Q3 2019 Earnings Call
Ladies and gentlemen, please continue to hold your conference call will begin momentarily.
Ladies and gentlemen, thank you for standing by and welcome to the Sprouts farmers market third quarter 2019 earnings conference call.
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After the speaker presentation, there will be a question and answer session.
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I'd now like to hand, the conference over to Speaker today, Suzanne I live in seen Investor Relations. Thank you. Please go ahead with them.
Thank you and good afternoon, everyone. We're pleased isn't taking the time to doing through third quarter 2019 earnings call Janssen Claire Chief Executive Officer in CIT Minimally Board member interim Chief Financial Officer Girls on the call with me today.
Earnings release announcing or third quarter 2019 result.
Okay. This call can be accessed through the Investor Relations section every website.
Investors that through Uh huh.
During this call management may make certain forward looking statements, including statements regarding or 2019 expectations in guidance.
These statements involve another a number of risk and uncertainties that could cause actual results to differ materially from those described in the forward looking statement.
For more information please refer to the risk factors discussed in or does he see filings along with the commentary on forward looking statements.
End of our earnings release issued today.
In addition, I remarks today include references to non-GAAP measures for a reconciliation of or non-GAAP measures to GAAP figures. Please see the tables in our earnings release.
That many handed over to Jeff.
Thank you Susan and good afternoon, everyone.
Thank you for joining a goal today.
I recently passed my hundred State you did surprise and I'm, even more excited now but in the future of this company that I was three short months ago.
Spreads unique offering from both a product and experienced perspective has enormous potential for growth, we pioneered making healthy eating accessible to everyday grocery shoppers and this trend is stronger today than ever before.
That said, we do have challenges to overcome.
We must continue to stabilize the business in the near term, while also creating the platform to accelerate growth.
All such a booth and the future.
Results in the third quarter was slightly better than we expected, which chip will speak to in a moment.
Very pleased with her diligently the team is working towards improving the business, whether the same chain focusing on the long term potential growth of this friend.
To chip is finished I will return to provide more detail on who we're working towards your future chip.
Thanks, George and good afternoon, everyone I will begin by discussing or business during the third quarter, and then review our guidance for the remainder of 2019.
For the third quarter net sales were 1.4 billion or 8% compared to the same period last year.
Comparable store sales increased 1.5 person.
Traffic was down slightly well basket was off.
Our home delivery sales wrote more than 200% this quarter as customers adopt this added convenience.
A significant portion of our online business came from repeat customers.
We also continue to learn from or click and collect us.
Early results suggest suggests that this service is not as attractive to our customers as home delivery.
For the third quarter gross profit decreased by 8% to $477 million and our gross margin rate was 33.1 person a 25 basis point decline when compared to the same period last year.
For its to manage promotions to better balanced traffic sales and margins resulted in gross margin stabilizing in the back half for the quarter.
As she day increased 12% to $404 million for 28.1% of sales compared to 27.3% in the same period last year.
35 basis points over this de leverage is from the adoption of the new lease accounting standards.
The remaining de leverage is due to investments in new stores expansion over home delivery program and higher health care costs.
For the third quarter or depreciation and amortization costs increased 12% to $31 billion for 2.1% of sales an increase of five basis points compared to the same period last year.
Store closure and other costs, mainly related to executive severance and hurricane preparedness were $2 million.
Our interest expense was $6 million and our effective tax rate was 23% compared to 17% a year ago.
Third quarter diluted and adjusted diluted earnings per share was 22 cents compared to diluted EPS of 29 cents and adjusted diluted EPS of 27 cents in the same period last year.
As a reminder, the lease accounting standard will result in a net incremental expense of four cents per share for fiscal 2019, or a penny a quarter.
Shifting to the balance sheet and liquidity.
We continue to utilize our strong operating cash flow from operations $323 million year to date to support our unit growth and sales initiatives. So far we've invested $130 million and capital expenditures net of landlord read of reimbursement primarily for new stores.
During the third quarter, we opened nine new stores, resulting in 335 stores in 21 states.
We remain on track to open 28 stores in 2019.
We ended the quarter with $80 million in cash and cash equivalents.
$515 million borrowed on our 700 million dollar revolving credit facility 55 million available under our current share repurchase authorizations and a net debt to EBITDA ratio of one point fourx.
Year to date, we have repurchased 7.3 million shares for a total investment of $163 million.
Now, let me turn to guidance for the remainder of 2019.
For the fourth quarter.
We expect net sales to grow 6.5% to 7.5% with calls in the zero to 1% range.
Gross margin is should be flat to slightly negative when compared to the fourth quarter of last year.
We do expect to be more selective with promotions than we were last year.
For the fourth quarter earnings per share is expected to be between 12 cents and 15 cents.
For 2019 fiscal year between $1.10 and $1.13.
We expect our 2019 capex spend to be between 150 $260 million net of landlord reimbursement.
We have seen sequential progress during the quarter that said there is work to be done and developing the platform of people process and infrastructure. So that we can sell it can accelerate the expansion of our brand.
This will take some time, however, we are confident more than ever that we're moving in the right direction.
Let me now I'll turn it over to Jeff.
