Q4 2020 Sprouts Farmers Market Inc Earnings Call

One on your Touchtone telephone.

Please be advised that today's conference is being recorded.

Should you require any further assistance please press star zero.

I'd now like to hand, the conference over to your host Vice President Investor Relations and Treasury Susannah Livingston.

Thank you and good afternoon, everyone. We are pleased you have taken the time to join sprouts on our fourth quarter and full year 2020 earnings call.

Jackson Clerc, Chief Executive Officer, and Denise <unk>, Chief Financial Officer are with me today.

The earnings release announcing our fourth quarter and full year 2020 results. The webcast of this call and quarterly slides can be accessed for the Investor Relations section of our website at investors that sprouts Dot com.

During this call management may make certain forward looking statements, including statements regarding our expectations for 2021 and beyond these statements involve a number of risks and uncertainties that could cause actual results to differ materially from those described and 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 the GAAP figures. Please see the tables and our earnings release.

Also please note that full year 'twenty and 'twenty was 53 weeks with the extra week falling and the fourth quarter, making at a 14 week quarter with that let me hand, it over to Jack.

Thank you Susana and good afternoon, everyone. Thank you for joining our call today.

So there is no doubt the 'twenty and 'twenty was a year like no other.

And as the calendars tons and we reflect on the year. The events of 2020 of only made sprouts stronger we generated a robust top line with sales up 15% record earnings and operating cash flow of nearly $500 million.

While absorbing costs associated with an increase and E. Commerce sales the opening of 22, new stores and the payment of record of bonuses to frontline team members I'm delighted we have paid these bonuses to our team members during such challenging circumstances.

Clearly we have some tailwind from Covid. However, on our strategic initiatives are fueling of performance and we'll continue to have lasting impacts we anticipate further non COVID-19 related improvements and our business in 2021 and beyond.

These improvements will come as our strategy further at comes alive, winning with our target customers are redefined brand and marketing platform reverting back to smaller formats strong unit growth of focused on disciplined supply chain and best in class customer service.

<unk> is uniquely positioned as a speciality grocer.

We lead with a fresh project selection highlighted and the center of our stores carry a different assortment of food and provide a smaller format experience. The strongly resonates with today's customer who is focused more than ever on health and wellness and innovative products. We are not the traditional grocer and.

We are confident regarding our future financial targets.

Before I go further I want to give a heartfelt thanks to all of the team members at pros for the service to our customers and on unprecedented years.

The teams from our stores distribution centers and the corporate support office worked tirelessly together to make lasting positive changes to the company all of the while improving access to healthy foods across the country.

Customers are also expect expressed gratitude in many ways from meaningful words of thanks to all of your ROIC store team members to a record year of grabbing gift promotion up 30% the support local food banks during the holiday season.

The spreads healthy communities foundations work advancing nutrition education, and access to credit fresh foods shifted quickly to help of communities schools on nonprofit organizations.

And helped for nonprofit organizations and rapidly change the programming and response to the coronavirus. The foundation awarded $1 6 million and grants to 130 of the local nonprofit organizations to provide an estimated 350000 students with nutrition programs.

<unk> to food insecure individuals and families fund the Denver city wide distribution of home to grow Gobs and kids among other support.

Yeah.

The customer behavior during the pandemic as well documented consumers made fewer trips shopped and less retailers prepared more food at home and shopped more food online as a result, our business had less trips and bigger baskets.

We're starting to see this trend change and we're expecting this to evolve through the year.

As it was a headwind to us in 2020, we are optimistic it could be a tailwind to us in 2021 as a vaccine the rules out.

Additionally, many of you have asked about our target customers. We are pleased to see the post the first wave of the pandemic of transaction and basket performance with our target customer a stronger than similar metrics for our non target segments, particularly those coupon clippers.

While we are still early in our strategy the execution. This reinforces our conviction of our focus on target customers that represent approximately $200 billion.

Food and beverage grocery sales.

Our differentiation and runs deep at sprouts with over 68% of our products being attribute driven like keto Paleo of plant based or of course organic were much different than other grocers and case. You are wondering we were as we were going through the analysis, we just saw.

I did all approaches was vegan.

As well maintaining on natural health regimen continues to be important to our core customers and as the especially heightened during these times.

And this trend resulted in organic for the total stores, representing 23% of our sales and an increase of 45% and on our.

Alternative meats from brands like beyond the impossible on products like daily, where we were first to market.

As we aspire to be the leader for developing and carry and new products and the natural and organic space. The merchandising team is bringing in more brands and owned brand exclusives to sprouts like local vegan pizza move all of our key tool milk also both first to market at sprouts. These.

