Goldman Downgrades Sprouts Farmers Market To Sell: Organic Food Fight To Squeeze Margins, Multiples'

Goldman Sachs’ Stephen Grambling believes that the consensus expectations and stock valuation for Sprouts Farmers Market Inc SFM are “overly optimistic.”

Grambling downgraded the rating on the company from Neutral to Sell, while lowering the price target from $24 to $22. The analyst expects 22 percent downside risk.

Impact of Comp Trends

Although Sprouts Farmers Market outperformed its peers in FY15, driven by better comps, comp momentum stalled in 1Q16, narrowing the gap with peers.

“We believe the comp deceleration reflects increasing competition rather than a one-off slowdown due to transient headwinds such as weather or promotional comparisons,” Grambling mentioned.

The analyst believes that when the consensus expectations begin to account for the new comp trajectory, there could be a re-rating of the stock that is more in line with other high-growth and food retailers.

Cautious Stance

Grambling prefers to maintain a more cautious fundamental stance, given that weak traffic at Sprouts Farmers Market is expected to persist, especially since “the better buying environment in produce last quarter did not amount to incremental traffic.”

In addition, competition appears to be intensifying, with the lackluster results of specialty peers and the more aggressive pricing from conventional grocers expected to impact the company’s top and bottom line.

The analyst also pointed out that the company “is investing in training and wages to remain competitive,” which Grambling expects would “limit flexibility in a more challenging environment.”