Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Sprouts farmers market.
Quarterly and full year 2019 earnings call.
This time, all participants are any listen only boat.
So to speak a presentation there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
You require further assistance please press star zero.
I would now like to hand, the conference over to your hosts Susannah Livingston Ma'am. Please go ahead.
Thank you and good afternoon, everyone. We're pleased to have taken the time to join sprout and our fourth quarter and full year 2019 earnings call.
Got Sinclair, Chief Executive Officer, and Chip Molloy Board member and interim Chief Financial Officer or with me today.
Also with US today as Denise Paulonis, Denise will officially take over as our CFO beginning tomorrow.
The earnings release announcing our fourth quarter full year in 2019 result, and the webcast of this call can be accessed through the Investor Relations section or web site at investors that's about dotcom.
During this call management may make certain forward looking statements, including statements regarding our 2020 expectations and guidance.
These statements involve a number of risks and uncertainties that could cause actual results to differ materially and those described in the forward looking statement.
For more information please refer to the risks factors discussed in our SEC filings along with the commentary on forward looking statements at the end of our earnings release issued today.
In addition, my remarks today include references to non-GAAP measures for a reconciliation of our non-GAAP measures to the GAAP figures. Please see the tables in our earnings release.
That let me hand, it over the Jack.
Thank you Susan and good afternoon, everyone. Thank you for joining our call today.
I'm delighted that during the fourth quarter, we drove positive comps well delivering an improved margin profile well ahead of our expectations a testament to the changes we're making.
Well these results may not be with people at the same level I'm encouraged by the organizations dedication to improve our business in the short term as we reshaped a longer term strategy.
We've made some fundamental changes in how we run our DTC business I know told me off some of those changes beginning to have a positive impact on financial results. There also helping us to understand the future opportunities.
In a moment I will share more on our early wins and highlights some of the rally thoughts on how do we expect to consistently deliver long term profitable growth.
Joints, Bryce I made a commitment to building a world class team.
As opposed to achieve our purpose with that said I want to extend a warm welcome to de Denise Paulonis.
[noise] joined our leadership team as Chief Financial Officer.
And east brings a strong financial and strategic background to spreads Richard and speciality and food retail expertise.
Denise will officially takeover the range of Seattle from chip to beginning tomorrow.
I also want to welcome our newest board members, Joel Anderson and don't Walsh, Joe brings a wealth of retail experience from high growth five below to Walmart Dot com and toys R. US in addition to our strong multi channel marketing bright grind.
Dr. Is also welcome addition to our board having played a key role in the national expansion, especially algae gruesome trader Joe's today. He remains very passionate affordable nutrition through his leadership of the daily table.
Nonprofit food retail focus on the environment.
I look forward to old her many contributions as we grew our brand expanded footprint and provide greater access to healthy foods before I hand, it off to chip to discuss the financials I want to passionately fine kemper's support over the last several months.
His leadership business acumen, and I integrity upping invaluable during this time a transition for company I look forward to continuing to cooperate with them or the board level chip.
Thanks, Jack good afternoon, everyone.
I'll begin by discussing our business results for the fourth quarter and for your and then review our outlook for 2020.
For the fourth quarter net sales were 1.4 billion helps 8% compared to the same period last year.
Comparable store sales were 1.5% with a continued upward trend in a two year stack to 3.8%.
The non perishable categories were strong and we experienced the benefits of driving the right holiday trends early in the season like the expansion of our if you get a plant based holiday meals and sides.
For the fourth quarter gross profit increased by 11% to $469 million and our gross margin rate was 34.4%.
An increase of 120 basis points when compared to the same period last year.
Well, we recycling tailwinds from deeper promotions in the fourth quarter 2018 early efforts to balance or price position call an improved margins paid off in the fourth quarter.
Despite experiencing some early margin wins or traffic was still slightly negative.
As 2020 progress is correct balance of driving comp and traffic well continue to stabilize margins will remain a focus area for the team.
Yes, she they increased 10% to $387 million for 28.4% of sales compared to 27.8% in the same period last year.
35 basis points of this de leverage is from the adoption of the new lease accounting standard.
The remaining de leverage is due to higher health care cost expansion of our home delivery program ongoing strategy work, that's likely to California payroll tax benefits in 2018.
For the fourth quarter, or depreciation and amortization costs increased 10% $31 million or 2.2% of sales an increase of five basis points compared the same period last year.
[noise] store closure and other costs were $3.9 million, mainly related to the noncash impairment of three stores.
Our interest expense was $5 million.
For the quarter, our earnings before taxes was $42 million, an increase of 27% compared to adjusted earnings before taxes in the same period last year.
Our effective tax rate was 24%.
Fourth quarter diluted earnings per share was 27 cents compared to diluted earnings per share of 10 cents and adjusted diluted earnings per share of 19 cents in the same period last year.
For fiscal year 2019, net sales grew to 5.6 billion up 8%.
Gross profit increased 8% to 1.9 billion, resulting in a gross margin rate of 33.6%.
An increase of approximately five basis points compared to 2018, mainly attributed to the more thoughtful promotional approach in the fourth quarter of 2019.
S.G. they increased 10% to 1.5 billion, an increase of 50 basis points to 27.5% of sales compared to last year.
35 basis points of this do leverage is from the adoption of the new lease accounting standards.
The remaining to leverage is attributable attributed to investments in new stores expansion of our home delivery program, our health care costs and increased credit card fees, partially offset.
