Q4 2022 Sprouts Farmers Market Inc Earnings Call

March 2, 2023

We believe our relationships with farmers scale and expertise in fresh projects enable us to own and grow this space.

That advantage has led to the launch of our rescued organic purchase program in California, benefiting our farmers and customers unhealthy to combat food waste.

The farmer gets the added benefit of selling projects that are still completely fresh and tasty, but it could have otherwise ended up being wasted all because of irregular shapes sizes our blemishes.

So customers can buy delicious organic fruits, and vegetables, which simply don't meet visual specifications at a great price.

We also learned that our customers strongly desire to engage with sprouts more often especially regarding more convenient occasions proof point of this is that our E. Commerce growth has been one of the fastest in grocery at 400% since 2019.

Building on this last quarter <unk> launched a partnership with door dash to provide a new channel of e-commerce focused on the convenience of delivery to customers.

These channels offer new opportunities for engagement for our high value customers.

Lastly to connect with customers more effectively we are scaling our <unk> efforts to develop a stronger one to one relationship with.

We're investing significantly with the right partners to build a more robust marketing and technology platform.

These investments will continue to be a top priority to meet customer needs for additional engagement ultimately boosting customer loyalty.

Chip has briefly spoken about investments to create an advantaged supply chain from which we can grow more than 85% of our stores are within 250 miles of our distribution channels up 20% from 2019. This.

This year will be focused on investments at our current Dcs, replacing our socal DC and expanding our Texas DC to account for growing demand, while heightening, adding ripening rooms to our Arizona, Texas, and southern California, Dcs to deliver even better approaches to our customers.

As we expand our brick and mortar capabilities. We are also expanding our supply chain systems, allowing us to leverage our technology better to ensure we have the right products in the right location for our customers to enjoy.

This includes a DC replenishment system expansion and.

In perpetual inventory computer assisted ordering at our store operations.

We started implementing <unk> in 2022 and have experienced much success approaches daily frozen and grocery are benefiting on the sales front from better in stocks on optimized inventory levels with more fast moving items and fewer slow movers.

We have reduced our shrink by improving tons and freshness from transitioning to adjust in time replenishment module.

And we have experienced labor savings by allowing the computer to do the work for us.

Lastly on the real estate front, we are expanding with a new 23000 square foot store and every store opened this year will be in a new format.

We are excited about our robust pipeline of more than 80 approved stores and nearly 60 executed leases. We have already opened four new stores in this first quarter with the plan to open at least 30 stores. This year and we are on track to reach our 10% unit growth starting in 2024.

In summary, we remained focused on advancing our strategy to differentiate approach further as a unique speciality retailer focused on health and wellness, while expanding our footprint with an advantaged unique store format.

We will also continue efforts to manage all costs. During these untapped uncertain times effectively I firmly believe these general principles will guide us through another year of success and I look forward to sharing our progress.

With that I'd like to turn it over for questions operator.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Our first question comes from Rhopressa Perich with Oppenheimer you May proceed.

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

Yeah.

Wanted to touch on comp tier so comp growth, obviously accelerated on a multiyear basis. So I was hoping to get a better sense of what youre seeing.

From the consumer here, that's a great trade down perspective, or any other notable changes in consumer behavior lately.

Well I think the patch on.

Over the past.

Level of food inflation, you've seen a trade down as we've talked about people have been trading down in terms of both the number of items in the basket and trading down in certain categories, you've seen a little bit of a trade down and in the protein space, you've seen a little bit of a trade down you can see the strength of our brands business, you've seen a little bit of a trade into that as well so I think that consume.

Our behavior in Q4 was pretty consistent to what it was throughout the year of 2022 and I think we're seeing that same pattern as we go through this year.

Okay. That's helpful. And then we know you have a difficult compare with the King Soopers strike from last year, and then we've seen industry headwinds lately in the vitamin category. So just curious if there's any more color you can provide.

Quarter to date trends at this juncture and then just.

Any commentary.

On the vitamin category.

<unk> care.

Specific to the vitamin category, what you what you find in there as the patterns are trending very much a range the ups and downs of Covid comparisons from the previous year that was such extreme numbers in different directions across different years, So youre seeing that pattern continue the cold and flu.

What happens with cold and flu clearly effective Iceland business pretty significantly as well. So we see we see some great months in not so great months, so it's fairly volatile.

It continues to be a very important category to us and we're very excited about the people that are operating in the middle of that vitamin Department, what works really well for for Sprouts is in.

And the vitamin Department, we've got a lot of expertise of people, who can really understand how the vitamins and supplements can help our customers. So we're excited about the team excited by what's happening, but there's a lot of volatility in that maybe Jeff can talk a little bit by the broader context of your question, Yes sure.

So as we were going through the end of the year, obviously, we're comping against <unk> towards the end of the year and then into the beginning of this year and then we were comping against the King Soopers strike.

Any of this year, so our comp compares a little bit more difficult coming into the beginning of the year, but we're seeing it we're past that now are steady and you can see in our guidance.

Feel pretty good or one and a half to two and a half call from that guidance there for the quarter.

Okay, Great I'll pass it along.

Thanks.

Thank you.

Our next question comes from Mark Carden with UBS you May proceed.

Good morning, Thanks, so much for taking the questions and nice quarter, you guys noted that youre looking to close 11, new stores. Following your real estate <unk> are these stores being replaced ultimately by Neurostar prototypes in similar geographies.

Some of the local markets simply too weak to support a sprouts longer term and then just longer term how should we think about additional closures in the years ahead and any potential impact on your long term, 10% unit growth algorithm.

