Q3 2022 Sprouts Farmers Market Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Ladies and gentlemen, thank you for standing by and walk through the Sprouts farmers market third quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone I would now like to turn the call over to she said Olivia you may begin.
Thank you and good afternoon, everyone. We are pleased you have taken the time to join sprouts on our third quarter 2022 earnings call, Jack Sinclair, Chief Executive Officer, and Chip set Malloy Chief Financial Officer are with me today, the earnings release announcing our third quarter 2022 results.
The webcast of this call and quarterly slides can be accessed through the Investor Relations section of our website at investors that sprouts Dot com. During this call management may make certain forward looking statements, including statements regarding our expectations for 2022 and beyond.
These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward looking statements for more information. Please refer to the risk factors discussed in our SEC filings and the commentary on forward looking statements at the end of our earnings release.
Mark's today include references to non-GAAP measures. Please see the tables in our earnings release to reconcile our non-GAAP measures to the comparable GAAP figures with that let me hand, it over to Jack.
Thanks, Donna and thanks to everyone for joining us today.
Many of the current challenges in the consumer landscape. We are encouraged by our performance in the third quarter, which included total sales growth of 5% comparable store sales of two 4% on an earnings per share growth of 9% I want to thank Jeff talk Q1 thousand team members for their continued.
The dedication and commitment to making surprised the ultimate destination for discovering healthy eating and wellness options.
Our customers count on us to be a leader in innovative high quality unhealthy products and a unique and inviting shopping experience.
I'd also like to highlight the efforts of our operations supply chain and human resource teams and supporting our Florida stores and the communities. They serve during and after Hurricanes Fortunately, 100% of our team members are safe on all our stores on the Orlando distribution Center, we're up and running within four days.
The storm's passing I would also like to thank all of our supplier partners, who have played a vital role in successfully navigating the storm.
We believe we are making progress and delivering expectations for our customers team members and shareholders. We had a solid third quarter and expect continued progress in the quarters ahead.
In a few moments I'll follow up with more details about our recent activities and the remainder of 2022.
Now, let me hand, it to chip to review our financial performance in the third quarter and our current outlook chip.
Thanks, Jack and good afternoon, everyone for the third quarter total sales were $1 6 billion up $81 million or 5% from the same period in 2021, driven by new stores and comparable store sales growth of two 4%.
Comp sales were supported by an increase in basket due to retail inflation, partially offset by a slight reduction of items in the basket.
Our E Commerce sales grew 19% representing 11, 1% of our total sales for the quarter.
Daily to continue to be a top performer as customers sought sprouts as a destination to fulfill their appetite for healthy prepare meals and grab and go options such as sandwiches salads and snack boxes.
The other categories of strength, where we have the most innovation and differentiation, including bakery grocery dairy and frozen.
Our third quarter gross margin was 36, 7% an increase of approximately 90 basis points compared to last year's third quarter.
The majority of the impact was driven by the fact that we were less promotional this year than last year. When we were testing a variety of promotional and pricing tactics.
SG&A for the quarter totaled $461 million or <unk> $37 million higher when compared to the same period last year.
The increase was driven by new stores higher wages and additional marketing spend.
Last year, we shifted marketing dollars into more promotional activity.
E Commerce fees were also higher due to the associated increase in sales, while credit card fees arising as more customers shift from debit to credit.
For the quarter, our earnings before interest and taxes were $90 million interest expense was $2 million and our effective tax rate was 26%.
Third quarter net income was $66 million and diluted earnings per share were <unk> 61 and.
An increase of 9% compared to the same period in the prior year.
Yes.
During the third quarter, we opened one new store in Moreno Valley, California, bringing our total to nine for the year so far.
Turning to the balance sheet and cash flow highlights.
We ended the quarter with $316 million in cash and cash equivalents.
$250 million outstanding on our 700 million revolver, and 25 million of outstanding letters of credits.
100% of our $250 million in outstanding debt remains fixed with our interest rate swaps through the end of this year.
Cash flow and the cash flow generation in the third quarter remained strong.
We generated $98 million in operating cash flow and spent $25 million in capital expenditures net of landlord reimbursement in the third quarter.
This robust cash flow generation allows us to invest in the growth of our business. While also returning cash to our owners through our ongoing share repurchase program.
For the quarter, we repurchased one 6 million shares for an investment of $44 million.
For the third quarter diluted weighted average shares outstanding were down 6% from last year.
Turning to our expectations for the year and the fourth quarter.
