Sprouts: a lot of food for thought


Back on 8/1/2013, after doing my due diligence, I was ready to invest in Sprouts Farmers Market (SFM) on its first day of trading. However, SFM opened at $35/share, a whooping 94% premium above the IPO’s priced shares at $18 (the expected range was $14 to $16), and I backed off. That day, Sprouts realized a Mt. Everest high 123% gain - a debut that outdid the likes of LinkedIn 109% and Noodles & Co. 104%. Since then, I’ve kept Sprouts on the back burner. But recently, I took a look see when Sprouts pulled back to under $30/share with a P/E in the low 40s and forward P/E in the high 20s, which are more acceptable and tolerable at Himalayan base camp levels where I can breathe without an oxygen mask.


Today, the U.S. supermarket industry is huge ($620.2 billion in 2013 according to Progressive Grower), intensely competitive and highly fragmented. The industry includes conventional supermarkets, super-centers, warehouse grocery stores, military commissaries and limited-assortment and natural/gourmet-positioned supermarkets. According to Natural Foods Merchandiser, a leading trade publication for the natural foods industry, in 2013, natural and organic product sales through retail channels accounted for $89.4 billion, or 14.35% of the supermarket industry total.

Not surprisingly, Whole Foods holds a substantial market share of the $89.4 billion natural and organic sales, as shown in the following table.

	                   2013 Sales	% of total
	                  (billion $)	
Whole Foods (WFM)	      $12.917	14.4%
Sprouts Farmers Market (SFM)	2.438	 2.7%
The Fresh Market (TFM)	        1.329	 1.5%
National Grocers (NGVC)	        0.430	 0.5%
Subtotal	               17.114	19.1%
Total Sales: Natural/Organic  $89.400  100.0%

Whole Foods combined with 3 other major companies - Sprouts, The Fresh Market and National Grocers - account for almost 20% of the natural and organic total sales. However, the line between natural and organic retailers and all others is becoming more and more blurred as conventional supermarkets, such as Kroger and the merged Albertsons/Safeway, and others like Walmart and Trader Joe’s crash the scene.

Recently, share prices of the four natural and organic companies have pulled back significantly, and I decided to revisit this sector, looking for any investment opportunities.


Latest 10K Business Statements

Whole Foods Market is the leading retailer of natural and organic foods, the first national “Certified Organic” grocer, and uniquely positioned as America’s Healthiest Grocery Store™. The Company incorporated in 1978, opened the first Whole Foods Market store in 1980, and is based in Austin, Texas. We completed our initial public offering in January 1992. Our Company mission is to promote the vitality and well-being of all individuals by supplying the highest quality, most wholesome foods available. Since the purity of our food and the health of our bodies are directly related to the purity and health of our environment, our mission is devoted to the promotion of organically grown foods, healthy eating, and the sustainability of our entire ecosystem. Through our growth, we have had a significant and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance over the last 36 years. We have one operating segment, natural and organic foods supermarkets. We are the largest retailer of natural and organic foods in the U.S. and the 7th largest public food retailer overall based on 2013 sales rankings from Progressive Grocer.”

Sprouts Farmers Market operates as a healthy grocery store that offers fresh, natural and organic food that includes fresh produce, bulk foods, vitamins and supplements, grocery, meat and seafood, bakery, dairy, frozen foods, body care and natural household items catering to consumers’ growing interest in eating and living healthier. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. With 198 stores in 12 states as of February 26, 2015, we are one of the largest specialty retailers of fresh, natural and organic food in the United States.
The cornerstones of our business are fresh, natural and organic products at compelling prices (which we refer to as “Healthy Living for Less”), an attractive and differentiated shopping experience, and knowledgeable team members who we believe provide best-in-class customer service and product education.
Healthy Living for Less. We offer high-quality, fresh, natural and organic products at attractive prices in every department. Consistent with our farmers market heritage, our offering begins with fresh produce, which we source, warehouse and distribute in-house and sell at prices we believe to be significantly below those of other food retailers. In addition, our scale, operating structure and deep industry relationships position us to consistently deliver “Healthy Living for Less” throughout the store. Based on our experience, we believe we attract a broad customer base, including conventional supermarket customers, and appeal to a much wider demographic than other specialty retailers of natural and organic food. We believe that over time, our compelling prices and product offering convert many “trial” customers into loyal “lifestyle” customers who shop Sprouts with greater frequency and across an increasing number of departments.”

The Fresh Market is a growing specialty grocery retailer focused on creating an extraordinary food shopping experience for our customers. Since opening our first store in 1982, we have offered high-quality food products, with an emphasis on fresh, premium perishables and an uncompromising commitment to customer service. We seek to provide an attractive, convenient shopping environment while offering our customers a compelling price-value combination. As of January 25, 2015, we operated 169 stores in 27 states across the United States.”

Natural Grocers is an expanding specialty retailer of natural and organic groceries and dietary supplements. We focus on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We strive to generate long-term relationships with our customers based on transparency and trust by: (a) selling only natural and organic groceries and dietary supplements that meet our strict quality guidelines—we do not approve for sale grocery products that are known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils; (b) utilizing an efficient and flexible small-store format to offer affordable prices and a shopper-friendly retail environment; and (c) enhancing our customers’ shopping experience by providing free science-based nutrition education to help our customers make well-informed health and nutrition choices.”

