Goldman Sachs Says Sprouts Farmers Market's (SFM) Guidance Could be Sign of 'Steep Change' in Competitive Environment

September 7, 2016 8:54 AM EDT
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Sprouts Farmers Market (NASDAQ: SFM) dropped sharply pre-market Wednesday, dragging peers Whole Foods Market (NASDAQ: WFM) and Kroger (NYSE: KR) lower. The three stocks were indicated to open lower by 13%, 3.5% and 3%, respectively.

The malaise followed updated guidance from Sprouts ahead of participation in the Goldman Sachs 23rd Annual Global Retailing Conference tomorrow. The grocer provided FY16 EPS guidance that was well below consensus due in part to "significant ongoing deflation."

"The prolonged deflationary environment, competitive landscape and industry dynamics have prompted heavy promotions across the industry, adversely impacting retail deflation and traffic generation," said Sprouts.

The sharp reduction to guidance is surprising as it comes just a month after Sprouts Farmers Market reported 2Q results and revised its outlook for the year, said Goldman Sachs analyst Stephen Tanal. In his view, this suggests a step change in the competitive environment in recent weeks.

"The deflationary environment likely worsened on deeper retail promotional activity as grocers work to drive traffic/tonnage to their stores. We had viewed SFM as an aggressor in this regard, starting from a fiercely competitive price position in produce, and competitive prices across the rest of the store. Struggles driving traffic, as indicated by the company’s comments, suggest it may be more exposed than we had thought," said Tanal in a research note to clients.

The bank's price target and estimates are under review pending management’s presentation tomorrow.

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