Q1 2022 Sprouts Farmers Market Inc Earnings Call
Hello, Thank you for standing by and welcome to Sprouts first quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll 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.
This conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Suzanne and Livingston, Vice President 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 first quarter 2022 earnings call, Jack Sinclair, Chief Executive Officer, and Chip Molloy, Chief Financial Officer are with.
With me today the earnings release announcing our first quarter 2022 results. The webcast of this call and quarterly slides 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 2022 and beyond these statements involve a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward looking statements.
For 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 comparable GAAP figures. Please see the tables in our earnings release with that let me hand, it over to Jack.
Thank you Susanna and good afternoon, everyone. We are pleased with solid first quarter results and believe it is a sign that many of the strategic changes we've made over the past couple of years are beginning to materialize.
To positive comp sales supported by positive comp transactions.
Same time, maintaining stable gross margins was extremely encouraging.
During the quarter, we successfully attracted new health enthusiasts.
Innovation seeking customers by continuing to focus on providing both the precious produce a great prices along with a wide variety of differentiated attribute based products.
This was especially important during the all important new year's resolution season.
Our earnings for the quarter benefited as our pricing caught up with inflationary trends leading to better than expected gross margins. We also made good strides in our unit growth objective with the addition of six new stores that spanned across Colorado, Texas and Florida.
One of the stores were opened during the quarter on the majority of the remaining stores opening this year will be in a new format.
All of this was possible due to the resilient team. Many thanks to them as it remained diligent in keeping a fresh supply chain running and our shell stopped while at the same time caring for our customers by providing friendly service and product knowledge.
While we are pleased with our strategic changes and the positive impact they have had on the business. The near term landscape has changed a bit since our last conversation with you which is slightly impacting our outlook for the remainder of the year.
Chip will provide details relating to our financial performance.
And then I will follow up with more details relating to our focus for the remainder of 2022.
We're navigating the current environment with that I would like to turn it over to chip.
Thanks, Jack and good afternoon, everyone for the first quarter total sales were $1 64 billion up $66 million from the same period in 2021, driven by comparable store sales of one 6% supported by positive comp transactions and new stores.
We did benefit early in the quarter from the King Soopers strike in Colorado, and the height of the Omicron variant.
That said, we experienced both positive comp transactions and positive comp sales each month during the quarter.
We are encouraged by our top line growth, while simultaneously maintaining our gross margins.
E Commerce sales were 11, 5% of total sales, which was also slightly elevated during the early part of the quarter due to the omicron Serge.
We continue to experience strength in our deli business as consumers search for both healthy and easy meal options. We also experienced strength in those areas with our greatest breadth of differentiated products, such as grocery dairy and vitamins.
We are particularly proud of our merchandising supply chain and operations teams as they managed to keep our shelves stocked with both perishable and non perishables and a challenging sourcing environment.
We continued to see our customer engagement grow from a digital standpoint with increases in account sign ups active E mail users and tech subscriptions. We also saw positive trends in customer retention rates, while our customer satisfaction scores remain very high.
Our first quarter gross margin was 37, 3% essentially flat when compared to the first quarter of last year and better than we originally expected.
We pass through inflationary cost and are closely monitoring price elasticity, we'll continue to test promotional strategy to drive both positive traffic without sacrificing overall gross margin.
That said, we are continue to experience slightly fewer units in the basket when compared to the same period last year.
SG&A for the quarter totaled $460 million or $20 million higher when compared to the same period last year increases were predominantly driven by new stores and higher in store labor and supply chain supply cost.
We also spent approximately $2 million relating to California's 2022 supplemental sick leave law that provides paid time off for COVID-19 issues.
Now expect the total cost to be approximately $3 million by the time the law expires in September 2022, unless there is another variant outbreak.
Total SG&A increases were partially offset by timing of a portion of our marketing spend that will shift to the remaining three quarters of the year.
For the quarter, our earnings before interest and taxes.
We're a $120 million interest expense was $3 million and our effective tax rate was 24%.
First quarter diluted earnings per share was <unk> 79, an increase of 13% over the same period last year.
During the quarter, we opened six new stores spent $22 million in capital expenditures net of landlord reimbursements and repurchased one 5 million shares for an investment of $46 million.
Our strong cash flow from operations of $153 million continues to fully support our ongoing capital needs.
Turning to the balance sheet highlights we ended the quarter with $324 million in cash and cash equivalents $250 million outstanding on our revolver 25 million of outstanding letters of credit and a net debt to EBITDA ratio of less than zero.
As you probably saw on March 25, we closed a $700 million revolving credit facility, which replaced our previously existing $700 million revolver that terms and conditions conditions are substantially similar to our previous agreement with a new exploration date of March 2027.
As well as the addition of ESG linked pricing terms.
While we plan to continue to fund operations and unit growth through a robust cash flow generation. This facility provides sprouts with greater financial flexibility as we grow.
As for our outlook.
Our view today is slightly different than it was at the beginning of the year.
We believed we could drive slightly positive comp transactions, our proxy for traffic throughout the year more importantly, we believe year over year inflation will begin to dissipate as the year progressed and the declines in units per basket, which that slowly stabilize.
However, inflation is not slowing and customers to continue to put one to two fewer items in their basket this year than last.
We can speculate a variety of reasons as to why the fewer units.
Rising gas and utility prices.
Prices are flight of precious discretionary dollars to more experiential offerings, such as travel or restaurants et cetera.