Yes, specifically strategically.

This job.

Two years ago, and now it seems a long time ago now.

Our strategy very clearly about that.

Smaller stores would be more effective going forward.

In terms of returns and what we expect it to be able to deliver in terms of returns from those stores as we've looked at the store portfolio that strategy playing out really made us take a very hard look at those stores that are a little bit vague, but lovely stores that were built by the previous team.

But they are not the kind of an in SaaS and locations. We picked the wrong wrong locations. We would have acted sooner on these stores had it not been for the pandemic. We didn't think it was appropriate to shop grocery stores in the middle of a pandemic.

They are giving access to healthy foods. So the specifics on the 11 stores you won't see direct replacements coming.

And in those geographies going forward because that probably in the wrong place.

The leases aren't quite where we want them to be but going forward. There will always be leases that we've got to deal with.

As a kind of a one and done let's clear up a big chunk of some of the stores from our strat strategy that we laid out three years ago.

I'll, just say, we would probably have a little bit sooner on these had it not been for the pandemic.

I would just add as we go forward.

Have a much more robust modeling gone.

Due to the new system last year.

Or mitigate the risk of opening those stores to new models give us a much better location sort of main and main and we're.

We're not opening up 30, 40000 square foot stores.

Got it that's helpful and then as a follow up there's been some press that one of your largest natural organic competitors. It's been getting more aggressive on pricing are you seeing any ripple effects impacting the broader natural and organic space and do you see any more likelihood of competitors, becoming less rational in your head.

Well, we haven't seen too much rationale, let's say.

In terms of what's happening in our space, we're very confident that we've got a strategy that we can follow.

We're.

Sticking to our guns on our strategy I haven't seen a lot of volatility in pricing.

In our direct space in the natural and organic space, We obviously watch that pretty closely we're very sensitive to our project pricing.

That particular competitor.

We're in a very good shape with regard to project pricing overall, that's something that we would pay a lot of attention to but we haven't seen anything that causes us.

Too much to worry about rates at the moment.

Great. Thanks, so much good luck guys.

Thank you.

Our next question comes from Karen short with Credit Suisse. You May proceed.

Okay.

Hey, Thanks, very much good to talk to you again.

A couple of questions with respect to your comp guidance.

And your results in <unk> can you just talk a little bit about what traffic versus ticket was in <unk> and then how you're thinking about traffic.

Versus tickets through 'twenty, three and then also triangulate that with what your expectations are for inflation in 'twenty three and then I just had one other question.

Sure Karen.

So traffic was just a hair down in the fourth quarter and then the ticket was up and were picking that up through both.

Inflation or AUR offsetting a slight decline in units.

As we go into the year. This year, we feel good about traffic so far year to date, it's up slightly our expectations are that we'll maintain traffic pretty steady throughout the year. Our expectations are inflation will still be with us year over year, but it will start to decline.

As we progress into the back half of the year.

At the same time as the sequential units per basket slows that year over year that will improve and net net you kind of get into that low single digit range.

Okay. That's helpful. And then just wondering if when you look at sales growth versus EBIT growth, obviously, I know you've given in terms of margins. So.

You Didnt say I think on the <unk> EBIT.

EBIT margins would remain more or less steady and it looks like youre kind of guiding to a slight decline in EBIT margins. So I wanted to ask about that but I also just wanted to talk broadly about.

What you think the right relationships should be on sales growth versus EBIT growth.

Fundamentally yes.

Yes, we did guide in a way that suggests that operating margin will decline a hair.

We could well get flat to some slight increase in gross through the year SG&A, we're managing it really tight working it really hard as you know with most of the retail landscape managing costs is becoming the.

The challenge of the day.

We're working through that we'll probably have a hair of deleverage. This year as we go forward to answer the second part I think it's a healthy if we think it's a healthy place to believe that our operating margin would essentially stay flat and that our sales growth and earnings growth will grow appropriate accordingly.

Great. Thanks very much.

Thank you.

Our next question comes from John <unk> with Guggenheim You May proceed.

Good morning, Jack Chip you have Anders Meyer on for John Hind powerful nice results this quarter.

So you're planning on enhancing customer engagement in 2023, calling out the launch of your new marketing campaign and further.

Further personalization efforts with that we were curious on where we stand with the loyalty program.

When it might launch and how much incremental wallet share in <unk>.

Yes.

Yes, thanks for the question.

We're spending a lot we've done a lot of different experiments over the past couple of years in terms of trying to get our target customer and encouraging them to spend a little bit more and we've made some progress in different categories and made some progress at different times of the year, which we've been encouraged by we're looking at investing.

A little bit of money to try and understand what we can do to inspire our customers to come a little bit more often or spend a little bit more we've got a customer base that we've talked about in the past that really in terms of affinity to the brand really truly love sprouts, and we were encouraging.

At tactics as to how we can get them to extend and spend a little bit more on the one hand and on the secondhand how do we get more customers, who look like the customers are loving us at the moment of which we know that our launch I was there. So the work we're doing in the broader customer communication and customer engagement.

Is one trying to work directly with those customers that allow us to drive.

More customers, who should be loving us and as we've talked about there's a significant opportunity for us to increase the number of people who are giving us the information were pretty low relative to competitors in terms of the number of people that scanner information when they come through the register and how to do that we will be about making.

<unk> for us for those customers that differentiate sprouts, so that can all of us becoming a member of a club.

Grocery environment for loyalty, we're seeing to be very different for us going forward.

