Q3 2021 Sprouts Farmers Market Inc Earnings Call

November 4, 2021

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.

Ah remarks today include references to non-GAAP measures for a reconciliation of non-GAAP measures to the gap figures. Please see the tables and our earnings release.

In addition, because our results for the third quarter of 2020 were impacted by the COVID-19 pandemic. This presentation will also include certain comparisons to results in the third quarter of 2019.

As a reminder to account for the 53rd week in fiscal 2020, we shifted each week back one week, thereby ignoring the first week of fiscal 2020 to better align holidays for comparison purposes.

Because of this the two year stack comp will not be that simple addition of two periods for more information can be found at investors Dot sprouts Dot com under additional report this needed with that let me hand, it over to Jack.

Thank you <unk> and good afternoon, everyone I'd like to start today, but of course welcoming chip I was on mute Chief Financial Officer. Just recently made the decision to resign from our boards of directors up for nine years and join US full time I'm excited to have him as a partner key member of our leadership team.

During to this call I'll start with a few highlights chip will then provide the review of our financial results look for that I will return to provide details relating to both cultural activities on updates on key elements of our strategy.

We have the right strategy and I'm excited about moving it forward piece by piece, making great progress on our supply chain differentiated merchandise new format on real estate selections.

However, our initial marketing messages fell short in a few years.

We fully expected to see a positive to your stock in the back half of this year.

Through the third quarter, we did known.

With this in mind, we are focused on delivering a clear message. The highlights are shop produce pricing innovative products on a farmer's market experience to drive additional transactions and the quarters and years ahead.

Taking a step back any of you remember in the middle of 2019, we began on Germany of strategic transformation. The capitalist for that Germany was recognizing the efforts to acquire new customers, primarily through an onslaught of aggressive and ever increasing promotions would result in continued margin and.

The new markets building density in brand awareness.

Before providing more details relating to the quarters activities I'd like to turn it over to chip, who will review our financial results under a fluke.

Thanks, Jack and good afternoon, everyone.

For the third quarter net sales totaled $1.5 billion and comparable store sales were down five 4% compared to the same period last year.

On a two year basis, net sales increased 5% and our two year stack comp was down to 1%.

We experienced a slight sequential improvement each month of the quarter in both comp transactions and comp sales.

From an e-commerce perspective sales penetration stayed relatively flat at 10% and appears to be stabilizing at that level.

Third quarter gross profit was $540 million in gross margin was 35, 8%.

The gross profit decline of approximately 130 basis points, which was in line with our expectations was driven by the anniversary of elevated levels. During the height of the pandemic and the balancing of cost inflation and retail pricing.

We continually monitor market price points in all departments and are able to pass through most but not all cost increases.

Our margins are still more than 260 basis points higher than during the third quarter of 2019.

SG&A costs were $423 million, a decrease of $52 million when compared to the same period last year.

The cost decreases were attributed primarily to lower lower Covid pandemic response costs incentive compensation and marketing spend.

For the third quarter are adjusted earnings before interest and taxes was $86 million interest expense was $3 million and are effective tax rate was 23%.

Are adjusted diluted EPS was 56 cents up 8% compared to 2020.

As Jack mentioned earlier compared to the third quarter of 2019, EPS was up 155% as we continue to maintain our margin structure to a more differentiated customer proposition.

During the quarter, we opened three new stores relocated one and remodeled one.

Per share is expected to be between 26 and 30.

Lastly, we expect to open nine new stores in the fourth quarter and six new store openings to shift early next year due to difficulties in securing certain equipment from third parties because of supply chain delays.

The total new store openings for 2021 is now expected to be 14, including one relocation.

Before turning to our initial outlook for 2022.

First wanted to discuss my reasoning for joining the company full time.

Many of you have asked the question why or why now.

First and foremost a loved this company its people and its purpose of providing healthy living options at reasonable prices.

Second I believe the stage has been set for future success.

We have a differentiated customer experience with unique product offerings and a new private prototype that should allow us to aggressively expand our reach while creating shareholder value along the way.

As we continue to learn more about those customers that love us and tell that and tell that message to those who don't know us I believe we will slowly but surely turned the corner on comp store sales, while still maintaining relatively stable margins.

Combining our low single digit comp with our opportunity to grow stores should allow us to consistently produce high single digit sales growth and high single digit <unk>.

Growth, while producing sufficient cash for that growth without taking on any more debt.

We should still have a significant amount of cash remaining each year to return to our owners.

All of this with the backdrop of a current net debt position of essentially zero, while our equity is trading at approximately five five times, our current year EBITDA.

What does all this mean for 2022.

It's a bit early to be definitive around expectations, and we know we will still be navigating some of the lingering challenges of COVID-19 and inflationary pressures on costs in retail prices.

That said for now we are expecting to open 25 to 30, new stores of which approximately 65% will be in the fourth quarter.

To be clear <unk> 22 openings are supported by a very strong pipeline of executed leases and approved sites above this level, but restricted as the aftermath from the pandemic continues to impact supply chains city approvals and developments.

Comps should be relatively flat total sales growth in a low to mid single digit range and EBIT growth also flat.

Plus category did an exclusive lunch with surprise I did Simon working and not chips.

And tell me, we're also keeping the innovation trained moving and held our first or Brian Vander summit with over a few hundred participants.

We have lunch Darwin brand plant based or whipping cream or milk milk no just in time for the holidays.

As well we have included new wood fired flatbread pieces from Italy organic goat milk. The first of its kind in our daily said in a vast probiotic program and divide some department.

And the third quarter, we also reset our wine Department and created spreads service takes with over 50, plus new wines focused on transparency of ingredients and attribute like organic grapes are sustainably grown these.

These wines known it tastes good.

Great that they have also been bitching, our expectations the wines along with the other unique products mentioned are driving all the best parts of our farmers market exploring new and exciting products from people and companies with interesting stories and passions.

Moving on to promotions and marketing our focus remains on adding profitable sales growth getting more customers in the door and creating more loyalty with our target customers.

Earlier this year, we fell short in communicating our commitment to great prices in our marketing, especially in projects.

While it was present in store, we didn't effectively communicate our value message to our customers.

We began to address this imbalance in the third quarter by trying new things somewhat some didn't for example, bone Spike walk uneven drove future visits after the second visit special events and projects focused on a differentiation like tropical fruits are varietals grapes like men dropped and gun.

<unk> drops drove more excitement in the store and were successful.

We leverage embedded call to action in our branding work, we highlighted a competitive advantage and projects, including attractive pricing, which is better than most.

Differentiated with more local new varieties inorganic projects were being very deliberate and making major investments in this regard and utilizing more of our own media to share these messages.

Patient site the strategic change we made this year with the opening of two new Dcs closer to our Colorado and closer to our stores in Colorado, and Florida is mitigating some of the transportation cost pressures experienced in the industry.

The addition of the new DC has not only helped in costs, but they also help bring our local produce offering to life in stores.

Colorado growing season, just wrapped up the ability to source from local vendors were prevalent in all the regional stores in that state.

During the third quarter sales penetration of local projects in Colorado reached double digits I'll have another level never before and greatly improved the freshness to our customers.

Neither were in November the Florida growing season is just kicking off we're excited to be featuring 20, plus local Florida growers and over 100 local items during peak season supported by the meet the grow our marketing in the store and we have high expectations of replicating the success, we had in Colorado.

Yeah.

The third quarter marked a significant milestone along our journey with the opening of two new format stores. One was a relocation in Phoenix to a nearby site on the other was a remodel of our Tustin, California store.

But it's early days for these two new format stores I'm excited to share some highlights first.

First and foremost the Phoenix location relocation is 23% smaller and the sales are up significantly the tustin remodeled store does not change in size, but it has all the elements of the new format format and its performance is encouraging.

And then your pharma projects remains the highlight briefly displayed in the center of the store unique to sprouts meat to first inflow, we expanded and centralized our frozen department and presented more grab and go items Daily Department.

The new stores are experiencing an increase in the percent of protein sales and frozen is performing exceptionally well despite removing expand the expensive solid bond Prepacked daily options daily sales are also performing above the company average.

Even though it's early days these results give us confidence in the new format module.

Over the next few months, we will open three more new format stores and it will be the platform for our 2022 openings.

We continue to learn from and develop this new format.

