Q1 2021 Sprouts Farmers Market Inc Earnings Call
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Okay.
High 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 in the forward looking statements.
From our 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 release earnings release issued today.
Ah remarks today include references to non-GAAP measures for reconciliation of our non-GAAP measures to the gap figures. Please see the tables and our earnings release with that let me hand, it over to Jack.
Thank you Susana and do the afternoon, everyone. Thank you for joining a call to do.
I'm very pleased with how we of navigate through to come to environment as we begin to cycle. Some of the positive took them from the onset of the COVID-19 pandemic last year from.
Combining a strong financial performance with the strategic opportunities ahead of US makes me very optimistic about the future of sprouts for.
For the first quarter regenerated diluted EPS of <unk> of.
Up 52% from the first quarter of 2019, as our strategic initiatives and promotions on shrink continue to deliver a strong sustainable financial results.
As I've stated before I believe 2022 was a turning point per sprouts, and we're continuing to build on that success of momentum of this year.
Of 2021, our focus remains winning with our target customers by building of run through meaningful marketing in and out of the store to reach it merchandise building an efficient supply chain and unit growth supported by of new format to further expand our reach.
2020 was a pivotal year not just for scouts, what sort of Americans in general as we all try to stay healthy.
As we kick off of new year. The same focus on health is top of mind.
Or strokes displays well into who we are fresh natural and organic speciality retailer.
Nice projects has always been the mainstay, it's gross and it continues to be at the heart of our proposition representing 22% of our business. In addition, what sets us apart from one of our grocers is of bread attribute based products that we carry.
To be attribute these trends like key too clearly organic plant based gluten Korean functional are all themes focused on wellness on play directly to our target customers.
In 2020 or organic sales across the store increased 21% to $1.4 billion on and produce organic sales were of 23% driven by the desire to eat healthier.
We are becoming the leader in the attribute space joined by a pioneering band of community, becoming the destination of up and coming vendors in the food industry as of fundamental part of our merchandising strategy on something or target customer of desires. We.
We like to lean in and take risks from these young companies no. One else is collaborating with of teams like.
We helped drive that innovation and improve that ingredient tunnels, which results in exclusive market entries with leading edge products gross approach.
Nope poets Creamer is one such example, we started partnering with them back in 2018 as of small women owned company.
Over the years, we've partner to create force to play of Vermont, Boston market flavors and value sized offerings on this week of new zero sugar sweetened auction will be in stores.
The growth we have seen enough points on many of US has been extraordinary and we look forward to how much more of a kinder.
In the long run these relationships of creating a product innovation pipeline to keep our shelves full of unique trending merchandise.
As I've said before and will continue to see where notes of traditional grosser and as we grew in scale. We're evolving as the go to food retailer from natural organic an attribute based upon the ships and product releases.
And the first quarter as in quarter of paths attribute led protocol from <unk> drove revenue the plant based trend just one sexual thing that we continue to expand our sales for example, take two milk alternative made from rigid rejuvenated Bali Umbrae of group of deity free ice cream of two products.
That will help drive sales and Danny influences.
Both daily and bakery continue to grow on top of last year's COVID-19 run out of fueled in part by innovation as well like sweetheart plant based checking alternative Nielsen daily on strength from seasonal offerings keto based products and Bacon.
And grocery of the team continued to drive forward or innovation pipeline, resulting in more than 400, new items in the first quarter with still more to come this year.
Many of these new products, where the result of strategy work performed in 2022 better serve our target customers gross.
Wrote this year, we will bring even more new products to create a treasure hunt shopping experience and will be highlighting these new items innovation centres and our new stores and are kind of new favorite merchandising displays through of stores.
Moving onto our brands. So we have 362 stores across the country, we of behind from a brand recognition perspective, our awareness is very low.
In 2021 this will change.
Oh goodness gross campaign was kick 12th late last year with our first per re enter television and many other digital mediums.
This year of the brand changes will start to come alive in the physical assets, starting with our five new format stores. Eventually they will be reflected in our product all three through of common design principle, completing the entire umbrella of this gross brand.
On the marketing from digital of course initiatives designed to connect with more target customers continue to progress well.
We're building our base of customers with E mails up over 140% in the first quarter and website profit growth of 39%.
Importantly, email subscribers tenths of lots of our basket some of our customers, which is one reason why you remain focused and growing this number overtime.
Through our marketing, Germany, we have identified cuss.
Customers of the gun to increase of digital communication on a store.
Talking to see this resonate with target customers through our data sources, we continue to see post trends and data points suggested that we are winning disproportionately with our target customers.
Well, we continued to see customer accounts, improving ending the quarter with the highest we have seen since last April when the pandemic sets in.
In addition, we noted in one of our customer service.
Majority of our customers true reduced or eliminated trips to sprouts during the pandemic expect to return post pandemic. These.
These are all steps in the right direction for our marketing strategy.
Forward to increased sales from these initiatives as of year progresses.
When I first joined strokes I notice of our supply chain was disjointed with stores too far from our distribution centers.
So I'm very excited about the opening of a fresh distribution center in a rural Aurora, Colorado seven.
Having 45 stores and bringing us to 66 across the country. The opening went well and we are now supplying all stores, Colorado, Utah, and new Mexico reach it a testament to the strength of of the team.
