Could Sprouts Be Next and is a Bidding War Possible?
WSJ
Jun 16, 2017
Amazon.com Inc.’s $13.7 billion agreement to purchase Whole Foods Markets Inc. is sending shockwaves through the shares of traditional grocers. Here are some of the early reactions from analysts who cover the companies, many of whom raised their price targets on Whole Foods following the news:
1. Sprouts Could Be Next: Multiple analysts said Sprouts Farmers Markets could be the next acquisition target among grocery retailers. A natural grocer like Whole Foods, Sprouts stock was down more than 6% Friday with other grocery retailers also getting hit following Amazon’s announcement of the Whole Foods acquisition.
Sprouts previously had a small partnership with Amazon involving grocery delivery for a small number of stores, leading some to think Amazon might target it instead of Whole Foods.
The Sprouts business model has been very transportable over the past 4-5 years (261 current stores; successful entry into the Southeast) and targets more of a middle-income shopper (e.g. greater market share opportunity long-term vis-à-vis [Whole Foods]). Accordingly, we think today’s news 100% puts Sprouts into play with Wal-Mart and Kroger potential bidders. —Gordon Haskett analysts
We view the SFM sell-off today as an attractive entry point to get involved with a very high quality retailer. On a fundamental basis, we believe the company remains well positioned on its own and there is also takeout potential down the road. —Oppenheimer analysts
2. The Future of Commerce Is More Than Just Digital: Several analysts noted that Amazon’s latest acquisition, which would be larger than all of its previous deals combined, could be indicative of a broader retail trend. They said combining digital strength with traditional store infrastructure might be key moving forward to success for grocers, and maybe even other retailers.
This announcement clearly has implications for grocery as now the highly competitive food retail space goes deeper into direct competition with Amazon…. But [it] also validates that combined digital & brick and mortar presence may be essential to long-term success in grocery.—BMO Capital Markets analysts
We are incrementally more cautious on the brick-and-mortar supermarket industry, and envision an accelerated shift towards combining digital and local, with scale an increasingly important competitive advantage. —Wells Fargo analysts
Increasingly eCommerce gains (especially in under-penetrated categories like groceries, [consumer packaged goods] & apparel) might require a more mixed omnichannel strategy which blends an online/offline presence that continues to turn the Amazon “flywheel” of convenience, price & selection.—UBS analysts
3. Massive Changes Are Coming Quickly: Investors seem to be anticipating that Friday’s deal will overhaul the grocery store industry based on the stock price gains for Whole Foods and Amazon and losses for more traditional grocers, and analysts think Amazon will waste little time making changes to Whole Foods if the deal goes through.
We believe Amazon can launch nationwide grocery delivery coverage within 12-18 months. While Amazon’s impact to retail took many years as Prime adoption scaled, we believe the current levels of Prime adoption (~75% of upper income) support similar disruption in a shorter time frame than retail.—Piper Jaffray analysts
Because Amazon has developed a very powerful and disruptive brand intangible asset that has become synonymous with competitive pricing, expedited shipping, and customer service — all of which underpin our wide moat rating — we think this deal could be advantageous as Whole Foods works to right its ship.—Morningstar analysts
Whole Foods 461 stores grants Amazon a sizeable physical presence that it could leverage in a number of ways, including grocery pick-up (which is more cost effective and something WMT has seen success with), product sales or lockers for deliveries of general merchandise.—Citi analysts
4. Could Another Bid Be Coming? Mutual-fund giant Neuberger Berman said Friday that it expects a Whole Foods bidding war coming given the $42 per share price tag. Analysts disagreed on the potential for one.
We had previously estimated a value in the mid- $40’s range in a takeout scenario, so we believe there could be some money being left on the table.—Oppenheimer analysts
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