The simplicity and smaller size of the new farm that will significantly reduce our cost to build and operate the stores the cash investment to build as approximately 20% less by taking out of the expensive daily fixtures and simplifying other areas like proteins with smaller square footage comes.

Lower cost to operate be that in rent expense improved shrink or other operational efficiencies like self checkout.

By utilizing our space more efficiently without having to reduce our SKU count in most departments, we expect sales to be at least equal to the larger folks as we built in the past all resulting in improving returns.

Before I wrap it up I am excited to share some updates on this price healthy communities Foundation in.

In 2021 were supporting 150 nonprofit organization.

With grants totaling $3 million continue.

Continuing our work to support our communities with access to fresh nutritious food and I'm proud firing children with the knowledge and resources to live a healthier life and this weekend, we have a national day of service with over 500 Sprouts volunteers will complete 50 service projects across the country.

Through the help of the foundation, we all get our hands dirty by supporting the local school and neighborhood Gardens. We've helped create over the years, which is a great event to give back to the communities who support us.

You think you can.

Well I'll, let chip go through detailed some of the margin dialogue that we've been having fundamentally we reshape the margin is janosko over the last couple of years and we are in a position where there may be some tweaks, we need to do to invest in it but by and large we've got our margins, where we need to get them to to be on the focus of the business over the next over the next.

Quarter next year is how do we get comp sales to that module comp sales that we talk about this kind of three buckets and not as high as you grow the basket, which the stores are doing a nice job of invest in chasing after that is hygiene grow transactions from existing customers and we've seen some success and some of the marketing activities and not whether it be the.

Bounced back or 72, our sales we've seen something in that and then the next stage is hobey grow new customer, we probably need to think a little bit about where we invest in our marketing dollars to drive that going forward, but I'll, let chip talk a little bit but the margins.

Yes.

Fourth quarter.

Just to be specific I think on the fourth quarter. The gross margin is going to be down year over year. It will be done as much as it was in the third quarter call at 70 to 80 basis points.

In the first kind of early for next year I do suspect that will still be down year over year going into the first quarter what year on year, we're aiming towards flat for next year.

And I think we are becoming the kind of destination for a lot of the small brands as to who if you want to get started with your small brands approaches the ideal place to do that and the team are working very well in terms of bringing those things in and I think private brand will play an even bigger role in that innovation going forward. So when it comes to innovation projects right.

I think we do have differentiation and increasingly our grocery fixtures the level of assortment that we have around keto Paleo gluten free.

Maybe you need to talk about that more assertively, but the kind of diet space that we occupy and the authority. We have in that space I think it brings us differentiation I think the question inherent in your question is how are we doing enough to pull them into the store and I think that's something that we're working out pretty clearly I'll be telling the message clearly enough or not.

Something that won't be doing a lot of work on over the next quarter and beyond.

Alright, guys. Thank you so much good luck.

Thanks Scott.

Thank you as a reminder, we exited you. Please yourself to one question and one follow up our next question comes from Matt Fishman with Jefferies. Your line is open.

Yeah.

Hey, guys. Thanks for the question.

I think our customers know without well enough when we're not doing such aggressive high low so he DLP pricing on projects needs to come to the for a little bit stronger and a tactical sense and then in the second aspect is how do we make our innovation much clearer our to our cost to the potential customers that we have and and these buckets of <unk>.

Diving cost some of them require marketing I think we can go to the basket in the store by doing the things we've been doing in terms of putting innovation and they're getting a story behind you varietals and driving behind the project business, we can grow without without marketing I think those aspects of how we grow the transactions with our existing customers that we've seen some success in our marketing.

And then the final bucket, either we get new customers, who look like our existing customers and I think there is some marketing messaging tactics that will have to push some resource into it going forward, but it's not beyond where we've been in the past in terms of how much money, we need to spend on marketing.

Maybe it took traffic chip.

This is chip as it relates to October the wheel typically provide guidance by the or provide information by the month, but we got it for the quarter minus three to minus five.

We feel good about October as it relates to the guidance.

November and December which has been factored into the guidance.

Was pretty good last year, because there was a resurgence of COVID-19 towards the end of the year, which makes it a little bit more difficult in November and December from a year over year comparison, but we feel good and feel confident that we're going to be in the three that minus three to minus five and then a little bit on the marketing spend front too I think it's good to know.

That we're continuing to test quarter.

Quarter over quarter from Q3 sequentially. The queue for we are spending more money in marketing or at least we're anticipating spending more money and marketing not just test and learn but also to help us set off the year right for next year and then year over year were spent a little bit more in queue for than we did last year.

All makes sense. Thanks for the additional color there and just as my follow up.

I know that.

Cost inflation is usually for conventional grosses at least in.

In many ways.

Go into the top line.

Can you just remind us might be specifically why sprouts and may be specialty.

Grocers.

May not experienced that that tailwind the same way.

Commentary about flat or flattish comps in 2022, it's a little bit lower than what the street was expecting especially if your margins are already where they need to be so.

Just trying to kind of parse out what some of the headwinds are that would hold you back from a positive numbers are an element of uncertainty here because of the macro trend back to away from home I just wanted to kind of get a.

More of a complete list if I could as well.

What would hold you back from a positive number there.

Hey, Ken this is chip.

What would hold us back as one is early and there's a lot of uncertainty in the marketplace.

<unk> already alluded to inflationary pressures, how does that play out where does that go what does that do to the consumer as you start to see while it's getting squeezed in.

In the marketplace.

What does that do to a secondary or tertiary shop, or a secondary or tertiary item. It's just too early to bet on something thats higher I'd much prefer us plan for something Thats lower plan, our cost structure Accordingly for that and then as we get through these test and learn spaces. The more we can learn about where we can drive true.

Rafik with marketing dollars or promotions will then go forward and we will continue to do that profitably going forward, but at this point I'd, rather us plan around the idea that it's going to be closer to zero and we can work our way into something better as we learn more.

Yeah.

Okay that makes sense and then.

You did talk about again your margins kind of being in that range you want to be you talked about the gross margin next quarter I wanted to get a sense because your SG&A dollars have come down each of the last five quarters, obviously off a pretty high number during COVID-19.

Are we at a more of a level a level 423 years or so.

That's kind of a run rate going forward I know, it's not going to be exactly the same every quarter, but I'm just trying to get a sense for how low we should think about that going ahead.

It has been relatively static oh about 25%, we think unless there's an estimate that we've got a 15% of those came from came from the COVID-19 environment and 10% probably came from the change in the promotional struct strategy that we fairly aggressively implemented a little while ago and since then.

Then there's been a kind of privy static Max pretty consistent in terms of the way the customer some customer more customers have drifted off but some good customer of drifted in as well so.

Ill go I think he'll flatten I think it's kind of getting towards where it's flattening out pretty quickly.

<unk> a little bit more in terms of how did this translate to potentially improve store traffic and what are maybe some of the early learnings from customer engagement and loyalty building perspective that you can go forward.

Forward from here.

Well, we can often go up.

I'll come to loyalty second in terms of the activities that we did in terms of our pacing for Q3, secondly, when we project product in there and we think of differentiated varietals of grapes, they've worked really well for us when you get flavors and tastes and we get some playing one of the things that has helped us in Q3, a little bit actually we managed to.

Get some sampling back into the stores and as you can get the experience of tasting products that you can't get anywhere else. We do believe that's a loyalty builder for us and we're excited about doing much more sampling going forward around the differentiated products that we have and also our innovation centers that we've been putting into store, where we're getting new.

But you're seeing obviously a lot more inflation on the fresh side, how much were you able to pass through in the third quarter and have you seen any customer resistance to higher prices in some departments, perhaps were to change change of rate has been more rapid.

So I think I'll, let Jeff comment as well, but fundamentally we've seen some pretty significant cost inflation on beef chicken.

Pork salmon and we've seen we've been able to pass on some of it but not all of it and we have seen some resistance to some of the price points at the top end of cuts in the meat space and we've so we've seen some trading down and around within this within the protein space purchase has seen an increase.

Double digits low double digits, and we've been able to pass on project pricing and it Hasnt, we havent seen too much resistance in that space. So the rest of the businesses.

Manageable as we said, but that that would be where the one place where we've seen some resistance would be in the beef protein space.

Got it. Thank you so much best of luck.

Thank you.

Our next question comes from Edward Kelly Wells Fargo. Your line is open.

Yeah, Hi, guys good afternoon.

