Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Why Sprouts (SFM) cannot survive

Sprouts (SFM) cannot survive as an independent supermarket operator. Sprouts Farmers Market (NASDAQ: SFM) lacks the cash to be competitive in today’s grocery market.

For instance, Sprouts recorded $17.18 million in cash and equivalents on 30 September 2018. In addition Sprouts recorded a free cash flow of $19.86 million and an operating cash flow of $64.36 million.

Meanwhile, Amazon (NASDAQ: AMZN); the owner of Sprouts’ most visible direct competitor Whole Foods, had $20.425 billion in cash and equivalents on 30 September 2018. Additionally, Amazon reported $9.34 billion in short-term investments it can tap into.

How Amazon Threatens Sprouts (SFM)

Thus Sprouts is competing directly and indirectly with a company with practically unlimited amounts of money to burn. For example, Amazon could afford to give organic groceries; Sprouts’ main product, away as a loss leader if Jeff Bezos wanted.

To make matters worse, Amazon recorded a free cash flow of $6.061 billion and an operating cash flow of $8.588 billion for 3rd Quarter 2018. Significantly, Amazon achieved revenues of $56.576 billion for 3rd Quarter 2018.

Meanwhile, Sprouts reported revenues of $1.329 billion for 3rd Quarter 2018. However Sprouts’ revenues grew at a rate of 10.2% during 3rd Quarter 2018.

Sprouts’ revenue growth does not matter because of Amazon’s size and cash. To explain, Amazon can throw several billion dollars into the organic grocery market without affecting its bottom line.

How Amazon Go Threatens Sprouts (SFM) everybody else

For instance, Amazon could offer free delivery of organic groceries. In addition, the Amazon Go cashierless convenience store threatens sprouts.

To enumerate, Go sells readymade just like Sprouts. Yet Amazon Go’s operating costs could be far lower because it is cashierless. Hence, Amazon’s labor costs will be a lot lower.

Moreover Brick Meets Click claims Amazon Go is generating up to $2,700 in sales-per-square foot. Thus, Amazon could generate a lot of cash from Go, and plow it back into the business.

Notably, Amazon is planning to open 3,000 Amazon Go locations in the next few years. Thus Sprouts could soon face an aggressive new competitor that will leverage Amazon’s technical expertise and Whole Foods’ quality.

Why Sprouts (SFM) cannot survive

Sprouts’ dilemma is that Amazon is just one of its competitors. Besides Amazon sprouts has to compete with Kroger (NYSE: KR), Walmart (NYSE: WMT), Aldi, and Target (NYSE: TGT) to name just a few.

For example, Kroger has a close relationship with Instacart and it is America’s largest organic grocer. For example, Kroger sold $1 billion worth of organic produce in 2017, Progressive Grocer estimates. In addition, Kroger sold $2 billion worth of its Simple Truth organic grand in 2017, Progressive Grocer calculates.

Under those circumstances, I cannot see how Sprouts can compete and survive as an independent company. Instead, Sprouts’ future will be as part of a larger organization – such as Aldi Nord or Kroger.

Who Will Buy Sprouts (SFM)?

To explain, Aldi Nord; or Aldi North, is the German company that owns Trader Joe’s and Lidl. The  Aldi Nord’s sister company Aldi Süd or Aldi South owns the Aldi-branded grocery stores in the United States.

My prediction is that Sprouts will run out of cash soon. That will force the company’s management to sell out as Supervalu’s management did in October.

Hence, Sprouts’ stores and the Sprouts brand will survive but the Sprouts’ company will disappear. I think Sprouts is a great fit for Aldi Nord or Kroger’s family of stores. Notably, owning Sprouts will help Aldi Nord expand in states like Colorado and California where Lidl does not operate.

Sprouts (SFM) has Little Value as a stock

Hence I think Sprouts has a lot of value as a grocery brand but little value as a stock.

Therefore, I conclude the market dramatically overvalued Sprouts (SFM) at $26.82 a share on 22 November 2018. Investors must stay away from Sprouts because its stock is heading for total collapse.

Instead, if you want to add a grocer to your portfolio check out Kroger (NYSE: KR), Target (NYSE: TGT), or Walmart (NYSE: WMT). Those companies have a future Sprouts does not.