Partnerships with our vendors keep the innovation and flywheel moving overall 2020 brought the addition of more than 5100, new branded and private label items, which contributed more than 35% of our sales growth. Our private label holiday program had a record performance even with for.

Few of items introduced as we focused on seasonal trends like our pumpkin Spice almond butter and holiday favorites like our dark cocoa kettle corn and.

We've highlighted the strength and product differentiation, even more of this year with a find a new favorite campaign all of these healthy lifestyle choices of become woven into the daily lives of our core consumers.

And we believe these habits are here to stay.

As it relates to strategy, we have only begun to scratch the surface of our strategy in 2020 with changes to marketing our brand the margin reset and on Omnichannel ecosystem co.

Covid allows us to allowed us to accelerate our switch from print to digital channels by years, resulting in more efficient media spend with a vastly expanded and targeted reach not to mention of positive environmental impact by investing 60000 metric tons of Cotwo annually.

Through all the efforts of our customer data base grew tremendously in 2020 with customer and emails growing 50% and downloading of our sprouts mobile app, increasing nearly 60%.

In total we have surpassed 3 million email addresses and driven by our team members and the store through fund operational competitions like sign up showdown on.

The new brand campaign sprouts for goodness growth was released and the fall and as building awareness by reaching more customers through our first of our commercials doubling brand awareness brand favorability purchase intent and the key brand attribute sales high quality products.

A quick rollout of pickup at every store and the spring of 2020 and the release of shocked at Sprouts Dotcom and the summer boosted our omni channel presence, allowing our customers to shop and a way that works best for them.

And I'll go to market strategy has changed our financials for the long term with our thoughtful approach to better everyday pricing part of principal promotions getting back to our roots of approaches buying organization, which is nimble and flexible.

With additional investments, we're making and systems and process improvements and our stores, we continue to make further advances and strength and shrink.

As we mature our go forward pricing and promotion strategy, we continue to test different ways to stimulate new customers and transactions with more arrows in our equivalent and we can now invest from a position of strength, which we continue to do.

While there is much more to do to bring our brand promise to life. We are pleased with our progress in 2020, and particular I am pleased with our strengthened leadership team, which is combining the best of the original sprouts team with experienced executives brought in from the outside.

They all share a passion for our mission and despite the strange Webex and zoom environment, We're all living and the team is working very effectively together.

Coupled with our new store growth, we're already markedly expanding our earnings from 2019 as demonstrated in our 2021 outlook issued today.

Looking forward I would like to highlight a few pillars of our strategy that we expect will show results. This year, specifically marketing unit growth on format and our distribution channels.

First on new brand and marketing program is vital to attracting more spend from our core customers and <unk>.

While it was released and the fall much of the heavy lifting of cards towards the end of last year.

Many of our customers today fall into one of the two target customer segments health enthusiasts are experienced sika.

However, we are the only capturing a small percentage of target customers available and our markets due to the low brand awareness once those customers of the acquired they have a strong affinity to our stores stores I've seen and our net promoter scores we.

We started working with media partners and one being Verizon who has over 350 billion daily proprietary data signals of the fingertips, we specifically target of our core customer using this vast amount of data.

Our marketing now spans a diverse mix of high affinity television radio and streaming to help build brand awareness and accelerate the reach of our message.

Personal digital touch points like location based shopping behavior, and social media profiles and contextual targeting will help to drive individual spend.

The marketing program will continue to provide value to our customers as it builds this approach name and a more meaningful way.

For example, where we used to do anonymous marketing through our print ads. We are now utilizing customer data for digital driven ongoing targeted communications.

Our unit growth story remains one of the best for retail since last year of the real estate team has been actively finding new and create new locations, which meets our strategic expansion plans. We plan to open approximately 20 stores and 2021 slightly below our targeted 10 plus percent.

And with primarily at primarily due to Covid related slowdowns.

Handful of these stores will be at on new format and the majority of it will build will be built with a smaller footprint of 25000 square feet at less providing improved bulks economics as the true.

As we look through the year, we will remodel and existing store with the parts of the Nufarm on early in the summer and our first ground up new store format will open later in the summer and Phoenix. These.

And these first stores on a few of those will pilot and many of the new changes prior to opening of our 2022 vintage all and the new format.

Building on the foundation of our heritage projects will remain the heart of the store highlighted by our low profile farmers market experience as well as personal connections with team members and a treasure hunt for yield.

