Q2 2022 Sprouts Farmers Market Inc Earnings Call

August 3, 2022

Good day and welcome to the Sprouts farmers market second quarter 2022 earnings conference call all participants.

It will be in listen only mode should you need assistance. Please signal a conference specialist.

So archie for what might be wrong.

After today's presentation there'll be an opportunity to ask questions. Please.

Please note. This event is being recorded I would now like to turn the conference over to Suzanne.

Great.

Our 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 second quarter 2022 earnings call, Jack Sinclair, Chief Executive Officer, and Chip Molloy, Chief Financial Officer are with me today the earnings release announcing our second quarter 2022 results the web.

Cost of this call and quarterly slides can be accessed through the Investor Relations section of our website at investors that sprouts dotcom.

During this call management may make certain forward looking statements, including statements regarding our expectations for 2022 and beyond these statements involve several risks 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.

And our SEC filings along with the commentary on forward looking statements at the end of our earnings release issued today.

The market today include references to non-GAAP measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP measures to the comparable GAAP figures with that let me hand, it over to Jack.

Thanks, Suzanne and thanks to everyone for joining US today, we're pleased with our performance during the second quarter, we emphasized bringing back the selling culture, improving in stocks I'm, putting up our merchandising on testing marketing initiatives. This resulted in better than expected financial performance, including <unk>.

Total sales growth of 5% comparable store sales of 2% and earnings per share growth of 10%.

I want to thank our team members for delivering this performance in what continues to be a very difficult environment for them professionally and personally.

They live our values every day and bring positive LNG to our stores and ultimately to our customers. One of our key values is love being different which is ingrained in our DNA and underpins our strategy. It can be seen in the unique products we carry.

The layout of our stores on the knowledgeable service provided by our diverse team members.

As we move further away from what we all hope was the peak of the pandemic. These differentiations are being recognized by our customers and we are pleased to see this resulting in positive topline performance.

We recognize the well documented challenges facing the consumer in the months ahead. However, as we celebrate our company's 20th anniversary. We continue to be confident we're headed down the road with the right strategy and the right team in place.

In a few moments I'll follow up with more details relating to our recent activities and focus on the remainder of 2022 for note. Let me hand, it off to chip to review our financial performance in the second quarter and outlook.

Outlook chip.

Thanks, Jack and good afternoon, everyone.

For the second quarter total sales were $1 6 billion up $74 million or 5% from the same period in 2021, driven by new stores and comparable store sales growth of 2%.

We did experience positive comp transactions, which is our proxy for traffic.

Both traffic and comp sales steadily improved as we progressed through the quarter.

We experienced strength in categories, where we are most differentiated such as grocery dairy and frozen.

While Delhi continues to be a shining star as consumers search for healthy and convenient meal options.

Our E Commerce sales grew 15% representing 11, 1% of our total sales for the quarter.

Our merchandising and store operations teams are slowly, but surely making progress as they partner to bring back the consultative selling culture in our stores.

Key items with placement signage well.

Also supporting them with sampling events.

Our goal is to spark interest in purchasing that one extra item for a consumer who we know is having to make difficult spending choices. During these highly inflationary times.

Our second quarter gross margin was 36, 4% an increase of approximately 30 basis points when compared to the second quarter of last year.

The improvement is primarily associated with shrink and decreased warehouse and distribution costs, which continued to benefit from the opening of our two new distribution centers last year.

We continue to pass through the increased product cost to retail pricing.

SG&A for the quarter totaled $462 million or $26 million higher when compared to the same period last year.

Increases were predominantly driven by new stores rising wage rates credit card fees and ecommerce fees.

For the quarter, our earnings before interest and taxes were $87 million.

Interest expense was $3 million and our effective tax rate was 26%.

Second quarter diluted earnings per share were 57, an increase of 10% over the same period last year.

During the quarter, we opened two new stores and closed three.

The three closed stores had reached the end of their lease and we believe that most of their respective customers can be better served by nearby stores in the marketplace.

There are no further closures planned for this year and in fact, we exploit we are excited that all but one of our new store openings in the back half are in the new format.

Turning to the balance sheet and cash flow highlights.

We ended the quarter with $289 million in cash and cash equivalents.

$250 million outstanding on our $700 million revolver, and 25 million of outstanding letters of credit and a net debt to EBITDA ratio less than zero.

Importantly, during this time of rising interest rates, our interest cost remains relatively flat due to our $250 million swap in place on our outstanding debt.

Our ongoing strength of cash generation fully supports capital investments for growth, while also allowing us to continually return cash to our shareholders through our share buyback program.

For the quarter, we spent $24 million in capital expenditures net of landlord reimbursements and repurchased two 4 million shares for an investment of $65 million.

Our diluted weighted average shares outstanding for the first half of the year were down over 5% when compared to last year reflective of our sustainable share repurchase program.

Turning to our current outlook for the full year, we expect total sales growth for the year to be 4% to 5% and comp sales growth between 1% 2%.

Earnings per share are expected to be between $2 18.

And $2.26.

We expect to continue to pass through product input costs and expect a slight increase in gross margins for the full year relative to last year.

On the SG&A front, the back half growth relative to the front half slightly higher due to the timing of our new store openings higher marketing investment in Q3 relative to last year.

Rising supply cost and increased security measures in a number of our stores.

In addition over the last several quarters. It has been extremely difficult to fully staff, our stores, which has offset a rising wage rate environment.

The good news is that we feel we are finally, making real progress in staffing the stores. However, it results in slightly higher total spend.

We expect to open 15 to 17, new stores. This year inclusive of the eight new stores opened year to date we.

We're slowly making progress towards our strategic goal of 10% unit growth a year and currently expect to open at least 30 new stores in 2023.

We now expect capital expenditures for this year net of landlord reimbursements to be between $130 million to $150 million.

For the third quarter comparable sales are projected to be in the range of 1% to 2% and earnings per share are expected to be between 49 and 53.

With that I'll turn it over to Jack.

Thank you chip.

Recognize the challenge of consumers are facing in this fluid environment and are considering this in our strategic decisions inflation high gas prices and a year on year effect of the impact of Delta last year, all contribute to an uncertain outlook for our stores and our customers.

In light of this microenvironment, we remain proactive implementing tactics for sprouts for long term success and a solid back half of the year.

In operations with amping up the selling culture on operating a more efficient store with a focus on in Stoke and merchandising, we're highlighting our differentiation undervalued like sprouts brand as well as healthy prepared meals and in marketing we are quickly analyzing what works and what doesn't.

I'm excited to see the selling culture reignite get it spreads it can be witnessed in the energy in the store with the seafood Roadshows community event and sampling and yet team member contests, nothing brings back selling culture more than a little healthy competition amongst stores. The team members on this one in the second quarter.

Unreached new goals.

In June we returned to an in person annual Sprouts Corn festival with 1200 team members from grocery vitamins projects and store managers in attendance, we were enthused to see more than 1200 vendor exhibitors representing more than 500 brands sharing that unique product attributes.

First tightened I left inspired by the energy from the team and I'm excited to see the impact in our stores and on our performance.

As I mentioned on our last call. The operations team continues to improve in stocks and reduce shrink by leaning on new technology like perpetual inventory computer assisted ordering or P. I C E O F I am.

Fresh item management by aligning inventory levels to sales demand daily and fruition I'm seeing meaningful improvements and importantly, this is flowing through to better sales.

With the addition of two new distribution centers, we're taking miles off the road and benefiting gross margins even more importantly, this batch ourselves our customers who are looking to approach for the best quality and value and fresh and organic projects.

While we have lapped most of the new D. C's benefit in the second quarter, we look forward to continuing to leverage the Florida D. C. As we expand in that region as well as expand our supply chain as we grow in the mid Atlantic and California areas.

As we continue to expand our footprint retaining and developing sprouts top tier 1000 team members is key to our future success. Recognizing this we have taken measures to improve the onboarding experience enhance our training and fully staff our stores to support our customers and engage our team members.

With this focus we're seeing turnover stabilize and excitement in the organization around the culture building we are doing.

Moving onto merchandising as the consumer is being pressured by inflation, we are proactively focusing on value across the store, we're driving value through pipe and pricing leading into a great project pricing emphasizing a large bulk offering where customers can control their costs expanding our LOE.

<unk> projects, which provides more attractive pricing on running bogo invite someone offers to help customers save.

In addition, we continue to move the needle on our surprise brand.

<unk> is key to our product selection and it's rooted in the value we give to our customers.

Our surprise, Brian does all for the entry level price point, but it is more focused on innovation treasure hunt experience wellness or health benefits as well as quality.

Some recent releases out pasture raised eggs avocado, and asparagus cries and medicinal gummies with many more to come this year.

Daily meal sandwiches, and sushi continue to outperform our expectations as time remains precious for consumers. Our daily traffic has been up even after increasing retail prices to keep up with inflation.

All of our one price that remains fairly constant is our longstanding favorite.

$5 made toward daily Sandridge has recently taken off on tick tock unsolicited with more than seven 8 million views.

Our in house culinary team is inspiring change with innovative meal options, including Penny Caprese enough pre pesto sauce salmon with Nathan roasted garlic, Brussels, and no antibiotics ever chicken, South total railcar with Chile, sweet potatoes, and many more to come.

