BMO said the ongoing volatility in the food retail space offers an opportunistic entry point in Sprouts Farmers Market Inc SFM, which the brokerage described as "one of the most unique and differentiated concepts in U.S. food retail."
Shares remained volatile after the company cut its 2016 outlook, despite better-than-expected second quarter earnings, as it grapples with deflationary pressures.
Though BMO acknowledged an accelerating deflationary backdrop increases promotional activity and heightens the uncertainty in forecasting, it expects SFM to maintain its competitive pricing position.
"We see potential for SFM's multiple to rebound back in line with its potential earnings growth (targeting +14-18% range over the next few years) in a more normalized backdrop, which depending on the magnitude of the current deflationary cycle may not be until later in 2017," analyst Kelly Bania wrote in a note.
The company lowered its 2016 EPS guidance to $0.92-$0.94 (from $0.96-$0.98), comp view to 3.5-4.5 percent (from 4-6 percent) and net sales growth of +13–14 percent (from 15-17 percent).
Bania maintained her Outperform rating and $30 price target as the analyst believes the comps should benefit from solid growth in customer traffic, demand for higher priced grocery categories and merchandising initiatives.
"[W]e believe ongoing food retailer consolidation could rise and be a silver lining for the group," Bania added.
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