Q4 2021 Sprouts Farmers Market Inc Earnings Call
Good day, and thank you for standing by welcome to the Sprouts farmers market fourth 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.
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I would now like to hand, the conference over to your speaker today, Susannah Livingston, Vice President of Investor Relations and Treasury. Please go ahead.
Thank you and good afternoon, everyone. We are pleased you have taken the time to join sprouts on our fourth quarter and full year 2021 earnings call Jackson, Clerc, Chief Executive Officer, and Chip Molloy, Chief Financial Officer are with me today, the earnings release announcing our fourth quarter and full year two.
'twenty one results the webcast of this call and quarterly slides can be accessed through our 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 2022 and beyond these statements involve a number of risk factors and uncertainties that could cause actual results to differ materially from those described in the forward looking statements.
For more information please refer to the risk factors discussed in our SEC filings along with the commentary on forward looking statements at the end of our earnings release issued today.
Our remarks today include references to non-GAAP measures for a reconciliation of our non-GAAP measures to the GAAP figures. Please see the tables in our earnings release in.
In addition, because our results for 2020 were impacted by the COVID-19 pandemic. This presentation will also include certain comparisons to results in 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 the simple addition of two periods.
For more information can be found at our investors that sprouts dot com under additional reports if needed with that let me hand, it over to Jack.
Thank you Susanna and good afternoon, everyone. We're pleased to report that our results for the fourth quarter were better than we anticipated.
For both sales and earnings.
Encouraged by the fact that our quarterly comp transactions some positive <unk>.
2021 was a year of meaningful accomplishments for this price team while at the same time, we successfully navigated a very challenging retail environment. During the year. We opened 12, new stores remodeled one and relocated one of which four were in a smaller store format and encouraged with the initial results.
We made significant progress towards filling a pipeline of future store openings opened two new distribution centers launched over 5700 new product.
A fulsome ESG report, which resulted in a AAA rating from MSCI just to name a few.
I'm excited about the platform, we're building and where we can take it in 2022 and beyond going forward, creating more meaningful messaging about our customer proposition densify, our store base and established markets and extending our reach to new customers and new markets will help us to continue to profitably grow.
To that and I am thrilled to announce that <unk> will join our team in March as President and CEO I'm looking forward to Nick's leadership over the areas of marketing merchandising and operations Nick brings a wealth of experience in these areas with deep deep retail knowledge from industry, leading companies such as target.
Okay cool.
As we enter our 20th year Theres, a speciality grocer the bolstering of our team allows us to move our strategy forward and fulfill our mission of providing healthy living options for less to more people.
The book before providing more details relating to the quarter's activities and strategic performance I'd like to turn it over to chip, who will review our financial results for the quarter and full year as well as provide our 2022 outlook chip.
Thanks, Jack and good afternoon, everyone.
Before I get started I would like to reiterate the fact that fiscal year 2020 was a 53 week year.
Year over year and quarter over quarter comparisons will be 52 to 52, and 13% to 13 weeks respectively.
For reference purposes, the extra week in 2020 included a $122 million in sales $29 million in SG&A $16 million in earnings before interest and tax and 10 in earnings per share.
Fourth quarter total sales were $1 49 billion up $12 million from the same period in 2020.
Comparable store sales were down one 1%, resulting in a positive two 7% two year call.
As Jack mentioned comp transactions for the quarter were slightly positive. It was the first quarter with positive comp transactions since 2018.
Average retail prices were up primarily due to inflationary cost pressures passed onto the consumer while our units per basket were down as we continue to cycle. The larger baskets that occurred during the first 12 months of the pandemic.
Encouraging is the fact that our units per basket for the quarter were still higher than they were during the same period in 2019, even with higher prices.
E Commerce sales were 10, 4% of total sales settling to what appears to be a relatively stable run rate.
Fourth quarter gross margin dollars totaled $533 million and gross margin rate was 35, 7%.
The margin decline of approximately 100 basis points was driven predominantly by a slight lag in price increases relative to the pace of cost increases.
That gap has been narrowing as we've moved into the first quarter of this year.
SG&A for the quarter totaled $449 million or $14 million higher when compared to the same 13 week period last year.
SG&A increases were predominantly driven by new stores offset by lower Covid response and incentive compensation costs.
For the quarter, our earnings before interest and taxes were $51 million interest expense was $3 million and our effective tax rate was 25%.
Fourth quarter diluted earnings per share were <unk> 32.
During the quarter, we opened eight new stores spent $28 million in capital expenditures net of landlord reimbursements and repurchased 2 million shares.
For fiscal year 2021.
Total sales declined 4% to $6 $1 billion.
The six 7% decrease in comparable store sales growth, which was primarily from cycling the demand from the Covid pandemic in 2020.
Yeah.
Our gross margin for the year was 36, 2% down approximately 55 basis points.
Merch margins were down approximately 40 basis points and the remaining 15 basis points was the result of warehouse and distribution deleverage during the first half of the year.
Our gross margin was slightly better than we projected at the beginning of the year and up approximately 260 basis points when compared to 2019.
SG&A expenses for the year decreased $86 million on a 52 week basis to 175 billion or 28, 7% of sales.
Increases in SG&A from opening new stores were more than offset by significantly lower expenses associated with Covid response costs and lower incentive compensation.
For the year, our earnings before interest and taxes were $334 million or interest.
<unk> expense was $12 million or effective tax rate was 24% and our diluted earnings per share were $2 10.
