Q2 2020 Sprouts Farmers Market Inc Earnings Call
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Thursday Thursday, Thursday Thursday
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Ladies and gentlemen, thank you for standing by and welcome to the Sprouts Farmers Market second quarter 2020 earnings conference call at this time. All participants lines are in a listen-only mode after the speaker's 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. If you require any further assistance, please press * 0. Oh now like to hand the conference over to your speaker today Miss, Susanna Livingston. Thank you, please go ahead man.
Thank you and good afternoon everyone. We are pleased you have taken the time to join Sprouts on our second quarter 2020 earnings call Jack Sinclair chief executive officer and Denise, Chief Financial Officer are with me today the earnings release announcing our second quarter 2020 results and the webcast of this call can be accessed through the investor relations section of our website at investors. Sprouts.com during this call management may make certain forward-looking statements including statements regarding our 2020 expectations down statements involve a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statement. For more information. Please refer to the risk factors discussed in a sec filing 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 New Jersey.
Got measures to the Gap figures, please.
You see the tables in our earnings release with that. Let me hand it over to Jack.
Thank you, Susanna. I'm good afternoon everyone. Thank you for joining us a call today a lot continues to happen in our world and its pros before I speak to the results. I wanted to express my thanks to our team members who have worked so hard during challenging circumstances, but I've seen from the dream team is a true demonstration of our Sprouts culture rooted in respect inclusion and care for one another this cultural Shane's through and everything. Our team members do for our customers and for each other and troops prose form. Our team members of adapted to a new way of operating off remain everyday Heroes as they provide our communities and customers healthy food for their families.
I long for the day when this pandemic is over. But for now we are steadfast in doing what we must to keep our team members and customers safe wearing protective gear keeping a social distance and maintaining a sanitized and stopped store. Our results are in large part due to our team members on the front line as such I am focused on supporting them with their hands compensation and a safe work environment. I remain committed to continually reviewing these topics through these trying times. In fact in July. We once again just compensation and continue to encourage and pay for team members to stay home if they are not feeling well.
That's what our results our sales for the second quarter of peaked in the middle of the quarter and started to settle in June some of the consumer Trends we experienced in the first quarter related to them remained in the second quarter customers Consolidated trips to avoid social contact which resulted in a reduction in traffic but with increased fastest size wage customers desire to remain healthy correlated to an increase in immune building categories where the ones bought such as vitamins and healthier products, like organic and plant-based Foods the percent of a gap produce sold trended up into the high 20% range of total produce sales and sales growth of organic chicken is out three times since pre-recorded days.
As a country continues to practice social distancing. Our eCommerce sales have remained elevated up more than five hundred percent from last year in the second quarter are roll-up of pickup service to our stores was successfully implemented by Ellie me giving our customers another option for shopping with Sprouts the pickup service grew rapidly throughout the quarter and not expected home delivery remains a preferred service by our customers at six times the size of pick up during the second quarter. We also increased our marketing spend for our own change delivery. Sprouts.com. This website is also powered by instacart, but when customers order through this only Channel we capture a customer data provide any sites for future marketing The increased marketing dollars resulted in our own channel sales growing more than two times that of all in Commerce sales.
The supply chain for our distribution for produce distribution centers.
Strong in the second quarter rebounding from the high volumes in March and early second-quarter importantly for our fresh distribution are on time delivery two stores is now he's back to historical Norms from a non-perishable standpoint service levels of dramatically improved since the low levels in March and the stores are doing well keeping the stocks. With available products are pinch Point mainly remains with the vendor community in our assortment availability, but Imports are flowing through again resulting in improved level a private label products and importantly our Innovation pipeline is robust. We continue to launch new items. Like there's no monkey vegan paleo ice cream frozen vegetables from vegetables from starfish Island Farms who was the first Farm to build a biogas plant using agricultural by product and become certified as sustainable.
I know like to provide an update on a few pillars of our strategy starting with some additional color on our Target customer segments last quarter. We highlighted to Consumer segments this approach resonates with the health enthusiasm and Innovation or experience Seeker. These two consumer segments combined covered a wide range of income demographics from gen Z to Baby Boomers where they live in the country Airlines nicely with our stores and our store expansion plan healthier foods and a pleasant store experience with highlights it by friendly customer service to defining characteristics of sprouts Drive their shopping habits. Both consumer segments also over-indexed oppressed produce home fun foundational category of sprouts and parts of r d n e r produce lineage traces a long way back in history and the Bountiful fresh produce selection and great prices dead.
Will always be the centerpiece of our stores having said this we have significant Headroom, then these Target groups to capture on your customers by doubling down our efforts today. We're closed captioning a small percentage of the more than $200 billion dollar market that makes up these two segments.