Thanks Chip in the last 200 days I'm focused on visiting many of our markets in stores speaking with our customers and team members I visited distribution centers met with vendors and work with our leadership team to gain a deeper understanding of what is working and where we have opportunities for improvement.
As I indicated in my opening remarks, I am encouraged.
Pete thousand team members commitment to our mission and dedication to improve the business I believe more everyday that we can exceed significantly expand our brand and do so profit simply.
At all levels in our business, we have the advantage of team members, who are experts in the industry and passion about both approach we sales as well as the customers They said.
We're engaging enterprise wide with the team to interact with our customers every day by encouraging all 30000 team members to contribute to improving our business. We've introduced some new processes to capture these ideas and I'm excited already but some of the potential outcomes.
Our pharma is unique in terms of product offering departmental categories and how do we differentiate ourselves the stores that feature clear sight lines across the store.
Im delighted to see the our opening is differentiated relevant and the assortment has debt to many categories like grocery frozen DSD and produce our.
Our private label focus continues to grow with significant future expansion available. All these come together with our small store small scale store layout to create a trust in our brand that is how to come by in today's environment.
What truly Amazes me is the love of customers have for our brand, especially in markets, where we have created density and awareness.
After 100 days on firmly of the belief that overcoming challenges is within our own control.
Well the size of our store prototype has only increased slightly over the last few years the cost to build has increased significantly.
As we have drifted a bit from the core elements of how we best serve our customers use doors of being increasingly more complicated and become more expensive to operate on built.
Interestingly of smaller stores tend to be more productive dialogue to stores.
Our fresh self distribution works effectively where we have density where we don't it is sub optimal which creates shrink and cost and efficiency.
Going forward the expansion of our store network and associated logistical support will be more coordinated and concentrated driving efficiency in distribution and transportation.
On the marketing front, we spent the majority of our dollars on print advertising, which is an ineffective way to build our brand.
Pricing promotion strategy have led to margin instability.
The Sprague's brand is differentiated and has real savings for both existing and potential customers, but we are not telling the brands stability to the best devote ability.
Private label continues to be a great growth vehicle for sales, but we have multiple brand names under the sprouts brand of collection of products, we plan to build a cohesive private label brand streamlining and improving our communication to customers that maximizes sprites position as the affordable healthy living group.
So.
We have diligently developing our longer term strategy and will be leveraged gene extendable expertise to supports us during this time.
While we anticipate discussing our food strategy in more detail in Annaly 2020 , Let me highlight a few key points today focused on our brands unit growth and profitability.
We can build our brand modify our store format and rebalance our pricing and promotions investments.
There are so many great stories that we can bring to life as we transition our marketing spend toward more digital unless print.
We have the opportunity to build one of the strongest grocery brands in the United States by making healthy eating affordable to all through improved marketing efforts.
Our customers should Newell, our product depth is far superior to competitor competitors. As an example, sprague's frozen Department counties, one of the largest selections of gating free alternative ice creams I've ever seen.
In produce offering speciality items allows us to de commoditize This category.
Our short period obtain every year, we county, cotton Candy crepes, literally bursting with real cotton candy flavor and because of our strong produce pump ships, we always receive a disproportionate amount.
As we evaluate and potentially modify our store format, we're going to slightly slow growth to approximately 20 store openings in 2020 .
This selection will include stores that already in flight on door in premier locations.
Our expectation in 2020 , one is that we will return to or exceed our current rates of cool.
We have confidence that with the optimal prototype sprouts has a long runway of unit growth ahead.
A better balance of everyday low prices and promotions is imports into the financial health of the business.
This will take team.
Well, we experienced some early wins these changes could lead to unevenness in comps as we cycle highly promotional periods.
Overall, these changes will stabilize margins in the near term and create a stable and loyal customer base in the long Tim.
This is a new chapter for spreads on I'm energized by the opportunity still to be implemented and convinced we can control our destiny.
That is significant work to do as we move through these critical steps and we are confident it will position us for longer term profitable growth.
With that we would like to open up the call for questions.
Thank you Sir.
My first to ask a question you would need to press star one on your telephone.
Sorry, your question press the pound.
Please standby, while we've compiled the kewaunee roster.
Our first question comes from quarter to sell from Deutsche Bank. Please go ahead.
Good morning.
And good quarter.
I'm just curious if you could give a little bit more detail.
On how you're going to approach.
New stores going for it.
Particularly in terms of some of the areas that you are looking at potentially modifying.
The geographies and where you're going to focus on building and exactly what size box you thinking about putting off thanks.
Yes, Thanks, Paul I think as well as I've gone Ryan blood cannot the the stores, particularly the new stores that I think as I said in my remarks, the cost has crept up a little bit and then probably got a little but to bank I think we can deliver the proposition and slightly smaller stores, but in terms of exam.
Actually was that size as Ron about point, yet we're working through some farm out work to get doesn't not place. So that's the kind of format site with regard to the geography.
Yes, that's clearly be some inefficiencies in creating stores far away from our distribution center, which has created some cost inefficiencies has us from.