During the year, we opened 12, new stores, ending with 374 stores across 23 states and invested $81 million in capital expenditures net of landlord landlord reimbursements funded by our strong cash flow from operations of $365 million.
For the year, we repurchased seven 4 million shares of common stock for a total investment of $188 million ending the year with $112 million remaining under our current $300 million share repurchase authorization.
Turning to the balance sheet highlights we ended the year with $245 million in cash and cash equivalents $250 million outstanding on our revolver and 28 million of outstanding letters of credit and a net debt to EBITDA ratio of nearly zero.
As we move into 2022, we are cautiously optimistic.
We're encouraged by our fourth quarter results and believe many of our strategic initiatives have laid the foundation for ongoing and more consistent growth in revenue profits and free cash flow.
Navigating inflationary pressures on costs, both product and expenses as well as some lingering COVID-19 dynamics will be important to our success in the near term.
For 2022, we expect total sales growth between 4% and 6% with comparable store sales growth of zero to 2%.
We now expect to open 15 to 20 new stores.
Less than our previous communication of 25% to 30 on our strategic goal of 10% growth per year due to the ongoing permitting and supply chain challenges associated with sourcing materials and equipment.
Several of our new stores in 'twenty two we're scheduled to open in December on Enel shifting to the first quarter of 2023.
Our real estate team continues to work diligently building a quality pipeline of new locations and we believe by 2023, we can be closer to our 10% goal.
Day, we have more than 80 approved sites and more than 50 signed leases in the pipeline.
For the year, we're expecting our gross margin rate to be relatively flat when compared to 2021 and SG&A to grow approximately 4% to 6%.
We expect adjusted earnings before interest and taxes to be between $330 million and $345 million.
Interest expense of 11 million and effective tax rate of 25% and adjusted earnings per share of $2 $14 24.
Assuming no additional share repurchases.
That said, we do expect to continue to repurchase shares opportunistically.
Capital expenditures net of landlord reimbursements should total between 150 on a $170 million, which includes the potential relocation of one of our distribution centers to a larger facility.
Our guidance for the year does not include the temporary cost associated with California's recent passage of their 2022 supplemental sick leave Bill that provides paid leave time off for Covid issues through September one.
The estimated incremental cost is between two and $4 million.
For the first quarter, we expect comparable store sales growth of zero to 2% and adjusted diluted earnings per share between <unk> 69 and 73.
With that I'll turn it over to Jack.
Thanks, Chip I would like to speak more about our business and ongoing strategic initiatives.
I want to give a heartfelt thanks to all the team members at sprouts for their service our team members remain critical to surprise and taking care of them is our top priority. We will continued cultivating the community within sprouts reinforcing the positive culture inherent in our DNA. We're also expanding access.
As to development opportunities, helping ensure our amazing team members reap the rewards of their hard work and are able to grow within sprouts, it's not been an easy to use for them yet they never stopped working to solving our customers make lasting positive changes to the company and improving access to healthy foods across the.
Three.
Our focus on product innovation and differentiation in partnership with our vendors is the lifeblood of our success and what makes us a speciality grocer.
This focus helped drive our sales in the fourth quarter, and we were especially pleased with our sales performance in daily bakery vitamins on grocery daily continues to show strength and are prepared daily meals grab and go vegan options and sushi.
Even though sushi department is getting into plant based offerings and in prepared foods, we released some new meals created by our in house shift, which really brought the program to life. They included sous-vide keto friendly Atlantic Salmon with pub Llano crammer on a whole line of pasta meals using any <unk>.
Can grasp fed beef and other attribute driven proteins base.
Basically continues to grow year on year supported by ongoing innovation and seasonal events fourth quarter saw strength in holiday items up double digit from last year.
This category continues to grow and artisan breads and gluten free items and keto bread sales are now larger than conventional bread sales, which speaks to our expedient sika customer.
Vitamins benefited from immunity products partnerships and innovative new items. The year ended with a return to a normal cold and flu season, and when coupled with elevated Covid cases, it led to a sales increase in our immunity categories like John was Castleton.
Top trending mushroom brand OEM.
Created immune multi boost which had all the key attributes on trend ingredients to support immune health and everyday wellness, which we released in the fourth quarter to great fanfare.
In October we hosted an interactive wellness livestream with industry experts to discuss natural remedies for anxiety inflammation and immune health.
Grocery benefited again from our strong holiday program and innovation holiday sales started early and remained strong through the fourth quarter, especially in private label.
Some favorites driving the strength with our sprouts branded dark cocoa cancel corn and CIC as many <unk> a full innovation centers rolled out in our new format stores and we converted nearly 250 bulk tables into innovation tables in our existing stores.
Creating halo and trial each week as bi monthly we highlighted new innovative items.
This treasure hunt destination displays trending private label and branded items, such as our Chilean line rolled tortilla chips on new organic sprouts branded teas.
These premium teas are harvested from small farms around the world with complete traceability and include fully compostable and biodegradable T bites and strengths.
As it relates to strategy, we moved the needle on many fronts in 2021, our merchandising team made tremendous progress by highlighting even more of a differentiation and innovation, which remains our strength our spreads we.
We ended the year with over 70% of our products being attribute driven like keto Paleo plant based or of course organic which is much different than other doses and this strength is being recognized in the marketplace as our vendors increasingly look to us as the destination for all new ideas.
