Q1 2020 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to Sprouts farmers market first quarter 2020, <unk> earnings Conference call. At this time, all participants are in listen only mode.
To the speaker 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 of today's conference is being recorded.
If you require any further assistance. Please press star Zero I would now let's say in the conference over to your Speaker Ms., Susannah Livingston, Vice President of Investor Relations and Treasury. Please go ahead.
Thank you and good afternoon, everyone. We're pleased to have taken the time to join sprouts on our first quarter 2020 earnings and long term growth strategy call.
Yes, So Claire Chief Executive Officer, and Denise Paulonis, Chief Financial Officer, or with me today.
The earnings release announcing our first quarter 2020 result, our long term growth strategies life and the webcast of this call can be accessed through the Investor Relations section of our website investors that sprouts dotcom.
During this call management may make certain forward looking statements, including statements regarding our 2020 expectations and outlook as well as our long term growth strategy and financial target.
These statements involve a number of risks and uncertainties that could cause actual results to differ materially and as described in the forward looking statements.
For more information please refer to the risk factors discussed in our SEC filings along with the commentary on forward looking statements at the end of our earnings release issued today.
Our remarks today include references to non-GAAP measures for a reconciliation of our non-GAAP measures to GAAP figures. Please see the tables in our earnings release.
As well to accommodate the additional time needed to discuss our long term growth strategy. We have added an extra 15 minutes to the call today with that let me handed over to Jack.
Thank you Susan and good afternoon, everyone. Thank you for joining our call today.
We could not have expected the magnitude of change in our business hasn't caught used to cope with 19 pandemic and they want to stop the coal by emphasizing how critical of team members, particularly our store team members have been and this time of crisis.
Sure store workers around the world not become everyday heroes working on the front lines to ensure people up the food on products they need to feed the families on frankly to survive.
The more than 32 times and hard working on profoundly dedicated team members of the spreads family hotshot countless hours onto the most difficult circumstances in order to ensure our customers all healthy food to feed the families is extraordinarily how people are changing their view of our grocery store workers every day there.
Right into the occasion, showing up to the jobs Dawning, Boston Globe carefully following ever increasing safety measures on ultra operational procedures on taking it in stride as they continue to prioritize customers on them each.
Right now we are focusing primarily on on people. The entire leadership team has inspired by the amazing work up team members under partners are doing.
It takes a cumulative dedicated individuals to keep our stores open it up time that none of us I believe speech.
I want to sign not only our dedicated team members and strives, but also all parts of our supply chain, our distribution centers or drivers, our vendors and our farmers and growers for all parts of keeping the food supply chain running.
I'm inspired by not only our store team members, but by the decisiveness and agility, although leadership team and our management team who went oldest began immediately jumped into contingency plans as we pride prioritized team member on customer safety, while ensuring we remain in stock on fresh.
Healthy food for communities, we are laser focused on ensuring our team members have taken Carol and I want to share some of what we've been doing to support them. During this global pandemic.
We accelerated and maximize bonuses are not paying monthly incentives. In addition to bonuses for store and distribution center team members to ensure they are getting compensated at a time when they need. It. Most this is equivalent to more than $2 per hour, we want to ensure that nobody comes to work if they're feeling sick.
So we enhanced paid sick time honestly I forgotten team every team members job should they feel the need to stop a week for any reason during the crisis.
We've also created a disaster relief fund to help with things like medical bills on rent, but there was affected by the krona vitesse, we'd relaxed attendance policies on shocks in store hours to provide our team members more opportunity to rest.
The healthy health and safety of our team members is my number one priority.
Implemented a number of safety measures in stores to keep team members on customer see.
We've installed plexiglass at all the registers unreal limit the number of customers in the store. One time, we've also enhanced cleaning timelines for stores, including right right. Just doesn't production department and we are providing every team member with masks on gloves to with throughout their shift.
I've said it before team members are the foundation of this organization. The six asked we have seen is due to them to the tie listen diligent work keeping the wheels turning during these extraordinary change on while all this is happening we continue to drive our transformational strategy to ensure sprague's.
Long term success.
Talk more about strategy in a bit but far studies will discuss Q1 financials before the on this off to Denise I want to welcome Gil fit our new Chief marketing officer to the team goes experience will be instrumental in shaping spreads for long term strategy to build brand awareness on loyalty without talking shopper.
He brings a wealth of experience on development and building brands I look forward to his contributions to define on strengthen a private label Denise.
Thanks, Jack and good afternoon, everyone first I hope all of you and your families are healthy and say.
I'll begin by discussing our business results for the first quarter, and then hand, it back to Jack to discuss the current environment and strategy I'll join again to discuss the long term financial targets for sprouts.
First quarter profitability was very strong with adjusted earnings before interest and taxes up 61%.
The quarter was really a tale of two cities so to speak the first two months of the quarter. We're on track to deliver sales in line with the high end of our expectation and margins above our expectations due to the smarter promotional strategies, we implemented late last fall.
George followed with a dramatic increase in demand for food from the Cobot 19 crisis, resulting in additional sales and leveraging the business.
First let me review the highlights.
In the first quarter net sales grew 16% to $1.6 billion and comparable store sales were up 10.6% compared to the same period last year.
We estimate that cobot 19 positively impacted sales by $146 million in comps by 9.6%.
For the first quarter gross profit increased 23% to $594 million and our gross margin was 36.1% an increase of 180 basis points compared to the same period last year.
SGN, a increased 16% to $436 million or 26.5% of sales flat compared to the same period last year.
As Genie included a pretax special charge of $1.2 million related to our ongoing strategic initiative.
As for the story behind the numbers the quarter start off with January February on track to post comps at the high end of our outlook was slightly negative traffic as.
As well, our early efforts to refine and balance or price position costs and improve margins through the elimination of inefficient promotions were positive to the business.
In fact gross margins were on track to exceed last year by at least 100 basis points.
In addition in the beginning of the quarter SGN, a continued to experience de leverage from higher health care and labor costs. The expansion of our home delivery program as well as higher occupancy cost due to larger source.
Starting in March consumer behavior dramatically changed as customers began to fill their pantries as cobot 19 stay at home orders led to less eating out.
We experienced heightened call in the middle of March led by grocery frozen and vitamin categories, which settled by month and to a higher new normal resulting in a 26% comp for the month of March.
Sales were up in the store as well as through our digital home delivery and pick up.
For the quarter ecommerce was 4% of sales up more than 160% compared to last year.
As much progress we continue to experience strong margins with stockpiling attributing to a shrinking prudent as inventories reduced and the mix benefit recall grocery frozen and vitamins are higher margin categories for us and so these increased sales provided a better margin mix.
As the cobot 19 pandemic escalating we leverage the higher sales on fixed cost like occupancy and marketing due to our reduction spend.
As well we were challenged to keep labor in line with heightened sales.
Offsetting this leverage we made significant investments in pay and benefits to recognize our team members instrumental commitment to serving our communities and didn't have implement additional safety measures.
We maxed out and paid early store in DC team members, the first quarter bonuses as well as additional bonuses.
Sick pay also began to increase during March.
