SFM Q2 Results Show Store Growth Strength but Margin Pressure Builds

SFM’s Q2 Results Were Mixed

Second-quarter earnings were $1.37 per share, above the Zacks Consensus Estimate of $1.35. Net sales increased 4.7% year over year to about $2.33 billion but produced a 0.1% negative sales surprise.

Comparable-store sales declined 1%, following a 1.7% decrease in the first quarter. The combination points to new units as the larger contributor to top-line growth while demand at established stores remains under pressure.

Sprouts New Stores Keep Delivering Growth

Sprouts opened seven stores during the quarter and ended June with 490 locations across 25 states. Management plans 42 net new stores in fiscal 2026, including 43 openings and one closure.

The development pipeline includes more than 110 executed leases and 155 approved stores. Costco Wholesale Corporation COST reported a 10.7% increase in July net sales, showing that large-format food retail demand remained healthy in parts of the market. BJ’s Wholesale Club Holdings, Inc. BJ is also investing in club growth and member value, providing another expansion-focused peer for comparison.

SFM’s Margin Pressure Is the Key Consequence

Gross margin declined 12 basis points to 38.7% as loyalty investments and elevated fuel costs outweighed part of the benefits from self-distribution and vendor participation. Operating margin contracted 60 basis points to 7.5%.

Selling, general and administrative expenses rose 5.8% to $682.6 million and deleveraged 30 basis points. Lower comparable sales reduced fixed-cost absorption as Sprouts continued investing in the business.

Sprouts Guidance Sets a Tough Q3 Test

For the third quarter, management expects comparable-store sales between down 0.5% and up 1.5%, with earnings of $1.20-$1.24 per share. EBIT margin is expected to decline about 50 basis points.

The pressure reflects fixed-cost deleverage from softer comps and a heavier opening schedule. Sprouts expects at least 15 new stores in the third quarter, making traffic improvement and expense absorption key measures of operating progress.

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SFM’s Cash Flow Supports Continued Investment

Operating cash flow totaled $369 million in the first half of 2026. Sprouts invested $186 million in capital expenditures, net of landlord reimbursements, and repurchased 2.8 million shares for $210 million.

The company ended the quarter with $224 million in cash and cash equivalents and no borrowings under its $600 million revolving credit facility. That liquidity supports new stores, supply-chain projects, loyalty initiatives and shareholder returns.

SFM’s Rank and Scores Reflect the Mixed Quarter

The near-term setup remains balanced. Store expansion, differentiated merchandising and cash generation provide support, but negative comps and ongoing margin pressure leave execution risk elevated as Sprouts moves through the second half.

SFM currently carries a Zacks Rank #3 (Hold). It also has a VGM Score of A, Value Score of B, Growth Score of B and Momentum Score of B. The favorable Style Scores indicate solid characteristics across those investing styles, while the Zacks Rank suggests a more neutral near-term earnings-revision backdrop. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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