The good news is that our traffic is continuing to be positive and in many ways driving more units in the basket is a bit more within our control.
Jack will not only address progress towards many of our multi year initiatives, including those that attract more customers, but also near term tactics to stimulate demand while in the store.
With all that said, we now believe it is prudent to expect total sales growth comparable store sales growth and earnings per share to be at the low end of the outlook. We provided during our last earnings call in February .
As a reminder, that outlook included 4% to 6% total sales growth zero to 2% comparable store sales growth and $2 14 to $2 24.
Earnings per share.
We are still on track to open 15 to 20, new stores and invest $150 million to $170 million in capital expenditures net of landlord reimbursements.
For the second quarter comparable sales should be close to flat and earnings per share is expected to be between $49 53.
With that I'll turn it over to Jeff.
Thanks Chip.
Despite the current environment. The company remains laser focused on delivering the long term vision for sprouts and an immediate focus on building a stronger basket.
Relentless focus on product differentiation and partnership with our vendors, it's what sets us apart as a speciality grocer we.
We believe this is one of the primary reasons, our target customers love to shop as spreads considering this is so important to spreads. We just recently promoted Ken coffin to chief Voyager to oversee innovation nationally across all departments, Kim and her team will build on the very strong foundations.
That we have with regard to protocol innovation in the health and attribute space.
Our merchandising teams are constantly in pursuit of new products based on healthy trends taste and uniqueness, we conduct prototypes things constantly and while category reviews happen a few times a year you'd captains of car regularly to keep our shelves are full of interesting new products our organization on smaller markets.
Farmers market store are built to be flexible, allowing us to insert new products in every store and a week, which vendors to love. It is this passion and a healthy product focus that drives new innovators and vendors to surprise, allowing as many exclusives and first to market.
In the first quarter, when we released over 1000, new items to the store.
We have recently restructured approaches department and reorganized to improve freshness seasonality locally sourced products in unique and exclusive varietals.
Clear differentiation for spreads is our dedicated local approaches team not seen other grocers with a local project sales growing steadily. These teams are developing stronger relationships with smaller local farmers.
We're giving long term commitments to these growers, which provides pressure products and cost benefits that we are proud to pass onto our customers and better pricing all of this reflecting our farmers market's heritage.
Building, an advantaged supply chain closer to our stores was an integral part of our strategy to improve produce freshness and <unk>.
Rising nicely to support local farmers with two new distribution centers behind us in 2021. This year were focused on optimizing these new centers in Colorado, and Florida, especially with more local approaches and systems all Dcs.
We also plan to move our southern California distribution center into a larger facility in 2023 to support our ongoing growth in that region.
We've already begun the work on this facility, which will include ripening rooms to present fresher product to our customers and will be solar enabled LEED certified and planned to support electric charging for commercial trucks.
Switching gears to our new stores, the pipeline remains strong and with six new stores under our belt in the first quarter on a few more already opened this quarter based on our approach guys to date with confidence we will be able to open 15 to 20 stores. This year supply chain remain tight, but we're getting the necessary equipment to put our builds.
This year.
Moving on our journey and marketing continues data tells us the awareness is still an opportunity and as it increases so do our customer counts as well data also reinforces that produce value and product attributes drive customers to our stores. So youll see us hyper focused by.
Reinforcing these two areas and are matching our merchandising.
Through our media investments.
Im excited to have Nick <unk>, our new President and Chief operating officer onboard to lead us in Denver has experience in both merchandising and digital marketing are invaluable.
Recent consumer data shows us.
<unk>.
<unk> customers give us credit for providing great value and approaches are opportunities in non sprouts shopper, who may not be aware of just price low prices on approaches and actually perceive us as being more expensive in this category by.
<unk> non sprouts shoppers.
<unk> already know we have great prices on the fresh approaches we expect to drive incremental traffic.
Its price is unique as we intersect fresh volume discovery like no other grocers.
I have always held strong equities and fresh and we are well positioned to grow perceptions in project value and discovery of healthy new products across the store.
These messages are being integrated across our marketing efforts to reach customers in our various trade areas.
<unk> and value are reinforced through owned and paid media channels and we're stepping up the healthy discovery by focusing on influence such as customer experience vendor partnerships and new products spotlights. Just this past month, we exclusively launched Martin Honolulu pure drinking water founded.
By Jason Memorial, who filmed a promotional video and one of our stores, Florida is sustainable movement campaign.
This one video post procedure over 13 times the views, we typically see and it was the most engaged post in the past 12 months.
Also partnered with broad based on tick tock or sensation, Kevin Chamberlain, who is buying a catchy jangle and social media promoting the unique products shoppers can discover and store.
Overarching the entire campaign will be our ongoing messaging highlighting highlighted by differentiation seasonal focus and of course volume purchase.
I've been particularly pleased with our rollout of our new values, we can lump being different I know when Ian I'm sure. This will have a significant impact to drive customer engagement and sales in our stores.
As well our community support continues to grow since its inception in 2015, the sprouts healthy communities Foundation has granted $15 million to more than 300 nonprofit partners, which have brought hands on gotten based lending to one 5 million children.
In April to strengthen and expand school gotten based education.
<unk> hosted an inaugural growing schools gotten summit in Denver, Colorado.
The first of our national gathering focused entirely on scope governs the summit, United over 400 educators and leaders from across the country working to sustain school garden programs.
Educators on the nonprofit organizations they represent operate landing gardens over 6000 school campuses throughout the United States, providing hands on nutrition science and academic instruction to an estimated $2 5 million students every year.