This new DC, along with the new Florida to be opened this quarter will create a faster supply chain and build on our goals of.
Deceased within of 250 mile radius of our stores.
In addition, they will allow us to set of more stores and customers with fresh approaches aided with the benefit of right ripening rooms, and allowing us to support local farmers.
And season, a local projects offering in Colorado will increase by more than four times are passed assortment of the Colorado D equal host produce from family owned store or farms there've been growing potatoes in Colorado since 1910 family owned Petrocorp farms, only 30 minutes from our D C who grew up with.
Thing from leafy Greens to sweet corn and peppers.
As well as Hazel Dale exotic of organic Mark mushrooms growing year round in temperature control chit among others.
These farming relationships will expand with a new local sourcing team host out of the D. C with a wealth of experience in a local solution.
Sourcing model is being replicated across all of our of distribution centers to ensure we are supplied with seasonal on look clear relative projects in every store.
With this initiative, we will also of decrease the miles of trucks drive therefore, reducing greenhouse gas emissions and treating operational efficiencies like less shrink and a reduction in food waste.
Kind of unequivocally see this piece of our strategy is good for our customers our business and our planet.
Our investments in 2021 go beyond the deceased considering with a young company will only 54 stores of decade ago.
Attunity to invest in of upgrade our systems the support can drive our future growth of.
Few of the investments this year of focused on perpetual inventory replenishment computer assisted ordering labor management, and a new human capital management system. These.
These project are intended to improve and stalks improve our labor productivity endorsed overall store conditions and provide team members with an efficient modern HR access points.
Sort of unit growth of pipeline remains strong with deals reaching out to 2024.
As planned we didn't open any stores in the first quarter of as we were developing of new format continuing with our plan. We have one store scheduled to open in queue to stay.
Stated before COVID-19 pushed most of all most all of our opening for the back half of the year and remained remain on track to opened approximately 20 new stores this year.
By the end of July of two new format stores opened a new store on one remodel of an existing store.
And walking of two three day rendition of the new store consumers overwhelmingly gave it posted marks on the low profile and overall feel while also raising the store batch of carbon store experience.
As a reminder of this new format little of of smaller footprint, but more sailing space per square feet cause 20% less to bills and we expect of similar sales to are both just to day, resulting in expected high returns.
One last topic last week, we issued of 2020, environmental social and governments report that highlights the tremendous work of team has accomplished during the year.
Bringing positive change to our nation's health, which goes well beyond the food we sell.
From a response to the COVID-19 pandemic.
To reduce our environmental footprint and improve the wellbeing of our many stakeholders. We've made great progress on our journey to improving our sustainability program, we've done great what reducing our climate impact by decreasing decreasing are normalized carbon emission on a square foot basis aided by.
Of strategy to switch to digital marketing from print.
Our team's focused on weeks reduction has reached a new milestone I'd almost 60% landfill diversion rate rooted in our drive to increase could security per our communities foods anything the equivalent of 23 million meals to local food banks.
Developing the next generation of leaders to grow with Sprouts is of great importance to me on the future growth in 2022 weeks from mortgage 7200 team members half of whom whereas sneakily diverse team members and we felt 72% of store manager of positions within channel candidates and cheering.
<unk>. It spreads you can create of Korea, not just a job.
I encourage you to review all of the details and yes to your report, which will give you good insight to the what we're doing I'm.
I'm very convinced we can do good by doing good for our customers and for all of our stakeholders.
Before I hand, it off to Denise I want to acknowledge the incredible work with teams of the stores deceased and and the support of office continue to do week after week that driving customer of engagement in sales supported by the depth of knowledge in the natural and organic space.
<unk> have these day before where only in the early innings of our strategic changes with many improvements still to come in yet one constant remains through the changes we've all gone through people want healthy foods no more than ever which is of sproat sprouts is all we do know.
No, let me hand of Titties to discuss our financials in more detail as well as of 2021.
<unk>.
Thanks, Jack and good afternoon, everyone for the first quarter of net sales decreased 4% to $1.6 billion and comparable store sales were down nine 4% compared to the same period last year.
Our year over year comparison is nice straightforward indication of growth. We believe it's important to focus our performance on a two year basis.
To that end, our net sales were up 11% compared to the first quarter of 2019 and Archie your cough stack was up to 2%.
After posting positive pops of start the quarter as expected same store sales turned negative.
The end of cycle of 2020, COVID-19 impact and reopening progressed.
Importantly towards the end of the first quarter and into the current quarter, we've seen of returned positive traffic.
Due to our ongoing of strategic changes, even with some sales deleverage and record high E. Commerce sales penetration profitability remained strong with an adjusted EBIT margin of seven 2% trending well ahead of our five 7% margin in the first quarter of 2019.
As Jack mentioned innovation continued to help direct sales across many categories with deli and bakery notable winters.
Offsetting this we saw set of sales pressure and vitamins due to a nonexistent cold and flu season.
E Commerce sales continue to remain strong with sales of 221% compared to last year for.
For the quarter ecommerce lifts, 12.5% of sales reflecting of notable increase in January as a country experienced of spiking of the cases settling back down to our fourth quarter of 2020 levels by March.
Clearly the work done last year to create a full omnichannel experience by expanding take up to every store and the addition of shop that sprouts Dot com continues to resonate with our customers.
For the first quarter gross profit with $586 million and our gross margin was 37, 2%.