Moving down the rest of the income statement, our depreciation and amortization costs increased 5% to $31 million or 1.9% of sales decrease of 20 basis point compared to the same period last year.
Store closure costs and other credits or a 1 million dollar credit compared to 500000 in costs in the same period last year, mainly related to a true up the 2019 store closure charge.
For the quarter, our adjusted earnings before interest and taxes were $129 million, an increase of 61% when compared to the same period last year.
Our interest expense was $5 million and our earnings before taxes were $123 million an increase of 65%.
Our effective tax rate was 25%.
First quarter diluted earnings per share were 78 cents, an adjusted diluted EPS was 79 cents compared to diluted and adjusted diluted EPS of 46 cents in the same period last year.
We estimate the positive EPS impact of Cobot 19 was approximately 22 cents.
Excluding the positive code 19 impact we estimate that adjusted EPS would have been improved by 24% compared to the same period last year, which we attribute in large part to our ongoing strategic promotional improvements.
Throughout these uncertain times, we've been able to maintain healthy cash cash preservation.
As most of you know sprouts cash generation has always been strong and this quarter was no exception.
In the first quarter, we generated cash flow from operations of $277 million up 146% for the year.
We paid down $87 million on our revolver in the beginning of the quarter and allow cash to build on the balance sheet for the remainder ending the quarter with $247 million in cash and cash equivalents.
Reflective of our strong balance sheet, we ended the quarter with a net debt to adjusted EBITDA ratio of 0.6 times, reducing our borrowing spread on our revolver by 25 basis points to 1.25%.
Under the current pandemic environment, our near term focus this utilize the robust cash generation. This business produces to invest in the business and maintain a strong cash balance for financial flexibility.
Lastly, we invested $17 million in capital expenditures net of landlord reimbursement primarily for new stores.
For the first quarter, we opened four new stores ending the quarter with 344 stores in 23 state.
We remain on track to open approximately 20, new stores this year.
So far only one store has been delayed due to the cobot 19 pandemic.
We've been closely monitoring our results and certain trends we saw it in the latter part of the quarter have continued into April.
Elevated levels of grocery spend have continued as many consumers have increased their food at home spend.
Social distancing has changed consumer behavior, including customers consolidating trips and increasing use of ecommerce services.
As a result for the month of April comparable store sales increased 7.2 per cent compared to the same period last year notwithstanding the closure of all of our stores for Easter Sunday, The first time in company history.
Our average basket was $51 nearly double the historic average and ecommerce sales represented 13% of our net sales in April.
While the increase sales and our strategic initiatives around smarter promotions remain a benefit to margins the timing of heightened investments to enhance team member pay benefits and cost to implement additional safety and cleaning measures will weigh heavier in the second quarter compared to the first quarter.
Because of this we don't believe we will sustain the same level operating margin expansion experience in the first quarter.
The Koby 19 crisis has created a lack of visibility for the remainder of 2020 with many unknowns.
We remain uncertain as to when the consumer behavior will return to normal or what may emerge as the new normal.
This environment is making it difficult to predict specific outcomes and accordingly, we are not reaffirming or stating a new outlook range.
However, due to the strong sales and earnings to date. We currently expect that we'll be able to meet or exceed our previously released annual outlook.
Our business is strong our cash position is robust, enabling us to continue to build an even stronger sprouts for tomorrow.
Now, let me hand, it back to Jack to discuss the current environment and strategy.
Yeah.
Thanks, Denise before I discuss our strategy I wanted to share a few comments around today's environment, given the unusual circumstances I'm going to give color on the current trends.
Finishes number show elevated sales levels that continued into April so no not at the same level as Mark we believe the stockpiling is older more importantly, our observation is the industry's expediency no significant change in consumer behavior.
In order to avoid social contact customers are consolidating the shopping trips on shifting of visits more throughout the week unless on the weekend.
The last trip, so resulting in many more items in the baskas, but tata reduction to Tropic.
No one knows how long these behavioral lost.
Social distancing has changed consumer behavior as well leading to a significant search in E. Commerce sales for April our E Commerce sales increased over 950% from last year.
This change in consumer preference prompted us to swiftly rollout or pickup service from 55 stores to all stores, we aggressively implemented the Severstal This angeles and Central California in mid April on are on target to implemented all 344 stores in a heavily me.
This service in partnership with Instacart utilizes on innovative model with our team members performing the picking on delivery to cost. Many of these pickup rules will be filled with existing team members, which has presented even more opportunity for us to bring in new talent.
Right covert 19, weve been aggressively hiring creating thousands of new Korea as it spreads, though it's as much too early to define on your normal Cobot 19 has been a catalyst for trial of our E commerce offerings, which could stick with many customers as we exit this time damage.
So we're keenly focused on the price and corporate 19 has provided us the opportunity to create trial and awareness of our brand.
Lets capture new customer emails on Rick you recruit more customers to Iraq to establish longer term loyalty.
Come through we have put many of our print ads.
Less relevant during these times, we've adopted our marketing spend to focus on customer acquisition on communication through more digital social streaming radio with the message to stay connected with US. This was highlighted by leadership, but he was cooking at home ideas on how tight team spreads which gained a tremendous positive.
Spawns from customers well above others in the industry.
Well, we have discovered the newest 2019 vintage we have seen an outsized lift in sales compared to the chain average it's too early to tell but perhaps the maturity Cup for these stores is being accelerated as new customers are experiencing spreads for the first time.
Anecdotally, we've had from many customers in our new markets that it was a first visit into our store obviously, what on a weird of us before the crisis the changing dynamics. During this health crisis has prompted consumers to allow for healthier food, resulting in a mix increased to more organic sales in procedures and more grass fed beef and more.
Antibiotic free chicken.
As I mentioned earlier, our investment in our team members top priority and fight for the month of April. These expenses have increased from March with additional sick pay added benefits on enhancements to safety and health measures implemented to protect our team members on customers.
In addition to alleviate safety concerns starting in March we temporarily shut down solid all of on suit bars on pre pot, all our fall into individual serving bikes.
I believe that are always opportunity to be found in a crisis and we're making sure to them from this one.
We're finding that customers are reacting well to pre pot salvage pre packed polyps and drop and go meal solutions as well as the pre pot bulk options.
All of these measures we have taken will help us become more efficient in the future.
One last topic to discuss before I move on to strategy, our supply chain from our internal fresh Dcs to our partner key have been adjusting to the daily changing demands to keep our store stopped excluding a few weeks in March approaches to distribution centers have been and remain in good shape.
And in restaurant activity has created plenty of supply to flow through to our stores.
Keep keep up with the new heightened demand Odcs, we have leveraged idle labor capacity from other industries until he alleviate some pressure from Kiki, we've leveraged our five fresh DC to deliver fresh items like eggs and milk to the stores.
From a non perishable standpoint, our Boeing buying teams took advantage of what we could to fulfill heightened demand.
We are fortunate the products, we kinda you know grocery assortment, our unique and as a result, we have not been competing for limited supply against some of the larger players in the industry.
Our service levels in April improved from our March flows I mean, I believe our stock levels have been better than many an industry in part due to this product differentiation.
