Sprouts Farmers Market, Inc. (SFM) on Q1 2021 Results - Earnings Call Transcript

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Sprouts Farmers Markets First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker for today, Susannah Livingston. You may begin. Susannah Livingston: Thank you, and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our first quarter 2021 earnings call. Jack Sinclair, Chief Executive Officer; and Denise Paulonis, Chief Financial Officer, are with me today. The earnings release announcing our first quarter 2021 results, the webcast of this call and quarterly slides can be accessed through the Investor Relations section of our website at investors.sprouts.com. Jack Sinclair: Thank you, Susanna, and good afternoon, everyone. Thank you for joining our call today. I'm very pleased with how we have navigated the current environment, as we begin to cycle some of the positive impacts from the onset of the COVID pandemic last year, combining our strong financial performance with the strategic opportunities ahead of us, makes me very optimistic about the future of Sprouts. For the first quarter, we generated diluted EPS of $0.70, up 52% from the first quarter of 2019, as our strategic initiatives and promotions unshrink continue to deliver strong, sustainable financial results. As I've stated before, I believe 2020 was a turning point for Sprouts, and we're continuing to build on that success and momentum this year. For 2021, our focus remains winning with our target customers by building our brand through meaningful marketing in and out of the store, curated merchandise, building an efficient supply chain and unit growth supported by a new format to further expand our reach. 2020 was a pivotal year, not just for Sprouts, but for Americans in general, as we all tried to stay healthy. As we kick off a new year, the same focus on health is top of mind. For Sprouts this plays well into who we are, a fresh natural and organic specialty retailer. Fresh produce has always been the mainstay of Sprouts, and it continues to be at the heart of our proposition, representing 22% of our business condition what sets us apart from other grocers is the breadth of attribute based products that we carry. Attribute based trends like keto, paleo, organic plant-based, gluten free and functional are all themes focused on wellness and play directly to our target customers. In 2020, our organic sales across the store increased 21% to $1.4 billion, and in produce organic sales were up 23% driven by the desire to eat healthier. We're becoming the leader in the attribute space joined by our pioneering vendor community. Denise Paulonis: Thanks, Jack, and good afternoon, everyone. For the first quarter net sales decreased 4% to $1.6 billion and comparable store sales were down 9.4% compared to the same period last year. Our year-over-year comparison is not a straightforward indication of growth. We believe it's important to focus our performance on a two-year basis. To that end, our net sales were up 11% compared to the first quarter of 2019 and our two-year comps stack was up 2.2%. After posting positive comps to start the quarter, as expected, same-store sales turns negative as we began to cycle the 2020 COVID impact and reopening progressed. Importantly, towards the end of the first quarter and into the current quarter, we have seen a return to positive traffic. Due to our ongoing strategic changes, even with some sales deleverage and record high e-commerce sales penetration, profitability remained strong with an adjusted EBIT margin of 7.2%, trending well ahead of our 5.7% margin in the first quarter of 2019. Operator: Our first question comes from the line of Mark Carden with UBS. Your line is open. Mark Carden: Thanks a lot for taking the questions. So on the comp you were up 2.2% of your stack in a period where there were still some COVID restrictions in place. Now I you guys don't sell as much as some of your competitors in the way of popular CPG products, but are there any other factors that we should be aware of on the top line that may have held you back with a mainly vitamin driven, are customers still consolidating trips to larger stores, they sell adjusting to new strategy, any color here would be great? Thanks. Denise Paulonis: Well, you kind of answered the question there Mark and the things that you mentioned it's specifically to the first quarter. As we look clearly there's an overlap Jan, Feb was a different overlap two March's overlap. But one of the things that would probably have been a factor that we didn't quite take into account was the vitamin growth that we would have expected from a cold and flu season in January, and that's something that probably didn't happen to the extent because everyone's wearing a mask and nobody had the flu. So that certainly made some impact on that in the early stages of the quarter. And the reopening program, what's happened with regard to restaurants opening and not opening had some impact on us in the meat space and probably in the alcohol space as well a little bit. And that's something that certainly had an impact. And as we've said all along in this dialogue around what's been happening over the - through the pandemic as probably as people have reduced the number of places they go to do their food shopping, that we didn't benefit from some of the growth that happened previously. And that's certainly something that continues, and is beginning we think to kind of mitigate itself as we play through the year. We're certainly seeing some encouraging signs on our target customers with the intention that are telling us that they're going to be more comfortable about going out and shopping in more places. And that's something that gives us a little bit of encouragement going forward. I think that's pretty clear our health enthusiasts target customers were probably