Starting in June. We began to significantly adapt to our marketing spend to focus on more digital social radio. And for the first time T to watch these two customer segments off in the past. Heavy Reliance on a print heart kept us from optimizing our connection to the customers that are brand and experience resonate with the most to bring this point in June 2019. We sent out a hundred and ten million print flyers of our weekly ads without having full visibility into how many were seen by customer in comparison in June of 2020 with 125 million measured digital impressions of our weekly art and were able to achieve a significant eighteen hundred percent year-over-year increase in digital impressions of brand and promotional content by reallocating the savings from eliminating print.
another key
and say is that we know from the data that customers who read the printed Flyers frequently only read the front page while the digital Flyers have high leadership across all pages were reaching more customers and importantly customers are aligned most to our offering and that's New Media strategy will continue to evolve
our messaging and promotions are evolving as well gone are the days when all our marketing dollars are spent talking about price. Our promotions are starting to become more around stores selling the products. We carry are unique like dealings dealings Frozen plant-based chicken Alternatives and our marketing stories will bring them to life this in no way means we're eliminating promotions even during this covert pandemic. We are still promoting but we're being smarter or buying better and targeting our promotions to our core customers are investments are focused on items that are elastic and drive volume. We stopped a deep promotions and price that they don't change the customer's decision or drive additional traffic and only result of deflated sales moving forward with promoting what we are known for healthy differentiated products and multiple varieties of produce.
Portion of the promotional dollars left are being raised reinvested back into a competitive everyday price. We started as promotional change in the back of the third quarter of 2019 in the fourth quarter of last year and the pre corporate days of twenty-twenty. This strategy was taking hold as seen in those results and it's still a day outside of March and part of April most. All Grocers are back with their food distribution of print promotions, and we continues to see the benefits from our strategy as evidence from today's results.
Being with such a young company are operating margin Improvement opportunities are Beyond promotion and praise. We've already begun to experience shrink improvements from the gas station of fresh item management. For example, for the first time. The meat department has a clear line of sight of how to reduce overproduction and what products really are the best sellers from an overall cost perspective reducing the complexity of our store's merchandising appropriate or with appropriately with the right number of SK use and may not fix your changes will result in further savings and shrink in the years to come a smaller less complex boss with our new format also contribute to better labor standards am going to offset future increases in labor costs and a continuation of the rollout of self-checkout stations in our stores can create additional labor efficiencies to help tone.
I said additional labor needed for future e-commerce growth our future at Sprouts remains.
Right, and I look forward to the continued Improvement in the business as we scale and grow now. Let me hand you off to Denise to speak to the financials for the quarter and provide some additional Tome enough stock to the subculture.
Thanks, Jack and good afternoon. Everyone first. I hope all of you and your families are staying healthy and safe the covid-19 pandemic continues to positively impact our business in the second quarter net sales grew 16% to 1.6 billion dollars and comparable-store sales were up 9.1% compared to the same period last year with our sales peaked in May at 13% led by the grocery meat and Frozen categories estate reopening became more widespread in June cops came in at 8 per month.
E-commerce sales continue to remain strong for the quarter e-commerce was 12% of sales up more than 500% compared to last year. It's hard to delineate a precise amount that we're driven by the covid-19 environment, but needless to say the comp Trends are substantially above the prior guidance we gave back in February of this year for the second quarter gross profit increased by 32% to $613 and our gross margin was 37.3% a positive increase of four hundred fifty basis points compared to the same period last year to main buckets drove this margin expansion first were the positive strategic changes we made that were in-flight prior to covid-19 this includes utilizing more thoughtful promotions that are focused on more unique differentiated products instead of just price and eliminating inefficient promotions.
In addition to the benefit of ongoing shrink initiatives, the promotional changes were an outsized benefit in the second quarter as we cycled very deep promotions from last year the church and bucket included covid-19 and benefits and accounted for approximately two hundred fifty basis points of the Improvement. We were able to accelerate our plans shift from print to digital for our week resulting in a reduced number of items on ad and more sales at everyday retail prices as well or protein was able to procure excess product in the marketplace at great prices. And we benefited from shrinks do to sales leverage and lower sales on high shrink items like Deli. Well, some of the covid-19 fits will not repeat those pandemic others like the mixture between promo android price sales May carry forward depending on customer sentiments.
Offsetting some of the gross margin leverage at CNA increased 106 million dollars to $489 or 29.8% of sales rep. Do you ever just 270 basis points compared to the same period last year sg&a included a pre-tax special charge of three point four million dollars related to our ongoing wage initiative as we discussed our last call. We took significant steps to adjust to the impact of covid-19. Most importantly we made investments in bonus pay and benefits to recognize our team members commitment to serving our customers during these unprecedented time and ongoing safety measures in the store added to these costs.
in total
We estimate the additional costs associated with covid-19 was approximately $47 for the quarter.
Additionally with increased e-commerce sales. We realize increased e-commerce fees which were partially offset by lower marketing expense as we shifted from a print circular to more digital spend.
Movies on the rest of the income statement or depreciation and amortization costs for the second quarter or $31 or 1.9% of sales a decrease of 20 basis points compared to the same period last year for the quarter are adjusted earnings before interest and taxes or ninety six million dollars an increase of 87% when compared to the same period last year off our interest expense with four million dollars and our effective tax rate was 25% Second quarter diluted earnings per share with $0.57 and adjusted the wage earnings per share with $0.59 compared to diluted and adjusted diluted EPS of $0.30 in the same period last year
Our cash position remains strong year-to-date. We have generated cash flow from operations of 393 million dollars up 58% for the year long. We ended the quarter with 328 million dollars in cash and cash equivalents reflected are strong balance sheet. We ended the quarter with a net debt to adjusted ebitda ratio of 0.3 times as well subsequent to the end of the quarter. We paid down $76 on our revolving credit facility. We continue to prioritize our strong cash generation of organic growth opportunities consistent with our strategic growth plan lastly. We invest in 48 million dollars during the second quarter in capital expenditures net of landlord reimbursement primarily for new stores for the second quarter. We open 6 new stores and then the quarter with 350 stores and twenty-three States. We remain on track to open a pub.
