Goldman Sachs Still Buying Sprouts Farmers Market: 'Ready For A Storm'

Sprouts Farmers Market Inc (NASDAQ: SFM)'s 2Q results came in “better than feared.”

Goldman Sachs’ Stephen Tanal maintains a Buy rating on the company, with a price target of $29.

2Q Results

The company reported 4.1 percent growth in same-store sales, driven by a 3.5 percent increase in traffic, “as deflation took the edge off ticket but drove a pop in gross margin,” Tanal mentioned.

EPS was up 10 percent year-on-year to $0.25, beating the estimate and the consensus.

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“Deflation dominated our conversations with investors, and fears of a price war appear widespread. Straight talk from SFM did not allay these concerns, but it’s always darkest before dawn,” Tanal stated.

The analyst believes the guidance revision suggests a step change in gross margin, which is likely to give Sprouts Farmers Market leeway to protect tonnage.

Tanal expects the company to outperform peers in 2H.

Stock Sentiment

According to the Goldman Sachs report, “Sentiment is so bearish, in our view, that the backdrop would have to get worse than SFM's rather sober outlook to drive much downside in the stock from here. 3Q is likely to be the nadir, with moderating yoy deflation thereafter.”

However, Tanal believes the company’s model is on trend and in its early stages, with Sprouts Farmers Market appearing well positioned to take share from conventional and specialty grocers alike.

The EPS estimates for 2016, 2017 and 2018 have been reduced to reflect the lower 2H2016 sales and the 2Q results.

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