Our community involvement doesn't stop with the foundation.
<unk> is committed to focusing on women's athletics by partnering with the Los Angeles Angel City Football club as the team's finding backup Jersey sponsor, making our first commitment to women's professional soccer.
Enhancing our support of the broader Los Angeles community.
We're thrilled to support Angel cities, so soccer much last month.
Well as we look to expand our women's sports platforms in the coming months.
And one of the ESG topics. We're always proud of is our food waste recovery, which increased to 78% in 2021, mainly driven by the Indonesian on equivalent 26 million meals to over 400 food rescue organizations across the country. These and many other stats can be seen in our <unk>.
2021, ESG report that we just published this week.
So as you can see we're feeling good about the progress we're making against the strategic objectives, we outlined over two years ago.
As we highlighted earlier, our traffic to our stores as opposed to while customers are putting one to two fewer items in the basket. It is important for us to control, what we can control and focus efforts not only on incremental traffic, but also building basket, especially as the consumers' wallets get squeezed.
A few of our focus areas include installed.
Bringing back our selling culture stores key merchandising solutions and basket level promotions.
Starting within stocks sprouts has historically been somewhat challenged in this area due to unsophisticated systems and processes that make it extremely difficult for our stores I'm darn matches.
Resulting in less than optimum installed positions.
Improved this last year, we embarked on implementing a new system that supports perpetual inventory and computer assisted offering or <unk>.
This system and associated processes provide greater visibility and accountability to inventory levels and shifts store responsibilities from estimating an offering to just counting.
We're extremely confident this will improve our in stocks across the chain. We recently started the implementation by department and we will soon have Danny and frozen completed across the chain.
All departments will be completed by early next year.
And at the same time, we're building out a true replenishment team.
Turning to selling culture, we want to bring more bus tour stores, the pandemic restricted the opportunities to drive excitement in our stores. Our team members have to spend an inordinate amount of time on sanitizing versus being able to engage with our customers, we're bringing back assess its aseptic sampling in a bit.
Equity, allowing our customers to taste and expanding into new products.
Beginning in Q2 for the first payments price history with true labor standards in our stores and our system to support it.
This will this will provide efficiencies by weeding out unnecessary and duplicative tasks and allows us to shift those hours towards more customer engagement across to store similar to our vitamin Department today.
In addition to our store bonus programs, we're providing our stores more visibility to actual units in the basket and implementing cost contest within the regions relative to the associated performance.
As it relates to match and dies in the front end of our stores are becoming more basket building with key seasonal impulse items. We're also rolling out innovation centers and more prepared meal fixtures in many of our stores.
The innovation centers helped create the ongoing treasure hunt and highlight new permits in our stores.
Our customers are telling us that they like the convenience of prepared so we're stepping up our exposure to heat and eat daily meals unprepared, one pan meals.
<unk> becomes a more precious commodity for consumers.
Finally, as it relates to basket promotions, we're having some success shifting towards hopes are department discounts as opposed to specific items. We find these programs not only drive incremental traffic, but also deliver basket to X the average.
I hope our comments today are helping you understand what we are building and surprise a speciality grocer focused on wellness with differentiated product on the freshest produce at great prices.
At the same time I Hope you believe we are working diligently controlling what we control as we navigate the current economic environment.
At this time, we're happy to take your questions operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Draw your question press the pound key.
Our first question comes from Mark Carden with UBS.
Please go ahead good afternoon.
Thank you good afternoon. Thanks, a lot for taking my question. So I wanted to start by digging into the comp a bit more we've seen some pretty strong topline results at grocers like Publix in recent days with inflation, presumably I think its bit of a tailwind there. What do you think is driving the pressure in the other direction for sprouts in your view really when youre thinking of.
At your forward guidance.
Editors investing more in price is trip consolidation of larger grocers, maybe capping your transaction growth from being even higher than it is today.
You also mentioned of course that pure items per basket or is there something else thats really.
Kind of driving differential there.
Yes, thanks Mark.
First of all we're pretty encouraged by the transaction growth so.
The fact that transactions are going up as something that's encouraging as well.
Over the last couple of quarters, and we think that it's likely to continue the issue is as you say as units per basket. What we're not seeing is any real intense promotional activity from other people that's influencing that and we think it's some of the macroeconomic environment.
Existing inflation is clearly affecting people's.
Our ability to spend as much or to buy as many items as they come into our stores. We think consumers are spending a little bit more on travel. If you look at the TSA data is pretty clear the number of people that the increase in travel that's going on so disposable income on that I think is probably going to east restricting our basket.
A little bit, but as I said in the in the remarks, we do believe there is a lot and I'll come on in our control that we can drive it through and excited by some of the new merchandising activities, we're putting into store. We're excited about using some of the techniques to get our in stocks, even better than its been over the last little while so we're focusing on the things that can grow our basket.
Not seeing I'm not I'm not seeing any intense promotion pricing activity elsewhere. I think this is in our own come on in our own control and we're focusing on controlling what we can control to drive that basketball.
Okay, Great. That's helpful. And then just as it related follow up to that it sounds like competitors are largely acting rational across the board with respect to passenger price even in these last couple of months, where where inflation has really picked up.
Yeah, I'm certainly seeing rationale margins margins are not nobody is investing a huge amount of margin to try and drive business.
Yes.
I am not.