Only 20 new stores this year.
To date only a few stores have been delayed for a short period of time does the covid-19 pandemic as for current trends elevated levels of groceries and have continued into July with our cops have reached tolerated in July and we estimate them to increase approximately 9% compared to the same period last year similarly e-commerce Trends remain elevated and we estimate that way just the month at approximately 11% of sales for July.
The trajectory of the covid-19 situation remains uncertain clouding the impact of the food retail industry over the coming quarters while our sales continue it elevated levels. So two additional costs associated with operating our business additionally at the end of the third quarter will begin to laugh the first phase of our promotional efficiency efforts that drove merchandise margin Improvement starting in the fourth quarter of 2019 with that said at this time, we expect increased gross margins in the second half of the Year predicting specific outcomes remains difficult and accordingly were not stating a new outlook range. We remain confident in the financial strength or business and our strong balance sheet and our new long-term growth strategy presented last quarter, which we believe will strengthen the Sprouts Grand and set us up for long-term success with at this we can open up the call for questions operator.
as a reminder to
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Our first question custom ROM with Gordon Haskell your line is now open. Thanks. Good afternoon. Congrats Jack curious. When when you dissected your customer base here in the second quarter of done any work on new versus existing Shoppers. And if any of the new ones that started to repeat and then as a follow-up looking ahead what steps are taken to solidify those relationships with those new customers going forward. Yeah. Thank you Chuck because of the the traffic and transaction Trends in the second quarter is difficult to break it all down cuz the the whole industry as you know, seeing such dramatic reductions and transactions and then such dramatic increase in baskets anecdotally our stores are seeing a lot of new people that look like the people will be targeting wage and that's quite encouraging we're going to do a lot more work to get to the bottom of exactly who's coming and who's not coming in. There's a lot of backup work being done on customer analytics to see if it's following Thursday.
On the targeting that we talked about in our last day in our last day earnings call. So in some ways that's a little bit vague Chuck, but we're seeing a lot in new customers and our doors seeing less transactions, but we're seeing customers that we think are very much in line with the new customers that were targeting.
So he was part of the question was just just in terms of productivity opportunities looking looking ahead and how you can continue to engage with those customers going forward.
Yeah, well very much would a very dramatic change to our marketing positioning going forward in terms of how we're going to engage that customer. We've got a master brand piece of work. We've got a new a new marketing ad in the in the organization who's changing not only the fact that we're moving the media but very much the messaging and we're going to be telling a lot of stories behind the reality of the products may have it on stores in terms of differentiation in terms of our fresh produce offer in terms of our bulk offer in terms of vitamins and vitamin off and a lot of the exciting things have gotten our grocery business that are different they'll be the team will be telling the story of that in very different ways in starting actually at the back end of Q3 off into Q4 and I'm excited about that and I think you'll it'll be very clear that it's targeting the kind of customers that we know will respond to our offer when we put that clearly in front of birth.
That's great. And then just to follow-up would be performance stuff are in July. You said nine percent curious how the performance has been in some of the markets where you've seen em, you know surgeon code cases such as your backyard, Arizona, Florida to California.
We we see basically your your we've got we've got places where the Corvette cases are high. So California, Arizona, Florida have been performing pretty well, but the rest of the countries in very well as well. You see a little Peaks and troughs based on playing local ordinance just come over and we watch that pretty closely and you know when when I place shuts down and changes a little bit when it opens up at changes and we see that within our categories, but by and large were seen a pretty consistent pattern across all states and countries, really
That's great. Thank you.
Thank you. Our next question comes from Ken Goldman JPMorgan your line is now open.
Hi, good afternoon. Thank you. I wanted to ask first one of your larger competitors recently talked about promoting more in June than April in may obviously you gave us all your numbers, but I'm just curious did you experience any impact from any of your major competitors? No shifting a little bit of their priorities in terms of promotions in June. So that's my question. Yeah. Well, okay and I think we talked about we talked long before the Corvettes thing about how we were changing our promotion emphasis and they were going to promote things that are very not not quite so long deep cut which was creating a huge margin problem not driving traffic and probably deflating some sales as well and some of those categories. So what we we we realigned our promotion phone cuz starting with produce and meat that across the store in for last year and that's what we continue to do when the pandemic hits in March. We clearly pulled out our flyer dead.
And went to Promotions had to come out and only partly because of availability but partly because of sending paper into people's homes wasn't what we wanted to do. So I went away and then everybody came back and put the Flyers back in we didn't We Made It All Digital and pushed hard on digital promotions. We saw no impact from changes in June from everybody else come flying back into the place Flyers are back in the rest of the industry our boat where they where before preschool between now in a position where we're spending zero on it off and it doesn't seem to have affected as at all. Okay. Okay. Thank you for that. And then my follow-up Denise who talked about funding some of your debt pay-down subsequent to the quarter, you know, you don't have necessarily A a high interest rate on your revolver and you have a lot of potential projects you can spend on you know, there's capex induced birth.