We have been adding additional prepared meals cases to our existing store base to support this growth, which is now in more than 85% of our stores.

In addition, we continue to update and add new one pot meals to our meat department with our proprietary marinades loved by our customers.

Marketing is one area, we continue to monitor and pivot more quickly as needed.

<unk> shows that the consistency of our paid media message is focused on great prices on the precious projects is working in our market and increasing overall aided awareness. However, our aided awareness is still quite little put out a massive market with this in mind going forward, we are over indexing on them.

Marketing spend in a matter of being an expansion market, especially in digital streaming TV and radio.

When it comes to driving spend we're growing personalised offers continuing basket building initiatives and aligning all our channels social digital and in store with consistent messaging, but all key events.

We've done to test personalize engagement in categories wheel and like vitamins in organics and are seeing success.

On the social side, we continue to actively nurture long term relationships with micro micro Mega influencers across the health and wellness space.

On the consumer data site, we continue to understand our target customer expansion, we utilized four key data points numerator credit card customer surveys on e-commerce from.

From a digital standpoint, we've increased email subscribers by more than 19% SMS subscriptions by more than 17% and mobile downloads by more than 30% over last year.

Overall customer kinds have been slowly increasing overtime.

Customer satisfaction stores remain very high.

We also began testing e-commerce campaigns to attract new customers to our shop sprouts Dot com site.

<unk> and high double digit sales growth.

As well during the second quarter, we began to accept E. B T. Snap for same day delivery and curbside pickup for orders placed an interest to come.

This allows all customers toward a fresh and nutritious foods online and enjoy greater convenience accessibility and affordability.

I'm delighted that our new inspiring women's resource group was instrumental in supporting one of sprouts, new initiatives with investing in women's College athletics through the backing of the Big 12 in part 12 conferences for key universities and 50 individuals collegiate women athletes and partnership with <unk>.

Paul I Cohen, Jenny Finch being.

Being the first grocery retailer to make this commitment to collegiate athletics and coupled with our sponsorship of the Angel City Football club, we remain invested in growing and changing the landscape of women's sports for years to come with private response of these great female athletes and look forward to many more strong ideas.

From other just filing women's resource group to support our business.

With that with that I want to thank you for your interest in sprouts. We're confident we're working diligently on controlling what we can control and become economic.

Environment, while not losing sight of the long term.

To grow with us unique brand across the country.

At this time, we're happy to take your questions operator.

Yes.

Thank you.

We will now begin the question and answer session too.

To ask a question you May Press Star then one on your Touchtone phone.

Youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Scott, Michigan with <unk> capital. Please go ahead.

Hey, guys. Thanks for thanks for taking my questions and Jack Thanks for some of the some of the detail.

So my my question really goes to some of the stuff you were talking about at the end there Jack like you talked about sampling that's returning the marketing campaigns kind of what's happened with the Sandwich. I think you said $5 range got took a took off on Taco Bell I think is what you said.

When we look at the quarter did you could you see any building momentum in traffic was it were you able to actually kind of see some of these things working and maybe you can point to you yes, no you don't.

Why you might think one of the other.

Well, if you think about what we talked about at the last time, we talked about we're seeing quarter on quarter, the traffic growing and that's something that we havent be not before so we saw in Q2, another increase in our traffic gentle increase in the traffic, but what we're looking for with regard to the we talked last time about units in the basket and what was happening to that rich.

Talked about some of the initiatives, we're putting in place to drive those units to the basket. So putting in the 70 daily has been encouraging the daily meals case that we've put into our stores as you said that as we talked about the sandwiches seem to be driving some business for us. So daily has been encouraging and we put some equipment behind that to drive both.

Sushi on under our meals offer so that's come to get coming together, well and we're pleased with what they installed work is progressing and we continue to work on improving in stocks across the chain. We've made some progress on that but we've got more progress to make as we implement some of these systems are on <unk> and some of the Sis.

Some that were talking about to improve the backroom processes. So that we can get more installed during the day all the way through the day. So that we've made a lot of progress there we talked a little about some of the marketing initiatives switch and on the face we've got more work to do in that in a bit more learning to do but we made a little bit of progress while not so that kind of bucket of things that we can.

<unk> talked about.

The thing I'm, probably most excited about is.

Post Covid, we've actually been able to get back to some sampling and this whole idea of a sampling new product sampling fresh produce sampling some of the innovative products, we're beginning to get back into our it's always be part of the DNA and spreads and we're beginning to get the five we've got again, Scott with a bit more work to do on this but I'm pleased with some of the probes.

We have made in Q2.

And just a quick chip this is true.

Sequentially, we did see some improvements both slight improvements in traffic we did see some slight improvements in comps. Obviously you know when we talked in April .

April wasn't the greatest of the month, so it got better as the quarter went on the decline in units per basket and sequentially in the quarter was slightly better. So we're encouraged by that but we still have work to do there, but we're encouraged.

It must be a mind reader because that was what I was going to follow up with and then in my.

My second question Chip Chip, it's I think it's probably directed at you know we've talked about what level of comps you guys needed to kind of lever your expenses overtime I mean, obviously the short term.

Is that changing like higher now that the expenses you know, it's harder to get people labor costs are rising.

You guys, just talk about 3% or we meaningfully above that at this stage and then thank you.

Well certainly as costs rise, you're going to need a hard comp and truly leverage and you need a comp that's probably.

Basis points above your cost growth to two really.

Drive meaningful earnings growth, assuming you don't have new stores.

So the good news as well the toughest yes prices are rising so cost per labor hours blowing up our supply costs are going up we're working really hard to manage through those I think we're in a pretty good place to manage through it for the rest of this year and then we've still got several months ahead of us that we can start to now we're working.

What does this mean for next year and where there is pockets that we can find some opportunities to mitigate some of these rising costs and we're working really hard beginning now on getting ahead of that.

Thanks, guys.

Our next question comes from John <unk> backhaul at Guggenheim. Please go ahead.

Hey, Jack let me start with you you talked about.

Brand awareness.

What what are in your mind, what are the emerging markets, where the unaided awareness is where you'd like it to be how big is the gap.

Versus.

Where it is but it obviously sounds like Phoenix, but some.

It's more mature markets and then is the best way to do this just you know.

Densely dense in the store network.

As opposed to marketing or.

That will just take time.

Yes, well, yes, it will take some time, but let me just kind of trying to articulate where we are with regard to emerging markets on the more established markets. When we look at stores that we opened in California stores that we open even in Colorado, even and then and Oh, Arizona, We've got strained someone got densification. There. So we kind of hit the ground.

Running about possible there because that is unaided awareness.

Awareness initiative is a big part of what we're doing in Florida, a big part of what we're doing in the mid Atlantic and a big part of what we're doing and.

Texas as well in Dallas in particular, so driving awareness in those markets marketing as a part of it densification in other part of it we're opening a lot of stores in Florida. The moment falling on from the D. C investment last year, and that's certainly helping us get awareness across the market place. So I would say it's about both dense.

Suffocation, clearly makes marketing more effective and more efficient and it's something that we're right in the middle of the relative strengths of awareness is pretty good the empirical number at top of my head, but the difference between awareness in California, and Florida, It's pretty significant.

Maybe there's points before.

How many points.

20 to 30 points would be off the top of my head a number that I would kind of cool.

Okay and then.

Maybe following on that.

Maybe talk about the Florida in.

Particular right.

The opportunity there right I know everyone seems to be Comping extraordinarily well in Florida. If you look at the published results.

When you think about your ultimate opportunity right to store.

We're out.

Great.

Yeah, how would you size that up right.

Tripling quadrupling in store count is that is that too optimistic.

Well not will not be tripling our store count in the short term, but will certainly be doubling our store count in a relatively short space of time as you know what's happening in Florida, John is what people move in there. So there's an influx of people and there was an influx of people who are in our target customer base people, who are interested in health and health healthy products.

More interest in nutrition more interested in fresh foods. So the people that are moving to Florida kind of are in line with our target customer base. So we're very confident about I'm very encouraged by the opening of the new DC in Orlando is that kind of builds the opportunity for us to create great fresh foods and the fact that we're sourcing a lot of product in.

Florida is allowing us to work pretty well with the growing community in Florida, and we've done some really nice work on the seafood space on seafood in Florida, which I'm encouraged by the way. The team are working on that so yeah, we're very optimistic about Florida, that's probably going around and fastest growing market over the next two or three years.

Thank you.

Thanks.

Okay.

Our next question comes from Kelly Bania with BMO capital. Please go ahead.

Hi, good evening or good afternoon.

Just I guess quick question just on inflation is it fair to assume that your inflation is kind of similar to the industry. You know food at home CPI numbers that we're seeing or could it be above or below and then just I had a couple of follow ups.

And I think Kelly is by and large in line with what you're seeing from the CPI. We do have a slightly different mix and youre seeing a level, but the volatility in projects means it goes up above and below there's a volatility around the project pricing, which probably more extreme in our business than youll see in other people's businesses and things like vitamins and <unk>.

But where we've got a smaller proportion you'll see a different mix flowing through but overall I think you can take the assumption that we're buying law genlyte.