Outlined in my remarks on it also compromises, our French farmers market position and satin stores as well so we'll be lifted out more geographically concentrated store growth going forward. Once we get the fall not exactly that we want to get counted going forward.
Thanks, and just as a follow up if we did talk a little bit more about how you're looking to manage.
Motions, maybe talk about the competitive landscape as well lies.
Any actions you feel are needed in terms of retail pricing and maybe kind of what you're seeing on the inflation deflation hot as a part of that gross margin conversation. Thanks.
As we review the whole probably I think I indicate this in the in the last call that the balance off.
Investment in high low.
Pricing and invest in everyday pricing got out of sync and that we were kind of to both at the same time I'm not created I think some dilution in a comp sales onset and that detrimental effects in our margin over the last couple of years.
As we look to stabilize that the first place with Blue Todd is not want the place where there's a lot of volatility and volatility in our produce depends a lot and how we source our projects and we spent a long time trying to figure out what the right way to price our projects businesses, which is such a big part of our operation and we're fine.
Hey ourselves to be in a very strong position competitively across the marketplace are not having to be quite as aggressive on price on our fly out program.
So that's something that we continue to test new ways of of.
Attempting to figure out how to maximize our margins while also not diluting the price position that will then I'm not seeing across the competitive landscape benefited us wanting me in terms of what anyone doing to make it more difficult for us to do that going forward.
When we look at our different categories. We are looking at different categories and trying to be surgical in terms of where we need to be in terms of pricing to be the value position that we want to be which is the healthiest best price growth soon in the marketplace on that nobody more tests will be doing over the next.
Clinical trial in different categories, where we may have to be more aggressive on other countries, where we may be able to be less aggressive in the future. So we're right in the middle of a number of tests on that Paul.
Thank you best of luck.
Thanks.
Thank you Hi next question comes from Tudor Fromer from Credit Suisse. Please go ahead.
Hi, Thanks for taking the questions.
First you did mention I think chip mentioned negative traffic in the comp I was wondering if you could give us any color on the elasticity you saw from pulling back on promotion in the second half of the quarter on how that makes you think about driving traffic across the battle longer term.
Sure this is chip.
The traffic has been slightly negative throughout the year.
Interesting for us as we started so for lack of a better expression sort of unwind some of the aggressive promotions. We found that the traffic trends really didn't change that didn't go they didn't get worse, they get better but at the same time, we're able to pick up overall, there you are side, which helps comps at the same tolerable.
Start to stabilize margins and as I said in his remarks as we got the back half of the quarter. Our margins were stable you from year over year perspective.
Yes, as we felt far one just to.
Build on what took just said I think no way to drive traffic in the business is a lot about how do we invest in our marketing dollars we've got fairly.
Okay marketing dollars budget in terms of won't be goal that we spend a disproportionate amount of that on print.
Thanks, what we've done some really interesting level tests about trying to use digital and mobile and I'm more effective way and communicate more directly.
At the that the reason for come into Sprouts, and I think ultimately launch will be the determining by telephone as and when we got traffic growing and that's certainly would determine to get there.
But in the short term, we're doing a number of test does to how did the best way to spend dollars differently. We sent 21 million paper flies every week. So there's a lot scope for us to take send a few less fly OS and spend some money on different ways of driving traffic and by market. When it got a number of tasks that we've started on a number of.
Tests that were about 10 per month, which will give us some confidence as we go through next year that we can stop to use our marketing dollars more effectively to drive traffic.
Okay, Great and Jack I think you mentioned kind of bringing in some external expertise in potentially.
Bulking up for the team and operationally meeting.
I have a more solid platform, where have you seen sprouts potentially lacking in terms of the infrastructure.
I will be it operationally real estate supply chain or otherwise that you'd maybe like to improve before you embark on getting back to kind of current levels of square footage growth.
As I said at the in the remarks, I'm really really pleased by the spirit of the people in our stores, it's actually blowing me away the quality of the people the interface with the customers.
Our managers, having the right across the store particular, vitamin supplement department, where we've got real expertise and I've been really pleased with that I think behind the scenes how do we create an infrastructure to be more effective at managing our inventory to be more effectively managing our distribution flow and to be more effectively making.
Life, a little bit easier for our stores in terms of what we do have some support those stores.
I'd in the life of the back of our stores as being something now find very helpful to understand the number of deliveries we've got coming in the amount of inventory this call coming in on the effectiveness of that is something that on infrastructure and our merchandising and our distribution and logistics departments will help that going forward and with regard to the extent will support weve.
That support is primarily going to help us with the strategic view going forward I and those up and there's a bandwidth issue within our business and that would go along very committed people, but in order to deal with some of the short term things I've just talked about we probably and we are we do need some external support to help us with.
Longer term thinking here.
Makes sense, thanks, and good luck.
Thanks.
Thank you. Our next question comes from Ken Goldman from JP Morgan. Please go ahead.
Hey, good afternoon. Thank you.
Two questions for me if I can the first is.
You mentioned I think the term you said it was some unevenness in comps ahead as we cycle.
Highly promotional periods.
I know, you're not giving guidance in the future, but it would help us for modeling purposes. If there are there any quarters that stand out in the next two or three that we should we have to think about us.