An increase of 114 basis points versus the first quarter of 2020.
Efficient promotions and good every day pricing as well of continued benefits from our ongoing shrunk initiatives drove improvement.
As a reminder, the first quarter included the annual location of the promotional changes, we implemented and late Q1 and early queue to last year.
SG&A costs increased $3 million to $440 million or 27, 9% of sales deleveraging 141 day at this point compared to the same period last year.
The majority of this deleverage was attributed to sales deleverage from cycling the onset of COVID-19 last year and increase ecommerce fees to the higher omnichannel sales as more customers of continue to rely on home delivery income so I'd pick up.
As well SG&A was impacted by additional COVID-19 costs related to sick time in here, okay more than offset by lower bonus payouts first of this last year.
For the quarter are adjusted earnings before interest in Texas or $113 million, an increase of 41% when compared to the first quarter of 2019 of significant positive step change in performance that we will continue to build upon.
Our interest expense of $3 million and are effective tax rate was 25%.
First quarter diluted and adjusted diluted earnings per share or 70.
Up 52% from the first quarter of 2019.
We continue to generate strong cash flow from operations $105 million in the first quarter to fund the future expansion and sales initiatives.
For the quarter cash was impacted by higher bonus payout for the strong 2020 performance and an increase in inventory and preparation of opening of the Colorado D C.
In the quarter, we invested $9 million in capital expenditures net of landlord reimbursement primarily for new stores.
Additionally, following the board's approval of of share repurchase authorization in mid March we restarted our share buyback program purchasing approximately $3 million in stock by the end of the first quarter.
We continued share buybacks in the second quarter and year to date through main three 2021 Weaver purchased $5 million in stock under the current authorization.
We ended the quarter with $250 million outstanding on a revolver $39 million of outstanding letters of credit.
$256 million in cash and cash equivalents and $297 million available under our current $300 million share repurchase authorization.
Reflective of strong balance sheet, we continue to maintain of load that position ending the quarter with a net debt to EBITDA ratio of nearly zero 0.01 time.
Now, let me provide an update on our 2021 outlook.
The impact of the pandemic will have on the U S economy food at home demand and consumer habits is still in flux and in turn we continue to manage the business under a number of of scenarios, creating a bit wider than typical range for our outlook.
As a reminder, giving these comparisons on of 52 to 52 week basis as fiscal 2020 was of 53 week here.
We continue to expect net sales to be flat to up slightly versus 2020, driven by unit growth of approximately 20, new stores, which will open in the back half of the year and comparable store sales down a flow to mid single digits.
As stated before underpinning our assumptions are negative cops and the first and second quarter as we lack of the height of COVID-19 with an improving two year cop sales sack each quarter.
Capital expenditures net of landlord reimbursement are expected to be in the range of $140 million to $160 million.
We now expect our corporate tax rate to be approximately 25%.
Due to slightly better performance and SG&A than expected in the first quarter, we are increasing our adjusted EBIT expectation by $10 million to be in the range of $305 million to $325 million and increasing our adjusted diluted earnings per share to be in the range of of $1 87 to $2.
We continue to expect to maintain a majority of the gross margin that right improvement we realized in 2020 with the first quarter experiencing outside of benefit and the remaining three quarters of being pressured as we cycled from COVID-19 benefits from shrink and buying opportunities, we don't expect to repeat.
We see several of puts and takes for SG&A margin for the year with reduce expenses from bonus normalizing, mostly offset by annualized COVID-19 of related costs as well as increased health care costs and sales deleverage.
We have started 2021 on a good footing with a strong balance sheet and I'm confident that the strategic changes we began last year structurally changed our financial outlet for the long term.
At this time, we're happy to take your questions.
Thank you, ladies and gentlemen, as a reminder to ask the question you would need to press Star then one on your telephone.
To withdraw your question press the pound key.
Again, that's star one to ask the question.
Please stand Bob I'll be compiled of Q&A roster.
Our first question comes from the line of Mark Garden with UBS. Your line is open.
Great. Good afternoon. Thanks, a lot for taking my questions. So on the comp you're up to two per cent of onto your stack of a period, where there are still some covered restrictions in place and I know you guys don't sales much some of your competitors in the way of popular CPG products, but are there any other factors, but we should be aware of of on the top line of minute hold you back with of mainly vitamin.
Driven our customers store consolidating trips of larger stores and there's still adjusting to your new strategy any color here it would be great. Thanks.
Well you kind of answered the question their market and the things that you mentioned that specifically to the first quarter as we look clearly the zone overlap John Fab was of different overlap to marches overlap, but one of the things that would probably have been a factor.
So that we didn't quite take into account was the vitamin growth that we would have expected from a cold and flu season in January and not something that probably didn't happen to the extent because of rooms with a mask and nobody had the flu. So that certainly made some impact on that in the early stages of the quarter.
The reopening program and what's happened with regard to restaurants opening of no opening had some impact on us in the in the meat space in an appropriate in the alcohol space as well a little bit of not something that certainly.
Other than pipe and as we've said all along in the dialogue of our own what's been happening over the through the pandemic is probably.
As people of reduced the number of places they go to do their food shopping that we didn't benefit from some of the growth to happen previously and not certainly something that continues.