Is this remodels and you know, Jack you talk today about having some more work to do and understanding your customers. So I guess I'm still a little curious why maybe some more growth-oriented projects are off getting a little bit more of a higher priority from your cash flow at this time, if that's that's a fair question not you know, obviously paying that debt to a very valuable thing to I'm just trying to get a better sense of as cash flows in your priorities might be ahead and let me separate out the two different pieces about what our priorities are over the long-term versus what we just did is we finish the quarter here. So just very long term is that we finish the quarter we are we are sitting on excess cash. We believe that it's been prudent through the pandemic to always have a little bit of excess cash, but just because we had more than we needed we did just want to take off of that off the revolver and and get the revolver balance down a bit that said first and foremost if you think about our long-term capital allocation plans right now, we are very focused in investing off.
Find the business. I don't think.
There you'd be able to say that there's a shortage of our investment that we have done this year, you know, but much of our investments going to be to come as we cycle out of twenty twenty in two twenty Twenty-One both wage IT projects in our new stores and putting our two needs new disease in place. So I would tell you, you know, we are a hundred percent behind invest investing on what has returns to drive the business go forth and that'll be the first priority, you know, and then after that, you know excess cash that's out there will continue to come back and and re-evaluate where we feel like we are with the revolver vs. Some other return of capital actions, but for now, I'd actually just re-emphasize that we are focused on investing in the business. It just happens to be some of those Investments are a little bit further out than this particular quarter.
All right. Thanks so much.
Thank you or next question cuz I'm Chris Mandeville with Jeffries. Your line is no open.
Yeah. Hi. Thanks. I guess I was curious if we could maybe dig into your online business a little bit further specifically. I'm kind of interested in understanding how the margin profile looked presumably some greater basket size as well as maybe some of the the mix shift and delivery versus pick up and and anything else that might have influenced Channel profitability. Also, I suppose with the e-commerce penetration actually slowing a little bit now that it's about 11% of sales in July for 13% in April. How did that play out on the margin for you and and maybe in light of the fact that you've now rolled out pick up nationally, I guess I'm curious if if this reduced penetration might have actually surprised you in if you can provide any color with results with respect to the results of pick up.
Yeah, it's Chris. Let me take the the kind of what's happening in the you know, e-commerce business and I'll let them go through the margin profile and then fight provide in terms of our business when I started we were running at 4% and it got back up as you said to over 13% and how did took down a little bit and it's tipped back up a little bit. It just kind of goes up and down but it's very significantly different than where it was our our strategy Remains the Same on that. We want to provide the option for the customer particularly within the context of of the the coronavirus wage. We want to give them the option to either pickup have it delivered or use the store and that that we we expanded we talked the last time we expanded dramatically the pickup capability and home of the teams that are really nice job of making that happen. We've seen the customers respond to that partly in a different way at different times depending on this is one that's barely depend on a local jurisdiction.
And how people are feeling comfortable with it. And it's also actually help to deal with the mask issue in able to enable people to say look you don't have to come into the store. If you don't want to wear a mask you can use it you can use the name is delivery or the pickup which is actually helped us a lot in the dialogue are not starting issue. So I'll let the need to talk about specifically or under Martin side of it sure am just to pick up on that a couple of things just about what we're seeing in the overall trend into the basket and how they evolved or e-commerce basket is a notably bigger basket than than four basket as you can think about the idea of people consolidate app purchases. It's a bigger basket to start and generally the mix of the product in the basket is a little bit more margin favorable to us that you know, our business actually is very strong and a profit perspective in the birth of like Grocery and vitamins things that are non perishables for us generally hold a little bit higher margin and those are mixing a little higher into the basket. So that's a bit of a benefactor.
when we think about the margin and an e-commerce basket that we have from a mixed perspective and then secondarily, you know, the other pieces with us having this balance our business to have those delivery and
Pick up a while. Pick up Still Remains a very small part of the business are margin on that pick up business. We have the ability to leverage a bit more by the use of our own team members in store to do with the picking and the delivery out to the vehicles for my pickup perspective. So there's also a little bit of an Arbitrage there as people mix out and have a bit of their business being pick up. So overall we're playing PS4 margin dollars. Our e-commerce businesses is profitable and so we really want to serve the customers where they want to be served. But the notion of that bigger basket and a little bit of positive mixed benefits in terms of the product choices is a benefit to us.
Okay, it's very helpful. And then my follow-up. Well, I believe you only really have a handful of stores that are exposed to four new all the locations that will be opening in the state of Arizona later this year. You just give us a quick reminder with regards to what initial impact you might have saw or what you did see for that matter from that Banner when it came to California if you was back and how quickly you were able to recover. Yeah, I finally enough it and that doesn't meant in any way arrogantly when I'll become next to it. It doesn't need a lot of difference to our business events and it drives a little bit of traffic to us and it's such a different proposition that the customer seems to be pretty comfortable using others a complimentary wash up in that environment. You know, I've competed with all the all my career and all sorts of different guises and there are very clear competitors in very many places for us here is broke. I see them less as compare authors.
And in some ways the driving of traffic that comes from from it might even help us a little bit. I mean you might be surprised to be hearing me say that but I certainly how we view it.
