Q2 2021 Sprouts Farmers Market Inc Earnings Call

[noise] grass fed beef assortment, whether it'll be towards our key tool business it'll be much more about how do you tell the story and give a volume against our vitamins and hopper business give of value to our bolt on as we relaunch of our bulk there'll be more of a category.

And then and aggressive in some ways as I said, we've got some resources to do that so it will be aggressive and that will be what it wouldnt be as a return to 10 for $1 corn.

Perfect. Thanks, guys I appreciate it.

Our next question comes from Ken Goldman with Jpmorgan. Your line is open.

Hi, It's Tom Palmer on for Ken Thanks for the question.

I just wanted to follow up on the promotional discussion.

Do you think if you chose to you could drive traffic with heavier promotions.

And the current environment, our promotions is effective and they've been and more normal period I'm just trying to understand.

How you think about that that potential lever as you reach out to customers.

I think it's a good question of whether the dynamics of change I think there's certainly a I.

The holidays are competitors of thoughts how we'd want to call them. The mainline groceries are certainly going back to more aggressive promotions around the holidays on products that we do on sales. So I think there may be some evidence of that can drive some traffic and the post COVID-19 world of kind of.

And any of the Covid world.

Could we drive traffic by going back to aggressive pricing probably would have been the wrong people coming into the stores, probably would help us probably not so ken.

Of the whole business is about driving the traffic of the target customer base and winning dollars on market share from that target customer base and that's a call to action that we're putting in place. The last thing we want to do is drive and very low profitable customers. So just come in for the deals which is where we came in.

Couple of years ago, and and that's why the comparison to 2019 Q2 on the Q2 and 2021 works for me in terms of understanding our business. We've reshaped the whole proposition of the business and we've reshaped to target against specific customers, who appreciate the difference.

<unk> and that we have so that we're not going head to head with antibody on pricing of promotions are and we don't actually after win of threat from anywhere and we just need to win some dollars to drive the transactions. So I think to answer your question, we probably could get traffic back end in terms of their on traffic, but it doesn't feel like that would be the right.

Police because we'd go back to make and a lot less money as well.

Okay understood and.

And then just on the store delays so at some of the 2021 openings get pushed to 2022, you indicated that 2020 to be back end loaded could we expect some of these stores to just get pushed into 2023, given bandwidth constraints or are sure. If those stores get pushed and should we think about 2022.

10% unit growth plus whichever portion of the 7 stores get delayed.

Yeah, great Great Great question, and we actually keep the 2 piece of separate so I'd say, we continue to be optimistic about our core of 2022 pipeline in terms of deals that we have and the works and getting to that 10%.

New store growth that we wanted any impact that happens with up to the 7 of the stores from 2021 is a separate outcome and what would be and 2022. So if some of them push that would make the 2022 number of bigger not really be a replacement and then of belief that 2022 would push out at justice.

And just to understand of the delay and the in the stores that we have is really tied to some of the refrigeration equipment and some of the inputs that go into how those get installed into stores and working hard to find alternatives to just some supply chain constraints and some of that product.

On inputs being able to come through so we don't expect that this is gonna be a long term sustainable issue that we have about our own capacity and to build the stores. It is just of near term supply chain constraints.

On some of your thank you recruit up done differently, if we know and and so we've not given up on those 7 stores, yet so we'll see where that plays out over the next few weeks.

Thanks.

Our next question comes from Robbie <unk> with Bank of America. Your line is open.

Hi, This is kind of I'll just kind of on for Robbie Thanks for taking my question.

And I started saying you guys could give us any color on how SG&A performed during the quarter versus maybe what you were expecting.

And as a percentage of sales were you expecting it to be down as much as it was and or should we still beat and hammer out a flat rate of sales.

For the year.

Yeah. So in reverse order there and we are still expecting to have a flattish rate of sales for SG&A for the year and as we have expected throughout the year and the quarter did come in as we expected.

2 main drivers of of the health in the quarter were the lapping of a number of the COVID-19 related compensation and incentives are items that were in place last year that we knew would come away and and come out of the model. This year and then secondarily as we were expecting and we saw a little bit of a trickle down and e-commerce penetration.

<unk>, which then reduce some of the e-commerce fees in the model as well so I'm very much in line with expectations and do you expect for the full year to be flattish as we look as we look to close out 2020.1.

Got it and that's helpful. Thanks, and then just kind of as a follow up on me on to your same store sales trends all of that.

