Gross margin performance
In 1Q16, Sprouts Farmers Market (SFM) reported gross profits of $306.5 million, which represents a 19% YoY (year-over-year) increase and an 80-basis-point increase in gross profit margin to 30.9%. This increase was primarily a result of higher margins in certain product categories primarily due to deflation and normalized promotions compared to the previous year.
Sprouts’ gross margin performance has been better than its guidance for fiscal 2016. The company is looking for a flat gross margin change in fiscal 2016 primarily due to the price investments that it plans to make.
A look at operating margins
Sprouts’ operating profit increased by 17% YoY to $77.8 million in 1Q16. Its operating margin saw a slight improvement of 7 basis points to 7.8%. Operating expenses increased as a percentage of sales, from 18% in 1Q15 to 20% in 1Q16. The increase in operating expenses was driven by higher stock compensation costs and an increase in corporate overheads.
Sprouts’ current profitability and margins are better than that of other supermarket peers. Kroger’s (KR), Whole Foods Market’s (WFM) and Supervalu’s (SVU) operating margins stood at 3.5%, 6.5%, and 2.6%, respectively, in their last reported quarters.
Net income and EPS
Sprouts’ net income for the quarter increased by 20% YoY to $46.2 million. Its diluted EPS (earnings per share) stood at $0.30, as compared with $0.24 for the same period last year. This was better than the consensus EPS estimate of $0.29. Notably, Sprouts has topped analyst earnings estimates in ten of the past eleven quarters.
Investors looking to invest in SFM through ETFs can look into the First Trust Mid Cap Core AlphaDEX Fund (FNX), which has about 0.34% in SFM.
Now let’s check out Sprouts’ stock market performance and valuation.