<unk> increased rent credits during the year.
Our interest expense was $21 million and our adjusted earnings before taxes was $197 million a decrease of 5% when compared to adjusted earnings before taxes in 2018.
Our effective tax rate was 24%.
For fiscal year 2019 diluted earnings per share was $1.25 compared to diluted earnings per share of $1.22 in 2018.
Adjusted diluted earnings per share was $1.25 compared to adjusted diluted earnings per share on the dollar 29 last year.
As a reminder, lease accounting standard resulted in a net incremental expense of four cents per share for fiscal 2019.
Shifting to the balance sheet and liquidity.
For 2019, we generated strong cash flow from operations of $355 million up 21% for the year.
The robust cash generation. This business produces continues to support and self fund our unit growth and sales initiative.
We invested $157 million and capital expenditures Nedum landlords landlord reimbursements, primarily for new stores.
For the fiscal year, we opened 28, new stores and closed one ending the year were 340 stores in 22 states.
During the year, we also repurchased 7.95 million shares for a total investment of $176 million.
We ended 2019 85 million in cash and cash equivalents and $538 million bar on our 700 million dollar revolving credit facility.
Reflective of the strong balance sheet, we continue to maintain a low debt position ending the year, where they net debt to EBITDA ratio of 1.4 X.
Now, let me turn to our outlook for 2020.
Two items to point out.
120, 20 will be a 53 week your with the extra week falling in the fourth quarter.
The company estimates the impact for the 50 Threerd week to be approximately $120 million and total sales $9 million in earnings before taxes and six cents diluted earnings per share.
And too. So we are encouraged by our fourth quarter results and optimistic about the direction. We are heading our strategic work is still ongoing. Therefore this outlook only factors our current business does not factor any potential strategic changes.
For fiscal 2021, a 52 week basis, we expect net sales to grow 5.5% to 6.5%.
Comps to be in the zero percent to 1% range any t. to be hotter and $87 million to $197 million diluted earnings per share between $1.17 at $1.23 and effective tax rate of 26%.
We expect our 2020 capex spend to be between 120 at $130 million Nedum landlord reimbursements.
This is slightly lower than previous years did opening fewer stores, we anticipate opening approximately 20 stores in 2020.
A few other items to note.
We expect gross margins to be slightly positive for the full year with more benefit expected during the first three quarters.
As today, we'll continue to be pressured from occupancy E commerce labor and benefits.
We expect to utilize our cat strong cash generation to invest in our business and to pay down a portion of our revolver debt.
Quarter to date, we paid down $50 million on our credit facility unexpected additional $50 million to $60 million paid out before the end of Q1.
For the first quarter, we expect comps to be in a zero percent to 1% range and diluted earnings per share between 45 cents and 47 cents.
It has been a delight to serve as interim CFO. During this transitional time period and worked directly with Jack as she leaves our company and strategy moving forward.
I am confident to hand, the raises CFO, overdoes knees, whose knowledge and expertise and retail will help keep the business moving into right direction now back to Jack.
Thanks Chip.
For the last several months, we challenged ourselves to make key fundamental shifts in how we run our business leading to some at least signs of improvement during the fourth quarter, we find and Bob and start promotional strategies to target our core customer and eliminate inefficient promotions to be clear, we're still promoting in providing value to our.
Customers, but we're doing so differently, we focused our promotional activity by responding to opportunities in the marketplace, rather than reacting to promotional pricing elsewhere, resulting in improved cost of merchandise, we focused our display in presentation in store when I teams that differentiates us in the market.
Ladies and provide unique this to the customer if the composition at the competition sake, we liked.
Our core fresh categories, we focused less on commodities on more on our strengths in assortment on apples, we promoted unique varieties like Lucy glow are the holidays, we focused on greater attribute driven products like new on T. biotic other cherokees, rather than commodity items. This has been a profitable change.
Exploding how to develop this approach even more broadly across our portfolio.
We are becoming the platform for innovation with our vendors come to US first because we can move quickly to put new healthy products in our stores.
We've implemented new initiatives to accelerate our innovation pipeline like our innovation summit targeting and matching bronze I don't you think tank panel comprised of partners in the industry the incubate stuff top brands.
These programs led to successes in our grocery Io with the addition of Pittcon packed with nutrients and taste and Vanleeuwen Fort Mill began ice cream. All these changes have created a plot from from which we can build our brand can and will be known as a treasure hunt for healthy eating across this country.
Enhanced cross collaboration has helped teams work together to better plan on source our products.
We reorganized our project buying group to enhance our vendor partnerships, increasing availability to spreads and improving our costs. These improved vendor relationships allowed us to highlight Briscoe suite to batch plot blueberries, which are Baker suite to increasing sales in the fourth quarter or.
All these changes resulted in meaningful differences in how do we promote price and source or goods.
And we did this all the while driving gross margins contributing to much of the quarter success.
This progress and the team and vitamin retreated resonated across the entire organization and across the store portfolio.
As a result, we're making progress across the country. The East Coast Division opened half our new stores in 2019 and with relatively new leadership the results what commendable.
Both Florida, and Georgia and proof the store operations on Georgia greatly improved their financial finished position, which had been lagging in past years.
And that's a testament to focused focused leadership with a clear set priorities we plan to build on the success as both Florida, and Georgia prevail growth opportunities for the future.