For the full year, we expect total sales growth to be in the range of four 5% to 5% and comp sales of approximately 2%.
Earnings per share is expected to be between $2 32, and $2 36.
We expect capital expenditures for the year net of landlord reimbursements to be between 120 and $135 million.
For the fourth quarter, we expect comp sales of approximately 2% and earnings per share between 35 and 39.
We also expect to open seven new stores during the quarter, bringing our total for the year to 16.
Given the current uncertainty in the marketplace. Its a bit early to guide for next year other than the opening of at least 30, new stores that said, we are committed to controlling what we can control to drive to drive meaningful results.
Before turning it over to Jack I would like to share an update on the sprouts healthy communities Foundation.
I've had the good fortune of serving on the Foundation board over the last year and have been unbelievably impressed by the sprouts passion for the mission of helping children learn to grow healthy through.
Through the foundation Sprouts actively supports 130 nonprofit organizations that operate thousands of vibrant school gardens. It provides students with hands on gardening cooking and nutrition education, while reinforcing academically what students are learning in the classroom classroom.
This year. The foundation has supported programs that benefit an estimated 3 million students.
Our team members also helped bring this work to life through their hands on support volunteering to help build and maintain many of these garden spaces.
This fall we hosted our annual Sprouts day of service, where 700 team members donated 3000 volunteer hours to support the Foundation's mission.
We want to thank all that took time to participate in these events.
And with that I'll turn it over to Jack.
Thanks Chip.
Today I'd like to highlight progress in key focus areas that enable ongoing profitable growth and deepen our relevance with the consumer.
To that I'd like to touch on the human know what's happening with our customers. During these unprecedented inflationary times and how we respond.
First on the real estate front.
A few years ago, we set out to open 10% new stores every year, we have not delivered on that goal given the permitting and supply chain challenges created by the pandemic. This year, we will opened 60, new stores and the trend is improving we expect to open at least 13, new stores next year on our path to 40 plus by.
<unk> 2024.
Recently, we completed the implementation of a new real estate too.
This too does three things for us.
One it provides details of the sprouts white space for every MSA in the country base.
Based on the two we believe the brand can support <unk> hundred 50 total stores in the Continental U S.
An incremental 970 from where we stand today.
Second it identifies the absolute best location for a spread store within a trade area, essentially Maine and Maine.
This enables our real estate team to be more proactive in sourcing the very best sites.
And third it provides a more accurate sales forecasts for each location, helping us avoid potential underperforming stores.
As we've mentioned many times this year another area of focus is in in stocks, we expect to complete the implementation of <unk>, our perpetual inventory computer assisted ordering by the second quarter of next year.
Recently, we also invested in and on shelf availability solution that provides a single source of truth for products availability as seen from the customers is the combination of these two tools should support incremental sales improved margins via the reduction of markdowns and shrink and free up cash.
Related labor hours in the store so that our team members can spend more time better serving our customers.
Moving on product innovation and differentiation are critical for spreads.
Rates in an environment of ongoing discovery discovery and helps reinforce customer loyalty.
We partner with over 250 local farmers on the project front to help build strategies around unique varieties today, we have over 300 local projects items in our stores almost double that of last year and by the end of 2024, we expect 20% of our project sales to be in.
Okay.
I would say the projects, we're doubling down with our brands. So far this year, we've launched an additional 400 private label products and repackaged more than 450 with an update to design the highlights vital product attributes and is also considered more appealing.
Based on customer surveys.
Our brands non perishable sales growth during the third quarter was more than double that of branded products.
Our matches also continually seek new and innovative products from the vendor community and grocery all the one this year, we've launched more than 301st to market products. Many of which are exclusive to spreads for a period of time.
Lastly, daily has no shortage of innovation as we curate our unique meals and offerings that taste, great and are good for you.
<unk> has been our highest growth category this year.
The last key area of focus I want to highlight is in the customer analytics on loyalty arena.
In the previous two years, we built a true customer analytics team and are working diligently to understand our customers' behaviors on designers banta with a long way to go but it's a journey that starts with connecting and during the third quarter. We increased our active E mail accounts by 19% or S. M S.
Counts by 42% and our mobile app downloads increased by 15%.
Today, we can link approximately 16% of our total transactions to individual customers compared to just 12% a year ago.
Approximately seven 5% of transactions up tied to loyalty customers up about 50% compared to last year.
There are baskets are almost 70% higher than non loyalty baskets.