Organic continue to be a driver of differentiation for sprays in total they represented 24% of our sales in 2021 and produce a contribution of organic sales to total department sales grew by nearly 600 basis points in daily organic sales present penetration.
60% higher than conventional grocers I did meet which is neutral organic performed better than we expected.
Overall 2021 brought the addition of more than 5700, new branded and private label items of which more than 400, where private label releases.
They include many client based and organic products like our whole wheat spaghetti on organic extra Virgin olive oil as well as vegan protein powders and a new health and beauty line.
Our supply chain was boosted in 2021 with the opening of two new distribution centers, reducing our miles on the road by $3 million, improving strength, and bringing fresher and more local products to the shelf.
In Colorado, we increased our local SKU count by 200% in season, resulting in sales penetration of our local approaches in the mid teens for Florida, while we're still in season, we've already partnered with many local growers. These partnerships are already resulting in increased local project sales penetration and.
And to the mid teens, which should continue to increase as we hit peak season.
In 2021, we also planned to open to smaller more profitable new format store. Our FTE count is very similar to older vintages with a slight change in departmental mix, resulting in seven of our opening sales.
In total with four of those stores in 2021, including one relocation and one remodel.
<unk> remains the cornerstone of the new format stores highlighted by prominent position in store, new varietals and of course, our focus on best quality everyday great prices.
We expanded the frozen department put a greater emphasis on plant based items, both of which are showing stronger sales in the new vintage and despite the daily being smaller in scale and lowering cost to build it continues to show sales trends with the addition of more grab and go options and prepared foods, even after taking out more labor.
Intensive items like salad bars.
Most all of the new stores this year will be in the new format, except for the seven stores, we pushed from 2021 due to supply chain challenges in getting equipment.
And finally, I want to speak to marketing our marketing approach has gone through an evolution in the past year.
We began 2021 with a new campaign, which strengthened our awareness as a speciality grocer a highlighted our strength in fresh quality projects are not perception remains very high in the industry. However, we found it didn't include enough coal types and to drive more footsteps to the door.
And that those that shop has understood we had great prices, but that fell short in the market overall.
In the back half of 2021, we began to change a few tactics by reinforcing the value matches message compelling reasons to visit the store and product differentiation in all our storytelling inside and outside the store to break the inertia of the known sprouts shoppers.
We are optimistic these changes are starting to make a difference ending the year on a good note with slightly positive traffic.
<unk> related to our fourth quarter improvement, we delivered the holiday catalog, which through storytelling emphasize all the attribute driven holiday items like organic free range turkeys gluten free ingredients unhealthy sites like Kevin's Paleo mashed, sweet potatoes, and tattooed shift right to call it.
Stuffing.
It includes digital based auctions muddying up storytelling with QR codes to join our App melding together, our growing customer base, which days informed and get access to all the deals customers and I know the all our best deals are automatically loaded in this spread SAP with discounts given at checkout.
No more clipping necessary.
For 2021. These efforts helped grow our royalty scans up more than 700%.
<unk> E mail addresses grew over 25% to approximately $3 8 million customers, which equates to a 90% growth since 2019.
Our SMS text group grew over 75% led by a quick enroll program nationwide.
In total we can now reach over 5 million customers through different channels.
As it relates to ESG, while our 2021 report won't be out for a few months it would be remiss if I didn't mention the accolade sprouts has received this past year from a from the progress we've made on the updated disclosures. This past fall we received a triple a rating from MSCI.
Marked improvement from the respectable triple B rating last year as.
As well just recently, we were honored by the corporate Knights I was one of the global 100, most sustainable corporations in the world.
Both highlight the excellent work of our company on foundation has done in improving our disclosures disclosures on making a positive impact on the environment.
On a positive impact on our team members and the communities we serve.
For 2022, our focus remains on providing our customers a unique and differentiated product assortment aligned with their shopping needs our customers will be able to see and taste, even more creations from sprouts and our vendors as we launch our innovation centers to approximately 120, new and existing.
Stores as for new stores or unit growth story remains one of the best out there for retail, though our growth in 2022 is less than 10%. Our pipeline remains very strong with more than 80 stores to be opened in the next few years.
Kipp pointed out once the supply chain and city approval process right size from the pandemic, we expect to be back on track to our high growth model.
As for marketing, we will mine, our customer data to get them engaged with broader and more inclusive media messaging highlighting value differentiated categories and supported by our vendors partners and Influencers. The livestream. We did this past fall we saw successful would exploring additional events this year as well as innovative partners.
Partnerships with industry experts.
While we do expect supply chain challenges to linger due to labor shortages in the fields and warehouses as well as a shortage of drivers our team remain hedge down finding new places to source products and passing through increased cost in most cases.
We believe the focus on health and wellness is here to stay which bodes well for our differentiated offering we are optimistic that the positive fourth quarter traffic is beginning to validate our strategic changes our focus remains on delivering great products and great prices to our customers and coupled with unit.
Gross expansion will drive our top line.
Internal focus on efficient operations on the right promotions will maintain the change in our margin structure.
Courage of the progress we've made against our strategy and I'm confident the success will only grow in 2022 and beyond.
At this time, we're happy to take your questions operator.
Thank you Andrew.
Finder to ask question, you will need to press star one of your telephone to withdraw your question press the pound key.
We ask that you please limit yourself to one question and one follow up.
Our first question comes from Ken Goldman with Jpmorgan. Your line is open.
Hi, Thank you good afternoon.