Deprecation of what's happening with loyalty cards, if you like in the grocery space is that a pretty zero sum game and everyone's got the cards and nobody yet we don't want to be the next cards in the wallet when people are the parts when people open up.

When people go through the register so we're working very hard that becoming differentiated in that space and the timing of that well, we're going to invest some money in it. This year, we'll make some progress on that this year, but this is going to be a multiyear effort to get us where we need to get to.

Thank you.

Our next question comes from Edward Kelly with Wells Fargo. You May proceed.

Yes.

Hey, guys, you've got Anthony on for Ed. Thanks for taking my question.

So first I wanted to ask about trade down I know you guys said bulk sort of seeing a turnaround as people care more about value can you just talk a little bit more about what youre seeing from consumers.

A value seeking behavior and then how does that dynamic typically impact you based on what you've seen historically.

Yeah, well I think what I think across the industry Youre seeing some trading down across the board felt one of the things that we've picked out because certainly when you look back at the history of spreads and you look forward people kind of migrate to bulk a little bit because that allows them to get the portion control and allows a significant price adverse.

<unk> per pound against equivalent things in packaged parts of the store. So we've got a pretty extensive range in that space and we've seen some encouraging trends in that category as people move into that and I think it's partly economics, just partly because it team have done a really nice job in trying to put the right products in the right place at the right time in that space. So we've seen that as I said.

A little bit earlier, we've seen a little bit of a trade down in the protein space across that across different proteins as people migrate to slightly cheaper cuts in that category. We have seen some trade into sprouts brand, which I think some combination of new products that we've put into that space and desktop sorry Chase.

Changing for a little bit better value as you go through the assortment one of the things that happens in our environment, probably differently to the more traditional grocery environment is we've got customers who are very focused on the attributes and the products that we sell are very focused on.

We sell more plant based milk and dairy milk. So if you had a plant based chopper you are unlikely to translate to places where you can buy the whole client base. So the elements of trading down in about an hour environment. I think is a little different to what it is in other places, but we are seeing that trend across our customer base coming into the store.

If that helps in any way.

Yes, that's helpful. Thanks, and then.

I also just wanted to ask about the share repo you guys have been able to repurchase quite a lot of stock over the last couple of years.

And youre sitting on quite a bit of cash, but youre also accelerating unit growth can you just talk about how youre thinking about the prospect of additional repo this year.

Yeah, well, we're always going to invest cash in the business first as we start to get closer and closer to that 10% unit growth a year.

I suspect it will be around three 5% of sales of our Capex is still gives us a lot of cash and.

We are a share repurchase friendly company. Our goal is to try and see if we can reduce our share count anywhere from 4% to 6% a year.

Got it thank you.

Thank you.

Our next question comes from Cristina <unk> with Deutsche Bank You May proceed.

Hi, good morning team congratulations on the nice results.

I wanted to go to.

The fourth.

Just wanted to go back to the fourth quarter comp momentum, which was really nice to see that that's off.

Especially coming in better than even what your guidance called for it.

How much of the improvement do you think is related to sprouts specific actions that you are doing on merchandising and differentiation and just overall marketing versus the overall macro with a little bit less commodity pressure on the consumer really outside of food inflation.

Well I think we always talk about what we can control and what we're doing with that and we saw a strong wished a strong end to the quarter, which we were encouraged by we think first firstly, we were much better in stock and the holidays done when usually are partly because of the focus of the team on on some of the implementation of some of the systems that we have.

Talking about certain categories, we saw a really strong end to the quarter I think because of the <unk> investment. So you saw our grocery business strong our daily business strong what are two of the key seasonal businesses were strong and we think we could eat next year that there's a platform to do even better seasonally.

As we chase the volume in that space. So first of all I think <unk> and stock was better and we're getting better at managing that both at the store level on the distribution with our distribution partners. So we think we'd probably take I would say that with us as.

As much as announced.

The other piece I think we've made some nice experiments in our marketing space with that stimulate some business going into the holidays. Some some specific activity that I think helped us a little bit in the fourth quarter going into the holidays.

Our company.

Against the more traditional grocery businesses, we don't have those huge peaks for Thanksgiving and the holidays that other companies have and have always seen that as an opportunity for us and I think we saw the first kind of the first parts of that coming alive in Q4 or as we worked through that.

Some of the category work I think has been pretty exciting we've seen some pretty strong our meat business has come a little bit better than maybe we expected to initially.

Probably some good category walked some good installed work on a level, but marketing we think we did a little better at the end of Q4 than maybe we had indicated in our in our disc.

Discussions previously.

That's great. Thank you for that.

Jack and I guess, just on the unit growth, it's nice to see you reiterate those 30, new doors for the year.

<unk> also talked about the model now that youre using for real estate selection as being much more precise with forecasting. These new opening I guess, what can you share in terms of how these new stores are opening up and as it relates to improving the unaided awareness I guess, where are you on that journey to get that number up in these newer markets and.

What is the job like how does it compare to establish mark yet.

Like in Arizona, and California versus if we say, Florida and mid Atlantic.

Yeah, you asked a lot questions that I've got it.

That's true.

Bye bye.

First thing is we introduced I'll, let chip.

Contributor royalty.

The first thing is the new module that chip talked about in one of the answers a little while ago, we're much more comfortable that it is robust.

As more and more confidence and we've identified.

What we call seed points right around the country and as long as they are within 250 miles of our distribution center. The real estate team are chasing got hot and we know there's plenty of opportunities for us to keep keep that 10% growth plan that we're going to hit in 2024, and one will be able to do that for a long period of time and we're feeling more confident about the module.

