Why this former grocery center developer is buying Sprouts

I know I often mention the stand-alone properties I helped build back when I was a real estate developer. Restaurants, dollar stores, drugstores, auto parts retailers, manufacturing companies…

So many of them wanted to work in single-tenant structures where they could operate as they pleased. And I was more than happy to work with them.

I made a lot of money from those customers, and I still see the value of investing in them today. However, of all the property types I worked on, grocery-anchored shopping centers were by far my favorite.

For one thing, I enjoyed the challenges involved, which are different from almost any other retail project. Blueprints have to be carefully crafted so that grocers complement their fellow tenants instead of detracting from them.

That way, the entire center can benefit from stronger traffic, higher tenant sales, and greater long-term value.

This is especially true considering how much more competitive the grocery business has become. Traditional supermarkets now face pressure from Walmart, Target, Costco, discount grocers, and even dollar stores and drugstores.

That’s why it’s so important for investors to look for grocery store investments with dominant local market share and durable competitive advantages.

This was an enormous consideration when Wide Moat Confidential recommended Ingles Markets (IMKTA) last January. And, sure enough, it’s paying off beautifully, returning roughly 43% since then.

The same rule applies when we look into related real estate investment trusts (REITs). Some of my favorites include Kimco Realty (KIM), Regency Centers (REG), Brixmor Property Group (BRX), and Phillips Edison (PECO) – all of which I know are good at making shareholders money.

Though that’s not the direction I’m going in today. Instead, I want to focus on specialty grocer Sprouts Farmers Market (SFM).

It’s absolutely one to know about – and quite possibly one to buy as well.

Sprouts isn't another Kroger. Nor is it trying to be. And it definitely doesn’t care to be Walmart.

It’s carved out a differentiated niche altogether that’s centered on health, wellness, fresh produce, and specialty foods… categories that are paying off very nicely.

More than 70% of what Sprouts sells are "attribute-driven": products specifically grown or created with certain needs in mind. These could be organic, gluten-free, nut-free, tomato-free, plant-based, or otherwise better-for-you offerings. And they’re found all throughout Sprouts’ stores instead of within small, specified sections like you’ll find at Giant, Food Lion, or Publix.

Moreover, Sprouts can and does charge higher prices for those specialty products. It knows its loyal, higher-income customer base values quality and consideration first and foremost.

The company is also expanding its private-label business. Its Sprouts brand sales hit $2.3 billion last year, with private-label penetration rising to 26% of sales.

These products typically support stronger margins, greater customer loyalty, and less direct price competition. So they’re a bigger deal than many people realize.

And here’s another thing that sets Sprouts apart: its smaller-box strategy. That’s something I can especially appreciate from a real estate perspective.

Traditional supermarkets often exceed 60,000 square feet. But because Sprouts doesn’t try to cater to absolutely everyone all at once, it requires less space. And that in turn means it can fit into a broader range of shopping centers, paying less rent along the way.

If that sounds like landlords lose out in the process, think again. Smaller boxes can easily create more flexibility for them. They also generally require less sales volume to generate attractive returns.

Management estimates each new store requires only about $3.8 million of cash investment… opens with roughly $13 million in annual sales… reaches earnings before interest, taxes, depreciation, and amortization (EBITDA) breakeven within its first year… and generates low-to-mid 30% cash-on-cash returns by its fifth.

Those are exceptional economics that I, for one, don’t mind participating in.

By the end of the second quarter, Sprouts was operating 490 stores across 25 states. That’s quite the nice number, though management says it isn’t even close to stopping.

It believes the U.S. can ultimately support more than 1,000 locations. Which means it’s not even halfway through its expansionary efforts.

The company is currently targeting about 10% annual unit growth supported by new distribution infrastructure. However, Sprouts isn’t settling on growth for growth’s sake. It has a disciplined site-selection process it adheres to, and I don’t see that changing anytime soon.

As someone who spent decades evaluating retail locations, I’m particularly happy about that detail. I’ve seen what happens when companies don’t look before they leap, and it isn’t pretty. Not for long, anyway.

As it is, Sprouts’ numbers tell a much more sustainable story. During its most recent quarter, the grocer generated a:

Those aren’t just good returns for a grocery retailer. They’re outstanding.

Sprouts’ balance sheet is equally impressive. The company finished fiscal-year 2025 with no borrowings outstanding on its $600 million revolving credit facility. And it entered Q1-26 with $252 million of cash and just $22 million of letters of credit outstanding.

It’s also important to point out how Sprouts operates from a net-cash position on a conventional basis. Virtually all of its leverage is tied to long-term operating leases, not traditional debt.

This gives management significant financial strength to repurchase shares. Aggressively so.

Between fiscal 2021 and its Q1-26, Sprouts has repurchased stock equal to about 21% of its current market capitalization. It’s also reduced its diluted share count by about 19% – including around 4% during just this past year alone.

That's the exact kind of capital allocation I like to see: investing in high-return growth projects while maintaining a fortress balance sheet and returning excess cash to shareholders through opportunistic buybacks.

It’s hard to go wrong when that’s how you run your business.

From an investor perspective, it’s also hard to go wrong when Sprouts is trading at just 13.5x forward earnings. That multiple is surprising for a company that, remember, is generating:

The market tends to assign premium valuations to businesses with durable competitive advantages like that. Yet it appears to be skeptical about Sprouts’ long-term sustainability.

I can’t agree.

As someone who spent years developing grocery-anchored shopping centers, I've learned that the best stores don't simply fill space. They create ecosystems that drive customer traffic, support surrounding tenants, and compound value over time.

All of which Sprouts appears to be doing – and doing well.

That’s why Wide Moat Research is officially listing Sprouts Farmers Market as a Buy. We see meaningful upside from here, both in its internal numbers and its share price appreciation.

It’s just a matter of time before the market wakes up and smells the fresh produce.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

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