When you were listing the departments that you were particularly proud of I didn't think I heard frozen and correct me if I'm wrong. There. So number one was that an intentional omission if I did hear it correctly and number two can you walk us through a little bit how the frozen business is doing for you at the current time.
Yes, we're very encouraged about frozen kennan.
And the place where I'm going.
Maybe we should've mentioned that specifically if I'm not if I'm honest with you because its been something thats been really strong for us over the last two or three years, we've reinvented the products that we're selling a lot of a lot of innovative vegetarian vegan and plant based keto Paleo. So we're really encouraged by and if you look at new stores, we're giving a lot more space to <unk>.
Frozen and our new stores going forward. So we're investing in it we're encouraged by it.
We're pretty we think it's something that you know there's a few years ago frozen was seen as a kind of pure relational against fresh, but it's been a place where we've been able to generally a lot of innovation and the team are chasing this hard so.
That was probably a miss on our part Ken but its doing well for us.
Great. Thank you and then quick follow up I know you don't give specific gross margin guidance. All the time just wanted to get a sense of a range. The street's at about 36% for 'twenty two is that far off from where your model might be expecting at this time.
Kevin This is Chuck no that's not far off we said relatively flat to this year, so it's going to be relatively flat.
Some of the margin degradation in Q4 is starting to subside into Q1.
Great. Thank you.
Thank you.
Our next question comes from Martin with UBS. Your line is open.
Good afternoon. Thanks, a lot for taking my questions. My first question is on the comp guidance I know low single digits is what you're targeting over the long term.
Given the degree of inflation that we're seeing in the marketplace and your relatively easy comparisons why not bring up 2022 comp guidance anymore, it's simply a desire to build in some conservatism something else. Thanks.
This is chip.
There's a couple of things going on there one is just the balance of traffic units go into the basket.
And so you just look at the trends and where we are we've had units in the baskets have been down year over year and that will still continue to be down as you're going into the.
Through the first quarter and part of the second quarter as we're comparing to 2021.
And then traffic will be we're hoping to have traffic in the positive range throughout the year and will the AUR will start to subside as the units in the basket start to build again, so net net it all kind of comes out together.
Zero two range.
Got it that's helpful. And then how is cost inflation trended coming out of the quarter are you passing on any more or less than you may have started this deflationary wave our competitor yet still rational and how are you positioned to play out.
The market seems pretty rational to me Mark in terms of how people are passing on but what's the level of inflation that it's a pretty volatile situation I'm old enough to remember kind of what happens when you get high when you get <unk> inflation.
The context of how you manage that is the timing on it is always kind of Theres always lags and then you get ahead of it and you get behind that level, but as you try and manage it I'm not seeing any any major <unk>.
<unk> from anybody that would say those I know right, there's not rationality going on in the kind of promotional space on this but there is some timing in terms of how fast you can you can you can move pricing when you get cost inflation and probably in Q4, we were kind of a level, but slower than we might have been and as we go forward.
Forward, we're seeing that coming in line.
Yes.
I'd add Mark if you go back, which probably Q2 this year were the <unk>.
Cost got ahead of the prices a little bit and that's flowed through and it's starting to catch up and once again I think we're catching up to that by Q1 of next year Q by Q2 for sure and it's starting to narrow in Q1.
Great. Thanks, so much guys and good luck.
Thank you.
Our next question comes from Scott Levine with RFID capital Your line is open.
Hey, guys. Thanks for taking my questions. So a couple of things number one is the higher of a COO.
Why did you do it and what are you expecting from that person what do you think he brings.
Well I think as we as we grow our business and we need to widen our bandwidth and the capabilities that we have in the organization to to to generate and stimulated the growth that we want going forward. This is quite a.
I kind of immature business in many ways, so bringing more talent and more people on board to can drive that so we're very excited about Nike brings a wealth of experience and a real passion for our for our proposition and what we do.
The fact that you've got the kind of background. These go I think he's going to add a lot of value to our business and bring a lot of discipline to our merchandising marketing and operations side of things which in.
In many ways.
It's part of the process of us growing and developing as a business and I'm very excited about the royalty is going to play for us.
Perfect and then just two quick housekeeping items I want to make sure I heard something right and then I wanted to go back to the last question around comps. So the $2 million to $4 million I think you guys pulled out as far as the change in the California Law I think you said it's it's.
Excluded from guidance and I'm, just curious why since you know what the number would be and it sounds like it's ongoing and then the second thing with comp would be the <unk>.
Zero to two in the first quarter with inflation running as hard as it is it would be suggested that volumes are down fairly sharply.
And I, just I mean, I heard the explanation I, just I guess I'm, just not sure I understand it completely.
Yeah.
A couple of things so the California piece that that actually stops in September . So the law was set up in September we were we werent sure actually when we started quantifying it because we just all just got passed this recently and it's a $2 million to $4 million number and we just felt like we wanted to call it out because its a temporary.
Sort of one time, one time costs.
As it relates to the zero to two.
You got to almost go all the way back to when the pandemic started in the second quarter.
2020, and you think about four quarters. Unfortunately, it didn't happen at the beginning of the year. So it's kind of the next four quarters and what happened where the units in the basket went way up in the second quarter of 2020. So when you cycle that this past year, they went way down and they've been staying down so we've got another quarter of that.
Where they go where theres still going to be comp units per basket are going to be pretty far down and then that'll start to catch up on the anniversary and it should be going in the second to third quarter. It will unless something else happens from a you know another variant that.
