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We added Sprouts Farmers Market to our Best Idea Long List, but kept Kroger on the Long Bias list.
Consumers' food consumption habits have changed due to COVID-19 creating new winners and losers in consumer staples. Investors are too focused on lapping the stay at home restrictions and are missing the long-tailed changes in consumer shopping behavior from the COVID-19 pandemic. We are bullish on SFM and the grocery sector due to the following:
- Consensus estimates are too low, because they imply an elevated level of grocery spend only through the end of calendar Q2.
- Sprouts Farmers Market's multiple does not reflect its unit growth potential and the scarcity of companies with open-ended store growth opportunities.
- Second wave or just a continuing wave, both companies are positioned to grow above current projections with or without another lockdown.
We outlined our case for going long SFM, the competitive challenges that KR faces, and a deep dive into developing industry trends including e-commerce.