It's interesting. I do appreciate the thoughts. Take care.
Thank you. Our next question comes from Kelly Daniel with BMO Capital your line is now hi. Thanks for taking our questions. I had to that I wanted to to ask about first just on gross margin. Obviously a really big increase their I think maybe probably bigger than you were planning. But how is wondering if she was understand and unpack just the shrink the promotional impact and and what categories are you pulling back on promotions and just help us think about that kind of growth and expansion.
Sure, actually, I'll start and then Jack and jump in as as he sees fit you first you mentioned the idea of of did it come in a bit stronger than we might have anticipated earlier in the quarter. I would say you actually did come in a bit stronger two drivers to it coming in stronger one was a shrink Improvement was better than we originally expected part of that is sales velocity remained. Hi. We were not necessarily birth. It would remain as high as it did which helped shrink but we also saw a good traction on some of our own operating initiatives in store to be driving that shrink Improvement. So that was one item and then the fact is we came into the quarter. I think we were cautiously optimistic that our ability to pull back and stick with digital ads versus print ads would be able to continue but when we were able to continue that took the whole quarter we saw a little bit more outside benefit and being able to do that than we originally anticipated coming into the quarter but then more broadly kind of unpacking the items that are there.
From a promotion perspective Jackson talked about this quite a bit. You know, we're really leveraging a couple of
Rules and approaches one is really understanding. What's an elastic promotion and what is it efficient promotion sticking with those and pulling back in places where those don't make sense? I think the second thing is really the shift between a print ad to a digital ad and being able to come and much more targeted as to what we're promoting each week. And the third type of that is what we're able to do to marry up the way we think about in particular are produce buying and then what we promote and having moved to a digital ad we're actually able to leverage much closer in what our produce buying team is able to do and get a good deal on short notice and being able to take advantage of getting those to the customer in the marketplace. And so we're really able to work through those levers and a different bit of a different way than we would have been if we were only doing a project and and then on shrink as I mentioned one portion of this is we just have great sales velocity and with things like Deli and salad bars being closed down during
Drink areas by default have lower sales and in turn a bit lower shrink coming through the second part though is all the operational efficiencies we're doing so whether that's part of our fresh item a program and being a better about what produced items are coming out in what quantities and managing a or it just being discipline of team members watching terms of product in the back door and appropriately kind of reordering and setting order sizes and managing through that you were starting to see the goodness of that shrink program come in as well. And then the third part I would just add is I realize that last year in the second quarter. We were very deep in our promotional intensity. So not just the number of items promoted but how deep we are going. So we also happen to be tapping in a in a quarter a just a very deep cycle from last year.
Yeah, I don't think that the key probably is the whole produce change in the way that the approach to produce is being last year. We were doing a lot of very aggressive Commodities are very low prices Below in the market place and they were being planned three four weeks out to support a flyer. What we're doing now is being much more thoughtful about what we produce is still promoting fairly aggressively but we're being much more thoughtful items repeating in it and being much on being much more in taking advantage of a fairly volatile volatile Supply situation because we're doing a digital age and it's happening. You can make changes right up until the last day almost in terms of planning this and because of distribution centers are there in fluid through very quickly. So I think the flexibility and being kind of nimble on the team would put some new people and some really good people have joined the produce department of a very encouraged by the progress they're making and that's probably why it got a little bit better than we thought it would be with in Q2. I'm not moderate wage.
thank you for
Okay, thank you. That's that's very helpful. I guess Jack just one other big picture question. Obviously when you laid out your strategy and early early.
Stages when when covid-19 Dove hit so I guess just curious as you dissect the results and and look at the business. You know, what metrics are you using to to discern? How much is is the core underlying strategy and a sustainable and obviously hard to maybe separate those but you know what gives you comfort that you're on the right track with with this strategy possible clearly is difficult. We've tried to break it down in the numbers that we've gone through and try to see this is cool with an S is known, and I think we made a pretty good face of getting as close as we can to that and maybe an issue could it's going to outline how we've done that but the the piece that gives me some confidence in the the strategies actually off and it was just asked about everyone else going on aggressively promoting. So the contacts when we introduced the strategy Precor. Was we're going to we're going to Target a very specific group of cut off.
I'm going to communicate with them in an effective way. I'm going to turn on on our heads how we're doing a promotion and I will do in our marketing so that we can Target those that group and I suppose the nervousness long as we walk that's went through was hope how effective was that going to be the fact that everybody else has reached into promotions and our numbers of stayed pretty strong has given me a lot of confidence. And as we do more customer research and more customer analytics, we're getting clearer and clearer about the exact people that we're targeting and I'm when I've done that we've been doing work on real estate and looking back over the stores that we had. We can tell the stores that are working really well. Are targeted and we can actually see one or two stores that may be having quite the whole the customer that will have in the stores going forward. So couple of days appoints other guys promoting and perform and really well and the data point as we're looking at real estate Port phone number.
But it looks like it's very much in line with the target when we dig into the catchment areas.
Thank you.
Thank you. Our next question comes from Paul Russell with Deutsche Bank. Your line is now.
Good afternoon, and thank you for all the details. I wanted to ask about new stores. You obviously don't have an opened up as many as usual but just curious in terms of the performance that you are seen and as we look for if you can talk about the pipeline of locations to open and how that site selection process is going in addition the supply chain. Maybe just given up.