Company Product Sales Mix, Store Size, Store Total & Comparable Store Sales Growth

The following data reveal how the above business statements have been executed in their existing stores.

	                Whole Sprouts	Fresh	National
	                Foods		Market	Grocers
o Perishables	        66.8%	50.8%	65.4%	
o Non-Perishables	33.2%	49.2%	34.6%	
o Grocery				        67.0%
o Dietary supplements,				23.0%
o Body care, pet care				10.0%
o Gross sq. ft. (000s)	  38		 21	
o Selling sq. ft. (000s)      25-28		10
TOTAL STORES	         (a)			
6/2/2015	         417	205	168	96
FY 2015			                169	
FY 2014	                 399	191	151	87
FY 2013                  362	167	129	72
FY 2012	                 335	148		59
FY 2011	                 311	103		49
FY 2010	                 299	 43		39
FY 2009	                 284	 40		33
FY 2008	                 275	 36						

COMPARABLE             Whole Sprouts   Fresh  National
STORE SALES GROWTH     Foods	      Market   Grocers
2015			                2.9%	
2014	                4.3%	9.9%	3.2%	 5.6%
2013	                6.9%   10.7%	5.7%	10.8%
2012	                8.7%	9.7%	5.4%	11.6%
2011	                8.5%	5.1%	5.0%	 4.9%
2010	                7.1%	2.3%	5.0%	 2.1%

Note (a) includes Whole Food stores throughout the U.K., Canada and 42 U.S. states.

Investors here must know if a company is and will continue winning over more customers, especially if its stock is expensive. While all four companies have responded well to their customer base demands (like providing more fresh produce shown above), same store sales growth is the key metric. [For those unfamiliar with this term, go to this website for a definition: http://www.investopedia.com/terms/s/samestoresales.asp ] For traditional grocers, same store sales growth above 3% is an excellent achievement. Some analysts, however, suggest the bar should be higher for natural & organic food retailers, but provide no percentage and no backup reasons. The leader Whole Foods is a likely candidate to set the bar, but the company has not been able to consistently sustain a growth percentage level.

Over the recent five-year period, Sprouts has realized excellent same-store sales growth that have far exceeded the corporate financial target of 6%, and, now in the 9% to 11% range, Sprouts is at the very top far above its brethren. With a store foot print much smaller than Whole Foods, Sprouts has rapidly increased its store count from only 36 in 2008 to 205 today with future plans to expand eastward from its U.S. Southwest concentration across the U.S sunbelt to the U.S. East Coast.

Whole Foods’ same store sales growth peaked at 15% in FY 2002 and, subsequently, declined to an awful minus 3% in FY 2009 and, after rebounding to 8.7% in 2012, has realized a significant downward trend to 4.3% for FY 2014. After reporting a disappointing same store sales growth this past May and due to competitors assaulting its market share, Whole Foods announced plans to start a sister chain of smaller stores that will be aimed at younger shoppers and will have lower prices and cost less to operate; their primary target is Trader Joe’s which has been a thorn in their side over the years.

Both The Fresh Market and National Grocer have also increased their store count, but recently have realized significant declines in same store sales growth.

Corporate Financials

I first take a look at margins, cash flows and ROIC-WACC spreads to ascertain if the companies are creating value and making money.

In the table below, all four companies show an increasing margin trend. However, the entry and expansion of the big boys (Wal-Mart, Kroger and Albertsons/Safeway) in the natural and organic food arena have already begun to exert pressure on the margins of the four companies. For example, Wal-Mart, knowing that 91% of their shoppers prefer buying organic products from affordable brands, is attracting more customers and expanding organic items by advertising that customers can save 25% on its organic products compared to national brands. This price war creates havoc for natural and organic food retailers because it forces them to make “price investments”, i.e., selling their products at lower prices in order to remain competitive. Price investments, in turn, put a lot of pressure on their gross margins.

One way to increase margins is taking the low cost private label route. For example, Sprouts chooses not to carry most of the traditional, national branded consumer packaged goods generally found at conventional grocery retailers and focuses on expanding low cost private label products in their overall product portfolio. The company has brought 60 new products and reached 1,600 items under the private label umbrella. The company believes that their private label products build and enhance the Sprouts brand and allow them to distinguish themselves from competitors, promoting customer loyalty.