Yes, maybe a difficult lap.
Kevin This is true so.
Well as it relates to the quarters on the outlook. We're just now working through our budget for next year. So how that how that plays out into next year is to be determined we gave guidance for the fourth quarter. The guidance for the fourth quarter is slightly lower than we just delivered in Q3, but if you look on a two year basis since it looks.
Barely similar so that's kind of how we're planning it as it relates to next year.
It's going to be a year that we work through as we work through our strategy as we work through here as you heard the stores are going to be in the 20 ish range as we prepare the infrastructure for the following year, but long term I mean, this as a business that if we want to build square footage long term to be able to create and earnings growth environment you have to do.
To a two and a half close call and that's the goal for US is to get to a place where we're able to deliver the kind of call with stable gross margins that creates a meaningful earnings growth, while you're still square, while you're still building square footage and that's going to take a little time, but for right now as you get you gave you a Q4.
Next year as.
Probably going to look right now working it out probably won't look a whole heck of a lot different than than this year, but as we get into 21, that's where we're really focused.
Sorry, I missed what you said wouldn't look that different next year I apologize for year full year next year, we're still working at all but I don't think it will look much different than this year from a total call perspective, I wouldn't expect it to.
Okay Thats helpful and then.
I guess I'll follow up another question about next year and I'm sure. That's not what you want to answer but I'll try anyway.
You have talked about a couple headwinds and tailwinds and things that you won't get two 2.5% comp and so forth, but I think the big missing piece.
For me and maybe some other people on the call is how much you need to spend to get back on the business right, whether its capital spending operating expenditure systems.
I guess, but people are trying to figure out really is okay. If the comp is similar next year are we looking at a more much more difficult overall EBITDA margin because of these investments or is it something where you feel like you know what no. Its little minor tweaks may be hearing there and next year is still being investment here, but it won't be as big as feared perhaps.
I'll start with the capital side capital side, clearly, we'll probably be with just only 20 stores you just saw us reduce our cap capex for the projection for this year.
Full year, and that's because of the less capital, we're putting out right now.
Four stores this should be opening next year. So my expectation on the capital fraud next year should and if anything it will go down and then as if we decide and 21 and beyond to grow faster or with more stores.
You think about part of what we're doing Harris and try to reduce the cost to build our stores have gone up over 40% on cost the goal in the last four years, we have a strong belief that there's a lot of that cost that we can eliminate and build our stores less expensively. So therefore I don't see.
Capital ever really getting higher than the 150 to call. It 200, and the next several years for that new stores, whether bdcs, whether it be infrastructure, we probably will build some more DC is because we want to being much more effective and efficient as it relates to operating those stores.
But I just don't seem to capital again going any higher than what I just said over the next several years on the operating expense.
We're going to get so place or yeah, we'll have initiatives, what we're going to do that in the confines of we can only grow expenses. So much so at least in a stable gross margin environment to create some sort of acceptable earnings growth and so we have control over that and I think we're working towards what puts and takes.
Right now that will get us to a place where we hopefully hopefully wont get de leverage, but we think we can at least get flat to some leverage over the course of the next couple of years.
Thanks, Tom I'm sorry.
Sorry.
Thats happening in fact on that as chips point on stabilizing our margins, which we feel confident we can do.
Understood. Thanks, so much.
Thanks, Ken.
Thank you Hi next question comes from John Heinbockel from Guggenheim Securities. Please go ahead.
So two questions number one.
What do you think what mature store comp would be embedded in it and a half overall comp.
And this is the bigger opportunity could you talk about customers that are passionate who know what the brand stands for is the bigger opportunity non customers.
Getting a better appreciation for what you stand for.
Number one and the number two.
It sounds like click and collect probably does not.
Get expanded from here that kind of dies and the focus will be on home delivery.
But I'll go well a couple of things what I'll talk to both on Jack can jump there yes.
Brad perspective, there's a true we believe those are tremendous opportunity for our brand reach perspective.
Customers that potential customers that don't know us today. Those are how we are reached some more effective marketing in the markets were ahead of the markets, we're going to but also entering new markets and doing it in a more concentrated way and we can start to put more marketing dollars in those markets and leverage that we can get more word of mouth. We can talk more radio we can talk more.
Sure and whatever medium we can so there is there is brand reach opportunities here in existing markets and in new markets and you will get much more effective in the way we go to those new markets on the click and collect fraud, we're not going to stop though click and collect customers or theres customers are going a lot that service it doesn't.
Cost us a lot of action wanted to do that service isn't it hasn't taken.
It hasn't taken we do six times, an average store that has click and collect versus an average store that has delivery. We do six acts on the delivery saw than we do on click and collect.
Right now, but we're still going to offer that service and will grow as the customer groza.
Yes, so just to reinforce them the message on brand awareness join the reality for me is that when we have such sporadic geography, and our and our development in our new store program, it's very hard to get effective marketing communication and the opportunity to an awareness is very real and we can see.
The data that there's a lot of people just don't know who we are and as you go to market one store to attain it's harder to get that message OCA, particularly when you do in a program of sending price through flies it doesn't tell the message or the story of who we are and I am very actually excited about what that might try Florida.
