Morgan Stanley Met With Sprouts Farmers Market Management: Here's What Happened

Morgan Stanley said productive growth and market share gains will continue for Sprouts Farmers Market Inc (NASDAQ: SFM) who the brokerage terms as a "differentiated, natural/organic growth story.""With produce now inflationary, investor focus is turning back to Sprouts' fundamental outlook, which we see as best-in-class. We reiterate our OW rating, with management meetings increasing our conviction in SFM as a top pick," analyst Vincent Sinisi said in a client note.The Sprouts store model only continues to strengthen despite competitive intrusions and replications of its low-price produce model."We believe that with its reverse store layout, supplier relationships, 220+ store base, and 15+ year track record honing the concept, Sprouts has built a substantial competitive moat," Sinisi said. Importantly, as SFM expands, management re-invests gains from scale, mix, and efficiency back into the business, and the analyst believes this continuous improvement to the value proposition makes it more and more difficult for anyone to sustainably replicate the Sprouts' model.With a low-price produce focus, Sprouts makes natural / organic accessible to all consumers, setting SFM up well to gain share a secularly growing segment, the analyst added.Sinisi noted that don't expect gross margin expansion and said that's a good thing. While initiatives can benefit SFM on the gross margin line, management remains committed to reinvesting gains in the business."We are positive on this strategy and how it has been communicated to investors, including through Sprouts' medium term targets for 15%+ sales growth and 12%-16% Adjusted EBITDA growth," Sinisi said. In addition to price, Sprouts is focused on investing in technology and in personnel, two key areas that the analyst believe can directly support the customer experience and help drive sustainable sales growth long-term.Sprouts expects to add 36 new stores in 2016, representing 17% unit growth – this is above the company's 14% target, reflecting the addition of 4 acquired former Haggen locations.On the competitive front, the analyst didn't see any threat to SFM over the next few years from new concepts including '365' by Whole Foods Market, Inc. (NASDAQ: WFM) and 'Main & Vine' by The Kroger Co (NYSE: KR) as these concepts remain in very early-stage test mode.The Sprouts offering is resonating with customers when compared to the competition, evidenced by 5.8% comps and 20% EPS growth in 2015, despite difficult produce conditions. "Overall, we continue to expect a decoupling of the specialty retail "FM" stocks (SFM /TFM / WFM) in 2016, with Sprouts likely the greatest beneficiary as trends positively diverge from peers," Sinisi added.Sinisi has a $32 price target on SFM stock, which was down 0.02 percent at $28.28. The stock has gained 7.6 percent year-to-date, while the benchmark S&P 500 index fell 2.25 percent.