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Is Sprouts Farmers Market Next on the Grocery Acquisition List?

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Jul. 10 2017, Updated 9:07 a.m. ET

Sprouts’ YTD stock market performance

Sprouts Farmers Market (SFM) has done a good job on the stock market this year. The organic and natural foods retailer has gained close to 20% YTD (year-to-date) as of July 6 and is now trading at $22.54, or 15% below its 52-week high price.

Like other retailers, Sprouts was also impacted by the deal between Amazon.com (AMZN) and Whole Foods (WFM) announced on June 16. Its stock plunged 6.3% after the announcement and fell 5% during the month of June. 

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Sprouts could be the next acquisition target

There have been speculations that Sprouts could be the next takeover target. The retailer is a relatively small chain, with only about 268 stores, and could be easily acquired. It recently recorded total annual sales of $4 billion, which is about one-fourth of Whole Foods’ revenue and only 4% of Kroger’s (KR) revenue.

However, Sprouts has delivered industry-leading comps (comparable same-store sales) and margins and could be considered an ideal buyout choice for a player who wants to expand deeper into the organic segment. Its comps have continued to grow, despite ongoing industry headwinds, which have taken a toll on the comps of bigger players like Kroger and Whole Foods. In fact, Whole Foods has seen negative comps for the past seven consecutive quarters.

Sprouts also has a strong near-term earnings outlook. Its EPS (earnings per share) are expected rise ~8% over the NTM (next-12-month) period, compared with the 6.4% decline in Whole Foods’ NTM EPS and the mere 1.5% rise in Kroger’s NTM EPS.

Oppenheimer’s take on Sprouts

Oppenheimer has recently recognized Sprouts as the next buyout target. “With Whole Foods now seemingly out of the mix as a takeout, Sprouts could be the next target out there,” commented Oppenheimer analyst Rupesh Parikh.

Oppenheimer has upgraded Sprouts to “outperform” from “perform.”

Notably, investors looking to invest in SFM through ETFs can choose to invest in the First Trust Consumer Staples AlphaDEX Fund (FXG). SFM has a weight of ~3.3% in FXG.

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