[noise] restructured store bought his plan laser focused on for our store team members can control has proved to be successful incentive driving sales and engaging team members across the organization.
In 2019, we completed the production planning phase offend, resulting in work flow improvement they took duration of assortment on a reduction in shrinking our fresh departments.
We also entered the second phase offend deploying computer assisted offering.
Which when completed will provide fresher product to our customers improve sales floor conditions and reduce unproductive inventory I.
Additionally, we completed industrial engineered getting labor standards on all in store activities and will be integrating the labor standards with on labor management system to properly schedule resources based on production needs by item.
These initial positive results are setting the foundation on which we will continue to build.
As chip mentioned, we're keenly aware, though traffic remains negative we're taking a long term view I know as we move towards a new marketing strategy, a stronger everyday price position I'm pulling back on unprofitable promotions.
Me result, and continued traffic headwinds, we expect an adjustment period, and then profitable customers will respond.
The retail landscape remains fluid and we continue to a bolt how do we connect with our customers.
I'm pleased that during 2019, we enhanced our touch point, whether customers, we increased our digital subscribers to over 2 million accounts up more than 75% for the yet.
As well as our home Delevering continue sticks as well of home delivery continues to expand.
Ending the year off more than 150% and we continue to see increased adoption.
We tested self checkout in a handful of stores. So resoundingly positive response, and we will extend to test in many more stores in twentytwenty.
The rest much work ahead.
Company, we're testing some tactical changes in our marketing, including how do we reallocate the mix of our media spend we're focusing less on print dollars and redirecting these funds to different channels.
And different content to drive brand awareness passionate ization on store traffic.
We've experienced some positive test results in the early stages, but not yet declare victory I look forward to additional testing and data as a month progress.
Looking ahead I want to share some of our initial conclusions from our strategic work to date. The foundation that made sprites will remain a healthy brand rooted in the farmers markets heritage that is good for you good for your family and good for the planet, we will lead to innovation either through market trends national.
In the ships or private label investments and will remain value orientated and accessible to the everyday consumer.
With considerable transformation work in front of as we've identified a handful of opportunities.
One through or at least segmentation work, we have a deeper understanding of the covenant and future customer spreads.
We understand what is important to these customers, where we have opportunities on how we will integrate changes to reflect their preferences.
We expect the store growth should accelerate beyond historical 50 stores a year with a smaller bauxite, there's less complicated and more profitable similar to many of our older Southern California stores, which continued to produce above average profit.
Three we will plan to enter new markets with a greater concentration of new stores.
For all markets, both existing and you will be supported by a more effective and efficient supply chain network.
Improving costs and guaranteeing freshness of products due to short term distribution change.
At this point is of great importance, though we have 340 stores our supply chain has been disjointed with our growth.
This will be corrected in short order and we'll separates us from other competitors from like this infrastructure.
And lastly, marketing will evolve to promote more brand awareness. So on customers understand why they should chocolate spreads and their loyalty on a greater share of wallet.
Concentration of stores bypass supply chain network, and a focused marketing program on our target customers, coupled together will create optimal store economics I look forward to sharing the detailed strategic vision with you all touch our next earnings call.
[noise], a new chapter is starting to take shape for spreads with the positive fourth quarter results behind us the dynamic leadership in place on an inclusive team member culture. We are all even more energized for the work and challenges ahead I want to thank all the team members that spreads for the debt.
Occasion under enthusiasm displayed chart customers every day in the stores.
Even more so to date I remain confident in the team's ability to focus on creating a more efficient business, while implementing a strategic plan to position us for long term profitable growth.
With that we would like to open up the call for questions operator.
As a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound G again that star one and you touched on telephone to ask your question. Please standby we've compiled the Q when a roster.
[laughter].
First question comes from a lot of Paul Trussell of Deutsche Bank. Your line is open.
A good afternoon, and congrats on the Holy progress and welcome Denise and I guess until next time chip.
My first question is really regarding the top line.
It sounds like traffic is still slightly.
Negative so maybe talk a little bit more about the outperformance you saw versus initial expectations in the fourth quarter.
And then just looking at.
The strong two year stack did that produced at least relative to prior quarters, just like a little bit more insight.
In.
The rationale behind the only flat to up one guidance for this upcoming year. Thank you.
Yeah that I'll talk little about but what's happened in Q4 with regard to her complete I. We we made some changes in our promotional mix and made some changes in terms of hi, reinvested in what products, we invested in I'm not clearly we weren't sure exactly how that would play I would what happened in the Pos.
Is that they excessive investment in promotions wasn't driving the top line was actually deflating, the sales rather than rather and creating positive sales and as we've evolved the promotional.
Plans in terms of the product, we're putting in the in or promotions on the pricing, we're putting behind them and using different products. The outcome has been what the outcome has been it hasn't significantly changed traffic trends, but it significantly change the underlying.
Comp sales it was hard from not from the volume that we're putting through.
Going forward does a lot of volatility in the year on year comparisons and as we look at the setup me in Q1, two Q Q1 Q2 in Q3, you've got of any significant.
Volatility and what we did last year and as we measure that I think it's prudent to be where we are at the moment in terms of.
For costs going forward on comp sales.
Thanks, that's helpful.
Just in terms of my follow up pretty meaningful.
Expansion on the gross margin line. This past quarter, you know do how much of that is directly attributable to the pullback on promos versus other drivers impacting that number.