Validity of good that you're saying and the progress you guys are making when the overall fresh supply chain plan that your outline as part of the strategy would like to talk to the new stores first and I'll let you get into more detail Denny's on this one specifically. We we consciously we said this long before Corbett. We consciously said we would slow down the, you know, the news program because they were too big and we wanted them to be more in line with their stores that they're going back to the basics. And that's the program that we're working on now and we'll have one or two stores opening next year that came in without new format. And the meantime the subject of the pipeline that's in in place that some of which we could go off and some of which we couldn't have been very encouraged by the stores that being open in 12 a.m. Visited a number of them and I've been really encouraged by the customer reaction to them and I think if we make a little bit smaller than work, even though provide the kind of returns that we want from them and we're dead.
in the middle that work this
Reaching that new format store more like what we used to do rather than what we did in the last two or three years supply chain where we were announced. The creation of the distribution box is red, Colorado in Florida. And those are up-and-running. They they will be up and running in the early part. Then it may time between March and may next year. We'll get them up and running and that will significantly improve the freshness for a number of stores as we get this the store portfolio within two hundred and fifty miles of a distribution center. There's further work with them on that strategically going forward as to what other categories should we be carrying in those days and there's a lot of work going on and to build that for next year, but we can we can anticipate as we age twenty Twenty-One significantly lower Transportation costs and significantly better fresh quality in a number of stores that are being had too far to transport a product to that. He's yeah, I think Thursday
Try to add to that call. Is that regarding the stores this year? I think the the the stores we've open so far, which is 10 stores a year at a date generally performing in line with expectations and in some cases where they're in areas where we might be a less well-known in the market. I think the benefit of opening during covid-19 are looking for additional Alternatives has been a nice way to get new customers into that those stores so all in all the the cohort is performing well to date as we looked at twenty Twenty-One and when we laid out our strategy we talked about getting, you know, ten plus percent growth each year off right? We're starting to build a pipeline. I will tell you we're not yet at that 10% right as we think about restarting our pipeline from having taken a pause while we work through the strategy that restart box a little bit of time. So we we certainly Inspire to get back to that number in 2021, but it's it's going to be kind of touch and go as opportunities present themselves, or maybe they'll be a pocket of birth.
It might be able to come all at once but the flip side of that realizing that some developers who might be doing ground up builds might just be more challenge to get financing when they might not have as many tenants took up for a new boxes at this point in time. So overall still very much working that pipeline still very much aspiring to hit those those numbers but just starting a little bit later than Thursday might be ideal to know that we're going to get there.
Thank you. And then just a quick follow-up is just on the sg&a maybe a little bit more color on the breakdown of the growth in expenses this month and how we should think about, you know, those higher operational costs and bonuses going forward sure church. So when you think about if she and a front overall as we mentioned we incurred about forty-seven million dollars of of cost that we would say are are directly attributed to
That we've paid out earned bonuses tied to higher.
Performance or sick time and it would have come through then the remainder of the costs are really more about p p e and safety-related measures in the stores. I think about those going forward. We spend a good amount of time talking about how many will how much of that will persist how much of it won't I think in general if the operating environment remains like it does today a reasonable amount of those costs will persist, you know, we believe that you know, safety matters and our team members are facing a lot of challenges as they're working in the stores and we want to continue to reward them but I think the piece I'd also leaves some of those costs are variable. So if sales are not at the levels they are now or or they they start to moderate at all. Some of those costs are really tied with a particular level of our sales outperformance that will come down in line with sales trending so will closely monitor things. But I think the good news for us is as we think about it. They'll be dead.
Let me just don't compromise on we won't compromise on safety of our team members. We will not compromise on PPE and doing the right thing with sick time for those that need it. But some of the costs are variable tied to a sales and that's an option of what we can manage over time.
Thank you. Best of luck.
Thank you. Our next question comes from Karen short with Barclays. Your line is now open. Hi, thanks very much a couple of actually since we were just talking about as broadly off when you back up covet and obviously the Strategic expenses as seen a was still up 14% So I guess is I know you commented that costs money like the shift and digital or immediate. Ooh digital but it is 14% the right way to think about sg&a growth going forward excavated. Is that just seems like a phone number. I'd really think about the incremental sg&a that we will have going forward will be tied with a new stores coming online and the cost of operating those stores for the off all of our cost of operating the stores hit within our sg&a. We also would see some sg&a costs as we're investing in the business behind some things like I T and the comment of the 14% off
In specific, you know, I I'm not really going to give a prediction on that specific number but overall we're watching sg&a very closely. And and in total would not consider it to end up being an outsized a nice area of growth Beyond what's happening with new stores and some basic inflation's. Okay, and then I wanted to just ask about gross margin kind of more broadly. So obvious Jack before you arrived there was conversation at Sprouts where the focus was on the fact that merchandise margins had remained remarkably stable over time. And and you know, that was generally Thursday we can all look at the model. But you know, when you arrived at the conversation kind of shifted a little bit to the fact that you know produce merchandise margins had obviously been coming down and had been a big had one for a while. So I guess my question is how can you help us again? It's hard with covid-19. Can you help us? Think about what gross margins could look like more sustainably longer-term dead.
if we
And get back to a more normalized environments. Yeah, and you're right count is very difficult because of corporate to be very explicit about this but let's take it back to the corporate world. What we were what we were missing. This is this is my that's the first one I came in on was cute too last year. So I that was the first conversation. I've literally been here a few days and we'll take a look at the at the business. It was seeing a very significant margin investment to get very little comp sales and there are negative traffic and decline in profitability and a business that showed up and and right and one of our great heritage's are produced business in the DNA of produce in our in our organization is second-to-none. How do you effectively maintain that DNE while managing those kind of dynamics that we inherited so very specifically it's about being dead.