Okay, and I guess, just a follow up I mean, it sounds like that the traffic is turning positive, but how are you looking at or thinking about market share I mean.

Some of the data we're looking at as you know natural sales kind of in that high single digit range at least.

Is that at all concerning to you or are there still customers that you think you're just setting as a result of the strategy or just how do you think about kind of market share or is that really not important as you kind of analyze the business well. Let me tell you how I think about market share I think we sell very different things to what everyone else sells.

So if I compare our market share to gross it it really is pretty indifferent, what's happening in the grocery space on market share across the traditional.

Traditional grocery space, because ultimately if they are doing well or badly it doesn't help us one way or another the important thing for US is are we winning share of wallet with our target customer and that's how we imagine we've got more to do to measure that better but fundamentally <unk>.

Market share that I look at that that you guys are looking at is looking at a whole load of things that either we don't sell or don't want to sell the only comparable sets of products. So we have is our projects business. So we watch that carefully is our projects business growing at the rate that it should be and we've made a little bit of progress on that in Q2, and we've got more work to do.

Do there, but we sell a lot about the nobody else sales I don't know how that comes into market share. We sell a lot of vitamins in the hopper that a lot of other people don't sell so I'm kind of.

Maybe the end of your question, we don't worry about it too much we worry about are we looking after our customers and are we growing share with those customers and doing the right things with them.

Okay fair enough and if I can squeeze one in on on unit growth I guess.

It looks like you said about 30 I think for next year, so that 10% growth target I guess it is getting pushed out till 'twenty four.

But is that the right way to think about it like 7% to 8% unit growth or are there any more store closures planned can you help us just kind of understand the the total picture there.

Yes, Kelly this is chip so as we said in the script, we talked about at least 30 next year, we're going to continue to work hard to try to get that number higher.

Being said you know as you know we've been we've been bringing the number down in the last year. So we don't want to we don't want to over promise and under deliver from our own perspective and for the investment community perspective. So we were pretty confident we can do at least 30 next year are going to drive to a higher number but for now I would think.

It being 30 and as we get into 2024, we're really aiming to be at that 10% unit growth by 2024 in fact, we'd like to get there next year, but for right now we're banking on Thirtyish.

Thank you.

Yeah.

Our next question comes from Ken Goldman with Jpmorgan. Please go ahead hi.

Hi, Thanks, so much.

I wanted to ask you know one of the questions that I get on sprouts is.

When will the company show a little bit more I guess consistency for lack of a better word in terms of its earnings and its general fundamental performance and I think maybe this quarter would be quote unquote, good versus your expectations and some others have been kind of back and forth. So I guess.

Obviously every company's goal is to have consistency, but is it a high priority for you at this time or is it really just hey, you want to just put everything into the business and.

See how it goes I guess I'm, just kind of asking well, we had a period where investors can finally get a little bit feel like theres, some reliability and some of the numbers that are coming out there rather than some of the back and forth that we've seen I hope that makes sense sure.

Certainly we'd be aspiring to be more consistent we've been in the last couple of years, having said all of that there's been an unprecedented level of volatility not just in our business, but maybe across the market place now I don't know what's going to happen going forward. Ken. We're certainly very clear about what we are aspiring to do and what we're trying to do and we want to get to that.

Consistent measure of new store growth and comp growth that we've talked about it and that will deliver the kind of numbers. The one consistency we've got as I said our margin within that context, so we're feeling not.

We've put the building blocks in place on the performance of the business I would expect us in a normalized environment to two have been and will be much more consistent going forward.

Okay. Thank you for that and then.

As a follow up.

You you talked about.

How your portfolio differs from some of your competitors and clearly it does.

So maybe this isn't quite the most relevant question, but I wanted to get your sense of the rationality in terms of pricing promotions.

Of some of the.

Maybe you won't consider them direct competitors, but other food retailers sort of in proximity to you are you seeing.

Generally rational environment given the.

The combination of both higher inflation that needs to be passed on.

And maybe a little bit more challenged consumer out there.

Yes, I think what we've seen so far is that there's such a pace of volatility in the cost prices.

Cross the food retail space people have been passing on the unprecedented pace at which I don't think anyone's had to faithfully since the 19 eighties I'm, probably the only guy old enough to remember how you deal with some other stuff, but you'll have to pass on that.

What people have been doing is passing on the on the cost prices that have been coming through we've not seen any irrationality in that supply chain remains a challenge still for people. So it's unlikely you're going to see very aggressive promotions, having said all of that what will happen going forward and this is outside of our space what will happen going forward.

When the consumer comes under and there are some you know what.

It's going to happen at the end of the year as people run out of money and run out of the recession that everyone's talking about happens what is likely to happen I think it's.

It's unknown going forward, Ken, but my gut feel is that.

There'll be rationale, let Raj and I'll, let rationality in it we certainly have every intention of.

Planning our business on the basis of not investing any margin for promotions are for a competitive environment that quite frankly, as I said a little bit ago.

We're less worried about what other people do we're more worried about making sure we're providing the right value for our customers what does that mean it means being aggressive.

Our SaaS and our relative value in produce and making sure. We're very clear on the rest of our portfolio that we're taking a kind of elasticity that we're watching what happens to volumes, when we change prices and making the necessary adjustments within our own environment Hudson when this evolves.

Thank you so much.

Yes.

Yeah.

Our next question comes from Edward Kelly with Wells Fargo. Please go ahead.

Yeah, Hi, guys good afternoon.

I wanted to ask you about the.

The acceleration in store growth, you know that starts and it kind of starts in 'twenty three.

And how much of what we're seeing today around sort of like you know less items in the basket right in that that elasticity.

Issue that we're seeing with a tougher consumer and inflation.

What role that's playing in sort of like Oh, when new stores or do you expect to breakeven in.

In terms of like an earnings contribution and then as we think about the stores next year. What are you thinking about from like a new store productivity standpoint.

Related to the stores that they will be opening.

So Ed this is chip.

<unk> or our IR deck today, we actually have a store profile and there is slightly different than what's been out there in the past not much different but slightly and we're still we're essentially targeting about call it $13 million in sales in year one.

We think that that will grow in the next five years will grow 20% to 25% or.

Generally breakeven in the first year by year, five or they're doing an 8%.

EBITDA margin and they're doing 30% to 35%.

Cash on cash by year five.

And youre looking at that and Thats incorporating the most recent or more current cost to build because there has been despite the fact, we've brought the square footage down and our initiatives really to bring the cost down which we've done for costs in the industry have gone up.

Gone up somewhat.

$3 8 million for us on a per box basis. So hopefully go look at that you'll get a better feel for it that being said, it's still really good returns it's returns against a weighted average cost of capital is.

Low single digits, and we feel confident we can continue to build those and Oh.

Fully be fairly aggressive on store growth.

Great. Thank you and just a follow up on.

<unk> side I'm curious two things one is the cadence of SG&A as we think about the rest of the year typically I think Q2 is higher than sorry, Q3 is higher than Q2, and then Q4 is sort of lower than Q3 wondering if that's right and then just going forward as we think about 2023.

Thinking about sort of 7% to 8% sort of unit growth.

I know, you're still sort of working through you know like opportunities too.

You're going to be efficient from a cost perspective, but it certainly seems like it.

Because there is a chance that you could see I guess off our SG&A dollar growth a little higher than that and I'm. Just I don't know to what extent you can help yet around that but any color would be great.

Yeah as it relates to this year the dollar growth in the back half is going to be higher year over year than the front half. Some of that is we were severely under invested I would say in marketing last year in Q3, So it's a big chunk of that in Q3 and we are.

Teeny bit of marketing slide from Q2 to Q3.

And then as we think about next year.

Certainly we're going to work hard to try to take take cig new stores aside.

It's gonna be our job to try to manage those costs, it's something in the <unk>.

Low to mid single digits at the highest for us to do what we want to do which is drive earnings grew in the high single digits. So that's before share buybacks.

We've got work to do but we're working on it and we will continue to work on it through the remainder of this year before next year ever gets started.

Our next question comes from.

Correct.

Oppenheimer. Please go ahead.

This is actually Erica eiler on for Pam Thanks for taking my question.

I wanted to touch on traffic as well so.

Just curious if youre seeing.

You know broadly traffic improvements throughout the chain alright, very specific geographies of note and then second with gas prices easing here. Just curious if you think that's helping the business at all here lately.

I would say on the on the this is chip on the gas prices.

It's I think it's too early to tell we're not seeing a direct impact I do believe that if gas prices as they started to come down that that will help everyone like should help everyone versus where we are.

As it relates to the regions it's.

It's interesting when you look at the regions I think the areas, where we have a ton of stores and we've been there for a long time, we had in Q2, we had solid results kind of in line with the company I think when you look at the emerging markets, where we really are doubling down in Florida and the mid Atlantic.

We had above average as you would expect a performance because they're newer stores and they're ramping in general the areas, where we're a little bit weak is the areas, where we've been we've been there for a while and we don't have a lot of stores.

We really don't have a brand presence we don't have a lot of stores you know the northwest where we haven't been doubling down.

Places like you know, Alabama, or Louisiana, those areas, where we just don't have enough.