While we are feeling more confident that always takes a little time to China real estate change of strategy from a bigger store to a smaller store, there's always a pipeline that you're working your way through and I'm kind of what really this year all of them will be in the size of the stores that we want them to be in the first four that we've opened we've been very encouraged by Mr. Very early data.

But we've been encouraged by the first spot and those have opened in both established markets and non established markets. We put a higher investment hard law known established markets and we were pretty confident that this model that we've put in place is giving us more confidence going forward.

That we've got what pick in stores in the right place with the right.

Mix of people, who look like our target customers. So that's encouraging and in terms of.

The specifics, you're asking about new markets and how we're performing on and I've been delighted and just shout out to the team in Tampa is a market that we were pretty immature in a couple of years ago. We've now got decent critical mass of stores in that market and we're seeing that what you should start to see in terms of two years and three year comps I mean, it's not a data point.

That you can extrapolate across the business, but a certain data points and are an established our less established markets in Florida, particularly that we're feeling comfortable about and.

And somehow elements over the mid Atlantic we have seen some when you get to the two three year plan on some of these stores is encouraging and when you get critical mass when you got enough stores all in one place we got strength both in terms of being able to recruit customer knows who we are and from a marketing point of view you can get efficient on your spend we've got a lot of work to do to.

Really make sure that people do know who we are in an established market and the marketing team are working hard to that.

I'll just pile on a little bit when I think about the strength of the quarter.

We had a strong quarter in California, but the other places where we're seeing strength.

Atlantic in Florida, where we're really starting to get that brand awareness, we're starting to see the strength build and over indexing as you would expect in those markets, but it's now encouraging it feels like it's starting to get that brand awareness.

Yes.

That's great. Thank you for answering all of your questions. Good luck.

Thanks Kristina.

Thank you.

Our next question comes from Kelly Bania with BMO capital you May proceed.

Hi, This is Ben wood on for Kelly Danielle. Thank you for taking our questions.

We first wanted to just.

The comment on the trade between units and basket, increasing potentially as inflation comes off a little bit if you don't mind.

It seems like in general that grocers are guiding to a pretty meaningful comp deceleration is it inflation potentially abate. What are you guys seeing that gives you the confidence that units will accelerate throughout the year to potentially offset that expected slowdown of completion anything to help us think about units and basket drivers would be helpful.

Oh Ben.

For starters, our expectations are not units will accelerate in the basket. Our expectation is that the sequential bleed of units will slow and mitigate.

When you do that year over year. Your compares get to where it's not a negative year over year, it's flat or flat to even it could be slightly up.

That's our expectation.

We don't expect as inflation comes down that will accelerate those units I know we've seen some data points that would support what chips, just said certain categories, you've already seen a kind of baked dilution and if the inflation is not that it has gone to deflation, but it has not been as much inflation. So categories like the meat category, where you've seen a kind of flattening out of inflation.

The relative and again just to emphasize chip's points the relative reduction in units per basket slows down and not just from a market point of view as back to the number that we need going forward. So that's the basic assumption in it and I think if you look back in history, and it's always dangerous to go too far but when you see.

Changes in price elasticity changes when price.

When price inflation dilutes. So I think we're feeling that there's enough data points to give us some confidence in how were articulating highlight basket is going to evolve going forward.

Great. That's super helpful. And then I just wanted to talk about SG&A, a little bit it seems like SG&A growth in 2022 came in a little bit ahead of expectations. So just wondering if you could walk us through the puts and takes there and how that compared to your plan and then just looking forward.

How is the current labor environment, and what is your forecast going forward and what's contemplated in guidance.

Well as it relates to SG&A for the for this past year I think we were very articulate in the script, but they're seeing we're fighting labor cost.

Fighting that but we're managing that we're managing through.

Both operational improvements that we've made in our stores the movement of ours. So we're managing through that but certainly it's a pressure that continues on the cost per labor hour, we've seen cost increases on supplies directly at the stores source.

Non non not re sellable stuff, there that we need to do packaging type stuff for meals et cetera. So we've seen cost increases there that we're working really hard to manage against and then the other side of SG&A as our E. Comm business is outpaces, our business grow through E comm fees.

That hit the SG&A line. So those are kind of the big areas and of course, new stores and the SG&A line as well, it's going to be kind of the same battle going into 2023, we're going to continue to work through.

Those supply lines were going to continue that we're going to have more stores next year than we had this year that we grew so whereas you accelerate the number of stores to open that puts a little bit of pressure on the SG&A line, and then cost per labor hours and something that we're continuing to battle, but I do think that is starting to it starting the tide is getting to where it is.

Obviously labor labor wages don't come down, but the rate of growth has slowed.

We still have other opportunities within the SG&A line and try to manage through that but net net it's a it's a challenging environment there and we're working it really hard we do expect a slight some slight deleverage this year, but ongoing our goal is always to try to keep it in line with sales.

On the broader labor and vitamin that you touched on in your question is an interesting kind of dynamic as we again play playing out from the pandemic. We're finding it we're getting more applications than we've ever had we're getting better quality applications than we've ever had.

Its something thats changed fairly substantially over the last six months or so and that kind of supports chip's point, that's the pace at which a wage inflation has gone up is likely to its not going to go back down and nor would we want it to but it's likely to slow down in terms of what is kind of an effect going forward and we're very focused on.

Retention in our business and what kind of hard to make sure that the good people that we have in our stores, we can retain them and get to a better level or not and that will help our SG&A as SG&A as well going forward, but it's a very volatile labor environment.

