Sprouts Farmers Market (ticker: NASDAQ:SFM) has reported an encouraging start to 2024, with a 9% increase in sales and a 4% rise in comparable store sales in the first quarter. The company's diluted earnings per share also saw a 14% uptick from the previous year. Sprouts' online sales have notably expanded, with a 25% growth in e-commerce, now accounting for 14% of total sales. With seven new stores opened in the quarter and plans to launch around 35 by year's end, the company's expansion strategy seems to be on a solid trajectory.
The outlook for the full year remains positive, with sales growth projected between 7% and 8% and comparable sales expected to increase by 2.5% to 3.5%. Adjusted earnings before interest and taxes are forecasted to be between $415 million and $425 million, with adjusted earnings per share anticipated to be in the range of $3.05 to $3.13. The upcoming beta launch of the Sprouts Reward loyalty program was also announced, highlighting the company's commitment to customer engagement and sustainability.
Key Takeaways
- Sales increased by 9% and comparable store sales by 4% in Q1.
- Diluted earnings per share rose by 14% from the previous year.
- Sprouts opened seven new stores and plans to open approximately 35 by year-end.
- E-commerce sales grew by 25%, representing 14% of total sales.
- Full-year sales growth forecasted at 7% to 8%, with comp sales expected to increase by 2.5% to 3.5%.
- Adjusted EBIT expected to be $415 million to $425 million, with adjusted EPS between $3.05 and $3.13.
- Sprouts Reward loyalty program to be beta launched.
- Company emphasizes improved brand awareness, market presence, and positive workplace culture.
Company Outlook
- Sprouts forecasts a steady growth in sales and gross margin throughout the year.
- A focus on sustainability and community impact is central to future strategies.
- The company is optimistic about growth prospects and delivering a great customer experience.
Bearish Highlights
- Wages are expected to continue rising, impacting operational costs.
Bullish Highlights
- Strong gross margin expansion due to better inventory management and shrink reduction.
- Positive impact from increased demand for food at home.
- New stores are performing well due to improved modeling and marketing.
- E-commerce partnerships with DoorDash (NASDAQ:DASH), Instacart (NASDAQ:CART), and Uber (NYSE:UBER) Eats are successful.
Misses
- No significant misses were discussed during the earnings call.
Q&A Highlights
- The company is investing in inventory management, technology, loyalty programs, and talent.
- Low single-digit inflation has stabilized, with no major changes in customer behavior due to inflation.
- Strong performance in the frozen department is attributed to differentiated and attribute-based products.
- The growth of the business mix to 21% is linked to the focus on unique health-based products.
- The company is not concerned about competition from private label brands and remains committed to its differentiated product strategy.
Sprouts Farmers Market's first quarter of 2024 sets a robust tone for the year, with the company leveraging both physical expansion and e-commerce growth to cater to a health-conscious customer base. The success of their differentiated product offerings, particularly in the frozen department, and the anticipation of a new loyalty program indicate a strategic approach to market competition and customer retention. With a clear emphasis on innovation, sustainability, and community impact, Sprouts Farmers Market appears to be nurturing a solid foundation for continued growth and market share gains.
InvestingPro Insights
Sprouts Farmers Market (SFM) has demonstrated a promising start to the year, and the InvestingPro data underscores the financial health and market sentiment surrounding the company. With a market capitalization of $6.48 billion USD, the company's size and stability in the sector are evident. The adjusted P/E ratio for the last twelve months as of Q1 2024 stands at 19.98, indicating the market's valuation of the company's earnings. Moreover, the Price / Book ratio of 5.35 suggests that investors are willing to pay a premium for the company's net assets, possibly reflecting the market's confidence in Sprouts' growth potential and management effectiveness.
InvestingPro Tips highlight several strengths and considerations for investors. Notably, Sprouts Farmers Market has been profitable over the last twelve months, with a strong return over the last year, as evidenced by a 69.81% one-year price total return. The company's cash flows are robust enough to cover interest payments, which is a reassuring sign for debt management. Additionally, liquid assets exceed short-term obligations, ensuring that the company has the liquidity to meet its immediate financial needs.
InvestingPro offers further insights into Sprouts Farmers Market, with 11 additional tips available to help investors make more informed decisions. These include metrics such as the company's moderate level of debt and the prediction by analysts that the company will be profitable this year. For those seeking to delve deeper into Sprouts' financials and market performance, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at https://www.investing.com/pro/SFM.
The company's robust performance, coupled with the insights provided by InvestingPro, paints a picture of a business that is not only growing but also managing its finances prudently. This information can be invaluable for investors looking to capitalize on Sprouts Farmers Market's market movements and strategic initiatives.
Full transcript - Sprts Frmr (SFM) Q1 2024:
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Susannah Livingston, Vice President, Investor Relations and Treasurer. Please begin.
Susannah Livingston: Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our first quarter 2024 earnings call. Jack Sinclair, Chief Executive Officer; and Curtis Valentine, Chief Financial Officer are with me today. The earnings release announcing our first quarter 2024 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website at investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2024 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings and the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP measures. Please see the tables in our earnings release to reconcile our non-GAAP measures to the comparable GAAP figures. With that, let me hand it over to Jack.
Jack Sinclair: Thanks, Susannah and good afternoon, everyone. I want to start by thanking our 42,000 hardworking team members, who worked together to create a great experience for our customers, which in turn delivered impressive financial results. Our sales have grown by 9% with comparable store sales growing by 4% and diluted earnings per share growing by 14%, compared to adjusted diluted earnings per share in the same period last year. These positive results reflect the effectiveness of our strategy and the exceptional execution by our team. It has been a strong start to the year and we're encouraged by the continued momentum in our business. Our entire approach across the business remains centered around our target customer. We've aligned our merchandising, marketing, operations, new store design and supply chain strategies to provide the freshest most innovative attribute driven products in the marketplace. We've also created a unique and easy to shop format with great service. During the first quarter, we organized Sprouts brand and organic events, which were highly successful. These events and others led to positive customer traffic growth in the first quarter. We are pleased to bring Sprouts to more communities across the country. The new store program continues to gather pace. We opened seven for the quarter and are on track for the year, And we're committed to helping our customer live and eat better with every new store opening across the country. I'll follow-up with more on our journey in just a bit, But for now, I'll hand you over to Curtis to review our financial performance in the first quarter and our 2024 outlook. Curtis?