We've also completed some abbvie testing on targeting and personalization efforts with encouraging results. This will take time to scale, but will provide opportunities for sprouts in the coming years.
Turning to the you know we all know we live in an inflationary environment not seen for most of our lives.
Environment is impacting the consumer and virtually all industries, including retail.
He had at Sprouts, we are encouraged by the fact that our traffic has been relatively stable for several quarters. We've experienced some months, where it has helped slightly in some way the sound of it.
We're not really experiencing a classic trade day.
In fact, many of our higher priced categories are experiencing the most significant growth.
We continue to experience that our customers puts approximately one last item in the basket.
One last item on average is essentially projects, our lowest price point category. The one with the most items in an average basket on one of our lower margin categories.
Even though we are competitively priced every day and produce we believe our customer is managing that overall basket spend by eliminating that extra approaches items.
How are we managing in this environment well.
Well, we're laser focused on in stocks and our matching and store operations teams are creating key item promotions or purchase a buzz in the stores for our team members to support the drive for that extra item. Our matches also worked diligently with our marketing team to develop and test promotions to drive increments.
It'll profit dollars.
Our teams have done a phenomenal job managing margin dollars. During this volatile period of cost increases.
We've also recently announced a partnership with door Dash, we expect this service to be available in all locations by the end of the year by partnering with door Dash, we enter a new marketplace, where more customers can access our unique unhealthy assortment door dash, along with our long standing industry partnership.
Should enable ongoing e-commerce growth.
We're working now to get ahead of 2023, we believe the average retail increases this year will produce a tailwind for at least a portion of next year. However, we know it is critical to manage all costs, including cost of goods supply chain on SG&A, while progressing in those vital focus areas that.
I outlined today.
With that I'd like to turn it over for questions.
Operator, ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your Touchtone telephone, we will pause for a moment, while we compile the Q&A roster.
Okay.
Our first question comes from Mark Carden with UBS. Your line is open.
Good evening, Michael Lasser, Mark Carden, Thanks, a lot for taking our question.
The model is evolving from one that was driven heavily by.
We're buying protein.
And now it's going to be more deli and prepared oriented how do you think that's going to change the economics over the long term.
Do you think that the fact that.
We're adding one line item in the basket is more of a function of some of the model changes that have occurred or is it more of a function of the economic environment right now.
Yes, I think mark sorry.
Michael Michael Sorry, Michael.
And as I.
That's one through our project business is being affected more by the economic environment and by a change in our model projects remains at the heart and the center of our proposition to the customer a significant proportion of our sales come in projects I think what's happening is it's just a little bit easier for the customer to take one item.
The basket and projects they'll buy one punit strawberries as opposed to punish the strawberries and not certainly a trend that we've seen over the last two or three quarters and with regards to the model I think it's a customer that has taken us to where we where we need to go in terms of meals and prepared meals and we're seeing strength in that business and the team have done a nice job of developing some great products.
And with our healthy Kaino health and attribute based assortment. So I think it's more about the evolution of the customer and the evolution of how effective we would be coming in our meals space and will become much more effective going forward.
Other than a significant change in the model.
Is that kind of answers your question.
Yeah, and my follow up question.
You've outlined some parameters around <unk>.
For next year, how should we think about the economics.
Overall.
Same store sales growth in any event. There is another question you do.
Over index to more affluent consumers, who would presumably be a little less impacted by some of the challenges in other consumer.
So when your prices are a little bit higher than other retailers. So how do we think about those puts and takes.
Well I think the important thing about our business is our proposition in different to other retailers.
Retailers, so if you're very focused on a vegetarian diet or a vegan diet or a keto diet or a paleo diet, you'll likely to stay that way irrespective of the economic conditions that surrounded by so I think we feel we've got some stickiness in our all proposition in terms of what we offer.
Our respective of the context of what's happening in the marketplace. Our proposition is differentiated enough and appeals to a group of people who.
Very much I think are aligned to what we are putting in front of them and I think we've seen that from the stickiness in our and our and our traffic over the last couple of years and I've been encouraged by the fact that almost irrespective of the ups and downs around inflation and pricing we've got a sticky.
Customer and I think that will continue our respective of what happens and who knows what's going to happen over the next year or so going forward. We've got a sticky consumer who has bought into who we are and as we evolve and develop our loyalty and communicate direct engagement with those customers.
We are well placed to compete almost in whatever circumstances come our way.
Thank you one of them before our next question.
Our next question comes from Ken Goldman with Jpmorgan. Your line is open.
