The move comes in the wake of the company reducing its annual outlook apart from announcing $250 million share buyback program following the completion of its earlier $150 million repurchase program. The company's EPS provided positive surprise ranging between 3.4 percent and 12.5 percent in the last four quarters.
The brokerage listed three primary factors for the downgrade decision:
- There is no end in sight for worsening deflation in the current year based on the CPI Food-at-home data.
- Sprouts traffic is impacted by increased rival promotional activities.
- Increased competitive activities and uncertainty brought down the stock to a lower multiple.
In a research note to clients, Deutsche Bank said, "One of the aspects of SFM's algorithm that we have liked is the long unit growth runway, including its +14 percent annual unit growth and 1,200 store target. We think these targets may still be achievable – however, the recent sharp decline in comps and margins underscore the risks that unit growth may not be as steady and predictable as we once believed."
Therefore, the brokerage believes the company will find it tough to achieve its mid-term financial objectives. As a result, the analyst reduced the estimates and target price.
At time of writing, Sprouts was down 0.89 percent at $19.50.
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