Late last week, natural and organic grocer Sprouts Farmers Markets filed for an IPO.
It was back in 2011 that Apollo Global Management (NYSE:APO) purchased the company and then went on to acquire other rivals like Sunflower Farmers Market and Henry’s Farmers Market. As of now, Sprouts has 157 locations in eight states.
What sets it apart is a small-box format; Sprouts has an average store size of 27,500 square feet. That’s not huge, but still enough room to have a wide assortment of fresh produce, seafood, dairy items, frozen foods, wine and even body care products.
There are several benefits to such a small-format approach. First of all, it means that lease rates are generally less and allows for more efficiency in terms of moving products, which is critical for perishables. On top of that, a small format is easier to locate in urban centers, where its not easy to find space — just ask a big-box giant like Walmart (NYSE:WMT).
In terms of the performance, Sprouts has been no slouch either. Last year, net sales came to $2 billion, up 16%, and net income was $19.5 million, which compared to a loss of $27.4 million in 2011. In fact, Sprouts has generated positive comparable store sales for 23 consecutive quarters. In 2012, the growth was about 9.7%.
Going forward, the growth ramp should continue, especially as consumers look for healthy foods. According to the Nutrition Business Journal, the market should grow at an annual rate of 10% until 2020. The vitamin and supplement market is also expected to show decent growth, with an average rate of 7% during the same period.
But grocers like Sprout are not just benefiting from the general health movement. Consumers are also looking for locations that provide a better shopping experiences, with easy-to-shop floor plans, open-air atmospheres and more. It also helps to have highly trained employees. Because of such factors, traditional grocers have seen an erosion of market share, which has gone from 73% in 2005 to 67% in 2012.
It’s no wonder that similar companies to Sprouts have pulled off strong IPOs over the past few years. Here’s a look:
|Company||Ticker||Return (from offering price)|
|Natural Grocers by Vitamin Cottage||NGVC||93%|
And of course, the star is still Whole Foods (NYSE:WFM). For the past five years, its average return was an impressive 26%.
But this list itself illustrates a problem: Competition is getting more and more intense. Keep in mind that traditional grocers like Kroger (NYSE:KR) and Safeway (NYSE:SWY), along with do-it-all stores like Walmart, have also been getting into the organic game.
Sprouts has another way to differentiate itself, though: value pricing. According to the company’s prospectus: “We offer prices we believe are significantly below those of conventional food retailers and even further below high-end natural and organic food retailers.”
That sounds nice, but this advantage could easily evaporate. Already, Whole Foods has been been taking a more value-based approach and this could also ultimately be the strategy for the traditional grocers. In other words, there could be increasing pressure on sales for companies like Sprouts.
In the meantime, though, Wall Street does not appear too concerned. In the short-term, the growth is likely to continue and that means Sprouts will probably see lots of demand for its offering. The bottom line is that organic grocers are hot right now, and investors will jump at any chance to get into what could be the “next Whole Foods.”
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.