Why analysts say buy Sprouts, sell Whole Foods
- UBS initiated a “sell” rating on Whole Foods, while issuing a “buy” rating for Sprouts Farmers Market, according to CNBC.
- The firm wrote in a research note that it believes Sprouts can "coexist with emerging low-cost competitors over time," including Trader Joe's and Aldi.
- However, they wrote, Whole Foods' days of double-digit growth are probably over. The report says the natural products giant "needs to move from a growth phase to an efficiency phase. Plus, the entrepreneurial culture that served it well in its growth mode now needs to be more process-oriented. That can be a tough transition."
The analysts at UBS may be bullish on Sprouts due in large part to its possible merger with Albertsons.
Things have been looking strong for Sprouts over the past year. In its latest earnings report, the company reported a 14% increase over the previous quarter and a 6% increase over the same period last year. Net sales reached $986 million in Q4.
If Albertsons were to take Sprouts over, it would benefit from Albertsons' deeper pockets and nationwide reach, as competition in the organic sector intensifies.
But Whole Foods has seen its numbers slide, with same-store sales down 2.4% and revenue up just 1.9% in the most recent quarter. It has doubled down on increasing operational efficiencies, closing less profitable stores and honing in on its core customers. A partnership with Dunnhumby is expected to boost existing customer loyalty programs, helping the retailer to better leverage offerings and target promotions.
Whether an Albertsons-Sprouts merger occurs, or whether Whole Foods' focus on the customer yields rewards will be seen in the coming months. Though the bottom line of both of these retailers may get a boost from projected increases in grocery profits in the year ahead.
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