Overall I'm humbled by the teams response to the crisis from the stores to the DC to the support office I'm very proud of the quick and decisive actions. We took to ensure our store for me to open with food to several communities. It's a testament to the strong values of all team members of this company.
Now I'd like to transition into our strategy review.
Despite the ongoing crisis the team was able to finalize our strategic plan to drive the company forward, if anything I'm more confident about growth potential in a post corporate world.
Our proposition of healthy affordable fruit supported by a compelling vitamin department on enhanced assortment in a smaller box will be exciting put our target customer in the future.
Please follow along with the slides posted to our Investor website on linked in the press release today.
Starting on slide four today I will discuss our target customer how do we will elevate our brand discuss our smaller format and market expansion on an outline our supply chain changes.
Denise will wrap it up with our financial targets on box economics.
Moving to slide five and six being a relevant brands starts with insightful consumer understanding.
We employed deep resets to understand our target customer what occasions drive purchases, what the by where they buy it already shipped reset fielded a better understanding of who really as our target customer. We funded we over indexed to specific groups health enthusiast and innovation seekers and this is.
We had our future part will be focused though these customers loop for better for you auctions on innovative products to support the healthy lifestyle. We fund we had significant headroom with these target groups to capture new customers by doubling down in our efforts.
You can sleep see from slide six we can double our business by capturing just an additional 3% with our target customers, we should be the destination for healthier food.
And the POS we focused on many different customers trying to be everything to everyone, which diluted our efforts to grow sales.
One piece of data from our customer research that drove this home for me was we spent about 90% about advertising money on aggressive promotions, yes, you're only spoke to the 6% of our customer base that is deal oriented.
As well as on slide seven.
If the covert 19 crisis has made me think anything you know strategy. It is how do we can create seamless and contactless connections outside the store using E. Commerce I do believe cobot 19 accelerated E commerce adoption and grow see that is likely to change the long term trajectory in the United States.
At least 12 more elevated level than historical trends.
Fortunately our processes were in place for these services and we reacted quickly to accelerate the rollout of pickup across the chain ultimately we are agnostic as to where our customer transactions.
But instead focused on strong engagement on building brand equity with them.
Moving on to brand and marketing on slide eight.
The sprites brand this loved by our customers that shop with us, but our brand recognition is low we know we can grow our share of wallet by more effective and relevant brand recognition marketing initiatives, while spending less on promotions.
There's nothing proprietary and promotion and I would rather than baked in items, where we can drive differentiated benefit over long periods of time like our spreads Brent.
Starting late last year into this year, our marketing spend will lean into more brand building.
And our first test market, we pulled back on promotional print ads on increased our friend on cultivating our brand.
Sales were slightly below average to begin the sales quickly accelerated to that of our control group all product called it to be please.
This work will progress.
Eventually flipping a much larger portion of our marketing spend to various paid campaigns in social sat streaming media is on more which can build top of mind awareness of spreads.
Our target shoppers are drawn to our product differentiation marketing inside and outside the store, we will highlight our product differentiation in each category.
Like I attribute driven paleo key to and plant based companies emphasizing digital digital shopping list and customer engagement around our buzzworthy smaller brands. Our ultimate goal is to make our marketing dollars more efficient and effective on most importantly help drive traffic.
Typically it we're still promoting and providing good volume everyday to our customers, but we are doing so differently by being much more targeted.
On slide number nine or some great. Examples of these changes in January this year, we run a promotion on locally grown strawbridge for the southeast region in the past. This would have meant trying to be the lowest price in tone on a broad promotion across all berries, and we would have sold a lots of them, but with very little profit.
Fast forward to Twentytwenty, we focused on a single item strawberries and the differentiation of the Proto being local strawberry sales in this region Comped north of 20% with a margin that was up tremendously from last year.
This displays the only an ability to highlight fresh product, but how our scale is allowing us to partner with more local growers.
Well many of these new promotions are being advertised to a more targeted customer through digital with deals more to the our customers to spend more.
Moving to slide 10, our store size will reduce to 21 to 25000 square foot store on it will remain a health orientated brand deeply rooted in the farmers market heritage with a friendly store experience.
No capacity will be eliminated, but we will integrate changes to reflect our target customer preferences. We're very excited to grow areas that are target customers prefer like approaches frozen on further expansion of Centerplate proteins, all focused on a differentiated product offering.
It seems like daily will remain and will become more simplified.
If anything cobot 19 give us a glimpse into what this may look like at highlighted simplified premade items like solid sale on more complex costly solid boss may not be necessarily in future margins.
Well it has allowed us to see clearly where we could gain ASCII you optimization.
On the flip side, the new format will contain an innovation center, where our vendors condemn when you products an incubator brands can display what is new and trending.
Looking back we had higher expectations of the enhanced larger bulks and we have been building on the which is an appealing bulks. These store struggled to provide more favorable economic returns to cover the increased capital costs and yet we had a great model in our older vintages that were less costly to build and therefore a benchmark.
Fit for our ongoing rapid expansion.
On slide 11, we highlight other smaller store benefits, we can reduce our non selling space and therefore maintain a large number of SK use as well the smaller store will have lower rents on will be more efficient to run with less complicated production Department. We believe these smaller stores can deliver sales on par with the larger store.
Proven with historical locations, we have today.
Resulting in stronger tons of a simple model setting us up well to expand across the country.
Moving onto slide 12 to discuss our expansion plans.
Based on an intersection of we had our target customers live the revenue potential on where our current and future Dcs are on will be located.
We now too darn near term expansion markets, which alone could provide 300 to 400 more stores.
We will continue to focus where we are strong like California, Texas, while building a Florida on the mid Atlantic to Tivo to achieve a larger concentration of stores.
Our plan is to grow at a minimum 10% annual unit growth rate, but most importantly support our growth with a supply chain network.
Moving onto slide 13.
From day, one I realized our supply chain was disjointed from our unit growth plans thoughtful change with the strategy.
We have a commitment to our customers to provide fresh produce however, with five DC supporting 344 stores with a number of those stores beyond 500 miles freshness is hard to goninety.
Going forward, we aspire to have our Dcs within 250 miles of the stores, Colorado and Florida, Our first priorities with the mid Atlantic on the heels. This will not only provide fresh project product it will optimize our supply chain costs, we plan to create a fast and fresh DC the Elaine.
With our fresh partners in a more synergistic with.
This may eventually lead to vertical integration in the long term and we'll take advantage of cross docking activities in the near term.
As well, we will invest to drive efficiencies late demand forecasting to provide inventory visibility from the pharma to the store, while providing the ability to support scaling of the business without added resources.
While the current environment affects the precise timing of when these strategies will impact our results I'm confident all these initiatives will improve our store performance drive efficiency establish a tremendous unit growth trajectory on accelerates our future earnings.
Now, let me hand, it back to that needs to discuss our financial targets.
Thanks again, Jack over the last few months, we've challenged our internal performance expectations, our past practices, our box economics, and our expansion plans.
We set a high financial bar grounded in long term targets, which we believe we can obtain.