Alright, thank you.
Jack you said last quarter I believe that.
E Comm, perhaps will settle in at maybe 8%, 10% of sales post pandemic and then grow off that.
We're pretty far past hopefully the bulk of the pandemic now, but <unk> still growing nearly 20% its over 10% of your total as you mentioned why would it at this point go back toward a high single digit number if it's growing so fast in this kind of environment today.
Ken I think Thats, a really good point and I think as we've evolved and see what's happened our customers have bought into that space and I think the fact that they're able to access our brand and the branded products that we have that fit in with the health attributes and that kind of diet focused process.
Customers have clearly voted with their feet around e-commerce, and as I've said, you're right as I expected it to maybe settle down a little bit more but it continues to grow and not support that.
One of the reason we've put the door dash.
Process in place, which has given more access for people to choose in an omnichannel way how to access our products and our brands. So I. Thank you.
Appropriately challenged what I've said the last time. This thing is continuing to grow and we expect that possibly to continue to grow further.
And then thank you for that just for a follow up I wanted to ask about Capex you reduced your capex guidance the guidance for this year.
I know you're not talking about 'twenty three but you have previously provided a range I think you said two and a half to three and a half for next year.
Was the Capex number reduced because it's being pushed into next year or were there other factors that went into that for this year.
No. It's been reduced just as as you get closer and closer to the end of the year. Ken. It's just we're just fine and we spent a little bit less on some of the projects that we thought we would spend on as it relates to next year, we're still looking at probably somewhere between three and three 5% of cells. The store growth will be bigger next year, just a couple of projects.
We'd like to do next year. So we're and we have a new DC coming online so it's going to be closer to three 5% next year.
Thank you one moment for our next question.
Our next question comes from refresh FERC with Oppenheimer. Your line is open.
Okay.
Okay.
Okay.
Thanks, operator.
Okay.
Passion for past, you're not coming through.
Sure.
No.
They're underwater I apologize.
You can look upon that bhatia on my phone.
Tom I have a passion for kind of again one of them.
Our next question.
Our next question comes from Chuck Cerankosky with Northcoast Research Your line is open.
Good evening everyone.
Quick question on inflation, what kind of inflation did you see in cost of goods in the third quarter.
Yeah, Chuck we don't we don't give out the actual numbers, but you can see it throughout the industry.
<unk>.
It's pretty still steady pretty high inflation has been flowing through for the last several quarters now.
Okay, and then looking at the inventory level for going into this fourth quarter, how do you feel about that.
However, the out of stocks and how much of a seasonal factor or are we looking at for.
For the holiday.
Selling program, realizing that sprouts isn't as strong in those categories typically as a conventional supermarkets.
Well I'd, just say chunk, we don't sell anything like as much in the seasonal January is a big month as we prepare as people get focused on her on that.
<unk>, specifically going into the holiday period generally we're trying to focus on our stocks, which we talked about it and there's a lot of work going on in the stores in terms of why cannot we.
Very important to us is things like organic turkeys and some of the attribute based products, we've got our own vegan and vegetarian for the holidays, we're well placed for that we feel we're in good shape clearly its a volatile world that we're living in but we feel we're in good shape with pretty good holiday program together I'm pleased by the market.
We're putting behind all of these were doubling down a little bit on it. So we feel we're pretty well placed going into the holiday given the given the context for our business, which you appropriately identified.
Thank you one of them before our next question.
Our next question comes from Spenser <unk> with Wolfe Research Your line is open.
Great. Thanks for the question could you guys just provide a little bit more context on what's driving the acceleration and three year comps and in <unk> and then relative to <unk> are you expecting a more balanced contribution from perm units and price next quarter.
Hey, Spencer.
We're not thinking about three year comps anymore. So messy. So we're really starting to settle and more on a two year or so.
So I could go back and do the math or one of them is good but we really focus on where we are now.
As it relates to the acceleration we're still we're still in this place where we see inflation, we see traffic pretty steady we see some inflation on our cost of goods and subsequent on price.
Little bit less on the units and when we came into the beginning of the year. We are seeing that we thought that would dissipate in both directions.
Sure.
Parents part it didn't happen because inflation was continuing and it's going to continue now at least through the first half of next year.
And then we'll wait and see at that point, but we're hopeful that as we get through not only what we call the less units in the basket as we get later into the year, but at the same time, we'll probably lose a little AUR and pick up a little bit on the units.