Could you just talk about the.

We were low single digit you get to that number could it be a little higher it could be but that's a that's kind of how we think about it now for 23 ish and beyond.

On the leases in the pipeline in good shape in terms of what we need going forward just the dates at which we get them opened as it kind of been a crazy time for everybody, but as chip said the parents and the construction and the materials and it's just been a real challenge in terms again of where we want to get too.

But it's not that we've changed direction.

Peso, which we're going to be able to move.

We wanted to be play out to talk about 2022.

And then can you just talk about what the mix of the new stores are going to look like going forward, you know new newer let's call them newer markets like Florida.

As opposed to existing markets and then what you are seeing in those newer markets in terms of store ramp how long it takes for stores to get to <unk>.

Profitability.

And how that you know this ramp up the store growth both this year and next year.

Just to consider how it impacts the P&L.

Yes, certainly.

All of our new stores going forward.

In 'twenty, two and beyond as planned or of the new format. So they'll all be the smaller stores new format. Our expectation is that the average unit volume won't be dramatically different than they have been historically and the ramps should not be much different than they have been historically, so that's the way that I would think about it going forward.

And from a geography point of view, we clearly have different.

Expectations and markets, where we're not as well known in terms of the time that happens on flood consolidating Florida has been an interesting kind of exercise for us as we try and get consolidated with end markets, whether that be Tampa morph. The fact doing smaller stores allows us to get a little bit more concentration.

And in a market, which allows us to get the marketing spend at the right level to start with so certainly Florida is one that we were very excited about going forward. We've got the distribution center and we've got a ton of leases in place to be able to build <unk>.

<unk> March in some some of the key conurbation has done that.

Mainly excited about how that's all going to play out.

And I would add to that is it is very clear to us that density matters. It matters from a brand perspective, it matters from an opening sales volume perspective.

The ramp may be a little bit dampened because it's it's in a market that is established.

The opening volume is higher in an established market.

And the profitability is higher in established markets. So as we get into these new emerging markets like Florida like the mid Atlantic.

It is really critical for us to get some density in those markets from a brand awareness perspective and get to the volumes that we believe will really drive shareholder value.

Great. Thank you.

Thanks.

Thank you as a reminder, we ask that you. Please limit yourself to one question one follow up our next question comes from Brandon Fletcher with Bernstein. Your line is open.

Hey, guys I appreciate the time.

My question is pretty simple.

The strategy makes sense and we track on the differentiation one of the things Thats been odd to US is that some of the other grocers that may have kind of comped the comp a little bit better. We certainly perceive is having less of a strategic move meaning the differentiations that there the service level isn't there, but maybe the comps haven't suffered quite as much.

And so the puzzle we'd been trying to solve through which you gave us a little color on if you had to let go of some of the kind of the less profitable and coupon Clippers, but were curious it kind of do you have a view as to how folks that have less differentiation may have been holding up a little bit better kind.

Kind of on the comp the comp battle, because I think that's kind of the weight of that hangs on what is otherwise a really positive story in our view.

Yeah, I think it's a good point and I think when I look at the the conventionals.

As you are comparing the comps too I do believe that.

The COVID-19 environment. The consolidated it's clear the number of shops that people make to buy their groceries shopping has gone down through the pandemic from something like 5% to and I've just gone from five to do the consolidation of the shelf around concerns around the around the conventional grocers has probably.

It helped that enabled them to hold our comps Bachelor and hours over that period of time.

And I think it's beginning to change a little bit and we might get some benefit of that bouncing back the other way when I look at what's happened in the course of the marketplace the broader marketplace. The mass channels on the club channels can add to our club not so much but certainly the mass channels struggled a little bit it's a little bit to start with theyre bouncing back pretty hard on the numbers at the moment.

So the conventional grocers, probably suffering a little button lot going forward.

We tend to not focus too much on what other people's comps.

We focus very much on being we are a complementary retailer and we believe our comps are kind of controlled by our own destiny that if we get this right and do the right thing that will be in a position to drive the additional share of wallet that we need from our target customers and there's plenty of dollars out there for us to get to the kind of model.

Just low single digit comps that chips being talking about that we can get there within our own world almost irrespective of what happens to the other guys, but in simple answer to your question I think it's a COVID-19 environment has made that difference.

And I would also add Brandon I think we've made it in the opening comments, but it is encouraging when you think about I mean, when we lost 25% of the transactions in the second quarter of 2020 certainly that's.

That's a challenge and the fact that they havent come back is a challenge, but the idea that those 75% as Jack mentioned, they're putting more units in the basket today than they were in the third quarter of 2019, and they are paying significantly higher prices, both through mix as well as inflation today.

And they were in 2019, and we need more of those customers and drive those customers and then the icing on the cake is we can get those 15% the left because of Covid, who maybe for a variety of reasons. It's a secondary shop, it's a tertiary shop inflation is squeezing their basket whatever if we can get some of those back.

As well, we can we can win.

Yeah that makes a lot of sense. So when you go from five to two and then eventually back to three because were not going back to five the idea would be that those customers will have a reason to add you as the trip and if your message that right then you'll get the magic of a little bit of extra comp flowing through so beautifully through the P&L and so.

I think that makes sense to us and as long as you guys think about it that way.

We understand it well.

Yeah.

Thanks Brendan.

Yes.

Our next question comes from Patrick Murray.

Your line is open.

Good afternoon. Thanks for taking my questions. So two related questions just capital allocation. So just given some of the changes in new store growth at least for next year I'm. Just curious how you think about capex as a percent of sales going forward and then also I guess just related to that given given where your share prices today in the multiple at which it trades.

Trades does anything change in terms of how you guys approach share buybacks and I know the pace in recent quarters hasn't necessarily been that aggressive.

Hey, refresh as chip as it relates to Capex.

We haven't provided a number but I think honestly I think Denise said, we're at about 3% to three 5% a year.

Yeah, it's probably call it 3% a year, we'll give you more specifics for next year, but it should be about 3% of sales from a go forward perspective, and then as cap, which obviously that leaves a lot of excess cash coming out of the business capital allocation, we're going to continue to evaluate our options we will continue to.

We want to give money back to our owners in some form or fashion. The pace of that we'll just we're going to play it by ear and we'll opportunistically buy.

Okay, Great and then maybe just one follow up question. So.

If you look at SG&A same thing in FY 'twenty, two and beyond like what type of leverage point, what type of comp do you need to leverage SG&A do you think going forward and in the current cost backdrop.

Well, that's a question that everyone asks.

And it has for 20 years, but.

It always depends on what Youre managing year over year. So right now for next year, our expectation is that our our SG&A, we're going to try to manage at least going in in that call. It six maybe 7% growth somewhere in there, 5% to 7% growth and we're not going to get earnings growth on that number so.

If you really want to leverage SG&A consistently is pretty much any retailer I think you needed two to three comp if your margins are stable.

Okay, great. Thank you.

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

Hi, Thanks very much.

A couple of questions on next year in terms of the comps can.

Can you maybe just give me a little color on how you think that the comp composition will be with respect to traffic.

Basket.

But I don't know that I heard that clearly from you and then I had another follow up.

Hello, Karen we haven't actually said it.

You didn't hear that yeah. That's that's why you probably haven't heard of it.

Hmm.

It's really early for us to and there are so many it's like a lifetime away 2022 right now.

That said how are we thinking about it we really want to get our traffic back to at least neutral.

And so if you think about that you got to get the traffic back to neutral right now.

Don't see that it's quite back to neutral and right now I think that will be we will get some AUR with inflation I'm not so sure the units in the basket, especially when you're looking at where your comp and I don't think the number of units per basket will will increase I think there'll be flat to down and then.

You do the math and you kind of get to a zero ish comp can we do better than that if we can get traffic going if we can get traffic.

Positive we will have positive comps next year.

So there'll be three things bank three things that drive our comp if we get it right as I said earlier, one will be growing the basket with people that are in the stores, which is going to just switch is going to be part of our comp drive both basket both units on AUR growth.

Transactions from our existing customers. So the customers that come with us come more often because there is a reason to do that because of something new all the time because the fresh foods has developed new products, new varietals, new new products coming in the innovation center sampling there'll be people coming in not basis and then.

Bucket is growing new customers from an effective marketing campaigns all of that should add up job at a thought in terms of transactions are pretty flat transactions number going forward that would be our aspiration.

