feedback@benzinga.com to let us know!