[noise] coupons sure.
The majority of that is coming from.
I want to say the pullback on promotions blood promoting differently. So we're promoting.
We're promoting products that we can actually make money on we're going into the marketplace with the vendors with the deals were making finding unique products and then we're promoting those and then were to some degree were not promoting everything to everyone. So we're not trying to chase every competitor to the bottom and we're being more selective about the what those pro.
Those are and quite honestly, that's that's driving the vast majority of the margin expansion year over year last year, we out we had some benefit year over year, which we anticipated going into the quarter, but the performance of the.
Strategy, if you will in the quarter actually over before and what we expected.
Thank you best of luck.
Thanks I suppose.
Thank you. My next question comes from Ken Goldman of JP Morgan Your line is open.
Hi, Thank you very quickly as a as a brookwood resident I do want to thank you for the shout out for Ben Lu with ice cream. It is a it was a good local brands, what's good to see it expanding out west.
And I just wanted to ask a little bit about you know I know you're not well it ready to talk all about all your strategic changes, but no. The last one we are well the second to last part of the of the five elements you talked about with a more effective and efficient supply chain network can you give us just a little bit of insight into what you think that requires from.
Hey.
The next standpoint.
Even if the numbers aren't exactly there yet it will be helpful. I know, if you're if you're thinking about oh, a meaningful step up something a little bit more modest or indeed, nothing at all just curious for your your insights there if you can.
Yeah regarding Oh, sorry, Kevin it's gonna be really modest because expanding or do you see network and expand even cesar free free pretty small relatively small from a capex perspective, so anything that's going to materially change or capex profile going forward, we'd be more stores not not easy.
Unlike the crux of the supply chain initiatives going forward will be to increase we've talked about this in the pocket as we've built some of our stores that the network as being stretched in terms of the distribution miles that were traveling from our distribution centers tourist stores I'm not that causes obviously increased.
Cost, but also challenges some of the freshness in terms of how do we present the product that we wanted to be presented so we'll we'll be investing in making sure that the distance that we travel on the opportunities for us to source more locally and more effectively will improve the not only the cost to the supply chain, but the quality of the product were.
And in front of the customer as well.
Okay. Thank you for that and then just to confirm Oh, you talked about that an adjustment period potentially coming on traffic just to confirm I assume that your guidance Ari factors that adjustment period with baby traffic you know worsening a little bit as some consumers are a little slower to react to some of the pricing changes you're making it that affair.
Assumption.
Yeah, I think generally that's fair. It's it's a long year on was slightly negative traffic Oh, we're gonna have started to comp a negative traffic as we go through the year. We hope that you know we're hopeful that we're going to start to get positive hope is not strategy of course, but it would be it would not be prudent for us to expected.
Big swing in traffic going into this kind of your.
But I'm really sorry, and it can in time, but expecting out a profitable customers to come that's the that's the objective of our traffic on patients going forward.
No chase unprofitable customers.
Understood. Thank you so much.
Thanks.
Thanks next question comes from Scott Mushkin of Arc five capital your line is open.
Guys. Thanks for taking my questions one follow up a little bit on a couple of questions.
He answers to them around the gross profit a big moves we saw in the margin rate and the expectations as we get into next year. So it sounds like it works pretty well it sounds like traffic really didn't deteriorate.
Well to really Tac I guess my question is is that it would suggest that why why why deviate and why is the guidance where it is.
So I guess, that's my first question.
He's got it should.
As it relates to the guidance. So one we are expecting margin expansion in the year.
On to as we as I said in the call. It will be predominantly in the first three quarters I think the fourth quarter given our most recent performance is pretty much a push right now is the way we at least that four out of the way we're thinking about it and so we will get a gross profit increased over the year, but at the same Taiwan.
We're still putting then 20 stores.
And so that's going to put a little down on the bottom as it relates STD, but on the gross profits.
On a zero to one call. That's that's the guidance on EIP, yes, it's really driven by the comp.
Okay terrific and.
Could you guys think about.
Mark maybe you want to go into a nice you want to concentrate the stores I think you said, Georgia performed better during the quarter.
Is there, but I think you only had four stores, there's the southeast as a place where you still or a fairly committed to outside Florida.
[noise] parts of the southeast most definitely so Georgia for sure Florida for sure as we continue to do our work on our customers understand where we have the greatest opportunity there will be other parts of the southeast there's opportunities in the mid Atlantic, which we've already started and there's continued to be opportunity.
As in the markets, where we are today like Texas in the in the southwest.
Yeah. It's on when you look at the individual markets because 16 stores in Georgia at the moment I was a 15 in Florida both of those markets represent significant opportunities going forward to us and we also see opportunities and in southern California, and its similar based market, where there's a whole host of Oh.
A new targeted customers, which we'll be talking to you about the future.
We see that mark as a significant area of opportunity photos as well going forward I was highlighting some of the operational improvements have been pleased with in Georgia and Florida in her remarks.
[noise] perfect guys do I get what more do I need to go back into queue.
No no more.
So then that my final one is just kind of a a quick on the gross profit was or were there any timing differences and I know you put rent through the for the growth gross profit also help with that big move of 120, Bips and then I'll call I'll yield.
There was nothing there were no timing elements of significance and that was predominantly almost driven by merge margin.
Thanks, guys appreciate it.