Who knows but beyond that it should start to all come together and stabilized with.
Relatively small relative positive traffic transactions transactions should be positive units per basket should be a little bit positive AUR should be a little bit positive as we start to cycle the big.
Inflation of last year.
Okay, guys. Thanks, I'll I'll yield appreciate the answers.
Thanks.
Our next question comes from with.
Oppenheimer Your line is open.
Good afternoon, Thanks for taking my question.
So the first question I have is just on quarter to date trends is there anything you can share in terms of what you're seeing quarter to date.
Hey refresh.
Normally this company Hasnt give guidance for the current quarter in the past, but we've done that this this time. So we will going forward. So the guidance. We've given is in line with where we expect to be for the end of the year end of the quarter.
Okay, Great and then second just on private label. So a lot of a lot of innovation routes on the private label side curious where your private label penetration is today and where you guys expect it to go by the end of the year.
Well exactly what will happen to the penetration I'm not sure, but I think as I've said in the past and a lot of these conversations our private label mix at the moment I think it's about 14%, 15% something like that $60 to 62% as we said to the moment some of that 16% is commoditized that we don't really kind of feel is the right direction for <unk>.
The label, but some of it is real innovative product on the progress that we've made in our holiday I was very encouraged by there was a new design new team in place who are doing a really nice job and we've got some really innovative products coming through so I'm excited about the new designs in the new products coming into the business through the course of this year exactly what the penetration will be.
Not something we're ambitious but no we're not saying it's got be 20 years ago.
Is it task all those years ago, it doesn't need to be a particular number of the important thing for us is that it's bringing that differentiation to our customer and we're bringing innovative products into this space and that's something that.
I'm very excited about going forward, but the exact number I'm not quite sure where it will play out.
Great. Thank you.
Thank you. Our next question comes from Cerankosky with Northcoast Research. Your line is open.
Good afternoon, everyone.
Jack I was wondering.
I was wondering if you could discuss.
Some of the best benefits, thus far of clustering stores or having more stores in clusters.
How it is helping with sales growth distribution efficiency.
Cost reduction.
Well, specifically when we open stores in markets, where we've got a significant penetration we do better than when we opened in markets. What are we doing so simply speaking when people know who we are we've got a real chance of hitting the ground a little bit faster, what we're finding in the mid Atlantic and Florida will.
Got great customers in that space, we've got great opportunities on it but as we build the density we're starting to get better strengthen up but it takes a little bit of time in these markets where people literally don't know who we are and not.
That's a marketing challenge and it's a communication challenge and it becomes much easier when you've got density in the marketplace to do that so.
Very simply when we've got decent strength market a market share in California, Arizona Vegas, we do better than when we get on.
On day, one we do better than when we launched <unk> in the mid Atlantic and Florida marketplace. So I suppose that makes a lot of sense and but we're very encouraged to the distribution centers is allowing us to be much more effective locally. So we've put two new distribution centers on the ground, we're probably going to have them.
Another one at some point during the next 18 months or so and that's going to allow us to source product more locally so when you're in a farmer's market in Florida. The fact that we've now gone Orlando distribution Center, we're not shipping from Atlanta, Georgia, All the way down to Naples, we've actually got ourselves in a place where we're working much better with the local farming community the local.
<unk> cultural community on selling more local product and I'd like us there will be encouraging the teams to do much more of that we've been recruiting a lot of people. So that combination of getting product getting more stores in a dense area, providing more local product through our distribution network, which will evolve and develop I think sets us pretty well for the future.
So what you want to add to that chip, yes. The other things I would add to it is this from a tailwind perspective, you start to get some brand awareness, it's easier to hire talent as you promote people from within the boxes, it's easier to promote and move them to other boxes and they know.
Not bringing in people that don't know who sprouts or in a new market and then on top of that of course, you get leverage off of your media spend as well.
Got it.
Okay.
Quantify at all what what.
The amount of sales you might have left on the table due to out of stocks and as sprouts more vulnerable to out of stocks due to the unique nature of many of your products versus.
<unk>.
Run to the mill CPG.
Alex in a typical supermarket.
Yeah, It's a great question and it's something we talk about lower actually almost may be contrary to the question I actually think when you're only sourcing products that you sell yourself.
Our destiny is in your own hands, the reality of the CPG world over the last two months or so as you've had all the conventional grocers bottling with Walmart bottling with target for product.
When I go into those stores over the last few weeks I see pretty significant stocks now we've got some we got some challenges, but not nothing like the challenges im seeing in some of our some of those more conventional grocers.
The fact that we're not bottling for inventory with other people in the context of the supply chain challenges and labor challenges that exist across the marketplace.
Able to work pretty closely with our vendor base and our distribution partners.
Only as we either get it right get it wrong and I think in many ways in January in particular, I think we'll be better placed than most of the other guys. Although we won by no means where we wanted to be but I think we were better than most.
Alright, thank you.
Thanks.
Our next question comes from Kelly Bania with BMO capital Your line is open.
Hi, Thanks for taking our questions.
Wanted to just dig in a little bit more on the <unk>.
Rafiq and ticket drivers and I guess, a couple of questions. There the decline in units per basket is that across all of your customer types or is there any differences in trends between your different customer types. There and then the traffic momentum that you have are you able to tie that back to your <unk>.
Marketing campaign, and new customers or just any way you can track how that marketing campaign is working to drive traffic.
Yeah, So Kevin let me take the two separate quick let's start with the traffic question, maybe Jeff you could pick up on that.