In terms of additional traffic when we get up and running and making working with regards to take click and collect I think our pharma don't lend themselves as much to that as some of the larger format. Some of the mass format, having said that Jeff's point will meet the customer where the customer wants to be Matt I'll be probably really interested about how people in place.
This is the bay area have been access accessing our delivery people have been accessing the brand pretty effectively in certain stores and I'm intrigued by how do we might develop that going forward in terms of me again meeting the customer where they want to be to be met going forward.
Okay. Thank you.
Thanks.
Thank you Hi next question comes from Karen short from Barclays. Please go ahead.
Hi, Thanks.
I wanted to just go back to the store opening comments.
So for 2020 openings.
I guess the first question do you have the ability to tweak the cost to build for the 2025.
And then.
So what exactly do you think you'll be adjusting.
Well in terms of that caused us some opportunity for us to improve.
The 2020 build costs, but not by as much as what we think it can be going forward in terms of making the store slightly smaller so in terms of that opportunity that would be that kind of that's the cost per square foods.
Can come down by making the total cost will come diagnostic cost per square foot square footage goes down the cost pass square food can come down a little but as we mature our sourcing effectively of some of the things that we've put into our stores our enhanced format stores. If I answer your question Ken.
And then I guess.
Class of stores, so I mean.
You are not involved in the approval process of those locations. So can you maybe get a little color on what gives you confidence locations are optimal.
Well, thank Cartus show.
Well, we've looked at all the stores that were in flight for next year.
Those that we felt like really were on the fringe and we really would prefer from a supply chain perspective, or a cost perspective, where we've we've got our best to unwind those the ones that.
Our still on the list or what we believe are the better locations of the class and they're also in many cases. They are ones that we think we have some control at this point to reduce the cost on those stores. So we're doing we're working our way through that class and try to make it as effective as we can recognize.
Using that most of those if not all of those leases were selling.
As it relates to 2021, our expectation is we'll get back to at least 30, a year and we'll have a lot more control over those and we're just now we're not a proving knows yet until we really refine the way we want that prototype to look.
On the real estate team have done a really good job in developing these stores and getting them, but then maybe a strategy that we're going to change going forward, but I think as they mature the focus on how do we costs down I think we can make some short term benefits as well.
And then just a question on pricing.
You talked a lot about high low any DLP I just was wondering if you could give us.
Initial color and this is aside from highly DLP.
On your pricing and non perishable.
Obviously, one of your primary competitors has been making progress on pricing, especially in like three non perishables.
Early thoughts on where you stand on that and whether there is.
That needs to be just in there.
I think as you go through the whole non perishable sandal business. The thing when we are successful and you can see in our comps is when we have very differentiated assortment and then pricing becomes less of a sensitivity in terms of if you have selling things that nobody else is selling you can actually manage effectively.
As a value play and when I look at coffee is with particularly somewhere like frozen foods women I woke up and down our frozen cabinets, we've got a very different offer to while I would find enough traditional grocery store I lose I think you got the kind of pricing that reflects what the customer sees as value as opposed to reflect.
For our competitors, our pricing something up and we find the seem at our client base business. We found the same at our beauty business that when we've got real differentiation the pricing hasn't got the scene sensitivity as it might happen as when other grocers are competing themselves with other grocers in that space were taken a good look our vitamins in op.
Our business to see whether that's as competitive as we need it to be so there's a little about what's going on that but in the rest of on non perishables I think we're in a pretty good place on pricing.
If we keep bringing innovation to the marketplace and keeping at all but I'm pretty confident in those categories are well priced.
Great. Thanks very much.
Thank you Hi next question comes from Scott Mushkin from our foreign capital. Please go ahead.
Hey, guys. Thanks for taking my questions that I'm, sorry, I'm, a little bit on the street here. So.
Yes. My my question is about the stores I mean, there the idea of spending more and go into kind of a slightly larger box had to do with adding a lot of stuff into those boxes expanded Kelly okay. As an example, some more foodservice.
And I believe that was part of the reason the stores were coming out in the box pretty pretty solid. So I guess I just want to occur understand a little bit more about the decision to.
Maybe go to a smaller box with lesser these services and how we how you're kind of thinking about it because it seemed like a company went away from the smaller box and added stuff there because the competition, we've gotten a little more fierce particularly in the fresh area.
Yeah I think.
As I go around our new are bigger stores with the enhanced daily proposition at the customers like them, just costing a little bit too much photos on the taking up a little bit too much space and when I compare those stores to some of the stores that we have done and a smaller stores is as I think Jeff on one of them as a meeting.
Romano, our smaller stores actually tiny as much for the custom on in terms of what they can get you could argue they experience is different because its smaller we've built on expediential.
And improvement in our daily business, and our enhanced stores, but in terms of a farmers market feel.
The smaller stores, creating that farmers market feel that we're trying to kind of replicate and it's got nothing.
Assortment and product offer that we wanted to have so I think thats a middle ground to you in terms of where we get too we don't know exactly how it's going to play out but when you look at the cost per square foot, we need to find a way of not spending as much money and I think we can get a lot more stores into 2021 and 2022.