Our teams are working very hard to make sure we get the right quality people in our stores and as I say, the fact applications I point out is something that I think centre is a bit of a message that that's not just for us across the marketplace. So I think the wage pressure from labor is probably going to do a little bit going forward.

Thank you.

<unk> to ask a question you will need to press star one on your telephone.

Our next question comes from Kendall Toscano with Bank of America You May proceed.

Hi, Thanks for taking my question and congrats on a great quarter.

So the first thing I wanted to ask was just more.

Quick clarification on the around the 11 store closures so.

You mentioned that these are in larger.

Formats versus the new format Youre going with.

Can you just remind us now that you've been opening stores in this smaller format for.

A few years now what's the kind of breakdown in the portfolio as between the smaller format in our larger format stores and.

And then I guess, the clarification kind of just around.

How should we think about it.

11 store closures this year versus.

You guys potentially reevaluating.

Portfolio going forward and maybe deciding to close additional underperforming stores.

Or is this kind of just really a onetime thing.

Specifically to the question as we said in there that had been part of our strategy going forward, how do we move from <unk>.

Some of the debt.

Building of stores going forward, our plan is to build them at 23000 square feet. We've only really got that move in in the last six to nine months relative to the strategy that we outlined two or three years ago. We didn't some of these bigger stores that weren't performing the way we would want them to.

Would probably have closed them before now because of the the strategy that we had in place, but it would have been the wrong thing to do in the communities of those grocery stores are operating and given what's happened in the last couple of years, but this is the intention behind that says let's get this out the way that will always be one or two stores going forward of rone differently. If the rent goes.

Are those leases arms race, so there will always be one or two things going forward in any portfolio, but this is the big analysis of our portfolio that we did early on and we were very comfortable that this is a kind of as close to one and done as it can be without one or two other things.

One or two things that might happen around leases or something like that but it's not something that we are seeing a significant. This is not part of an ongoing exercise. This is a kind of as I say, a one and done thing chip do you want to just.

Okay.

This might be a little bit of a pile on but if you go back to 2019 and when we started to shift our strategy and thought about it very hard very hard and we were building boxes at that point there were over 30000 square feet. They were very expensive and we felt like it was a better better.

Amex to build them smaller we were convinced and are still convinced that we wouldn't lose sales by having a smaller box. They were just too big and unproductive and so we evaluate it at all at that point.

We also went through the entire list of stores that were where we were going to build them, but yet they were bigger and in those cases, where we can get out of the potential lease. We went ahead and moved away from those in 2019, and those where we couldn't we try to scale those back.

Much as we could to smaller boxes. So we have a kind of a I'll call. It we were sort of in the middle of this strategy, where we actually built some boxes that werent 32, but we got them to 25 and got them 24, but now we're in a place where everything we're building as our new prototype very close to our 23000 square foot. Thank goodness.

We decided to build them smaller given the cost increases that have happened over the last couple of years on construction costs et cetera. So we feel really good about where we are we've got some.

Prototypes in the ground and are doing well, we feel really good about the stores that we've just recently opened the ones that we've even opened this quarter, they're coming out of the blocks in a really good place.

We feel really good about it as Jack said this is sort of the whole portfolio of course, we might close we're getting to become an old enough retailer and a big enough retailer that of course every couple of years or every year. So you might have one or two that you just where the where the leases have expired and we went over.

Renew it or the trade areas move, but we won't see any store closings of this magnitude anytime that we know anytime in the near next several years.

Got it that's helpful. Thanks.

And then one other question.

It was just on the <unk>.

In terms of January trends.

Something we had seen in the data is that it looked like there was a bit of a shift away from food at home spending towards food away from home spending in January I know you mentioned traffic.

Traffic being up.

Quarter to date for <unk>. So I was just curious if you could speak to whether or not you've seen anything like that with your customers.

Well our business first coming out of the blocks in January again, we were comping against.

King Soopers strike in Colorado, we have several stores in Colorado, We're also comping against the AUM across so.

We saw the comps were weaker in the beginning of the quarter as we expected as they've improved since tropics <unk> study, though even were positive traffic even against those comps last year that I. Just described so we're encouraged by that.

Do you think about our deli business, which is which has been a very positive business for us both last year and it continues to be strong going in this year as consumers are looking for prepared meals quick too quick to be able to it's a savings of time, but our deli meals are really high quality.

<unk>, they're good for you the tastes great and so that's another business that you can see where the consumer is they are chasing that idea of.

A complete meal at home, but easy it's easy to make.

And I think the contrast between food at home and food away from home is kind of getting blocked a little bit by categories like the meals things that we'd guys convenience it seems to be driving the biggest influence here. So.

We think we're well placed and we're certainly doubling down and investing in both equipment and cabinets and product development to make sure that we're <unk>.

Hyper convenient within the context of this healthy healthy target customers that we have so.

See I think the fusion between away from home and home is kind of getting a bet beloved.

Thank you. This concludes the Q&A session I would now like to turn the call back over to Jack Sinclair for any further remarks.

Well. Thank you everyone. Thank you to everyone for the questions and thanks for everyone. That's listening in on the call. We appreciate your interest in our business and we look forward to updating you throughout the year as we go through the 2023, so take care everyone. Thanks ever so much.

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

The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

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Good day, and thank you for standing by and welcome to the Sprouts fourth quarter 2022 earnings Conference 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 you will need to press star one on your telephone.

You will then hear an automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Susannah Livingston.