While the current environment affects our ability to predict the precise timing of when each of these strategies will impact our results I'm confident the strategies will lead to future earnings growth.
Starting on slide 15, the basis of my discussion today is our goal of driving attractive profit growth and expanding ROI see by reducing our cost to build driving annual 10% plus unit growth and delivering comps in the low single digits, while stabilizing or expanding our EBIT margins.
Turning to slide 16, as we evaluated our strategy, we realized our box was becoming too large and too expensive to build to maintain the economics, we have historically.
Jack hit on the benefits of the smaller store earlier.
The result is a box that it's about 20% smaller in square footage and with a similar reduction in fixture costs, leading to a blended cost to build of approximately $3.2 million, including inventory and preopening costs.
It's important to note that this cost or enhance layout store had reached upwards to $4 million in 2019. So this is a substantial reduction in costs.
Moving on slide 17, the target economics of the new box includes year, one sales of approximately $14 million with sales growing 20%, 25% in four years to annual sales of $16 million to $18 million.
As John commented these sales will be roughly flat to our historic trends, though in a much smaller square footage box.
We expect that this will result in a blended 8% four wall EBITDA margin in year four.
Considering our cash investment of $3.2 million the box can yield approximately 40% cash on cash return by year for which should continue to grow into your five.
We have a long runway of growth ahead, as we mentioned, we're focusing our near term expansion in markets, where we have a presence and where we can build out a dedicated fresh supply chain.
Our goal is to have all of our stores within a 250 mile radius of our Dcs.
Some of our stores fall out of this radius, even with the future DC and we'll continue to evaluate them over time as part of our regular store performance reviews.
For now, especially considering the heightened demand for food from grocery stores and the addition of new customers walking through our doors. During these times it would be premature to take any strategic action with respect to those stores.
In the near term until the newer markets mature with more scale they will pressure our earnings.
Over time market Densification and the opening of Nuti fees will help improve this headwind to our financials.
We expect comparable store sales to grow low single digits.
Key drivers of our comp performance as shown on slide 19 include enhanced marketing capabilities, a focus on innovative and differentiated products and ecommerce growth.
Regarding marketing to reemphasize subjects earlier comments utilizing more digital channels will elevate the we're in a sprouts by focusing more on our brand while spending less marketing and promotion.
We'll also attract our target customers through marketing that highlights quality centerplate proteins, and our differentiated products many of which will be featured in center of store demo and tasting stations.
Additionally, new source will aid in comp growth.
One significant change to our new store strategy is our promotional schedule in the past our new store opening promotions were very deep and for weaken and therefore, reducing costs in the future.
Going forward will still bring value to our new customers, but with a smarter targeted promotional approach what would take a few years before the new vintage comp flywheel takes hold due to our scale today. We expect this new approach to benefit comps in the long term.
Moving on to slide 20, boiling down everything you heard today, our expectation is that we can stabilize to expand our EBIT margins going forward.
From a tailwind perspective as stated on our last earnings call, we structured our previous buying team, which improved our vendor relationships and allow for better sourcing and product.
We expect our in store labor productivity initiatives multiple year shrink improvement plan as well as our investments to improve the supply chain, especially leveraging new Dcs and Colorado in Florida, well together improve our operational and infrastructure costs.
Our shrink improvement in our fresh departments will be the major driver in these savings aided by the fresh item management system implemented last year.
Lastly, the new Starbucks economics will contain lower rents due to the smaller size and a reduction cost to build lowering depreciation and amortization both of which will be a benefit to the piano.
From a headwinds perspective, we expect labor and benefit costs to continue to increase each year and while ecommerce will likely be an overall benefit to call and profit it will pressure margins, which we have factored into our targets.
We continue to explore the optimal omnichannel set up for sprouts, delivering on customer expectations, while improving the economics of this channel.
For example, as Jack mentioned earlier for pickup we have started to utilize our in house labor to support the pick and pack and fulfillment to customer vehicles.
We believe sprouts team members will be more efficient pickers based on their knowledge our stores.
Overall, netting the Tailwinds and headwinds we believe we can at a minimum stabilize EBIT margins, if not improve them in the future.
One aspect that has been a constant for sprouts as our strong cash generation as seen on slide 21.
Our focus remains on utilizing our cash flows to invest in our business to deliver strong returns.
Unit growth as a first priority complemented by other sales supporting initiatives such as DC expansion plans.
On slide 22, you'll note that our historic Capex spend and our expectation for future years.
Looking forward, our expectation is to keep capex spend in the range of 2.5% to 3.5% as a percentage of sales with the key variable being new stores.
In the immediate term through the code 19 pandemic beyond investing in the business. We will continue to build cash on our balance sheet and maintained a strong level of financial discipline.
Once this crisis. This past, we'll reevaluate our capital structure Nene and turn determined the best alternatives for excess cash that the company continues to produce.
In summary, strong unit returns and ample market opportunity, coupled with low single digit comparable store sales growth smarter promotions and other cost savings activities can lead to a stabilization and potential expansion of our EBIT margins.
We believe our strategy will ultimately deliver attractive low double digit earnings growth and expand our ROI see thereby driving meaningful shareholder value creation.
We will continue to serve our communities now and in the future with healthy differentiated fees foods, while delivering on these commitments to our shareholders.
I want to thank our dedicated team members, who make these compelling strategies and strong results possible.
At this time, we can open eight open up the call for questions operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You May then returned to the Q to withdraw your question press the pound.
Please stand by while we compile the culinary roster.
My first question will come from Karen short with Barclays. Please go ahead.
Hi, Thanks, very much and you know really appreciate the color on the longer term.
Good luck in focus I mean, I do want to ask some questions about that but obviously things are extremely abnormal now. So wondering if you could just answer a couple shorter term questions to begin with.
Specifically on Etsy today is there any way to give us the actual dollar amount of investments in labor that you had in place for one q. I realize that small, but then some color on how to think about that dollar amount into Q and then once things normalize what the stickiness would be on costs from cleaning.
Perspective anything you could get on that would be really helpful.
It's difficult to be exact will not counting in terms of hope things of our evolving and changing it's difficult to know how much pp, we're going to need going forward, we're clearly going to need some.
It's difficult for us to evaluate exactly what that number is going to be one of the reasons, what a bit reticent to be clear, but when it's going to be going forward as some of these pressures going forward I think the likely impact of of at post covert world is probably broken into.
Three things for resin costs offset in the past 12, it how much impact will have on our wage rates how much impactful out long term and are they a cost in operating the stores how much will social distancing impact is going forward. So I think is difficult, but it's a good numbers to it but it's clearly part of our plans.
And going forward and we're doing a lot work on it at the moment.
And Karen I think with the math that we gave you asked specifically as to what impacted Q1, you should be other back into pretty well with the SGN a weight was in the quarter.
But it was all really here to supporting our team members MPP any.
Yeah, I mean, we were kind of come up with incremental M&A for Twoq you have about 60 million. So then I think that the question is really that seem to exceed what the sales number will look like if we kind of steam April was 7% and then maybe may and June.
June kind of decelerate from their slightly.