Certainly not seeing that that's put in is under pressure in terms of we are passing on pricing those timing issues on that but we're passing on pricing against the cost increases that continue as you are all very well aware of as it continues to keep pushing on the inflation rate with Pos in Ireland and pricing as is everybody else.
Great. Thanks, so much and good luck.
Thanks Mark.
Thank you. Our next question comes from Scott <unk> from RBC capital. Please proceed.
Hey, guys I had a couple of question, but one clarification first.
I think it was said that marketing spend timing was.
Some of them some of it wasn't done in the first quarter and that's going into the second and third quarter did I get that right and is it material.
I'll, let chip talk about the materiality of it but it sounded a significant we've been what can really hard and getting the right messaging and marketing as we've been talking about fairly consistently over the course of the last few quarters and the messaging that we're trying to get is very clearly to those customers that don't know us highways are our approach used pricing and our approaches.
Rashness is.
Is much better than our competition in most markets and we're trying to emphasize that message alongside the scale of differentiation that we have as a group so that.
Should that treasure hunt and the healthy experiential kind of space, putting those two messages together, we're just trying to get that message and get it where we need to get to so we delayed some of our marketing because we felt we weren't quite where we needed it to be and.
Certainly in terms of the timing of that is a timing issue as opposed to a materiality of numbers chip it anyway.
It's just a couple of million dollars.
Its associated as Jack said Theres, the creative side of that that was we thought we'd get Curt we thought it would be finished in Q1 and that's tracking its way into Q2 and some in Q3.
Okay, that's great.
Just kind of to my real question here.
Obviously, you guys have done a lot of work with the company. We go into a lot of stores your execution is good.
But you also are having.
Very different experience than most people in your industry over the last say 12 months.
On the comp the comp line and then obviously you run out the time will run out where you can comp at zero and still have good numbers youre going to start to Delever. Eventually here. So I guess number one is do you need to do something more radical to kind of get this business moving.
You get a lot of cash financial performance is good and then the second thing is is like is it all kind of thought of as Albert said, we're going to do strategic alternatives here like do you need to start thinking about that kind of stuff with shareholders in mind.
Given that we're really struggling to comp and eventually it's going to catch up and buy in the blood.
Hey, Scott, we are always going to be taken shareholders in mind in terms of how we think about things going forward, but that's not part of our thinking at the moment, we're very clearly focused on getting this business, where it needs to be I'm really encouraged by the traffic growth that we've had in the last two that's the difference in terms of what we've been talking about over the last 12 to 18 months.
So we've got ourselves in the last two quarters into seeing a traffic growing and I do think theres. Some theres some uncertainty in the consumer space Thats kind of probably restricted to comp that we would go we would have expected to get going forward and I think that's reflected in the basket. We're talking a different story here this time that might be made.
Two or three quarters ago, and now we're talking about a traffic growth, which we havent been talking about before and we're now talking about units and baskets, not being where we would like it to be and I think there are some factors that are driving not we're pretty confident that plays through in the uncertainty unravels.
What we've got is a proposition in terms of outstanding fresh foods as you say great execution in the stores and that combined with really tailing getting the message through that youll start to see the kind of comp growth.
We're going to have to get to over the next little while.
Alright, guys. Thanks for taking the questions I appreciate it.
Yeah.
Thank you. Our next question comes from Chuck Grom with Gordon Haskett. Please proceed.
Okay. Thank you my question is on the basket again I'm just wondering if you could remind us where your average basket stands today versus pre COVID-19 levels and if you think you can hold onto that level, where do you think you have to give some back here over the next couple of years.
Hi, This is chip Chuck I don't know if we've ever actually disclose the total we have.
Total dollars of the basket.
70 points and 31, Oh, so our average dollars into basket are north of 40 today. So a lot of that over the last couple of years has been on price. So you think about just average units average.
Costs for our price per unit is running in the mid $3. So you're talking 11 to 12 units. So a unit makes a difference for us.
Losing one unit makes a difference on the downside, but gain in that one unit back and controlling it helps on the upside.
Okay.
That's helpful. And then I guess, maybe we could talk about the interplay between that 1% to decline.
And you can see which would be I guess about three to $6 versus the changes in your AUR that youre seeing retail can we talk about that interplay.
Well I mean, the changes in retail is in line with inflation over the last couple of years generally so we're looking at.
<unk> been seeing double digit inflation over the last two years.
Got it Okay got it and then just last question just on the gross margins.
Prior guidance I believe was for gross margins for the year to hold just wondering how we should think about the gross margin line over the next couple of quarters.
Given given the slight change in guidance you just provided.
Yes, the margins are pretty steady so as Jack indicated even playing around with price.
The item level isn't really driving a reduction or an increase so there isn't a big huge investment in margin and we think it's going to be relatively flat year over year could actually with some shrink savings we could actually have just a hair up year over year, but generally flat.
And as we've been talking about margins over the last few quarters, we're fairly confident that the improvements that we've made in our margins over the course of the last couple of years are kind of embedded into the model going forward.
Certainly the inflation environment means we are going to be paying out a lot more attention to how we manage our pricing, but we're pretty confident where we are not in our margins is something that we can be confident about going forward.
Okay, great. Thanks very much.
Thanks Chuck.
Thank you. Our next question comes from Karen short with Barclays. You May proceed with your question.
Hi, Thanks, very much I'm actually wondering if you. So first question can you just give us a sense of what actual inflation is as you measure it on cost and retail.
It's showing low double digits.
Karen.
Both the cost and retail.
Yes.