Brand awareness and we haven't committed to building more brand awareness there.

Okay. That's that's helpful and then just.

On the decline in units per basket can you talk about that getting slightly better sequentially.

Are there any efforts that you can highlight for us where you feel like you're really starting to see traction.

Teams.

Driving those increased units.

Well the only thing I'd repeat what I said, a little bit earlier, and I think our daily business, we're seeing a strength not as it comes through our bakery business. We've been encouraged by some of the work that's coming through on that and our underlying theory business as being pretty strong relative to that but.

Within the context of an industry, that's seeing a reduction in units per basket and we talked about it in the last quarter or just looking to try and get one or two units extra in the basket and the places that we're seeing the biggest strike churn is probably our daily business.

Our next question comes from Kristina.

We've had Deutsche Bank. Please go ahead.

Hi, good afternoon.

Yes, I wanted to follow up to some of the store dynamics that you have highlighted you know last quarter, you talked about softer performance in fresh.

Today, you said frozen Berry are better Youre seeing good traction in Delhi. So maybe if you could just talk about how the various departments are performing now that traffic has started to come back and then how are you planning on capitalizing on this to essentially ensure that you will continue to see traffic improvement.

So from a category point of view.

We've been a little bit encouraged by our fresh business of late our projects business has picked up a little bit, which we're encouraged by giving it so important to our business. We had a strong run and our vitamins and hover department given what happened at the start of Q2, so theres. Some theres some encouragement there how that would play out I'm not quite so sure go.

Forward and our daily business I'll reiterate we're doing well there and across the Dalian frozen being driven by banks are installed and it gives us some encouragement that when we get off P. I C E O implementation across the other categories, we will see a more even split even spread all the improvements from installed so kathryn as I've done well as you saw.

Ed frozen dairy and daily project is picking up a little bit vitamins dead, well Im not sure how that's going to play out going forward.

Across the board.

We've got a very unique one of the things that's kind of switched is our bulk business, where our bulk bulk was hallmark through Covid and then we had to close a lot of them don't in some jurisdictions doesn't even less sell them and thats. It buys up all the bulk we're seeing some encouragement and not which is given the strength.

What that does for a consumer that allows the portion control allows them to manage volume level, but so we think we've got a positive differentiation in that space. Some I'm kind of hopeful that that will help drive some business going into Q3, and Q4 and I think we'll see some positives there.

That starts to reopen and people get more familiar with it so I'm not going to see that kind of flavor of where we are across the categories. We continue to work on marketing initiatives to make sure. We keep the momentum that we've seen in the last few quarters on traffic moving forward then traffic remains a little bit positive, Florida, which is important to us going forward.

Got it.

As a follow up you know just as we.

Think about inflation I mean, we heard from Costco Tonight that July inflation was still there to June .

But we also have a pretty severe drop or is this something that is giving you concern from a sourcing perspective, considering that you also work with smaller farmers, who might be more challenged with the cost of running their businesses right now than some of the bigger food manufacturers.

It doesn't particularly concern us more than the general concern about what the pressures out on the economy going forward, we certainly working closely with our projects growers can we give long term commitments to those guys and we're passing on worth taking cost increases and passing those cost increases through what should give.

Give us some confidence that we can supply we can source, what we need to supply.

So it's not something that's bothering us too much just at the moment.

We're in pretty good shape with one or two categories in the more commoditized space, where we're competing with other people that were seeing some challenges, but not so much in our project space.

Okay.

Our next question comes from Robbie.

America. Please go ahead.

Hi, This is kind of just got on for Robbie Thanks for taking my question.

I just wanted to see if you had any update on how you're thinking about inflation as we went through the year.

But you had said last quarter that the expectation right.

You would expect them to disappear.

Maybe in the back half way through the year now that we are well into the back half I guess have you been seeing anything in terms of product cost increases that would.

When you do have to believe you could see.

Starting to see inflation moderate.

I haven't seen anything yet there's a lot of volatility in the fresh produce space, whether it goes up and down and up and down given the nature of supply in that space.

Would have expected inflation, maybe it's come down given how much what the fed has been doing on interest rates, but we haven't seen it and we continue to see a level of inflation is pretty unprecedented and we're not we're not expecting that to change anytime soon.

But who knows.

We might get a little bit of relief on some of the cost base oil prices coming down but not out.

I don't think thats going to impact the product input cost in the near future.

Got it that's helpful.

And then my other question was just on track.

Traffic trends I know you said that there was a sequential improvement from the first to the second quarter.

I was just curious.

You could give any color on a three year basis looking at a more normalized here just given them last year.

<unk> was an easier comparison than the first quarter, but I guess, yeah, but theres still a sequential improvement if you looked at traffic on a three year basis.

Oh, well, we talked about sequential first we were talking about through the quarter so from period to period.

We don't give the actual numbers and we don't do that for the quarter and then we don't at this point looking at three years for US as we just don't look at the three years anymore. We feel like we're in a really stable place where from this point going forward in our guidance sort of implies that that it's really pretty stable.

Right now year over year as it relates to traffic.

Our next question comes from Mark Carden with.

UBS. Please go ahead.

Good afternoon, and thanks, a lot for taking my questions. So to start another question on unit growth what are the biggest factors driving the slower than expected expansion in 2023 is it primarily supply chain driven.

Getting tougher to find applications you Wanna BN.

Our real estate cost is higher than planned any extra color there would be great sure Mark one of the things that we talked about and why we have not opened as many stores in 2022 as we would've liked isn't that we haven't got the sites. It's a pace at which we can build the sites partly the supply chain challenges we've had some fairly significant.

Fly chain challenges on little pieces of things that go towards air conditioning little pieces of things that go towards refrigeration.

And the other thing, it's kind of slowed us down in 2022, whereas the planning and getting the licenses from the various authorities didn't have people in the office monitoring and planning it through so it kind of constraints on licensing on permanent the constraints on supply chain have led us to that.

Number of 15% to 17 in 2022 as we've said often we're sitting on 80 to 85 I'm not sure. The exact number chip is sitting on 80 to 85 signed leases. So we've got them in place. So 2022, you could 2023, you can say well why are you not doing more than 30, then I think we're being naturally cautious.

As Kevin where we're not in the context of what's happening supply chain. It seems to gain hugely better, but it's definitely not getting any worse. So we're feeling confident on the SaaS fee number for 2023, but as I look at the pipeline. We've got to do it for 24 to build the pipeline up I'm confident the sites.

And certainly as we look through the opportunities. We have there are locations that we can build stores. The other target customers, there's more than enough for us to do 10% your stores into 'twenty backend of 2023 going into 2024 more than enough. The challenge has been execution.

Legitimate execution challenges that we faced.

So if that gives you a flavor for it.

I'd like to think we may be doing a few more in 2023, but we're pretty we're we're sticking with the FDA at the moment.

Got it that's helpful and then with inflation staying as hot as it's been are you seeing any changes in trade down I know youre, a private label isn't necessarily opening price point like this for others. What are you seeing movement in fresh categories or anywhere else.

We're seeing some trade down as we've talked about at the last meeting and the number of the sizing of avocado is that people are buying the sizing the number of great. So they'll buy in at any one time. So people on module a number of charities. We clearly projects is a big part of our business and people buying still buying purchased from us.

But the way to what they are buying it's probably going down a little bit going forward, we're seeing a little bit of a trade down any areas like our health and beauty business, where people are trading down to cheaper products.

It's not as big an issue for US again, I mentioned bulk figures I think that might be one of the reasons that our kind of our bulk business picked up a little bit in the last two or three weeks I think people are seeing the opportunity to buy the right amount that the volume that they need so they are able to trade down in size, a little bit and we're doing some work on some of our products to try.

And make sure that the.

Sticker shock of the price point comes down because we changed the size on it. So if that gives you a flavor for it we're working on it we're watching it and we are seeing a bit of trade down just like everyone else. It's just different in our business Mark.

Our next question comes from Robert Moskow with <unk>.

Credit Suisse. Please go ahead.

Hi, Thanks for the question.

Yeah.

In the last earnings call you talked about a downturn in traffic at the very end of the quarter. If you had to just kind of like summarize like what went right to turn that around.

Was it execution or do you think there was a.

Other macro factors that help things get better.

And micro factors I think there might have been some macro factors as people went away and came back I think there might have been some in the metal of backlog as we as you'd retrospective platelet market things there might have been some things, but the thing that we focus on as we talked about it is we control what we can control and we think we've done some.

Things to help drive our business a little bit as we go through Q2 as outlined earlier and stops working harder being better in store store competitions, where the teams are competing with each other to sell more units in the basket, putting in daily equipment, putting in your your confidence putting in new areas for us to sell.

South sell meat products the seafood roadshows. So there's a number of things that we can point to that we did that we think improve that units per basket. The traffic side of it I think there's some macro factors and not and some of it is about I think some of the tactics that we used in marketing as we try and think through what are the.

Right tactics to use in marketing how do we do it better how do we learn from it and sell.

Certainly that's something that we.

We continue to work at and I think we are lapping a level, but as we go on our marketing initiatives.

And how do you think of the macro environment just from here because I think the pushback on your stock is that people doubt whether consumers will go to a second grocery store for their weekly shop or third grocery store like sprouts.

