Deutsche Bank Downgrades Sprouts Farmers Market (SFM) to Hold
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Deutsche Bank downgraded Sprouts Farmers Market (NASDAQ: SFM) from Buy to Hold with a price target of $20.00 (from $28.00) after the company lowered FY guidance. Analyst Shane Higgins highlighted worsening deflation with no end in sight and the fact that conventional grocers stepped-up promotional intensity. In his view, greater competition and uncertainty equates to a lower multiple.
"Yesterday (9/7), SFM announced that FY16 sales and earnings would come in well below guidance provided on 8/4 due to ongoing deflation and a steppedup promotional environment. Our Buy rating was based in part on our view that SFM would be somewhat insulated from competitive pressures given SFM’s strong value offering, particularly in produce. However, we underestimated the severity of the current environment. Given the limited visibility into when deflationary and/or competitive trends may abate, we believe that SFM shares deserve a lower multiple," said the analyst.
"SFM is seeing a significant step-up in promotional activity from conventional grocers, who are using aggressive promotions in their circulars to drive traffic, which is impacting SFM’s traffic. The deflationary environment may be a key contributor to the promotional activity, as grocers are becoming more desperate to drive comps. We believe the consumer may also be under pressure and may be more value-driven," added the analyst.
Shares of Sprouts Farmers Market closed at $19.68 yesterday.
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