So so I guess it kind of back the new what.
So you gave some numbers in terms of overall annual guidance being slightly better, but it really comes down to gross margin at that point. So maybe first thing can you tell me if I'm way off on the Shannay on that 60 million per to Q and then I guess on the gross margin friend, if you could give a little color in terms of.
How much shrink is benefiting you and in terms of like when Q. I guess in the covert period, but also into Q because I assume you have some significant benefits from lack of like most spoilage.
And then I have spent hundreds of basis points. So any color you could give there would be great.
Yeah, Karen what I would say I'd reiterate what we talked about in the scripts that we released so April we saw our sales up about 7% that included being closed on Easter Sunday. So that adds back 300, a 400 basis points to what we had seen in the April sales trends.
When we are seeing margin right now, we're still seeing benefits from shrink and we're seeing a little less mix goodness as you would just assume as people are back to buying produce and some other things and our store.
DNA I think your numbers high so just in terms of the total dollar amount of what we would foresee right. Now your number is high so I wouldn't be expecting that much to be coming through and what your modeling.
Okay, and then just on the longer term strategy. I know you said that you were not taking out any categories and the new smaller format, but maybe just a little more elaboration on what will be downsizing I know you did call it dairy, but anything else you could call out would be helpful.
Sure.
I think that the reality of as as we went to larger stores, we didnt actually to a lot more skews our categories into the store. We did some seven contribution given more space and did a better Joe probably in terms of the customer experience going forward, we were certainly going to double down on those categories are very important too.
As I am very important to that target customer grouping that we were talking about I'm not comes down to produce which is always going to be fundamentally important to us and we won't be compromising anything on the event it than doing a little bit more in that space frozen foods has come out as a very important category because we're so differentiated in it the fact that we've got.
So much plant based so much vegetarian unique brands is really come in through strongly in this customer segment that we are targeting so we'll probably give a little bit more space to frozen foods, and we'll probably look quite hard to our what we call center a plate whether it be our meat business, whether it be our plant based business how do.
Do we become more of a destination for Centerplate. Those are the three cost to that we're going to give a little bit more emphasis to the consequential. We think we can do vitamins and supplements really really well with a little bit less space. We think we can do bulk really quite well, although there's a lot discussion going on about bulk as you can imagine in the current world.
We think we can do that in a little bit less space. So we'll be flexing our space a little bit daily won't be quite as strong as bake.
But certain capital got more space as I'd give some color too you can.
Thank you. Our next question will come from Scott Mushkin with our five capital. Please go ahead.
So our cultural thanks for taking my questions. So I just wanted to get into the April sales a little bit and.
As far as it does that goes with your long term strategy got smaller boxes. It seems with our data that maybe you guys or it's just a little bit under comping the industry.
So far in April and I was wondering what you think maybe driving that and then forward.
Just to give you any pause about the strategy at all.
Yes, Scott I'd tell you when we look our comp would give very significant we don't have the benefit if that's the right were part of the volume that 'cause come from consumables in the space. The majority of grocers I've had a very big uptick on what you would call paper production bleach is no they'll be as things have come flowing through and not well.
No, we're not really not space, although we've got some some entrusting all put in there that's not something that so the core of our business until we're not getting the benefit there on the other piece of our business as we've taken a solid bars and we've taken out.
So when we've taken out.
Dave all of Boston, and Weve restricted our bulk offer because of the mountain utensils on volte in it. So if you take those categories of it and you take consumables out of it we think we're feeling pretty well in the market.
Okay, Thats really great color slip one more short term going a little bit the longer term.
Strategy question.
Everyone's obsessed with SGN, a and whatnot, but incremental margins have generally been about 15% on extra sales as we think you guys going forward is it going to be way lower than that or is it going to be somewhere near that or how are you thinking about incremental margin on extra sales and then the hedges one last one on Proteus pros.
Yes.
Well the margin really what's been happening on margin over the last little while as you know from the previous pre Colvin World, we were significantly enhancing our margins by being much more thoughtful about our promotional investments. So that continued into the first two months of Q1, and then into Pete three we had the covert.
Dynamic, which changed it a little but the covert dynamic enhance the margin even more nothing we quoted in our numbers, what we thought pre cobot post call bid, we pull obviously pulled back a lot of advertising because having the inventory to be able to support promotions became a real challenge that naturally enhanced margins and it will have done for the.
Industry as well the high topline that were not clearly enhanced strength, which enhance margins are not flowed through pretty well the mix on mix actually enhanced a little bit and then he said in her remarks. So that has the mix gets a little bit better because of vitamins and supplements, which had been a real strength for our business, particularly in March and we've seen.
In our grocery business has been strong as well, which for US is an enhanced margin mix for us. So we're seeing some positive to not on the and I think what's happened. When you are more fresh dominated business when the restaurants kind of pulled back there was a lot of availability of low price inventory, which we were helping to farmers moved through I think we played a put it.
Good role in helping the restaurant in helping the inventory that was going to restaurants in fresh fruits that we were probably better place to take advantage of than some of our competitors or some of the retailers are operating in the grocery space.
So those five things some of them will be real for a long time some of them won't be real for a long time is difficult, but again for us to predict the margin going forward, what buckets I would be very comfortable that we'll be able to deliver on where we were pretty cool bid on the margin growth going forward if not beyond that.
Alright, perfect one of many comedy yield I appreciate LTPS the pricing question offline. Thanks appreciate it thanks.
Thank you. Our next question will come from Rupesh Parikh with Oppenheimer. Please go ahead.
Good afternoon, and thanks for taking my questions. So I also have a shorter term and on a longer term. So I know you aren't providing guidance.
Going forward, but if we see a comp similar to the April level would there be enough lever to drive positive operating margin expansion, even with a higher level cost.
Yeah, I think as I as I mentioned in my remarks, I think that at the moment, we think that for the full year, we'll be able to meet or exceed what we previously guided and in talking about Q2, I think that I said, we believe that we will not be the operating margin improvement that we saw in Q1.
If we have elevated sales letter levels, it's still reasonable to believe that we will see operating margin at or better than last year in Q2.
Okay, Great. That's helpful and I guess, just going back to your additional store pickup recently is there way to help US understand your if you look at stores that have store pickup versus that want versus stores I havent, what's what type of comp their price are you seeing between between those two different classes of stores.
While the increase in the 55 stores that we had was fairly substantial the reality of as the rollout programs literally just just tied to some store I think we've got 40 more stores to finished just looking at yet but sort of know doing the work of a 40 more stores to finish to get to 340, but these are literally just happened inside the stores.
It's very clear from the 55 stores that were seeing an uptick it was very clear we were seeing an uptake on the delivery program as weak as art as our as we mentioned the numbers on E commerce going forward. So I think we took the view that it was something that the customer would be one thing from us as part of the challenges on social destined thing and we think.
It is something that's going to be.
Measurable going forward exactly what that number is going to be.
I'm not sure, but I'm sure there's going to be more than what it was before we started well and in the very immediate term we've seen generally a leveling out of the delivery portion of the business. We mentioned that it was 13% of the sales in April with the rollout of of the pick up a portion of the business that pieces still increasing in it.