And if I missed this but should we still be thinking about and improvement on a 2 year stack each quarter and moving past QQ.

Yeah, I would say the way and we really are thinking about at right. Now is what we gave and the -5 to -7 comp you know, we're going to we're going to come up on an easier comparison to last year as we work through Q3 and Q4 and.

So that's really what's factored into the baseline and that gets us for the -5 and line of 7 for the year.

Okay, great. Thank you.

Yeah.

Our next question comes from Greg <unk> with Wolfe Research Your line is open.

Hi, This is Spencer hanus on for Greg.

Could you just comment on personal basket shopping and when do you think that's going to get back to pre COVID-19 levels and and.

And you guys aren't the only returns at that's experienced some some loss of shoppers and since people of consolidated trips and Wal Mart as it comes to mind is another big 1 that maybe some challenges there what do you think of as a strategy for the industry uses to sort of get those shoppers bankers at price driven is it more focused on advertising.

How are you thinking about that and then and in terms of your value scores with with your core customers how has that sort of changed over the last few quarters.

Yes, that's a good both good questions in terms of and I think ultimately what happens will be driven by COVID-19 on the customer behavior customer behavior, I am not sure retailers will be able to influence that.

Cause really over the pandemic has not really been the retailers' behavior of this influenced a lot of what's happened it's been the customer behavior and how do they view the context, which evidence coming at them and it's clearly we had the expected even a few weeks ago, we would expect it to be and a different place today relative to.

Where we were then and who knows how people are going to play out with us now.

And what will the retail of due to try and attract traffic within that environment I think probably it will be more about trying to invest if they need to invest and some kind of promotional.

Technique to try and get people back probably using loyalty and data and information more effectively than it was hard number of about 70, something we are thinking about how best we can communicate directly with our target customers and really kind of give them a rush at all to come back and probably getting some calls to action as I, just kind of outlined and talked about.

The second part of the question and I've kind of lost my hope and just how customers looking at value out of the customers looking at volume we were doing a lot of research on that so I think Dennis alluded to it and our remarks, we're doing a ton of research to understand our target customer and what their perspective is the ones that we are targeting are pretty much.

Looking at to US at the same as it's always been at Sprouts, and it's kind of good value on projects I think people recognize that I think they recognize the differentiation and they recognize the value behind it we're not seeing significant we're not seeing any score changes in terms of volume amongst our target customers and thats something were.

Because that's important to us I think that's why we're getting pretty static traffic at the moment. The question is how do we try and slate how do we get to translate this awareness that we've got and this growing awareness and to into transactions and we think as COVID-19 at.

And of Dilutes and becomes less important and we think that's going to help us as we as we get these KOL sites and into the end to the marketplace without target customers.

Yeah that's.

And that's really helpful color and then I just wanted to ask on on inflation, what was that running and the second quarter end and how are you thinking about sort of passing that through sort of over the next and the back half of them and into 2022. What do you think there is an acceleration does it does it remained pretty sticky or different or is this more of a transitory inflationary environment that we're on today.

We're being told that it is of transitory inflation environment and realized wait and see I think we will manage as it goes projects has been up and down but pretty flat in terms of we're not seeing huge problems passing on.

Price of the pricing changes and projects the protein side of things Simon and beef and we have seen significant cost price increases and we probably haven't been able to pass on quite as much as we'd like to but we do see us certainly weighted.

And we're planning on being transitory and that this thing and I'll go back to normal in due course, and it really wasn't the freshness of side of the business, we've really not seen anything material and then on the non perishable side of the business to date.

Thank you. Our next question comes from Mark Carden with UBS. Your line is open good after.

And thanks, a lot for taking my questions. So last quarter. You noted that you were starting to see some customers trickle back in and it may have been consolidating their trips for the krogers and albertsons for the world During peak Covid. It sounds like some of this has stagnated a bit with of Delta variant does it become harder to get these customers back as they become more used to shopping for natural organic at the competitors maybe day.

And of our loyalty programs and does it change your strategy at all for and getting them back. Thanks.

I don't think we've lost at any of those customers, who are interested and natural and organic and answers that and our proposition and that the data would suggest our traffic stayed pretty flat with that type of target customer the customers that we lost notwithstanding the consolidation of Papa.

