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Sprouts’ 3Q17 Margins Improve, Earnings Beat Expectations

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SFM beats 3Q17 earnings estimates

As discussed, Sprouts Farmers Market (SFM) reported 3Q17 results on November 2, 2017. The company’s quarterly earnings per share rose 44% YoY (year-over-year) to 23 cents, beating Wall Street expectations by five cents. Earnings growth was boosted by higher sales and margins, SFM’s stock repurchase plan, and a lower tax rate.

Grocers had a mixed earnings season this time. Supervalu (SVU), which released its results in mid-October, recorded EPS of 46 cents (versus 21 cents last year), beating the consensus by ten cents. Supermarket giant Kroger’s (KR) earnings fell 17% YoY to 39 cents, in-line with the consensus expectations.

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What’s behind improving margins?

Sprouts’ 3Q17 gross margin improved 60 basis points to 28.7% of sales as the gross profit rose 19% YoY to $346 million. Amin Maredia, chief executive officer of Sprouts Farmers Market, said that this improvement was due to “cycling the heightened promotional environment in the third quarter of last year in addition to sales leverage on other fixed cost.”

Operating margin improved 40 basis points to 4.4% of sales, reflecting better gross margin, higher comparable store sales, and operating efficiencies. The company recorded an improvement in operating margin after six consecutive quarters of decline.

Guidance update

Robust 3Q17 top and bottom-line results motivated the management to raise guidance for full fiscal 2017. It now expects full-year earnings per share to be in the 98 to 99 cent range (18.7% at midpoint) as compared to the prior guidance of 88 cents to 92 cents.

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

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