Given gas prices are still high may be fading, a little bit like do you think that it's getting easier for you or is it getting harder or how.

Much of an uphill climb is it.

Well I think to be honest, who knows what's going to happen regardless the upheld claims for everybody over the next six months or so I think theres a lot of uncertainty and not for all of US I actually think that upheld claim for us is less of an uphill climb, but others. If you don't have to.

You can you don't all of a sudden not become a change.

Change your dietary habits, because of inflation because of any kind of macro environment oil and gas pricing and I think the fact that we've got differentiated assortment means if that's what you're worried about that's what Youll go inshore part you can get a lot of the stuff that we sell in the traditional growth. That's the reason we.

Can coexist, so effectively as a complementary retailer as opposed to that so the question was you raised as well they go which I said can store. The only go test that can store if there's something in that second store that they can't get in the first store and I'm fundamentally believe that's why our differentiation is so important to us and it's very.

The customers that do show up with us because of Quito, paleo or plant based or vegan or vegetarian and flexitarian. The reason that they do it is because they can't get anywhere else because they're going to the big guys for tight and Coca Cola and they kind of get out from us.

So I, yes, I think theres some macro challenges for everyone. In the course of the next six or nine months or so as this economy works itself out, but we're confident that the differentiation that we have.

<unk>.

The proposition so that as I say people are gaudy and conscious of what you eat you probably have to come to spreads.

Yeah.

This concludes our question and answer session.

Like to turn the conference back over to Jack Sinclair for any closing remarks.

Well, thanks, very much for your attention and listening to US we really appreciate your interest in our business and look forward to further updates as we go through the year. Thanks ever so much.

Take care.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Good day and welcome to the Sprouts farmers market second quarter 2022 earnings Conference call.

Participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing star.

Sorry, Keith all at zero.

After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.

I'd now like to turn the conference over to Suzanne Livingston, Vice President Investor Relations and Treasury. Please go ahead.

This call and quarterly slides can be accessed through the Investor Relations section of our website at investors that sprouts Dot com.

Our SEC filings along with the commentary on forward looking statements at the end of our earnings release issued today.

Mark's today include references to non-GAAP measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP measures to the comparable GAAP figures with that let me hand, it over to Jack.

Thanks, Suzanne and thanks to everyone for joining US today, we're pleased with our performance during the second quarter, we emphasized bringing back our selling culture, improving in stocks operating up our merchandising and testing marketing initiatives. This resulted in better than expected financial performance, including total.

Sales growth of 5% comparable store sales of 2% and earnings per share growth of 10%.

I want to thank our team members for delivering this performance in what continues to be a very difficult environment for them professionally and personally.

They live our values every day and bring positive LNG to our stores and ultimately to our customers.

One of our key values is a love being different which is ingrained in our DNA and underpins our strategy. It can be seen in the unique products. We carry the layout of our stores on the knowledgeable service provided by our diverse team members.

In a few moments I'll follow up with more details relating to our recent activities and focus on the remainder of 2022 four note. Let me hand, it off to chip to review our financial performance in the second quarter and outlook.

Outlook chip.

Thanks, Jack and good afternoon, everyone.

For the second quarter total sales were $1 6 billion up $74 million or 5% from the same period in 2021, driven by new stores and comparable store sales growth of 2%.

We did experienced positive comp transactions, which is our proxy for traffic.

Both traffic and comp sales steadily improved as we progressed through the quarter.

We experienced strength in categories, where we are most differentiated such as groceries dairy and frozen.

While Delhi continues to be a shining star as consumers search for healthy and convenient meal options.

Our E Commerce sales grew 15% representing 11, 1% of our total sales for the quarter.

Our merchandising and store operations teams are slowly, but surely making progress as they partner to bring back the consultative selling culture in our stores by highlighting key items with placement signage, while also supporting them with sampling events.

Our goal is to spark interest in purchasing that one extra item for a consumer who we know is having to make difficult spending choices. During these highly inflationary times.

Our second quarter gross margin was 36, 4%.

An increase of approximately 30 basis points when compared to the second quarter of last year.

The improvement is primarily associated with shrink and decreased warehouse and distribution costs, which continued to benefit from the opening of our two new distribution centers last year.

We continue to pass through the increased product cost to retail pricing.

SG&A for the quarter totaled $462 million or $26 million higher when compared to the same period last year.

Increases were predominantly driven by new stores rising wage rates credit card fees and ecommerce fees.

For the quarter, our earnings before interest and taxes were $87 million.

Interest expense was $3 million and our effective tax rate was 26%.

Second quarter diluted earnings per share were <unk> 57, an increase of 10% over the same period last year.

During the quarter, we opened two new stores and closed three.

The three closed stores had reached the end of their lease and we believe that most of their respective customers can be better served by nearby stores in the marketplace.

There are no further closures planned for this year and in fact, we excite we are excited that all but one of our new store openings in the back half our end of new formats.

Turning to the balance sheet and cash flow highlights.

We ended the quarter with $289 million in cash and cash equivalents.

$250 million outstanding on our $700 million revolver 25 million of outstanding letters of credit and a net debt to EBITDA ratio less than zero.

Importantly, during this time of rising interest rates, our interest cost remains relatively flat Europe due to our $250 million swap in place on our outstanding debt.

Our ongoing strength of cash generation fully supports capital investments for growth, while also allowing us to continually return cash to our shareholders through our share buyback program.

For the quarter, we spent $24 million in capital expenditures net of landlord reimbursements and.

And repurchased two 4 million shares for an investment of $65 million.

Our diluted weighted average shares outstanding for the first half of the year were down over 5% when compared to last year reflective of our sustainable share repurchase program.

Turning to our current outlook for the full year, we expect total sales growth for the year to be 4% to 5% and comp sales growth between 1% and 2% earn.

Earnings per share are expected to be between $2 18 and.

And $2 26.

We expect to continue to pass through product input costs and expect a slight increase in gross margins for the full year relative to last year.

On the SG&A front and the back half growth relative to the front half is slightly higher due to the timing of our new store openings higher marketing investment in Q3 relative to last year rising supply cost and increased security measures in a number of our stores.

In addition over the last several quarters. It has been extremely difficult to fully staff, our stores, which has offset a rising wage rate environment.

The good news is that we feel we are finally, making real progress in staffing the stores. However, it results in slightly higher total spend.

We expect to open 15 to 17, new stores. This year inclusive of the eight new stores opened year to date.

We're slowly making progress towards our strategic goal of 10% unit growth a year and currently expect to open at least 30 new stores in 2023.

We now expect capital expenditures for this year net of landlord reimbursements to be between $130 million to $150 million.

For the third quarter comparable sales are projected to be in the range of 1% to 2% and earnings per share are expected to be between $49 53.

With that I'll turn it over to Jack.

Thanks Chip.

Recognize the challenges consumers are facing in this fluid environment and are considering this in our strategic decisions inflation high gas prices and a year on year effect of the impact of Delta last year, all contribute to an uncertain outlook for our stores and our customers.

In light of this microenvironment, we remain proactive implementing tactics for stroke for long term success and a solid back half of the year in.

In operations, we are amping up the selling culture on operating a more efficient store with a focus on in stock and match in dining we're highlighting our differentiation undervalued like sprouts brand as well as healthy prepared meals and in marketing we are quickly analyzing what works and what doesn't.

I'm excited to see the selling culture reignited it spreads it can be witnessed in the energy in the store with seafood Roadshows community event and sampling and yet team member contests, nothing brings back selling culture more than a little healthy competition amongst stores. The team members on this one in the second quarter.

And reached new goals.

In June we returned to an in person annual spreads corn festival with 1200 team members from grocery vitamins projects and store managers in attendance, we were enthused to see more than 1200 vendor exhibitors representing more than 500 brands sharing that unique product attributes.

First tightened.

Inspired by the energy from the team and I'm excited to see the impact in our stores and on our performance.

As I mentioned on our last call. The operations team continues to improve in stocks and reduce shrink by leaning on new technology like perpetual inventory computer assisted ordering.

<unk> and AFI M. Finn fresh item management by aligning inventory levels to sales demand daily and frozen are seeing meaningful improvements and importantly, this is flowing through to better sales.

With the addition of two new distribution centers, we're taking miles off the road and benefiting gross margins even more importantly, this better ourselves our customers who are looking to approach for the best quality and value and fresh and organic projects.

While we have lapped most of the new Dcs benefit in the second quarter, we look forward to continuing to leverage the Florida DC as we expand in that region as well as expand our supply chain as we grow in the mid Atlantic and California areas.

With this focus we are seeing turnover stabilize and excitement in the organization around the culture building we are doing.

<unk> projects, which provides more attractive pricing on running vocal in vitamin offers to help customers save.

In addition, we continue to move the needle on our surprise brand differentiation is key to our product selection and it's rooted in the value we give to our customers our.

<unk> does all of our entry level price points, but is more focused on innovation treasure hunt experience wellness or health benefits as well as quality.

Some recent releases are pasture raised eggs avocado, and asparagus fries and medicinal gummies with many more to come this year.

However, one price that remains fairly constant as a longstanding favorite.