Curtis Valentine: Thanks, Jack, and good afternoon, everyone. For the first quarter, total sales were $1.9 billion up $150 million or 9% from the same period last year. This increase was driven by comparable store sales growth of 4% and the addition of new stores. We had another quarter of positive traffic and as expected, average unit retails and units per basket continued to stabilize sequentially. Our business continues to be resilient. Our comp performance highlights the categories with the most differentiation such as grocery, dairy, frozen and meat continue to attract our target customers and drive our results. Sprouts brand growth continued to outpace total company performance and contributed 21% of our total sales for the quarter. Our e-commerce sales grew approximately 25%, representing 14% of our total sales for the quarter. This included incremental sales from our recently launched Uber Eats partnership and all three of our online partners joined us in promoting healthy trends to create momentum in the New Year. The fact so many of our target customers seek out Sprouts online continues to highlight the appeal of our differentiated assortment. Our first quarter gross margin was 38.3%, an increase of approximately 80 basis points from the same period of the prior year. This improvement was primarily due to a significant turnaround in our fresh shrink performance, driven by our continued focus on inventory management. We also continue to see year-over-year margin improvement due to promotional optimization efforts carrying over from 2023. SG&A for the quarter totaled $540 million, an increase of $57 million or approximately 80 basis points of deleverage compared to adjusted SG&A from the same period of the prior year. As anticipated, the first quarter was impacted by approximately $4 million in holiday pay, with the New Year's Day falling in the 1st day of fiscal 2024. Our strong sales performance led to higher e-commerce fees, as well as higher incentive compensation for the team. Last quarter, we shared our plan to invest $15 million in 2024 to build a foundation for sustainable long-term earnings growth and we are on track with approximately $2 million spend in the first quarter. Store closure and other costs totaled approximately $2 million for the quarter. These are primarily related to the ongoing occupancy costs from our 2023 store closures. Depreciation and amortization, excluding depreciation included in the cost of sales was $32 million. For the quarter, our earnings before interest and taxes were $148 million, interest expense was approximately $1 million and our effective tax rate was 23%. Net income was $114 million and diluted earnings per share were $1.12, an increase of 14% compared to adjusted diluted earnings per share from the same period of the prior year. During the first quarter, we opened seven new stores ending the quarter with 414 stores across 23 states. A strong and healthy balance sheet has underpinned our financial performance. We generated $220 million in operating cash flow, allowing us to self-fund our investments of $46 million in capital expenditures, net of landlord reimbursement to grow the business. We also returned $60 million to our shareholders by repurchasing nearly 1 million shares. We have $148 million remaining under our current share repurchase authorization. We ended the quarter with $312 million in cash and cash equivalents, $125 million outstanding on our $700 million revolver and $21 million of our outstanding letters of credit. Turning to our outlook, for the full-year, we expect total sales growth to be between 7% to 8% and comp sales in the range of 2.5% to 3.5%. We plan to open approximately 35 new stores, all in our current prototype. Adjusted earnings before interest and taxes are expected to be between $415 million and $425 million and adjusted earnings per share are expected to be between $3.05 and $3.13 assuming no additional share repurchases. That said, we do expect to continue to repurchase shares opportunistically. We also expect our corporate tax rate to be approximately 25%. During the year, we expect capital expenditures net of landlord reimbursements to be between $225 million and $245 million. To add a bit more color to the full-year, we expect gross margins to be up as we continue to focus on initiatives to improve shrink and annualize our promotional optimization work from 2023. On the cost front, we expect ongoing wage increases, new store deleverage and our strategic investments to pressure SG&A resulting in additional deleverage in 2024. For the second quarter of the year, we expect comp sales in the range of 3% to 4% and adjusted earnings per share between $0.75 and $0.79. We are expecting more moderate year-over-year impacts in both gross margins and SG&A as we lap fewer outliers in our second quarter comparison, resulting in gross margins up slightly, while SG&A will deleverage slightly. And with that, I'll turn it back to Jack.
Jack Sinclair: Thanks, Curtis. We remain committed to serving our customers, our health enthusiasts with products that help them live and be better. Our team is dedicated to finding innovative and distinctive products with attributes such as organic, gluten free, grass fed or vegan that set us apart from others. The success of our foraging program has continued as sales on our innovation center continue to grow and we believe we have become the destination for exciting entrepreneurial food companies to introduce their unique products to the marketplace. This innovative spirit lives within our Sprouts brand and culinary teams as they continue to add hundreds of new items like hot honey chicken tenders, non-dairy frozen desserts, and flavored cauliflower rice. Additionally, as I mentioned earlier, in store experience and customer engagement remain paramount for us. Part of our appeal is our friendly and knowledgeable team members who help customers navigate differentiated assortment available to them. The team's dedication to our customers in the first quarter resulted in some of the highest customer service scores in our history, a remarkable achievement. Sprouts is incredibly fortunate to have the support of many customers who truly love our brand. As a complementary shop, we have an opportunity to deepen our engagement with our customers and grow their share of wallet through a loyalty program. Our vision is to distinguish our program by enhancing what our brand already does, helping our customers and their passion to live and be better. This is a multiyear endeavor that will enable Sprouts to build a thriving community where our customers can engage with our brand and we can provide them with personalized content catering to their unique shopping preferences. Our upcoming beta launch of Sprouts Reward in two markets this quarter is just the beginning, and we're excited to continuously improve the program by incorporating feedback from our customers and team members to enhance the experience, functionality, and technology over time. One of the reasons our customers and team members love Sprouts is because our values are aligned. We all care deeply for our communities and the planet. We recently published our 2023 impact report highlighting our work in areas we believe matter most to our target customers. Areas such as responsible sourcing of sustainable products, waste reduction, and supporting the communities we serve. In 2023, $3.3 billion of our sales were from products with social or environmental attributes. Our transition to reusable bags removed approximately 130 million single use bags from circulation and our stores donated 29 million meals to those in need within our communities. It was exciting