Okay, and then can you just.

Again, we're not in normal times, but can you just remind us on when you are or what you're seeing now in terms of the comp waterfall, specifically, because obviously <unk> talked about this as a growth company everyone looks to your comp waterfall.

Yes.

Comps, obviously don't reflect that.

Gaining share at all even.

New stores, let alone an existing so maybe a little color and update on your thoughts on that.

Your definition of comp waterfall is transactions units per ticket units in AUR.

No just as in.

Open stores when they open at a certain percent comps right.

Okay.

The ramp therefore, yeah, yeah, yeah because of the ramp.

If were doing 10% square footage growth, we're probably getting one ish comp out of that on a 10% square footage growth. So next year, we're not we're going to be I think around 7% square footage growth, we might get a little bit less than one on that.

Okay. That's helpful. Because I do think there was an issue where some of the stores you opened at a certain point in time, we're actually much higher volume stores. So you may have been negatively impacted by higher volume and cycling, but I just wanted to clarify that we certainly used to open stores with more aggression in terms of promotions and took a lot more time to get back to.

Kind of paying back our investment so I think that's probably what you're alluding to comment our previous dialogues.

Okay. Thank you.

Thank you.

Thank you I'd now like to turn the call back over to next Sinclair for closing remarks.

Yeah, Thanks, very much everybody for taking the time and we really appreciate your interest in our company and we look forward to continue the dialogue in helping to make this whole exciting venture come alive. Thanks ever so much.

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

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Yes.

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Yes.

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Good day, and thank you for standing by welcome to the Sprouts farmers market third quarter 2021 earnings conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

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

If you require any further assistance please press star zero.

I would now like to hand, the conference, but what you have to be good day, Susannah Livingston, Vice President Investor Relations and Treasury.

Please go ahead.

Okay.

Thank you and good afternoon, everyone. We are pleased you have taken the time to join sprouts on our third quarter 2021 earnings call, Jack Sinclair, Chief Executive Officer, and Chip Molloy, Chief Financial Officer are with me today.

Earnings release announcing our third quarter 2021 results. The webcast of this call and quarterly side can be accessed through 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.

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 tomorrow.

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 non-GAAP measures to the GAAP figures. Please see the tables in our earnings release.

In addition, because our results for the third quarter of 2020 were impacted by the COVID-19 pandemic. This presentation will also include certain comparison to results in the third quarter of 2019.

As a reminder to account for the 50 <unk> week in fiscal 2020, we shifted each week back one week, thereby ignoring the first week of fiscal 2020 to better align holidays for comparison purposes.

Because of this the two year stack comp will not be at a simple addition of two periods for more information can be found at investors that sprouts dot com under additional reports if needed with that let me hand, it over to Jack.

Thank you Susana and good afternoon, everyone I'd like to start today by first welcoming chip as our new Chief Financial Officer Chip recently made the decision to resign from our board of directors. After nine years on join Us full time.

So to have them as a partner on key member of our leadership team.

During today's call I will start with a few highlights chip will then provide a review of our financial results and outlook and then I will return to provide details relating to our third quarter activities.

Dates on key elements of our strategy we have.

Have the right strategy and are excited about moving it forward piece by piece, making great progress on our supply chain differentiated merchandize, new pharma on real estate selections. However.

However, our initial marketing messages fell short term period is we fully expect to see a positive two year stack in the back half of this year.

Through the third quarter, we did not.

With this in mind, we are focused on delivering a clear message that highlights our shop projects pricing innovative products and our farmers market experience to drive additional transactions in the quarters and years ahead.

Taking a step back if any of you remember in the middle of 2019, we began a journey.

T J transformation the catalyst for that Germany was recognizing the efforts to a cloud your customers primarily through an onslaught of aggressive and ever increasing promotions would result in continued margin and brand erosion, which was not in the best long term interest of our stakeholders, we immediately pulled back.

On many of the ineffective unprofitable promotions and experienced a slight decrease in traffic as expected, but also improvements in our margins.

Shortly thereafter as we all know Covid became a major factor that impacted virtually all retailers in a variety of ways ways.

For sprouts, one of the most important points to understand.

Is that in the second quarter of 2020, we lost approximately 25% of our transactions to date they have not written.

<unk>.

Certainly COVID-19 played a significant role in changing the shopping patterns of our customers during the height of the pandemic. Additionally, our change in promotional approach resulted in a loss of coupon Clippers.

It is encouraging as it was pre pandemic customers that make up to 75% of transactions that have stuck with us are putting more units in the basket to date than they did in 2019 paying higher average prices via a combination of mix fewer promotions and inflation, resulting in record third quarter.

Profits are sales in the third quarter of this year were up 5% on our.

Earnings per share was up 155% when compared to the same period in 2019.

The impacts of Covid have also reinforced our strategic direction, which includes the need to win with our target customers refining our brand and marketing approach with everyday great pricing and unique product offerings, creating a supply chain that provides the freshest projects, while also updating our store.

Right.

Our prototypes that continues to provide our customers with a unique experience with differentiated product, yes in a smaller more efficient store, resulting in higher financial returns on the ability to grow faster in new markets building density and brand awareness.

Before providing more details relating to the quarter's activities I'd like to turn it over to chip, who will review our financial results and outlook.

Thanks, Jack and good afternoon, everyone for.

For the third quarter net sales totaled $1 5 billion and comparable store sales were down five 4% compared to the same period last year.

On a two year basis, net sales increased 5% and our two year stack comp was down two 1%.

We experienced a slight sequential improvement each month of the quarter in both comp transactions and comp sales.

From an e-commerce perspective sales penetration stayed relatively flat at 10% and appears to be stabilizing at that level.

Third quarter gross profit was $540 million and gross margin was 35, 8%.

We continually monitor market price points, and all departments and are able to pass through most but not all cost increases.

Our margins are still more than 260 basis points higher than during the third quarter of 2019.

SG&A costs were $423 million, a decrease of $52 million when compared to the same period last year.

The cost decreases were attributed primarily to lower lower Covid pandemic response costs incentive compensation and marketing spend.

For the third quarter, our adjusted earnings before interest and taxes was $86 million interest expense was $3 million and our effective tax rate was 23%.

Yes.

Our adjusted diluted EPS was <unk> 56.

Up 8% compared to 2020.

As Jack mentioned earlier compared to the third quarter of 2019, EPS was up 155% as we continue to maintain our margin structure through a more differentiated customer proposition.

During the quarter, we opened three new stores relocated one and remodeled one.

Both the relocation store in the remodeled store or in the new format.

Shifting to the balance sheet and liquidity.

We continue to generate strong cash flow from operations $297 million year to date.

Through the third quarter, we invested $53 million in capital expenditures net of landlord reimbursements.

During the year, we've also repurchased approximately $137 million in stock and ended the quarter with $250 million outstanding on our revolver.

$28 million of outstanding letters of credit of $260 million in cash and cash equivalents and $163 million available under our current $300 million share repurchase authorization.

We continue to maintain a low a low debt position ending the quarter with a net debt to EBITDA ratio of nearly zero.

Now turning to our updated outlook for the year, our outlook for the fourth quarter.

Total sales for the year are expected to be between 6.055 billion 6.085 billion and comp sales down approximately 7% to seven 5%.

Adjusted earnings before interest and taxes is expected to be between $325 million to $330 million.

Earnings per share is expected to be between $2 <unk> and $2 eight.

And capital expenditures of $95 million to $105 million.

For the fourth quarter total sales should be between $1 45 billion and $1 $4 75 billion and comps down between 3% and 5%.

Fourth quarter earnings per share is expected to be between 26 and 30.

The total new store openings for 2021 is now expected to be 14, including one relocation.

Before turning to our initial outlook for 2022.

First wanted to discuss my reasoning for joining the company full time.

Many of you have asked the question why or why now.

First and foremost a loved this company its people and its purpose of providing healthy living options at reasonable prices.

Second I believe the stage has been set for future success, we have a differentiated customer experience with unique product offerings and our new private prototype that should allow us to aggressively expand our reach while creating shareholder value along the way.

As we continue to learn more about those customers that love us until the until that message to those that don't know us I believe we will slowly but surely turned the corner on comp store sales, while still maintaining relatively stable margins.

Combining our low single digit comp with our opportunity to grow stores should allow us to consistently produce high single digit sales growth and high single digit EBIT growth, while producing sufficient cash for that growth without taking on any more debt.