Is beginning we think to kind of mitigates itself as we played through the year. We're certainly seen some encouraging same John R or target customers with the intention of telling us that they are going to be more comfortable about going out and shopping and more places are not some from that gives us.
A little bit of encouragement going forward.
I think that's pretty clear are healthy enthusiastic target customers what are probably more concerned about the pandemic of the implications for the health.
Maybe the average customer and I think in some ways I think that's why I R. E. Commerce business is quite strong and I think people that are more comfortable of going out we're thinking of some of those too.
Some encouragement going forward and the data that we're seeing.
Great. That's helpful. And then we're hearing more of a rising inflation of data and I know sprouts has historically had a bit of of different profile of myths Bryan, but how are you thinking about inflation over the course of of the next few months and does your new promotional strategy really change your thought process with respect of passing through any higher costs X.
Certainly what we're seeing as you know our mix of business is different in approach in looking at the first quarter of produce was actually deflationary inflationary in the first quarter, a little bit, but not hugely but a little bit of not something that.
Means of our makes going forward, what obviously anticipating the produce going forward that it was going to be pretty good yields and pretty strong opportunities for us to take advantage of price in the market place. So we're not as worried about inflation and are fresh and our fresh produce business, probably a little bit more worried about inflation reported to the right word.
A little bit more conscious of inflation and the meat space in one of two of the other parts of the grocery business and we're watching not closely transportation's clearly putting some pressure on the on the supply chain of our vendor base on there were watching that closely by and large were feeling pretty confident given that we sell of pretty differentiated range.
<unk> of products that as of inflation plays in cost inflation plays into our business, we're feeling pretty confident that we can paso on appropriately if it gets too Big then we'll have to watch and of dialogue with our vendor based on it but from what what he on so far and what's in front of US were feeling that we can pass it on and off of the kind of huge watery of.
What my up and going forward.
Got it thanks, so much.
Thanks.
Thank you. Our next question comes from the lineup Scott Moskin with our five capital your line is open.
Hey, guys. Thanks, Thanks for taking my question. So first of all of US a little bit of of along the same lines of the last one but I wanted to bend it out a little bit about comps the big thing that we hear from clients is very K scratches of good business, but let's face it they just can't call the should and the gross margin gains of theirs.
Seeing are not sustainable that they're going to have to come in and and lower pricing and some of these earnings really is a little bit of Mirage of that's one of troops who cheaply. The equity what are you guys shade of that what's your what's your rebuttal to that line of thinking.
Well I think we Scott we've been pretty so far we've had fairly consistent record of delivering on not so the sustainability so far quarter after quarter. After quarter were feeling confident of both that would certainly aware of why will the margins of come from and partly I suppose.
A promotional unraveling of a very aggressive hi, little promotional and I actually negative profitability promotional we're not going to bring those back so I can kind of gum.
Mix that was driving a lot of the.
Margin issues in the business has gone away unsustainably going away. We know we can improve continue to improve our strength, we're seeing that in our business week. After week. After week. So we're feeling very confident about the sustainability of that.
The fact that we're selling such differentiated products.
US to manage already DLP pricing as long as those.
Products that were selling of different we were able to price it based on elasticity.
And as long as that pleased through and work. So I'm pleased with some of the work we've been doing in the price of the pricing team of the pricing systems of you and bringing in allowing us to give us a lot of confidence.
Sustainability and of gross margin on the sustainability in our operating margin and think about the other things that were doing the distribution costs should be coming down guys. We drive list miles to the stores the operating ratios in our business should be kept on doubles of some labor precious with the operating.
Ratios were a fairly amateur young business. So the things that we're working on in terms of inventory management and operating the stores sales check coach of the registers. There's still there's some sustainable operating improvements that we can the whole drive help us drive bottom line with go sustainable logistics improvements that can help to drive both of them.
Lane.
We're pretty confident when we know the promotions aren't coming back in any aggressive way on on on.
Hi, little promotions or aggressive below of course promotions. So you put it together.
I'm certainly vary from.
I'm confident of of anything I am confident of over five dollar margin growth of sustainable.
And I think lumpy side of add on the customer front is and we have been making a pivot with our strategy and we knew that there would be some folks who might be more of a coupon clipper profile that wouldn't be the ones that would stick with us and the intent was to gain a lot more of our target customer going forward and I think it's interesting that we have a couple of pieces of research that.
Of done that are pointing things in the right direction with some with some green shoots and that that is all starting to resonate and I'd say.
First we actually did research directly and people have told us that where they had reduced their shopping trips to sprouts before because of the pandemic.
The majority of them have intend to return of the pandemic subsides and we said that's great, but what's even better is that of we as we've come into April or starting to see this prove out of it. So we ended the quarter with the highest customer accounts, we've seen since the start of the pandemic so of nice positive direction and more customer starting to come in the store.
We're also seeing that customer accounts in particular with the reactivated and reacquired customers. So the same once you told us they had stopped shopping with us because of the pandemic, we're starting to see those numbers trend up a bit and then with the positive return to traffic I think everybody was wondering well what will happen in the basket and and we've been very pleased to.
See that while traffic is turned positive at the end of the quarter and the end of queue to virtually holding our basket pretty much in line with where we were coming through last year, rather than there being a trade off between that basket and traffic number so system. Some positive indications of their that hit it in the strategy that we're making is starting to.