to see our team members support our Healthy Communities Foundation by donating over 5,500 service hours to build school gardens that help kids grow healthy through nutrition education. I encourage you to read through the report to get a flavor of our focus areas and impact. I was delighted with the opening of several new stores during first quarter from Cuddy, California to Bartonsville, Maryland. In the first quarter, we launched seven new stores and are on track to open approximately 35 by the end of the year. We have an extensive pipeline of approximately 100 approved new stores and 70 executed leases, a testament to our commitment to expanding our brand and access to healthy foods in more communities across the country. We've also seen improved new store openings this year and we attribute much of the success to better brand awareness as we continue to densify markets and we have growing confidence in our real estate site selection model, which continues to evolve. These improved openings coupled with continued comp momentum in newer markets and our robust pipeline will support our growth aspirations. Internally, our team is making great progress in building a best-in-class workplace through our values and culture. Our retention rates are currently at an all-time high, which is a tribute to the intentionality behind this work. We're seeing improvement across the board in our team member engagement scores and believe this focus on culture is translating into the great customer service scores that we're seeing. We know that our journey towards improving our culture is ongoing and we are excited for the progress we've made thus far. In addition to the culture work, we're focused on preparing our leaders for growth. We aim to have a pool of skilled team members ready for future assignments. We typically promote close to 60% of store managers from within. To prepare them for leadership roles, we have developed Assistant Store Manager leadership tracks. Over 30 graduated this year from our initial cohort and another 50 team members entered the program in 2024. In closing, the continued momentum we are seeing is a demonstration of the effectiveness of our execution. We're delighted to receive encouraging feedback from our customers, which confirms that our collective efforts are making a meaningful impact. Our store distribution center and supporter office teams are ambitious for Sprouts future and are determined to deliver on the opportunities that lie ahead. Moving forward, we remain focused on execution, both day-to-day in our stores and on our investments for the future, all while keeping customers our top priority. Thank you for your support and we look forward to connecting with many of you in the coming months. And with that, I'd like to turn it over for questions. Operator?
Operator: Certainly. [Operator Instructions]. Our first question will be coming from Leah Jordan of Goldman Sachs (NYSE:GS). Your line is open.
Leah Jordan: Thank you. Good afternoon and great job on the quarter. Just wanted to start off on the comp. What was the primary driver for the outperformance versus your expectations? How did traffic trend throughout the quarter? And what do you attribute to the recent market share gains?
Curtis Valentine: Hi, Leah. Thanks for the note there. So yes, comps outperform, it's really coming from a lot of different things. I think it's a little bit of everything just being a little bit better than we expected. So continued positive solid traffic, the AUR and the unit stabilizing as expected, and the business just continuing to come along. So we're pleased with the performance in Q1.
Jack Sinclair: Yes, we're seeing positive traffic in both e-comm and in our bricks and mortar business. We're seeing positive traffic in terms -- positive basket in both of those panels that we have. So we're kind of feeling positive about that. And basically, everything seems to be in good shape.
Leah Jordan: Okay, great.
Jack Sinclair: And the market share gain question you asked, Leah, just to comment on that a little bit. We kind of -- market share is difficult for us. We kind of look at our own business and see how well it's doing, because it's very difficult to define what we do within the context of the total grocery market share. But certainly in the last -- since the pandemic, I think people have been more comfortable in shopping in more places, which suits us as a complementary shop.
Leah Jordan: Okay, great. That's very helpful. And then a number of follow-up. I just wanted to ask about gross margin. I mean, it came in really strong expansion in the quarter. You talked about some of the tailwinds earlier. Just how should we think about it for the balance of the year? How much of the magnitude will moderate on the promote optimization side for the rest of the year? And then you said it would be up for the full-year. Any more color compared to last quarter when you said it would be up 20 to 25 basis points given the strength in the first quarter?
Curtis Valentine: Yes, sure. I think so for the year, I would say up approximately 50 now. So certainly we got better flow through in the first quarter than we expected and it was really a shrink story. And we talked about on the last call, but we had challenges throughout last year and particularly in the second half and really credit to the teams, they got on top of it late last year, and that turnaround just happened a little faster than we expected and resulted in really good performance. Really just to focus on inventory management and some of the things that we're investing in and the teams really working together, be it operations, merchandising, some of our analytics teams and our IT team coming together to help the business, figure things out and get things moving in the right direction. But yes, for the full-year, I've expect it up about 50 on the gross side.
Leah Jordan: Thank you.
Operator: And one moment for our next question. And our next question will be coming from Mark Carden of UBS. Mark, your line is open.
Mark Carden: Great. Thanks so much for taking the questions and nice quarter. So to start, maybe a follow-up on that last gross margin question. Obviously, a lot's going right now, clearly benefited from shedding coupon clippers. 1Q is historically your strongest quarter from a seasonality perspective, the strong performance inventory management. Just thinking about 1Q relative to maybe 1Q next year, was this pretty much a perfect backdrop for you guys? Are you approaching upper bound? Or do you still see more room to go from here? So in other words, when you think about the benefit in the back half of the year, is that just these current tailwinds or do you see really more rooms go up?
Curtis Valentine: Yes, I think we're pleased with there's a lot in that. So I'll try to tackle them piece-by-piece, but we feel good about our margins. Certainly bottom line, we expect to be a stable business and the gains we're experiencing there in gross margin, there's nothing in there that was particularly one time in nature. It was a soft compare year-over-year, which definitely helped from our overall magnitude perspective. It won't be quite that big going forward. But again, we feel good about the work that we're doing and we feel like it's sustainable and that we're kind of changing the water level and shrink here moving forward, and it will be a little bit better here in 2024 than it was in 2023. And longer-term, we've -- we talk about it a fair amount. We're still a fairly immature business, so there are opportunities. There are pressure points as well and net-net, we plan to manage the business to stable on the bottom line and continue to grow the business.