Its contribution to the overall sales.
Great and my last question just on the longer term how are you thinking about price investments in your commentary that you believe you can.
Expanding perhaps able to expand the EBIT margins.
Yeah, I think as I've said in previous calls I fundamentally believe the out assortment. Our products are such that it's very hard for us to have competitive pricing on invest in products because the key to us is differentiation and as long as we've got value within not product that were put in front of the customer.
Elasticity of demand will reflect what we need to do in terms of investing or or mark what we need to do with our margin. We're very clear that the important categories for us we're investing in the right.
Sourcing resource both in terms of the big plays around how can we work on differentiation around varietals development and produce breeding development in our meat business and our I'm really getting ahead of the plant based trend that these products will be different for us and we won't be on though the kind of.
The focus on pricing will not be the way it would be if I was sitting in another grocery business looking to other grossly businesses competitive pricing, it's hard to compare us we've got to have great volume and we'll just great value by the elasticity of the prototype that we have not was working pretty well photos of the started Q1.
And then the whole kind of portals changed a little bit from March but that said that the the program that will be following going forward.
Great. Thank you.
Thank you. Our next question will come from Ken Goldman with JP Morgan. Please go ahead.
Hi, good evening. Thank you.
I wanted to ask about a couple of barriers of your storing whether you're able to either take advantage of some.
Dislocations or what do you find us to be some challenges.
What I'm asking about in particular is produce where we're obviously all seeing stories of some produce skiing, unfortunately thrown out rather than sold.
And then the meat side, where we're all of course hearing about.
Some some.
Labor issues and plant closures, which are leaving some shortages. So just wondering how you're dealing with those what some of the headwinds and tailwinds been along those lines. Thank you.
Good question, Ken I know kind of any alive in terms of how we're thinking about things going forward on its kind of highlights the reality of the last few weeks what is all as things change from one week to the next from one day to the next on the meat thing really did kick off dramatically in terms of excess demand the middle of last week up to the the executive.
Although it was good puts in place was highlighted.
The potential shortage of supply and meet the great thing for our business as we tend to have our when supply base. So we've got pretty tight supply base that works directly with US we don't need the extent of pre packed meet that is very much a feature of a law the grocers where the D. The.
Reconstructed the the meat business in the back of the stores. So there's no as much but surely not as many boot chosen not as much if you like.
Creation of product within the store, so we're pretty well placed in that we've got a really strong team really proud of the butchers and the width of operated right. The way through this crisis in terms of taken onboard some real discipline in terms of how the operating procedures and giving customers real confidence that.
Does the hygiene and place that needs to be in place, so weve, whether that pretty well, although demand has been pretty dramatic over the last few days and if demand keeps going up the rate that is going you'll have shortages in meat, but supply will not so worried about is the level of demand that we go to connect manage our sale.
And we think we're well placed to manage the having our own butchers with regard to the project side of things kind of pretty side I was listening to.
Congresswoman from Florida talking about Florida in Florida, with some grow with some projects potentially going to be through note I know our team really aggressively spoke to the the Florida produce association on quickly moved up product into the stores I, obviously pretty low cost prices, but we.
We got this thing moved and go to into customer signs and it we will be aggressively looking for ways to support local farmers as farmers markets have kind of one don't across the country, we're really well placed to sell a produce and that's worked well for us being responsive fund supportive of local the.
The local source of projects supply I think we're well placed to do that and restructured ourselves but to be able to do that better than we may be would have been able to do two or three months ago.
Okay. Thank you very much for that and then a follow up for me.
I may have missed this forgive me if I if I did you guys address whether you going any further made any.
Concrete conclusions about what you're going to do with the Deli business and your stores I know there were.
Some debates internally about.
Directions to go there I just didn't know if you had finalized anything on that side.
Well, specifically on daily we clearly invested a lot space in a lot of cost into the daily in what work and our new format stores.
Level of investment not level of space, we will wind back on Sundar will be a big part of the utility back to utilize the Asian of space going forward, the daily business and if anything the covert world has got us thinking very hard to about how effectively we're going to provide.
If you like meals to go ready meals that kind of sex of something that.
We will be doubling down on how best to achieve that because in a in the post corporate world.
It feels to me like the restaurant business is an open a rush spot not going to come back anytime soon certainly aggressively anytime soon and that Theres an opportunity for us to do the right thing in that environment, we might not thought that saw aseptically pre covance that post corvid that as a way of doing this outside the store.
Creating really good products for customers the allows them to fulfill these needs. So early days, but more to come on not going forward.
Thank you. Our next question will come from Paul Trussell with Deutsche Bank. Please go ahead.
Thank you for taken or question and good afternoon.
I am I know you're not giving.
Forward guidance as it relates to.
Same store sales, but but as we think about the second half for this year.
Right I'm curious to know if you believe that.
The right thought process.
Is that the business will be trending back towards a 1% or so kind of comp level, which it sounds like what you were doing kind of pre cold it.
Or is your view that the initiatives and strategy that you just outlined in terms of marketing and merchandising plans or perhaps would still going on you know across the broader environment from a food at home standpoint, or as you mentioned customers being introduced to re.
Produced to your stores that you will going forward be at a at a little bit of a higher trajectory or run rate from a topline standpoint, even as this.
Kind of pandemic.
Starts to be hardness.
Yes, Paul I think since last year question is I wish we knew right I think that we're all watching what's changing in the environment I'm very quickly and I think that while whether cove. It is in place at not or not or stay at home owners are in place or not we're seeing we're seeing some goodness in new customers getting introduce into our stores.
Customers kind of re introducing themselves to us.
But in terms of where will even be with stay at home and the volume of demand that will still be I'm not in restaurants, and still centering around how long is really the part that we just don't know so I think that we feel good that this our strategy is going to is going to keep pushing if anything co that likely accelerated some of our.
Ability to communicate with some of our customers just because they needed another outlet for food, but at the end of the day, it's really a it's bit of a wait and see right now.
Yes, just to reinforce thought I think I don't know if we'll ever combined to of course Cobiz world. The loosely Capri cope with world. So it's difficult for us to envisage that I do believe the trends on E. Commerce on the trends on restaurants will be in a post cobiz world. So it was all mean for our business. We just don't know and that's the reality of it.
Understood.
As it relates to the slide I think it's 20.
In your.
Long term plan you spoke to.
Stable to expanding EBIT margins and gave what kind of list of items that will contribute to that I would say that its.
It's very comprehensive and easy to understand what will transpire on the new store front. Just curious if you can get a little bit more detail on the actions taking place and the timetable in which you will impact.
All the stores as it relates to.
The improved barring the optimization of the supply chain labor productivity et cetera.
Yeah, Let me, let me start with a few comments on and then I'm sure Jack will jump in with some additional color. When you think about smarter promotions and improved buying that's the work we've been doing that as the work that Jakone team started before I joined last fall and I think that that will only continue and as we continue to think differently in particular with our produce buying with heavy.