With.
With that on an approach that take makes them a little smaller.
Scott I would add just.
Think about the fact that if you make your stores more expense of.
Yes, you are enhancements.
Do create a return but the returns yes, they do create shareholder value, but if you take the alternative approach and said what a lot if I can still present, the customer the core customer value proposition and I can do it a lot less expensively and the returns on these individual.
Sites are higher on it affords me the right to take more risk go into markets more concentrated create more brand awareness et cetera. So that's the lean we saw work that due to get prove it out but we have stores today as Jack pointed out.
Now that are significantly smaller create the same the breadth of core brand proposition at are incredibly productive and so that's that what that's what leads us to at least a hypothesis and something that we need to work through.
Those are those are older stores correct, the once you're referring to without productivity.
Oh, most are older stores that's true.
And I'm not expecting to get the same kind of volume and those various stablex deepened trench stores, but if I can get the same volume I'm getting today at a newer store and it cost me, 40% less to get in there and I was getting basically the same volume the returns are exponentially larger.
That's perfect. Thanks for the long it very well not long answer quicker detailed answer. So my second question My follow up question, but goods to the degree of hurry.
Business and how we should think about the economics of that as it grows and then I'll, let our yield thank you.
You mean home delivery business Scott.
Yes, correct correct, Yeah, Yeah, I set you what we're finding as we're finding pockets all cost real customer interest and less on it tends to be pockets and it's not all create right across the chain how many to understand the as we evolve and develop but it clearly does cost is more the margin isn't as strong on that and then there's ways the weekend.
Take eight that negativity in terms of margin play, but as I said, we've got to meet the customer where the customer wants to be Matt. If we get this rate experience, usually our home delivery, but in terms of in store our home delivery business will not be appropriately alongside it. So the you've got people doing both things.
And then if we can get basket growth that comes from customers being committed to the spreads brand, whether that's going to come to the store having delivered I think we can mounted to the margin in such a way that we can manage effectively but we're doing a lot walk on the as we speak in the external.
People are helping us on this will help us understand this little bit balances will.
All right guys. Thanks very much.
Thank you.
Next question comes from Kelly Bania from BMO capital. Please go ahead.
Hi, good evening, thanks, sorry.
Taking my question.
Just wanted to ask a couple more on the stores and the decision to it sounds like more intensely locate the stores, maybe just an update.
On cannibalization, how that tracked this year in and what it could look like in 2020 and beyond as you start to kind of more densely populated stores.
Hey, Kelly as chip cannibalization I'll start with this year cannibalization has been decreasing as the negative impact for us as a company.
We've been very recovery has been very focused on it I think for US as we were focused on it we haven't really thought about the bigger play here, which is if I could go attack a market and I could go attack. It with 20 stores because of projected returns are a lot higher and I have supply chain.
I have just distribution center there to support to the efficiency of the distribution center too.
To help support it and the brand the brand presentation because of distribution centers closer and you can do a lot more stores, we think that that would be better answer lots adjusting I'm, not suggesting where they are quite yet, but we're working towards.
As we think that will be a better answer and the and the need to worry about cannibalization is it just becomes something that we shouldn't worry about as much.
On the context of cannibalization for me it comes back to the conversation we've been having about brand awareness within each market place. If we can get a more dense store proposition I do believe if we marketed effect if and when it even in markets where people noahs. There's a lot people that don't know who we on what we do and I think there's an opportunity.
Our us to really invest in marketing appropriately to drive awareness, Tim dilute the effect of cannibalization and if you do smaller stores you need less.
Sales as well within that to make the economics work. So both of those things as the hypothesis that the theory that would go to the moment.
Okay. That's that's helpful. And then maybe just another one on on the stores with.
The 20 that you're expecting next year.
We expect that that has some sort of modified Delhi.
Component or or that will still have the the the deli that were used to seeing in the stores and when we get back to.
When the plant targeted to get back to 30 in 2021 is there does that depend on where comps go next year or how the this this 20 stores performs I'm just curious like what that is.
What kind of your gauge and to get back to that level of growth.
Well the gestation period continent stores that 20 stores that were doing that's year are going to be buying lots of the same as the stores you've seen in the enhanced prototypes with the launch of daily and as I said the customers lighten up so I think they'll perform well going forward how can we read.
Key the experience that customers are getting without spending as much money in smaller stores would be the attempt that we're going to make in the farm out what we're going to be doing over the next few months, but the 2020 stores well look the same as the storage exceed that were we won't be able to change them. Even if we wanted to I think we can do them a lesson.
Simply because we believe them time to do it more effectively as the team being working on this Atlantic to do it.
Going forward. After 2021, I believe that we can dual leased back to where we were in terms of the number of stores that were building I would actually what would be able to do more than that going forward.
Kelly I would also add our confidence and getting back to the 30 isn't because it's there because we're not we're not.
Oh really disappointed with the stores that were building today, we just believe we could do with better worse case scenario. We're building 30 in 2021 that will just like the ones. We bid building, but we just have a belief that we can do it different and better so we're going to work through that.