more concerned about the pandemic and the implications for their health, run maybe the average customer. And I think in some ways, I think that's why our e-commerce business is quite strong and I think people that are more comfortable at going out, we're thinking there's some encouragement going forward in the data that we're seeing. Mark Carden: And then we're hearing more about rising inflation in food. And I know Sprouts has historically had a bit of a different profile on this front. But how are you thinking about inflation over the course of the next few months, and as your new promotional strategy really change your thought process with respect to passing-through any higher costs. Thanks. Jack Sinclair: Certainly. What we're seeing - as you know our mix of business is different and looking at the first quarter, our produce was actually deflationary, not inflationary in the first quarter a little bit, not hugely but a little bit. And that's something that means that our mix going forward. What I see anticipating the produce going forward, because there's going to be pretty good yields and pretty strong opportunities for us to take advantage of price in the marketplace. So we're not as worried about inflation in our fresh produce business, probably a little bit more worried about inflation. If worried to the right word but a little bit more conscious of inflation and the meat space and one or two of the other parts of the grocery business, and we're watching that closely. Transportations clearly putting some pressure on the supply chain of our vendor base, and we're watching that closely. By and large we're feeling pretty confident, given that we sell a pretty differentiated range of products that as inflation plays and cost inflation plays into our business, we're feeling pretty confident that we can pass on appropriately. If we get too big then we'll have to watch and have dialogue with our vendor base on it. But what we're hearing so far and what's in front of us, we're feeling that we can pass it on and not have the kind of huge worry about what might happen going forward. Operator: Our next question comes from the line of Scott Mushkin with R5 Capital. Your line is open. Scott Mushkin: So, your first one is a little bit along the same lines as the last one, but I wanted to broaden it out a little bit about comps. The big thing that we hear from clients is like, hey, Sprouts is a good business but let's face it, they just can't comp like they should. And the gross margin gains that they're seeing are not sustainable that they're going to have to come in and lower pricing, and some of these earnings is really is a little bit of mirage, that's why I trade so cheaply the equity. What do you guys say to that? What's your rebuttal to that that line of thinking? Jack Sinclair: Well, I think we sculpt - we've been pretty. So far we've had very consistent record of delivering on that, so the sustainability so far, quarter after quarter after quarter, we're feeling confident about that. We're certainly aware of why will the margins have come from and partly it's about the promotion or unraveling of our very aggressive high-low promotional and actually negative profitability promotional. We're not going to bring those back. So I can kind of guarantee that mix that was driving a lot of margin issues in the business has gone away and sustainably gone away. We know we can improve continue to improve our strength. We're seeing that in our business week after week after week, so we're feeling very confident about the sustainability of that. And the fact that we're selling such differentiated product allows us to manage our EDLP pricing. As long as those products that we're selling are different, we're able to price it based on elasticity. And as long as that pleased through and work so and I'm pleased with some of the work we've been doing and the price of the pricing team and the pricing systems we've been bringing in is allowing us to give us a lot of confidence that their sustainability and gross margin and the sustainability in our operating margin. And think about the other things that we're doing the distribution costs should be coming down as we drive less miles to the stores. The operating ratios and our business should be kept on - those are some labor pressures, the operating ratios were a fairly mature young business. So the things that we're working on in terms of inventory management and operating the stores, self checkout to the registers. There's some sustainable operating improvements that we can all drive help us drive bottom line. We've got sustainable logistics improvements that can help to drive bottom line and we're pretty confident that we know that promotions aren't coming back in any aggressive way and on and on, high, low promotions or aggressive below cost promotions, so you put that together. I am certainly very quiet, although I'm confident about anything I'm confident about the fact that our margin growth is sustainable. Denise Paulonis: And I think one piece I'd add on the customer front is, we have been making a pivot with our strategy and we knew that there would be some folks who might be more of a coupon clipper profile that wouldn't be the ones that would stick with us. And the intent was to gain a lot more of our target customer going forward. And I think it's interesting that we can have a couple of pieces of research that we've done that are pointing things in the right direction with some green shoots and that that is all starting to resonate. And I say, first we she did research directly and people have told us that where they had reduced their shopping trips to sprouts before because of the pandemic that the majority of them have intent to return as the pandemic subsides. And we said that's great, but what's even better is that we as we've come into April or starting to see this prove