Estimates going higher after Q4 (SFM)
Sprouts Farmers Market reported Q4 EPS of $.49, above consensus expectations of $.45. Slightly better sales and margin upside drove the upside. SSS increased by 3.3% with positive traffic. E-commerce grew 17%, representing 12.4% of sales, adding nearly 2% to the comp. Sprouts recently added Uber Eats to its e-commerce platform. Gross margins expanded 20bps due to higher merchandise margins offset by higher DC costs. SG&A was deleveraged by 25bps from higher wages and a calendar bonus benefit.
Management guided Q1 EPS to $.98-1.02, above consensus expectations of $.97, with SSS between 2.5-3.5%. Management guided EPS to 2.85-2.95 for the new year vs. consensus expectations of 2.80. Based on the momentum reported in Q4, the guidance appears to be set comfortably.
The company has been able to generate better SSS without spending on margins to achieve it, contrary to our short thesis. Our traffic monitor reported weakening trends in Q4, which we will attempt to reconcile. Eliminating the promotional circulars that drove traffic to the stores before the pandemic likely led to the company's most price-sensitive customers leaving the brand before the surge in inflation. That may partly explain why its customer base is spending more on higher-cost food choices despite not being high-income households. Driven by the surge in food inflation, there are fewer high-income food shoppers, and the middle class has shifted more towards club stores and discount grocers. Another driver of SSS growth is the lower new store productivity as store growth is accelerating, providing a boost to SSS in later years as the stores mature.
Positive read-throughs (DANOY, STKL)
Danone reported Q4 EPS of €3.54 vs FactSet €3.46. LFL sales growth of 5.1% was slightly below consensus expectations. Volume/mix grew by 0.8%, and price increased by 4.3%. The positive growth in volumes/mix was the first time in more than two years. North American LFL sales grew by 3.1%, with volume/mix up 2.8%, while pricing was +0.3%. Growth was led by Coffee Creations, International Delight, and Stok. Oikos continued its momentum in yogurt. In plant-based, management said the first signs of the strategic changes, including advertising, product quality, and execution, were positive. Management said North America was the first region to raise prices aggressively, and it is the region seeing the fastest normalization. Plant-based sales trends slowed in 2023, but the read-through from Danone's report suggests the category is stabilizing.