Then go out with that but that's why we're confident we can get to at least already and if we can do it better and more cheaply and we think it's more effective we can build more than that.
That's helpful. If I could just ask maybe one more on just the pricing.
Thank her sprouts histories, I'm aware, they've talked about kind of about 20% to 30% price gap.
Versus traditional supermarket peers and produce at least.
And just just with your comments so far.
Talking a little bit about that category and the front page ads is that's still the case that you're seeing when your with your pricing analysis or where do you think sprite sprouts needs to be Hum in order to get back to to the comps that it is targeting.
By and large we're still operating at 20% less on our produce business on its as us at the more we can create differentiation, though when I think we're going to invest a lot more people in resorts in local sourcing so that in Colorado, our Florida, where actually much more effective bringing local products and replicate what a farmers market.
I would think is and if we're going to be a great farmers market, we need to really source product on the ground locally more effectively than we are at animal and we're investing people behind that and then it changes the whole price equation and tens of how you can walk kit, but by lots were still at 20% cheaper the promotions are not quite as aggressive.
If is that.
We're not seeing any any effect on our traffic on our margins are tweaking up a little bit. So I think we'll keep doing that but a little while then see what it takes us.
Thank you.
Thank you. Our next question comes from Edward Kelly from Wells Fargo. Please go ahead.
Hi, guys good afternoon.
Yes, so I wanted to ask your question about.
New store returns and what's what's reasonable target. So when you. When you went public if I remember correctly, you had a payback period of probably in the neighborhood of like three and half the four years.
As as we think about where things are today and I can look at your EBITDA margins on that and their 300 basis points lower and the cost is 40% higher so.
Im just kind of curious where where's what do new store returns look like now.
And then what's a reasonable target for us to think about it if you decide that.
The new model works and that you would accelerate growth upon that.
Yeah honestly I think it will be premature at this point to go through that level detail I would tell you that at some point that is something that we would provide what assist too early for us to do that because we don't know.
World, meaning one direction, but what that finally looks like doesn't necessarily mean, we don't want to assume that we're absolutely right. We're leaning that direction as weve implied on the call, but give us a little time give us a couple of quarters and we'll get back to you on that one.
Alright, and any thoughts on store closures as well as what all of this means to the east coast strategy.
We're sorting through that as well that's going to be an area of focus for us. It is really we have.
Commendably, even as we should supply chain and new stores have to go hand in hand, they have to and so as we look across the country and we look for those areas of opportunity to build stores and we look for where we have stores today, we're going to be evaluating all of that and it's critical for us to make sure that our supply.
Chad, especially on the produce side, which we pretty much control all within our own house it needs to be much more dense.
So short tail lines of distribution will lead us to focus on exactly where we build the stores in the strategy of supply chain logistics on new stores comes together pretty well with regard to the East Coast East Coast comment that we're very excited about Florida going forward I think some.
Real opportunities in that market.
All right one last one for you just on on supply chain, obviously sprouts is prided itself on value and produce.
Selling prices over the years that retail obviously have come down what's happened on the supply side, though for.
For sprouts, and what I mean, as like what is what you're buying this product that.
Has there been any negative impact by the fact that scale grows and the type of deals that you see our maybe different than what they were right. The large you get you start to become more of a mainstream sort of sorcerer and.
Can you still price product that that discount the conventional you see what I'm asking.
I see the question, you're asking I think the reality of that haven't been involved in ethanol over the place over the years.
The quality of your sourcing team on the thinking behind specifications as one other things that allows you to be very appropriate and what well with the growing community I'm one of the things we brought some new people into that space and we'll bring some more people into that space. When you get the right relationship with the grew worse.
You can manage this effectively there's a lot of volatility and being on top of that volatility from one week to the next from one month to the next than front one geographic location to the next allows you to be very effective having competitive prices.
And the right way going forward and more and more we will as you get to scale. It's about developing the type of relationships that build long town growing plans of growing plans with you with your growers.
Condemn upping excited about the dialogue that we're having a not to not only keep our price position in our value position, but bring differentiation in terms of the.
The specifications the.
Things like larger blueberries, our sweet taste, great, so our and getting into how you get varietals, developing and tomatoes, and those kind of thing. The team are doing a nice jump on that and that will allow us to continue to have a differentiation.
And on key projects at the forefront of the.
Farmers market needs to be.
Great. Thanks, guys.
Thank you.
Next question comes from Mark carbon from GBS. Please go ahead.
Good afternoon. Thanks for taking my questions. So you guys inherited a number of different initiatives and ones that were already in place like fresh and management and workday financials are you seeing the desired results. Thus far and then even beyond cost standpoint, given the sheer number if it does that were already in place. When you guys fully took the keys does that limit the degree of incremental change do you think you can make next year.
Thanks.
Hey, Mark so.
We're happy with them and we're happy with Workday.
Yeah, we've gotten through those and we're getting in some of the benefits from many of which we thought we were going to get those are showing up workday is a better way to work and so we went through a massive a quality or ERP for that and we're on the other side of it and we're getting benefits there as well. So we're very pleased with that as.
It relates to going forward.
What was the second part of course I apologize.
