Goldman Sachs Says Sprouts Farmers Market Has 'Taken Its Medicine,' Keeps Buy Rating

On September 7, Sprouts Farmers Market Inc (NASDAQ: SFM) cut its FY16 EPS guidance from $0.92–$0.94 to $0.83–$0.86 on lowered comps guidance from 3.5–4.5 percent to 1.5–2.5 percent.

Goldman Sachs’ Stephen Tanal maintains a Buy rating on the company.

Guidance Cut

Sprouts Farmers Market also cut its Q3:16 same-store sales guidance from 3–4 percent to flat, citing “significant ongoing deflation, a step up in the promotional environment, and its cautious outlook for 2H16 as drivers of the reduction,” Tanal mentioned.

Related Link: Kroger's Guidance Cut Looks Modest Relative To Peers' Outlooks

The company also mentioned that there had been challenges to generating traffic in August, driven by heavy promotions by a competitor.

Competition

Management attributed the disappointing August performance to a “large conventional” competitor that promoted proteins “irrationally” during the month. “With its outsized mix of perishables, SFM bore the brunt of this,” the analyst stated.

Pointing out that Sprouts Farmers Market was “not impervious to competition,” Tanal noted that a 300j–400 bps reduction in the same store sales guidance within about four weeks did seem to be an exception, rather than a rule, and that the company had clarified that it had been “caught off guard” and had been unable to react in time.

“It has since responded with its own promotional offers, stating that trends have improved. Revised guidance looks achievable if not beatable, and we think the stock has “taken its medicine”,” the analyst added.

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