Jack Sinclair: And Mark, the gross margins particularly, there's kind of buckets that we look at, shrink certainly been a big benefit for us in this quarter. And I think there's continued opportunity. As Curtis said, the immaturity in our business as we get better at managing inventory with some of the systems that we put in and are applying increasingly more effectively. I think there's some further benefits on that going forward. We're getting a little bit better at promoting more effectively and understanding the elasticities of when were that's been an ongoing thing over the last few years. And I think we're just gradually getting a little bit better of being efficient at promoting when we do promote. And there's been some drivers on mix, which I think will continue to help us in terms of mix towards organic and mix towards some of the more attribute based products that we work increasingly getting a reputation for. I think those three buckets will help us going forward.
Mark Carden: Great. That's helpful. And then as a follow-up, we've heard about some pressure on restaurant demand recently. Do you think Sprouts has been experiencing much trade in from outside of food at home? Have you seen any uptick in prepared food sales or do you think it's mainly just coming from within food at home?
Jack Sinclair: No, I think we've got -- we have had some benefit from that. I've been very pleased by the investments we've made that the team have made inside the stores. We've put a number of new cabinets in to support the meals space from both the meat business and the dairy business and we've seen some good benefits on that. Our frozen business has been strong. So there kind of three big buckets that come basically from people eating at home as opposed to eating in restaurants. I do think we've had a bit of a benefit from that. And who knows how the economy is going to go over the next six, nine, 12 months. But I think it's more likely to be a benefit than a disbenefit going forward.
Mark Carden: Makes sense. Thanks so much and good luck.
Jack Sinclair: Thanks, Mark.
Curtis Valentine: Thanks, Mark.
Operator: And one moment for our next question. Our next question will come from Michael Montani of Evercore ISI. Your line is open.
Michael Montani: Hey, thanks for taking the question. Wanted to focus in on two areas, if I could. One was just on shrink. I think for you all, it's more a story of efficiency gains versus theft. But just wondering if you can give us some incremental color there, Jack, in terms of what you've seen and what the opportunity could be? And then secondly, on the wage and benefit front, so can you just provide an update about what you all are experiencing there and what you're looking for this year in that line item?
Jack Sinclair: Sure, Michael. I'll let Curtis add a little bit more color on the two buckets. Shrink, we've made some benefits particularly in our fresh shrink. And as you correctly say, it's less likely -- we don't experience the kind of theft that you're hearing from a lot of the non-food retailers going forward, partly because our attribute products are so differentiated. I think it's harder for people to steal them and sell them on to be honest with you. So I think we're getting -- we're not seeing the kind of issue in that space that a lot of other people are doing, although we continue to watch it. The real benefit lies in how we manage our fresh inventory and we've got a bigger fresh mix than most. So the opportunity is bigger going forward as we get into these much more better replenishment systems. We've got an initiative around here called FARM, which is Forecasting Allocation Replenishment Management, which is allowing us to -- I think get better at putting the right amount of inventory in the stores at the right time. And we're immature in this, Mike. So that remains a continued opportunity going forward. And we're kind of I'm very pleased the way the teams and the operations teams have really got made some progress on that with a lot of support from the merchants and the IT teams. With regards to wages and benefits, one things we're very encouraged about is the retention rates that we're having in our stores, and we think that's having a positive benefit. You don't have to pay as much for training. You don't have to pay as much for enrollment. So the fact that we're operating a very significant improvement on retention gives me a lot of confidence that the way the teams are managing each other is a positive and is working well. And as I alluded to in my remarks, I think some of the work that we've done on culture and values and purpose is beginning to pay dividends in actual improved retention. Wages are going to continue to rise and we've got that in the numbers going forward. And our benefit -- one of the reasons that we think retention is working as we're doubling down on communicating the benefits that we get whether it'd be health care benefits and bonuses. We pay bonuses quite a number of stores, everybody in the store gets a bonus. The leadership team well over 90% of the leadership team in every store got a bonus and that's those numbers are significantly rising and it's also financing. So we're very positive about the way our bonus programs have been working. So I don't know whether you want to add something to that, Curtis?
Curtis Valentine: No, I think the only color maybe on shrink is about we talked about just about 75% of our shrink is in the fresh side. So just to add some context to that that tough piece is pretty small for us as Jack alluded to.
Michael Montani: Great. Thanks and good luck.
Jack Sinclair: Thanks, Mike.
Operator: One moment for our next question. And our next question will be coming from John Heinbockel of Guggenheim Securities. Your line is open.
John Heinbockel: So, Jack, let me start with, what do you want to learn from the two test markets with the loyalty program? And where do you think the benefit lies, right, traffic basket. And I don't know if it's hard for you to figure out your wallet share, but how do you think about that?
Jack Sinclair: Yes, John, great questions and they very much relate to -- we first of all, the benefits will come in 2025. The work that we're doing in 2024 is first of all to get the plumbing right and the pipework right, so that we've got the proper marketing technology behind creating a very efficient experience for the customer, So there's seamless and efficient experience. The two test markets that we're doing, we'll learn whether that works or not and we'll get it. We'll iron out the kinks in that. And then by the end of the year, we'll extend that to a pilot in a broader sense with more stores. So through 2024, we will learn how to do this as when it comes to 2025 and that will be an iterative process as well. What do we expect to happen? As you alluded to, we're expecting an increase in share of wallet of our target customers. I think we'll be able to understand those customers so much better that we'll be able to increase. And we've got a measure -- some measure of what where we are in terms of share of wallet. And I think we've talked about that in the past. It's double-digit, but it's not hugely into the double-digits above the kind of low teens. And that context, that's the context that we'll be expecting to drive a little bit more of share of wallet from those target customers and that will more than fund this and pay for this thing going forward. So as I said, the benefits will come in 2025, the learnings will come in 2024. The first elements of the learnings are about technology and marketing technology. The second elements of the learning are about understanding our customer, so that we can stimulate and create this feeling of being part of something special by being a Sprouts customer -- by being part of the Sprouts ecosystem. And we're pretty excited about it. The team are doing a lot of work behind the teams as you can imagine, and we're excited about what's going to come out at the other end, John.