[noise]. Thank you. Our next question comes from Karen short of Barclays. Your question. Please.
Thanks, a couple housekeeping and then a couple of bigger picture first thing is new store productivity was fairly low this quarter I didn't know if there's anything to talk to on timing or anything and then second on housekeeping is a color on inflation in the quarter and what your expectations are for 2020 and then.
I have some bigger picture question.
Yeah as it relates a new store productivity is predominately timing and then the other item we're not it's a benign inflation deflation area and that's the way it what we're assuming going forward and it's an area that quite honestly when it comes inflation deflation.
As you know this has been in Hollywood.
In the past the company has really use that as sort of.
I don't want to say it as sort of a driver when at the reality of it's our responsibility weather's inflation or deflation go drive sales and do that at a stable plus margin and that's what we're going to do an awful.
Okay, and then just I guess bigger picture I I guess Jackie made some comments on how you agree structured the store bonus program. So I was wondering if you could give a little color on that and then you also comment and on having a deeper understanding of the customer. So I I guess I'm wondering if you can elaborate on that.
And the last the last thing I'd. Just ask is you have talked in the past about backs and changing specs on some of that.
Hi.
Especially in Proteus I'm wondering if he could give an update on that.
Yeah, Okay, let's take on what our same store born is what we've done in the store bonus, particularly on in Q4, we ended up paying more bonuses to more stores than we had in the previous few quarters, which is encouraging but it was based on based on making asking the stores to take accountability for exactly the things that accountable for.
Topline sales shrink operating cost and non good snow for resale, though they're operating of what they can buy more if it why did they can melissa inventory in the back of the stores more effectively rather than holding them accountable for things like Iran, and things like issues that I went to their control and that's not certainly helped I think.
Get summit real focus analogy bind to the stores in achieving the bonuses in the something what encouraging them to develop even further going forward. The second question is a boat customer issues. We spent quite a lot same trying to dig into exactly how do the food market in the United States is split up.
And we spend it that we split that up and six different groups and we've seen some of those groups are far more relevant to our future strategy than others and we'll talk a lot motorboat. That's our next earnings call, but effectively there's such a huge opportunity for us if we focus in on those customers.
Who already like cars and there's a lot more customers like that in the marketplace. So how do we communicate with those customers in how we manage those customers going forward is going to be a core part of our strategy. Both in terms of a category work in a store what going forward.
And the thought question can was all about product specs I think one of things I've been encouraged with as we've changed the structure of the produce team nine in particular is how you can be appropriate to the specifications by both the geography that people are operating within and the time of the the timing and.
In terms of what's available and what's not available on being in my view specifications are.
Part of the equation of getting really high quality fresh produce in front of customers. The biggest challenge in the biggest thing that can work is on.
Quality is about the freshness of the product itself and sometimes we get a little bit too.
Focused on exact size and shape and color as opposed to exactly how the customer would be interested in buying the product and we've seen a <unk> progress or not in different categories, where we if you like.
Let the flat, let the specification loose at certain times in certain places and that's allowed us to put the right products in the right in front of the right customer at the right on Nobel automotive that going forward can.
Okay, great. Thanks very much.
Thank you. Our next question comes from John Heinbockel of Guggenheim Securities.
Question. Please.
So just maybe two related a big picture thoughts number number one is as you've done your segmentation work.
Where do you think your share of wallet is with your core customer right you want to I don't think about upper does file or core Tyler. However, you want to define it.
And then secondly, when you think about the existing markets during opportunity right with the smaller box what do you think the residual.
Storing opportunity is in those existing markets. You know is another you know 100 stores 200.
Have you gotten your arms around those two topics yet.
Well certainly we've got very good handle in terms of how what the opportunity is with regard to the customer base going forward in terms of segmentation and then I think about a it's a fairly I can't give your share of wallet vide number because I don't have that number to Honda right. When I don't have to have that number, but what I do have and clearly.
In my mind that we've got fairly tiny Shia all this market, though we're going to be targeting.
And we had a 5 billion dollar business on there's plenty of people out there who will the healthy enthusiasts. The in innovation CK. The kind of people that were going to be targeting we have got tiny share of that marketplaces that exist today not only in the geographies that were not been the geographies that we are.
So it really as a matter prioritizing going forward given the resources away have on Dan It maybe I'll pass you on to chip to talk specifically about where we are in terms of store growth in the smaller store group too tight taco lot market opportunity.
Hey, John its a little premature to talk about the runway I think that we'll talk to that specifically on the next call in two months, but as it relates to opportunity I can say that we do believe there's a lot of white space. When you look at sprouts like customers and you look at across across the you US there are.
Many many many many places today, where there are sprouts like customers that we don't serve today number one number two though what's more what's most critical is that the we can go after those customers do it in a profitable way with an operating box. It makes sense and creates the right kinds of returns it creates shareholder value and that's the part that we're working on and that's the part that we.
We're refining and we're making sure that we're going to get it right before we go after those customers and that's the work that you'll hear more about next quarter.
Okay. So we do believe there's plenty of opportunity joined going forward that's for sure.
Okay. Thank you.
Thanks.
Thank you. Our next question comes from Chuck Cerankosky North Coast Research. Please go ahead.
Good afternoon, everybody quick take on a kid on the balance you finished with the cash balance up significantly any particular reason for that was the timing and Andy could you could do you have been more aggressive on buying back stock and I will follow.