out of it. So we ended the quarter with the highest customer hands we've seen since the start of the pandemic, so a nice positive direction and more customers starting to come into the stores. We're also seeing that customer count, in particular with the reactivated and re acquired customers, so the same ones who told us they had stopped shopping with us because of the pandemic, we're starting to see those numbers trend up a bit. And then with the positive returns to traffic, I think everybody was wondering well what will happen to basket, and we've been very pleased to see that while traffic has turned positive at the end of the quarter and into Q2, we're actually holding our basket pretty much in line with where we were coming through last year, rather than there being a tradeoff between that basket and traffic number. So some positive indications there that the pivot in the strategy that we're making is starting to resonate and hopefully we'll be able to see that with a bit more clarity as some of the COVID haze subsides. Scott Mushkin: So that’s really good color, guys. And I have one follow-up question. I mean obviously your balance sheet is really good and there is not - really any debt on it. You're producing good - free cash flow and the store crank up doesn't really come to next year. Why not get more aggressive and just buyback a chunk of stock and say, hey, it's cheap, it's our best investment right now. I know you have a buyback, but it seems like you could do a lot more if you want it? Jack Sinclair: Yes, I think, we're really pleased that we have the authorization out there and we do intend to utilize that authorization. I think we would all agree that we think that the stock has a lot of positives that it can run in the future years and we'd like to get in on that too. You know, I think what really happened in the first quarter for us is that authorization got put in place fairly late in the quarter and we were trading under a 10b5-1 plan. So you didn't see quite as much come through as we could have done. But we have all intent to be using - utilizing the authorization as the weeks and months here evolve. Operator: Our next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open. Rupesh Parikh: So, I guess, just following up with your commentary on, I guess, improving traffic lately. Is there a way to get more color on maybe the quarter day competence or just anyway to sort of, better understand the types of trends you guys are seeing in April? Jack Sinclair: Yes, I don't think we're going to call it any numbers because we know, week by week there's a lot of volatility in what we're seeing here. But I think there's some positive specifically related to the target customer that we'd reiterate. So I think with our target customer and specific, they have a larger basket and their basket has continued to increase more, kind of, post-pandemics in non-target customer, suggesting innovation and other things in the store are resonating with them. And - we have seen target customer retention turning higher and increasing over this period of time as well. So, you know reasons to believe, particularly with those target customers that the positive traffic turn and holding the basket is something that we will continue to see. Rupesh Parikh: Maybe just one follow-up question. On the SG&A line, I think, this call you mentioned that - you expected SG&A dollars I believe to be flat - roughly flat for the year. What's the right way to think about it now? Jack Sinclair: Yes. We generally, actually, of course we expect to SG&A rate to be directionally flat for the year. And so that might be a little bit different in the - in what you are hearing. But what we believe is we're going to continue to see benefit as we have bonus that point to roll-off, NBA tailwind for us - with intern some additional expense as we continue to manage and hero pay, healthcare expenses and then just some general sales deleverage, but the two of those, every quarter won't necessarily be flat. But we'd expect the year will be approximately flat. Operator: Our next question comes from the line of Ken Goldman with JPMorgan. Your line is open. Tom Palmer: It's Tom Palmer on for Ken. Thanks for the question. First, just wanted to ask on the e-commerce side looks like penetration rates for you were still climbing. Do you expect this to continue as the year progresses, just because more stores offering services and the improved out? Or do you think we've reached a peak and as we kind of reach reopening, that starts to ease a bit and then alongside that. How has fulfillment been? Have you been figuring out ways to make it more efficient, kind of, reduce the SG&A burden that it has put on your stores? Jack Sinclair: Yes. I'll let Denise talk a little bit about the cost side of this in terms of the demand side of it. Tom we're feeling that we probably have reached a peak on this, as I said a little bit earlier, I think a lot of - we've probably one of the fastest growing ecommerce businesses in grocery over the course of the last year or so, and that has probably been driven by the sensitivity of our customers to going out and they want access to this product, but if I had to use it to - through all ecommerce vehicles, and we expanded our pickup which made a big difference too. We were only in 55 stores for pickup and we expanded that to all 360 stores, as we've talked about in previous calls. So that's been a driver to our space and a driver to the fact that we're growing by more than most in this space. And as it settles down as people are more comfortable getting out as a mask mandates change those vaccination rules out, we're expecting it to settle down. It wouldn’t settle all the way back down to 3.5% where we were when I came in, I think it'll settle back down, if I was guessing somewhere around 8%, 10% of our business rather than significantly anywhere