John Heinbockel: Maybe second thing, right. You're obviously adding a lot of stores this year and you did last year a little bit in the Northeast. So when you think about the timing right of that D.C., so how do you think about that now and how far can you push the envelope? I know the idea was going well beyond potentially well beyond produce, in all of the D.C.s. How far can you push that?
Jack Sinclair: Again, there are -- we've created the infrastructure that allows us to have choice in this and linking back to what I was saying about our farm initiative. When we get our replenishment mode in place that I wanted to get in place, we'll have a lot of optionality. We want to get more control of our Sprouts brand business going forward. We probably think there's some elements of our fresh business that we can take hold of. We've got capacity to do that. As you alluded to, we've not quite got there in the Northeast yet, but we will be. There's a lot of work going on about what's the right distribution, where the right place for the distribution is and what the optionality is for us in that space. I'm hoping we'll be there by 2026 at the latest in terms of having that in place. So we've got -- we're creating the optionality by the work we're doing now. And going into 2025, you'll definitely see us selling doing more than produce.
John Heinbockel: Thank you.
Jack Sinclair: Thanks, John.
Curtis Valentine: Thanks, John.
Operator: Thank you. And one moment for our next question. And our next question will be coming from Rupesh Parikh of Oppenheimer and Company. Your line is open.
Rupesh Parikh: Good afternoon. Thanks for taking my question. Also congrats on a nice quarter. So just on the e-commerce front, so as you've added Uber Eats, DoorDash in recent years, just curious if you're seeing the incrementality at this point you would have expected with these additional partners?
Curtis Valentine: Yes. We're really pleased with all three partners. We've seen strong business out of all three. They did a really nice job in the New Year, the healthy fresh start to the year that everyone goes through, it's a big time for us and they were great partners in that respect. And yes, it's been incremental as expected. So we've added both partners over the last two years and we've seen really strong results.
Jack Sinclair: And the good thing about it Rupesh as you've got DoorDash and Uber Eats, both got kind of different customer base. So I think we're bringing some access to the assortment that we have to a slightly broader base. So it's been working well as Curtis said.
Curtis Valentine: They play a little differently geography wise too. So again, it's allowing us to access new and different customers and it's an increasingly omni channel world and then that helps us as well from a convenience standpoint for those customers that are a little further away from our stores.
Rupesh Parikh: Great. And then maybe just one follow-up question, just given all the concerns out there in the macro, clearly, your business is performing quite well, but just curious what you're seeing from the consumer. Any new trends to note or just anything -- any changes what you're seeing with your consumer?
Jack Sinclair: Well, one of the things we've always talked about is that we feel pretty confident that the assortment that we have if you're a vegan, you're going to stay vegan irrespective of what's going to happen in the macro world. So we feel there's some more to feel like to the macroeconomic environment. I think there is a lot of uncertainty and we continue to watch it very closely. We believe that what we are doing and targeting those specific health enthusiast customers. There's a few more of them, again, whatever happens in the macro environment and we feel that that's going to stand us in good stead going forward over the next couple of years as that customer base continues to grow and we continue to work hard at serving that customer base appropriately. So again, I don't want to dismiss the macro environment, but it's something that we think we're a little bit shielded from them, almost from them whatever happens here. And to be honest, Rupesh, your guess is as good as me what's going to happen in the macro environment.
Rupesh Parikh: Great. Thank you. Best of luck.
Jack Sinclair: Thank you.
Curtis Valentine: Thanks.
Operator: And one moment for our next question. Our next question will come from Scott Mushkin of R5 Capital. Your line is open.
Scott Mushkin: Hey, guys. Thanks for taking my questions. So kind of a two part question here. So I mean, obviously, margins have been trending up and you talked about it being stable. But just from like a company philosophy perspective versus margin rate versus margin dollars, where do you kind of think the rate is kind of where you want it to be and you're going to focus more on the dollars and even accelerating sales more?
Jack Sinclair: Yes. Scott, let me have a start to that and then I'll pass it on to Curtis to talk specifically on the margins. Our primary focus is traffic and top line. And then everything we're doing is making sure that we're serving our target customers better and better. And we will be able to manage our margin within that context, but we'll be sensitive to it in terms of how that works going forward. Having said that, I think the elements of what we've talked about in terms of shrink, in terms of the mix of the product and the better thinking around our promotion or evolving thinking on our promotion gives us opportunities going forward. But at no stage will we compromise margin or customer top line if there's an interaction between it. So far we haven't hit that point and I'm feeling pretty confident about that we can manage both pretty effectively. But as I say, the important thing for us is traffic.
Curtis Valentine: Thanks, Scott. I'd just add to that. I mean, I think about it on the bottom line and EBIT margins being stable and we feel really good about being able to do that in the short term, long-term, et cetera to what Jack spoke about. And sometimes that will mean a little bit of investment in SG&A, I feel like an inventory management investment, so that we can get a better shrink. So we're going to work the immaturity in our business and sometimes that'll fall in a gross benefit and sometimes that'll be an SG&A benefit, but really we're focused on that bottom line stability and maintaining that going forward and we feel pretty good about being able to do that.
Scott Mushkin: So my follow-up question to that is, let's just say the strength in the business continues. Obviously, you guys have had a nice little string of quarters and it seems like the customers coming your way, macro may not matter as much. So if this strength of the business continues, what areas would you invest in more over the next couple of years?
Curtis Valentine: I think it's the same places we're investing this year will be key components, right. So inventory management, we've talked about, the technology underpinnings for scalability. We'll continue to work on that and make sure we have the right foundation to continue to grow. And then loyalty will be a multi-year journey that we will continue to improve upon. And I think the last piece is team and talent is critical for us, as we've got to continue to find store managers, department managers and great team members who engage with the customer, take care of our target customers and provide a great experience in the store. So those would be the places that we'll continue to double down and make sure that we've got the right foundation or scalable for the long haul.
Jack Sinclair: And we need to invest going forward, supply chain is going to be important to us as well, Scott, in terms of making sure that we're giving ourselves the options of supplying maybe broader geographies and where we're at the moment. That's not for now. But as we go forward, there's plenty of places in the country that we don't have a Sprouts store. So we continue to accelerate that as we continue to see success and strengthen our business.