GROSS %				
2015 (ttm)	35.48	29.63	33.92	29.04
2014	        35.54	29.83	33.92	29.10
2013	        35.84	29.75	34.09	29.20
2012	        35.52	29.55	33.98	29.45
2011	        34.99	28.12	33.11	29.25
2010	        34.83	29.00	32.77	29.58
2009	        34.29		32.09	29.18
2008	        34.03		30.44	
2015 (ttm)	 6.61	 6.64	 7.36	 4.80
2014	         6.58	 6.73	 5.91	 4.66
2013	         6.84	 5.72	 5.52	 4.43
2012	         6.36	 3.94	 7.64	 3.57
2011	         5.42	-2.33	 7.48	 2.80
2010	         4.86	 1.66	 4.20	 3.98
2009	         3.54		 6.16	 4.03
2008	         4.13		 4.64	
PROFIT %				
2015 (ttm)	 4.05	 3.59	 3.45	 2.71
2014	         4.08	 3.63	 3.59	 2.59
2013	         4.27	 2.11	 3.36	 2.45
2012	         3.98	 1.09	 4.83	 1.98
2011	         3.39	-2.48	 4.64	 1.32
2010	         2.73	 0.94	 2.35	 1.94
2009	         1.83		 5.71	 1.72
2008	         1.44		 2.43			

In the following table, all four companies have strong ROIC numbers, and their current ROIC-WACC spreads (EVA) indicate that all four are creating excellent value for shareholders.

2014	        19.01%	13.51%	21.61%	14.25%
2013	        19.83%	 9.90%	20.14%	15.30%
2012	        18.59%	 9.29%	31.49%	15.43%
2011	        14.24%		32.22%	13.68%
2010	        12.00%		15.54%	38.61%
2009	         7.66%		64.46%	
2008	         7.87%			
ROIC	        18.87%	14.02%	21.21%	14.64%
WACC	         9.21%	 2.31%	 4.23%	 5.85%
EVA	         9.66%	11.71%	16.98%	 8.79%
ROE	        15.00%	17.04%	19.80%	15.50%
P/E (ttm)	24.22	40.39	25.98	35.32
FWD P/E	        21.15	27.47	16.42	30.09
P/B (mrq)	 3.63	 6.03	 4.58	 5.04
P/S (ttm)	 0.97	 1.44	 0.89	 0.95				
FCF/share (ttm)	 2.48	 0.19	 1.23	 0.25
Cash (mrq)     776.00M 177.72M	89.35M	 7.24M
Total Debt      63.00M 379.53M	32.95M	25.23M
Debt/Equity	 1.4%	51.3%	 9.5%	23.3%
Current ratio	 1.40	 1.75	 1.24	 1.25
Market Cap	14.4B	4.46B	1.60B	0.548B
52-wk high	57.57	38.45	42.12	35.00
6/5/15 Price	40.18	29.12	33.00	24.37
52-wk low	36.08	26.86	29.31	15.89
IPO offer/open				
Nov 5, 2010		       $22/25	
Jul 25, 2012				$15/18
Aug 1, 2013	       $18/35		

Currently, the stock prices for all four companies have pulled back significantly. Sprouts high P/E raises eyebrows, but, after a trade start at a 123% premium back in August 2013, Sprouts’ P/E has significantly dropped from 126.23 for Qtr Sep-13 to the current 6/5/15 P/E of 40.39 as Sprouts has realized strong growth in same store sales and revenue.

		    (million $)
6/5/15	  40.39	
Mar-15	  48.93	        857.51
Dec-14	  48.27	        734.59
Sep-14	  44.72	        766.41
Jun-14	  58.43	        743.81
Mar-14	  78.33	        722.61
Dec-13   101.13	        608.24
Sep-13   128.67	        633.61

Furthermore, Sprouts forward P/E of 27.47 indicates a continuance of this downward trend.

Next are the financial metrics that this board places a lot of importance.

REVENUE	     Whole Change  Sprouts Change   Fresh Change  National Change
(million $)  Foods    YoY	     YoY   Market    YoY   Grocers    YoY
2015 (ttm)  14,950           3,100	    1,780	       573	
FY 2015					    1,753    16%		
FY 2014	    14,194    10%    2,967   22%    1,512    14%       521    21%
FY 2013	    12,917    10%    2,438   36%    1,329    20%       431    28%
FY 2012	    11,699    16%    1,795   62%    1,108    13%       336    27%
FY 2011	    10,108    12%    1,106  114%      980	       265    17%
Jan-2011 (a)				       78			
FY 2010	     9,006    12%      517    6%      974	       227    10%
FY 2009	     8,032     1%      488			       206	
FY 2008	     7,954							
NET INCOME   Whole Change  Sprouts Change   Fresh Change  National Change
(million $)  Foods    YoY	      YoY  Market    YoY   Grocers    YoY
2015 (ttm)     605	       111	       62		16	
FY 2015					       63    24%		
FY 2014	       579     5%      108   110%      51   -21%	13    28%
FY 2013	       551    18%	51   163%      64    25%        11    59%
FY 2012	       466    36%	20	       51   141%	 7    90%
FY 2011	       343    39%      -27	       21		 4   -21%
Jan-2011 (a)					3			
FY 2010	       246    67%	 5    -2%      23		 4    25%
FY 2009	       147    28%	 5				 4	
FY 2008	       115							
EPS	      Whole Change  Sprouts Change   Fresh Change  National Change
(diluted)     Foods    YoY	       YoY  Market    YoY   Grocers    YoY
2015 (ttm)     1.66	       0.72	      1.27	       0.69	
FY 2015					      1.30    24%		
FY 2014	       1.56     6%     0.70    89%    1.05   -21%      0.60    28%
FY 2013	       1.47    17%     0.37   131%    1.33    24%      0.47    57%
FY 2012	       1.26    30%     0.16	      1.07   143%      0.30    88%
FY 2011	       0.97    35%    -0.28	      0.44	       0.16   -20%
Jan-2011 (a)				      0.06			
FY 2010	       0.72    67%     0.08     0%    0.48	       0.20    25%
FY 2009	       0.43	       0.08			       0.16	

Note (a): TFM changed their FY ending from December to January.