Laughter and I think that's what's happened. That's sustainable going forward positioning our business where we bring differentiation in terms of both product and I'm kind of what we're promoting we talk about if one if a company does one thing we want to do the other and we were getting caught into this pattern of trying to be every promotion from every competitor off. And as I said earlier, I'm comforted by the fact that our Mountains will be have some sustainable growth when I see what the other guys are doing right now in terms of throwing a lot of Flyers are out there trying to build for Fourth of July in Memorial Day and all the things that people have talked about. I think we've got a sustainable long-term Martin enhancement that's coming about from what we're doing and I'm getting more contracts in on the last confident as time goes on what are exact number is kind of so difficult to highlight because of where we are with them with Corvette.
Okay, and sorry discuss one more question cuz I really would like your view on this. So you mentioned on the last call that the 2019 cohort of stores out performed. I think during the granted it was a couple of weeks that you would have been able to measure that but I guess that was in the format that so that 2019 cohort would have had more bells and whistles and off and you did comment that that cohort out performed. So I guess how do you weigh the risk again of simplifying the format by going forward when it looked like that was the store based off perform better in Covent again. Let me take you back to when I went to visit all the San Diego stores in the Colorado stores and the stores in California that were smaller the performance package. Well when I went to visit the new stores the 200 2019 course I thought the stores were lovely. But when I looked to the numbers, they didn't add up all the the the the economics didn't suck.
Yeah, so I think what happened in the in the when covet came along was that there's an didn't just apply to our 2019 stores. I think applied to all our stores. There's a kind of tale went to what we should do. And there's a tail went to Organics or tail went to produce. There's a tale went to vitamins enhance the whole supplements business that that we've got a benefit from them. I think if you like a shiny new store, the customers haven't been exposed to before because of the kind demek actually encouraged necessarily what people were seeing when they were coming into the stores and our marketing being so in the past our marketing being so dependent on price and promotions wasn't really targeting the Target customer that we were
targeting
That the time and what we're seeing at the moment, I think is a Tailwind driving people into all the stores and unused or creating kind of Good Feeling the communities over and off and I really think about it as these stores just matured a bit faster and earlier than other stores would have mature. They actually started off perhaps a little lackluster and and what they did is they just caught up because of a given environment to Jack's Point. Got it. That's helpful. Thanks very much. Thanks.
Thank you or next question customer with Oppenheimer your line is not open.
Good afternoon, and thanks for taking my questions. So I guess I just wanted to dive a little deeper into the market share for the quarter. So the level of compromise appears to have trailed some of your larger conventional peers. They're just wondering if you can provide any more color issue in terms of maybe with contributing to the difference.
So I'll start there, you know, I think about it is we talked about on the last call, you know, we do sell a different assortment of product in our store. Then the conventional sell. So where the conventions have a long amount of paper products consumables cleaning supplies all things that people are continuing to buy in in higher quantity of those just are items that aren't in our store. So I think when you start to feel it more as a comparable mix, we're we're pretty much in line with what we think the market is performing on a comparable mix basis, you know, certainly there's some places where where folks are are having really great results, but when we release their it down, it's a bit of that mix affect playing out more than anything.
Okay, great. And then my one question so on inflation what type of benefit did you get from food inflation the corridor and then just any thoughts on the outlook on it for it off. So in the quarter itself, you know food inflation was not a a material part of our story. I think we all saw a little bit of elevated costs in Meet where all the production of sites were having a little bit of challenge but it wasn't really an outsized effort for us when you look forward I'd say that you places where we watch it. The most closely would be in our produce and our meat spaces. It's it feels as though it's just kind of leveled off production facilities have have figured out their new operating procedures managing through and it seems like that supply-demand equation is is pretty good. I'd say the produce side, you know, we anticipate there could be some inflation coming forward as just there's just a lot of demand out there and Growers, you know, from what we can tell are being appropriately cautious wage.
About what they're planting and the quantities of what they're planting not knowing exactly what the the future holds for them. But overall, you know, I don't think we'd look at it and say there's anything tied to inflation or deflation that wouldn't let us continue to manage the business the way we've been doing it.
Great. Thank you.
Thanks.
Q our next question comes from Robbie Williams with Bank of America your line is not open. Oh, hey guys. Thanks for taking my question. I actually wanted to follow up on Karen's question. I am so you and most others are you know, not giving any guidance but your your gross margins going up a lot right now and you're you're telling us to expect it to be up, you know in the back half and we we do have to think about next year and we have to think about you know, the cost of you know, you guys shifting more into e-commerce Etc. When when you look to next year I'm should is is is Sprouts going to a a significantly higher gross margin place in a normalized environment. And do you think some of the things you're doing already are things you woke to Dupree covid-19 that are getting you there and you you see a way to keep a much higher gross margin than historically and then do we need to think differently about the sg&a as you're doing more pick up?