Got it that's helpful and then with the pending consolidation in the industry. How do you think that that will impact the competitive dynamics in some of your core markets like California, and Arizona I understand you don't compete directly in a lot of the categories, but just curious how you think that impacts price price in the industry.
Well Spencer has certainly created a lot of dialogue in the industry. That's for sure I think we are in a position where.
We do see ourselves on a very differentiated so we've got a very clear strategy in terms of where we're going forward in terms of our assortment and differentiation. So if if the.
Consolidation leads to a lot of price investment.
It will be on things that we sell so we kind of see.
What kind of shielded from almost anything that might happen. So whether it's really successfully vouchers I rather not successful we think our destiny is in our own hands whats not in the destiny of what might happen in the marketplace. So we're gonna counting on plugging everyone can even if that's the right expression.
We're going to keep doing what we're doing in developing innovative and differentiated product that fits in with the healthy lifestyle of the customers that we have and we think that wouldn't be affected by the kind of match our conversations have been happening in the industry over the last couple of oil and particularly too and that would apply anywhere in the country with us operate.
<unk>.
Thank you one moment for our next question.
Our next question comes from Robert Moskow with Credit Suisse. Your line is open.
Yeah.
Hi, Thank you for the question.
I understand that Californians are receiving government stimulus checks in October I wanted to know if you thought that would be a positive for your business and maybe you can remind us what.
What percent of your businesses in California.
And then secondly, I wanted to know how much visibility do you have into the 30 new store openings.
There's delays and all kinds of projects for all kinds of reasons and I know you've already pushed back that target once how solid is the 30.
But we're feeling pretty solid about 30 stores.
As we've said in the last few calls we've got a solid pipeline of stores well beyond the number that we need for for this year. So thats a number that we're feeling comfortable with and I know this year. We got we only got to 16, but were feeling that the context of that we understand much better as we go into 2023 and 2024.
And then we did in going into 2022 with all the volatility that was going to go into the supply chain. So all other things being equal we're feeling good about that number of 30 stores, California is a big part of our business or the one with Jeff as you go into <unk>.
The 40% Rob.
And in terms of the specifics around we don't get as much when people in government checks get paid out as other people get but I certainly wouldn't do us any harm.
Thank you one thing interesting all the one thing interesting all of that we don't do as well or we don't do as much on EBT in our brick and mortar, but we've noticed as we've introduced it on a on our E. Com platform, we're actually over index more than we do in our stores. So it's giving access via.
E com to those customers that we didn't think that would happen, but it's happened.
Thank you one moment for our next question.
Yeah.
Our next question comes from Edward Kelly with Wells Fargo. Your line is open.
Hi, guys good afternoon.
It seems like.
It seems like the gross margin. This year is maybe coming in maybe a little bit better than that sort of like slide.
Full year.
<unk> talked about.
Can you maybe just provide a little bit of color on that and then as we think about 'twenty three and I know.
It's early but can.
Can you just kind of talk about what your expectation is there impact of new T C that type of stuff.
Sure sure.
For this year, so the quarter, we picked up about 90 basis points more than half of that was if you remember last year in the third quarter, we went out and did a bunch of promotional to us.
Full box, we had we had promotions on top of promotions and we didn't do that this year as we learned some things out of that so that's about half of the pick up year over year. If you remember early in this year. We also as the merchants have had to deal with the cost increases that have been calling with them we got.
A little bit of a little bit behind so we had a little bit behind I think that was either Q4 Q1 that we were a little behind it was Q4.
This quarter, we got a teeny bit ahead, so it's as they manage through it net net we picked up the 90 basis points as we think about next year.
Our aim is to manage our margins essentially flat, we got a little bit of DC, a teeny bit of a headwind there as we relocate our southern California D C. But there are some opportunities both in mix and some opportunities to drive a teen EBITDA margin, but generally we're looking at flat for next year.
Okay, Great and then just the.
Quick follow up.
On SG&A, obviously with an acceleration in store growth.
You'll see a company that acceleration and SG&A, but you did sort of mentioned looking to be sort of like tight on expenses and I was just kind of curious.
What some of the things are he ended up potentially could that could help you.
That line item.
Yeah, we have some things still in the stores, we're looking at supplies we're looking at.
We're looking at every rock to try to make sure that we can manage through that.
Wage increases that are coming at us, but well if I looked at the list.
Suppliers are.
Our bigger opportunity we have some things on our tags as we pushed tags into the store.
Doing less of that and when price changes we started that this year, we'll get some more of that next year.