Okay. So youre passing on cost inflation two retail yes. We are yes, we are yes, we're passing on the cost and inflation.
Okay.
And then wondering if you could just give a little color in terms of what your actual mature stores are doing from a comp basis and we talked about this before but obviously you have a waterfall benefit on your comp.
And with your unit growth, so that doesn't seem to be flowing into your comp currently but wondering if you could just give a little color on how that how the your mature stores are comping versus your newer and an update on the waterfall benefit.
Yes, I can provide some so we actually in the first quarter started to see some more material benefits from our vintages of stores.
I go back to call. It 2020, so we're getting we're getting double digit comps from 2020.
The vintage we're getting call it mid mid single digits from our 2019 and in 2018 and before.
Kind of mixes into the call 2021 of course, we're not they're not comping yet.
Okay and then last question just for me so you're you're basically you are seeing pushback from <unk>.
Customers on inflation, that's fair to say right because youre seeing that in.
Yes.
Average unit volume.
Thanks.
I would say that yes, we are seeing less units going into the basket is it because they're pushing back because they don't like the price of the unit are they pushing back because they are spending their discretionary dollars somewhere else such as restaurants experiential.
Places that we see happening between restaurants.
Travel et cetera, but at the end of the day. They are deciding that I only want to spend so much on the basket and we play with testing we tested play with pricing all the time and test and test it and theres not its not driving incremental demand just through price.
And if you look at what we look at it we're looking at survey data to that would suggest.
That.
Others are having the same unit in the basket issues or challenges maybe different magnitudes.
And then when we look at comp even comp guidance in the industry and you look at double digit inflation and you look at single digit comps either either the industry is experiencing less traffic or less units in the basket that has to be one or the other.
And how do you see that playing out throughout the year as it relates to you.
Yes.
Yeah, it's in our guidance as we said at the beginning.
We were going to get to a place where we were comping that from a year over year perspective, and our expectations were as inflation would start to see.
Subside beginning in the second quarter, just from a year over year perspective.
And the unit stabilized, but what we're seeing is inflation is continuing to.
Quarter to quarter to quarter is still higher year over year and with that the.
The industry is seeing less units going into the basket.
Okay. Thank you that's helpful.
Yeah.
Thank you. Our next question comes from Edward Kelly with Wells Fargo. You May proceed with your question.
Yes, hi, good morning, guys.
I guess my first question really is probably sort of similar.
What you've heard from others here.
I'm, just trying to better understand.
The momentum of your business versus sort of like what we're seeing.
Some of your conventional peers because.
I understand this debate around they're seeing less items in the basket, but.
The reality is like if we sit here when we look at sort of like comp sales versus 19 in your business versus others made its dramatically different.
And now Youre talking about elasticity, and we're not picking up and we're not really hearing that from others. So.
Yes.
Do you think that there is something incremental lease specific that's happening to your business in Q1, that's causing this underlying deceleration.
Or do you think you are just one of the first to really kind of start to sound the alarm bell on.
Just too much pressure out there on consumer.
Well I don't know how to characterize what everyone else is going through but we know exactly what's happening in our business. We have seen double digit cost inflation, we're passing the one in double digit retail inflation, you've clearly got a lot of pressure on the consumer right the way across the economy, whether it be gas prices or spending money on restaurants are spending money in.
Transportation is people amounts from the pandemic the uncertainty of supply chain costs and inflation is clearly paying is having an impact on the economy. So what is that doing to our business. We're really confident about the <unk> traffic is growing in the context of this environment, that's something that we've been talking to you all about in Tulsa.
And to the community, but fairly consistently we're encouraged by that to see a positive positive transactions in our business. We actually think that will continue we think that proposition that we have we're not conventional grocer, we're not trading from a conventional grocers.
Speciality grocer, we are doubling down on being a speciality grocer that has it.
Exceptional fresh foods exceptional pricing and very differentiated product that focuses in on attributes whether it would be key to a paleo vegan or vegetarian and all of that is coming together really strongly and I think that's one of the reasons traffic's getting a little bit better.
As we continue.
Get that message in that context, when people are coming into the stores. What we are seeing is that our buying one or two units less we think we can do that within our own come out within our own control. Despite the world Thats going on around US. We think there's things we can do whether it be improving installed getting a bit more of a buzz inside our stores I think.
Grocers did an amazing job through the pandemic as we did but we inevitably became less farmer's market feel because people are unable to drive excitement in the store when you come in and do sampling.
Some of the products and get some of the new products and enter People's United as we see that as a significant opportunity for us to drive that basket back can we don't need much for this thing to come right when youre offering on positive traffic. So thats why we are confident about our business is definitely for me to characterize what's happening elsewhere, but clearly those.
And it looks to me the last units going into everybody's basket.
And then maybe just a follow up I guess, it's kind of related but just you talked about how your confidence that the.
You are confident that the margins sort of stays where.
<unk> it.
It is currently and obviously thats the way you're guiding this year.
The <unk> test on gross margins up a lot over the last few years and the comp where it is today is not great.
So I'm just kind of curious as to.
Where the confidence around that come from because I think my concern probably a lot of others is just around sort of like the over earning arguments on our margin.
And just kind of curious as to updated thoughts there yes.
Yes, well again, we believe there's traffic opportunities, we know exactly the number of customers that they have in the country that look like the customers that love sprouts, and if we can attract them theres plenty of traffic to drive what we need to drive in terms of our numbers and then with regard to our margins. We've tried a little while we've done various things and when I came in.
