Why Sprouts Farmers Market Plummeted, Then Started to Rebound Today

Key Points

• Sprouts Farmers Market sailed past analysts' expectations with its second-quarter earnings.

• Revenue grew by 17%, same-store sales grew by 10%, and profit margins continued to rise.

• Sprouts may be more expensive than it used to be, but it has a lengthy growth runway ahead of it still.

• 10 stocks we like better than Sprouts Farmers Market ›

Shares of better-for-you grocery chain Sprouts Farmers Market (NASDAQ: SFM) are down 3% as of 2 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.

Sprouts reported second-quarter earnings on Wednesday afternoon that saw sales and earnings per share grow by 17% and 44%, respectively.

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While these results surpassed analysts' expectations, the stock initially dropped 8% overnight, before partially recovering.

Strong results, but mixed reactions

Sprouts focuses on the better-for-you portion of the grocery industry. Prioritizing organic, gluten-free, non-GMO, vegan, plant-based, and grass-fed grocery items, the company has carved out a profitable niche in a premium industry.

Delivering 17% sales growth in Q2 -- including 10% growth in same-store sales -- the market's adverse initial reaction to the results may seem somewhat odd.

However, it is worth remembering that Sprouts' stock has risen more than fivefold in just three years. Along the way, its price-to-earnings ratio ballooned from 12 to 34 today. Said another way, the market was expecting borderline perfection out of Sprouts' stock this quarter, and it apparently came up just shy.

Image source: Getty Images.

Ultimately, Sprouts Farmers Market (the business) continues to fire on all cylinders. The company opened 12 new stores in Q2 and now operates 455 stores in 24 states.

Despite this growing footprint, roughly 75% of Sprouts' stores can be found in five states, leaving a massive growth runway ahead. With a pipeline of 130 new store locations already approved, the company's double-digit growth should have ample opportunity to persist for years to come.

Best yet for investors, as Sprouts' stores mature, the company's gross margins and EBIT (earnings before interest and taxes) margins have improved for three straight years.

Trading at 30 times forward earnings, Sprouts may be more expensive than it was, but its growth story is still nascent.

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Josh Kohn-Lindquist has positions in Sprouts Farmers Market. The Motley Fool recommends Sprouts Farmers Market. The Motley Fool has a disclosure policy.