In both centralized and local resources to really take advantage of the best opportunities I think that's an ongoing piece of work, but one that has certainly already started and we've referenced a number of times as being part of the benefit that we are seeing now and supply chain optimization, we talked about Florida, and Colorado Dcs.
We hope that we will have both of those in place by early next year.
As those come online, though very quickly start to help transportation costs, which is really a key part of the benefit that they're going to provide to get much closer to our stores for all that outbound product. So we'll get transportation benefit and freshness benefit at the same time.
A lot of the labor productivity changes are more likely to come along as we roll out initiatives that will be a little bit longer term in nature. So probably not next week or next quarter, but more out a couple of years in terms of the options will take care. One example of things that we're testing right now as we are testing self checkout.
I will test and read that but if that would be an initiative, we'd be able to push on that one.
So those are probably a little bit longer term and play.
We're working on shrank right now I was a fresh item management program that we've got as well as a lot of other processes that were working on in the stores and we're starting to make some improvements there, but once again a bit of a longer term play so not next week or next month, but hopefully in the foreseeable future and then E com.
Yes, and the labor and benefits costs are just real to US now so that kind of embedded in the numbers assuming that they are here and here to stay.
Does that help.
I'm not just to reinforce the supply chain optimization will help us both with in terms of shrink as well because the proto fresh product taken lit tend to get there will be able to get a much better flow through of the proto not but also materially and nothing us something this and we can see potentially already some.
Benefits coming through in the way, we're thinking about it but once we get shorter distribution channels I think the so dramatically help our business towards the end of the years beginning in next year.
And as a reminder, ladies and gentlemen to the time restraints. We ask that you. Please limit yourself to one question and one follow up question. My next question will come from Judas Frommer with Credit Suisse. Please go ahead Tom.
Hi, Thanks for taking my question for all the color.
First so there's some kind of a high level question kind of squaring some of.
The cobot related comments with the longer term plans. It does sound as you kind of.
Reset your sites on a new target customer that maybe you're more focused on you know or specialty type store customer one historically the sprouts story has been the you know our key competition is the conventional gross or.
So how do I think about kind of that you know potentially narrower customer building as big a basket going forward as maybe they are during cobot, given you're limited SKU offering and kind of like you said you know the fact that you don't offer those national brands.
Yes, I think if you if you really look at the segmentation first of all I believe there's going to be more customers like the customers. We have targeting because of a post could world people are more interested in healthy eating people are more interested in we're seeing in our grass fed beef sales were seen in our antibiotic free chicken thing.
Things are perceived as healthier more people are going to be interested not in the post could work on our vitamins and supplements business is performing very well, which again I think with immunity and people thinking more about these things I think there'll be more people within it but in the slides that we went through we need a very small number of people.
Extra on there's plenty of them over there. If you can see that slide that shows a slip out of market share that we need to grow the business going forward I wouldn't describe especially out let's say I would like to describe as complementary I don't see us directly competing maybe that's the different directly competing with the grocers foot traffic.
We are directly competing with people for the good spend and I'm very confident that there's enough people there for us to more than achieve ambitions.
Whether were to fade as defined as a specialty group specialty grocer on a gross I'm not sure. What we are but I'm very clear the target customers are therefore, healthier and very yen bespoke products.
Created for the benefit of those that target customer base.
Okay. That's helpful and I'm, just changing gears for a second given given the ramp in E. Commerce activity to the extent you can can you help us with kind of you know pre Corbett and maybe during cobot you know the profitability on your online baskets. You know are they you know obviously they are dilutive to margins have you been make.
The money on your home delivery baskets and does that change with pick up and then and then separately how much customer data are you capturing depending on how you access the customer right. If it come through Instacart App, where are you getting versus you know how many are coming through your.
On a website and properties.
Yeah, you know overall it when we saw the uptick in E. Commerce demand I think first thing that we'd reach out and say, we're so proud of our team members were so proud of our Instacart team members for really stepping up and being able to try to chase. This demand that was coming through to serve the customers that we needed to serve almost overnight you started to see those orders increased and.
To get capacity to service those is no small feat that is out there you know the majority of our state sales still come directly through the Instacart platforms. So while we have some visibility to information on their shoppers. We don't have the visibility as much as that came directly through us, which as you want opportunity that will always continue to look at for the future.
And so I think from from that bigger strategic point of view.
Working on that piece more broadly on the profitability, we definitely make money on our ecommerce business, both pickup and delivery. So it is a slightly lower margin business. Because there are some additional costs that are paid through the system for that but it is a profitable business and we're really pleased with our pickup business, we're really doing that.
Hybrid structure that is letting us leverage our own team members that if anything because of their knowledge of the stores should be that much more efficient and picking orders than what our instacart partners would be so really leveraging the best to both worlds of getting capacity and some additional expertise in the store.
Ask is a much much bigger with those customers. That's one of the things is pretty that it is pretty encouraging in terms of that in terms of we have the assortment on the product mix on the product range that really does have tried that can attract big baskets, which is pretty encouraging as we look to the numbers going forward on there, but we've got more what to do in terms of understanding.
Customer, we will be doing going doing a little work over the next few months and years about how do we can bet to really understand the customers that we have not having a loyalty club means we don't have as much data as I would want us to hop going forward.
Thank you. Our next question will come from Chuck Grom with Gordon Haskett. Please go ahead.
Hey, Thanks, and good afternoon.
You're welcome.
Can you speak to the cost to build out the 300 Dcs over the next few years and then as a follow up can you remind us how many of the smaller store concepts that you've tested them you're expecting a lot of confidence that you can hold sales on the store. That's that's going to be about 20% smaller just wondering if you can speak to any pets concepts that youve.
So far.
Well, we've got some we've got some test concepts written down a bit paper, we haven't opened any specific ones, but the great confidence we have as I've got we've got stores are not size all through our fleet. The are doing higher sales not in the bigger stores. So they economics kind of already in our business is not.
Anything that we all here, we will do some things are going to make it more appropriate and bets or maybe a handling the pickup in E. Commerce site of the business, we'll probably do a better job in terms of making our beat meat business come alive, but in essence, we got the stores in our population. So it's not that need to go and test Dennis and dramatically, we just need to make sure.
So we receive we go back to where we were just going back to the future. If you like going back to what we've done in the past on those numbers are more than enough, what weve going on existing fleet or more than enough to what we need to do on that's encouraging going forward and on the DC side of things.
The opportunity for us to expand and put the TDC is out there in Florida, and Colorado comes with a very high ROI on what's unique about these diseases are primarily protease oriented so they're not incredibly high cost to build think millions of dollars not tens of millions of dollars to put in place what we would need for these dcs.
And the benefit that we get in transportation because of how inefficient our supply chain has been quickly returns the costs. It will take to build these out and get them stood up so I definitely think about this is a nice simple fresh DC.
Definitely not a high tech complexity see to put on that's on the ground.
I am just from a timing pleasure to Florida in Colorado will come before the limited we've now got we've not Neil exactly what we're going to doing them at Atlanta, yet, but we're very clear, but Florida, Colorado, and hopefully that will be up and running starting next year.