For FY years 2013 and 2014, Sprouts has clearly outperformed the others, showing the highest percentage of growth in annual revenue, net income and EPS.


Whole Foods pioneered the natural and organic food segment that it still dominates, but recently investors worry that it could lose more share to specialty retailers such as Sprouts, Fresh Market, National Grocers and Trader Joe’s, as well as mainstream retailers such as Kroger, Albertsons (which merged with Safeway) and Wal-Mart Stores.

IMO, the most formidable competitor in the natural and organic arena is Trader Joe’s which has successfully gone head-to-head with Whole Foods over the years. Trader Joe’s substantially outpaces its competitors in sales per square foot as shown in following table from research reports in 2014:

	 Average Sales
	   per Sq. Ft. 
Publix	           552
Kroger	           496
SPROUTS	           490
Harris Teeter	   442
Roundy’s	   393
Weis Markets	   335
Ingles	           325

At a whopping $1,734 sales per square foot, Trader Joe’s sells almost twice as much as Whole Foods and leaves Sprouts, Fresh Market and Natural Grocers behind in the dust. Trader Joe’s currently has 446 stores with an average size between 8,000 and 12,000 square feet versus Whole Foods’ 400 stores with an average gross area of 38,000 square feet.

Here’s the geographic distribution by State for Whole Foods, Sprouts, Fresh Market, National Grocers and Trader Joe’s.

Company	     Whole Sprouts   Fresh  National  Trader
Location     Foods	    Market  Grocers    Joe’s
California	79	84	 0	       172
Texas	        28	35	 6	13	16
Arizona	        11	29		 4	14
Colorado	20	27		34	 7
Oregon	         8			 8	12
New Mexico	 4	 6		 5	 3
Nevada	         5	 5		 1	 7
Utah	         5	 5		 2	 2
Montana				 4	
Idaho	         1			 3	 1
Nebraska	 2			 3	 2
Wyoming				 2	
Washington	 8			 1	21
Florida	25		40		15
N. Carolina	12		19		 9
Virginia	10		13		14
Georgia	        10	 7	12		 7
Illinois	24		 9		21
Tennessee	 5	 2	 8		 2
S. Carolina	 4		 7		 3
Ohio	         6		 6		 6
Alabama	         1	 3	 6		
Indiana	         3		 5		 2
New York	16		 4		21
Pennsylvania	10		 4		10
Maryland	 9		 4		 8
Louisiana	 5		 4		 1
Kentucky	 2		 3		 4
New Jersey	13		 3		11
Connecticut	 9		 2		 7
Wisconsin	 2		 2		 3
Kansas	         4	 3	 2	 8	 1
Arkansas	 1		 2	 2	
Oklahoma	 3	 7	 1	 5	
Iowa	         1		 1		 1
Mississippi	 1		 1		
N. Hampshire	 1		 1		 2
Massachusetts	30		 1		18
Michigan	 6				 6
Minnesota	 6				 8
Missouri	 2	 2			 5
D.C,	         4				 2
Rhode Island	 3				 1
Maine	         1				 1
Vermont					         1
Delaware					 1
Hawaii	         3				
Total	       400     215     166	95     446

Privately-held Trader Joe’s is a formidable competitor in this arena. Renowned for its quirky personality and unique products, Trader Joe’s is a chain of specialty grocery stores at 446 locations in 39 states and Washington, D.C. The company will open soon 11 new stores at the following locations: 1 store in Birmingham, Alabama; 3 in Texas (2 in Dallas and 1 in Houston); 2 in Florida (Davie & Ft. Lauderdale); 1 in Grand Rapids, Michigan; 2 in Washington (Shoreline & Spokane); and 1 in Tulsa, Oklahoma. Store sizes average between 8.000 and 12,000 square feet that support and carry fewer than 4,000 items, about which 80% are private label. The company’s greatest edge over conventional chains is the fact that consumers cannot get its items anywhere else. This unique positioning serves as a powerful marketing tool and is effective at insulating the company from competition. According to Supermarket News data, Trader Joe’s 2013 sales were at $11.3 billion, compared to the leader Whole Foods at $12.9 billion.

According to Consumer data from Simmons National Consumer Surveys from Experian Marketing Services, consumers for Trader Joe’s and Whole Food tend to have a higher education; are conscious of labels, ingredients, nutrition, and eating healthfully; interested in natural/organic products, gourmet foods, foreign foods, and the way food is presented; and concerned about environmental issues. At Whole Foods, the focus is premium quality and huge selection. At Trader Joe’s, the focus is a sharply edited assortment of great products at great prices. There is also a vast difference in their marketing thrusts. Whole Foods promotes the concept that by buying products at its stores, consumers are supporting not just organic foods, but a production model that benefits local farmers, people in third-world countries, and the environment. In contrast, the marketing thrust of Trader Joe’s is that it is here to make shopping fun—and has great products that it searched the world to find just for you, at prices that are a steal.