$5 made towards daily Sandridge has recently taken off on tick tock unsolicited with more than seven 8 million views.

Our in house culinary team is inspiring change with innovative meal options, including Penny Caprese in not pre pesto sauce salmon with Nathan Raw, Skylake, Brussels, and no antibiotics ever chicken <unk> railcar with Chile, sweet potatoes, and many more to come.

We have been adding additional prepared meals cases to our existing store base to support this growth, which is now in more than 85% of our stores and.

In addition, we continue to update and add new one patent meals to our meat department with our proprietary marinades loved by our customers.

Marketing is one area, we continue to monitor and pivot more quickly as needed data shows that the consistency of our paid media messages focused on great prices on the fresh produce is working in our market and increasing overall aided awareness. However, our aided awareness is still quite low.

For our emerging markets with this in mind going forward, we are over indexing, our marketing spend and our mounting in expansion markets, especially in digital streaming TV and radio.

We've done to test personalized engagement in categories like.

<unk> vitamins in organics and are seeing success.

On the social side, we continue to actively not sure long term relationships with micro macro and medical influencers across the health and wellness space.

On the consumer data side, we continue to understand our target customers better we utilized four key data points numerator credit card customer surveys and e-commerce from.

From a digital standpoint, we've increased E mail subscribers by more than 19% SMS subscriptions by more than 17% and mobile downloads by more than 30% over last year.

Overall customer counts have been slowly increasing overtime.

Customer satisfaction stores remain very high.

We also began testing e-commerce campaigns to attract new customers to our shop Dot <unk> Dot com site, resulting in high double digit sales growth.

As well during the second quarter, we began to accept EBT snap for same day delivery.

Curbside pickup for orders placed tonnage to come.

This allows all customers towards a fresh and nutritious foods online and enjoyed greater convenience accessibility and affordability.

I am delighted that our new inspiring women's resource group was instrumental in supporting one of sprouts, new initiatives with investing in women's College athletics through the backing of the Big 12 in part 12 conferences for key universities and 50 individuals collegiate women athletes in partnership with <unk>.

Paul Icon Jenny Finch being.

Being the first grocery retailer to make this commitment to collegiate athletics and coupled with our sponsorship of the Angel City Football club, we remain invested in growing and changing the landscape of women's sports for years to come with private to sponsor. These great female athletes and look forward to many more strong ideas.

Promote inspiring women's resource group to support our business.

With that with that I want to thank you for your interest in sprouts. We're confident we're working diligently on controlling what we can control and the current economic environment, while not losing sight of the long term vision to grow this unique brand across the country.

At this time, we're happy to take your questions operator.

Yes.

Thank you.

I will begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

You are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Scott Myshkin with Barclays Capital. Please go ahead.

So thanks for thanks for taking my questions and Jack Thanks for some of the some of the detail.

So my.

My question really goes to some of the stuff you were talking about at the end there Jack like you talked about sampling thats returning the marketing campaigns kind of what's happened with the Sandwich. I think you said $5 essentially I took a took off on target and I think as we've said.

When we look at the quarter.

Could you see any building momentum and traffic.

Were you able to actually kind of see some of these things working.

Maybe you can point to yes no.

Why you might think one of the other.

If you think about what we've talked about the last time, Scott we talked about we're seeing quarter on quarter, the traffic growing and thats something that we havent be not before so we saw in Q2, another increase in our traffic gentle increase in our traffic, but what we're looking for with regard to the we talked last time about units in the basket and what was happening to that and we talked.

It's about some of the initiatives, we're putting in place to drive those units to the basket so putting in.

Certainly daily has been encouraging the daily meals case that we've put into our stores. As you said this as we talked about the sandwiches seem to be driving some business for us. So daily has been encouraging and recruit some equipment behind that to drive both sushi.

And our meals offer so that's come to get coming together, well and we're pleased with that the installed work is progressing.

And we continue to work on improving in stocks across the chain. We've made some progress on that when we've got more progress to make as we implement some of these systems are on <unk> and some of the systems that we're talking about to improve the backroom processes. So that we can get more installed during the day all the way through the day, so that we have.

Made a little progress there, we talked a little bit, but some of the marketing initiatives switch and on the face we've got more work to do in that in a bit more learning to do but we made a little bit of progress on that so that kind of bucket of things that we talked about and the thing I'm probably most excited about is.

Post Covid, we obviously have been able to get back to some sampling.

The idea of sampling new product sampling fresh produce sampling some of the innovative products, we're beginning to get back into its always be part of the DNA and spreads are beginning to get that again, Scott has got a bit more work to do on this but I'm pleased with some of the progress we made in Q2.

And just a quick chip this is true.

Sequentially, we did see some improvements both slight improvements in traffic, we did see some slight improvements in comps obviously when we talked in April .

April wasn't the greatest in the month, so it got better as the quarter went on the decline in units per basket and sequentially in the quarter was slightly better. So we're encouraged by that but we still have work to do there, but we're encouraged.

It must be a mind reader because that was what I was going to follow up with.

My second question Chip chip. It today, it's probably directed at you know we've talked about what level of comps you guys needed to kind of lever your expenses over time, I mean, obviously the short term.

Is that changing like higher now that the expenses, it's harder to get people labor costs are rising.

You guys, just talk about 3% or we meaningfully above that at this stage and then thank you.

Well certainly as costs rise, you're going to need a higher comp truly leverage you need a call thats, probably 100 basis points of volume cost growth to really.

Drive meaningful earnings growth, assuming you don't have new stores.

So the good news as well the toughest yes prices are rising so cost per labor hours going up our supply costs are going up we're working really hard to manage through those I think we're in a pretty good place to manage through it for the rest of this year and then we've still got several months ahead of us that we can start to now we're working.

Thanks, guys.

Our next question comes from John <unk> with Guggenheim. Please go ahead.

Hey, Jack let me start with you talked about.

Brand awareness.

What are your mind, what are the emerging markets, where the unaided awareness is where you'd like it to be how big is the gap.

Versus.

Where it is but it obviously looks like Phoenix, but.

It's more mature markets and then is the best way to do this just.

Sensing the store network.

As opposed to marketing.

That will just take time.

Yes, well, yes, it will take some time to let me just kind of China articulate where we are with regard to emerging markets on more established markets. When we look at stores that we opened in California stores that we open even in Colorado, even in Arizona, We have got a strains and we've got densification. There. So we kind of hit the ground running.

Possible there because there is unaided awareness.

This initiative is a big part of what we're doing in Florida, a big part of what we're doing in the mid Atlantic and a big part of what we're doing and.

In Texas as well in Dallas in particular, so driving awareness in those markets marketing as a part of it densification and other part of it we're opening a lot of stores in Florida. The moment falling on from the DC investment last year and that certainly helping us get awareness across the market place. So I would say it's both.

Densification clearly makes marketing more effective and more efficient and it's something that we're right in the middle of the relative strength of awareness is pretty good the empirical numbers top of my head, but the difference between awareness in California, and Florida, It's pretty significant.

Maybe Randy said their clients before.

How many points.

20 to 30 points would be off the top of my head a number that I would kind of court.

Okay, and then and then maybe following on that maybe.

Maybe talk about the floor.

Florida in particular right.

The opportunity there everyone.

Everyone seems to be Comping extraordinarily well in Florida, If you look at the published results.

Do you think about your ultimate opportunity right.

The store out the states.

How would you size that up right.

Tripling quadrupling in store count is that is that too optimistic.

While we will not will not be tripling our store count in the short term, but will certainly be doubling our store count in a relatively short space of time.

What's happening in Florida, John is what people move in there. So there was an influx of people and there is an influx of people who are in our target customer base people, who are interested in health and health healthy products.

More interest in nutrition more interested in fresh foods. So that people are moving to Florida kind of are in line with our target customer base. So we're very confident very very encouraged by the opening of the new DC in Orlando is that kind of builds the opportunity for us to create great fresh foods and the fact that we're sourcing product in <unk>.

<unk> is allowing us to work pretty well with the growing community in Florida, and we've done some really nice work on the seafood space.

Seafood in Florida, which I'm encouraged by the way the team are working on that so yeah, we're very optimistic about Florida, that's probably under our fastest growing market over the next two or three years.

Thank you.

Thanks.

Our next question comes from Kelly Bania with BMO capital. Please go ahead.

Hi, good evening or good afternoon.

I mean, I think Kelly is by and large in line with what Youre seeing from the CPI, we do have a slightly different mix and youre seeing a level, but the volatility in projects means it goes up above and then below that of volatility around the project pricing, which probably more extreme in our business than youll see in other people's businesses and things like vitamins.

And hop out where we've got a smaller proportion youll see a different mix flowing through but overall I think you can take the assumption that we are by and large in line.

Okay and.

I guess, just a follow up I mean, it sounds like that the traffic is turning positive, but how are you looking at or thinking about market share I mean.

Some of the data we're looking at is.

Natural sales kind of in that high single digit range at least.

Is that at all concerning to you are they are still customers that you think you're just setting as a result of the strategy or just how do you think about kind of market share or is that really not important.

You kind of analyze the business well.