Well as it stands right now truck or intentional buying back stock. We bought back you know a big chunk earlier in the year. We then made sure we were buying back any sort of dilution for the repayment for the next year this coming year that rent today, but as it relates to the we want to get through the strategy work first before we continue to buyback.
Star, We don't have a new authorization authorization I believe expire at the end of year. So we don't have into authorization right now any cash proceeds were going to use to be down on our revolver and once we really refiner strategy to determine how much of our capital needs are going to be each and every year, we'll revisit what's left over in what we do with it.
Got it.
Thanks for that and looking at the comp guidance for 2020 anything on the economy that influences you. It does look conservative.
Oh are you just concerned about some of the traffic issues you're facing.
Oh, there's nothing on the economy front you know we're a domestic U.S. We're not we're not in fact is by the things that are impacting the global economy, which then have residual impacts locally, but as it relates to the comp guidance Oh, Yeah, We're where we are be who'd is we believe as it relates to the potential volatility.
We're going to add one going through the year for traffic as it relates specifically to how we promote and where we promote.
So so so you're talking about a little bit of experimenting perhaps the realized some things might not work.
Before we always had not been treasure hunt aspects. So absolutely absolutely we've been we've been doing experimenting a ever since Jack arrived a we've done a lot of experiments a lot have work some have not and we'll continue to be experimenting through that through this fiscal year, but we don't think we're gonna be doing anything it's going to.
Dramatically impact is negatively or positively oh at this stage.
Alright, great. Thank you.
Yes.
Thank you. Your next question comes from Judah Farmer.
Credit Suisse. Your line is open.
Hi. Thanks. So first question is regarding the language about the 2020 outlook I think it does something along the lines of of the outlook doesn't contemplate strategic changes all it sounds like the strategy is contemplating changes in pricing and promotion so what else could change within the strategy that.
In may throw the outlook off course.
[noise], Oh, well as it relates to strategic changes, we're still working through the strategy. It isn't as it relates the promotional sort of the house that work we're doing already that's not that's tactical work that we're working that we're working on every day to continue to make business a better business, while working on any sort of walk.
Longer term, what I would call impactful things like this store growth like the size of the box like the like the desired you know pace at which we grow shifting of categories a little bit so.
We're going to have more complete information on that at the next quarter, but bear in mind. The direction. We're going are remaining is in our opinion is going to.
Through the <unk> the runway of this company and the performance of this company along the way and there may be some short term wins or losses, as well, but we haven't articulated that today.
Okay. That's helpful line, and then maybe more and more broadly on the competitive environment are clearly you've seen I think some conference that people would considered somewhat similar to scrounge. You know go bankrupt recently, obviously very different leverage profiles, there, but what kind of similar fresh lad concepts and you see.
The bigger grocers in the country continue to focus on fresh so how do you think about your position do you think about price gaps or promotion within fresh and produce differently than then center store than maybe you did previously.
We sat may spend a lot of time looking to our own business right as opposed to look in our competitors business I think the reality of our about our operation. This is thing that I think of Len. Most in the last six months says, we're we're pretty if we do it right.
We get good results.
Respective applaud competitors do I've been very encouraged when I go around the country and depending on who were sitting next to we are very much a complementary retailer as opposed to directly competitive retailer a fresh produce operation is better than most then we'll stay better than most.
Both corporations pretty unique vitamin operations pretty unique and our gross spending when do we have the categories are doing really well for us our when I can't do any price comparisons because the products that were Sally I totally deaf into a common stock in fainted conventional or mass market competitors. So.
In that sense, we are watching and aware of what's going on in particular in approaches pricing marketplace.
So what creating a lot differentiation by the type of products that were put again and that we were buying it and we were focusing your behind it.
And you know I think you identified pretty well the fight that where this is a strong cash generative business with a strong balance sheet, which I think contrast, a little bit with where we've been with some of with some of them more direct competitors in this space and they didn't really have to scale I don't think that to the very meaningful in the sense of helping us.
No nothing else with regard to what we are being do without stores I think some things, we probably have learned from one or two of those competitors as if you spend too much money on too much capital and invest too much in labor in certain categories and particularly in daily in prepared foods you can put your.
Self in a place where the cost base is it makes it very difficult to make the returns that you'd want to make and that's something that we will be reversing in there and as we went down not right over the course of the last few months.
Great. Thank you.
Thank you next question comes from Kelly of Wells Fargo.
Your line is open.
Hi, Good afternoon, guys. Thanks for taking my question I wanted to ask about the you know the promotional strategy and the changes that you're making there and maybe if you could just provide a bit more specific color on some of the adjustments and whether you're striking the right balance.
I think the concern maybe is that if you pull back on promote being pulled Baxter on weibo, where oil or if you adjust on promotions that those promotions were probably driving some traffic at a minimum of gas right and is that why we could see units opinion continued softness of trafficking and 20 and just you know just general thoughts around how you have.
The balance all that for the long term.
I've sat in the very much pot and what the experimentation phase over the last six nine months of over the last six months have been and will be over the next few months, we still got to refine every aspect of it but the reality of it as weve turned off on profitable customers by not going sole commodity focused on the product. So we put an hour.
Our our promotional and that promotional vehicles that we use both in terms of what we put in in the store and what we put in our Aflow distribution. So we've tried to take away a lot of the commodity type promotions that do drive traffic, but tend to be very promiscuous customers, who will go to weather.