Thank you and good morning, everyone. We are pleased they are taking the time to join the crowd on our fourth quarter and full year 2022 earnings call.

Claire Bean, Chief Executive Officer, and certain Malloy Chief Financial Officer are with me today are.

The earnings release announcing our fourth quarter and full year 2022 results. The webcast of this call and quarterly side can be accessed through our Investor Relations section of our website at investors that dot com. During this call management may make certain forward looking statements, including statements regarding our <unk>.

Dictation for 2023 and beyond.

Statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward looking statement 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.

Our remarks 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, Susanna and good morning, everyone. We ended 2022 on a strong note with fourth quarter results that included compare.

<unk> store sales growth of two 9% total sales growth of 6% and diluted earnings per share growth of 31%.

For the full year, our diluted earnings per share growth was 14%, which is in line with our long term strategy.

Highlights for the year include the opening 16, new stores, 60% and our new smaller prototype growing sales of sprouts brand to over $1 billion.

Increasing sales of local produce by over 100%, creating 600, new jobs launching approximately 8400, new innovative products and digitally connecting with 13% more customers.

I want to take a moment and commend our 31000 team members for driving these results and another very challenging year across the consumer landscape their continued dedication and commitment to making spreads a place for discovering healthy team continues to make me proud.

In a few moments I'll follow up with more on our journey in 2023 for now let me hand, it to chip to review our financial performance in the fourth quarter the full year.

2023 outlook chip.

Thanks, Jack and good morning, everyone for.

For the fourth quarter total sales were $1 6 billion up $84 million or 6% from the same period in 2021, driven by new stores and comparable store sales growth of two 9%.

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 16, 5% representing 11, 4% of our total sales for the quarter.

During the quarter, we also launched our partnership with door dash to acquire new customers and expand their access to sprouts.

Door Dash is now available in every store and continues to grow with each passing month.

Daily continue to be a strong performer in the fourth quarter as healthy prepared meal solutions are favored by our customers in store and online.

We experienced relatively strong performances and categories with the most differentiation such as dairy frozen grocery and bakery.

Bulk is also experiencing a positive turnaround as customers take advantage of the value and flexibility our offering provides.

Our fourth quarter gross margin was 36, 3% an increase of approximately 60 basis points compared to last year.

As you May remember during the fourth quarter of 2021, our margins compressed as our price changes lag input costs.

This past quarter as we did during all of 2022, we kept our price changes more in line with input costs.

SG&A for the quarter totaled $473 million, an increase of $24 million.

New stores additional marketing spend increases in labor costs and higher commodity prices were the primary drivers.

Store closure and other costs relating to noncash store asset impairments totaled approximately $8 million for the quarter.

For the quarter, our earnings before interest and taxes were $62 million interest.

<unk> was $1 million and our effective tax rate was 25%.

Net income was $45 million and diluting diluted earnings per share were <unk> 42.

An increase of 31% compared to the same quarter in the prior year.

During the fourth quarter, we opened seven new stores spent $41 million in capital expenditures net of landlord reimbursements and repurchased one 5 million shares.

For the fiscal year 2022, total sales increased 5% to $6 $4 billion, driven by new stores and comparable store sales growth of two 2%.

Comp sales for the full year were also supported by an increase in basket due to retail inflation, partially offset by slight reduction of items in the basket.

Our annual gross margin was 36, 7% of 45 basis points compared to last year.

The year over year increase results from slightly less promotional mix managing overall price changes more in line with cost increases and reducing shrink via operational improvements and system support.

SG&A expenses for the year increased $107 million to $1 $86 billion.

The increase is due primarily to additional stores inflationary conditions driving increases in store costs.

Card fees and increased e-commerce fees associated with higher sales.

The strides we've made in improving our labor management tools helped to offset rising labor costs.

For the year, our earnings before interest and taxes were $358 million.

Interest expense was $9 million and our effective tax rate was 25%.

Net income was $261 million and diluted earnings per share were $2 39.

An increase of 14% compared to the prior year.

During the year, we opened 16, new stores nine in our new smaller format and closed four.

We ended the year with 386 stores across 23 states.

Now, let's turn to the balance sheet and cash flow highlights.

We ended the year with $293 million in cash and cash equivalents.

$250 million outstanding on our $700 million revolver, and 25 million of outstanding letters of credit.

Cash flow generation remained strong for the year, we generated $371 million in operating cash flow and spent $112 million in capital expenditures net of landlord reimbursements.

Our robust cash flow generation allowed us to invest in the growth of our business predominantly new stores. While also returning cash to our owners through our ongoing share repurchase program.

For the year.

We repurchased six 9 million shares of common stock for a total investment of $200 million.

Our diluted weighted average shares outstanding were down 6% compared to last year, and we have $412 million remaining under our current share repurchase authorization.

Turning to our current expectations for 2023.

We continue to operate in a challenging consumer environment, focusing on what we can control to drive meaningful results.

One area of focus is ensuring our store portfolio is ongoing health and profitability.

We are pleased with the performance of our more recent store openings, especially the smaller prototypes.

We're also encouraged by the momentum of those newer markets as we begin to densify and establish more brand awareness.

In 2023, we plan to open at least 30, new stores all of which are our current prototype.

Back in early 2020, we consider closing some underperforming locations as we shifted our store growth strategy to a smaller more productive prototypes.

We consciously decided not to close those stores as the pandemic struck so our communities will continue to have access to fresh healthy groceries.

We recently revisited that decision and as you may have seen in our release. This morning, we plan to close 11 stores in 2023.

