Sprouts Farmers Market takes advantage of the pandemic
Sprouts Farmers Market reported Q2 EPS of $.59 vs. consensus of $.37. The upside was driven by better comps and gross margins. Sales grew 16% driven by SSS growth of 9.1% vs. consensus of 7.8%. SSS peaked in May at 13% and decelerated in June at 8%. E-commerce grew more than 500% and represented 12% of sales during the quarter from 4% just prior to the pandemic. Gross margins expanded 450bps driven by a change to its promotional strategy, easier comparisons, and shrink improvement. SG&A expenses deleveraged 270bps due to COVID-19 expenses including higher labor costs as well as e-commerce costs. COVID-19 costs were $47M of the $106M increase in SG&A expense.
Management expects July SSS to be up 9% with e-commerce at 11% of sales. Before the pandemic began management began changing how it used promotions in produce to drive traffic through circulars. Due to changes in shopping behavior, food consumption, and increased demand Sprouts Farmers Market has been able to push its test further. Consumers are looking for healthier food and are no longer driven to visit stores for deals providing the company’s new strategy with an environment that nearly guarantees success. Our EPS estimates are still meaningfully above consensus and the multiple has a lot of upside potential if management can continue to execute on their strategic initiatives and accelerate store growth. SFM remains a Best Idea Long, for webcast replay and materials: CLICK HERE
Beer category growth staying steady (STZ)
For the week ended July 18 alcohol sales in the off-premise channel grew 19%, accelerating from 17.3% in the prior week with spirits up 29.3% and wine up 19.7%. The beer category off-premise sales grew 15.4%, up slightly from the prior week’s growth of 14.9% as seen in the following chart. Volumes increased 12%. Beer sales excluding hard seltzers and FMBs grew 8.6%, up from 7.6% in the prior week. Super premiums grew 20.6%, craft beer grew 12.6%, Mexican imports grew 7.2% (1% lower compared to the prior week), premium lights grew 6.4%, FMBs grew 5%, and below premiums grew 0.4%. Hard seltzers accounted for nearly half the beer category’s growth for the week and grew 142%. The beer category grew 18.4% in the convenience channel, faster than the 15.4% growth in the grocery channel.
Elevated demand in supermarkets in July (ACI)
For the week ended July 18 total CPG demand was up 11% YOY, accelerating 2% sequentially, as seen in the chart below (indexed to 100 last year). The acceleration was driven by edible categories accelerating 4%, specifically frozen and general food. Non-edible categories accelerated 2% to 6%. The fresh meat department was up 24% and was second only to seafood which was up 36%. Grocery demand has remained elevated and quite stable in July despite more restaurants and on-premise businesses re-opening.