We've cut back nonproductive space and the store Tullow for a very similar number of Skus.

You will also see expanded departments meaningful to our target customers attribute messaging through at the store to highlight of differentiated products and on innovation Center to show cash showcase new offerings.

The innovation centers and important feature of the new stores, allowing our customers to see and taste, new creations from sprouts and our vendors.

In fact, we will rollout of enhanced innovation centers to manage existing stores throughout the year the.

And the 2022 pipeline is already filling up and we plan to be at our targeted 10 plus percent unit growth next year.

We've opened two threat new fresh distribution centers this year, one and Colorado next month, and one in Florida and early summer.

These of openings will drive us closer to our goal of having our stores within the 250 miles of our Dcs to optimize our supply chain efficiencies on the result, and carbon savings of nearly 3000 metric tons of steel to from reduced miles on the roads.

Local D. C is also support our desire to work with local farmers to expand the selection of unique seasonal produce and guarantee freshness to our customers for.

For instance, with the opening of our Colorado at D. C. Next month, we'll be doubling out of local produce offering on introducing more variety categories like yellow fleshed watermelon and numerous varieties of cooking range.

And we're also partnering with some young and expanding indoor and vertical growers to provide the local micro greens and the licenses, which provide farm to fork and hours not days.

With the addition of these two Dcs are fresh produce net product network will increase to 76 and the new Dcs will include additional features such as ripening rooms to several of our stores with a fresh of selection.

As well, we're kind of exploring how to nearly double the dollars that we sell and distribute throughout the CS and future years by adding categories like dairy bulk and some grocery items.

We look forward to sharing both the new DC and the new format with you all later in the year.

Sprouts has set itself on a new but familiar path will remain a high growth speciality grocer and in keeping with our heritage kind of unique healthy products with of farmers market speeds.

And we're evolving by Reformatting to highlight of our in store experience and improve Bulks economics on a lagging our fresh distribution centers closer to our stores and attracting more of our target customer spend with.

We're confident this balance will result in strong total sales growth, while securing our financial returns to provide compelling value for our shareholders.

We believe we are on a stronger foundation and the beginning of 'twenty and 'twenty and we look forward to building on this with the many opportunities and growth that's still lie ahead for.

While we have much work too much work in front of US 2021 will deliver.

Strong results.

Now, let me hand, it off to Denise to discuss our financials in more detail as well as our 2021, Idaho and.

Nice.

Thanks, Jack and good afternoon, everyone.

We finished the year strong with fourth quarter net sales growing 17% to $1 6 billion and comparable store sales up three 7% compared to the same period last year coupling this growth with ongoing strategic changes resulted in at robust profitability with adjusted EBIT up 102%.

As a reminder, 2020 included at 50 <unk> week in the fourth quarter. This extra week added approximately $122 million of sale $16 million to EBIT and Tencent to diluted earnings per share.

And the additional week is not included on our comp sales calculation.

There are four key points I want to highlight today to reinforce the strength of sprouts strategy.

One of our top line growth remains robust fueled by new stores, our new stores opened strong with low cannibalization and are taking market share at where they opened.

Two our margin structure has structurally changed for the positive.

Three we have created the need for omni channel offering and for our cash generation remains a top notch even outside of the pandemic crashed early and the are fueling our ability to drive growth.

E Commerce sales continued to remain strong for the quarter ecommerce was 11% of our sales with sales up more than 290 per cent compared to last year.

Our efforts to drive customers to shop, the dot sprouts Dot com continued to gain traction growing to nearly 15% of our total online sales.

Importantly, when customers enter through shop at sprouts, we capture their customer data and the seamless experience for the customer and they never leave our ecosystem.

Our customers now have a full omni channel choice to shop, how they like in store pickup for home delivery trends show that this choice changes throughout the month, one we faced off of our store and others. They shop online and our omni channel ecosystem allows them the freedom of choice.

At this time, we're monitoring ecommerce and helped me change post Covid are and scrap partnership evolves as we continue to growth for example last year when we rollout of our pick up to every store, we implemented the model, where our sprouts team members and do the picking bagging and delivering to the customers car, allowing us to drive productivity and capture of the room.

And labor efficiencies.

With the solid partnership with good economics and based on our scale, our current model and makes the most financial guidance for now.

For the fourth quarter gross profit increased by 25% to $588 million and our gross margin was 36, 7%.

Despite cycling of the beginning of our promotional changes last year, our gross margins improved 235 basis points compared to the same period last year, driven by smarter buying efficient promotions and continued benefits of our ongoing shrink initiatives.