near where we're at the moment. And in terms of how we're - we're specifically figuring out where to try and minimize. Remember its all profitable for us we're pretty pleased by the fact that it makes us all money, we lose all the margin, Max isn't quite as strong as you know, so and we're doing some specific things to try and minimize the cost of that. We're handling all of the all of the pickup at our store through our own labor which is making a difference in terms of both the speed and efficiency of the that and cost of it. And we'll continue to look at that as well definitely we might want to expand on that a little bit. Denise? Denise Paulonis: And Jack I think we covered, you covered a lot of the points. I think the point we'd re emphasize is, even with that penetration at 12.5% in the first quarter, we delivered a strong operating margin up substantially from where we were two years ago where penetration was next to nothing. And I think the other part that I'd mentioned as well is, we continue to invest behind our own channel, our Shop.Sprouts.com channel and its on the white label penetration for lack of a better way to put it is now up to about 17% of our total ecommerce sales. So as we're bringing those customers in a little closer to us and we have an opportunity to have more customer data, have a more direct relationship with those customers and to monetize that a little bit more than what we can simply do when we be selling through a marketplace. So we just reinforced the fact that for us it is a profitable business and we have absorbed the costs in our P&L to date at a relatively high level of penetration. So everything here and working forward as Jack said in efficiencies of picking ourselves in our stores will only be able to build on that as we go forward and improve that profitability more. Tom Palmer: Thanks for all the color there. I wanted to ask just on the promotional environment. Obviously the large pullback in promotional activity has really driven stronger margins over the past year and a half now. Is there a point where it makes sense to get more promotional as a way to drive traffic trends higher not back to prior levels, but just higher than we've seen over the past few quarters? And at what point does that make sense, I guess? Jack Sinclair: Yes, I think it's a good question, Tom as we continue to experiment with different ways to attract our target customers, our marketing activity and our promotional activity is very much geared to, how do we communicate directly with our target customer, and we've been learning that. Remember traffic and transactions have been distorted pretty dramatically over the course of the last year or so. And as we work our way through different techniques that we can use, certainly product and price won't be the driver that's going to attract the customers that we're trying to attract, it's more likely to be techniques that build loyalty amongst our target customer base. And we're getting increasingly - we've done a lot of what we call them test and learn through Q1, which we've learned some different techniques, some of which have worked and some of which haven't worked, and we're working our way through different techniques, as to how we can drive our business, but very focused on target customers, as opposed to doing broad brush product and price promotions, because what we want to have is a really good value in our produced business, communicate really strongly, communicate the benefits that we talked about in terms of our attribute-based products and drive people into the stores on the back of that. And then remember, our awareness is low, and the fact that awareness is low, gives us a lot of comfort that, if we really communicate the proposition effectively using the techniques that we're using. And we may have to spend a little bit more on marketing as opposed on promotions going forward. But as I say, we’re going to have test and learn phase, and we'll figure out the right way to handle it over the course of the next few quarters. Operator: Our next question comes from the line of Karen Short with Barclays. Your line is open. Renato Basanta: This is actually Renato Basanta on for Karen. Thanks for taking our questions. So - so my first question is sort of bigger picture. And maybe, maybe a follow up to Scott's question earlier, but you know right now obviously you had a lot of initiatives that are helping drive profitability and those are certainly showing up in the numbers and are commendable, but one could argue that at some point those start to dry up. So my question is, how do you think about prioritizing profitability initiatives versus sales growth, because I think at some point you're going to have to get that top line. You don't really going again to reach your longer term objective? Jack Sinclair: But longer term objectives in our business, fundamentally the growth plan that we've got in terms of new stores is going to give so much more access for our health enthusiast and innovation seeker customers to get access to this growth proposition, which will - is already pretty unique, and we're going to make it even more unique, so the specificity of why you come to Sprouts, and who you are at the target customer is the focus of all our work, whether it’d be merchandising work, real estate work, marketing work, we're focusing all on our target customers. We know from all the data that we've done that there's plenty of people there, who aren't spending the dollars, so we'd like them to spend with us, partly because of awareness, and partly as we work better to communicate effectively with those target customers. And it's very true in markets, where we're not - now when if you go to Florida or Texas or Baltimore, where I was last week, you got very different dynamics going on there, as opposed to San Diego or Denver, where we've already got a pretty