I'm just in terms of the added degree of complexity out from all those it when we can do next year.
No I don't think it limits, what we can do next year or you've already heard some of the let their other limitations next year sure as it relates to okay. We're already in flight on a bunch of store. So how do we how do we make that are there other things were in flight on absolutely, but none of those it really I don't think tar hands or limit us.
And I don't see any restrictions and it's going to take a little time, I think the pricing and promotions and as Jack is alluding to working our way through that and doing it right without burden the house down we want to make sure that that never happens and so we're we're working or if the lack of a better terms or unwinding a little bit of.
Very very aggressive pricing promotions on top of promotions on top of promotions, which were not getting credit for from a traffic perspective, or even a sales perspective. So we're being very careful about that but thats that those that's probably the most difficult thing to work your way through what the difficult nature associated with what the outcome of that is going.
To be so that's why we're doing a lot testing and.
To me, there's nothing in flight the I'm worried that we can.
Do if we don't want to do it the biggest thing I've been pleased about the mindset that team to try different things so not weighted to our mindset, where we were not and that's been very encouraging with them out into the operators and the team and I, that's going to make it easier for us to meet changes going forward.
Great. That's helpful. And then another question on delivery and one of your larger competitors recently announced that it was eliminating fees does this make you rethink your own grocer delivering grocery pickup fee structure, where do you think that overall value propositions don't like in share. Thanks.
Yeah, I think obviously as I, we watch what competitors are doing.
All the time Bauma think believe other FM, if a retailer knows what it wants to be we should stick to being good at what we are we'll watch what the competitive of doing our differentiation in terms of the product assortment that we have in terms of what we do in bulk in Tanzania advice, we given vitamins in terms of the.
Clots here that we have around.
Our plant based initiative declarative have around or beacon initiatives those kind of initiatives.
Create differentiation that will.
Means people, we want people and we think people will migrate to the sprouts brand at respective folks that particular initiative it doesn't.
It doesn't over concern me.
Great. Thanks, so much.
As Mark Thank you [noise].
Thank you I last question comes from Chuck Grom from Gordon Haskett. Please go ahead.
Hey, Thanks. Good afternoon, just a couple of for me earlier in the are you ran ITSM to some producers shoes as you sit here today, just how you're thinking about particularly given some of the issues in California and then just the second is on the comps when you think about the 1.5% deliberate here in the third quarter I'm curious how big a dispersion.
Exists between older stores, and a new stores and all I can tell you define old versus no. Thanks.
Chuck I think Jack will answer the first part I'll answer the second part Okay. So with regard to project the dynamic changes all the time and not from one week to the next when one growing region to the night and if you can get project. One place you can get projects and other place on the reality of as it's about a talent and the expertise and the team and stuff.
Said, a couple of things now, bringing new people onboard sourcing more effectively locally sourcing within our so if you think or this places we're operating in Florida is very different dynamic to California, Colorado has got a very dynamic to California, Arizona is got different dynamics. So the opportunities there for us to be a fair.
Active from one week to the next from one month to the next if we've got the right people in place not a set up be pleased with the way that's been working on hospital.
Chuck as far as the comps really the vintage comps.
Lower carbon to 1.5 and you're doing.
200% growth on your your delivery.
And you would hope that your newer vintages are CCOP and year over year, you would get took place. So let's say your older. Your oldest vintages are negative and that's true statement. They are but it's only slight so it's not nothing really bad or 2015 in bars slightly negative, but all of our newer vintages are positive and are.
Delivery is extremely pause.
Just to sort of follow up can you just remind us what the penetration is on delivery some cuts back into what the comp benefit how people here in the corner.
3% luxury, but I guess the 3%.
Yeah, we're doing about what we're doing to just over 3 million or weakness is growing at transferring assets growing up at 200% wondering.
Right I guess, just a follow up you know.
Walmart and target success on click and collect them very well documented it's really supporting their comps just curious why do you think it's not.
It's about being adopted by your customers much less because it seems to be working there. So I think the farm out lends itself to the allows US Ed I think just a large format store gives more space for the for them to execute that effectively but it's early days for us we haven't really marketed it we'll see what happens overnight Clinton well, we haven't abandoned.
As I said, if the customer wants to do it that we will do it that way our store set top isn't as easy to do when you got smaller box. We also when you think about it we're not a full shop, yeah. So we're sort of a destination for those unique and differentiated items.
We're also not.
Got a place that you're going to go for just the basics of the basics you know you're not going to buy the you're not going to buy a lot of for cleaner, you're not going to buy cleaning supplies are detergents et cetera. So when you think about that.
It doesn't makes it does it makes some sense as to why click and collect is just not.
Not as attractive to our customers as it may be for some of the others and if we get out your Andre treasure Hunt element to our business is different today consumable element that does lend itself to click and collect more effectively.
Right right actually want to people coming into stores on okay, great. Thanks very much.
Thank you.
Thank you. This concludes security session at this time I'd like to turn the call over to Jack Sinclair CEO for closing remarks.
Yes, thanks, very much geissler I spent time lesson today, we really appreciate your interest in our business on day I look forward to updating in the future calls thanks, so much.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect good day.