UBS Says Sell Whole Foods, Buy Sprouts As Natural Food Fight Escalates By Staff of TheFly.com Thursday, March 23, 2017 2:12 PM EDT
The shares of natural and organic supermarket chain Whole Foods (WFM) are falling after UBS started coverage of the stock with a Sell rating. Given the company's intensifying competition, its days of strong growth probably won't return, the firm warned. Conversely, the shares of Whole Foods' competitor, Sprouts Farmers Market (SFM), are advancing after UBS started coverage of the name with a Buy rating, saying that the company has found a good niche and ways of effectively attracting customers.
WHOLE FOODS: Warning that Whole Foods "has become a victim of its own success," UBS analyst Michael Lasser reports that natural and organic foods are now being sold at many supermarkets. After conducting "geospatial analysis," the firm found that Whole Foods is facing "direct competition from Trader Joe's, Kroger (KR), and Sprouts Farmers Market at 42%, 34%, and 12% of its stores, respectively, within a five minute drive." Moreover, many other retailers are placing more emphasis on fresh products, UBS warned. In light of Whole Foods' relatively high prices, i.e. about 13% higher than Sprouts and Kroger in some markets analysed, the increased competition will put pressure on the company's results, Lasser stated. Given the competitive landscape, Whole Foods' profits and revenue probably won't grow 10% or more "for the foreseeable future," but the stock doesn't reflect that reality, believes Lasser, who set a $25 price target on the shares.
SPROUTS: Sprouts, conversely, has developed a niche in natural and organic food, Lasser stated. While Whole Foods deals with negative "price perception issues," Sprouts effectively attracts customers with very low produce prices and "competitive packaged natural & organic prices," he tells investors. Additionally, it has "favorable demographics," its revenue from natural and organic food is surging 9% annually, and it can build many more stores, according to the analyst, who placed a $27 price target on Sprouts shares.
ANOTHER TO WATCH: Lasser also initiated coverage of Kroger with a Neutral rating and $32 price target. Meanwhile, research firm RBC Capital upgraded Kroger to Outperform from Market Perform. As reasons for the upgrade, analyst William Kirk cited favorable valuation, what he sees as the impending return of food inflation, and the company's strong analytics and loyalty program. Kirk, who also believes that the company's private label program is strong, set a $37 price target on the name.
MOODY'S: Yesterday, ratings agency Moody's predicted that supermarkets' operating profits would increase 6% this year as food deflation eases.
PRICE ACTION: In morning trading, Whole Foods fell 1% to $29.59, Sprouts gained 1% to about $23 per share, and Kroger climbed 1.6% to $29.42.
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