Sprouts Farmers Market: (SFM: $20, down $3)
Sprouts announced updated guidance in advance of participation in the Goldman Sachs 23rd Annual Global Retailing Conference. The disappointing update reflected the impact of significant ongoing deflation, the stepped-up promotional environment, and an incrementally cautious outlook for the remainder of the year.
Comparable store sales growth for the third quarter ending October 2 is now expected to be flat. According to management, the prolonged deflationary environment, competitive landscape, and industry dynamics have prompted heavy promotions across the industry and adversely caused retail deflation and weak traffic generation.
Given the current environment, management reduced the full-year 2016 comparable store sales growth to the range of 1.5% to 2.5% (3.0% to 4.0% prior) and EPS to be $0.84 ($0.93 prior). In an attempt to ease the pain, the board approved a $250 million stock repurchase program worth approximately 7.5% of the share count.
All in all, we are looking at a very disappointing outlook, which is particularly surprising as the sharp guidance reduction comes just a month after the positive 2Q16 reporting, implying that there was a steep change in the competitive environment only in recent weeks, or perhaps that management is out of touch with the front line of the business. We think the latter.
Are there any broader implications? Many are questioning if this is a canary in the coal mine for a worse than expected deflationary environment aimed at addressing soft traffic trends. Though there is also a camp that is ring fencing the issue to Sprouts specifically, calling out that the company is simply struggling to execute in a difficult environment. Either way, a new wave of caution surrounding the entire Grocery vertical has now surfaced.
BMR Take: We are exiting our position. The Grocery market is under intense competitive pressure and until we see some type of shake-out event, the issues that have just surfaced appear to be an ongoing problem. We are not pleased with having to do this. We feel management has let us down; in fact misled us. Whole Foods (WFM: $29) was down 5% yesterday and is below the $30 level again. The whole industry is in trouble and we would rather take a small loss than wait for the stock to drop 50%, forcing us to take a big loss.