Sprouts Reports Slowing Growth but Resilient Margins in 2025, Signaling a New Normal

What happened

Sprouts Farmers Market released its Q4 and full-year 2025 results, confirming a sharp deceleration in comparable store sales from double-digit rates earlier in the year to just 0-2% in Q4, culminating in a ~7% full-year comp. Despite this slowdown, the company maintained robust gross margins around 39.1% and strong operating cash flow, which funded ongoing buybacks and store expansion. The stock has plummeted over 50% from its peak, reflecting investor anxiety over whether Sprouts can sustain growth amid rising competition from conventional grocers and Whole Foods. Management's upbeat commentary masks the underlying shift to a lower-growth trajectory, with comps now aligning with the long-term algorithm of low-single-digit increases. This normalization suggests that Sprouts is transitioning from a high-growth story to a more stable, cash-generative model, but execution risks remain.

Implication

The deceleration in comps to near-zero levels in Q4 underscores that Sprouts' growth is moderating, necessitating a re-rating of the stock from premium multiples to more conservative valuations. Resilient gross margins and cash flow provide a safety net, but if comps turn negative, operating leverage could quickly erode profitability and undermine the buyback program. Unit growth remains a bright spot at ~10% annually, offering top-line support, but this depends on maintaining box economics in new markets amid competitive pressures. At the current stock price around $70, the risk-reward is attractive if comps merely stabilize, but downside toward the mid-$50s is possible if competition intensifies or margins compress. Key near-term catalysts include 2026 guidance on comps and store openings, which will test management's ability to execute on the long-term algorithm without further setbacks.

Thesis delta

The investment thesis shifts from relying on high comp growth to emphasizing margin durability and unit expansion as the primary drivers, with the key change being the market's acceptance of lower comp rates as the new baseline. Investors should now focus on whether Sprouts can sustain mid-7% EBIT margins and ~10% unit growth even with comps in the low-single digits, rather than expecting a reacceleration to prior highs.