Are the lowest price a chicken breast says as opposed to who's going to go and buy those products are going to differentiate and may cause different and better in the marketplace. We've tried to shape the promotions towards those things are different than better on the outcome of that potentially as you lose some unprofitable customers, but in the long run.
It builds as a kind of profitable traffic growth that we're going to be aspiring to over the course of the next few years.
That makes sense.
Yeah, Okay, and then just adds as chip and I want to I just want to point out too is.
There was a period of time in the first half a year that the company was negative on traffic as well and will continue to heat up promotions. So there were promotions being filed on top of promotions on top of promotions that weren't doing anything from a traffic perspective, but they were burning down margin.
Right.
Okay, and just a question on the but the store format going forward any color you can provide online a the changes that you plan to make how you might see their return metrics penciling out and then just talk about your decision to accelerate growth I think most of US look at food retail is pretty saturated industry, but you're out.
You see confident that you can take share profitably.
Just some thoughts there.
Yeah, I I'm very confident that does more and more people interested in healthy options in terms of buying for themselves in the family I know, it's I think that trend is pretty clear on there's going to accelerate at all income levels in all age levels I think there's a real opportunity for us to be the leader in that space.
Based on that space is getting Vegas within an overall food market. That's got some issues as you describe in it we're trying to we're not really thinking about the overall business, we're thinking specifically around those customers and those trends in the marketplace and as we watch that went through we can supply that need in our unique.
From a low profile.
Great presentation of fresh foods, the combination of Hoboken outside as well it gives us a uniqueness in it.
I'm I wasn't a news we opened a new store yesterday, no thought away on the passion and energy of the customers coming into that store and it was in Arizona, but the passion and energy of the customers coming into that store for the proposition that were put in front of them. It's something that makes me really excited and positive about they'll parts.
And he's going forward [noise].
Until career Snake and add real quick.
I just want to point out I mean, there's surplus at its highest level to slip we've articulated the store is is gonna be smaller than the three that's it for sure. It is going to be less expensive to not only build but less expensive. So operator, and we believe and we have a strong belief based on the you know looking at our customers looking where the customers.
Looking at our merchandise looking at what's productive merchandise, what's not we have a strong belief we can still present, our value proposition on the corner of Maine in me in a box is less expensive than it than the three that we're doing today and less costly to operate I'm really not lose any sales.
If anything I can we create the farmers market. They tell us really say two things partisan [laughter].
Thanks.
Thank you. Your next question comes from Chuck Grom of Gordon Haskett. Your line is open.
Hi, guys. This is actually a good greenblatt onto Chuck Thanks for taking my question.
Just a regarding your.
This means your supply chain do you anticipate any store closures regarding that going forward or right now just openings.
Oh, Dear well right now we're focused on the openings, we were going to evaluate all of our stores will continue to evaluate all were stores and see how that fits in our strategy and then we'll we'll sort through that but right now we're still working on network.
Hi, good.
Then just in terms of a instacart any color you could give on the benefit you're still seeing from that.
Well I mean, it's a great business I mean, we're we're up 150% for the year on home delivery, we're doing almost $11000 on a per box basis. We've got it all 340 were stores on the home delivery side the pickup side of the house is not really not that exists.
Well, we've got in 55 of our stores today, it's running at about a quarter or what the the home delivery is that's not something our customers seem to get out excited about but as it relates to the you know delivery. We're excited about that we have a great relationship with Instacart and we're going to continue down that path I didn't get some stores in a wall money and.
Yes dependent on the market the Bay area in particular thing countries be performing well for us in this space and Instacart didn't get jumpers.
That's great. Thank you.
[noise]. Thank your next question comes from Robby Ohmes from Bank of America. Your line is open.
Oh, Hey, guys. Thanks for taking my questions. Jack just I guess two follow ups just on the fourth quarter, you know with the less promotions and everything any any impact at all from you know the six less shopping days or anything in your seasonal that.
That impacted the quarter negatively any way to look at it and say that you know your traffic maybe would have been.
On a positive in the quarter given anything that happened.
I I Fred thought from some of the other retailers have released and I'm not we're not seeing that I think it's I think that impact has been more and that toys non food side of things that it's been an impact in terms about food business. So I don't think that's something that's a factor we've certainly not identified the as such.
That's helpful. And then just a follow up on the the smaller stores and and maybe home delivery penetration Howard how are you thinking about home delivery penetration.
Going forward and pick up in.
Is that factored into smaller stores matter, you know does it help or hurt home delivery penetration or pick up I'm, just curious how you're thinking about the role of.
Livery and pickup in sort of the new store formats.
Yeah, I think I think intends to the the broader strategic challenge over the other thing keep thinking through if that's when it pick up doesn't seem to be something that is really a big part of how our customers want to interface with our brands in terms of delivery smaller stores are bigger stores. We can we've got both those types of stores in our network in the moment both of them.
Who felt the need for home delivery for our customers pretty effectively when we do it so going forward, we'll certainly pay attention to in terms of the formats, we put in place and make sure. It can be executed efficiently, but it's not something we're seeing is a huge challenge and I'm going forward you know, we want to be a business where customers come to the.
Door for the reason that seeks there's a reason to be there because of something that they want expecting or something new that something fresh and on always used with the team internally as you know farmers markets is probably the fastest growing retail in United States at the moment. If we can just capture some of that farm that growth in farmers markets will be pretty well placed on not required.