We should still have a significant amount of cash remaining each year to return to our owners.

All of this with the backdrop of a current net debt position of essentially zero, while our equity is trading at approximately five five times, our current year EBITDA.

What does all this mean for 2022, it's a bit early to be definitive around expectations.

We will still be navigating some of the lingering challenges of Covid and inflationary pressures on costs, our retail prices.

That said for now we are expecting to open 25 to 30, new stores of which approximately 65% will be in the fourth quarter.

To be clear 2022 openings are supported by a very strong pipeline of executed leases and approved sites above this level, but restricted as the aftermath of the pandemic continues to impact supply chains city approvals and developments.

Comps should be relatively flat total sales growth in the low to mid single digit range and EBIT growth also flat.

With that I'd like to now I'll turn it over to Jack.

Thanks Chip.

Let me speak more about the current business and our ongoing strategic initiatives from a merchandising and innovation standpoint vitamins daily in grocery where some of the highlights during the quarter boosted by back to school seasonal shopping from tenants looking for better for you options for the children.

Allergy free up free items like healthy crunched, Jamba nut butter bars were popular in school lunch boxes this quarter and we're among the unique items, we highlighted in our new innovation center merchandising displays.

As kids return to school on the spread of flu in the Covid Covid Delta variant sales in our immunity based vitamin categories increased and with busy families and more folks returning to work. We saw strong performance in our updated prepared meal solutions sandwiches, and sushi bar driving growth in daily for <unk>.

Vendors and entrepreneurs, we are becoming the destination to launch new innovative products through our monthly find a new favorite program another campaigns.

Good catches innovative plant based branded seafood Lane, just launched nationwide with sprouts, Dr. Bruno <unk> entry into the broth category does an exclusive launch with this price added Simon Joachim Almond not chips.

And currently we are also keeping the innovation train moving on held our first our brands' vendor summit with over a few hundred participants we.

We have launched our own brand plant based or whipping cream.

Just in time for the holidays.

As well we have included new wood fired flatbread pizza from Italy organic goat milk. The first of its kind in our data set and a vast probiotic program and the vitamin Department.

And the third quarter, we also reset our wind department and created spreads sellouts pace with over 50, plus new wins focused on transparency of ingredients and attributes like organic grades are sustainably growing.

These wines nor on the take rate do they have also been beating our expectations. The winds along with the other unique products mentioned are driving home the best part of a farmer's market exploring new and exciting products from people and companies with interesting stories and passions.

Moving on to promotions and marketing our focus remains on adding profitable sales growth getting more customers in the door and creating more loyalty with our target customers.

This year, we felt short in communicating our commitment to great prices and our marketing, especially in projects. While it was present in store, we didn't effectively communicate our value message to our customers.

We began to address this imbalance in the third quarter by trying new things somewhat some debt for example bonds five watt uneven drove future visits after the second visit special events and projects focused on our differentiation by tropical fruits are varietals grapes like men drops in gun gum.

Drops drove more excitement in the store and we're successful.

We leveraged embedded call to action in our branding work, we highlighted our competitive advantage and projects, including attractive pricing, which is better than most.

<unk> differentiated with more local new varieties on organic projects, we're being very deliberate in making measured investments in this regard and utilizing more of our owned media to share these messages.

Throughout the third quarter, our traffic slightly improved each month as we believe our customers responded to these new messages.

During the fourth quarter, we are continuing many of these tests on a broader scale and we are doing more mass media on sprouts strength slight promoting compelling high perceived value items that are more relevant to our core customer.

As well, we continue to refine refine our broader brand message and campaign to attract those new customers still unaware of spreads differentiated store.

Just recently, we expanded the ways, we shared our wellness expertise with our customers in October we hosted an interactive wellness livestream with industry experts to discuss natural remedies for anxiety inflammation and immune health.

Led by Maria money on Us in collaboration with partners like ancient nutrition under one the panel spearheaded topics. We're all thinking of to date, how do I improve my health and feel better which is likely why we received 20000 rsvp's.

Turning to operations no one is immune to ongoing supply issues and rising labor product and transportation costs.

Doctor throughout supply chains, we are fortunate that we deal with smaller vendors to whom we're a big customer. This advantage allows our teams to continue to manage the health on the shelf, providing a great buying experience for our customers.

That said, we are experiencing higher costs, most of which we are passing through I would say have some fresh categories.

We're experiencing lower labor applications like others across the U S and are working hard to keep our stores stocked by focusing on retaining our team members and making new offers quickly to.

To ensure our team members are rewarded for their work in addition to base.

Our team members have accepted access to incentive plans at every level in the organization.

On the transportation side, the strategic change we made this year with the opening of two new Dcs closer to our Colorado and closer to our stores in Colorado, and Florida is mitigating some of the transportation cost pressures experienced in the industry.

The addition of the new DC has not only helped in costs, but they also help bring our local produce offering to life in stores.

Colorado growing season, just wrapped up the ability to source from local vendors were prevalent in all of the regional stores in that state during the third quarter sales penetration of local projects in Colorado reached double digits. However, another level never before and greatly improved the freshness of to our customers.

In Colorado.

The third quarter marked a significant milestone along our journey with the opening of two new format stores. One is a relocation in Phoenix to a nearby site on the other was a remodel of our Tustin, California store.

But it's early days for these two new format stores I'm excited to share some highlights.

First and foremost the Phoenix location relocation is 23% smaller on the sales are up significantly the tustin remodeled store does not change in size, but as all of the elements of the new pharma format and its performance is encouraging.

And then your pharma projects remains the highlighted briefly displayed in the center of the store unique to spreads we would meet to first inflow, we expanded and centralized our frozen department and presented more grab and go items Daily Department.

Even though it's early days these results give us confidence in the new format module over.

Over the next few months, we will open three more new format stores and it will be the platform for our 2022 openings.

We continue to learn from and develop this new format.

The simplicity and smaller size of the new format will significantly reduce our cost to build and operate the stores the cash investment to build as approximately 20% less by taking out of the expensive daily fixtures and simplifying other areas like proteins with smaller square footage comes <unk>.

Lower cost to operate be that in rent expense improved shrink or other operational efficiencies late self checkout.

By utilizing our space more efficiently without having to reduce our SK <unk> in most departments, we expect sales to be at least equal to the larger folks as we built in the past all resulting in improving returns.

Before I wrap it up I am excited to share some updates on this project healthy communities Foundation in.

In 2021 were supporting 150 nonprofit organization with grants totaling $3 million continue.

Continuing our work to support our communities with access to fresh nutritious food and then pairing children with the knowledge and resources to live a healthier life and this weekend, we have a national day of service with over 500 Sprouts volunteers will complete 50 service projects across the country.

Through the health of the foundation, we all get our hands dirty by supporting the local school and neighborhood Gardens. We've helped create over the years, which is a great event to give back to the communities who support us.

I emphasize we have work to do and while we're disappointed in the third quarter topline the strategic transformation is progressing well our journey to improve upon this post model is well underway from our and our new innovation centers. Our two new distribution centers are measured promotional approach and our new format stores.

We are confident in the ability of the long term strategy to create a more profitable and sustainable company for many years to come.

At this time lets open up to questions.

Operator.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

Sorry, your question press the pound key.

Please standby, while we compile the Q&A roster.

Our first question comes from Scott <unk> with <unk> capital Your line is open.

Hey, guys. Thanks, Thanks for taking my questions and thanks also providing a little bit of thoughts around 2022, So I think.

Obviously.

Lot of questions around.

<unk>.

Kind of sales performance as the company goes forward into the fourth quarter into next year. So I was wondering if you can kind of give us some thoughts about what the.

The gross margins you guys think will look like as we go into the fourth quarter and how much investment do you think there needs to be to get that traffic in sales line moving.

And then as we think of 'twenty, two which I think you said EBIT was going to be kind of on the flat side.

Take us to the idea of we are aware, we grow wearable margins b doesn't that'd be exact guidance, but clearly theres a lot of people in the market I don't think you guys can do this and so I was wondering if you could maybe tell you why why you think you can.

Well I'll, let chip go through in a detailed some of the margin dialogue that we've been having fundamentally we've reshaped the margin as you know Scott over the last couple of years and we're in a position where there might be some tweaks, we need to do to invest in it but by and large we've got our margins, where we need to get them to be on the focus of the business over the next over the next.