To resonate and hopefully, we'll be able to see that with a bit more clarity as some of that.
The COVID-19 Hayes subsides.
Should of really good car guys links have one follow up question I mean, obviously your balance sheet is really good there's not really any dead on it you're producing good free cash flow and the store Crank-up doesn't really come to next year why not get more aggressive of just buyback of chunk of stock and say hey, it's cheap it's our best investment right now I know you of.
Buyback, but it seems like you could do a lot more of if you wanted.
Yeah, I think we're really pleased that we have the authorization out there and we do intend to utilize that authorization I think we would all agree that we think that the stock is a lot of of.
Of positive that it can run in the future years, and we'd like to get in on that too I think what really happened in the first quarter for us is that of per authorization got put in place fairly late in the quarter and we were trading under attendance five one plan that you didn't see quite as much come through as we could have done, but we have all intend to be using.
Utilizing the authorization as the weeks and months here of of.
Perfect. Thanks, guys.
Thanks, Thank you.
Our next question comes from the line of Aerobics correct with Oppenheimer. Your line is open.
Good afternoon, and thanks for taking my question. So I guess just following up with your commentary on on the.
Improving traffic is there a way to give more color on maybe the quarter day conference or just any way to some compared to understand what types of trying to you guys are seeing in April.
Yeah, I don't think we're going to call it any numbers because as we know week by week, there's a lot of volatility in in what we're seeing.
But I think there's some some positive specifically related to the target customer that we would reiterate so I think with our target customer in specific they have a larger basket in their basket has continued to increase in more kind of posts pandemics and that non target customer as suggesting innovation and other things in the store are resonating with them and we.
Have seen target customer retention churning higher and increasing over this period of time as well so reasons to believe particularly with those target customers that the positive traffic turn and holding the basket is something that we will continue to see.
Okay, Great maybe just one follow up question on the SG&A line I think last call you mentioned that you expected estimate.
I believe to be roughly flat for the year, what's the what's the right way to think about it now.
Yeah, we generally actually.
We expect SG&A of right to be Directionally flat for the year, and so that might be a little bit difference in and what you are hearing but what we believe is we're going to continue to see benefit as we have bonus.
To roll off.
<unk> and for us.
Within tons of some additional expense as we continue to manage and hero pay health care expenses, and then just some general sales deleverage, but the two of those every quarter won't necessarily be be flat, but we would expect the year will be approximately flat.
Great. Thank you all possible long.
Thank you.
Our next question comes from the line of Ken Goldman J P. Morgan Your line is open.
Hi, It's Tom Palmer on per Ken Thanks for the question.
First I just wanted to ask on the e-commerce side of it looks like penetration rates for you were still climbing.
Do you expect this to continue as of the year progresses, just because more stores offering services and the improved out or do you think we've reached a peak and as.
Reached reopening.
That starts to ease of bed and then alongside back how has.
Government been have you been figuring out ways to make it more efficient kind of reduce the SG&A burden that it is put on your stores.
Yes.
I'll, let Denise talk a little bit of the costs say that us in terms of the demand side of it.
Some of them are feeling that we probably have reached a peak on this as I said, a little bit of Elliott I think of of we probably one of the fastest growing e-commerce businesses and grocery over the course of of the last year or so and that has probably been driven by the sensitivity of our customers to going out and they want access to.
Of this product, but if I have to use it if I have to use it through through the E. Commerce vehicles on we expanded our pick up which made a big difference too we were only in 55 stores per pick up and we expanded that total 360 stores as we've talked about in previous calls. So that's been a drive our to our makes an of drive up to the <unk>.
Right that were growing faster than most of in this space.
Is this settles down enough people are more comfortable getting out of masked Mondays change does vaccination rules out we're expecting it to settle down I wouldn't settle all of the way bike zone to three 5% of where we well when I came in I think it will settle bike zone, if all of us guessing somewhat of around 810% of our business.
Rather than significantly anywhere near where we're at the moment and in terms of highway where specifically figure no way to try and many of my remember it's all profitable for US we're pretty pleased by the fact that it makes us of money, we lose the margin Max isn't quite as strong as you know so on we're doing some specific things to try and.
Minimize the cost of that we're handling all of the all of the pick of all of the pickup of our store through our own labor, which is making a difference of that in terms of both the speed and efficiency of the cost of it.
And we will continue to look at.
Expand on that a little bit.
And Jack I think you've covered you covered a lot of the points I think the point, we'd reemphasize is even with that penetration of 12, 5% in the first quarter we delivered.
Strong operating margin of substantially from where we were two years ago, where penetration was was next to nothing and I think the other part that I've mentioned as well as we continue to invest behind are owned channel or Shopbots from Dot com channel and and and the white label of penetration for for lack of a better way to put it is now to about 17%.
Of our totally commerce sales, so as we're bringing those customers in a little closer to us and we have an opportunity to have more customer data have of more direct relationship with those customers.
To monetize that a little bit more than what we can simply do when we'd be selling through a market place.
So we're just reinforced the fact that for US it is a profitable business and we have absorbed with the costs in our P&L add to date at a relatively high level of penetration. So everything here and working forward as Jack said as efficiencies of picking ourselves in our stores will only be able to build on that as we go forward it and prove that profitability more.
Thanks for all of the color of their I wanted to ask just on the promotional environment.