We weren't doing very aggressive pricing that that context, when you're on a speciality grocer, you've got a proposition that is relevant for the customers and if all you're doing is attracting.
The people who are coupons clipped players who are going to trade with you because somebody else you've got a lower price than someone else. It's a transient thing you don't build long term loyalty behind it. So we've tried it we've tried pricing it doesn't actually work for us the elasticity that comes with it takes margin.
Some ways takes somebody a topline sales away as well so we're very much on the path of training.
A better return speciality grocer that kind of comp sales, that's going to drive fatty.
Long term success for our shareholders and our team.
Okay. Thank you guys. Good luck thanks.
Thank you. Our next question comes from Kristina Kazarian with Deutsche Bank. You May proceed with your question.
Hey, guys. Thanks, a lot I just wanted to follow up on that same topic as it relates to unit elasticity could you maybe elaborate on that if there is any specific categories, where does decline is happening and I think your average consumer slightly higher end than conventional grocers, but I guess you are the first one to really see this and I guess my question is have you.
Noticed any changes in patterns within your various income demographic that would point to trade down happening.
We haven't really got a pop perspective on not direct peers. We lived through the categories were seeing semi prepared meals has seen a strength for us vitamins or seen a strength for us. So we're buying on grocery has been quite strong given the proposition that we're putting in place so.
So by then to that the other parts of it not.
Strong is that going forward, so maybe our core meat and project business isn't as strong as some of the other parts of our.
Proposition at the moment and that May sound and our meat business, maybe there's an element of the price the value of that youre seeing some trading down in that space as people look to kind of try and consider some other dollars as they go into the centrum play kind of purchases.
Don't know if you got another perspective on that.
That would be our perspective, I don't think we're seeing a dramatic change in trade.
Again, we're seeing some positive traffic, which is quite encouraging in the middle of all of us.
Got it that's helpful and I guess I just wanted to.
Circle up on pricing.
Maybe if you could just talk about your assortment that is resonating in the current environment. Do you think there is any changes that you might need to make to drive positive comps and traffic is there, but just to get the total cost will be positive in this environment and I guess, if you could just talk about your current price gaps in key categories like produce frozen.
Thank you.
We've talked a lot about pricing project pricing is very important to our business. So we look to have.
Against most major conventional competitors, which is the only place we can compare projects is really the only place where we sell the same things as other people were looking for a 10% to 15% price gap against most conventional you won't see the same thing against Walmart, but we are we are looking at a price gap even against Walmart in our projects business. When you look at the other categories.
We will look at elastic meet our meat business, we tend to we tend to skew to higher specification product and Amit so were not directly comparing when you've got grass fed antibiotic free and those kinds of things, we're not directly comparing and meet so we don't look at that quite as much as a direct comparison, because we don't operate the old.
<unk> as they call it in that space to the same extent as the other players when it comes to our frozen business I think 96% of what we sell in frozen you can't find in a conventional supermarket. This whole range of plant based and keto Paleo and daily three and onward.
That category, we look at elasticity will look at whats happening to pricing and we've got a model that says what happens to volume when we change prices and not on the same is true across our grocery business, maybe the areas on pricing that would cause some kind of.
Concern as we look at it as a vitamin spaces are vitamin pricing against people like Costco, and Amazon, where it needs to be but we're looking at that and there's certainly some good margin in that space that might allow us some a little bit of space across the board project gaps are the ones that are the most important one the rest of the business we're looki elasticity.
Got it thank you and best of luck.
Thank you.
Thank you. Our next question comes sort of a tax free with Oppenheimer. You May proceed with your question.
Good afternoon. Thanks for taking my question. So I just wanted to go back to the full year comp guidance, which which I believe it now implies flat comp guidance for the full year. So I think based on all the commentary you guys provide so far inflation plus transactions plus the comp waterfall.
I think we'd be more than offset by fewer units in the basket and I think that that's been a negative territory is that the right way to think about that.
Yes, absolutely correct.
I mean, it's a push or minus rate, we guided to the low and zero for the year, we had a one six in the first quarter. So right now going forward it could be slightly negative slightly positive. That's why we're kind of pushing towards the low end of our guidance.
And look I didn't makeup or sometimes on the makeup of exactly what you just said.
Okay, and then quarter to date I think.
Zero percent comp essentially what youre seeing right now in your business.
Well, considering our guidance, we would take into account, how we're doing quarter to date, how about that.
Okay. That's helpful. And then maybe my last question just in terms of the new store format.
You've opened more locations you have seen your new store format test I guess continue to ramp how did those stores continue to perform versus your expectations.
Well, we can't declare victory yet because we've only really golf the Bible of them underground we've got one in Florida, one in Georgia, and one in Texas, one in California, and one in Arizona and some more mature than others. We're very encouraged by the two that we've done and they have been there on the ground longest the next two and encouraging too early to say, but the program going.
Forward the great thing about it for us as we're seeing higher sales per square foot fairly significant higher sales per square foot than what we called the <unk> five so the trends.
The sales per square foot that we're getting in the <unk>, which are 23000 square foot as opposed to the <unk>, which we were building at 72000 square foot is seeing a very significant increase or so really encouraged by categories like daily, which we've taken the space and the cost down fairly substantially and we're getting exactly the same sales from them.
So that's encouraging in terms of the returns on the risk till returns is that we've got significantly lower costs and I'm glad we did it given all the pressures that we've had on cost to building stores over the last year I'm really glad we did that because we are in a difficult position. If we hadn't done that so so far we're very encouraged theres going to be some tweaks that we're going to make to try.