These stores on average are approximately 30% larger than our current prototype and generate negative four wall cash flow.

One store closed during the first quarter as its lease expires and the remaining stores will close during the second quarter.

Team members from the closed stores will be transferred to other stores if they so desire.

On the supply chain front, we will relocate our southern California distribution center to a larger brand new facility in the second quarter.

In addition to supporting our growing capacity needs. The facility's location will reduce the miles traveled to our stores and is in a more robust labor market.

There will be special transition costs associated with this relocation.

The total cost for the store closings and supply chain transition will be approximately $40 million to $50 million pre tax of which close to 75% will be noncash.

With this backdrop for the full year, we expect total sales growth of 4% to 6% and comp sales in the low single digits.

We expect gross margins to be flat to slightly up and slight deleverage in SG&A cost.

Adjusted earnings before interest and taxes are expected to be between 355 and $370 million and adjusted earnings per share are expected to be between $2 41 and.

And $2 53.

Assuming no additional share repurchases.

That said, we do expect to continue to repurchase shares opportunistically.

Both adjusted EBIT, and EPS exclude the store closing and supply chain transition costs.

During the year, we expect capital expenditures net of landlord reimbursements to be between 210 and through $230 million.

Most of the Capex is for the 30, new stores and the new distribution Center.

Other areas include technology enhancements ongoing refresh and remodel expenditures merchandising initiatives and maintenance.

Ongoing we expect capex to be approximately three 5% of sales annually.

For the first quarter of the year, we expect comp sales in the range of one five to two 5% and adjusted earnings per share between <unk> 80 387.

And with that I'll turn it back to Jack.

Thanks Chip.

Nearly three years ago, we embarked on our journey under our new strategy, which happened to correspond directly with a global pandemic.

The noise of the erotic past few years begins to feed our progress is clear we are a stronger more profitable company and expect to sustain this business performance.

Our mission was to transform <unk> into a more relevant healthy living brand.

We defined a clear target customer then start to expand and market our product differentiation to our customers reduce our store size to reinforce our farmers market appeal grew our store base integrate and expand our supply chain and inspire our team and drive attractive profit growth along the way.

Despite all the challenges in the world in the last few years. This strategy has progressed and resulted in a financially stronger company.

The past few years, we have reset our margin structure improved our labor productivity and implemented needed systems. Since 2019, our gross margins have improved by 300 basis points.

We estimate that about two thirds of this was too decisive actions to promote more effectively the remaining one third were operational improvements such as less shrink from an expanded and well placed fresh supply chain and systems improved our ordering and in stock positions.

As part of our improved strategy, we intentionally changed up tactics to narrow our focus on our health conscious target customers and.

And we also made numerous investments in our business such as increased wages for team members and systems for improved labor management inventory and financials among others.

As a result, our EBIT margins improved by 170 basis points.

Three years earnings per share CAGR was 24% and our EBIT per square foot increased by 49%.

Our ROIC has also improved by 270 basis points all in line with our strategic goals.

These foundational initiatives have allowed us to move onto the next leg of our journey, we have plenty of work to do to.

To build on this foundation in 2023, we will be focused on growing customer engagement expanding category leadership and product innovation are more efficient and effective supply chain and accelerate our store unit growth.

On the customer front, we continue to focus on driving engagement with health enthusiasts.

Last quarter, we conducted a comprehensive study to understand better what is most important to our customers post pandemic.

Consistently told us they are looking for us to help them take new measures to be healthy freshness quality innovative variety and commitment to sustainability are all key drivers for our customers.

These lendings prompted us to pivot our marketing positioning to launch our new find your healthy campaign in January the.

The campaign connects by sharing several ways customers can create their own health journey at spreads and is anchored by what customers tell us They love our.

Our fresh high quality and innovative products you can't find anywhere else.

This differentiates us and creates a sense of discovery for our customers.

As I stated at the beginning of the call Sprouts brand $1 billion in sales late last year, a remarkable accomplishment lastly, due to our focus on innovation.

We plan to accelerate this growth even more in 2023.

You will see additional new sprouts brand products and increased focus on seasonal programs and our brand style and packaging redesign that is already showing promising results.

In 2022, we invested in growing our convenience meals and plan to double down again in 2023.

We bring differentiation to this growing category with higher quality on healthier options.

Our customers will find even more chef driven creations and seasonal offerings added plant based on health attribute options and additional family meals.

We doubled our local project sales in 2022 with more than 11% of our project sales now from local growers.

We believe our relationships with farmers scale and expertise in fresh produce enable us to own and grow this space.

That advantage has led to the launch of our rescued organic Proteus program in California, benefiting our farmers and customers unhealthy to combat food waste.

The farmer gets the added benefit of selling projects that are still completely fresh and tasty, but it could have otherwise ended up being wasted all because of irregular shapes sizes our blemishes.

So customers can buy delicious organic fruits, and vegetables, which simply don't meet visual specifications at a great price.

Building on this last quarter <unk> launched a partnership with door dash to provide a new channel of e-commerce focused on the convenience of delivery to customers.

These channels offer new opportunities for engagement for our high value customers.

Lastly to connect with customers more effectively we are scaling our personalization efforts to develop a stronger one to one relationship with.

We're investing significantly with the right partners to build a more robust marketing and technology platform.

These investments will continue to be a top priority to meet customer needs for additional engagement ultimately boosting customer loyalty.

Chip briefly spoken about investments to create an advantaged supply chain from which we can grow more than 85% of our stores are within 250 miles of our distribution channels up 20% from 2019. This.