Obviously, the large pullback in promotional activity is really driven stronger margins over the past year and a half now.
Is there a point, where it makes sense to get more promotional as a way to drive traffic trends higher not back to prior levels, but just higher than we've seen over the past few quarters and at what point does that makes sense I guess.
Yeah, I think it's a good question Tom as we continue to experiment with different ways to attract of target customers are marketing activity in our promotion activity is very much geared to how do we communicate directly with of target customer and we've been lending that remember of traffic and transactions of been the store.
Pretty dramatically over the course of the last year or so and as we worked our way through different techniques that we can use certainly products and price won't be the drive that's going to attract the customers that we're trying to attract it's more likely to be techniques of build loyalty amongst our <unk>.
Get customer base on we're getting increasingly we've done a lot of of what we call him test and let them through Q1, which we've learned some different techniques some of which of worked and some of which of and worked on we're working our way through different techniques as to how we can drive the business, but very focused on target customers.
As opposed to doing broad brush.
Product in price promotions, because what we want to of is of of really good value in our projects business communicated really strongly communicate of benefits that we talked about in terms of our attribute based products and drive people into the stores on the back of that Unremembered of our awareness is low on.
And the fact of awareness is low gives us a lot of comfort, but if we really communicate the proposition effectively using the techniques that we're using.
And we might have to spend a little bit more on marketing of the post on promotions going forward, but as I say, we are going through of tests and landed face and we'll figure out of the right way to handle it over the course of of the next few quarters.
Great. Thank you.
Thank you.
Our next question comes from the line of Karen short with Barclays Atlantis opened.
Hi, Good evening. This is actually Ronaldo compound per Karen thanks for taking our questions.
So from our first question of sort of bigger picture.
Maybe maybe a follow up of cough question earlier, but.
Right now obviously you have a lot of initiatives that are helping drive per.
Profitability in both of <unk>.
Certainly showing up in the numbers in honor of commendable from one could argue that of complaint though start to try it out.
From my question is how do you think about prioritizing profitability of initiatives versus sales growth because I think at some point, they're going to have to get that top line you don't really going again to return longer term objective.
Well the longer term of Joseph and our business of us of fundamentally the growth plan that would go in terms of new stores is going to give so much more access for our health enthusiastic innovations seeker customers to get access to the sprouts proposition, which will is already.
Pretty unique and we're going to make it even more unique so that the specificity of why you come to sprouts on who you out of the target customer is the focus of all of our war, whether it be merchandising work real estate marketing work, we're focusing at all on our target customers. We know from all of the data that we've done.
That there's plenty of people there who on spending the dollars of we'd like them to spend with us partly because of awareness and partly as we work best of to communicate effectively with those target customers and it's very true and market, where we're not knowing if you go to Florida or Texas.
False simple or when I was last week you'd go very different dynamics going on there as opposed to San Diego or Denver of where we've already got a pretty strong presence. So the focus of.
The premise of the question is that we have to invest margin to get <unk>, we're not in that space within the space of of proposition on the algorithm that Denise outlined in the remarks earlier, we've got an algorithm that base gives us a strong underlying profitability customers.
Of that look like the customers that we want to drive and it's up to us to do that effectively through communication not through investing tons of money and margin. That's the reality of it and we've got some immaturity in our operating base that gives us even more comfort of going forward, we can sustain the margins while attracting more.
Of of target customers.
Okay. That's that's helpful.
And then just a question on the comp guidance, so a bit of of slowdown from a two year.
Perspective in terms of compound from one Q I presume some of that.
Due to California timing restrictions being lifted and maybe some of the other things you called out but I'm. Just wondering if you can provide some color on how you are thinking about that reacceleration in fact trends from the rest of the year.
Certainly you should benefit from from less trip consolidation of as you talked about of things start to normalize.
But that also means there's likely more of a shift.
Food away from home.
From food at home. So just let me help reconciling those.
Those two things would be appreciated. Thank you yes.
Yes. They are all things that were looking out I'll, let Denise expand on this allows all things that will look kind of going forward, but we've said fairly consistently that Q1 Q2 was always going to be.
I'll leave not just for us, but for the oil industry in terms of who that pleased through Ah numbness to your stock basis, we're expecting a lot of other initiatives to gradually and just see an improvement in Q3 Q4 on the two year stock basis, as we start to kind of normalize of comparisons and as you said we did.
Get as big an upside last year. So we shouldn't is bigger we should be able to see are cute cute Q3, Q for two years type of just improve not truly as part of the underlying business that we have and as I said, we're very excited about the marketing.
Activity that we've put in place the test alone that we've done that that work will start to play pay dividends for us in Q3 Q4.
And I think the only other point that I would add is don't forget. The fact that we will continue to of new innovation coming into our stores building off of all of the category management work that we worked on through the fourth quarter last year and it takes a little time to get that into our stores and we will also have we already have one of our new gcs open as of the end of the first quarter Emily.
The second DCE opening now here in the second quarter of both of which are going to bring fresher more local products into Florida into Colorado important core market for us, where we really believe that that's going to resonate with customers as well and so all of the strategy points coming together.
We see the momentum coming from as we turn from the first half of the year, which certainly has its unusual overlaps end of the second half of the year, where we can really half of these things shine for our customers.
Great. Thanks, Thanks for the color.
Thank you.