You have to be tight on incremental head count or any incremental cost associated with that of course, we will look at are well look at marketing, but we want to over index. There. If we can so it's a that's the part we just got to manage through so we'll find ways to make sure that it works.
Thank you one of them for our next question.
Our next question comes from Kelly Bania with BMO. Your line is open.
Hi, Thanks for taking our question.
I'm wondering if we could just talk a little bit about the new store economic model I think last quarter, you made some tweaks to that.
So if you could provide.
How you estimate your year, one new store productivity is coming.
And how many stores do you have that are really tracking towards that year 113 million dollar sales target.
Yeah.
Well we have.
It was built in the last.
But right now we're looking at year, one is $13 million.
We don't know we don't have that many we just opened one more store. This this year, we've only got nine that we've opened this year. So what we're looking at is we still believe we'll be at 16 by year five and will be it.
A relatively breakeven in year, one and will be 8% of EBITDA by year five.
And we're really working hard to manage the costs. So we just haven't put a ton of stores in the ground and they haven't matured enough for us to.
Reinforce all of those assumptions, but we feel pretty good about it. The one thing we are finding us.
That the more established markets that come out of the gate stronger where we have brand density and where we don't have brand density.
A little longer they come in a little bit lighter than they are but they build a little faster.
And Kelly I think we've been quite encouraged by some of the stores in year two year, three and some of their life.
And some of the less.
Established marketplaces, we're seeing some strength in some of those stores now which is very encouraging.
So I think the economics of what we're building in terms of smaller stores. We've only got a few on the ground there, but all of them next year will be that and so that we're getting the benefit of that into the economics and I think we're feeling pretty good about the ramp up.
Okay. Thank you and and also just wanted to ask about.
I guess the categories, you talked about deli and prepared and some of the leading categories.
Thought that those were some categories that were maybe a little bit de emphasized in the new store.
Are you rethinking that at all or are those still are those categories still performing well.
All our stores there maybe you could just help us understand.
The deli and prepared Scot I think from here.
Go ahead.
Kelly than when we started on that track, yes, we were.
The new the last prototypes that we did yes was focused on a lot of the deli area.
It did it in a very grand way. So we made the store bigger we added a very expensive area for Delhi, where you could see it being prepared and those were areas. It was I would call. It just access we don't need to have that type of elaborate fixture ing and that elaborate of labor.
And that much square footage in a given box to be able to be really good at Delhi, and so we're continuing to evaluate that but we feel good we've got good fixtures today, we've got self serve fixtures today.
It's it's just it was just too expensive and too much and yet we can still chase that park with what we've got in our new prototype.
Yeah in the daily space and <unk>, five which is the version before the one that we're working on it.
It was very dry and but it didn't really add a lot of assortment and the thing that we've kind of got two over the pandemic kind of tucows areas is one opportunity of the reservoir is.
Prepared meals within not daily environment. So we've added cabinets paying down and invested in product and we'll continue to do that and I think that's come along from the pandemic as much as anything else what an opportunity for us. So we were probably a little bit late to the party but.
A soundly walking photos at the moment.
Thank you one moment for our next question.
Our next question comes from Robert Jones with Bank of America. Your line is open.
Hi, This is kind of gone along for Rodney Thanks for taking my question.
So I think.
If you can about that.
More detail on these traffic trends Nathan.
Nathan this quarter was more.
Steady trends in person the last few quarters, you've called out.
And I think Scott.
You said that the quarter over quarter.
Uh huh.
<unk> talked to them about our marketing initiatives are doing and the progress on that I guess what.
It's obviously hard in an inflationary environment, but what are you kind of looking at to measure.
The progress.
Marketing and things like that.
Alright would you hope to kind of has like a re acceleration in traffic.
It's Ken Alright.
I Couldnt quite hear but channel we're seeing.
We've seen the last three quarters, we had net positive traffic up until Q3 and Q3.
And every one of those quarters, where we had some months that were may be slightly down slightly up net net we were up this past quarter. We had the same phenomenon, but net net we were down just a hair for the quarter in Q3, and then as we rolled into October October was flat. So it's just a it's a really steady number.
It just moves a teeny bit up and down from a comp perspective as it relates to marketing.
Our teams are from our promotions perspective, our teams, they're playing with promotion every day. So every week and they measure them and they measure from a traffic perspective from a sales perspective and from a profitability perspective.
And we're finding as we've said in the past some things work a little bit.
