QV Alert – US Massively Under-Penetrated By Sprouts Farmers Market
I have been looking for something new happening to explain the explosive advance in the share price in recent years. Smaller, more profitable stores are one element. Another is the group’s success on social media.
One area that has played a key role in our acceleration is social media. Our team has brought our unique assortment and experience to life and has found willing partners with many influencers and celebrities, whose products and purposes align with ours. Their energy and passion inspire us. What is even more encouraging is seeing authentic posts from our customers, sharing their experiences in-store and with our products. As a result of our marketing efforts, we’re seeing more new customers, improved customer retention and increased shopping frequency, leading to strong comp traffic momentum.
Jack Sinclair, CEO, Sprouts Farmers Markets, Q3 2024, 30 October 2024
There is a famous expression – ‘retail is detail’. It is all about executing well at the micro level to achieve a great result. Execution and opportunity both look impressive at Sprouts.
Well, I think the first thing we want to say is there’s a huge upside in our customer base. We’ve still got a very small share of our customers’ wallet, and we’re doing some things that seem to be stimulating the customers pretty well. I’m very excited by how our marketing teams are shaping the message and using media effectively and being very thoughtful about that. I think we’ve learned a lot this year, which we’ll be able to use even more effectively next year. So I think that’s an encouraging sign for us. And as I said in the script, the execution at store-level continues to get better and better and stocks are getting better, the execution behind that.
We’ve invested a lot of money in infrastructure and systems over the last couple of years in terms of getting our business more in-stock and more in-tune with what needs to happen on a day-to-day basis in the stores. So I’m very encouraged that our operation execution will continue to drive some comp sales for us, encouraged that our marketing teams will continue to get better and better at picking the right messages and sending those messages in the right place. So there’s a lot of encouragement in our business and there’s a lot of upside to go with our customers.
Jack Sinclair, CEO, Sprouts Farmers Markets, Q3 2024, 30 October 2024
The company benefits from being in the right place at the right time.
This health trend is a very real one. And it’s one that I think we’re probably benefiting from that tailwind at the moment. And I think that tailwind ain’t going to go away anytime soon. So I think that gives us some confidence that we can comp the comp going forward.
Jack Sinclair, CEO, Sprouts Farmers Markets, Q3 2024, 30 October 2024
The brand is still immature.
We’ve only got 428 stores at the moment. And there’s huge swathes of the country that we don’t have stores, whether it be Chicago in the Midwest, whether it be Boston in the — the Northeast. There’s huge places where there’s lots of customers who look like exactly the kind of customers that we’re chasing after.
Jack Sinclair, CEO, Sprouts Farmers Markets, Q3 2024, 30 October 2024
Could there be a Sprouts Farmers Market store everywhere there is a Wal-Mart? I have no idea but there are 10 times as many Wal-Mart stores in the USA as there are Sprouts Farmers Market stores.
There is also scope to use fresh and organic produce to attract customers to other products.
We’re very excited about the launch of our new line of more than 130 premium body care and home fragrance items called Real Root by Sprouts this past month. They’re free from many things including parabens, phthalates, artificial fragrances and colors. These products help customers live healthier, nurturing inner and outer well-being. On the customer engagement front, our marketing efforts have successfully attracted more customers to visit our stores. We continue to tailor our marketing strategy to target our unique customers and adjust our media approach based on regional and market differences.
Jack Sinclair, CEO, Sprouts Farmers Markets, Q3 2024, 30 October 2024
Younger readers may not realise that Sainsbury began as a butcher and Tesco was just stacks of cans on pallets in its early days.
The chart below shows how dramatically Sprouts is outperforming other US grocers.
The opportunity looks immense.
The caveat to SFM’s extremely high valuation is its small size. Kroger has TTM [trailing 12 month] sales of $150bn, while Albertsons is ~$80bn. Sprout’s TTM sales are just $7.4bn. Thus, despite its tremendous 14pc sales-per-share CAGR [compound annual growth rate] over the past decade, it is nowhere near its potential total addressable market. Costco beats them all, with TTM sales of ~$250bn, though it may be below its TAM [total addressable market] if we assume it will continue to gain sales from the hemorrhaging middle-market grocers. Still, based on its organic same-store growth rate, very strong ROIC [return on invested capital], and comparatively small size, I think SFM has vastly superior long-term growth potential than Costco.
Seeking Alpha, 10 November 2024