Okay, and then just when they are transforming certainly if you guys could just on pack the components of the gross profit margin performance and accord between a better promotion efficiency mix and then shrink and then I guess looking ahead would you expect that level performance to continue into the second quarter is likely to offset some of the increased cost that that were asked about.
Earlier.
Yeah. So let me address Q1 first so we talked about on the call we were doing well a pre coated with it really being smarter promotions and of the way we were doing our buying driving the vast majority of our gross margin improvement and we mentioned on the call that that was upwards of 100 basis points of improvement in gross margin.
So think about that as the normalized improvement we were seeing from promotion and product buying as we were working through those early parts of the quarter.
On top of that then when you layer to where we ended the quarter and the big drivers that we had there was we did see lower shrink we had higher sales faster turning sales and in turn lower shrink as we saw elevated volume.
We were in needed to reduce some promotional intensity. During this peak stock up weeks because of the ended the day, we couldn't go out there with a promotion that we didnt know that we'd be in stock on to be able to serves the customer throughout our stores on throughout our network. So in some cases, we very much simplify the promotional offering to what we knew we would be able to deliver to our.
Summers and then as we mentioned there was a bit of mix favorability for us during that stock up in Cove, and because of a grocery vitamins and frozen which for us or more profitable categories and sprinkle into that a little bit of leverage that comes with a almost 11% comp and that really got the incremental 80 base.
This points or so in terms of getting gross margin to 180 basis points up year over year.
When you turn to the second quarter I think that color of a lot of the levers is is still real we're going to continue to work smarter promotions, we're going to continue to leverage the produce buying that we can do and with the supply that is out there leverage that leverage that locally where we can so that foundation remain.
If we continue to see elevated sales, we would expect to that shrink would still be a bit of a health as well.
And then other things will start to balance themselves out, but we have shifted our mix back to a bit more produce a bit more me, which are a little bit lower margins, you probably won't see on mix again, but you wouldn't have seen a net loss.
So net net I think that we believe that some of the trends will continue but I would argue than in Q1 that over the impact was just a very outsized impact.
Particularly in the last three weeks for the quarter.
Thank you know our next question will come from Greg Badishkanian with Wolfe Research. Please go ahead.
Good afternoon. This is actually Spencer handsets on for Greg.
First question is just for the stores do you have in markets that are already started to reopen thing states like Georgia can you talk about the sales trends that you're seeing there.
It's an interesting question spend so we've been watching it really closely in terms of of the dynamics to places that we got a decent store base, where things have changed a little bit in the last week or so our Texas in Georgia, if anything it's so adding to say im hesitating to me to be too bold AFFO to bend, Georgia, but not.
Seem really any difference in customer behavior of the still a lot of reluctance to.
Kind of go into the stores, we've not changed the traffic trends haven't changed the basket trains trends haven't changed maybe in level, but to Texas, we've seen a little above a difference, but not much uneven different jurisdictions as entrusting how different jurisdictions of doing different things at the moment.
One can see in Texas has said that I'm going to go buy so may fit what are the same me for end of May end up may so it definitely I think it's too early to say, but my gut feel as the customer isn't moving as fast as a change orders.
Oh.
Got it that's really helpful. And then switching to online how sticky do you think the incremental customers that you're getting in that channel will be going forward.
I'm, sorry could you repeat that you kind of broke up a bit.
Yes for the online customers, how sticky do you think there will be going forward.
Well I think we don't know what we don't know we know that folks early on on the on online ordering as people are ramping up capacity were ordering out of necessity that they didn't want to leave their homes and we're hoping that they've had a good experience and they want to think about I'm sticking with us to do that not enough data behind us.
Yet to really have a good sense of what that looks like and for now, but we're hopeful that people experience. The products that would go in the brands that we've got we're going to be sticky that would be that would certainly be it the implication of what's happening at the people out accessing our brand in that way I'll, then not rocca of customers over time.
Good thing so the likely to see whether provided we continue to do a good Joe form.
Great. Thank you.
Thank you and your final question, what's come from Mark pardon with you B.S. Please go ahead.
Good afternoon. Thanks, a lot for taking the questions and thanks for squeezing me in so how do you guys think about skew substitution in this environment would you consider stocking more conventional items in this environment, if it's particularly challenging to keep up in stocks in any categories and have you seen any major changes to your private label penetration inspires broke out thanks.
Yes, Eric again, good questions Mark in terms of would we go to a lot of the convert more conventional product probably not we haven't had two at that point, if we had nothing and the store I suppose you enough to think about off adjusted the moment because I think we identified we talked about in her remarks, because our assortments a little bit different we're not bottling against that.
Hi, guys is a big club channels over that.
Mass channels, and so I'm trying to access branded inventory that the other grocers have chasing after we've got our own bespoke at.
Product assortment, which I think as soon as in good stead for a little while the private brands site about has been a little bit more challenging as some of the private brand manufacturers coal to locate to start was and then started to come under pressure, which has caused us to go on look but other alternative brands, but very much in our type.
Space, the organic very not natural and organic space as opposed to mainstream conventional products. So we are having to do some substitution. We are under pressure in a few categories. As you can imagine on private brands, we're having to be more flexible and probably we would like to be but that's the nature of just supply chains.
At the moment across all sorts of different categories in products and industries.
Great. That's helpful. And then you mentioned ecommerce penetration reached 13% in April does the virus outbreak change your thoughts on where online grocery penetration could ultimately be per sprouts and would you expect ultimately have to take on any major upticks in capex down the red for things like micro fulfillment really any other capacity and.
Lansing options. Thanks.
Hi, good yes, we do believe we call message is going to be bigger than it would have been in my mind is bigger than it would have been I think E. Commerce generally has accelerated across the United States for grocery I think that probably going forward for years and four weeks.
That was of I think killed stabilized so looking at some of the data coming out of China. What happened was there was a peak they were operating at a level. They went off to a dramatic peak and it's actually come back down again, some more mansions level, what exactly happened in the industry, our and our business Im not quite sure, but we will have to make.
Sure. So we're capable of effectively servicing a bigger E commerce business going forward I'm not will involve us look at all the different strategic options around how you feel Phil you deliver you pick how you handle the last mile and we're in the middle of doing some work on us at the moment, but having said that was really pleased to though.
What Denise reinforce what did he said I was pleased with the way we were able to jump on the pickup thing and moved from 55 stores to 344 literally in the space of a few weeks and the team did a good job I'm not in the customers are reacting.
Very early they seem to be reacting well to that.
Great. Thanks again guys.
Thanks Mark.
Ladies and gentlemen, thank you for participating in today's question and answer session I would now like to turn the call back over to management for any further remarks.
Hey, thanks, so much vertex taken time to less than two is today I know, there's a lot going on in a log on east coast and.
I really appreciate you take containment short term interest in our company. There's a it's a it's a it's a fairly unusual time froze all in terms of the way we're working in the way things are going so I really.
I want to sign and I want to thank you for doing that and taken the time to do that I want to say the opportunity of thanking our own team for all the hard work on all the things that came together on that and Dan.
Stay safe guys look up yourselves and look out for your comments. Thanks, so much.
And ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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