The customers that we lost were what we call the coupon Clippers and the people that web and particularly dynamically interested and our proposition, but they were interested and very low pricing on the fresh foods that we've put in front of customers, whether it would be chicken fillets.

On the call and other tomatoes, and wherever it might have been at lower advertising aggressively so the challenge for us going forward is not so much cash.

And we get them back from Kroger at.

Can we get can we get the message out.

On the call to action with those customers, who are having a financing to who we are.

But we haven't got them in the store and if it's simply Covid. This does not I think that will happen automatically.

I think the hopper and automatically if there's no COVID-19 has done at I don't perceive that the challenge because of the proposition. If you go if you've gone to Kroger.

Say kroger for anybody in terms of the context of consolidate and you show up and you've gone and and you said all of that got some natural and organic thing a promise you at the scale of the differentiation between what we sell at.

First of all of the pricing on projects the differentiation from vitamins and Hopper the bulks at.

Assortment that we've got the attribute based products, whether it be keto paleo, it's so different our frozen food business, 90% of what we sell and frozen foods is different to what I can walk around any super market. So there's differentiation youre kind of access it and people.

As people.

At the people who've not shopping with us because of Covid. They will come back on the basis of the differentiation that we've got and we've got to give them a culture I can to do that and I'm very confident that we we have not gotten that underlying challenge that people have gone to the mainline supermarkets and thought I can.

Get everything I need I would've got at sprouts.

It doesn't look like that and the data that we've kind of analyzed.

Got it that's really helpful. And then on your digital customers, what's the breakdown of been between delivery and curbside and there's still skewing it.

Really primarily towards delivery of any major differences and shopping habits between the 2 what are you seeing and spend per customer and curious what you're seeing on that front. Thanks.

Yes overall, its still skewed very heavily towards delivery and we just have and nature of a different product that comes in and so people aren't coming to us for curbside for the convenience of not carrying out 24 packs of water and and huge packs of toilet paper. So it seems to be delivery really does resonate better with our customers and we continue.

And to have a nice portion of our business come through our owned website versus for the instant cart market place and so we're pleased with that as well as that adoption continues in terms of and overall difference of the customer and ecommerce basket remains significantly higher than and in store basket, which makes a lot of sense. When people are paying for that delivery process. They definitely want.

And take advantage of it and and so that basket is almost double what and in store basket would be so very healthy.

Business, there and overall, we've really seen e-commerce stayed pretty sticky so as we talked about on the call 10% for the quarter kind of only trending down to about 9.5% and by the end of the quarter now and we'll watch the volatility that might come with a delta of Iran. Over the coming weeks and see if we see any change in trends, but it seems.

Be well embedded into the shopping habits of our customers right now.

Thank you. Our next question comes from cash Perique with Oppenheimer. Your line is open.

Good afternoon, and this is actually Erica eiler on for cash. Thanks, a lot for taking our question so I wonder if and when.

It's back debt.

Net new unit growth here and clear.

Clearly the team very focused on on opening new stores.

But on the flip side of that comps clearly remain challenged.

So can you talk a little bit about why yourself being fairly aggressive on the new store front when the core business remains challenged at what point do you say hey, let's put on the brakes, maybe with with R. R.

Our new store opening and and focus on you know, maybe a little bit and why I'm driving comps and and turning around that that Columbus day.

Well I think we've been pretty clear about why we're not place for strategy wise, what we had as a business. We've lost some traffic over the course of those 2 years on the back of the change in strategy Notwithstanding Covid. We've lost some traffic on the back of our promotional strategy and that's why.

You look at 2019 and you take it forward to 2021, you can see that and we've identified the target customer base that we need and it's a pretty small number and we've been pretty modest and our comp expectations going forward, we don't need crazy comps for the economics of this thing to work as we can as you can see from the earnings that were delay.

And so if you can deliver superior returns.

On a relatively.

Relatively modest comp base.

And then the opportunity for us to grow comes with building a lot of stores in places, where we don't exist and.

There are so many of those and were trying to make sure that our distribution centers will support the program of growth and on the opportunity for us and we've identified this as part of the new format and we've opened opened a couple of them and the last few weeks, we can build of stores much cheaper and we can get them in front of customers and of.

Smaller.

Footprint.

And we can drive pretty significant returns on that when we look at when I go through the pipeline of what we've got for 'twenty..2 'twenty 3 all kind of smaller stores relative to where we've been on the returns of at can get on relatively modest top line.

