Valuation of SFM

1. Sprouts Farmers Market, Inc. (SFM)
October 7th
2019
Alec Glynn | Zach Narcross | Andy Newman | Collin O’Sullivan

2. Table of Contents
Industry Overview & Outlook 4-5
Company Overview 6
S.W.O.T. Analysis 7
Competitive Landscape 8
Comparable Companies Analysis 9
Precedent Transactions Analysis 10
Executive Summary 3
Discounted Cash Flow Analysis 11
Summary 12

3. Executive Summary
3
Founded in 2002, Sprouts Farmers Market engages in operating
healthy grocery stores. SFM specializes in fresh, natural, and
organic products.
Valuation results are based on the three quantitative methods
illustrated to the right, as well as three primary qualitative factors:
Underperformance Relative to Industry Growth
● Last six months, industry growth at 11.5% compared to
Sprouts coming in at -2.7%
● Net sales continue to grow year over year, while earnings
have decreased for the 2nd consecutive quarter
Competitive & Regulated Industry
● Fragmented supermarket industry is leading to increased
pricing pressures which drive down margin
Strong Expansionary Efforts
● Under new management team, currently planning to open
30 stores per year in coming years to grow retail sales
● Rollout of new digital presence & offerings to grow
customer base
Fairly Valued
● After comparison to its peers, Sprouts
Farmers Market is fairly valued compared
to its peers and precedent cash flows
● Based on Precedent Transactions,
Sprouts is nearing overvaluation
compared to its peers

4. Industry Overview
Industry at a Glance
FY18 Revenues: $654.6bn
FY18 Profits: $10.5bn
Annual Growth (2014-2019): 0.9%
● Industry operators range from large-scale conglomerates to small
specialty stores.
● Over the past five years, limited assortment stores like Trader
Joe’s and Aldi have experienced the most rapid growth.
● Limited-assortment stores sell primarily private-label products,
which are both less expensive for consumers and more profitable
for industry operators.
○ Trader Joe’s, the leading supermarket in sales per square
foot, sells more than 80.0% private-label goods.
● Improving discretionary income has enabled consumers to
purchase a wider variety of premium grocery items, specifically
organic products.
4
Sources: Yahoo Finance 10-K, IBISWorld

5. Industry Outlook
Grocery Industry Outlook
● Over the five years to 2024, the Supermarkets and Grocery
Stores industry is expected to benefit from the continually
strengthening U.S. economy.
● Shoppers will be more inclined to purchase premium-level,
value-added products.
● Operators will benefit from slowly growing input costs, as
commodity markets steady compared with the cost spikes
present during the previous five-year period.
Industry Trends
● Shifting demographics are anticipated to significantly influence
the industry.
● Millennials are typically characterized as being both health
conscious and value driven.
5
Sources: Marketline, IBISWorld, Business Insider Intelligence
Online Competition
● E-commerce sales are expected to rise at an annualized rate of 8.0%.
● The steady adoption of online grocery services will hamper brick and
mortar grocery revenue growth in the coming years.
Industry Life Cycle
● The Supermarkets and Grocery Stores industry is in the mature stage of its
life cycle. The industry's contribution to the overall economy is expected to
increase at a slow annualized rate of 1.5%

6. Company Overview
SFM Stock at a Glance
● Stock Price: $18.30
● Forward P/E Ratio: 17.33
● EPS: $1.14
● Market Cap: $2.27bn
6
Operations
● 326 stores across 21 states
● Strong Private Label Results, 13% of total revenue
● 6% Natural & Organic sector growth
● Expanding digital presence with delivery and pickup rollout
Planned Store Growth
● Plan to open approximately 30 stores per year for the coming
years
● Model works well in densely populated, urban areas as well as
smaller metro markets
● Success in both natural / lifestyle markets & more traditional
markets
Sources: Yahoo Finance 10-K, Marketline