Quarter on next year is how do we get the comp sales to that moderate comp sales that we talk about this.

Three buckets are not as high as you grow the basket, which the stores are doing a nice job of invest in chasing after that is how did you grow transactions from existing customers and we've seen some success in some of the marketing activities and not whether it'd be the bounce back or 72 hour sales, we've seen something or not and then the next stage is how do we grow new customers we've pulled.

We need to think a little bit about how and where we invest in our marketing dollars to drive that going forward, but I will let chip talk a lot about where the margins.

Yes, Scott in the fourth quarter.

Just to be specific I think on the fourth quarter. The gross margin is going to be down year over year, it won't be down as much as it was in the third quarter call. It 70 to 80 basis points.

In the first of its kind of early for next year I do suspect that we will still be down year over year going into the first quarter, but year on year, we're aiming towards flat for next year.

On the gross margin there are some opportunities in sort of the non merchandize margin areas to help mitigate some of the I'll call. It inflationary pressures that you have on margin margin as well as we're going to continue to test.

And measurably tests and.

And aggressively to us lots of ways.

To promote in a way that it's still kind of manage the margin within within our ability to do that and drive sales without.

Burdened the bottom line.

Thanks for that guys and then as a follow up we get this question also a lot from from from people around the format itself do you think it's differentiated enough in the marketplace or do you need to do more to.

To bring those people into it.

To have people understand that sprouts is different.

And just kind of draw them in a more aggressive kind of pull model versus pull people in and then I'll yield. Thank you.

Well in terms of the specifics of what's inside the store in terms of how does that differentiate us I do think the fact that we've got projects in such a prominent place not such a key part of the whole <unk> proposition reinforcing that and doubling down on that and something that is a differentiator for us, especially the <unk>.

Level of our pricing relative to our competition and projects, we probably need to talk about better by that but I think that what we're actually doing in the format store walks in that respect I think.

The vitamin Department is something that especially in the world of immunity and people wanting post COVID-19 about lots of aspects of their health, we see that as a fairly key differentiator. The people that we have working in that department really do add significant value and I think that's a key part of the differentiation.

What we've done over the course of the.

More recent changes these innovation centers and bringing key innovative products into the store, which wasn't there before I think that's something again, we should talk about a little bit more but it does provide a very clear differentiation selling products that other people don't sell it as differentiated as you can.

And it's how we talk about that more effectively and I think we are becoming the destination for a lot of the small brands as to who if you want to get started with your small brands proceeds the ideal place to do that and the team are working very well in terms of bringing those things in and I think private brands will play an even bigger role in that innovation going forward.

So when it comes to innovation projects vitamins I think we do have differentiation and increasingly our grocery fixtures the level of assortment that we have around keto Paleo gluten free again, maybe need to talk about a bit more assertively, but the kind of diet space that we occupy and the authority we have.

In that space I think it brings us differentiation I think the question inherent in your question is how are we doing enough to pull them into the store and I think that's something that we're working out pretty clearly in our retail and the message clearly enough and thats something that we will be doing a lot of work on over the next quarter and beyond.

Alright, guys. Thank you so much good luck.

Alright, Thanks Scott.

Thank you as a reminder, we exited you. Please yourself to one question and one follow up our next question comes from Matt Fishman with Jefferies. Your line is open.

Hey, guys. Thanks for the question.

As I think about like the top line trajectory from here I know you pointed to the past couple of months.

Sequential improvement.

October look.

Relative to the previous three months.

Related to that.

As it relates to marketing dollars.

Where do we see marketing dollars next year growing is this a case of there not being enough marketing dollars spent or is it simply like you were explaining the tactics involved with those marketing dollars. Thanks, well, let me talk about the marketing position and maybe chip can comment on October and the traffic in terms of what's been happening specifically.

Our marketing dollars, we are wrestling with what the right amount to spend is and it's more about <unk>.

We've got a lot of resources in marketing that we spent a lot of money in the past sending out a very highly highly aggressive promotions on paper Flyers, we've taken that out of the Covid pandemic allowed us to do that faster maybe than we would have done otherwise, but it has certainly given us a lot of ammunition, if we need to use it in Q3.

We were fairly judicious about how we spend our marketing dollars as we wrestled with the right tactics and as I said in my remarks is some of them are blocks and some of them are having and we're learning from that.

Fundamentally believe is <unk>.

I said in the last quest and the last comment was that we've got to tell the story of what the key differentiation of sprouts says more effectively and not simply goes around on pricing on projects, where in some markets, where 30% to 35% cheaper than our competition on it I don't think our customers know without well enough.

When we're not doing such aggressive high low so on <unk> pricing on project needs to come to the 400 level, but stronger in a tactical sense and then in the second aspect is how do we make our innovation much clearer to our costs to the potential customers that we have and in these buckets of driving costs some of them require marketing.

I think we can grow the basket and the store by doing the things we've been doing in terms of put innovation and getting the stores behind you varietals and driving behind the project business. We can grow that with our marketing I think there's aspects of how we grow the transactions with our existing customers that we have seen some success in our marketing dollars and then the final <unk>.

I do we get new customers, who will look like on existing customers and I think there is some marketing messaging tactics that will have to push some resource into it going forward, but its not beyond where we've been in the past in terms of how much money, we need to spend on marketing.

Can you talk traffic chip.

And Matt This is chip as it relates to October we don't typically provide guidance by the or provide information by the month, but we guided for the quarter minus three to minus 5%. We feel good about October as it relates to that guidance.

Remember in December which has been factored into that guidance.

We're going to be in that three that minus three to minus five and then a little bit on the marketing spend front too I think it's good to know that we're continuing to test quarter.

Quarter over quarter from Q3 sequentially to Q4, we are spending more money in marketing or at least we're anticipating spending more money in marketing not just test and learn but also to help us set off the year right for next year and then year over year were spent a little bit more in Q4 than we did last year.

Yeah makes sense. Thanks for the additional color there and just as my follow up.

I know that.

Cost inflation is usually for conventional grocers that at least in.

In many ways.

And to the top line.

Can you just remind us it might be specifically why sprouts and may be specialty.

<unk>.

May not experience that that tailwind the same way.

How do you expect that total impact in 'twenty, one to look relative to 'twenty two.

Well, specifically outlined we've seen on AUR increase in line with much of the marketplace around the inflationary pressures products that we sell to the rest of the market sell things like proteins meet very specific on a lot of our projects. We are seeing the same sort of levels of inflation that you're seeing across the conventional grocery space and I think as I said in.

The last call around the product, we sell a lot of products to other people doing sale and there's probably a lag a little bit we talked a little about by Allied when you've got a lot of small volume product and alive flowing through in terms of inflationary pressures. So we're seeing big inflationary pressures in our meat and our pork and chicken and.

Simon in our fresh produce and we're not seeing the same extent in our grocery business is much more muted and more measured in that space may be something I will comment that in the future. As you go into 2022, I think it's kind of your guess is as good as yet.

As mining that we're certainly seeing the level of increase in our protein business smoothing out over the course of the last mile.

Last few weeks is going up at a smoothing and I think you'll I think you'll start to see it going in the opposite direction.

Some point as the economy slows down a bit but.

We're certainly comfortable that in most commodities, we're able to pass on what is being passed on to us.

Part from one or two areas in our protein space.

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

Hi, Thank you you've given us some answers to this already but I wanted to explore a little bit more of the.

The commentary about flat or flattish comps in 2022, so a little bit lower than what the street was expecting especially if your margins are already where they need to be so I'm just trying to kind of parse out what some of the headwinds are that would hold you back from a positive numbers Eric element of uncertainty here because of the macro trend.

And back to away from home I, just wanted to kind of get to more of a complete list. If I could what would hold you back from a positive number there.

Hey, Ken this is chip.

What would hold us back as one is early and there's a lot of uncertainty in the marketplace.

As Jack has already alluded to inflationary pressures, how does that play out where does that go what does that do to the consumer as you start to see wallet is getting squeezed in.

In the marketplace.

Due to a secondary or tertiary shop, or a secondary or tertiary item. It's just too early to bet on something thats higher but much prefer us plan for something Thats lower plan, our cost structure accordingly for that and then as we get through these test and learn spaces. The more we can learn about where we can drive traffic.