And get it right because it's always an extra chip process, when you're developing new formats, but we're encouraged by where it's at in its certainly.
Something that we are doubling down on this year.
Great. Thank you.
Thanks.
Thank you. Our next question comes from Ken Goldman with Jpmorgan. You May proceed with your question.
Hi, It's Tom Palmer on for Ken Thanks for the questions.
I think you mentioned fresh categories as being a bit weaker than some others have been talking about the basket composition for me maybe the inflation.
But what about for produce I mean, we do have a drought coming on pretty severely in California is that having any bearing on protos availability or quality would you attribute maybe the relative produce weakness to something else.
Well I think that China, our challenge on approaches is actually more of our installed not so much. So we are saying is if we flow the goods into the store, which we've got I think we said in chapter monitor my remarks, we talked a lot about how we're investing in technology to try and make it easier for the stores to get installed the way we want to do is there has been some supply.
Challenges, but we are doubling down on putting the investment and to make sure instill the right quality product as fresh as we can be we're seeing better performance for example, in Colorado business, where we've seen when we built our distribution center closer to the stores, we're seeing a little bit better performance in our Florida business, because we felt as the.
<unk> center focus closer to the stores. So our focus very much is on freshness and install can on project business and we anticipate that that's going to help us drive through but certainly.
Suddenly the price pricing has had an impact there as it has gone up as pricing has gone up in that space and.
What happened to watch that carefully at the moment.
Okay. Thank you and then just wanted to ask on the store pipeline that Youre seeing had.
It had some.
Later 2022 projects delayed into 2023.
Are you starting to get enough visibility for 2023 to say that's going to be an hour on algorithm growth year in terms of units.
We have line of sight now I think it's going to be pretty close we should be able to get closer to the high single digit maybe maybe double digit growth next year as we get there. We have this bubble that we were trying to catch up to and then right about the time is supply chain got got challenge, but by pushing some of those stores out of 'twenty two.
Into 'twenty three.
And just the way we were catching up I think we're going to be in a pretty good place by 'twenty three to be close to our 10% target.
And we're very encouraged by the pipeline of stores that we've got coming for 2425. So there's a lot of confidence that that single source itself.
Clearly some construction challenges patenting challenges this year, but I'm pretty pretty clear 2023, 2024 is going to be back on track.
And one other add an item in 'twenty three to focus too is to really try to get to a place where there were consistently building our opening by quarter as opposed to at all bench of towards the end of the year. It's much better for operations. We're getting ahead of that now so I think we're going to be in good shape and 23 from a new store perspective.
Yes.
Great. Thank you.
Yeah.
Thank you. Our next question comes from Robbie Holmes with.
Bank of America, you May proceed with your question.
Oh, Hey, guys. Thanks for taking my questions I've got just a few quick follow ups. The first one just you mentioned the chip the gross margin being stable anything on labor costs or SG&A.
That we should be thinking about to get to the low end of your guidance range for the year.
No I mean labor cost, obviously labor costs are creeping up we're able to we have been able to manage through that we just recently.
Foot.
We've put a system in place and process in place went through labor standards. So really good from a labor standards perspective. So the costs are anticipated in the full year cost to be probably all in for SG&A, we will probably be up around.
Let's call it 6% ish for the full year, so it's still a little bit lower than our top line total growth I mean, it's a little bit higher so theres, some theres to be a little bit of deleverage there.
Which is to the point earlier that someone made about trying to get the comps.
Sure.
Okay. That's helpful. And then can you remind us Easter is not so important for you guys right and so there is no real Easter shift.
Between quarters.
No not really I mean, the Easter it's we're open on Easter So that's for starters.
Certainly it was like a one week move so we are a little bit better business on this year when it wasn't Easter and a little less business on Easter than we had year over year, but it's not material.
And then.
My last question is just.
Inflation has been surprising you.
What are you guys thinking inflation is would you think it could run double digit for the rest of the year.
Yeah, we think so I mean, everything thats, pointing everything seems to be appointed that direction not not what we thought earlier in the year, we thought we'd start to year over year. When you just looked at it you're starting to think that you would start to buy the second core this quarter.
Around this time, you start to see a trailing off because you're comping against big numbers the year before you'd probably be in the high single digits and by we got by the time, we got to the back end of the year, we expect deflation to be pretty normalized year over year and B call. It call it lower than mid single digits.
What we're seeing now is we're continuing to see cost increases flow through and our line of sight right now would suggest that.
Think about the full year, it's probably going to be minimum high single digits, if not low double digits.
And I don't think the fed I think in this kind of any significant reduction in inflation.
Yes. It is.
Some of the pressures on food pricing is going to come from the from the conflict.
The Russia, and Ukraine thing, which I think will have an impact <unk> impact on food pricing.
Think it's appropriate for us to think inflation is going to get much better.
Thank you guys that's very helpful.
Thank you. Our next question comes from John My muscle with Guggenheim You May proceed with your question.
So Jack what do you think you need to do to improve the selling culture that you referenced.
And what I have been too low.
Well I was going to be the part about what's happened to department manager in employee turnover, because that's been a part of that.
I think more often than I think it was logical what happened in our business and through the two years of the pandemic, we actually ton an awful lot of the magic really got spreads move in in the first place we're back to the early days this idea of creating a selling culture inside the store I think that was part of the DNA of the.