7. S.W.O.T. Analysis
7
Strengths
● Store presence in 21 states and a network of 780+ domestic
and international vendors help to diminish regional revenue
risks
● Diversified and balanced revenue bases (57.5% perishable,
42.5% non-perishable)
● Consistent revenue growth in prior years yielding higher
returns (FY2018 ROE of 26.9%) and increasing cash flows
Opportunities
● Robust expansionary efforts including 20 openings in 2018
and 30 in 2019 continue to help grow customer base &
market awareness
● The US natural and organic food market is expected to grow
at a CAGR of 8.6% in 2017-2022 (super market CAGR of
5.9%)
● A growing US e-commerce industry stands to boost the
already 10.2% of Sprouts revenue that came from
e-commerce in 2019 Q1
Weaknesses
● Dependance on single distributor (KeHE) creates key-man
risk to company operations
● Lacks in-house amenities such as pharmacies or fuel
stations, alienating convenience-oriented consumers
● Vulnerability to environmental conditions given focus on fresh,
farm-grown products
Threats
● Demanding regulatory environment that includes scrutiny
from the FDA, USDA, FTC, & others
● Highly competitive and fragmented supermarket industry that
has the potential to create pricing pressures that affect
margins & market share
● Rising cost of operations as store openings continue creating
greater need for human capital at rising wages
Sources: Marketline, IBISWorld

8. Competitive Landscape
8
Sources: Yahoo FInance, Bloomberg

9. Comparable Companies Analysis
9
Sources:Yahoo Finance, Bloomberg, Pitchbook
Implied Enterprise Value: 2.85
● (EV/EBITDA Avg)*EBITDA 3.47
● (EV/EBITDA Median)*EBITDA 2.24
Implied Share Price: 18.67
● (P/E Avg)*EPS 26.73
● (Price/Share Median)*R/S 11.84

10. Precedent Transactions Analysis
10
Precedent Transaction Analysis
Multiple Range Implied Metric Implied Value
LTM Sales 0.2x - 0.5x Enterprise Value $1,086 - $2,715
LTM EBITDA 6.0x - 7.0x Enterprise Value $2,046.90 - $2,388.05
1. Many of the deals within the industry, even if public, have been financed by cash displaying that the economy has been strong for M&A deals and companies are not afraid of avoiding debt.
2. The retail grocery industry has continued to consolidate shifting to add other nuance pieces such as technology, distribution, and delivery through M&A activity.
3. The LTM EBITDA multiple has the company valued closer to its current market cap; however, based on the LTM Sales multiple Sprouts is currently overvalued
Sources: Bloomberg, Yahoo Finance

11. Discounted Cash Flow Analysis (DCF)
11
Sources:,

12. Summary
12
Industry and Company Overview
● Fragmented supermarket industry is leading to increased
pricing pressures which drive down margin
● 5.9% industry CAGR over next five years
● 326 stores across 21 states benefiting from strong naturals
sector growth and growing private label revenue
● Versatile store model allowing for 30 stores per year growth
● Enhanced digital presence with ready-to-serve and
ready-to-heat offerings drive competitive edge
Discounted Cash Flows Analysis
● Sales expected to stagnate over time as the
number of stores opened becomes constant
● Costs are hard to disaggregate in their financials,
but it is safe to assume steady growth as they open
more stores
● Assuming a 4% WACC and a 2% perpetual growth
rate, Sprouts is fairly valued at $20.11
Precedent Transactions Analysis
● The stagnating grocery industry coupled with high
competition creates a hotbed of M&A activity in
order to experience inorganic growth
● Past M&A activity ranges from small deals with
private grocers to multi-billion dollar deals like
Whole Foods and Amazon
Comparable Companies Analysis
● In comparison, Sprouts floats at a strange
“in-between” EV of 3.9, with most of their most
similar companies being much smaller and other
retail comps being about twice the size.
● Within our comp range of mean and median
EBITDA, we see SFM fairly valued between 2.24
and 3.47 billion enterprise value.
Valuation:
Fairly
Valued

13. Questions?