Whole Foods operates 400 stores across the U.S. in 42 states and Washington, D.C. with the highest concentration in California, almost 20%. Whole Foods’ long-term growth plans target 1,200 stores in the U.S. However, disappointing comparable same store sales growth and the onslaught of competitors that could adversely affect gross profit margins have raised worries that Whole Foods’ high-end grocery model is showing signs of faltering. This is more evident now that Whole Foods just announced a new store concept - the aforementioned above sister chain of smaller stores aimed at younger shoppers - that co-founder and co-CEO John Mackey related will be “hip, cool and tech-oriented” with lower prices and less costly to operate. Mackey emphasized that they see this as an “and” to their Whole Foods Market brand and not an “or.” Whole Foods underlying business still remains very strong.

Sprouts currently has 215 stores (includes those opening in the next few months) across 13 states with heavy store concentration in the U.S. Southwest with almost 40% located in California. Sprouts has aggressive plans to expand eastward across the U.S. sun belt to the East Coast and penetrate Whole Foods and Fresh Market’s turf in the Deep South, in particular, Florida. There is also more room for additional stores in California and Texas. For example, within the city of Los Angeles, there are only 3 Sprouts stores; two are in far outlying neighborhoods (Granada Hills and Woodland Hills) and only one in Central Los Angeles (Westwood adjacent to UCLA).

The Fresh Market now has 166 stores across 26 states with primary store concentration in the U.S. deep south with almost 24% in Florida. In March 2015, Fresh Market made a surprising decision to abandon California and shut down its 3 stores in Palo Alto, Santa Barbara and Laguna Hills. The company expects to open 19 new stores in or near existing eastern U.S. markets. Fresh Market anticipates sales growth of 9% to 11%, with comps rising 2% to 4%.

National Grocers operates 95 stores across 15 states with a concentration in the U.S. far west with almost 36% in Colorado. Interestingly, there are no stores in California. Management has outlined its belief that the U.S. market can support 1,100 Natural Grocers stores. This represents more than a 11-fold increase from current store levels. The company plans on expanding its base of stores by 20% per year for the foreseeable future.

Wal-Mart is a huge threat due its scale and customer base. Since its acquisition of Wild Oats, Wal-Mart has rapidly expanded both the selection and reach of its organic food brand. Organic products are sold in 3,800 U.S. stores, which carry at least 30 organic items and include 2,200 stores offering a selection of 70 items.

The Kroger Co. (KR), headquartered in Cincinnati, OH, is one of the world’s largest food retailers, with fiscal 2014 sales of $108.5 billion. Kroger Co. operates more than 2,625 supermarkets and multi-department stores (1,330 of which have fuel centers) across the country under regional banners including Kroger, Ralph’s, and Fry’s. Kroger is also making a play for the natural and organic food space and considers itself the second-largest player in this market after Whole Foods. For FY 2014, same supermarket sales was 4.2% for supermarkets with fuel centers and 5.2% for supermarkets without fuel centers.

On 1/20/2015, Albertsons and Safeway Inc. merged into a privately held company that operates 2,230 grocery stores in 34 states and Washington D.C. The new company is comprised of three regions and 14 retail divisions, supported by corporate offices in Boise, ID, Pleasanton, CA, and Phoenix, AZ. Banners include Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Albertsons, ACME, Jewel-Osco, Lucky, Shaw’s, Star Market, Super Saver, United Supermarkets, Market Street and Amigos. This new company also plans to expand into the natural and organic food space.

Acquisitions and mergers are also possible.

Corporate Governance

Whole Foods co-founder John Mackey has been with the company since 1978 and currently is the Co-CEO.

Sprouts co-founder Shon Boney has been with the company since 2002 and served as CFO (2002-2005), CEO (2005-2012) and now is only a Board member. President and CEO Douglas Sanders has been with the company since its 2002 founding and was appointed to his present position in 2012.

Fresh Market founder Ray Berry has served as Chairman of the Board of Directors since he started the company in 1981 and served as President and Chief Executive Officer from 1981 until 2007.

Natural Grocers was founded by Margaret and Philip Isely in 1955, years before the first Whole Foods was opened in 1980. Natural Grocers is still in the hands of the Isely family, who make up half of the company’s board of directors. This generation of Iselys, which took the helm in 1998, began the expansion of Natural Grocers beyond a simple mom-and-pop concept. Kemper Isely, who serves as Chairman and Co-President with his brother Zephyr, joined the company as an employee at the age of 14 in 1977. The four Iselys on the board own a combined 37.6% of Natural Grocers, and all insiders own a combined 60% of shares outstanding. This level of insider ownership, coupled with ambitious plans for growth already under way, provides confidence that this management team is focused on the long-term success of the business.

Trader Joe’s is owned by a family trust set up by Theo Albrecht, one of the brothers behind the German discount chain ALDI. Its management is notoriously secretive about corporate business and financials.


