grockery shops are a fairly stable but slow growing industry. Historic supermarket sales confirm this, growing at 0.5% per year from 2016 to 2021. This statistic may drive growth-focused investors away from grocery stores, but fear not, there is an opportunity under the radar in this market. Enter Sprout farmers market (NASDAQ: SFM), a grocery stock that can give you both growth and value.

Image source: Getty Images.

What is Sprouts Farmers Market?

Sprout farmers market (or simply Sprouts) is a health-focused supermarket headquartered in Phoenix, Arizona. Most of its stores are located in California, the Southwest, Texas, and the Southeast. Sprout’s value proposition is to sell healthy, diet-friendly foods at a reasonable price. Its stores have a unique layout compared to traditional grocery stores with an open bulk and produce section at the heart of the store.

The company strives to attract what it calls “health enthusiasts” or people who follow specific diets like keto, plants or gluten-free, with products suitable for all popular diets. Management estimates that this limits Sprouts to just $ 200 billion of the $ 1.2 trillion in annual home food spending in the United States, but it’s a sacrifice they’re willing to make in order to differentiate the experience. in stores of other grocers like Kroger and Wal-Mart.

Consistent growth and return on capital

With just 362 stores in 23 states at the end of 2020, Sprouts has plenty of room for expansion. The company is opening 20 stores this year, and starting in 2022, management is targeting annual store growth of 10% or more. It is currently making a big step in Florida where it has just opened a new distribution center, and plans to move up the east coast with new stores in the next few years.

The constant store additions have also resulted in strong financial growth. Net sales increased from $ 4.67 billion to $ 6.47 billion between 2017 and 2020. Beyond revenue, the adjusted EBIT margin (earnings before interest and taxes) began to increase in the period. in recent years, rising from 5.7% in the first quarter of fiscal 2019 to 7.2% in the first quarter of 2021. Part of this increase in margins was likely due to lockdowns from the COVID-19 pandemic, which have favored supermarkets over restaurants, so investors should follow to see if margins can stay at that level through 2021 and beyond.

A big blow to this business was comparable sales for the fiscal first quarter, which were down 9.4% from 2020. However, this was a tough comparison to a very busy fiscal 2020 first quarter when panicked U.S. consumers were stocking up on food at the start of the pandemic. Two-year builds were up 2.2%, a sign that existing Sprouts stores continue to appeal to customers.

Apart from consistent growth and earnings, Sprout management continues to return money to shareholders through share buybacks. Over the past five years, shares outstanding have grown from over 150 million to 118 million today. And in addition to previous buybacks, the company just announced a new $ 300 million buyback program in March. With over $ 250 million in cash, a profitable business, and minimal debt, this gives Sprouts a great opportunity to take advantage of this buyback program over the next several years.

Data source: Ycharts.

Evaluation is cheap

Sprouts shares have a market cap of $ 3.29 billion at the time of this writing. The company is targeting a range of $ 305 million to $ 325 million in adjusted EBIT (or operating income) this year. At the high end of this forecast, it would mean that Sprouts is trading at a futures price to operating profit (P / OI) ratio of just 10. That’s cheap compared to most stocks in the market. , especially when you consider Sprouts’ unit growth plans.

If you think that the growth of the stores can lead to a constant expansion in revenue and results as management continues to reduce the number of shares through buybacks, the current share price of around 28 $ will look like a good deal in a few years. It’s not a high growth software company, but if you like growth stocks that trade at a reasonable valuation, it might be a good idea to take a look at Sprouts Farmers Market.

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Brett schafer owns shares of Sprouts Farmers Markets. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.