Premium resilience applies to consumer staples too…

Luxury clothing, jewelry, and cosmetics often top the list of inflation-proof consumer categories. But what about high-end grocery stores?

This week’s Street-topping Q1 report from healthy grocer Sprouts Farmers Market (SFM) shows that Americans are still spending at higher end food outlets. Same store sales rose 3% and profits grew 24% with strong results in both physical retail and e-commerce.

Sprouts’ bottom-line performance also tells us that the little guys are doing a better job of passing along food cost inflation to consumers than supermarket operators. Note: Kroger (KR) is forecast to report flat earnings for the quarter ended April 30th.

When SFM announced its Q1 results, we were waiting in the checkout line with a very bullish strategy on our Earnings Sheet. Our +58 Earnings Score reflected:

1) Demand growth that has correlated well with SFM financials -- Purchase Intent mentions were up +92% YTD.

2) Increasing levels of consumer happiness.

Cha-ching! On May 2nd, the register rang up an +8% pop in share price for SFM.

So, if a ‘boutique’ grocer focused on fresh, wholesome foods like SFM is doing well, AMZN’s Whole Foods Market must be crushing it too.

Wrong.

Whole Foods Purchase Intent is down -22% YTD:

Why the disparity?

SFM has found a sweet spot in the ultra-competitive grocery store space.

Although it largely caters to more affluent households, SFM is also hitting home with lower income shoppers by offering quality at more affordable prices.

Call it a cheaper version of Whole Foods.

Aligned With Better-For-You Trends

On top of offering brands you don’t find anywhere else and a wide assortment of store branded items, SFM’s better-for-you products are in sync with current health & wellness trends.

Consumer mentions of prioritizing natural ingredients, following an organic diet, and taking greens supplements are all trending higher.

While competitors place the fruits & veggies at one end of their stores, SFM prominently showcases its produce at the center of its footprint. Customer traffic ‘naturally’ revolves around a wide selection of organic, plant-based, and gluten free items.

Make no mistake, though. There are plenty of indulgences too:

A Unique Food Shopping Experience

The high level of SFM Happiness has a lot to do with consumers discovering innovative products in a treasure-hunt like shopping atmosphere. Taking a page out of the Costco playbook, Sprouts continually rolls out new, seasonal, and limited time items that attract repeat adventure seekers — but more importantly, newbies.

A growing, happy customer base is coinciding with healthy store growth. Management’s plan to add approximately 20 new stores hits year would bring SFM’s store count above 400 across 23 states.

This week’s grand opening of a new Las Vegas location on Cinco de Mayo will naturally come with plenty of fanfare. But what happens at Spouts Las Vegas, probably won’t stay at Sprouts Las Vegas. Like its assortment of organic produce, responsibly sourced meats, and better-for-you treats, SFM’s social media buzz is growing nicely.

Closing the Gap on the Supermarkets

Last week’s high-volume gap up makes it four consecutive post-earnings jumps for SFM. History tells us that if the strong LikeFolio data continues, the streak could continue — and with it, the potential for grabbing share from the supermarket chains.

SFM’s 2023 guidance calls for 10% EPS growth at the midpoint. Given the 24% growth in Q1, macro tailwinds, and increasing brand awareness, the outlook may prove overly conservative.

Bottom line: In the defensive grocery store industry, consumers are showing a willingness to pay more for quality…but price still matters. Companies like SFM that offer unusual products at reasonable prices are finding a middle ground — winning over premium and value shoppers alike.

We’ll be tracking the macro trends and consumer sentiment in the grocery aisle for more tasty ideas to add to the shopping cart.