Scott Mushkin: Perfect, guys. Thanks very much.
Jack Sinclair: Thanks.
Curtis Valentine: Thanks, Scott.
Operator: And one moment for our next question. Our next question will be coming from Robbie Ohmes of Bank of America (NYSE:BAC). Your line is open.
Robert Ohmes: Hey, great quarter and thanks for taking my questions. Jack, can you talk a little more about the new store performance in the first quarter? It was a pretty significant improvement in your new store productivity. And I know you mentioned a little bit, any more color on where stores opened a lot, say, earlier in the quarter? Like how did -- how was there such a dramatic improvement in new store productivity?
Curtis Valentine: Well, it's only seven stores and we were pleased by how those seven stores performed. Most of them are six of the seven stores we're very pleased with. But I think partly is what I alluded to in the remarks. I think we're seeing the success of our new store modeling, just beginning to find the right place a little bit more accurate in terms of where we open stores. And that's something that's encouraging. I think again, when you look back when we open stores during the pandemic, I think it was harder to drive traffic to those stores as people were reluctant to go to lots of places to buy their groceries. And we talked a lot about that probably over our conversations in the last couple of years. So I think the benefit we're getting a better store model. I think we're getting a little bit better at marketing. I think putting the right -- putting concentrating stores, so that we've got more stores in geographies. People are beginning, awareness has always been a challenge for us in markets where we're not known and getting more of them and driving that awareness. I think Florida has helped us a little bit in that sense, the work we've been doing in Florida. We're up to a significant number of stores there and now we're filling in and that's I think benefiting us as well going forward as we build this -- as we build the store program. And I think we'll see that benefit start to happen fairly significantly in the mid-Atlantic going forward as we go into the next couple of years, because we've got a lot of stores coming in all sorts of places. And we think there's some real benefit by having that concentration in our store portfolio.
Robert Ohmes: And any regional any more regional differences to call out? You mentioned Florida, but were any regions particularly stronger this quarter than others or types of markets new versus existing?
Jack Sinclair: No, I think the trends have been pretty consistent for us. We're not seeing any major departures from what we've seen last several quarters. The new markets are performing well. We're excited for the momentum, but it's kind of come in similar to what we've seen in prior quarters.
Curtis Valentine: And it has given us a lot of encouragement when we open at place like Bartonsville, Maryland, where the team are doing a terrific job. That is making us real confidence. We kind of expect -- change that we expect to do well in California, but we're doing well outside of that as well. So that's very encouraging and Florida as we talked about.
Robert Ohmes: That's great. Thank you.
Curtis Valentine: Thank you.
Operator: One moment for our next question. Our next question will be coming from Kelly Bania of BMO (TSX:BMO) Capital Markets. Your line is open. Again, Kelly Bania of BMO Capital Markets. Your line is open.
Kelly Bania: Hi, thanks for taking the questions. This is Kelly Bania. Just wanted to follow-up on the e-commerce topic. Are DoorDash and Instacart still growing? I assume maybe some of the outsized growth here is coming from the newest partner, at Uber. But just wondering if you could talk about that. And also just to see structures, are they similar for Sprouts and for consumers across the three or is there any preference, I guess from your vantage point between the different partners? And then also just to follow-up on competition with e-commerce, would you expect any competitive impact from Whole Foods given the new membership model that they recently announced with Amazon?
Curtis Valentine: I'll cover kind of the first couple of those and maybe I'll let Jack cover the last one. But all three are really performing well for us. So we're really pleased with the results in all three and I won't get very specific, but definitely all three are growing and we're seeing strong overall e-comm performance. On the fee structure, again, won't get into specifics there, but we're comfortable with the fees we have. We work closely with our partners and for us, there's really no preference between the three. Wherever the customer wants us to be, we're happy to be there for them and if they want to go through the stores, great. If they want to go through Instacart rate, DoorDash, Uber Eats, however they want to engage with us, we're happy to have them.
Jack Sinclair: And to be just to reinforce what Curtis said, we're very pleased with all three partners. They do a great job for us and all three of them are performing well in the context of our e-comm growth. With regard to the Amazon (NASDAQ:AMZN) Whole Foods conversation, Kelly, we watch Whole Foods. Amazon have made a lot of statements about food and fresh and we kind of watch them with interest. We feel our positioning is pretty strong against Whole Foods, which is the context of this that I would look at. In terms of value on produce, particularly organic produce, We feel we're in a really strong place for the customer irrespective of whatever the delivery charges are. We're in a good place relative value on fresh produce, which is an important part of our mix, less important part of their mix, but an important part of our mix. So we look at that carefully and we watch the pricing versus Whole Foods pretty carefully on everything else, but produce. And we feel we're in a pretty good shape there. And we watch it carefully, but it's not something that's got us, we feel as if we're in a good place position versus Whole Foods on product and pricing, irrespective of what's happening on the delivery charges. And that's one of the reasons we think our e-comm business is so strong. The differentiation that we have, why would you buy all your groceries through e-comm to Sprouts unless there was a really strong differentiation. And I don't think it's easy to switch. So that's what gives us some confidence, but obviously we'll watch it closely.
Kelly Bania: Thank you.
Jack Sinclair: Thanks, Kelly.
Operator: Thank you. One moment for our next question. And our next question will be coming from Chuck Cerankosky of Northcoast Research. Your line is open. Again our next question will come from Chuck Cerankosky of Northcoast Research. Your line is open.
Chuck Cerankosky: Hello.
Operator: Your line is open.
Chuck Cerankosky: Okay. Good evening, everyone. Jack and Curtis, can you talk about inflation in the 4% comps was in there and how are your customers are reacting to categories or SKUs that are inflating more than the average?
