Sprouts Farmers Market: Be Patient Until Insider Sales End

Aug.14.14 | About: Sprouts Farmers (SFM)

Summary

Sprouts continues to produce fast comp sales growth.

The constant dumping of shares by insiders is a persistent problem.

Do the earnings reports matter until Apollo Global Management stops selling shares?

Unfortunately for investors of Sprouts Farmers Market (NASDAQ:SFM), insiders can't seem to stop dumping shares in spite of continuously strong quarterly results. The stock dropped another 7% on the back of the most recent plan for insiders to dump shares.

It's not a major shock that Apollo Global Management (NYSE:APO) continues unloading so many shares knowing how many shares they owned at the time of IPO. The real issue is that the investment manager is slowing unloading shares every quarter making it difficult to make an investment in Sprouts.

The Q214 results were very solid. The grocer focused on fresh produce reported comp sales grew 9.5% for the quarter and a total of 20.3% on a two-year stacked basis. In total, net sales grew 20% for the quarter from the same period in 2013. Adjusted earnings grew 43% to reach $0.20, but the real question is whether these numbers matter with the moves listed below.

Insiders Dumping Shares

According to the S-1, Apollo Global Management made a strategic investment in Sprouts back in April 2011 to acquire 58.5% of the company for $214 million. At the time of the IPO in 2013, the asset manager owned nearly 52% of the outstanding shares, or 65.2 million. The ownership position declined to around 45% after the issuance of the IPO shares. The value of the position soared to several billion when the stock soared following the initial offering.

At that point, it was no surprise that Apollo would eventually unload shares. Now, the fresh and organic food segment is weakening with several earnings cuts by leader Whole Foods Market (NASDAQ:WFM), but a lot of weakness in Sprouts is tied more to constant selling pressure of major shareholders. The company and insiders including Apollo have dumped the following shares including the original shares in the IPO:

  • August 1 '13: The company and other selling shareholders sold 18.5 million shares at an IPO price of $18. The underwriters exercised the option to purchase an additional 2.775 million shares.
  • November 25 '13: Apollo Global Management and other selling shareholders sold 17.0 million shares at $37.00 with an additional option of 2.25 million shares sold. Apollo sold approximately 10.2 million shares.
  • March 27, '14: Apollo Global Management and selling shareholders sold 15.0 million shares at $33.75 with an additional 2.25 million shares sold with the underwriters' option. In total, Apollo sold approximately 9.4 million shares.
  • August 12, '14: Apollo Global Management and other selling shareholders sold 15.0 million shares at $30 with an option to sell 2.25 million additional shares. In total, Apollo will sell 13.0 million shares if the option is fully exercised.

The company and the large shareholders prior to the IPO have now unloaded 75 million shares for roughly $2 billion. The concerning trend is the willingness of these insiders to continue unloading shares every few months at consistently lower prices.

Apollo Global Management has roughly 32 million shares outstanding after this last offering is finalized. At this pace, it would require Apollo to perform three more offerings.

Stock Chart

The below chart tells the whole story with the stock continuing to decline despite the strong earnings results.

(click to enlarge)Click to enlarge

Conclusion

Outside of the valuation concerns with the stock trading at roughly 35x 2015 earnings estimates, the ability and willingness of the largest shareholder to continue dumping shares makes the stock one to avoid for now. For those that like the story, an investor needs patience to wait at least for the next large offering to take place before the stock can run higher. Until the market has confidence of the selling pressure nearing an end, the stock will have a very difficult time rallying no matter how well the quarterly numbers add up.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.