It’s too bad my first choice Trader Joe’s is a privately-held company. If it ever goes public, the opening price will most likely skyrocket to record heights. Among the others, I still favor Sprouts Farmers Market (SFM), my choice back in August 2013. Sprouts is operating in the black, creating excellent value for stockholders, making money and increasing margins. Within the natural and organic food arena, Sprouts outshines Whole Foods, Fresh Market and National Grocers with the highest percentage of growth in comparable store sales, revenues, net income and EPS. Since its IPO, Sprouts’ high P/E has dropped significantly and appears on its way to lower levels with a forward P/E in the high 20s . Sprouts is positioned well to meet and, in some cases, exceed corporate guidance levels for 2015.

53-Week Guidance
• Net sales growth (1): 20% to 22%
• Unit growth: 27 new stores
• Comparable store sales growth (2): 6% to 7%
• Adjusted EBITDA growth: 16% to 19%
• Adjusted net income growth: 18% to 22%
• Adjusted diluted earnings per share (3): $0.84 to $0.87
• Capital expenditures (net of landlord reimbursements): $100M - $110M
(1) On a 52-week to 52-week basis the Company expects total sales growth of 18% to 20%.
(2) Comparable store sales growth is on an equal 52-week to 52-week basis.
(3) Based on a weighted average share count of approximately 157 million shares for 2015.

The growing awareness, popularity and affordability of natural and organic foods have created a fierce competition for consumers among food retailers. Another way to invest in the natural and organic food sector is looking for well-run companies in its supply and distribution chain, which is being stretched by increasing demands. I’m also revisiting this area and looking at companies like United Natural Foods (UNFI), Hain Celestial Group (HAIN) and WhiteWave Foods (WWAV).

As always, conduct your own due diligence, especially since Sprouts Farmers Market, The Fresh Market and National Grocers are companies outside of Saul’s portfolio and TMF pay site safety nets.




This is one heck of a write-up! Thanks so much for putting so much time into this. It is going to take me some time to go through this and digest all of it.

It is also timely as I was also looking for something in organic foods to invest in. After looking and passing on HAIN and WWAV, I was considering a purchase of some WFM shares because of its recent drop in price but will now re-consider.

A few questions though, if you don’t mind:

  1. Do the debt levels or debt/equity (51.3%) of SFM concern you, especially compared to that of WFM (1.4%)?

  2. How much do you anticipate Sprouts rate of growth to slow down going forward as it gets bigger and runs into more competition in crowded markets? With a higher P/E than WFM, is this a concern?

  3. What do you think of Whole Foods’ smaller store concept? Personally, I’m torn and this is probably the reason why I haven’t already bought WFM shares.

  4. What is Sprouts’ 1YPEG? (If you included this I apologize. I’ve only browsed through all the information you posted.)

Thanks again for putting so much effort into this.

  • Matt


What an amazing report. How LONG did it take you to put that together? Wow.

Just want to speak very briefly to two points. You start by comparing Whole Foods, Sprouts, Fresh Market, and National Grocers as making up 20% of natural and organic market. Is this because they are the four biggest players (excluding Trader Joe’s?)

Recently, I’ve read about Costco “quietly surpassing” Whole Foods as seller of organics! So, Costco itself doesn’t really fit in a comparative study of markets that are primarily organic/natural/health foods markets because that is only a small percentage of its stock, its growth in organic market may still be something to take into consideration when studying this market.

Costco Wholesale seems to have quietly surpassed Whole Foods to become the biggest organic grocer as it courts a younger demographic, according to one investment bank.

In an earnings call last week, chief financial officer Richard Galanti mentioned that the Issaquah warehouse club’s sales of organic products exceeded $4?billion annually — up from a previous $3?billion-plus estimate given last year.


Second point, totally agree with you, if Trader Joe’s ever went public… That would be the store to own! Amazing, wonderful store with fantastic products at superior prices. Always busy. Love to shop there, and if it were just a little closer, it would ALWAYS be my first stop for grocery. However, although it has wonderful, products, unique selections, top quality, it also has limited selection, especially in produce. So, even if it were always my first stop, it would never be my one stop grocery shop. Would always need to stop elsewhere to increase diversity of what I cooked with and put on the table.

Whole Foods is extraordinarily attractive to visit and shop in. Top quality produce, big selection, always beautifully displayed. Big selection in other areas too. But not my first choice (also not right around the corner so that plays in, too) but you do pay a premium there for everything but the 365 brand. So, if on a budget, it’s (for me) a special occasion shopping experience, not an everyday one.

Local Sprouts, I’ve only been to once, (it’s a bit farther out of the way), but prices seemed more fetching, and selection also great. I’m surprised, though, to read that their footprint is much smaller than Whole Foods. At least for the Sprouts and Whole Foods near me (one Sprouts that I have visited, several Whole Foods stores) the new Sprouts store is much bigger than any of the Whole Foods Stores I have been in.

My additional two cents worth…



Recently, I’ve read about Costco “quietly surpassing” Whole Foods as seller of organics! So, Costco itself doesn’t really fit in a comparative study of markets that are primarily organic/natural/health foods markets because that is only a small percentage of its stock, its growth in organic market may still be something to take into consideration when studying this market.

