BMO Capital Markets Downgrades Sprouts Farmers Market Citing Tougher Macro Trends

Sprouts Farmers Market Inc SFM has limited options to turn around comps, given growing challenges with food retail becoming increasingly digital, according to BMO Capital Markets.

The Analyst

BMO’s Kelly Bania downgraded Sprouts Farmers Market to Underperform while lowering the price target to $15.

The Thesis

Small and regional food retailers are facing significant challenges, against the backdrop of an increasingly digital and price-transparent industry, Bania said in the downgrade note.

Sprouts Farmers Market reported flat comps in the second quarter and expectations are for comps to remain flat for the rest of the year. Although the company’s recently lowered guidance reflects these trends, risks remain, Bania noted.

She explained that Sprouts Farmers Market may need to lower price to revive comps and doing so will exert pressure on its gross margin. The company maintaining its 10% square footage growth will add to the risk.

While the impact of management change on near-term trends is unclear, the company’s low-margin produce-led strategy is “already under pressure given the challenging competitive environment and fear that its higher-margin vitamin and supplements-led margin strategy could also come under pressure in an increasingly price-transparent digital food retail backdrop” Bania wrote.

Price Action

Shares of Sprouts Farmers Market closed down 2.37% to $17.74.