Shares of health-oriented grocery chain Sprouts Farmers Market (NASDAQ:SFM) have fallen by more than 20 percent in the last week, bringing the trailing 12-month loss to over 35 percent. While shares of SFM have been under heavy pressure, the business itself has kept growing and remains actively profitable. Why did Sprouts stock fall so much, and could the selloff be an overreaction that gives long-term investors an attractive entry point?
Sprouts’ Slowing Growth In Q4?
The main problem putting downward pressure on SFM’s share price is weak Q4 guidance that accompanied its Q3 earnings report. Management only expects to see comparable store sales rise by 0-2 percent, while diluted earnings per share guidance of $0.86-$0.90 is well below what Sprouts was able to deliver in Q3. Though net sales were up substantially over the year-ago period, Sprouts also narrowly missed its Q3 revenue expectations of $2.23 billion, further contributing to negative sentiment among shareholders.
In the Q3 earnings call, management noted that comparable sales were already slowing late in the third quarter. As such, Q4 could get off to a shaky start almost immediately as the business runs headfirst into higher comp numbers.
Growth Headwinds Kick In
Although the business is starting to run into growth headwinds, Sprouts has done quite well up to now. In Q3, net sales rose 13 percent from the year-ago quarter to $2.2 billion. Comparable store sales growth, meanwhile, rose by 5.9 percent. Sprouts also opened 9 new locations during the quarter, bringing its total store count to 464. For the full year of 2025, Sprouts expects to open a total of 37 new locations.
Sprouts has also been able to deliver strong profitability metrics. Net margin over the past 12 months has totaled 5.9 percent, while returns on invested capital, equity and assets have come in at 16.7 percent, 38.1 percent and 13.4 percent, respectively. In Q3, net income rose to $120.1 million, up from just $91.6 million in the year-ago quarter. On a per-share basis, this translated to earnings of $1.22, up from $0.91 in Q3 of 2024.
For the full year, Sprouts is expecting revenue to come in about 14 percent above 2024’s total, with comparable sales about 7 percent higher. Diluted EPS, meanwhile, is projected to fall in the range of $5.24-$5.28.
Investors may also be reassured by management’s decision to authorize $1 billion in share buybacks, a very significant sum considering Sprouts’ market cap of only $8.2 billion. Although Sprouts doesn’t pay a dividend, this large buyback represents a significant step toward returning some of the cash that the business generates to its shareholders. Given how sold off SFM is, management may also be prioritizing buybacks now on the view that the stock could have become undervalued.
Taking a more comprehensive look at the positive trends within the business, Sprouts has achieved great success by keeping up with ever-evolving health trends and private labeling its own lines of healthy food products.
The business has also leaned into online sales, helping it offer a more convenient customer experience and further appeal to younger consumers who tend to be more health-conscious. Sprouts also tends to keep its stores within relatively short distances of distribution centers, a habit that has helped it keep unnecessary transportation costs to a minimum and maximized its efficiency.
1 Problem of a Cautious Consumer
The largest driver of Sprouts’ expected weakening in same-store sales is an American consumer who is increasingly price-conscious. This problem isn’t unique to Sprouts, as many consumer discretionary, retail and restaurant businesses are experiencing similar headwinds.
Spending is increasingly concentrated among higher-income consumers, while those with lower incomes are being squeezed by rising living costs driven by higher tariffs and inflation. While this situation may actually bode well for more budget-friendly grocers, a pricier health-conscious chain like Sprouts could struggle to grow in this macroeconomic environment.
Unfortunately, these pressures could be persistent. JPMorgan analysts expect inflation to rise again to 3.5 percent in Q4, then gradually drop to 2.8 percent over the following 12 months.
Meanwhile, the White House is reportedly readying fallback plans to keep its high tariffs in place if the Supreme Court rules against the Trump administration’s use of the International Emergency Economic Powers Act later this month. With these upward price pressures remaining in place and the labor market beginning to look weaker, consumers may be working with tight budgets for some time to come.
Is Sprouts Undervalued Now?
While Sprouts is certainly facing some challenges, the stock may have fallen into an attractive valuation range due to its recent selloff. Shares of SFM are down to just 16.2 times earnings and 1.0 times sales. At $83.82 per share, the stock has also fallen well below the entire analyst price target range of $90-$203. At the average price target of $136.07, SFM would have an upside of over 60 percent, and even the lowest price target of $90 would imply a gain of about 7 percent. As such, there’s a reasonable chance that Sprouts has sold off into a potentially undervalued price range.
Is Now the Time to Buy SFM?
While it’s important to recognize that Sprouts is facing challenging headwinds tied to deeper macroeconomic factors, the stock could present an appealing buy for investors who are comfortable with volatility in exchange for potential long-term gains.
Even with comparable store sales leveling off, Sprouts is still opening new stores that will contribute to its revenue base at a reasonably fast pace. Management’s decision to authorize large share repurchases, meanwhile, allows Sprouts to build value for shareholders and take advantage of its own reduced share prices.
With that said, the problems facing Sprout could last until the macroeconomic climate improves, potentially putting the stock on a fairly long timeline for recovery. As such, SFM may carry opportunity costs as well as the risk of additional downward volatility. While Sprouts could justify these risks with expected annualized 3-5 year EPS growth of about 17.5 percent, investors may not find the near-term performance quite as appealing.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.