Jack Sinclair: Yes. So from the kind of comp driver makeup solid positive traffic again this quarter and then continued stabilization in the AUR and unit story. So a little bit less inflation this quarter than last. And we're really to that place now where it has stabilized. We're low single-digit inflation. We're still slightly negative on the unit side, but getting closer to flat with each passing kind of quarter and month end, it's all playing out as we had anticipated. And then from a customer perspective, we're not really seeing a material change in our trajectory and trends there. I think the similar things that we were talking about in prior quarters are continuing to play out, but no major reaction or change in customer behavior as it relates to inflation or price there.
Curtis Valentine: Yes and Chuck, the categories that you see the most volatility is the fresh produce areas, when you see avocados going up dramatically or coming down dramatically, we will double down and neither sell a bit less or sell a bit more and customers do react to price in the fresh produce space linked to the inflationary trends that are happening in that category. And it's very volatile, which is one of the reasons our inflation doesn't quite matter what you see with everybody else. But to Curtis' point, we're not seeing any specific categories that are going up so much that we're worried about the unit volume any more than we kind of always have been.
Chuck Cerankosky: And I've -- you've made a lot of strides in private label and that's being helped by people looking for value with the inflation even as it slows down. How does that trading off with all the new products in your innovation centers?
Jack Sinclair: Yes, well we're trying to be balanced on this. We're not in the world of private label where it's about trading down or commoditizing against brands. We've got very clear about what our proposition is here. We're going to have innovative differentiated Sprouts brand and the relabeling and the new products that the team have done have been very encouraging. I think we've talked about 21% mix of our business, which is a really encouraging number in terms of where we used to be at 16%, but it's being driven by differentiation as is the branded businesses that are going into the innovation center. We are trying to be the destination for new entrepreneurial products in our health -- in our attribute health based space. And if you look around our innovation centers, which are now in all our stores and continue to perform well, it's a very strong brand, kind of unknown brands that have got real kind of sense of differentiation and excitement for our customers and our team members. We want to be really good at Sprouts brand on differentiated product and really good at branded items. And we'll keep away from those branded items that you can find in traditional supermarkets and traditional and then the mainline Walmart (NYSE:WMT)'s and people like that. We are going to try and be as different as we possibly can be. And I think that's standing as in good stead going forward.
Chuck Cerankosky: Thanks very much.
Jack Sinclair: Thanks.
Operator: And one moment for our next question. And our next question comes from Robert Dickerson of Jefferies. Your line is open.
Robert Dickerson: Great. Thanks so much. This might sound like kind of a random question, but I'm going to ask it. I'm just curious. How is your frozen department doing? And I just ask because I follow all the groceries, but I also follow companies that produce frozen products. So let's say frozen food in general has been kind of relatively weaker right over the past year or so in the volume side versus a lot of the other store. But, again, you have differentiated product. So I'm curious, would you say, our frozen department, we're seeing a little bit of pressure or maybe you're not, which would clearly be a differentiating factor?
Jack Sinclair: Yes, Robert, it's not too random a question. It's the kind of things we think about a lot of what's happening with different categories. So our frozen business, I think what happened during the pandemic is that frozen got a pretty big lift and there was a pretty big in that right across the marketplace. I think we have -- we doubled down in our stores on space and our new stores we're giving it more space than we used to give it, because we believe the category that is frozen, it lends itself well to attribute based products, it lends itself well to vegetarian based products, plant based products and we've seen some success. I've been really pleased with some of the Sprouts brand work that's really playing through well for us in the frozen cabinet. So I don't know what's happening in the broader market. I think there was a boost through the pandemic and it might have slowed down a little bit in the broader market. But in our space, we are seeing some really strong comps and I'm encouraged by what's happening in frozen. And I honestly don't know if that's in line with what's happening in the rest of the market, Robert, but that's where we're at on it.
Curtis Valentine: Yes. And I think, Rob, I would just attribute that to it's a differentiated -- it's a differentiation story, in our departments and categories where we have the most differentiation. Those are the departments that have been drivers for us for comp and frozen is among those and team does a great job with the assortment making a difference as Jack alluded to, and that just fits well within that broader story of where we're different, we continue to do well.
Robert Dickerson: Yes. That's great. And then I guess maybe just a broader question. I know you continue to highlight the newer stores or some of the smaller stores, merchandiser stores with [indiscernible] critical more prioritized categories that maybe a better growth potential. If you're going from, I don't know, 30,000 square feet, 25,000 or these are like drastic changes on the box size. I mean, they're smaller, better economics, everything. That's great. I'm just curious, like then where do you trim? Does it like produce get a little bit smaller, 35% of the store? I'm just trying to understand, I guess, more broadly kind of we now if you're opening up a new store now, where would you view those better growth areas?
Jack Sinclair: Yes. Well, the 23,000 square foot stores that we're building, that's what we're building going forward, the 35,000 we do this year and the numbers that we'll do next year, they'll all be 23,000 by and large, 23,000 square feet. What did we do? We cut back fairly significantly the non-customer facing space. So the space is required to create the debt behind the scenes in dairy, behind the scenes in bakery, behind the scenes in meat. We merged them all together. We created a lot more space in the back room than we've done took a lot more space out of the back room. So the consequences for the categories going forward is we ended up with a slightly less SKU assortment in our vitamins and supplements department, slightly less, but the rest of the category is actually frozen got few more SKUs as I just alluded to and across the rest of the stores is pretty the same skew count. Category wise, we chased after -- we continue to focus on projects, because that's one of the key determined -- key drivers for our business. We put a little bit more space into frozen and grocery and dairy and probably a little bit less space around bulk and some of the other spaces in our stores. So by and large, we ended up with the same SKU count apart from vitamins, a little bit more frozen and that would and a little bit more grocery that would be kind of where we're at.
Curtis Valentine: All right. Perfect. I think the key piece, Rob, is that when we crept up to 30,000 square feet prior to Jack's arrival, it wasn't again, it wasn't in assortment, it wasn't in the proposition, it was in fixtures, it was in kind of dead space and in unproductive space and so. It was not hard for us to get back down to '23 without impacting the assortments.
