Chicago, IL – June 28, 2024 – Today, Zacks Equity Research discusses Performance Food Group Co. PFGC, Sprouts Farmers Market, Inc. SFM, SpartanNash Co. SPTN and Farmer Bros. Co. FARM.
Companies in the Zacks Natural Foods Products industry have been benefiting from the increasing health awareness among consumers and their preference for nutritious, wholesome products. Companies have been expanding their product lines with innovative offerings and strategic acquisitions. Additionally, some players are investing more in enhancing their digital capabilities.
While struggling with the challenges associated with escalating operating expenses, natural food companies are actively implementing proactive measures to tackle the issue of cost inflation, particularly through strategic pricing strategies. These upsides work well for Performance Food Group Co., Sprouts Farmers Market, Inc., SpartanNash Co. and Farmer Bros. Co.
About the Industry
The Zacks Natural Foods Products industry comprises companies that manufacture and sell a wide range of organic and natural fruits, vegetables, dairy products, flour, bakery items, meat and seafood, as well as spices and condiments. These also offer packaged ready-to-eat meals, snacks, cereals and frozen food.
Some companies offer comfort food items like ice cream and soups. A few players provide personal care products as well as health supplements. The firms operating in this space sell their products mostly through wholesalers, distributors, large retail organizations, grocery chains, mass merchandisers, drug stores and e-commerce service providers. Some also cater to food service channels, including restaurants, cafes and hotels. Others offer services to schools, hospitals and industry caterers. Some players operate through independent retail stores.
Major Trends Shaping the Future of the Natural Food Industry
Adopting Healthier Eating Practices: Consumers are increasingly gravitating toward nutritious and natural food options, boosting the demand for fresh and organic products. This trend benefits businesses in the natural food industry as many individuals prioritize healthy eating, even when dining outside.
The demand for fresh, natural and organic foods is expected to remain strong, with a resurgence in foodservice channels for companies in this sector. Restaurants and cafes are also adapting by incorporating more wholesome ingredients into their menus to cater to health-conscious customers. Industry experts predict that the focus on healthier food choices will continue, likely sustaining the popularity of fresh and organic offerings.
Diversifying Product Offerings and Market Expansion: Companies are actively broadening their product lines and market reach through strategic partnerships, acquisitions and retail growth. There is a strong focus on research and development to create convenient home cooking options that have minimal preservatives but are rich in flavor. Products based on plant-based, gluten-free and keto-friendly ingredients are gaining traction.
To meet the growing demand for fresh and organic products, companies are ramping up production capabilities. Furthermore, the shift toward online shopping has benefited some companies in the natural food industry, prompting investments in digital transformation, including online sales platforms, delivery systems and digital marketing strategies.
High Operating Costs: Companies are grappling with increasing operating expenses. The growing costs associated with personnel expenses, such as salaries, wages, commissions and benefits, have impacted companies' operational budgets. Additionally, certain companies are experiencing elevated costs due to the establishment of new stores and higher marketing expenditures. While companies have been prioritizing growth-oriented investments, these efforts often come at the expense of profit margins.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Natural Foods Products industry is housed within the broader Zacks Retail - Wholesale sector. The industry currently carries a Zacks Industry Rank #14, which places it in the top 6% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since the beginning of April 2024, the industry’s earnings estimate for 2024 has risen 0.6%.
We present a few stocks that you may want to consider for your portfolio. However, before that, it’s worth taking a look at the industry’s performance and current valuation.
Industry vs. Broader Market
The Zacks Natural Foods Products industry has outperformed the broader Zacks Retail - Wholesale sector as well as the Zacks S&P 500 over the past year.
The industry has risen 44.2% over this period compared with the broader sector’s growth of 21.3% and the S&P 500’s increase of 25.2%.
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing Retail-Wholesale stocks, the industry is currently trading at 16.23X compared with the S&P 500’s 21.54X and the sector’s 22.52X.
Over the past five years, the industry has traded as high as 20.31X and as low as 10.88X, with the median being 14.94X.
4 Natural Food Stocks to Keep a Close Eye On
Sprouts Farmers: This renowned grocery retailer has been reaping significant benefits from its focus on product innovation, prioritizing e-commerce, expanding private-label offerings, targeted marketing and competitive pricing. SFM has been actively improving its same-day delivery capabilities and store pickup services to offer greater convenience to customers at its various locations. Moreover, Sprouts Farmers has been consistently strengthening its presence in the natural and organic market, leveraging the substantial demand in this segment.
This Zacks Rank #1 (Strong Buy) stock has soared a whopping 130.9% in the past year. The consensus mark for Sprouts Farmers’ earnings per share (EPS) for the current fiscal year has increased by 1 cent to $3.12 over the past 30 days. The Zacks Consensus Estimate for SFM’s sales and EPS for 2024 suggests growth of around 8% and 9.9%, respectively, from the figure reported in the year-ago period.
SpartanNash: This food solution company’s strategic initiatives and fundamental strengths underscore its potential for sustained growth. The company has shown resilience in managing operational challenges and a commitment to enhancing profitability through strategic investments and cost optimization. With a clear focus on innovation, customer satisfaction and market expansion, SpartanNash is well-positioned to continue driving positive results.
SpartanNash's efforts to expand its product range and market presence are also commendable. The company has been broadening its product lines through strategic partnerships, acquisitions and retail growth, with a particular emphasis on research and development. The consensus mark for SPTN’s EPS has increased from $1.93 to $1.96 over the past 30 days. Shares of this Zacks Rank #2 (Buy) company have tumbled 20% in the past year.
Performance Food Group: This Zacks Rank #3 (Hold) company is well-positioned for growth due to its robust position in the growing food-away-from-home market. The company's Foodservice segment has showcased resilience, underscoring its adept sales organization and strategic market positioning. Initiatives like launching a nationwide pizza concept in collaboration with GPM and expanding PFG branded foodservice concepts to convenience customers highlight PFGC's innovative approach to driving value.
These strategic efforts, combined with disciplined cost management and strategic investments, are expected to drive long-term growth. The Zacks Consensus Estimate for Performance Food Group’s fiscal 2024 sales and earnings indicates growth of around 2% and 8.5% from the prior-year reported figure. The consensus mark for the EPS has remained unchanged at $4.21 over the past 30 days. Shares of PFGC have risen 13.2% in the past year.
Farmer Bros.:The company has been benefiting from its robust strategic initiatives and fundamental strength, evident through its ongoing transformation into a direct-store delivery (DSD)-based organization and the optimization of its newly right-sized operations. The brand pyramid and SKU rationalization initiatives are streamlining product offerings, enhancing inventory management and improving cost efficiencies for the company, which engages in roasting, wholesale, equipment servicing and distribution of coffee, tea and other allied products.
The company’s focus on customer retention and incremental margin improvement, coupled with a strong balance sheet and capital expenditure management, positions it for sustained long-term growth and value creation. The Zacks Consensus Estimate for FARM’s current fiscal year bottom line has remained unchanged over the past 30 days at a loss of 66 cents. This indicates a rise of 62.1% from the prior-year reported figure. Shares of this Zacks Rank #3 company have surged 44.2% in the past year.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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