Where Sprouts is headed
In recent years, Sprouts Farmers Market (SFM) has moved toward a more balanced capital structure. The company’s debt-to-equity ratio, which stood at 1.4x at the end of fiscal 2012, came down to 0.4x at the end of the third quarter of the current fiscal year, which ended September 2015, as the company’s management has been prioritizing paying back as much of its debt as possible. At the end of 3Q15, total debt for the company stood at $291 million.
Sprouts’ financial health has also improved with robust cash flow generation. The company’s balance sheet cash stood at $132 million at the end of 3Q15, which is almost half of the company’s total debt. Retained earnings, which were initially negative, have been increasing with an improving bottom line and stood at $243 million in 3Q15.
YTD (year-to-date), Sprouts has generated $179 million of cash flows from operations and invested $79 million in net capital expenditures, primarily for new stores. The company plans to use its surplus cash in opening new stores. The company also has adequate liquidity, as reflected by its current ratio of 1.7x, at the end of 3Q15.
Leverage versus peers
Sprouts Farmers Market (SFM) has one of the best leverage ratios in the supermarket and mass merchandiser peer group. While Kroger Company (KR) has the highest debt balance, with a debt-to-equity ratio of 1.8x, Wal-Mart Stores (WMT) and Costco Wholesale Corporation (COST) had debt-to-equity ratios of 0.63x and 0.57x, respectively, in their last reported quarters. Sprouts, with its debt-to-equity ratio of 0.36x, only trailed Whole Foods Market (WFM), which had a better leverage, with a debt-to-equity ratio of 0.02x.
ETFs with exposure to Sprouts and peers
Sprouts Farmers Market (SFM) along with Whole Foods Market (WFM) Wal-Mart (WMT) and Costco Wholesale Corporation (COST) are a part of the SPDR S&P Retail ETF (XRT). Together, these companies make up approximately 4.2% of the fund’s total holdings.
Now let’s take a broader look at the organic food industry.