Is the growth potential that I think is pretty unique.

So I'm not sure of the going back to trying to chase the wrong customers to get calm and our existing store base and abandoning the pro and the program of new stores would generate the kind of returns of other kind of cash returns and we can get going forward and it's based on the premise of a couple of things 1 of.

And as the customer is more interested and healthy options and healthy eating and focused guys.

Being done and they will be more interested and not going forward than they will be less interested and that we've got a unique proposition that nobody else can market can can would even want to do because of our narrow and what we do and.

And that narrowed this allows us to target and allows us to build stores smaller and the right places on the numbers, we're looking at and I think the models kind of demonstrating that over the last few quarters, even through the kind of strange of work we've been in gives us a lot of confidence of those.

Returns and a modest comp and on an existing store base.

And Oh for a real opportunity for us to build 10% of new stores every year and deliver significant returns.

Okay and I appreciate all of that color and then just on.

Clearly a lot of other pressure points out there on the cost side can you maybe talk about from net cost pressures you're seeing on your business right. Now you know a waiver of transportation.

And and.

And.

How youre thinking about the library and you have to pull on to manage through them.

Yes.

First of all let's talk about the labor and stores I think 1 of the things I've said on previous calls unit were relatively immature and on our use of labor and the stores. So those things we are doing and have done that will mitigate some of the labor pressures and we started from a higher based on most of anyway in terms of wages. So we're on a good place at its not going to go up quite as much I don't think of some others.

Introduced self checkouts and a lot of our stores and are rolling out of fast we didn't have any of that so thats significant given the labor hours associated with that on a replenishment and in terms of getting product from the back door to the shale so of systems in place to reduce the costs the hours that we need to run out of stores.

And so filling the shelves and on taking the money through the register were relatively inefficient and the hours that we use so there's opportunities for us to mitigate some of the pressures that are coming on labor on that basis and was at.

Regard to transportation and I'm really pleased that we built a distribution center and Colorado. So if it doesn't have to drive from other zone at the Denver of the product I'm really pleased to reveal at distribution center and Orlando So of the products driving from Alonso to and aprils, rather and Atlanta to Naples.

Our transportation pressures of clearly real we've actually mitigated them by belt bring and the way and we said all along but less miles would save us. Some some of his save us some cost so it kind of mitigated that but those of real pressures on us. We think we're mitigating them pretty well I don't think of showing that at up no. I think you said at while Jack and.

And I think for all of those pressures coming forward and you can still see the profit that we're delivering through the company. So I think the realization that we do have the cost saves to offset some of those pressures as is evident and the results.

Yeah.

Thank you. Our next question comes from Karen short with Barclays. Your line is open.

Hi, Good evening. This is actually Renato <unk> on for Karen Thanks for taking my questions.

So some of my first question is on gross margin.

And so far this year and looks like you've been able to hold on to much of the increases you saw.

In 2020 versus 2019, which is which is in line with what you've guided to but and the second half of it looks like your guidance implies much less of an improvement on a 2 year basis. So.

Just wondering outside of losing some some COVID-19 benefit I'm wondering if there's anything unique to the second half in terms of pressure that you may be expecting.

Any color there would be helpful.

Yeah, you know I would reinforce that we do believe that we will hold the vast majority of the gross margin gains that we've had over the 2 year cycle, but 1 thing that you might need to think about on a 2 year basis is that remember at some of the improvements and margin actually started in the fourth quarter of 2019, So Jack joined US just before that.

And at the beginning of the third quarter and started rolling some of the changes that we have today and the fourth quarter was the first quarter of where you would see some of the pullback of the very inefficient promotions and so thats why you will just be a little bit less of a full 2 year stack gain in the fourth quarter. Then you would see the balance of the year only because we actually capped.

And at a quarter earlier.

And if that makes sense.

Thank you and our next question comes from Chuck Cerankosky with Northcoast Research. Your line is open.

Good afternoon, everyone.

First question of if we're taking a look at the customers who might have reduced there.

Visits to sprouts do you see any demographic reason and income reasons that they might be the same customers who are dining out more.

And.

I don't think I really know of the answer to that if I'm honest Chuck but.

Clearly that's a possibility I think the way, we look at what's hot and dry.

There's been 2 things of consolidation from Covid, and then Theres been a reduction from from Les I'm talking 2 years, the 2 year stack and <unk>.

Terms of traffic, there's been those 2 things consolidation plus.

