Sprouts Farmers Market has posted sales growth for the third quarter, mainly driven by its strong store expansion pace.
The Phoenix, Arizona-based supermarket chain reported a net sales increase of 5 per cent to $2.3 billion for the quarter ended September 27.
The company opened 15 new stores during the period, resulting in 504 stores in 25 states as of the end of the quarter.
While expansion continues to drive growth at Sprouts, performance at existing stores remains lackluster, resulting in a 0.9 per cent drop in comparable sales, said GlobalData MD Neil Saunders.
“Although the same-store sales decline has stabilized (it was -1 per cent last quarter), it should actually be strengthening as prior-year comparatives become slightly easier.
“That this isn’t happening means that Sprouts is losing momentum. And this can be seen in the two-year comparable growth stack, which was 9.1 per cent last quarter but just 4.9 per cent this quarter,” Saunders explained.
The issue also pressured the bottom line, as evidenced by the 5.6 per cent dip in net income.
According to the analyst, the company has stepped up on the product innovation front, but the new products are not yet pulling in new customers or helping to grow overall basket sizes.
“From our data, the issue comes from the wider dynamics of the grocery market where many consumers are cutting back, and others are shopping around more and spreading their spend more thinly. At Sprouts, these patterns are mainly seen among non-core customers, and this erosion is hitting the business,” he said.
There might be some levers that the business can pull to emphasize value more strongly, including highlighting its well-regarded own label more heavily, and engaging in marketing that focuses on value, Saunders said. However, these initiatives take time to filter through and influence consumer perceptions.
On the timing front, a recovery in the final quarter looks highly unlikely, Saunders continued.
“This is somewhat disappointing as the holidays should play to Sprouts’ strengths, but with the market focused on low prices and discounts, management is right to remain very cautious in their guidance,” he said.
The company expects comparable sales to slide 2-4 per cent in the fourth quarter and approximately 1.7 per cent for the full year.