The first question that was asked here with regard to traffic. There's a lot of things happened that we're feeling good about in terms of how our marketing walked in and Q4, we did a little bit a little button. Thank Todd I think in terms of telling the story digitally around the strength of our fresh pricing, particularly.
They are project pricing versus the marketplace.
I kind of mentioned in my remarks, how do we get clarity, particularly in our new markets, where people don't quite understand the value that we have in our project business.
And I think that the digital messaging behind that we think has helped us a little bit going forward. I also think that the fact that in the context of the COVID-19 environment that kind of accelerated at the end of Q4 people, we're not as nervous at the start of the pandemic people will never show up in the number of.
Times people were going to do grocery shopping went down from four or five times, a week to one or two times a week that didn't happen in December for US we saw that some of our customers.
Feeling more comfortable coming in so I think the combination of sending the message.
Getting some bond spike communication to customers to encourage them to come back from the holidays. So I was pleased with some of the marketing that worked in Q at the end of Q4, and I think the context of the marketplace helped us a little bit as well so and again, it's very early days, but we're kind of cautiously optimistic about the progress.
So we've made on getting this traffic, which has clearly been a conversation that we've had with you guys over the last little while we're cautiously optimistic.
We've done on marketing is helping a little bit and theres. Some theres. Some macro factors are probably helping that as well.
And then on the units Kelly.
I go back to.
You Gotta go back almost two years, because you look back we had dramatic and dramatic increases in units per basket, beginning second quarter 2020.
And then of course, when you cycle the <unk>.
Go into 2022 2021 those were negative.
We will continue to be negative year over year.
Through all of this past year and have another quarter to go so.
That should settle out by the second quarter of this year.
Net net if you looked at units per basket on a two year perspective, we've been up every quarter.
Okay. That's very helpful. And then just also have to ask on the stores and this might be too early but curious if you can talk a little bit more in detail about the sales and the margins and how they are starting to track out between the old and the new.
Format, and if the cost of the new store format is coming in line with your expectations.
While the cost of the new store formats, we've talked a lot about the fact that we've put less into the stores and we're making them smaller so the economics of the store in terms of rent in terms of the site because the size is smaller than we're clearly spending less to build them, having said that there are some cost pressures on the other side with regard to supply chain.
Construction steel a lot of the equipment. So there are some pressures coming that's pushing it in the other direction, but relatively to what we would have had to spend in the bigger stores that we've had there moving directly in line with what we our expectations were so just to be clear the cost might be creeping up a little bit, but they are significantly lower than they were.
And then in line with our expectations.
So in terms of the way the flow through is working on new store margins are coming through exactly the way we expected them to do some of our older stores with good this nomenclature of <unk> coming through the way, we want them to our older stores.
High volume other very profitable stores, and that's kind of what we're trying to capture with the new format stores make them smaller make them more higher sales per square foot and deliver better returns from them and when I look back at the smaller stores that we'd go out in San Diego and some of the areas of California. Those are the ones that are making the most money for us.
Thank you. Our next question is from Robby <unk> with Bank of America. Your line is open.
Hi, This is Adam on for Ravi Thanks for taking my question.
I was just wondering on.
The gross margin and I guess, the return to positive traffic.
And price to any extent during <unk> and now that you've seen traffic turn positive.
Does that change the way Youre thinking about maybe future investment in 2022.
Well we are.
Our promotional cadence and the investment in price is exactly what we've been saying for the last two and a bit years in terms of the change in approach, we're not going loss leaders, we're not chasing after.
Our promotion mix has gone down fairly substantially over the last couple of years. So we're not investing in price some of the margin stuff's, a little bit to do with the lag in pricing in terms of how faster we're moving our retails in the context of a high cost inflation environment are not smooth that will smooth out through time. So the simple answer is we're not we're not investing.
<unk> any anything in our margin and the margin expectations that we have going forward on in line with the expectations that chip, but through these in his presentation. So we're feeling pretty comfortable about where we're at on that provided there is no. Other major shocks in the marketplace that we're pretty comfortable that our margin is in a good place going forward.
We've reset our margins so that we're in a good place with our investments going forward.
Yeah. The only thing I would add to that is we're being a lot more selective so the breath of our promotions are not nearly as wide.
But the ones that we are doing that sometimes were been a little bit more aggressive on price or a little bit more aggressive on the deal, but it's a much narrower selection that that's being applied to.
And I've been very pleased at the way the marketing teams, we've got a lot more people engaging in our in our digital space. So we've got our scans are out there is we've got about 5 million people know from $2 million not long ago, who'd actually engaging and getting these promotions digitally and then not crazy promotions and we think is helping to stimulate some.
On the demand.
Okay.
Thank you. Our next question comes from Kristina.
With Deutsche Bank. Your line is open.
Hi, good afternoon.
Just as we thought.
Think about the last two years and the impact of trip consolidation can you just talk a bit more about your strategy of focusing on more value added promotions or call to action to really drive traffic that you have been testing and essentially some of the learnings and just how effective they have been and then in terms of your value scores.
Has that changed at all over the last quarter or two essentially conventional quota shares and now even the largest retailer in the country is raising prices.
Yes, okay. So.
Talk a little bit about how.
However, we cannot be what can this went through over the last little while I've been encouraged by as I've said a minute ago by the water.