I mean, can you give us any kind of you know thoughts on you know, gross margin stay at this level or should we think it's going to be somewhere between what you're doing now and what you used to do any any thoughts on a structural changes to to to the longer term here a number of things longer-term. They should let you talk about tennis but in terms of specifically around the margin the three different key dynamics that potentially will make a big difference to next year's launching one we've talked about which is the promotional investment and and the changing and promotional investment should enable us to have a more consistent pattern of our product gross. Margin our strength improvements. There's a lot of very fundamental things as a very immature business Sprouts in terms of its processes in a store and he's talked a little better but some of the stuff that were doing in the meat department in the daily departments and just getting some system investment an operating our stores a little bit more in a little bit more of a streamlined wage.
I think they'll give us some sustainable shrink Improvement going forward and we're pretty convinced that there and there to be had through the next couple of years. And the other side of this is the transportation costs. When you drive when we we both stores too far away from our distribution centres, which would put in a lot of pressure on Transportation costs for these two new distribution centers, and then potentially another one somewhere else. I could significantly should significantly reduce our transportation costs going forward. So those are things that are right in front of us and I saw if you take product margin you take strain and you take Transportation costs. Those are all real things going forward though. Well come through their respective of the cobit environment. I think the Covenant violent probably allowed us to accelerate this month change from paper Flyers to digital flyers and that speed at which we were able to do that surprised us was because of Covent and it but I believe it also be sustainable Goldberg
And then check on the sg&a side. If you if you get back to a place where your transactions are more.
But your e-commerce penetration is still high. Should we be thinking about a much higher, you know store sg&a rate to support that.
I think the way that I'd suggest thinking about is is there are puts and takes here in in terms of Tailwinds and headlines right on one hand while e-commerce penetration comes with a little less margin than our courses or business setting that we still have is Jack reference you were relatively young company and things that we can do on other labor productivity fronts can be a help in an offset to that. So often testing some self-checkout in some of our stores. I know most people might think we already have it in all of our stores, but but we actually don't we're testing through that process. You know, we're also thinking a lot about how to better leverage stores and be more efficient in the e-commerce work that we do, you know, of course, they'll be some of the standard sg&a pressures which will just be around labor rates which will be around health care benefits, but I know there's a fair amount of puts and takes for us to be able to manage both sides of that equation and and I guess to sum it up. I know we aren't giving guidance for next year, but I think that as Jeff mentioned I think we feel good about being able to can
Continue to manage in the margin environment, you know that were operating in today.
Thank you. Our final question comes from Edward Kelly with Wells Fargo. Your line is now open. Yeah. Hi. Good morning everyone. You know, I just I wanted to ask, you know, really it's just one question and that's how when you're looking at the business today and and given that we're an environment. Would Cove it how difficult is it, you know to say to say definitively that the strength is is working and I I asked that because you know, you're cops aren't up as much as peers and I know there's you know, there's there's reasons for that. But the gross margins up a ton. I'm wondering if it would be looking at a flat top with gross margins up a lot or if they better than that. I know it's hard for us to draw definitive conclusions from that we're seeing and I'm just kind of curious how you're doing that and and what you would say to us to to support the fact that you know, that things are moving in the right direction and I read dead.
And from a top-line perspective, I mean from you know, getting getting this business going again. Well traffic is very difficult to read Because of cold weather and your questions are very nice one. It's difficult to know I wouldn't have expected by let's assume call when I had I wouldn't have been expected to sitting here looking at the two numbers to have seen a meaningful impact on a strategy that we put in place. I wouldn't have expected a meaningful. I would have expected us to dilute to change the margin profile because of the the oil change in the promotion emphasis that we talked about pre covered. So I would have expected to see some margin enhancement not buy as much as we had but we have seen some margin enhancement and we would have been dead articulating the new marketing campaign articulating the new customer segmentation and chasing after the the answer to your question is we probably been able to accelerate some of this promotion.
Stuff that we wouldn't have been able to do otherwise and that seems to be working the other part of the strategy.
Well evolved, I will come forward we're not in a position. One of the reasons partly is we're not in a position because of covered but partly it was not gone far enough down this road with knock on the new Dave campaign over there would not really established would not put the new format in place. So there's a number of things. We've still got to prove in their strategy going forward and took over the stove. It's confused everything to be honest with and the key thing for us has been I think we were trying very hard and we talked about this pre covered is that the customer base would change we would create a situation where the promotional e conscious customers who were coming in for very deep promotions only on the occasions when we had the deep cut promotions.
We would lose some of them on that. We would gain the new customer base that we were talking about, which is a again we've talked about this. It's a fairly significant two hundred billion dollar market and we just need a small Southern of that to make this thing grow dramatically and that would have been coming through that would have been coming through today in this conversation. But if we hadn't had call with or we do have cool, but if that helps, there's no it does thank you. Thank you do appreciate that.
Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Jack Sinclair chief executive officer for any closing remarks. Thank you so much for taking the time to listen to it and show interest in our company were very excited about the prospects and I really appreciate you all and I hope you all stay safe and look after yourself. Thanks ever so much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Dead dead dead.