strong presence. So the focus of - the premise of the question is that we have to invest margin to get top line. We're not in that space. We're in the space of our proposition, and the algorithm that Denise outlined in the in the remarks earlier, we've got an algorithm that basically gives us a strong underlying profitability. We've got customers out there that look like the customers that we want to attract, and it's up to us to do that effectively through communication, not through investing tons of money in margin, that's the reality of it, and we've got some immaturity in our operating base. That gives us even more comfort going forward. We can sustain the margins, while attracting more of our target customers. Renato Basanta: And then just a question on the comp guidance, so you know a bit of a slowdown from a two year staff perspective in terms of comp for 1Q, and I presume some of that due to California dining restrictions being lifted. And maybe some of the other things you called out. But just wondering if you can provide some color on how you're thinking about that reacceleration and stat trends for the rest of the year, certainly, you should benefit from less trip consolidation as you talk about as things start to normalize. But that also means there's likely more of a shift to food away from home, - from food at home so just any help reconciling, those - those two things would be appreciated. Thank you. Jack Sinclair: And they're all things that we're looking at I'll let Denise expand on that. Let us all things that we looked at going forward, but we've said fairly consistently that Q1, Q2 was always going to be. I - not just for us but for the whole industry in terms of how that plays through, and on the two year stack basis we're expecting a lot of our initiatives to gradually and just see an improvement in Q3, Q4 on a two year stack basis, as we start to kind of normalize the comparisons. And as you said, we didn't get as big an upside last year, so we shouldn't get bigger, we should be able to see our Q3, Q4 two years stack just improve naturally as part of the underlying business that we have. And as I said, we're very excited about the marketing activity that we put in place the test and learn that we've done that that work will start to play pay dividends for us in Q3, Q4. Denise Paulonis: And I think the only other point that I would add is don't forget the fact that we will continue to have new innovation coming into our stores building off of all the category management work that we worked on through the fourth quarter last year, and it takes a little time to - to get that into our stores. And we will also have, we already have one of our new DC open as of the end of the first quarter and we'll have a second DC opening now here in the second quarter, both of which are going to bring fresher, more local products into Florida, into Colorado, important core markets for us where we really believe that that's going to resonate with customers as well and so all these strategy points coming together are where we see the momentum coming from as we turn from the first half of the year, which certainly has its unusual overlaps into the second half of the year, where we can really have these things shine for our customers. Operator: Our next question comes from the line of Chuck Cerankosky with Northcoast Research. Your line is open. Chuck Cerankosky: Could you talk to us, Jack about the sort of regional trends in sales without being overly specific and different states and even different counties have reopened in varying ways and what you're seeing in the stores and especially things we might not expect? Jack Sinclair: Well, let me - California is clearly important to us and we saw in December, a little bit of a boost in our California businesses closed down, went down and then in January it went the other way. So with California has clearly seen them that's beginning to settle down. As we look across, we're seeing more consistency across the country in the last few weeks, than we had seen previously. I think as you're just gradually people feel more confident about getting out and moving around. I think the vaccination program, and again, I think our customers are more likely to get vaccinated than the average and more likely to be comfortable at coming out. We're seeing that kind of consistency as we kind of talked about our baskets holding quite well and that would be through across the country just to make. We're not seeing the differences that we probably saw last year and certainly in Q4 that we’re starting to see now. So I don't know if that helps really, but I think we're seeing more consistency than differentiation over the course of the last few weeks. Chuck Cerankosky: Anything in the product mix that you would point out? Jack Sinclair: Yes. I think, as I said a little bit earlier as restaurants reopen you see a change in the meat business a little bit. It starts slows down a bit. Alcohol went absolutely crazy for reasons last year. Last year beginning to slow down a little bit relative to where we would have expected maybe would have expected to jump in. But by and large, generally to do with restaurants, finally now we're seeing some pretty interesting things happening in vitamins, although the cold and flu season went down in January. As we start to navigate through April in May, you're starting to see people. I think, migrating back to things that are very health focused. And so there's a little bit of an interesting - interesting trends happening in that space to the positive for us. They were intrigued by. And so, if that kind of maybe vitamins would be big, I don’t know there's anything else Denise we should be commenting on. Denise Paulonis: No, I think you hit the big one. Operator: Our next question comes from the line of Kelly Bania with BMO Capital. Your line is open. Kelly Bania: First, I just wanted to just follow up on the comment about traffic in March and April and great to hear that it turns positive. Just was curious if you could help us understand a little more context about what that looked like last year and what you were maybe comparing up against and is that comment just about in-store traffic or is that total transactions? And then I have another follow up. Denise Paulonis: So let me put in first in context last year. So last year if we all remember, really all of March and particularly early in March, but continuing March into April, what we saw was a dramatic reduction in the number of times people are coming into the stores and very large baskets. So people coming in and buying whatever they could get, wherever they could get it. As we all knew there was silly things like you know shortages of yeast or pepperoni or cheese that people would go and look for it wherever they could find it. So last year, we definitely saw a notable downtick in traffic, but a correspondingly big growth in basket. And as we worked through the year, our traffic trends got a little bit better, but they stayed negative through the year and basket fell off a little as we would expect after that big stock up. But also going to stabilize Q3 into Q4, when we turned into Q1, those same trends really existed in January and February, which were all pre-COVID last year, so that made a great deal of sense. I think we saw the same volatility that others would see in the early part of March, where this was lapping the height of things from last year, and that would be it where we just fundamentally all we are readjusting to our businesses. What we saw as we got to the very end of March and into April was the recovery of traffic. So, on a two year stock, it is it's not a net positive yet, but it is headed in the right direction. But I think the most encouraging part to us is not only is that number headed in the right direction. But the basket really held. And that tells us that things are resonating about what people are putting into their carts and what they've come to adopt and shopping at Sprouts. So hopefully that's just a bit of color that helps. Kelly Bania: Yes. Thank you. Thank you Denise, that's really helpful. And just also kind of along the same lines, you talk about some customers, I guess relaying to you that they have plans to come back to Sprouts post-pandemic and maybe you're starting to see that a little bit. But can you quantify, what percent of your customer base, you think that is? And what maybe is embedded in your guidance with regards to that customer coming back. Do you expect that to be a certain percent of them coming back is that expected to improve as we move through the quarters. And you know who you lost them to in the meantime? Jack Sinclair: Yes. I think in general, you know as we lost them too. We lost the folks that were just consolidating shop, which could have been whatever they chose to consolidate to, so they could have consolidated to Kroger or to an Albertsons to a regional or conventional. And some even a bid into a target or that type of environment. And they told us loud and clear, they just reduced the number of places that they were going. So anywhere they could get a full shop is where we would have seen them, consolidate a bi. In terms of the way we're planning, we haven't built the plan at the level of detail of this customer we lost? What percent of them do we think that we'll get back? I think what we're more reacting to is, we do expect through the year, that our customer health will continue to improve. And we believe a good portion of that from what the customer has told us. There is a majority of the folks, who told us they had slowed down or stopped coming to us through the pandemic, who told us that they would return. We think that will be a good proportion of where we see those gains. And but we also have an expectation that with the marketing campaigns and programs that we have out there, that we'll be able to continue to bring new customers in, as that kind of fear of COVID fear of shopping starts to subside, in the in the resonance of the messaging as of where goodness grows and what we stand for. We might be able to get a bit more reach out there is some folks who might not know about us as much today. Denise Paulonis: Definitely those new customers, I think, we built a lot of stores through that year. And it wasn't the time for people to experiment with new stores and try new things. So that's a big part of the marketing going forward. We think the stores that we did open over the course of the last year I've got a great opportunity to build, once the pandemic and it died down a little bit. Operator: Our next question comes from the line of Chris Jordan with Goldman Sachs. Your line is open. Chris Jordan: I have something, a debt free grocery store with a history of strong profitability in a world with zero percent interest rates is a crime against capital structure theory and Modigliani–Miller I'd like your perspective on your balance sheet. That's my only question. Good job, good quarter. Jack Sinclair: Thank you, the good question. Denise Paulonis: So in general, we are, we incredibly pleased to have a very strong balance sheet at this point in time. And clearly compared to prior history of the company, we currently have more cash on our balance sheets than we would planned than we would have had before, or we would plan to have going forward? And we're going to be putting a quite a bit of that cash on the balance sheet to use. And when we think about building out new stores, the technology we talked about. Our second DC coming online, so we feel good about that. And then, I think as we announced last quarter, with our share repurchase authorization, you're going to see us investing in ourselves and buying back more of our stock to go forward. And, but