But we're not there is no panacea out there that says this is the the perfect thing that we need to do to go drive traffic. So it's just a continuing and then overall marketing message and the marketing spend I think we'll continue to spend a little bit more money on it we want to spend more we want to invest in personalization and loyalty we're seeing.
We're going to be much more precise with our new media models. So that what we spend gets us more returns against that specific kind of dollars and that's a.
It continues to be a level of experimentation, we seem to be able to get awareness with our customer.
The next challenge for US is getting more engagement and that's something that we're working on and I think thats, having more as we've talked in the script, having more emails and I've been more direct ways of communicating with our customers will help us to build thought loyalty it builds more transactions, sometimes from the same customer and sometimes from newt.
Customers are not very much what we're working on across the space by Chip says there is no panacea, yeah. We've made a lot of progress and I think we're putting some very good building blocks in place to build that loyalty and personalization going forward.
Thanks, that's very helpful. And then just as a quick follow up.
If you could just talk a little bit more about the trends youre seeing with new and existing customers.
Well as we've got some very sticky customers, which is why we get a consistent level of parts on the traffic that chip was talking about a little while ago. So in our new markets and new customers take a little bit of time, what we find in our new stores in less established markets on.
The east coast and in parts of Florida.
A lot of customers commence out of Luke and then the real target customers are the ones that stick around and then the other ones that we grow from so you got an interesting kind of mix. When you open a new store, where a lot of people come in and then it takes a little while for that customer to really get who we are.
Because sometimes they come in and think what a grocery store and given that we're especially a healthy grocery store that that changes that dynamic a little bit so as I say, we're getting better awareness across the customer base, our existing customers. How did you get them to spend a little bit more we could do with what we've been doing a lot of activity on that space and.
New customers, we're seeing a balance of both coming into our business.
Thank you one moment for our next question.
Our next question comes from Scott <unk> with Arc five capital your line is open.
Hey, guys. Thanks for thanks for taking my question.
I guess I'm going to slide seven I think you guys put in the presentation, where you showed the EBIT margin kind of coming up to about just over 6%.
And I know we've talked about this in the past, but just kind of taking a step back and looking at the business model and the same store sales you guys are putting up.
Good morning.
If you if they were to stay in this kind of low single digit range.
Can you maintain this type of EBIT.
So that's kind of the first part of the question, which I said I have a follow up.
Scott, Yes, I think we can I think we can maintain it.
Obviously with a 10%.
Square footage growth.
We're going to need to call in a place that's.
Probably north of two to be able to keep that stable and we do have some costs that we have to manage through but net net we think that we're in a place where we're certainly not going to see.
We don't believe that we're going to see gross margins deteriorate.
We're fundamentally we've shifted the business we've changed the business it's different mix in the business today, and we don't see gross margins declining at this point. So it's really a matter of keeping that EBIT margin flat, while we're investing in new stores and managing our cost accordingly to be able to.
Ensure that our EBIT margin stays relatively flat.
She was in the <unk>.
Second follow up question to that was obviously a negative sign but the positive side I get this for clients quite a bad is it.
What can we do more aggressively to get that comp moving higher and I know you guys are working on some stuff because clearly it's almost like a coiled.
Coiled spring the equity itself, if you can get that comp moving higher I know again, we've talked about that before but it just.
You know it comes up with a lots of clients as you know the stock is pretty cheap if you can get that.
Moving.
Yes, I certainly agree Scott.
Stock is cheap so the opportunity going forward for US is how do we sustainably build a comp on a customer loyalty base going forward. The one thing that we can do it through these pulses of comp by investing margin and thinking that that's going to build long term sustainable.
Profitable customers that that's what the strategy entails slow confident driving of our customer base, who loves what we do and continue as we get continue to get more of them as a broader trend in the industry. It shows a trend towards health and wellness, we're really well placed to take.
The advantage of that we're really well placed by putting infrastructure into our business. So that we can run it and run it backs up going forward and efficient fleet.
Speciality retailer or the us should be operating at significantly increased relative to the conventional industry has significantly increased and underlying margin and that's where we've got this thing too. We now continue to have the opportunity in front of us to build long term customer loyalty, which fell.
Longtime customer profitability without it being these policies of N and then and I by chance.
Certainly.
The direction in which we are going.
Thank you one moment for our next question.
Our next question comes from Cristina <unk> with Deutsche Bank. Your line is open.
Hi, good afternoon, and congrats on a nice quarter.
