2 Reasons to Like SFM (and 1 Not So Much)

Sprouts currently trades at $168.75 and has been a dream stock for shareholders. It’s returned 580% since June 2020, blowing past the S&P 500’s 83.5% gain. The company has also beaten the index over the past six months as its stock price is up 11.7% thanks to its solid quarterly results.

Is now still a good time to buy SFM? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.

Why Does SFM Stock Spark Debate?

Playing on the secular trend of healthier living, Sprouts Farmers Market (NASDAQ:SFM) is a grocery store chain emphasizing natural and organic products.

Two Positive Attributes:

1. Surging Same-Store Sales Show Increasing Demand

Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Sprouts has been one of the most successful retailers over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 6.6%.

2. Increasing Free Cash Flow Margin Juices Financials

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Sprouts’s margin expanded by 2.1 percentage points over the last year. This is encouraging because it gives the company more optionality. Sprouts’s free cash flow margin for the trailing 12 months was 6%.

One Reason to be Careful:

Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last six years, Sprouts grew its sales at a tepid 7.1% compounded annual growth rate. This wasn’t a great result compared to the rest of the consumer retail sector, but there are still things to like about Sprouts.

Final Judgment

Sprouts’s merits more than compensate for its flaws, and with its shares beating the market recently, the stock trades at 34.6× forward P/E (or $168.75 per share). Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.

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