overall, I will take a flush with cash balance sheet for a period of time here and we will work our way back into all of that being great investments for the company go forward. Jack Sinclair: And what I would say a little bit about what we may do with that. As we look on new format stores, of which we've got a couple happening in July, there'll be elements of that that we want to try and to enter existing store base, and we'll have to think through exact to the things, particularly I'm excited about the innovation centers and how we can make that really relevant, and really effective. So, there's some things we can do with us going forward. And Denise and I often talk about such issues. Operator: Our next question comes from line of Edward Kelly with Wells Fargo. Your line is open. Edward Kelly: Jack I want to ask you, you've obviously made the argument that the company is running sort of like lower profit or lower return, promotions in the past. My question around this though is that the company wasn't really copying all that well for a number of years though and that doesn't really suggest that Sprouts was buying sales. It's probably more complicated than that but, what are we missing here, if we're just sort of thinking about it more simplistically like that. Jack Sinclair: It kind of taken me back a little bit to the kind of where we were a year and a half ago. I think my own view as to what was happening was, as the company was chasing top line, it was actually deflating top line at the same time. So buying an awful lot of empty volume and an awful lot of empty customers that not only were they attracting these, what we call the coupon clippers and we've identified those people. When they are coupon clippers were coming in, they were getting a deal, but everybody else was getting that deal, and not responding in terms of any volume. So you had the combination of the kind of target customers that we've got at the moment, being getting access to very low profit, negative profitability items, whether it be in commodity chicken or sweet corn are the things that they were chasing after. So, not only was that kind of - it was giving people something for nothing, and not generating volume and attracting customers who weren't spending anything and just losing money. So I think that's why the top line started to disappear from that, you start to see if getting into very low numbers. I think it was that downward spiral the grocers often get into where they chase it and actually you deflate it. I think that's what was happening, and we're trying to - well, we have done. We've changed the kind of momentum of that, so that we're chasing after customers who kind of value what we've got and we will promote with those customers, and there'll be promotions that are creative to us or other negative to us. And then we'll take it kind of going forward. I think that's the reason that happened. And what you find as business was becoming convinced, trying to become a conventional grocer by doing conventional grocery kind of things. And what we've tried to do is be really clear that we're a specialty grocer that we sell things that other people don't sell. We've got very big proportion of business in fresh produce. We've got a big proportion of business in bulk. We've got a big proportion of business in vitamins. And in many ways, the commercial strategy of the business was messing the differentiation and chasing after conventional, and that's we're in the middle of changing. And as we said earlier, we're in the early innings of this, but we're very clear that, where we were going was probably deflating our business and not attracting customers who are going to give you long-term profitability. Edward Kelly: Yes. And just I guess a follow-up to that. So is it's - you've heard a lot on this call, I guess right like - it's hard to imagine Sprouts getting the multiple that you probably think it deserves without this comp improving from here. How are you thinking about the timeframe around when you would expect comps to reflect, what you believe like the underlying fundamentals of this business are, and are we waiting for store growth to ramp up, and then the stores beginning to mature and then that building into the comp. I'm just kind of curious as to what the timeframe is that you think it's acceptable for comps to get to a more reasonable level? Denise Paulonis: Well we're focused on growth not comp, that's the real kind of focus on our business I think it's interesting. A lot of the grocery guys are in comps. If you look at the actual underlying growth of the business is significantly less than the comp number, we're exactly the opposite to that. So you're right, there will be some maturity in the new stores that will drive some comp sales going forward. But our focus is very much on how do we grow our business, which we've been pretty clear that we can grow our EBIT substantially into the quoting certain numbers, but we've been pretty clear that our sales growth can be north of 10% and our EBITDA growth will be north of that. If we think consistently deliver that month-after-month, quarter-after-quarter, that's the direction we're moving in and this business will move from a $6.5 billion to north of $8 billion business over the course of the next few years, and very substantial margin growth, so they're generating very significant EBITDA growth. That's the program we are on and that's what we're driving. Operator: Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Jack for closing remarks. Jack Sinclair: Yes. Thanks very much. However, we appreciate the time and I really appreciate your interest in our business and I look forward to continuing the dialogue over the next few quarters. Take care everyone. Thanks ever so much. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
SFM Ratings Summary
SFM Quant Ranking
Related Analysis