Our next question comes from the line of check Cerankosky North Cove research.
Good afternoon, everyone.
Could you talk to us direct kebab.
Sort of regional trends in sales without being overly specific of.
Different states and even different counties have reopened and bearing ways in which you are seeing in the stores, especially of things we might not expect.
Well, let me to California is clearly important to us and we saw in December a little bit of a boost in out of California businesses of closed down what day.
And then in January of what the other way. So we've California is clearly seen them that's beginning to settle down as we look across we're seeing more consistency across the country. In the last few weeks. Then we had seen previously I think cause you just garage Julie people feeling more confident about getting out and moving around I think.
The vaccination program and again I think our customers are more likely to get vaccinated.
The average and more likely to be comfortable at coming out we're seeing that kind of consistency.
As we kind of talked to both of our baskets holding quite well and that would be true across the country. Just to me we're not seeing the differences that we probably saw last year uncertainly in queue for that we starting to see note. So I don't know if that helps really but I think we're seeing more consistency than differentiation.
<unk> over the course of the last few weeks.
Anything in the product mix that you would.
Went out.
Yeah, I think I think as I said, a little bit later of those restaurants reopen you see a change in the meat business of little but it just slows down a bit of alcohol was went absolutely crazy.
Most of the reasons last year.
Beginning to slow down a little bit relative to where we would have expected maybe would've expected it to of being but by and largest generally to do with restaurants funnily enough. We're seeing some pretty interesting things happening and vitamins, although the cold and flu season went down in January as we start to navigate through April of.
May.
Starting to see people I think migrating back to things are very health focused and so there's a little bit of an interesting.
Interesting trends happening and not space to the positive for us that were intrigued by.
So if that kind of maybe vitamins would be the big enough of it if there's anything else Denise commenting on now I think you hit the big one.
Alright, Thank you very much.
Thanks.
Thank you.
Our next question comes from the line of Kelly.
With BMO capital.
Hi, Thanks for taking our questions.
First I just wanted to to follow up on the comment about traffic in March and April and.
Great to hear that it turned positive.
Curious if you could.
Help us understand a little more context about what that looked like last year and what you were maybe comparing up against and is that.
Comment just about in store traffic or is that total transactions and then I have another follow up.
And so let me put in first thing contact of last year. So last year. If we all remember really all of March and particularly early in March but continuing margin to April what we saw was of dramatic reduction in the number of times before coming into the stores and very large baskets, so people coming in and buying.
Whenever they could get wherever they could get it as we all knew there was from Philly things like shortages of east or pepperoni or cheese that people would go and look for it wherever they could find it. So last year, we definitely saw of notable downtick in traffic, but a correspondingly big.
Growth in basket and as we worked through the year or traffic trends got a little bit better, but they state of negative through the year and basket fell off a little as we would expect after that big stock up but also can of stabilized Q3 in the in the queue for.
When we turned into Q1, the same trends really existed in January and February which we're all pre COVID-19 last year. So that made a great deal of sense I think we saw the same volatility that others would see in the early part of March where this was lapping.
The height of things from last year and that would be where we just fundamentally all we're re adjusting to our businesses. What we saw as we got to the very end of March and into April was the.
The recovery of traffic, so and on a two year stack, it's not a net positive yet but it is headed in the right direction, but I think the most encouraging part to US is not only is that number headed in the right direction and that the basket really health and that tells us that things are resonating about what people are putting into their car.
And what they've come to adopt and shopping at sprouts. So hopefully that's just a bit of color of that helps.
Yes. Thank you. Thank you of any thoughts of really helpful.
And just also kind of along the same lines you talked about some customers I guess relaying to you that they have plans to come back to sprouts post pandemic and maybe are starting to see that a little bit but.
Can you quantify what.
Percent of your customer base, you think of that is and what maybe it's embedded in your card and your guidance with regards to.
Dot customer coming back to you expect that to be a certain percentage of them coming back of that expect it to just improve as we move through the quarters.
And do you know who you lost them too in the meantime.
I think in general we do not who we lost until we lost some of the folks that were just consolidating shop, which could of been whatever they can chose to consolidate too so they could of consolidated.
To Kroger to an albertsons two of regional conventional some even a bit into a target or that type of environment and they told us loud and clear and they just reduced the number of places that they were going so anywhere they could get a full shop.
Where we would have have seen them consolidate a bit in terms of the way. We are planning we haven't built the plan that the level of detail of this customer we lost what percentage of them do we think that will get back I think what we're more reacting to as we do expect through the year that our customer accounts will continue to improve and we.
We believe a good portion of that from what the customer has told US lots of majority of the folks who told us they had slowed down or stopped coming to us through the pandemic, who told us that they would return we think that will be a good proportion of where we see those games and but we also have an expectation that with the marketing campaigns.
And programs that we have out there that will be able to continue to bringing new customers in as that kind of fear of COVID-19 fear of shopping starts to subside in the residence of the messaging of where goodness grows and what we stand for and we might be able to get a bit more reach out there to some folks who might not know about us as much today.
Seven of those new customer of and we built a lot of stores through that year and it wasn't of the time for people to experiment with new stores and trying new things, though so that's a big part of the market and going forward. We think the stores that we did opened over the course of of the last year of Green.
Oh patootie to build once upon them it kind of dies down a little of it.
Thank you.