Around loyalty, we've talked a lot about segmenting, our customer base two years ago, when we bought maybe a bit more than that get mixed up two and half years ago. When we embarked upon this strategy.
We embarked on this strategy before the pandemic kicked in.
<unk>, we are following that strategy to the to the latter I'm encouraged by that but part of that was being very clear were narrowly focusing in on people who are excited about fresh foods and healthy food and people that are excited about innovation and expand the experience seekers and those are the ones that are buying into the law.
<unk> base.
Doing those are the ones that scan.
The full and when they go through the store.
Get engaged in our loyalty communication, so I'm encouraged by that in terms of that the focus that we've put in early on to segment the market and the marketing activity that we've put behind that.
He has to be gently and quietly improving our underlying customer base, we had a lot of customers, who basically wasn't making a gunfight losing us money. So those coupon clippers that we call. They seem to have drifted away what seems to be happening is there is there are some customers reactivate.
Coming back from where the well, but those are the customers that we've won and the customers that we're doing one or not being encouraged to come in because we don't go into a deep promotions. So if that makes some sense to you as we look at the traffic, we're seeing a little bit of improvement of some macro things happening people more comfortable going to more places than they were before which I.
I think benefits us because we're not the primary shop on the activity that we're doing to try and stimulate those customers, who love us seems to be driving a bit more transactions with those customers.
That's something that we'd be hopeful about going forward for the rest of the year.
No.
Kristina I would just throw out a couple of things to one as well.
We're now getting beyond the lapping of the trip consolidation yet.
One number two is when we did change the strategy two years ago or in 2019, the coupon Clippers as Jack points out that were read at all for all intensive purposes, that's behind us. So we're in a place where the traffic is really going forward is a much feels much more stable.
And then the other piece when you talked about value.
We are very price competitive when it comes to our produce pricing, which has always been the heritage of the business. We have opportunities as we said on the last call and were working on diligently we have opportunities to get that messaging out in a much better way that we haven't done.
For several for a couple of years actually yeah, and I think the value part linked to produce is the important thing for us I think the customers are understanding that those are volatile volatility everywhere as you alluded to the conventionals and the other guys are having to put prices up at the moment, but within the context of that will stick and pray rigidly too.
We need a discount we need to we need a.
An advantage in our produce space, which we have and will maintain on the rest of the store, but she is not directly comparable we're looking at your elasticity is on that and seeing what happens with prices change and that's something that will happen towards more diligently than we ever have before because of the level of inflation that's going on.
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 our questions.
So just first I was just wondering if you can talk a little bit about how you view sort of.
The company's overall growth algorithm on a on a more normal basis, obviously, a lot of noise with inflation this year.
Our store growth challenges, but.
I'm wondering how you think about sales growth anymore in a more normal year, including the waterfall benefit to comp.
And then generally the relationship between sales and EBIT growth.
On a more sustainable basis.
I'll, let Jeff follow up a little bit, but let's talk let's talk first of all about the store growth, we're very comfortable that from a top line store growth. We have the we have the leases and the sites in line for us to deliver on the on the algorithm that we've talked about which is a 10% store growth that's not going to happen. This year as we've said in the notes.
Simply because the complications of trying to work our way through both the licensing and the construction side of things.
It's very challenging I'm really pleased with the way the team are working their way through this but it is challenging but we're very comfortable that that the real estate team have got all the sites that we need to more than delivered against the algorithms that we've talked about on new stores.
And then when we get the new store program up and running that as you know there will be a flow through into our comp sales.
Not truly flows into our business. So we're pretty comfortable and I'll, let chip talk in more detail that we can grow our bottom line faster than we can grow our topline.
Marginally and that's part of what we've talked about all the way along in this space.
Yes, I would just say that we want to give to the algorithm that we've kind of described before number one Jack has already alluded to the store growth so the square footage growth or store growth.
Feeling we're hopeful I hope is not a strategy, but we feel good about getting back on track to the double digit new store growth in 2020.
Yours is 22.
Yes, 23, so we.
We should be able to get 23.
Unless something else happens, we feel good about that and then we've guided to zero two on comps for this year. There is still noise moving around between all the basket size and AUR and inflation in traffic, we feel really good about the zero to two for this year and then going forward once we get the store growth going.
We're hopeful and we believe we can draw that low single digit comp consistently we can continue to grow square footage up in the double digit range. We can continue to grow earnings before tax somewhere in the high singles to call. It 10.
And we'll continue to buy back shares.
And I'm not sure we'll ever get I don't know what normal looks like anymore. It is Kevin affiliate Board change there you go.
Thanks for the question.
Okay.
Thank you. Our next question is from John <unk> with Guggenheim. Your line is open.
Hey, Jack two quick things number one maybe talk to the assortment.
How happy you are how happy are you with where you are right.
Alright.
The benefit of breadth versus obviously, some inefficiency right. If you if you are overly assorted.
And then secondly, when you go from.
RMP openings up to 40, plus around 40% and 23.
Is there a temporary.
Piece of dilution from those new stores.
Thank you you re engineered mouse, where any dilution as a minimum.
Yes, Okay, John let's say start with assortment one of the things I've learned in this job over the last couple of years as this company needs broad assortment a lot of the discipline that I've had in my retail career I would say you've got a tail.
Taylor and keep the high volume items that would be the context of a lot of the work that's being done in conventional grocers in Walmart and tests go back in the UK that fundamental principle.