Experience show retailing eggs and Reclassed people to really want to be there and that's where our aspiration would be in terms of what we create and these small stores and we've certainly got it and some of our stores today that's for sure.
Really helpful. Thanks, Jack.
Thanks [noise].
Thank you next question comes from Charlie's any a of BMO capital. Your line is open.
Hi, good evening, Thanks for taking my question.
I think this has been asked but im going to try again.
It seems to be there's a little bit of a disconnect between your your more cautious comp outlook for 2020 relative to success you seen with this tactical change in the promotional strategy, maybe just over the last couple of quarters. So I guess I'm. Just curious is the concern me.
Maybe about is there any concern about the longer term impact of this is consumers get more accustomed to what you're promoting and how you're promoting and maybe Jim can you help us understand if your with your comp guidance is within your E. If your comps are within your guidance for the first quarter so far.
Well because true first off as it relates long term no. We don't think that there's going to be it <unk>. You know this is a short term belief as we start to change the way we go to market on the promotional sizes that we are going to lose some traffic we continue to lose some traffic that started.
Before we ever even started to ship so that part of it we're working through we expect that that'll continue through this this coming year. There are the it is volatile you'll see the volatility from week to week from promotions or promotion. So it would be like I said early view it would be not would not be prudent for us.
Got it just sit here and draw to.
The higher comp when that's not the work that we're doing as it relates to what was it was the second part of allergens.
What you want Oh, Q1, Q1, Oh, yeah were more than halfway through Q1, and we gave a guidance is zero to one. So that's that's what we believe is where we'll be for the quarter.
Okay, and I guess I'm, just another follow up and my understanding of Sprouts historical strategy was to kind of lower new consumers and with.
Aggressively priced produce and transition them over time to some of the higher margin parts of the store and just curious how you feel about that and if you're seeing that progression and how that plays into your AD outlook, and but kind of strategy or your sounds like you're still developing.
Sadly going forward Kelly this strategy will be fine, we'll be well have a foundation of very strong value produce in terms of both pricing quality product and we kit that will be a fundamental part it was a fundamental part of the of the origins of the sprouts farmers market business and I will be up.
Fundamental part of this business going forward in terms of what you then do without Tropic. One is there which is what this basis on a that's not going to change either of those elements across the mix of the business that will come together to create the business model that we need going forward. So in some ways. It will be more of the same or going back to the future Intel.
So how do we think that went through because that's what's kind of work to me. This business great in the first place and there's no reason why not thing kind, what just as efficiently going forward.
Thank you.
Thank you. Your next question comes from Bob Summer.
Buckingham Your line is open.
Thanks, Good afternoon.
To be just the data a little bit so as you're rebalancing the promotional posture I'm curious just too.
What type of consumer work, you're doing on price or value perception, and whether you're breaking that down between loyal customers Cherry pickers or whatever segments, you might have big because we think about that's worked with traffic negative. The basket is up and then you know is that driven by the baskets pride on product rate mix, you know just trying to get it.
Feel for you know how close on price perception, you are with the customer because I think that's really with what you're doing could you know could get away from you.
Yeah. The once again, the topic hasn't changed significantly since weve changes it be it stayed I kind of negative level over the course at that time as we've been changing around and doing experiments on our promotional strategies I think the the issue that we've done in terms of resets going forward as highlighted those pricing nearly as incessant Cathy Graham.
Yes, so we need to look at and we'll talk about a little bit and our strategy as we focus different investments in different categories will see there'll be some elements of the customers that were trying to target who are looking for more aggressive pricing in certain places and that will be part of our strategy going forward as we prioritized.
Certain categories over other categories on the we'll manage that within a mix unintended high that customers are viewing that volume as an important part of our proposition on we're not seeing what we're certainly not seeing anything the short term this doing anything other than losing some.
Highly promotional unprofitable customers that will be promiscuous no matter, what we do so getting away from that so what type of customers and targeting what are we going to do to build long term profitable customers is the key to the whole strategy going forward and.
That's why the some volatility and the numbers because you'll lose the immediate promiscuous customers faster.
Then you'll gain the new the other customers coming through and that's what we're trying to evaluate when we're putting together everything that we've been talking about over the last little Okay, Bob I would.
One other thing I'd make add to that is the work that we've done and the customer research. We've done at the end of the day, we're getting very little credit historically for being a value provider to begin with.
Okay.
Okay that makes sense and then just on any strategic changes.
I think a lot of us will view that as you know really or will equate to investment spending clearly still early for you, but just as a way to think about guard rails and I guess, what I mean as you know conceptually what do you think is the organization's ability to absorb envestnet.
You don't define the rate somehow I don't know dollars pressure on earnings what have you you know do you have any view on what you know.
Right you know way to think about that would be.
Well one hour I would think about it as from a capital perspective capital. They go all the.
But from a piano perspective.
I don't see from an ongoing operating of the business piano I don't see any major investments in the ongoing business that's going to dilute the P. you know if anything it's going to be positive.
Okay. Thanks.
[noise]. Thank you at this time I'd like to turn the call back over to CEO, Jack Sinclair for closing remarks, Sir.
Well, thanks, everybody for taking time to listen to our call today were very pleased for the progress. We've made in Q4 and we're very excited about sharing with you the future of the business starting with our next call in April type. So thanks, a lot of your attention.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
[music].