Sprouts Farmers Market, Inc. (NASDAQ:SFM) Maintains Strong Market Position Amidst Competitive Landscape

  • Sprouts Farmers Market, Inc. (NASDAQ:SFM) has seen a significant stock price increase, attributed to its impressive third-quarter earnings, surpassing Zacks Consensus Estimate.
  • BMO Capital maintains a "Perform" rating for SFM, raising its price target from $102 to $140, indicating a positive outlook on the stock's future performance.
  • The company's strategic focus on fresh, natural, and organic products, alongside robust comparable sales growth and strong e-commerce performance, positions it well in the competitive grocery market.

Sprouts Farmers Market, Inc. (NASDAQ:SFM) is a prominent grocery store chain in the United States, known for its focus on fresh, natural, and organic products. The company operates in a competitive market alongside other major players like Whole Foods and Trader Joe's. On October 31, 2024, BMO Capital maintained its "Perform" rating for SFM, advising investors to hold their positions. At that time, the stock was priced at approximately $129.65. BMO Capital also raised its price target for SFM from $102 to $140, as highlighted by TheFly.

Sprouts Farmers Market has recently experienced a notable increase in its stock price, driven by a strong performance in the third quarter. The company reported earnings of $0.91 per share, surpassing the Zacks Consensus Estimate of $0.77 per share. This marks a significant improvement from the previous year's earnings of $0.65 per share. The impressive earnings beat was fueled by robust comparable sales growth, positive traffic trends, and strong e-commerce performance.

The company's Q3 2024 earnings conference call, held on October 30, 2024, featured key participants such as Susannah Livingston, the Vice President of Investor Relations and Treasurer, Jack Sinclair, the CEO, and Curtis Valentine, the CFO. Analysts from prominent financial institutions, including UBS, Oppenheimer, and Deutsche Bank, attended the call, which provided valuable insights into Sprouts Farmers Market's financial performance and strategic direction.

Currently, SFM's stock is priced at $128.68, reflecting an 8.28% increase with a change of $9.84. The stock has fluctuated between a low of $127.09 and a high of $135.10 today, with the latter marking its highest price over the past year. The lowest price for the year was $39.98. SFM has a market capitalization of approximately $12.88 billion, and the trading volume for the day is 1,491,576 shares.

UBS Raises Price Target for Sprouts Farmers Market

  • UBS has increased the price target for Sprouts Farmers Market to $94, indicating a potential upside of 15.08%.
  • Sprouts Farmers Market's focus on health-conscious and organic products positions it well in the competitive grocery sector.
  • The company's favorable Growth Score and top Zacks Rank suggest strong growth prospects, making it an attractive option for growth investors.

Mark Carden of UBS has recently updated the price target for NASDAQ:SFM, Sprouts Farmers Market, to $94, up from its previous target. This new price target suggests a potential increase of about 15.08% from the stock's trading price of $81.68 as of June 28, 2024. This adjustment by UBS indicates a strong belief in the company's future performance and growth potential.

Sprouts Farmers Market operates in the competitive grocery store sector, focusing on health-conscious products and organic groceries. It distinguishes itself from competitors by offering a wide range of natural and organic foods at affordable prices. This unique market positioning has attracted a dedicated customer base and has positioned SFM as a compelling choice for growth investors, as noted by Zacks Investment Research.

According to Zacks, Sprouts Farmers Market's solid growth attributes are expected to allow it to significantly outperform the market. This optimism is supported by the company's favorable Growth Score and its top Zacks Rank, which highlight the company's real growth prospects beyond traditional financial metrics. These attributes make SFM an attractive investment for those looking for growth opportunities in the stock market.

However, investing in growth stocks like Sprouts Farmers Market comes with its own set of challenges, including above-average risk and volatility. Despite these challenges, SFM's strong financial growth and market position make it a standout choice for investors willing to take on these risks for the potential of exceptional returns.

The recent analysis and the updated price target from UBS reflect a positive outlook on Sprouts Farmers Market's ability to continue its growth trajectory and capture the market's attention. With a market capitalization of approximately $8.21 billion and a trading volume of 917,672 shares on the NASDAQ, SFM is well-positioned to leverage its growth attributes for future success.

Sprouts Farmers Market Initiated With Underperform at Evercore

Evercore ISI initiated coverage on Sprouts Farmers Market (NASDAQ:SFM) with an Underperform rating and a $29.00 price target, noting it views the company as likely to cede share because of significant West Coast exposure, a relatively high price perception, and mounting competition.

While credit management has successfully transformed the business in recent years, the company's premium offerings make it vulnerable to traffic and margin risks in a decelerating consumer landscape.

The analysts believe that the company's sales and margins are likely to moderate, and they expect a valuation that is relatively and absolutely at the lower end of its historical range to be appropriate.

Sprouts Farmers Market Shares Surge 13% Following Q4 Report

Sprouts Farmers Market, Inc. (NASDAQ:SFM) shares jumped nearly 13% on Thursday after the company reported its Q4 results, with net sales of $1.6 billion, growing 6% year-over-year. Comparable store sales increased 2.9% year-over-year.

The gross profit margin was well managed despite inflationary pressures, which together resulted in an EPS beat. Diluted EPS came in at $0.42.

For Q1/23, the company expects comparable store sales growth in the range of 1.5%-2.5% and adjusted diluted EPS in the range of $0.83-$0.87. For the full year, net sales growth is seen at 4%-6%, and comparable store sales growth is expected in the low-single-digits rate. Adjusted EBIT is expected to be in the range of $355-$370 million and adjusted diluted EPS in the range of $2.41-$2.53.