My take on the Costco news is that as much as anything it is an indication of the organic food market expanding and becoming more mainstream. So the “pie” is getting bigger, and that likely helps all stores in the sector.

No Sprouts in my neck of the woods yet, but one of my co-workers has been to one and liked it the best of all the organic foods stores she has been to.

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Below are my calcs for the 1YPEG. As always, please double check these numbers on your own.

Sprouts Farmer’s Market - SFM

2013		622	633	608
2014	722	743	766	734
2015	857

2013		.14	.13	.07
2014	.23	.20	.18	.12
2015	.25


3/2014	.57
3/2015	.75

YoY EPS =	31.58%

PE as of 6/5/2015 = 29.12 / .75 = 38.82

1YPEG = 38.82/31.58 = 1.23

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Very comprehensive Ray - nice work.

From an assessment point of view there was one metric I wasn’t seeing which is the income profitability per sq ft where basically WFM and Natural Grocers are way out in front.

If the world is moving to small format then NGVC are already there.

I have basically done my usual top and tail investing strategy with this sector (which I have done in Cyber Security with Check Point and PANW as well as storage with EMC and Nimble).

I have a holding in the sector leader (WFM) for long term quality earnings and stable growth - which I have added to recently after the recent price fall and at the same time buy into the smallest and fastest growing player to gain exposure to a growth opportunity that could deliver a 10x kind of gain (which frankly WFM is unlikely to do from here).

I have also bought into Hain as the any which way play on the sector.

With Sprouts and The Fresh Market falling back - they have become interesting I agree.


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We have Sprouts, Whole Foods, and Costco here…along with Walmart Super Centers and a Walmart Neighborhood market.

I seldom make it to Whole Foods. They run 20-80% higher in price and I’m not a totally organic person. They did away with several things I used to buy so I don’t bother to stop by. It’s 10 miles away, too. However, it is very busy.

Trader Joe’s is on the high price side of town (gas, restaurants, house prices higher there) and I have never been in a Trader Joes. From what I can tell, people go there for specialty items, not to weekly grocery shop. It’s still busy since it is the only one around for 10-15 miles.

According to Consumer Report, who did an extensive test in dozens of markets on dozens of fresh fruit/veggies, the only things worth buying organic are carrots and tomatoes. You’re wasting your money on other foods as they contain so little residuals in regular form vs the organic.

The Walmart only has half a dozen ‘organic’ items in veggie section… maybe six fruits… but has 2 rows of bread and buns …vs a small section at Sprouts for bread. Walmart definitely stocks more items than Sprouts - and of course, I don’t even think Sprouts offers detergent and cleaning products and similar. At least not rows and rows of it.

The Sprouts is just about as close as the Walmart. Better produce most of the time and often better prices. Their own brand is pretty good for a lot of stuff, but Sprouts is higher on milk prices. And dairy. But they have organic everything - from berries and fruit to veggies, as well as non-organic stuff. (well, organic tomatoes are hard to come by anywhere). Sprouts also has some items I can’t find at Walmart like specialty flour. Their frozen food is a bit higher for name brand items. Sprouts has excellent meat/fish.

Costco sizes of packages is too big for me (single). I don’t buy a lot of food there. I don’t need 3 dozen eggs at a time, or five lbs of tomatoes. They still are very busy and I buy other stuff there. They have the lowest price gas in town. The store is always full of people. You can’t do a weekly shopping trip there unless you are a family of 4 or 8. Or have a big freezer and freeze half the stuff.

I normally buy most of the food at Walmart, but stop by the Sprouts to pickup some midweek supplies. Probably spend 3x as much at Walmart.

We also have a Kroger and Tom Thumb nearby but I don’t go there. Overs love them.

All the stores here are always pretty busy. The Walmart Super Centers do a big business in food and other things.

Thanks for the analysis. Long term it might be a good long term buy, but the food market is littered with dead bodies like Food Lion and Albertsons and a dozen others. My mom shopped at A&P a long time ago.

The hottest growing food segment here is Hispanic markets and Asian markets. More and more Indian markets pop up too, and we now have a Korea center catering to that group in our town.


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Hey tele, The Fresh Market has also arrived here (Dallas-Fort Worth area to all the rest of you out there), although it’s much further away from you than the nearest Trader Joe’s. There’s one just south of Highland Park on Turtle Creek, a second at the southern tip of Lakewood, and the third is right in my neighborhood, but sadly right by Central Market so I think it’ll have a tough go of it.

-synchronicity, likes shopping at The Fresh Market, don’t know if I’d invest in it.

I shop HEB groceries* in Central Texas for most of my ‘grocery’ needs. I get some specialty items at Sprouts and at Natural Grocers.

I also stop at Fiesta Market, and the Asian Markets, when I’m in the area. The Asian Markets ALWAYS have good prices and unusual vegetables that are unavailable in ‘American’ stores.

I’ve bought dry goods in Walmart… 1X this year? Maybe 2 or 3X last year? I’ve bought no groceries in Walmart this year.
I have stopped in Walmart for the bathroom, though.

Whole Foods is too expensive, in general too crowded, and too far away.

HEB Central Market - when I’m in the area, I might stop in.