Let me tell you how I think about market share I think we sell very different things to what everyone else sales. So if I compare it our market share to gross it it really is pretty and desperate what's happening in the grocery space on market share across.

The traditional grocery space because ultimately if they are doing well or badly it doesn't help us one way or another the important thing for US is are we winning share of wallet with our target customer and that's how we imagine we've got that more to do to measure that better but fundamentally market share that I look at that you guys are.

<unk> is looking at a whole load of things that either we don't sell or don't want to sell the only comparable sets of products. So we have as our project business. So we watch that carefully is our projects business growing at the rate that it should be and we've made a little bit of progress on that in Q2, and we've got more work to do there, but we sell a lot about the nobody else.

Sales I don't know how that comes into market share we sell a lot of vitamins in the hopper that a lot of other people don't sell so I'm kind of.

Maybe the end of your question, we don't worry about it too much we worry about are we looking after our customers and are we growing share with those customers and doing the right things with them.

Okay fair enough and if I can squeeze one in on unit growth I guess.

It looks like you said about 30 I think for next year, so that 10% growth target I guess it is getting pushed out till 'twenty four.

But is that the right way to think about it like 7% to 8% unit growth or are there any more store closures planned can you help us just kind of understand the the total picture there.

Yes, Kelly this is chip so as we've said in the script, we talked about at least 30 next year, we're going to continue to work hard to try to get that number higher and that being said as you know we've been we've been bringing the number down in the last year. So we don't want to we don't want to.

Over promise and under deliver from our own perspective and for the investment community perspective. So we were pretty confident we can do at least 30 next year are going to drive to a higher number but for now I would think about it being 30 and as we get into 2024, we're really aiming to be at that 10% unit growth by 2024.

In fact, we'd like to get there next year, but for right now we're banking on <unk>.

Thank you.

Our next question comes from Ken Goldman with Jpmorgan. Please go ahead hi.

Thanks, so much.

So I wanted to ask one of the questions that I get on sprouts is.

When will the company show a little bit more I guess consistency for lack of a better word in terms of its earnings and its general fundamental performance.

Yes, I think maybe this quarter would be quote unquote, good versus your expectations and some others have been kind of back and forth. So I guess.

Obviously every company's goal is to have consistency, but is it a high priority for you at this time or is it really just hey, you want to just put everything into the business and.

See how it goes I guess I'm, just kind of asking where we had a period where investors can finally get a little bit feel like theres, some reliability and some of the numbers that are coming out there rather than some of the back and forth that we've seen I hope that makes sense sure. Don we certainly we'd be aspiring to be more consistent we've been in the last couple of years, having said all of that.

There has been an unprecedented level of volatility not just in our business, but maybe across the market place no I don't know whats going to happen going forward, Ken We're certainly very clear about what we are aspiring to do and what we're trying to do and we want to get to that consistent measure of new store growth and comp growth that we've talked about it and that will deliver.

One of the kind of numbers. The one consistency is our is our margin within that context. So we're feeling that.

We've put the building blocks in place on the performance of the business I would expect in a normalized environment.

Two have been and will be much more consistent going forward.

Okay. Thank you for that and then.

As a follow up.

You you talked about.

How your portfolio differs from some of your competitors and clearly it does.

<unk>.

So maybe this isn't quite the most relevant question, but I wanted to get your sense of the rationality in terms of pricing promotions of some of the maybe.

Maybe you won't consider them direct competitors, but other food retailers sort of in proximity to you are you seeing.

Generally rational environment given the.

The combination of both higher inflation that needs to be passed on.

And maybe a little bit more challenged consumer out there.

Yes, I think what we've seen so far is that there is such a pace of volatility in the cost prices.

Cross the food retail space people have been passing on the unprecedented pace at which I don't think that no one's had to faithfully since the 19 eighties I'm, probably the only guy old enough to remember how they deal with some other stuff, but you have to pass on.

What people have been doing is passing on the on the cost prices that have been coming through we've not seen any irrationality in that supply chain remains above a challenge still for people. So it's unlikely you're going to see very aggressive promotions, having said all of that what will happen going forward and this is outside of our space what will happen going forward.

When the consumer comes under and there are some.

It's going to happen at the end of the year as people run out of money and run.

The recession that everyone's talking about happens well, it's likely to happen I think it's just.

It's unknown going forward, Ken, but my gut feel is that.

There'll be rationale, let rationale let rationality in it we certainly have every intention of <unk>.

Planning our business on the basis of not investing any margin for promotions are.

<unk> environment.

Frankly, as I said, a little bad goal, we're less worried about what other people do we're more worried about making sure we're providing the right value for our customers what does that mean it means being aggressive.

Our SaaS and our relative value and produce on making sure. We're very clear on the rest of our portfolio that we're taking a kind of elasticity that we're watching what happens to them when we change prices.

Making the necessary adjustments within our own environment Hasnt when this evolves.

Thank you so much.

Thanks.

Our next question comes from Edward Kelly with Wells Fargo. Please go ahead.

Yes, hi, guys good afternoon.

I wanted to ask you about the.

The acceleration in store growth that starts in a car.

Starts in 'twenty three.

And how much of what we're seeing today around sort of like less items in the basket right in that that elasticity.

Issue that we're seeing with a tougher consumer and inflation.

What role that's playing in sort of like.

When new stores or you expect to breakeven.

In terms of like an earnings contribution and then as we think about the stores next year. What are you thinking about from like a new store productivity standpoint.

Related to the stores that will be opening.

So Ed this is chip or our IR deck today, we actually have a store profile and there is slightly different than what's been out there in the past not much different but slightly and we're still we're essentially targeting about call it $13 million in sales in year one.

We think that that will grow in the next five years will grow 20%, 25% Gen.

Generally breakeven in the first year by year, five Youre doing an 8%.

EBITDA margin and Theyre doing 30% to 35%.

Cash on cash by year five.

And youre looking at that and Thats incorporating the most recent are more current cost to build because there has been despite the fact, we've brought the square footage down and our initiatives really to bring the cost down which we've done the cost in the industry. They have gone up.

Gone up somewhat.

Single digits, and we feel confident we can continue to build those in.

If we'd be fairly aggressive on store growth.

Great. Thank you and just to follow up on.

Thinking about sort of 7% to 8% sort of unit growth.

I know you're still sort of working through.

<unk> opportunities too.

You're going to be efficient from a cost perspective, but it certainly seems like.

I think there is a chance that you could see I guess, our SG&A dollar growth.

Higher than that I don't know to what extent you can help yet around that but any color would be great.

Yeah.

As it relates to this year the dollar growth in the back half is going to be higher year over year than the front half.

Some of that as we were.

Severely under invested I would say in marketing last year and Q3s is a big chunk of that in Q3, and we had a teeny bit of marketing slide from Q2 to Q3.

Then.

As we think about next year, certainly we're going to work hard to try to take take take new stores aside.

To be our job to try to manage those costs at something in the.

Low to mid single digits at the highest for us to do what we want to do which is drive earnings grew in the high single digits. So that's before share buybacks.

We've got work to do but we're working on it and we will continue to work on it through the remainder of this year before next year ever get started.

Yeah.

Our next question comes from.

Yeah.

Oppenheimer. Please go ahead.

This is actually Erica eiler on for Pam Thanks for taking my question.

Wanted to touch on traffic as well so I guess.

Just curious if youre seeing.

Broadly traffic improvements throughout the chain alright, very specific geographies now and then second with gas prices easing here. Just curious if you think that's helping the business at all here lately.

I would say on the chip on the gas prices.

I think it's too early to tell we're not seeing a direct impact I do believe that if gas prices as they started to come down it will help everyone should help everyone versus where we are.

As it relates to the regions.

It's interesting when you look at the regions I think the areas, where we have a ton of stores and we've been there for a long time, we had in Q2, we had solid results kind of in line with the company I think when you look at the emerging markets were really are doubling down in Florida and the mid Atlantic.

We had above average as you would expect performance because they are newer stores and they're ramping in general the areas, where we're a little bit weak is the areas, where we've been we've been there for a while and we don't have a lot of stores. So we really don't have a brand presence, we don't have a lot of stores.

With west, where we haven't been doubling down.

Places.

Like you know, Alabama, our Louisiana those areas, where we just don't have enough <unk>.

Rand awareness and we haven't committed to building more brand awareness there.

Okay. That's that's helpful and then just.

The decline in units per basket can you talk about that getting slightly better sequentially.

There any effort that you can highlight for us where you feel like you're really starting to see traction as it pertains.

Driving those increased units.

Within the context of an industry, that's seeing a reduction in units per basket and.

We talked about it in the last quarter were just looking to try and get one or two units extra in the basket and the places that we're seeing the biggest traction is probably our daily business.

Our next question comes from Kristina.

Hi, Tyler.

Please go ahead.

Hi, Good afternoon, I guess I wanted to follow up to some of the store dynamics that you have highlighted last quarter, you talked about softer performance in fresh I think today, you said frozen Berry are better youre seeing good traction in Delhi. So maybe if you could just talk about how the various departments are performing now that traffic.

It has started to come back and then how are you planning on capitalizing on this to essentially ensure that you will continue to see traffic improvement.

