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Sprouts has big IPO, with shares up nearly 123%

Natural and organic foods retailer Sprouts Farmers Markets ends its first day of public trading at $40.11 a share, up $22.11. Whole Foods' results disappoint.

August 01, 2013|By Tiffany Hsu
  • Sprouts Famers Market clerk Brendan Foley stocks oranges in a Denver location.
Sprouts Famers Market clerk Brendan Foley stocks oranges in a Denver location. (Andy Cross, Denver Post…)

Shares of Sprouts Farmers Market Inc. exploded Thursday at higher-than-expected prices a day after Whole Foods let down Wall Street with its third-quarter financial results.

The natural and organic foods retailer ended its first day of public trading at $40.11 a share, up $22.11, or nearly 123% higher than its $18 offering price.

That was the biggest gain for an initial public offering since LinkedIn Corp. debuted with a 109.4% first-day increase on May 19, 2011, closing at $45 a share. LinkedIn closed at $213 a share Thursday.

The opening-day performance of Sprouts reflects the health of the company and the sector, said Andrew P. Wolf, analyst at BB&T Capital Markets.

"Fundamentally, the natural-organic specialty food retail sector remains very healthy, with a secular growth rate of over 10% annually," Wolf said.

"Sprouts stores are very profitable," he said. "Sprouts' operating model is to run a smaller, lower sales productivity store, but with operating costs lower than larger store operators."

James Richardson, senior vice president at Hartman Strategy, said that high-end specialized markets are growing.

"We're saturated in America with discount grocery, but upmarket is very underdeveloped," he said. "That's why you're seeing the growth rates in these brands."

Phoenix-based Sprouts raised about $333 million with its offering of about 18.5 million shares at $18 each, above the projected range of $14 to $16 a share. Sprouts trades on the Nasdaq exchange under the ticker symbol SFM.

Sprouts is putting growing pressure on the likes of Whole Foods Market Inc. But when asked about the increasingly crowded natural and organic grocery business, Whole Foods Co-Chief Executive Walter E. Robb told rivals: "Bring it on."

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"I would just say we love competition," he told a conference call with analysts Wednesday. "I think we feel good about our chances going forward."

Among other recent food company IPOs, Fairway Group Holdings Inc., a grocery chain out of New York, priced its April offering above expectations. From that $13-a-share level, the stock price has boomed nearly 93%.

Last year, Berkeley-based organic foods company Annie's Inc. soared 89% in its debut and raised $95 million. So far this year, the stock is up more than 25%, closing Thursday at $41.89 a share.

Sprouts and Whole Foods competitor Wild Oats Markets Inc. says it is planning a comeback. A trademark application suggests that local billionaire Ron Burkle is involved through his private equity firm Yucaipa Cos.

Sprouts, which launched in 2002 in Chandler, Ariz., said it posted $2 billion in sales last year. The nation's supermarket industry is worth $600 billion, the company said.

The grocer ran 163 stores in eight states as of mid-July with the potential to expand to 1,200 locations.

Whole Foods, which has 355 stores, Wednesday posted a 21% increase in third-quarter earnings to $142 million, or 38 cents a share, above analysts' expectations. The company said revenue rose 12% to $3.1 billion for the quarter ended July 7, below expectations.

Whole Foods raised its profit forecast for the year but trimmed same-store sales predictions to 7.3% growth from 7.5%.

The chain's shares fell 44 cents Thursday, closing at $55.14.

Twitter: @tiffhsulatimes

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