*various locations - there is often an HEB within a block of a Walmart

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I just returned home, after a gathering with friends for dinner and watching the NBA Steph Curry vs LeBron James game. Exciting over-time game!

First of all, for some reason, there’s a glitch in my geographic distribution by state table. The Florida line item slid to the left. The correct store numbers for Florida are: 25 Whole Foods; 0 Sprouts; 40 Fresh Market; 0 National Grocers and 15 Trader Joe’s.

Here are my responses to questions:
Do the debt levels or debt/equity (51.3%) of SFM concern you, especially compared to that of WFM (1.4%)?
As a value investor, I usually am debt adverse and favor and look for companies with Total Debt/Equity ratios less than 40%. However, when I’m looking at a company in obvious growth-oriented mode, I allow myself flexibility to make exceptions and tradeoffs, especially if other financial metrics show overriding significant performance. In Sprouts case, there are numerous overriding factors. IMO, the most significant is Sprout’s recent comparable store sales growth in the 9% to 11% range while substantially increasing its annual store count. So for now, with a debt/equity at 51.3%, I am not overly concerned, but it’s something to keep an eye on, especially if it rises significantly.

How much do you anticipate Sprouts rate of growth to slow down going forward as it gets bigger and runs into more competition in crowded markets? With a higher P/E than WFM, is this a concern?
My post’s conclusion includes Sprouts’ 2015 guidance which currently shows no slow down. I mentioned that Sprouts plans to aggressively expand eastward across the U.S. sunbelt to the Deep South where they see expansion opportunities rather than “crowded” markets. Yes, the competition will continue to be fierce in years to come. So beyond 2015, it will be important and necessary to keep track of the company’s guidance for any significant changes. I mentioned that Sprouts current 40.39 P/E raises eyebrows, but is on a significant downward trend due to growth in revenue and comparable store sales.

What do you think of Whole Foods’ smaller store concept?
Although Whole Foods has not defined small in term of square feet, it is definitely targeting Trader Joe’s. I say, “Good luck!” Traders Joe’s is deeply entrenched in the marketplace with a loyal clientele and, as I mentioned in my post, insulated from competition with 80% of its 4,000 store items under the private label umbrella and only available at their stores.

What is Sprouts’ 1YPEG?
For me, PEG (Yahoo, Nasdaq and this board’s versions) is just nice-to-know information that is not a critical metric for my analysis. Therefore, I don’t find it meaningful to include it.

How LONG did it take you to put that together?
I did my initial due diligence for this sector back in 2013 and had most of the table formats saved; just a matter of adding Sprouts and updating data for Whole Foods, Fresh Market and National Grocers from SEC filings (time consuming here). I also saved a lot of relevant informative articles and reports in my computer files.

You start by comparing Whole Foods, Sprouts, Fresh Market, and National Grocers as making up 20% of natural and organic market. Is this because they are the four biggest players (excluding Trader Joe’s)?

I focused on the four biggest publicly traded companies because they had readily available data from SEC filings to make a complete comparison in my post. I wanted to include Trader Joe’s, but had no access to its financials, since it’s a private company that is notoriously secretive about its business affairs. I also mentioned that the line between natural and organic retailers and all others is becoming more and more blurred and mentioned later in the post that Kroger is also making a play for the natural and organic food space and considers itself the second-largest player in this market after Whole Foods.

In my neck of the woods in Southern California, I have a Costco store and Trader Joe’s less than 8 minutes drive from my home and a Sprouts less than 15 minutes away. My usual food shopping ritual is first to stop at Costco to buy the bulk of my fresh perishable meat, seafood, vegetable, fruit and dairy items and, next on my way home, a stop at minutes away Trader Joe’s for smaller quantity items like whole wheat bread, unleavened bread, yogurt and humus. My wife and I also shop at Sprouts for fresh perishables. We also shop a lot at numerous nearby Asian markets for fresh whole fish, a wide selection of fresh Asian vegetables, Asian fruits and expensive Sukoyaka genmai whole grain brown rice (California grown). The nearest Whole Foods is a 25-minute freeway drive without traffic in Pasadena, California. Whenever we have medical appointments in Pasadena, we usually go to the gigantic two-level store with underground parking around noon to have lunch, selecting items from their excellent food bar offerings, before we shop. Many of my friends go to a nearby Wal-Mart supercenter for their groceries primarily for low priced, good quality items, Lastly, there are no Fresh Market stores and no Natural Grocer stores in California for me to see.



Thx Ray for sharing your analysis. Very insightful.

I just wanted to add that I was speaking with a well respected wall street grocery analyst at a post graduation event last weekend (of all places) and among other observations he told me that Amazon was going to be taking share from all the well known grocers when their investments in online and delivery are implemented and start paying off next year. He said ‘that is where the growth is in the sector’.

Thx again.





I had to comment about “Easy Cooking Sukoyaka Genmai brown rice.” This rice is fantastic. As I understand it’s a relatively new strain of brown rice that cooks as quickly as white rice, has a more mild flavor, but retains the benefits of regular brown rice. Stumbled onto a year or two ago and think for rice lovers this stuff is great.


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October 10, 2012
Homemade Economy Sprouter


Le Chef

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