And I think the pandemic kind of took about it that way simply because we were spending a lot of time worrying about cleaning things in protecting people and when gloves and wearing masks and people were frightened to kind of.
Approach people with some of the fresh products that we have in that culture. When you walk around the farmer's market tasty.
Tasting thing that I haven't people walking around the store with a few people in our stores who are great at that and I think we can reignite that and it's only now that we're able to even have that conversation.
Not be something that we've been comfortable with what we were talking about 10 nanometer on head and we kind of had to put all of that stuff on hold so the big thing for me on <unk>.
Reigniting that kind of DNA that exist in our company and if we can get the store managers thinking of it just selling a few more units.
Really good experience in our store yesterday.
The store manager and his team are just bombarding me with ideas as to how they were going to sell more units. So thats more units of that getting that culture into the organization. We've been just trying to serve our customers and serve our communities over the last couple of years and I think if you're interested in hearing health. That's been a good thing for us So to me, it's very much John about just.
Reigniting that.
DNA and we had appropriate for that when appropriate to be able to do that and you can think of.
Im encouraged by even the way people are talking about it already.
John I would add on to follow on a little bit as I.
And this in this industry for starters, but even specifically here, we've thought about basket basket basket in dollars and we think about sales.
But when you start to talk about the actual makeup when you start to talk about the units is such it's such a more tangible thing to try to coach your store associates of get that extra unit drive the extra unit.
Much more tangible than saying basket because.
They don't have immediate visibility to what the basket is they can kind of look at what you've got in your basket. But this is just it's much more tangible to selling culture that Jack and I are as we've talked to other call. It smaller businesses across the country, who are in similar spaces. Some of them are really good at that and it creates it.
The associated knows exactly how many units are being are coming off a certain fixture. So that's that's the culture shift. So it's not just going from where we were at 19% or 20 pre pandemic to wear to getting back to that on top of that there are other opportunities, we think to drive up.
More units in the basket culturally.
And just maybe as a follow up to that do you think.
Not having fuel rewards.
Hurts you right relative to others and is that just something youre going to have to live with or is there a way to address that maybe partnerships with.
Fuel providers.
We've never had it so I don't know if its hot thing is not having or having it I don't see it's certainly a legitimate question in terms of the context of what's happening with gas pricing and Novartis placed I think I'd like to take that went away and have a really good thing kubota.
Okay. Thank you.
Thanks.
Okay.
Thank you. Our next question comes from truck.
Patzke with.
Northcoast Research you May proceed with your question.
Good afternoon, everyone.
Got a question with regard to the unit sales.
Perhaps the conundrum here you got.
The supply chain that sometimes is not getting allowing us to get product on the shelf, which you also mentioned you wanted to do a better job of ordering and managing what's on the shelf plus a lot of new products.
Or are you fighting flight in your own Oh.
<unk> by changing too much when you're not ordering as optimally as you'd like while at the same time, it's just tough to get the products that were already in the catalog.
Hey, Chuck.
And when we talked about as.
The company historically has been what I would call less than optimal.
There is always kind of been this hanging opportunity for me in stocks did COVID-19 complicate it a little bit more yes. It has not nearly as material as it as it affected some of the conventionals over time, we believe.
But this opportunity to improve our in stocks.
Four or 500 basis points.
One that we've been laser we've gotten more laser focused on in the last year, because we decided to make that investment in our system, we've decided to make that investment in the training of that system in our stores, it's something that.
It's not like an immediate thing we just started because we wanted to just drive units in the basket that's been an ongoing effort.
We've made the investment we're doing the training we're implementing it now and it's we think that Thats.
Very critical for us as it relates to when you asked the question where does that is that a lot of things going on when we're bringing in more products and yes, we're going to challenge. Our so we're challenging ourselves now on the number of products. We bring it all the time and just making sure that we don't want to lose that innovation and we're not going to lose that innovation, we're going to continue to bring in great products. Some of our products have a long term.
On that so we have we have to be better about how to manage that longer tail and we're working on that as well. So in stocks is probably one of the it's one of the more critical if not the most critical thing we're working on behind the scenes to help run a better business and not give up innovation at all so that's that's.
Hopefully that answers your question.
The key to our business is being appropriately differentiated for our health enthusiast customers on innovation because that's what we've said is our real estate strategy as our merchandising strategy is our marketing strategy is how do we target those customers and if we lose an innovation is the key to that going forward.
Forward and.
I think it's within R. R.
Capabilities to manage the differentiation and manage the change of that brings because that's ultimately what's going to make us win long term.
And as part of that Jack and chip doing better in the meat and produce and call. It the protein and produce categories than the rest of the store.
Yes, I think it's really interesting to me when you the local business and projects is so important to us where you actually saw some byproduct locally on the DC network to allow us to do that and that's part of the differentiation getting that right building varietals of product take us to a level of taste and quality.
That's different projects just got a huge opportunity and we are doubling down on that our organic projects business is 95% of our overall approach is business that's pretty substantial.
The whole context of being different is kind of coming alive, even in categories like projects and in the meat Department is very much about how do you create different attributes that are different to other people are selling in the conventional space.
Every department, we're looking at we're doubling down on that.
Alright, Thank you very much.
Thanks Chuck.
Thank you and that concludes our Q&A session I would now like to turn the call back over to Jack Sinclair for any closing remarks.
Well thanks, everyone for your interest in our business and your question is they help us to help us think about our business. So I appreciate those questions.
Stay safe everyone is nice too nice to spend some time with you.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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