Something thats pretty much at the heart of being efficient we have to be the opposite of that in many ways on the assortment of what I think is about trying to be very clear and very appealing to those health enthusiast customers, who are focused on a keto diet or a paleo diet or a plant based diet or a daily free.
Diet or a gluten free diet. If you are going to be really relevant to those customers. Those target customers that we have you have to have a breadth of choice and not so you end up having a lot of items that maybe don't sell as much on an individual store by store item by item basis that you would want.
But it allows us to create the dynamic of the attraction to the customer and that's very much part of our marketing message going into 2022, and 2023, explaining the differentiation that we have because there's a load of products that we sell that nobody else would want to sell because of that but that's one of the great advantages that we have.
Being a different business. So the question about how.
Does the assortment, we're always looking at our assortment and you can see we've added thousands and thousands of items this year, which I think in the context of 2021 was a pretty big achievement by the merchandising team to to be able to motivate the vendor base to get that product into the system over that period of time, it doesn't and we have to develop.
Our systems and our replenishment systems on our product flow work to make sure. We're accommodating what the customer needs not what maybe you would I would have done in other places and thats been a real fascinating kind of exercise and I think the customers appreciate us when we get the breadth of assortment in front of them.
So look in a dietary needs.
The dilution from new stores, and how that works, maybe chappell pick that one up yes, I think it's a great question. When you think about having to ramp up from 5% square footage to 10% square footage. There is until you get to that steady state. It is difficult to do that on a zero to two call still.
Manage your cost to get that high single or low double digit growth on earnings. So there is that brief period, we just got to be really diligent as we go through that funnel. If you will we have to be really diligent on the cost and make sure. We're managing the costs not only of the new stores, but managing the cost of the corporation. So we can get to that steady state place.
The beauty is if we can get to two to four comp in that period, then that helps the world law. So once again, we'll manage it will get there there might be that brief period, when you're ramping from four to five to 10 that we just got to make our way through and we'll manage through that.
Thank you. Our next question comes from Greg <unk> with Wolfe Research. Your line is open.
Good afternoon. This is Spencer hanus on for Greg.
I just want to go back to the conversation on pricing. How are you guys thinking about the need to invest in price as consumers start to face the impact from this rising inflation and then.
When the supply chain eventually normalizes.
Do you think the industry is going to remain as rational as it has been organized start to deploy these trade dollars.
More aggressively given theyre going to be in a better in stock position than they've been for the last 18 plus months.
Yes, so with regards to supply chain normalization I'm not sure when that's going to happen, but if and when it does I can't.
Can't see whatever happens with are kind of in the grocery conventional space is going to affect us too much because as I keep saying on these calls we have a very different proposition. So the products that we sale I'll talk about projects in a minute, which is the one that's directly compatible with them till now the products that.
We sell or not.
Kind of in line with any one else for anyone else sells so we've got to watch elasticity and we are watching that carefully with inflation as prices go up what happens to the units and the bias what happens to the units.
Sales and we've got to be very conscious of that but that's not a margin investment conversation that so how do we figure that out in terms of maximizing our volume and maximizing our sales on individual skus.
Rogers is slightly different scenario.
We are in the place where we're trying to make sure that the differentiation that we have on pricing projects built on our quality perception of quality perception on a project basis.
<unk> Hi, it's way above most people in the data is very encouraging on that.
Our market square, where knowing our prices on knowing in markets, where we're not knowing although we've got price advantage, we need to talk about that more effectively so the context of the question Spencer.
Is there going to be when do we get supply chain normalization is going to be some kind of price activity across the marketplace.
But if it did happen.
I'm not thinking it's going to have a huge knock on effect to us because our customers are very clear that that come to us for the stuff that we sell that they can't buy another places when it comes to approaches I think it unlikely that people will use Proteus is a key driver to bring people into the store because their mix depends on projects been Ah ha.
High margin no. It's a low margin if that makes some sense, but I would love some supply chain normalization that would be great. If we can get there.
Spencer I would add too is just like we said earlier on the messaging of the weed.
We do have great value on produce every day get to them.
But we also have as Jack said, we have a lot of great products very unique products.
And part of our table Stakes is to make sure that the world knows that we are unique we are differentiated we do have those unique products and so it is not the same kind of.
Battleground with the conventionals and the more and more we can do that with our merchandising team is doing a great job of continuing to add great products.
Continually we have to let the consumer know how great. They are and we're doing that even through innovation centers in our stores or find this new product you can work in a lot of our stores today and we're going to launch those into virtually all of our stores by the end of this year. So.
We're driving the message that we are different and have different need feel different needs for the for the consumer other than just.
The normal conventional.
Got it and then you mentioned that transaction turned positive in the quarter do you think that's a sign that the grocery basket has started to re split again here and maybe you guys will be added back into the rotation.
Again or is it really just a function of marketing and just refining that message like you talked about.
<unk> expense I think is about both I think that has been done.
It does less worry about going into stores. This time range when the omnicare and Varian hit the market than there was when the first the first wave happened. So I think there will be more people shopping in more places, which I think is good for us going forward and I also believe that our digital marketing and our communication has helped us a little better.
As well so we'll be watching both of those dynamics over the course of the next few quarters.
Great. Thank you.
Thanks.
Thank you I would now like to turn the call back over to Jack Sinclair for closing remarks.
Well in a very volatile world. We appreciate you taking the time to listen to our calls today, we really appreciate the interest in our company and we're excited about what this company can do going forward.
I appreciate your support so thanks ever so much to everybody and take care.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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