Zacks Industry Outlook Highlights Performance Food, Sprouts Farmers Market and SpartanNash

Industry: Natural Food

Companies in the Zacks Natural Foods Products industry have been reaping the benefits of growing consumer health awareness and the rising demand for nutritious, wholesome products. To capitalize on this trend, many companies are expanding their product lines with innovative offerings and strategic acquisitions. Some industry players are increasing investments in digital capabilities to enhance customer engagement and streamline operations.

Despite the challenges posed by rising operating expenses, natural food companies are taking proactive steps to address cost inflation, particularly through strategic pricing initiatives. These positive factors bode well for companies like Performance Food Group Co. PFGC, Sprouts Farmers Market, Inc. SFM and SpartanNash Co. SPTN.

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

Shift Toward Healthier Eating Habits: Consumers are increasingly opting for nutritious and natural food choices, driving demand for fresh and organic products. This trend has become a major boost for companies in the natural food industry as more individuals prioritize healthy eating, even when dining out.

The appetite for fresh, natural and organic foods is expected to remain strong, with foodservice channels experiencing a resurgence. Restaurants and cafes are also responding by incorporating more wholesome ingredients into their menus to meet the preferences of health-conscious customers. Industry experts predict that the focus on healthier food options will persist, supporting the continued popularity of fresh and organic offerings.

Expanding Product Lines and Market Reach: Companies are diversifying their offerings and expanding market reach through strategic partnerships, acquisitions and retail growth. A key focus has been on research and development to create convenient, flavorful home-cooking options with minimal preservatives. Products based on plant-based, gluten-free and keto-friendly ingredients are gaining momentum.

To meet the rising demand for fresh and organic foods, companies are scaling up their production capabilities. The shift toward online shopping has benefited natural food companies, leading to investments in digital transformations, including e-commerce platforms, delivery systems and digital marketing initiatives.

Rising Operating Costs: Companies are facing rising operational expenses, particularly in personnel costs, including wages, salaries, commissions and benefits, which are putting pressure on budgets. Some companies are also seeing increased costs due to new store openings and higher marketing expenditures. While businesses remain focused on growth-oriented investments, these efforts are often weighing on profit margins.

Zacks Industry Rank Indicates Robust Prospects

The Zacks Natural Foods Products industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #93, which places it in the top 37% 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 bright 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 July 2024, the industry’s earnings estimate for 2024 has risen 2.1%.

Here, 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 59.9% over this period compared with the broader sector’s growth of 25.5% and the S&P 500’s increase of 27.2%.

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 17.88X compared with the S&P 500’s 21.48X and the sector’s 23.28X.

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.

3 Natural Food Stocks to Keep a Close Eye On

Sprouts Farmers: This well-known grocery retailer has been capitalizing on its emphasis on product innovation, a strong focus on e-commerce, the expansion of private-label offerings, targeted marketing efforts and competitive pricing. SFM has also enhanced its same-day delivery options and store pickup services to provide customers with more convenience across its locations. Sprouts Farmers continues to solidify its position in the natural and organic market, tapping into the growing demand within this sector.

This Zacks Rank #1 (Strong Buy) company has soared a whopping 156.8% in the past year. The consensus mark for Sprouts Farmers’ earnings per share for the current fiscal year has increased by 8% to $3.37 over the past 60 days. The Zacks Consensus Estimate for SFM’s sales and EPS for 2024 suggests growth of 9.6% and 18.7%, respectively, from the figure reported in the year-ago period.

SpartanNash: This Zacks Rank #3 (Hold) company’s strategic initiatives and core strengths highlight its potential for long-term growth. SpartanNash has demonstrated resilience in navigating operational challenges while maintaining a strong focus on boosting profitability through targeted investments and cost optimization. With a clear emphasis on innovation, customer satisfaction and market expansion, the company is well-positioned to sustain positive momentum.

SpartanNash’s efforts to broaden its product range and expand its market presence are noteworthy. The company has been diversifying its offerings through strategic partnerships, acquisitions and retail growth, with a significant focus on research and development. The consensus mark for SPTN’s EPS has increased from $1.94 to $1.96 over the past 60 days. Shares of this food solutions company have jumped 27.2% in the past year.

Performance Food Group: This Zacks Rank #3 company has been benefiting from its strong position in the expanding food-away-from-home market. The resilience of its Foodservice segment highlights the company’s effective sales organization and strategic market positioning. Notable initiatives, such as launching a nationwide pizza concept in partnership with GPM and expanding PFG-branded foodservice concepts to convenience customers, reflect PFGC’s innovative approach to creating value.

These strategic moves, alongside disciplined cost management and targeted investments, are anticipated to fuel long-term growth. The Zacks Consensus Estimate for Performance Food Group’s fiscal 2024 sales and earnings indicates growth of 3.8% and 13.3% from the prior-year reported figure. The consensus mark for the EPS has declined from $4.92 to $4.87 over the past 60 days. Shares of PFGC have risen 23.9% in the past year.

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