IPO Preview: Sprouts Farmers Markets

| About: Sprouts Farmers (SFM)

Based in Phoenix, AZ, Sprouts Farmers Markets (NASDAQ:SFM) scheduled a $278 million IPO with a market capitalization of $2.16 billion at a price point mid-range of $15, for Thursday, August 1, 2013.

Six other IPOs were scheduled for the week of July 29. The full IPO calendar can be found at IPOpremium.

  • Manager, Joint Managers: Goldman; Credit Suisse; BofA Merrill
  • Co-Managers: Apollo Global; Barclays; Deutsche; UBS; Guggenheim; Wolfe Research Securities

Business

SFM is a specialty food retailer that competes with Whole Foods (NASDAQ:WFM), Natural Grocers by Vitamin Cottage (NYSE:NGVC), and Trader Joes. SFM stores are clustered in the southwest.

As of July 19, 2013, SFM had 163 stores located in eight states.

Valuation

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

Profit

annualizing Q1 '13

Cap (MM)

Sls

Erngs

BkVlue

TanBV

Margin

Sprouts Farmers Markets

$2,160

0.9

27.0

6.2

-10.6

3.5%

Whole Foods

$20,440

1.7

36.0

5.6

7.1

4.7%

Natural Grocers by Vitamin Cottage

$807

1.9

62.7

10.2

10.3

3.0%

Click to enlarge

Glossary

SFM is priced at a price-to-sales and P/E discount relative to WFM and NGVC.

Conclusion

Buy SFM on the IPO.

To put the above conclusions and observations in context, the following is reorganized, edited, and summarized from the full S-1 referenced below:

Half the stores were not Sprouts Stores

In 2002, Sprouts Farmers Markets, LLC, an Arizona limited liability company opened the first Sprouts Farmers Market store in Chandler, Arizona. In 2011, SFM was formed when Sprouts Arizona combined with Henry's Holdings, LLC, which operated 35 Henry's Farmers Markets stores and eight Sun Harvest Market stores.

The Henry's Transaction was led by investment funds affiliated with, and co-investment vehicles managed by, Apollo Management VI, L.P. The Apollo Funds are affiliates of Apollo Global Management, LLC. In May 2012, SFM acquired Sunflower Farmers Market, Inc., which operated 37 Sunflower Farmers Market stores.

There were 80 non-Sprout stores, which are now being marketed as 'Sprout' stores, out of 154 total stores as March 31, 2013.

Seasonality

SFM's business is subject to modest seasonality. Average weekly sales fluctuate throughout the year and are typically highest in the first half of the fiscal year. Produce, which contributes 25% of net sales, is generally more available in the first six months of the fiscal year due to the timing of peak growing seasons.

Competition

Competition includes conventional supermarkets such as Kroger (NYSE:KR) and Safeway (NYSE:SWY), as well as other food retailers such as Whole Foods, Natural Grocers by Vitamin Cottage and Trader Joe's. In some markets Target (NYSE:TGT) is also a competitor.

5% stockholders pre-IPO

Apollo Funds, 52%
SFM Liquidating Trust, 36%
KMCP Grocery Investors, LLC, 7%

Use of proceeds

SFM expects to net $248 million from the IPO from selling 17.7 million shares. Shareholders expect to sell 797,785 shares.

Proceeds are allocated to repay debt.

Disclaimer: This SFM IPO report is based on a reading and analysis of SFM's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.