Thank you. Our next question comes from the line of Chris Jordan with Goldman Sachs. Your line of soap.
Yeah.
Hi, great quarter.
I have some of that free grocery store with a history of strong profitability and of World was zero percent interest rates.
A crime against capital structure theory Modigliani of Miller I'd like your perspective on your balance sheet. That's my only question to talk good quarter.
The good growth.
<unk>.
So in general we are incredibly pleased to have a very strong balance sheet at this point in time and clearly compared to price.
Prior history of the company. We currently have more cash on our balance sheet than we would.
Planned then we wouldn't have had before or we would plan to have go forward and we're going to be putting a quite a bit of that cash on the balance sheet to use in when we think about building out new stores. The technology, we've talked about our second DC coming online. So we feel good about that and then I think as we announced.
Last quarter with our share repurchase authorization, you're going to see us investing in ourselves and buying back more of our stock of go forward and but.
But overall I will take a flush with cash balance sheet for a period of time here and we will work our way back into all of that being great investment for the company go forward on of what I would say a little bit of a boat what we might do with.
As we look on new format of stores of which we got a couple of happening in July there'll be elements of that that we want to try and to enter existing store base and we'll have to think through exec because of things, particularly I'm excited about innovation centres and how we can make that really relevant and really effective and lots of so there's some things we can do with us going for.
Forward on the Nissan I, often talk of both such issues.
Thank you.
Thank you are.
Our next question comes from the line of Edward Kelly with Wells Fargo. Your line is okay.
Yes, hi, good afternoon.
Jack I want to ask you you've obviously made the.
The argument that the company is running sort of like lower profit or lower return promotions in the past my question around this though is that the company wasn't really copping all of that well for a number of years, though and that doesn't really suggested sprouts of spying sales.
More complicated than that but.
What are we missing here for just sort of thinking about it more simplistically like that.
Kind of taken me back a little bit to the kind of where we were a year and a half ago. I think I think my own view as to what was happening was as of the company was chasing top lane.
It was actually a deflating soap lane of the same time, so buying an awful lot of empty volume on an awful lot of of empty customers that not only were you.
They attracting these what we call the coupon Clippers and we've identified those people plenty of coupon Clippers of are coming in they were getting the deal by everybody else was getting not deal and not responding in terms of any volume. So you had the combination of the kind of target customers that we've got at the moment peeing.
Getting access to very low low below profit.
Net negative profitability of items, whether it be in commodity chicken of.
Street corner of the things that they were chasing after so not only was it kind of it was giving people something for nothing Ah not generate in volume and attracting customers, who I'm spending of innocent and just losing money. So I think that's why the top line started to dissipate from that you start to see it getting into very low numbers.
So I think it was that downloads phyllo of the grocers often get into with the.
They chase it and actually you deflated on of things.
Things us what was happening and we're trying to well we have done we've changed that kind of momentum of that so that we're chasing after customers, who kind of value of what we've got and we will promote with those customers and there'll be promotions accretive tours of of negative to US and then we will take it kind of going forward I think that's the reason.
That happened.
And what you find is the business was becoming ill.
Convinced trying to become of conventional grocer by doing conventional grocery kind of things.
What we've tried to do is be really clear of that what a speciality gross that we sales things of other people don't sail we've got very big proportion of business and fresh produce we've got a big proportion of business in bulk we've got a big proportion of business and vitamins and in many ways of commercial strategy of.
Of the business was missing the differentiation on chasing after conventional adopts what we're in the middle of changing on as we said earlier in the early innings of this but we're very clear of that where we were going was was probably the fleeting our business no of trying to.
Customers, who are going to give you a long term profitability.
The topic of expense.
And just I guess of follow up to that so.
You've heard a lot on this call I guess right like what.
It's hard to imagine sprouts getting multiple that you probably think it deserves.
Without this comp improving from from here.
How are you thinking about the timeframe around when you would expect.
[noise] comps to reflect.
Believe like the underlying fundamentals of this business are and are we waiting for store growth to ramp up in any stores beginning to mature and then that building into the comp just kind of curious as to what the timeframe is that you.
You think it's acceptable for comps to get to a more reasonable level.
While we're focused on growth not calm of surreal kind of focus on our business I think it's interesting a lot of the grocery guys of of.
If you look of the rifle underlying growth of their business is significantly less from the number we had exactly the opposite to that so you are right there'll be some maturity and the new stores I will drive some comp sales going forward, but our focus is very much on how do we grew our business, which would of been pretty clear of that we can grow out of EBIT, we can grow out of EBIT substantially into the.
Quoting certain numbers, but we've been pretty clear of that our our sales growth. It can be known of of 10% of EBITDA growth opened north of that if we can consensus consistently deliver the month after month quarter after quarter. That's the direction of we're moving and then in this business I'll move from.
Six $5 billion of business to north of $8 billion of business over the course of of the next few years.
Very substantial margin growth, so degenerate and very significant EBITDA growth, thus approach lots of program, where on that and that's what we're driving.
Okay. Thank you.
Thank you.
Ladies and gentlemen, due to the interest of time I would know like kind of the call back over to Jack the closing remark.
Yeah. Thanks, very much everybody I appreciate the time and I really appreciate your interest in our business.
And I'll look forward to continuing the dialogue over the next few quarters take care of everyone thinks over so much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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