Less stimulus in terms of any aggressive promotions with regard to restaurants, I think we saw a little bit of of peak at certain times up and down and this.

But there are some behaviors of the customers of state kept going which is I think 1 of the basket has kind of held off when they do come and whether it would be a little bit of baking and a little bit of cooking a little bit of them.

Meals, and we're seeing our strength and our daily business, which would suggest opposite to the question, but I don't know that I've really got the answer to that yeah, you know and and the 1 thing that I would consider is knowing that we had seen from some strength in April and that was at the beginning of the reopening, but then may and June I think we would all say weather, we experienced at personally or and the public.

For us truly restaurants, and becoming Dizzy again travel ticking up quite a bit I have to believe that that's relevant for our customer base more or less and someone elses customer base I don't know, but it feels as though it was real and that people are making choices to get out of their homes and to take advantage of what felt like that the COVID-19.

Glory days for lack of a better way to put it before the delta variant really ramped up.

Okay.

And what are your what are your.

Talk to you at calls to action or promotions could you talk to.

So all of us philosophically, how but differs.

From attracting a new customer.

For a lapsed customer into your stores versus giving and existing customer to spend a little bit more and and increased their basket size.

Yes, I think there are definitely 2 types of promotions that were working on in terms of driving the basket and the store when the customer comes in and there's some very specific activity that we're putting in place a combination of bring and very exciting kind of new varieties of product innovation centers, where we have got.

So if people haven't seen before and that drives it through and I'm very and probably more of SaaS. If displays of our produce business more of a SaaS at displays of local projects, which we've just kicked off and Colorado right now, which I'm excited about so of local seasonal innovation center, there's a number of things.

And that we're doing to drive to drive traffic to drive basket with the existing customer base the secondary and the other.

Other side of this equation and it's how do we drive drive the traffic to the store and that tends to be more holistic promotions that would cover across if you think of what we've got to communicate with great. Good everyday prices. We've got great projects prices, we've got unique promotions and we've got specific basket drive traffic.

Driving events and on that.

And what we're going through at the moment in terms of the number of coal to auctions. For example, we run 25% of all vitamins and on behalf of promotion communicated at very effective flip of direct customer and that's the kind of thing that can drive some traffic.

And drive some specifics of what we're going to be running at 25% of bulk.

Promotion, which again other people on going around about after and that allows us to kind of communicate and the differentiation of our business organic projects. We can use that very effectively on our organic project mix is up to 35% of our sales I don't know anyone to sell and 75% of the projects business. That's organic we're driving those kind of.

Messages and.

And our kind of digital way as opposed to on using some of the techniques of of being some some mass media that we haven't used and the path. We're on TV trying to do some of those things and some targeted market. So it's both sides of the equation and.

I'm actually really pleased the way at stores are getting behind the basket driving and work because they can do a lot to help that and I'm pleased for the structure of the way the stores are getting by and we're seeing some progress on that and.

And then we were excited about and what we're doing in terms of traffic building on the on the West coast option.

Thank you. Our next question comes from Kelly Bania with BMO capital markets. Your line is open.

Hi, Thanks for taking our questions.

First just wanted to be clear and I apologize if I missed this but.

Just wanted to make sure we understand exactly what is coming in better on the margin front for you to kind of maintain your EPS range. Despite the lower comp outlook just want to be clear on that.

And when we planned at the beginning of the year and we had we have different levers that we would pull of you know you can look and say, which projects and how fast might they knew how fast can we move on shrink and where can we drive efficiencies and labor in our stores and how quickly can we adjust for those types of activities and so what we are.

Really doing and we're really pulling those levers that were available to us we're not stopping progress on anything that is core to the strategy off of what we're really doing is being prudent and throughout the P&L and in terms of maintaining the gross margin gains from last year and and the way that we wanted to do Manny.

And managing distribution costs and taking advantage of the fact that we have for 2 new Dcs and taking transportation costs off the road and then really working on our in store productivity initiatives to be able to.

To realize the savings that we need to keep the P&L strong.

Thank you and this concludes the question and answer session I would now like to turn the call back over to Jack Sinclair for closing remarks.

And thanks, everybody for taking the time to listen to and we're excited of our business and we really appreciate you taking the time to spend some time for listening to us today. So take care of everybody. Appreciate your time.

This concludes today's conference call. Thank you for participating you may now disconnect.

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