With marketing and promotions will then go forward and we will continue to do that profitably going forward, but at this point I'd rather as plan around the idea that it's going to be closer to zero and we can work our way into something better as we learn more.

Okay that makes sense and then.

Are we at a more of a level a level $4 23 years or so.

That's kind of a run rate going forward I know, it's not going to be exactly the same every quarter, but I'm just trying to get a sense for how low we should think about that going ahead.

Yes, sure I think if you if you look at it we have in the third quarter. We did have as with the second quarter. We had a lot of SG&A reductions year over year predominantly driven by Covid or COVID-19 related costs last year, we are beyond that going into Q4, our SG&A is expected to grow.

Year over year in.

In Q4 of the math you guys can back into what the math of that is with the other metrics that we've provided.

And going forward next year.

Based on the guidance or not guidance, but the sort of initial outlook next year, we're going to we're not going to go backwards and costs. We're going to go we're going to we're going to continue to grow costs from this point going forward. It's just we got a monitor and measure to make sure that we don't we got to be prudent about how we grow it going forward.

Great. Thanks, so much.

Okay.

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

Good afternoon. Thanks, a lot for taking my question first.

A bit on the comp question.

We just had but are you guys able to measure how far you are today with respect to shedding some of the less profitable coupon clippers or we almost passengers headwind you still think there's a ways to go and then are you seeing any different customer mixes that your new format stores versus your legacy stores. Thanks.

Yes, both very good questions Mark first of all the the cotton.

The confusion that's come with Covid, you, we talked about losing 25% of our customers over the course of the immediate aftermath of the Covid.

Since then it's been relatively static all of that 25%. We think and this is an estimate that we've got a 15% of those came from came from the Covid environment and 10% probably came from the change in the promotional strategy that we fairly aggressively implemented a little while ago in <unk>.

Then there's been a kind of pretty static Max pretty consistent in terms of the way the customer some customers more customers have drifted off but some customers have drifted into as well. So our goal I think he'll have flattened I think is kind of getting towards where it's flattening out pretty quickly now that we're in a position.

<unk> were you shouldn't see the promotional impact being a cause of further dilution and traffic going forward. We believe it will go in the opposite direction, if we can get our marketing execution right.

But by and large we're kind of at that flat point as we go into the two new stores that we've reopened I think we're seeing not just in the two new stores by across the board some encouragement and our target customer base and the spending a little bit more with us and putting a little bit more on the basket. So we're seeing some trends to that effect, but it's kind of early.

Dave because I've only got two of them and there is a broader context going forward as we move into that we would expect that to be the case, but we've now got enough data to really backing that out right now.

Okay fair enough that makes sense and then on in stock levels, you talked about your advantage in working with some smaller suppliers, obviously sculpting challenges everywhere, but how are your in stock levels trending relative to what you've seen in recent quarters throughout COVID-19 and relative to where you'd like to be really in a more normalized environment.

Yes, I think.

I don't know when we're going to get to a normalized environment is certainly a lot of a lot of challenges and installed for us one of the issues for US is we've got a big SKU count. So if you don't have stock. The one thing I think there is an opportunity for customers to move to try to move around within within our assortment. So that mitigate somewhat are installed.

I would say our in stocks have got got bought in Q3, it maybe got marginally better towards the end of Q3, but it's up.

Constant battle at the moment trying to get things through the network and as much as <unk> analysis.

Product, but it's also about transportation and drivers in getting people into our warehouses and getting people into our third party distributors. So I would say it was tougher the solid Q3 get marginally better, but it's still a tough challenge at the moment.

Got it thanks, very much and good luck.

Thanks very much.

Our next question comes from Christopher <unk> Bank. Your line is open.

Hey, guys. Good afternoon, thanks for taking the question.

I guess I wanted to go back to <unk>.

Take a call to action test that you have been doing for the past three months and you did say that the ones that are focused on your differentiated produce mix resonated with customers. So maybe if you could just share a little bit more in terms of how did this translate to potentially improve store traffic and what are maybe some of the earnings are in the early <unk>.

Some customer engagement and loyalty building perspective that you can go.

Forward from here.

Well, we can often go up at all.

I'll come to loyalty <unk> and in terms of the activities that we did in terms of our testing through Q3, certainly when we produce products in there and we think of differentiated varietals of grapes, they've worked really well for us when you get flavors and tastes and we get some play one of the things Thats helped us in Q3, a little bit as we managed to get some <unk>.

<unk> back into the stores and as you can get the experience of tasting product that you can't get anywhere else. We do believe that the loyalty build up for us and we're excited about doing much more soft plane going forward around the differentiated products that we have and also our innovation centers that we've been putting into store, where we're getting new completely new.

Products, whether it be in chips or whether it be in <unk>.

Health focused products, whether it be in drinks, we've made some real progress in bringing products and I would like us to be doing a lot more in terms of getting sampling and testing for the customers when they come in to drive a lot more kind of loyalty in the future in and around those things testing and marketing the ones that kind of what we did this <unk> campaign.

Our customers.

We didn't do everywhere, but we did it in certain places where customers get the receipt and then they can come back a few days later and I think that encourages our existing customers to have more frequent transactions. So we think that's worked quite well for us and we did we did a 72 hour sale on specific products that seem to work quite well photos as well, but there are some other ones.

It didn't work as I said in my remarks has been hit and Miss we've had some winners and losers in that and our losses in that exercise going going forward on loyalty.

Doing a lot more work in terms of trying to understand our target customer base with a lot of different sources of data up to and including how we might think about do we go much further do we use E mail marketing how much further do we use getting the information on telephone on four numbers and using tax map marketing, which seems to be a.

Fairly significant trend in the industry at the moment and I think we can do a lot more text marketing going forward as we build the number of people who are giving us that information and we're getting a few more people in that space now.

That loyalty is going to come Ryan take marketing and E Mail marketing and how we can take that information and a more clear way.

Well the idea of loyalty cards is clearly part of our dialog going forward as we think about it.

That's great. Thank you and I wanted to follow up on some of the inflationary comments that you made you said that the.

The grocery side is much more manageable, but youre seeing obviously a lot more inflation on the fresh side, how much were you able to pass through in the third quarter and have you seen any customer resistance to higher prices in some departments, perhaps wanted to change change of rate has been more rapid.

So I think I'll, let Jeff comment as well, but fundamentally we've seen some pretty significant cost inflation on beef chicken.

So not double digits low double digit and we've been able to pass on project pricing and it hasnt, we havent seen too much resistance in that space. So the rest of the businesses.

Manageable as we said, but that would be where the one place where we've seen some resistance would be in the beef protein space.

Got it. Thank you so much best of luck.

Thank you.

Our next question comes from Edward Kelly Wells Fargo. Your line is open.

Yes, hi, guys good afternoon.

Could you just talk about the.

The the.

The store openings.

Then you've got kind of pushed back a little bit can you just talk about what youre seeing there and then.

Like in the guidance when you talk to or at least that.

The longer term about the low single digit comp in the high single digit sales.

That maybe we're not talking about 10% store growth just kind of curious if there was some subtle change there as well.

Yes. This is chip.

Well number one we in the near term what we're seeing is we have a great pipeline. So we're continuing.

To go and find great sites that we believe will fit for the sprouts model. The challenges we're having today are one.

They're getting through permitting is a challenge around the country for everyone. That's trying to build anything in.

Then also on construction and trying to get the construction completed and also the sourcing of the equipment. All of that is becoming challenging we did have a pretty back half loaded Q4 loaded number of new stores. This year as we did in next year.

It's become a little bit of a dominos effect as you start to see some of these challenges do we believe we can get back to the profile of doing double digit <unk>.

<unk> growth Yeah, I think we can get back by hopefully depending on we all don't know how COVID-19 is going to or how these impacts in the supply chain are going to.

Factor into 'twenty, three and beyond but right now we're very hopeful that by the time, we get to 'twenty three we can get back on a clip of 10% unit growth a year that being said, our new unit is not going to deliver its not going to be fully mature. So we just do the math, you're doing 10% youre going to get slightly less than 10%.

<unk>.

Topline growth on that and you combine that with a very low single digit you get to that number could it be a little or it could be but that's that's kind of how we think about it now for 23 ish and beyond.

On the leases in the pipeline is in good shape in terms of what we need going forward just the data once we get them opened as it kind of been a crazy time for everybody.

As chip said, the permit and the construction and the materials and that has just been a real challenge in terms again of where we want to get too.

