Subscribe to Entrepreneur for $5

Sprouts Farmers Market Stock Sprouts New Life After 15% Run

After surging past $33 in eye-opening fashion, Sprouts may finally be planting the seeds for a bigger run.

This story originally appeared on MarketBeat

It is not a high flying software or biotech company, but Sprouts Farmers Markets, Inc. (NASDAQ: SFM) is nevertheless one of the hottest stocks on the Nasdaq. contributor/ - MarketBeat

After a third straight convincing move higher on Friday, the up-and-coming grocery store operator finished the week up 15% while the Nasdaq Composite fell almost 3%. Sprouts' impressive year-to-date run comes after it notched a 48% advance in 2021.

Everything seems to be falling into place for Sprouts. After some stale performances in 2019, more recent financial results have been as fresh as its produce. Health-minded shoppers are increasingly gravitating towards Sprouts' old-fashioned, brightly lit stores where fruits and vegetables take center stage. In recent weeks, the market uncertainty brought upon by the Russia-Ukraine war has investors bunkering down with defensive grocery stores names, an added boon to Sprouts' share price.

Sprouts' newfound success is welcomed news for long-time shareholders that have seen the range bound stock struggle to break the $30 level multiple times since 2015. After surging past $33 in eye-opening fashion, Sprouts may finally be planting the seeds for a bigger run.

Why Did Sprouts Farmers Market Stock Go Up?

Sprouts shares have been trending higher since the company released fourth quarter results. Earnings were down significantly compared to the prior year period (partly due to there being one less week in the quarter) but ahead of the consensus estimate.

More importantly, management demonstrated that it has been able to perform relatively well in a supermarket environment marred by product shortages and rampant inflation. Sprouts expects to open 15 to 20 new stores this year and grow sales by 4% to 6% as it continues to expand its footprint across the country.

What really sparked the stock was the March 3rd announcement of a $600 million repurchase program. The Board's latest authorization will replace the previous buyback program that had less than $100 million remaining. The move signaled to investors that Sprouts thinks its shares are undervalued given cash flow trends and prospects for future growth.

Adding fuel to the rally was a blowout earnings report at Kroger that highlighted the success some grocers are having by investing in technology and catering to consumers' healthy habits in the wake of the pandemic. Kroger's performance and bullish 2022 outlook brought attention to growing grocery businesses at a time when geopolitical risk is shifting portfolio allocations to defensive asset classes and sectors.

What are Sprouts' Growth Drivers?

Sprouts differentiates itself by creating a farmers market experience that makes fresh produce the centerpiece of each of its 374 stores across 23 states. Although it has pared down store opening plans for 2022 due to the present challenges around sourcing building materials and equipment, growth is expected to ramp up in 2023. The company's target for 10%-plus growth after this year means that store openings could double heading into next year.

The leadership team has also taken a page out of Costco's playbook in bringing a treasure hunt atmosphere to the Sprouts locations. Inviting customers to search for new, hard-to-find items is a model that has worked wonders for the warehouse retailer and is producing similar magic at Sprouts.

Tapping into online shopping trends is also bearing fruit. Last quarter e-commerce accounted for 10% of overall sales and is expected to become a bigger part of the business with consumers' affinity for delivery and pick-up services persisting in post-Covid America. Further investments in digital tools and new distribution centers should strengthen Sprouts' supply chain and online order growth.

Is Sprouts Farmers Market Stock a Buy, Hold or Sell?

In the aftermath of Sprouts' year-end report, Wall Street research firms have fielded a mixed grocery bag of opinions. Some are calling the stock's surge a chance to sell due to the store expansion slowdown and margin pressures expected in 2022. Others believe the better than expected fourth-quarter profits will be a springboard to better bottom-line results in quarters ahead.

There are valid reasons to be both bullish and bearish about Sprouts Farmers Market. In the near-term, the company will be challenged by industry-wide supply and inflation concerns that will probably keep the lid on 2022 growth. Looking ahead to 2023 and beyond, though, the grocer looks well positioned to deliver double-digit store count growth as planned.

This means 2022 will likely be a transition year of slower growth—and that may suit investors just fine. Since there remains no peaceful end in sight to the Russia-Ukraine crisis and the geopolitical ripple effects are likely to last well into the year, a defensive grocery store stock like Sprouts may be a good place to hide out for a while.

Steady underlying product demand and the floor provided by a new share repurchase program should harvest stronger growth in the years ahead. A pullback from Sprouts' torrid run seems inevitable, but could create a good opportunity for investors to go shopping.

Entrepreneur Editors' Picks