So from a category point of view again, we've been a little bit encouraged by our fresh business. All eight our project business has picked up a little bit which we're encouraged by given it's so important to our business. We had a strong run and our vitamins and hardware department given what happened at the start of Q2.

So theres some theres some encouragement.

Play out I'm not quite so sure going forward and our daily business I'll reiterate we're doing well there and across the Dalian frozen being driven buybacks are installed and it gives us some encouragement that when we get that <unk> implementation across the other castroneves, we'll see a more even split even spread all the improvements from in stock.

So the categories that have done well as you said frozen dairy and daily projects is picking up a little bit by some instead, well im not sure how that's going to play out going forward.

Across the board, we've got a very unique one of the things Thats kind of switched is our bulk business wherein our bulk bulk was hallmark through COVID-19 and that we had to close a lot of them don't in some jurisdictions doesn't even less sell them and thats. It buys up all the bulk we're seeing some encouragement in that which is given the strength.

What that does for a consumer to allow us to portion control allows them to manage volume level, but so we think we've got a positive differentiation in that space I'm kind of hopeful that that will help drive some business going into Q3, and Q4 and I think we will see some positives there.

That starts to reopen and people get more familiar with it.

I'm not going to see that kind of flavor of where we are across the category. We continue to work on marketing initiatives to make sure. We keep the momentum that we've seen in the last three quarters on traffic moving forward and traffic remains a little bit positive for us, which is important to us going forward.

Got it and then as a follow up you know just as we.

Think about inflation I mean, we heard from Costco Tonight that July inflation listed to June .

But we also have a pretty severe drop is this something that is giving you concern from a sourcing perspective, considering that you also work with smaller farmers, who might be more challenged with the cost of running their businesses right now than some of the bigger food manufacturers.

It doesn't particularly concern us more than the general concern about what the pressures out on the economy going forward, we certainly working closely with our projects garage can we give long term commitments to those guys and we're passing on worth taking cost increases and passing those cost increases through what should give.

Give us some confidence that we can supply we can source, what we need to supply and so it's not something that's bothering us too much just at the moment.

We're in pretty good shape with one or two categories in the more commoditized space, where we're competing with other people that were seeing some challenges, but not so much in our project space.

Okay.

Our next question comes from Robbie.

America. Please go ahead.

Hi, This is kind of follow on for Robbie Thanks for taking my question.

I just wanted to see if you had any update on how you're thinking about inflation as we went through the year.

Hi.

Last quarter is that the expectation was.

You would expect that to dissipate as we move maybe into the back half way through the year now that we are a little into the back half.

I guess have you been seeing anything in terms of product cost increases.

When you do too, but we could start to see deflation moderate.

I haven't seen anything yet there was a lot of volatility in the fresh project space, where it goes up and down and up and down given the nature of supply in that space.

You would have expected inflation, maybe it's come down given how much what the fed have been doing on interest rates, but we haven't seen it and we continue to see a level of inflation, that's pretty unprecedented and we're not we're not expecting that to change anytime soon but who knows.

We might get a little bit of relief on some of the cost base.

Oil prices coming down, but not I don't think thats going to impact product input cost in the near future.

Got it that's helpful.

And then my other question was just on the traffic.

Traffic trends I know you said that there was a sequential improvement from the first to the second quarter.

I was just curious.

You could give any color on a three year basis looking at a more normalized here just given last.

Last year.

<unk> is an easier comparisons than the first quarter, but I guess, yes.

Is there still a sequential improvement if you looked at traffic on a three year basis.

When we talked about sequential first we were talking about through the quarter so from period to period.

Right now year over year as it relates to traffic.

Our next question comes from Mark Carden with.

UBS. Please go ahead.

Good afternoon, and thanks, so much for taking my questions. So to start another question on unit growth what are the biggest factors driving the slower than expected expansion in 2023, it's primarily supply chain driven.

Getting tougher to find modification do you want to be and our real estate costs, just higher than planned any extra color there would be great sure Mark one of the things that we've talked about and why we have not opened as many stores in 2022 as we would've liked it isn't that we haven't got the sites, it's a pace at which we can build the sites partly to supply.

Chain challenges, we've had some fairly significant supply chain challenges on little pieces of things that go towards air conditioning little pieces of things that go towards refrigeration.

The other thing it's kind of slowed us down in 2022 was the planning and getting the licenses from the various authorities didn't have people in the office monitoring and planning it through so the kind of constraints on licensing on permanent the constraints on supply chain have led us to the.

A number of 15% to 17 in 2022 as we've said often we're searching on 80 to 85 not sure. The exact number sitting on 80 to 85 signed leases. So we've got them in place. So 2022, you could 2023, you can say well why are you not getting more of a SaaS. He then I think we're being naturally caused.

Yes, Kevin where we're not in the context of what's happening supply chain. It seems to gain hugely better, but it's definitely not getting any worse. So we're feeling confident on this FTE number for 2023, but as I look at the pipeline. We've got to do for 24 to build the pipeline outbound confidence in our sites.

And certainly as we look through the opportunities. We have there are locations that we can build stores the hub of our target customers, there's more than enough for us to do 10% your stores into 'twenty backend of 2023 going into 2024 more than enough. The challenge has been execution.

Federer legitimate execution challenges that we faced.

So if that gives you a flavor for it.

I'd like to think we maybe do a few more in 2023, but we're pretty we're we're sticking with the FDA at the moment.

Got it that's helpful and then with inflation, saying is how do we spend are you seeing any changes in trade down I know your private label isn't necessarily opening price point like this for others, but are you seeing movement in fresh categories or anywhere else.

We're seeing some trade down as we've talked about in the last meeting and the number of the sizing of avocado is that people are buying the sizing the number of grapes up they'll buy in at any one time, so people on module a number of charities.

We clearly project is a big part of our business and people buying still buying a lot projects from us, but the way to what they are buying it's probably going down a little bit going forward, we're seeing a little bit of a trade down in areas like our health and beauty business, where people are trading down to cheaper products.

It's not as big an issue for US again, I mentioned bulk figures I think that might be one of the reasons that our kind of our bulk business picks up a little bit in the last two or three weeks I think people are seeing the opportunity to buy the right amount the volume that they need so they are able to trade down in size, a little bit and we're doing some work on some of our products.

To try and make sure that the.

Sticker shock of the price point comes down because we changed the size on it.

Gives you a flavor product we're working on it we're watching it and we are seeing a bit of trade down just like everyone else. It's just different in our business Mark.

Our next question comes from Robert Moskow with <unk>.

Please please go ahead.

Hi, Thanks for the question.

Yeah.

In the last earnings call you talked about a downturn in traffic at the very end of the quarter. If you had to just kind of summarize like what went right to turn that around.

Was it execution or do you think there was a.

Other macro factors that helped things get better.

Macro factors I think there might have been some macro factors as people went away and came back I think there might have been some in the middle of that law as we as the retrospective pocket things there might have been some things, but the thing that we focus on as we talked about it is we control what we can control and we think we've done some things.

To help drive our business a little bit as we go through Q2 as outlined earlier.

Installed working harder being better in store store competitions, where the teams are competing with each other to sell more units in the basket, putting in daily equipment, putting in your cabinets drilling in new areas for us to sell sell sell sell meat products. The seafood roadshows. So theres a number of things that we can point to.

Two that we did that we think can prove that units per basket. The traffic side of it I think there's some macro factors or not and some of it is about I think some of the tactics that we used in marketing as we try and think through what are the right tactics to use in marketing how do we do it better how do we learn from it.

And.

Certainly that's something that we.

We continue to work at and I think we are lapping a level that as we go on our marketing initiatives.

Given gas prices are still high may be fading, a little bit like do you think that.

It's getting easier for you or is it getting harder or how much of an uphill climb as well.

Well I think to be honest, who knows what's going to happen regardless to upheld claims for everybody over the next six months or so I think theres a lot of uncertainty and not for all of US I actually think that upheld claim for us is less of an uphill climb but others.

You can you don't all of a sudden not become a change.

Change your dietary habits, because of inflation because of any kind of macro environment oil and gas pricing and I think the fact that we've got differentiated assortment means if that's what you're worried about that's what Youll go inshore part you can't get a lot of the stuff that we sell in the traditional growth. That's the reason we.

Can coexist so effectively there's a complementary retailer as opposed to that so the question, which you raised as well they go which I said can store. The only go test that can store if there's something in the second store that they can't get in the first store and I'm fundamentally believe that's why our differentiation is so important to us and it's very.

Clear that the customers that do show up with us because of keto or paleo or plant based or vegan or vegetarian and flexitarian. The reason that they do it is because they can't get anywhere else because they're going to the big guys for tight and Coca Cola and they can't get up from us.

So yes, I think there is some macro challenges for everyone. In the course of the next six or nine months or so as this economy works itself out, but we are confident that the differentiation that we have.

Drives.

The proposition so that as I say people are gaudy conscious of what you eat it probably have to come to spreads.

This concludes our question and answer session I would like to turn the conference back over to Jack Sinclair for any closing remarks.

Well, thanks, very much for your attention and listening to US we really appreciate your interest in our business and look forward to further updates as we go through the year. Thanks ever so much.

Take care.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Q2 2022 Sprouts Farmers Market Inc Earnings Call

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