What a time it’s been for Sprouts. In the past six months alone, the company’s stock price has increased by a massive 40%, reaching $155 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Following the strength, is SFM a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.

Why Is Sprouts a Good Business?

Playing on the secular trend of healthier living, Sprouts Farmers Market (NASDAQ: SFM) is a grocery store chain emphasizing natural and organic products.

1. Store Growth Signals an Offensive Strategy

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Sprouts sported 440 locations in the latest quarter. Over the last two years, it has opened new stores at a rapid clip by averaging 5.7% annual growth, among the fastest in the consumer retail sector. This gives it a chance to become a large, scaled business over time.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

2. Surging Same-Store Sales Show Increasing Demand

Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.

Sprouts has been one of the most successful retailers over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 5.5%.

3. Increasing Free Cash Flow Margin Juices Financials

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Sprouts’s margin expanded by 1.9 percentage points over the last year. This is encouraging because it gives the company more optionality. Sprouts’s free cash flow margin for the trailing 12 months was 5.4%.

Final Judgment

These are just a few reasons Sprouts is a high-quality business worth owning, and after the recent rally, the stock trades at 36× forward price-to-earnings (or $155 per share). Is now a good time to buy? See for yourself in our in-depth research report, it’s free.

Stocks We Like Even More Than Sprouts

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