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Higher Costs Hit Sprouts Farmers Market’s Margins in 4Q16

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SFM beats on 4Q16 EPS estimates

As discussed, Sprouts Farmers Market (SFM) reported its 4Q16 results on February 23, 2017. The company reported quarterly earnings per share (or EPS) of $0.13, outdoing analysts’ estimates by $0.01.

On a year-over-year basis, its earnings fell 28% on a lower gross margin and a rise in its SG&A (selling, general, and administrative) and direct store expenses.

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Gross margin falls 70 basis points in 4Q16

Gross margin was down 70 basis points, primary due to tough 4Q15 comparisons. The company achieved a higher gross margin in 4Q15 on account of lower food prices without a corresponding promotional environment and the positive impact of the year’s additional 53rd week.

Sprouts Farmers Market’s operating margin contracted 210 basis points to 3.1% as its SG&A and direct store expenses surged 11% and 13%, respectively, during the quarter. The rise was primarily attributable to higher labor costs and the company’s deleveraging of fixed costs associated with lower comps growth during the quarter.

How does SFM compare to its peers?

SFM has displayed industry-leading margins over the last couple of years. Its operating margin averaged 6.5% between 2014 and 2015, compared to the average margins of 2.5%, 3.1%, and 5.5% for SUPERVALU (SVU), Kroger (KR), and Whole Foods Market (WFM) during the same period.

However, as outlined, SFM’s operating margin fell to 3.1% in the most recent quarter. Kroger reported a better operating margin of 3.4% in its last quarter. SVU and WFM had margins of 2.6% and 0.03%, respectively.

Investors looking to invest in SFM through ETFs could choose to invest in the SPDR S&P Retail ETF (XRT). SFM has a weight of ~1.2% in XRT.

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