Can Sprouts Farmers Maintain Margin Gains Despite Sales Slowdown?

Sprouts Farmers Market, Inc. SFM has sustained impressive margin expansion despite its top-line momentum easing. During the third quarter of 2025, the gross margin expanded by 60 basis points to 38.7%, driven by tighter inventory management and lower shrink. The EBIT margin expanded to 7.2%, up from 6.3% a year ago, demonstrating disciplined cost control amid a softening consumer backdrop.

However, the company’s near-term challenge lies in defending these gains as sales growth decelerates. Comparable-store sales rose 5.9% in the third quarter, below management’s expectations, and moderated from 10.2% and 11.7% increases registered in the second and first quarters, respectively. For the fourth quarter, Sprouts Farmers expects flat to 2% growth in comparable store sales. With tougher year-over-year comparisons and moderating traffic in some trade areas, SFM faces pressure to balance promotional intensity with profitability.

Management expects the EBIT margin to be flat year over year in the final quarter of 2025. CFO Curtis Valentine noted that efficiency levers in sourcing and category management, along with progress in self-distribution for meat and seafood, are helping offset cost inflation. Meanwhile, Sprouts’ private-label assortment continues to drive mix benefits, growing more than 25% of total sales. SG&A also leveraged 13 basis points to 29.7% of sales, supported by lower compensation expenses despite higher benefit costs tied to store expansion.

As Sprouts Farmers enters a slower growth phase, delivering a stable EBIT margin will depend on ongoing efforts in supply-chain management and private-label expansion. The coming quarters will reveal if SFM’s structurally improved margin profile can endure a cooling demand environment.

What the Latest Metrics Say About Sprouts Farmers

Sprouts Farmers, which competes with Walmart Inc. WMT and Target Corporation TGT, has seen its shares drop 40.1% over the past year compared with the industry’s decline of 9.8%. While shares of Walmart have rallied 22.7%, Target has declined 38.2% in the aforementioned period.

From a valuation standpoint, SFM's forward 12-month price-to-sales ratio stands at 0.80, higher than the industry’s ratio of 0.24. SFM carries a Value Score of B. Sprouts Farmers is trading at a discount to Walmart (with a forward 12-month P/S ratio of 1.10) but at a premium to Target (0.39).

The Zacks Consensus Estimate for Sprouts Farmers’ current financial-year sales and earnings per share implies year-over-year growth of 14.3% and 40.5%, respectively. 

Sprouts Farmers currently has a Zacks Rank #5 (Strong Sell). 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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