Sprouts Farmers Market Is 'On-Trend' In Goldman's View

Goldman Sachs’ Stephen Tanal expects robust quarterly results to drive Sprouts Farmers Market Inc (NASDAQ: SFM) shares to outperform.

Tanal upgraded the rating on the company from Sell to Buy, with a price target of $29.

Disruptive Player

“SFM is a disruptive player in grocery, making healthy living accessible to the masses,” the analyst mentioned.

The company focuses on organic, fresh and natural product mix delivered through a conveniently located but authentic “farmers market” store.

Related Link: Is Whole Foods Unable To Compete In The Organic Grocery Space?

Tanal believes Sprouts Farmers Market has a “clever product mix” that drives structurally higher merchandise margin, leading to the highest cash returns among its peers.

Growth Outlook

“Our capacity analysis suggest SFM could grow to 1,115 stores over time from just 228 today, 5X its current size, implying 12 more years of 14 percent growth in footage,” the analyst stated.

Sprouts Farmers Market is a compounder, and Tanal expects the company to be a long-term beneficiary of the ongoing shift toward wellness, “given its unique positioning at the crossroads of specialty retail and mass appeal.”

Tanal expects the company to witness 16 percent EPS CAGR during 2015–2018, based on an EBIT CAGR of 12 percent, driven by square footage growth of 15 percent, along with same-store sales growth of 4–5 percent, “flattish” gross margin beyond 2016 and expense deleveraging.

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