I wanted to follow up on the personalized offers you currently know about 16% of transactions. It seems like it's a pretty good opportunity. So maybe if you could talk a bit more about some of the metrics. You mentioned I think you said the basket of a loyal shoppers, 70% larger so how are you approaching the analytic side of things to make sure that this customer.
Genius to increase their spend with you and also get them to come into the store more frequently.
Well first of all we've invested in our customer analytics team, which we've talked about so very specifically putting resource into this so that we can mine not daytime may not information about that customer and try and understand very specifically at a personal level, what that customer what motivates that customer to head to.
Spend some more money with us and we've done some very specific tests in areas like vitamins specific tests in areas like bulk specific tests, where we can see who is that customer and how do we get a bigger share of their wallet going forward, we got a pretty small share even the customers that love us we got a pretty small share of the dollar.
Simply because of the nature of our of our our.
Our proposition so just mining that data understanding our data putting offers in front of them that allows us to grow up whereas Fannie area as I said in the script, where they were at the infancy of vessel process, but we're certainly got the infrastructure in place we are putting the people in place we're getting some partners on board to help us with us because we're not reinventing the wheel.
We'll hit I, though this has been done by a lot of people and a lot of ended a lot different industries to us. So we see a lot of opportunity in front of us, but personalizing offers driving not loyalty from customers, who inherently want to be with us and give us some information on that.
I think that's going to continue to grow going forward Cristina.
Great and then as a follow up I was wondering if you could maybe talk about some of the tailwind that you're seeing from a clustering of stores around Dcs like how has that helped with sales.
Now putting pressure items on the shelves, but also if you can quantify maybe what the tailwind has been on gross margin on distribution.
C and also cost reduction, especially you know with the elevated transportation costs that would have in this environment.
I'll, let chip maybe go into more detail, but specifically if you're driving distance and we're so pleased especially when gas prices were sort of diesel prices were so high the fact that we're traveling significantly less.
A month kind of remember the exact number.
$3 million I'm getting signals here three.
3 million miles.
Glass on the road to get to the same number of deliveries to the same number of stores, it's a very significant and save.
Saving.
Offsetting what costs would have come through on that so that's encouraging going forward thats going to be some doubling up costs for a little while while we got a southern California, a place where we need to get it but long term that will drive us some efficiency as well going forward I don't know if chip Kristina just the first half of the year, we got some benefits from.
The less miles and the fact that we were we had the new Dcs open once we got into the back half of the year. We're now at a place where we're comping those benefits. So the back half of the year, it really hasn't been a margin or it wasn't in the third quarter and nor do we expect it to be a margin enhancement in the fourth quarter. So.
Try to manage that line at this point as Apache.
Thank you one moment for our next question.
Our next question comes from refresh Farooq with Oppenheimer. Your line is open.
Good afternoon, and thanks for taking my questions. Hopefully you can hear me now.
Okay. Okay, great. So just on the new store prototype I believe the one outside of Phoenix.
So outside of Phoenix now you're in year or two so just curious how about stores performing in this overall as you continue to rollout the new store prototypes and any surprises positive or negative.
It's fairly close to being a year I'm trying to look at chips with a safeway overlap figure yet.
Yes.
Encouraged by the underlying numbers and that store is coming through well relative to where we would have expected it to be and where it was.
Very confident when it comes on that the other stores that we've opened and they say, it's only a handful of coming through pretty well across the board. So we're encouraged by it onto the stage and the economics are better than they would have been significantly because we're paying less rent their operating costs are lower and in the context of going forwards I'm glad that were built in smaller stores because theres.
A potential costs going the other way in terms of construction that robin to manage and we're very encouraged to the fact that our building smaller stores in terms of making that economics work and the mix in the business is coming through kind of the way we expected it to a level, but a little by strength in the daily business, which may be surprised.
As a pet that's come through well and our frozen foods has been very encouraging in terms of what's happening in those new stores with churn.
We can we can double down on going forward.
Great and then maybe one quick follow up question for Chip just as we look at Q4 is there any more color you can provide and the interplay of gross and SG&A margins for the quarter.
Yeah, I mean in Q4 were sort of expecting margins to be in the 36 ish range.
And I suspect cost will probably rise year over year on the SG&A line call. It co.
Sure.
Seven ish percent.
And.
That's you know, we said we could comp around too.
Yeah.
And I'm not showing any further questions at this time I'd like to turn the call back over to Jack Sinclair CEO for any closing remarks.
Well. Thank you everybody for your attention today, we appreciate your interest in our business and I wish you all a very good holiday season. Thanks a lot.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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