Sprouts: Differentiated Grocer With Attractive Unit Economics

Gary Mishuris of Silver Ring Value Partners presented his investment thesis on Sprouts Farmers Market (US: SFM) at Wide-Moat Investing Summit 2021.

Thesis summary:

Sprouts is a differentiated grocery business with attractive unit economics and underappreciated potential for long-term unit growth. The company aims to deliver a farmers’ market shopping experience and differentiated products targeting consumers who either seek healthier options or look for the experience of finding new and exciting foods. Sprouts has competitive pricing, using regional scale and partnering with suppliers too small to support a much larger national grocer. The company has 362 stores across 23 U.S. states.

A new management team took over in 2019 and has been turning around the company. CEO Jack Sinclair previously served as CEO of 99 Cents Only Stores and EVP of US Grocery/Food at Walmart. Sinclair switched the focus from discounting to targeting more price-inelastic customers; he also reduced store size and capex to improve unit economics. Margins and EBIT were already showing meaningful improvement in Q4 2019, but then COVID affected further comparisons.

Sprouts shares recently traded below 60% of Gary’s “base case” value estimate, with moderate downside to his “worst case” estimate. Gary believes this opportunity exists in part because the market has focused on the short-term negative impact on earnings from post-COVID reopening.

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About the instructor:

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm with a concentrated long-term intrinsic value strategy. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business. Prior to founding the firm in 2016, Mr. Mishuris was a Managing Director at Manulife Asset Management since 2011, where he was the Lead Portfolio Manager of the US Focused Value strategy. From 2004 through 2010, Mr. Mishuris was a Vice President at Evergreen Investments (later part of Wells Capital Management) where he started as an Equity Analyst and assumed roles with increasing responsibilities, including serving as the co-PM of the Large Cap Value strategy between 2007 and 2010. He began his career in 2001 at Fidelity as an Equity Research Associate. Mr. Mishuris received a S.B. in Computer Science and a S.B. in Economics from the Massachusetts Institute of Technology (MIT).

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