Robert Dickerson: Okay, great. And then maybe just another quick one for me. It's just -- I was curious as you enter a new market or expand a pre-existing market in an area where there hasn't been a Sprouts, right, you open the store. As you open that store, is it just essentially kind of like word-of-mouth for me? I'm sure you have been through signage and people drive by the store and they see it, but are there other ways to just try that kind of welcome the community so to speak, to the actual store without having to spend, get a fair amount of capital to do so? That's all. Thanks.
Jack Sinclair: Yes, we certainly. We make sure that where we open a store, there are enough people that look like our health enthusiasts in that catchment area. And that's what I was talking about in terms of aligning our model to the -- so the opportunities there, the people are there and our marketing teams are getting increasingly good at talking four to six weeks earlier than we open the store in terms of direct communication with those target customers, and we're working to get better and better at that. So there's a fairly intensive marketing approach on each individual store and it has to be different. It will be different when we open a store in Cudahy, Los Angeles than it will be in Aberdeen, New Jersey. How we approach that and how we think about it will be different, but the teams are increasingly getting better at picking the right ways to let people know. Certainly, we want visible sites, so when people drive by they can see it. We try not to hide them too much, but we try and get people excited in advance. And I spent some time talking to mayors of towns and trying to get them kind of excited about us coming into places that they don't know us. So it's a combination of things that work, but our marketing teams are doing a great job.
Curtis Valentine: And I'll just reinforce Jack's earlier comments around the density in the market helps. Certainly, when you open the 10th store in a market, it's easier than the first and there is some word-of-mouth and just having the building up and the signage up as people drive by the more and more stores you put in the easier that gets and all those things are coming together to help with new store performance.
Operator: Okay. And our next question will come from Krisztina Katai of Deutsche Bank (ETR:DBKGn). Your line is open.
Jessica Taylor: Hi, can you hear me?
Jack Sinclair: Hi, Krisztina.
Jessica Taylor: Hi. This is Jessica Taylor on for Christina. Thanks for taking our question. So I just want to go back to private label a little bit. And in the past, and today you talked about, like, how you watch your competitors' interest, but don't worry too much given, the product and customer differentiation. So now, the largest retailer has announced a new private label brand that's really aiming to increase its share from this set of customers who are more attribute driven and who are more health conscious. So how does this kind of change your view on, like, how you're watching that competitor and competitors in general who might follow that lead? And how does it kind of impact your go-to-market strategy for your private label and attribute driven items? Thank you.
Jack Sinclair: Yes. Well, Jessica, good question. We've been kind of -- I've been reading with interest the last couple of days as all initiative. We haven't kind of tasted it or eaten at all. I've forgotten what it's called better for or something. What's it called?
Curtis Valentine: Better good. Better food.
Jack Sinclair: Better good. So the way I've read it and we'll clearly watch it, Jessica, but the way I've read that it's a tiering in your branded strategy. So it's trying to trade people off. It's not necessarily trying to trade people to attributes. And I think that's how I'm reading it. It doesn't feel like a health initiative. It feels like a trading up initiative on quality. And again, that's a pretty common thing from my background in the U.K., how people think about tiering. It feels more like a tiering exercise than it does a health and attribute based active. Although there will be some things in there that oat milk this and something like that. But I didn't -- I felt it was more -- we love being next to Trader Joe's. I felt it was more a kind of let's look at Trader Joe's and take some business from that. But as I say, our Sprouts brand business is very much focused on being differentiated, not about trading up people on the same thing. And so it's not going to change what we're going to do. We believe we've got a set of target customers that are very relevant to our business and that we can do 30 keto products. I don't think there's better for things is going to be that kind of attribute based initiative, but we'll clearly watch it and be sensitive to how that evolves and develops. Walmart, I've got a habit of whatever they do is big.
Jessica Taylor: Yes, that's true. Thank you so much. And just a follow-up, can you talk a little bit about the cadence through the quarter, for comp trends and any month to-date or quarter to-date trends?
Curtis Valentine: I'll take that one. We won't get too specific here in the intra quarter, but pretty consistent from a comp perspective throughout Q1. Q1 is always a little bit noisy. There's usually some weather events and things like that and you'll see some weeks up and some weeks down, but generally pretty consistent for us in the quarter. And then certainly within Q2 here, we're comfortable within our elder guidance range with where the business is trending at the moment.
Jessica Taylor: Great. Thank you so much. Best of luck and congrats on a great quarter.
Curtis Valentine: Thanks, Jessica. I appreciate it.
Operator: And our last question will be coming from Edward Kelly of Wells Fargo (NYSE:WFC). Your line is open.
Evan Ketterhagen: Yes. Hey, guys. This is Evan Ketterhagen on for Ed. Thanks for taking our questions and nice quarter. I know we talked a lot about e-comm already, but just wanted to touch on it a bit more here. We assume that your online sales are included in the overall comp, but could you guys just confirm if that's correct and if that also includes your Uber Eats partnership that started up more recently? And then the 25% growth this quarter, put up an acceleration versus prior quarters. Do you think that the bad weather in January might have played a role there? Or should we just expect a higher rate of growth going forward with the increased number of partnerships that you have?
Jack Sinclair: Yes. So first part of it, yes, it's embedded in our comp and included in our comp. And certainly, some of the acceleration would be the new partnership with Uber Eats, which launched kind of mid to late Q4 and has been ramping up. And then the last part of your good question. Yes, we definitely see that when there's kind of significant weather events, it tends to move some people into e-commerce and out of the stores. And so through the first kind of half of the quarter, we had a few of those and saw that phenomenon. I would add to, again, all three partners recognizing kind of that health trend at the beginning of the year. That's our Super Bowl as Sprouts and they were right there with us and doing the best they could to capture that with our target customers. And so we had a lot of activity going on in those first six weeks of the quarter with us, with our partners to try to take advantage of that. And so I think all three of those things are contributing to that stronger e-commerce growth.
Evan Ketterhagen: Awesome. Thanks for the color and good luck.
Jack Sinclair: Thanks.
Curtis Valentine: Thank you.
Operator: I would now like to hand the call back to Jack for closing remarks.
Jack Sinclair: Yes, thanks everyone for your attention and your support. And we look forward to catching up with you in due course. So thanks ever so much. Take care.
Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.
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