But it's not that we've changed direction.

And which we're going to be able to.

We wanted to be clear intervals at 2022.

And then can you just talk about what the mix of the new stores are going to look like going forward, new newer let's call the newer markets like Florida.

As opposed to existing markets and then what you are seeing in those newer markets in terms of store ramp how long it takes for stores to get to <unk>.

Profitability.

And how that this ramp up the store growth both this year and next year.

Just to consider how it impacts the P&L.

Yes, certainly.

All of our new stores going forward.

In 'twenty, two and beyond as planned or of the new format. So they will all be the smaller stores new format. Our expectation is that the average unit volume won't be dramatically different than they have been historically and the ramps should not be much different than they have been historically, so thats the way that I would think about it going forward.

And from a geography point of view that we clearly have different.

Expectations end markets, where we're not as well known in terms of the time that happens and flood consolidating Florida has been an interesting exercise for us as we try and get consolidated within markets whether that be Tampa.

Doing smaller stores allows us to get a little bit more concentration.

In a market, which allows us to get our marketing spend at the right level to start with so certainly Florida is one that we were very excited about going forward has got the distribution center and we've got a ton of leases in place to be able to build.

Critical mass in some some of the key conurbation has done that and we remain excited about how that's all going to play out.

And I would add to that is it is very clear to us that density matters. It matters from a brand perspective, it matters from an opening sales volume perspective.

The ramp may be a little bit dampened because it's in a market that is established.

But the opening volume as our established market.

And the profitability is higher in established markets. So as we get into these new emerging markets like Florida like the mid Atlantic.

It is really critical for us to get some density in those markets from a brand awareness perspective and get to the volumes that we believe will really drive shareholder value.

Great. Thank you.

Thanks.

Thank you as a reminder, we ask that you. Please limit yourself to one question one follow up our next question comes from Brandon Fletcher with Bernstein. Your line is open.

Hey, guys I appreciate the time.

My question is pretty simple.

This strategy makes sense and we track on the differentiation one of the things Thats been odd to US is that some of the other grocers that may have kind of comp that comp a little bit better. We certainly perceive is having less of a strategic move mean, the differentiations in there the service level isn't there, but maybe the comps haven't suffered quite as much.

On the comp the comp battle, because I think thats kind of the weight that hangs on what is otherwise a really positive story in our view.

Yes, I think it's a good point and I think when I look at the the conventionals as comp.

As youre comparing the comps too I do believe that.

The COVID-19 environment that consolidate is clear the number of shops that people make to buy their groceries shopping has gone down through the.

<unk> from something like 5% to <unk>.

It's gone from five to do the consolidation of the shelf around concerns around the around the conventional grocers has probably helped that enabled them to hold our comps better than ours over that period of time.

I think it's beginning to change a little bit and we might get some benefit of that bouncing back the other way when I look at what's happened in the course of the marketplace the broader marketplace. The mass channels on the club channels kind of add to the top not so much for selling in the mass channel struggled a little bit the level of that to start with they are bouncing back pretty hard on the numbers at the moment.

So the conventional grocers, probably suffering a little bit of lot going forward.

We tend to not focus too much on what other People's comps, we focus very much on being we are a complementary retailer and we believe our comps are kind of controlled by our own destiny.

We get this right and do the right thing that will be in a position to drive the additional share of wallet that we need from our target customers and there's plenty of dollars out there for us to get to that kind of modest low single digit comps that chip <unk> been talking about that we can get there within our own world almost irrespective of what happens.

To the other guys, but in simple answer to your question I think is a COVID-19 environment has made that difference.

That's a challenge and the fact that they havent come back is a challenge, but the idea that those 75% as Jack mentioned theyre, putting more units in the basket today than they were in the third quarter of 2019, and they are paying significantly higher prices, both through mix as well as inflation today.

As well, we can we can win.

Yes that makes a lot of sense. So when you go from five to two and then eventually back to three because were not going back to five the idea would be that those customers will have a reason to add you as the trip and if your message that right then you'll get the magic of a little bit of extra comp flowing through so beautifully through the P&L.

I think that makes sense to us and as long as you guys think about it that way.

Think we understand it well.

Thanks Brandon.

Our next question comes from Oppenheimer.

Your line is open.

Good afternoon. Thanks for taking my questions. So two related questions just capital allocation. So just given some of the changes in new store growth at least for next year.

Curious, how you think about capex as a percent of sales going forward and then also I guess just related to that given given where your share price is today and the multiple.

Does anything change in terms of how you guys approach share buybacks, because I know the pace in recent quarters hasn't.

Necessarily been that aggressive.

Hey, refresh as chip as it relates to Capex.

We haven't provided a number but I think honestly I think Denise said, we're at about 3% to three 5% a year.

Yes, it's probably call it 3% a year, we'll give you more specifics for next year, but it should be about 3% of sales from a go forward perspective, and then as cap, which obviously that leaves a lot of excess cash coming out of the business capital allocation, we're going to continue to evaluate our options we will continue to.

We want to give money back to our owners in some form or fashion. The pace of that we'll just we're going to play it by ear and we'll opportunistically buy.

Okay, Great and then maybe just one follow up question. So.

If you look at SG&A same thing in FY 'twenty, two and beyond like what type of leverage point, what type of comp do you need to leverage SG&A do you think going forward and the current cost backdrop.

Yeah.

Well, that's a question that everyone asks.

And it has for 20 years, but.

It always depends on what Youre managing year over year. So right now for next year, our expectation is that our.

Our SG&A, we're going to try to manage at least going in in that call. It six maybe 7% growth somewhere in there, 5% to 7% growth and we're not going to get earnings growth on that number. So if you really want to leverage SG&A consistently is pretty much any retailer I think you needed two to three comp if your margins.

Stable.

Okay, great. Thank you.

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

Hi, Thanks very much.

A couple of questions on next year in terms of the comps can.

Can you maybe just give me a little color on how you think that the comp composition will be with respect to traffic.

Basket versus inflation.

No that I heard that clearly from you and then I had another follow up.

Hello, Karen we haven't actually said it.

You didn't hear that.

Slide you probably haven't heard it.

Look it's really early for us to and there are so many it's like a lifetime away 2022 right now.

That said how are we thinking about it we really want to get our traffic back to at least neutral.

And so if you think about that and you've got to get the traffic back to neutral right now.

You do the math and you kind of get to a zero ish comp can we do better than that if we can get traffic going if we can get traffic.

Positive we will have positive comps next year.

So there'll be three things three things that drive our.

Our comp if we get it right as I said earlier, one will be growing the basket with people that are in the stores, which is going to just switch is going to be part of our comp drive both basket both units.

You are correct.

Transactions from our existing customers, so that the customers that come with us come more often because there is a reason to do that because of something new all the time because the fresh foods has developed new products, new varietals, new new products coming in the innovation center sampling there'll be people coming on that basis and then.

Bucket is growing new customers from ineffective marketing campaigns all of that should add up to I would've thought in terms of transactions are pretty flat transactions number going forward that would be our aspiration.

Okay, and then can you just.

Yes.

Comps, obviously don't reflect that.

Gaining share at all even in.

New new stores, let alone an existing so maybe a little color and update on your thoughts on that.

Your definition of comp waterfall is transactions units per ticket units.

Sure.

No just as you.

You open stores when they open at a certain percent comp right.

On some of the ramp therefore, yeah yeah.

Because of the ramp.

10% square footage growth, we're probably getting one ish comp out of that on a 10% square footage growth. So next year, we're not we're going to be I think around 7% square footage growth.

A little bit less than one on that.

Okay. That's helpful. Because I do think there was an issue where some of the stores you opened at a certain point in time, we are actually much higher volume stores. So you may have been negatively impacted by higher volume and cycling, but I just wanted to clarify that we soundly used to open stores with more aggression in terms of promotions and took a lot more time to get back.

To kind of paying back.

<unk>, so I think thats, probably what youre alluding to kind of in our previous dialogues.

Okay. Thank you.

Thank you.

Thank you I'd now like to turn the call back over to next Sinclair for closing remarks.

Yes, thanks, very much everybody for taking the time and we really appreciate your interest in our company and we look forward to continuing the dialogue and helping to make this whole exciting venture come alive. Thanks ever so much.

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

Q3 2021 Sprouts Farmers Market Inc Earnings Call

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