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Sprouts Files for IPO After 2011 Acquisition By Apollo Global

Sprouts Farmers Market LLC, the natural foods retailer whose origins go back to a fruit stand on El Cajon Boulevard in 1943, filed to go public earlier this month and raise about $300 million.

Now based in Phoenix, Sprouts operates 157 stores in eight states, and is owned by Apollo Global Management LLC, among the nation’s largest private equity firms.

Apollo acquired Sprouts in 2011, and merged it with Henry’s Farmers Market, founded by Henry and Jessie Boney and already in the Apollo stable.

Since that acquisition, Sprouts has nearly doubled its annual revenue to nearly $2 billion, and grown its chain by about 60 stores. In San Diego County it has 21 stores.

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Bud Leedom, president of Leedom Asset Management in San Diego, said given Sprouts’ business model and a roaring stock market, the offering could find a nice response.

“This is a nice-sized IPO and the appetite is clearly there,” Leedom said. “I think this is going to be a record year for IPOs. The window is definitely wide open and there’s a significant amount of pent-up demand.”

A Shift to Healthier Foods

Renaissance Capital LLC, a Connecticut-based research firm, said in a recent report that through mid-May 59 IPOs went out this year, raising about $15 billion. Sprouts gave no date when it expects to issue the stock nor the share price.

As more people change their diets and shift to eating healthier foods, stores that specialize in such products are seeing more traction, and the biggest grocery stores are feeling the impact, Leedom said.

“A lot of the bigger chains are tinkering around with offering specialty and fresh foods,” he said.

Among the competition Sprouts already faces is Trader Joe’s, Bristol Farms, and Whole Foods Market, the nation’s largest natural food chain with 340 stores. But Leedom said Sprouts shoppers aren’t the same as those visiting Whole Foods, which seems to appeal to better heeled folks.

“This is definitely no Whole Foods in terms of the shopper experience. They’re appealing more to the granola food shopper,” he said.

Bill Stinneford, executive vice president at Buxton Co., a Fort Worth-based customer analytics firm that has worked for Sprouts, said there’s been a growing consciousness among American consumers about the benefits of eating healthier foods, and chains such as Sprouts that cater to that segment are seeing the positive results.

Brand Building Strategy

Building a brand that has a presence in multiple markets is a critical piece of Sprouts’ strategy, Stinneford said.

“The more locations you can put in a market, the greater brand awareness you get, and the more efficient you can be in your advertising,” he said.

In its filing, Sprouts said it opened an average of 16 stores a year from 2008 through 2012. It has 19 store openings planned for this year, and for 2014, it expects to open 20 more. Over the next five years it set a 12 percent annual store growth target.

According to a consultant’s report cited in the company’s prospectus, the company has the potential to expand to 1,200 stores but gave no timeline when it would achieve that.

In the same securities filing Sprouts said “the cornerstones of our business are fresh, natural and organic products at compelling prices, an attractive and differentiated shopping experience, and knowledgeable team members.”

The company said comparable store sales increased over 23 consecutive quarters, including 9.7 percent last year.

‘Mandated Quiet Period’

A corporate spokeswoman declined any interview citing a so-called ‘mandated quiet period’ that prevents the firm from commenting.

Sprouts said in the filing that it intends to use some of the capital it raises through the stock offering to repay existing debt. The remainder of the funds would be used for general corporate purposes that the company says it has broad discretion defining.

For 2012, Sprouts reported net income of $19.5 million on sales of $1.8 billion. That compared with a net loss of $27.4 million on sales of $1.1 billion in 2011.

In addition to the 70 Sprouts stores in California, it also has 25 in Texas; 24 in Arizona; 23 in Colorado; six in New Mexico; four in Oklahoma; three in Utah; and two in Nevada.

Apollo is the same private equity firm that purchased Hostess Brands out of bankruptcy earlier this year for about $410 million. That investment in the maker of Twinkies probably had little to do with the decision to take Sprouts public, Leedom said. “The bottom line is that these guys are opportunists,” he said. Apollo Management, through a contracted publicist, declined to comment.

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