This year will be focused on investments at our current Dcs, replacing our socal DC and expanding our Texas DC to account for growing demand.

Adding ripening rooms to our Arizona, Texas, and southern California, Dcs to deliver even better produce to our customers.

This includes a DC replenishment system expansion and.

And perpetual inventory computer assisted ordering at our store operations.

We started implementing <unk> in 2022 and have experienced much success approaches daily frozen and grocery are benefiting on the sales front from better in stocks and optimized inventory levels with more fast moving items and pure slow movers.

We have reduced our shrink by improving turns and freshness from transitioning to adjust contained replenishment module.

And we have experienced labor savings by allowing the computer to do the work for us.

Lastly.

On the real estate front, we are expanding with a new 23000 square foot store and every store opened this year will be in a new farm. We are excited about our robust pipeline of more than 80 approved stores and nearly 60 executed leases. We have already opened four new stores in this first.

Quarter with a plan to open at least 30 stores. This year and we are on track to reach our 10% unit growth starting in 2024.

In summary, we remain focused on advancing our strategy to differentiate approach further as a unique speciality retailer focused on health and wellness, while expanding our footprint with an advantaged unique store format.

We will also continue efforts to manage all costs. During these untested uncertain change effectively.

We believe these general principles will guide us through another year of success.

Look forward to sharing our progress.

With that I'd like to turn it over for questions operator.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Our first question comes from requests.

<unk> with Oppenheimer you May proceed.

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

First.

I wanted to touch on comp tiers with comp growth, obviously accelerated on a multiyear basis. So I was hoping to get a better sense of what youre seeing from.

From the consumer here.

Trade down perspective, or any other notable changes in consumer behavior lately.

Well I think the pattern over the past.

Fourth quarter was kind of consistent to what it has been through the year, we've seen a kind of pretty steady traffic, which we've been encouraged by and in terms of the consumer behavior, what's the level of food inflation, you've seen a trade down as we've talked about people have been trading down in terms of both the number of items in the basket and trading down in certain categories.

<unk> seen a little bit of a trade down and in the protein space, you've seen a little bit of a trade down you can see the strength of our brands business, you've seen a little bit of a trade into that as well. So I think the consumer behavior in Q4 was pretty consistent to what it was throughout the year of 2022 and I think we're seeing that same pattern as we go through this year.

Okay. That's helpful and then.

You have a difficult compare with the King Soopers strike from last year, and then we've seen industry headwinds lately in the vitamin category. So just curious if there's any more color you can provide.

Quarter to date trends at this juncture and then Jeff.

Any commentary on the vitamin category performance here.

Specifically to the vitamin category, what you what you find in the other is the patterns are trending very much around the ups and downs of Covid comparisons from the previous year that was such extreme numbers in different directions across different years, So youre seeing that pattern continue the cold and flu.

What happens with cold and flu clearly affects the vitamin business pretty significantly as well. So we see we see some great months in not so great months. So it's fairly volatile and it continues to be a very important category to us and we're very excited about the people that are operating in the middle of that vitamin Department, what works really well for <unk>.

And the vitamin Department, we've got a lot of expertise of people that can really understand.

Vitamins and supplements can help our customers. So we're excited about the team and excited about what's happening, but there's a lot of volatility in that maybe Jeff can talk a little bit by the broader context of your question, Yes sure.

So as we were going through the end of the year, obviously, we're comping against omicron towards the end of the year and then into the beginning of this year and then we were comping against the King Soopers strike.

Beginning of this year, so our comp compares a little bit more difficult coming into the beginning of the year, but where we are.

Seeing it we're past that now are steady and you can see in our guidance.

We feel pretty good or one and a half two and a half, California guidance there for the quarter.

Okay, Great I'll pass it along.

Thanks.

Thank you.

Our next question comes from Mark Carden with UBS you May proceed.

Good morning, Thanks, so much for taking the questions and nice quarter.

As noted that Youre looking to close 11, new stores. Following your real estate <unk> are these stores being replaced ultimately by Neurostar prototypes in similar geographies.

Yes, specifically strategically when I got this job.

Two years ago, and now it seems a long time ago now.

We set out at the strategy very clearly about the debt.

Smaller stores would be more effective going forward.

In terms of returns and what we expect it to be able to deliver in terms of returns from those stores as we've looked at the store portfolio that strategy playing out really made us take a very hard look at those stores that are a little bit vaguer. The lovely stores that were built by the previous team.

In terms of giving access to healthy foods. So the specifics on the 11 stores you won't see direct replacements coming in on those geographies going forward, because I've probably in the wrong place.

Probably the leases aren't quite where we want them to be but going forward. There will always be leases that we've got to deal with but this is a kind of one and done let's clear up a big chunk of some of the stores from our strat strategy that we laid out three years ago.

As I say, we would probably have a little bit sooner on these had it not been for the pandemic chip.

And I would just add as we go forward, we have a much more robust modeling are gone.

Due to the new system last year, we are mitigating the risk of opening those stores to the new models give us a much better location sort of main and main and.

We're not opening up 30, 40000 square foot stores.

Got it that's helpful and then as a follow up there's been some press that one of your largest natural organic competitors. It's been getting more aggressive on pricing are you seeing any ripple effects impacting the broader natural organic space and do you see any more likelihood of competitors, becoming less rational and year ahead.

Well, we haven't seen too much rationale, let's say.

In terms of what's happening in our space, we're very confident that we've got a strategy that we can follow.

We're.

Sticking to our guns on our strategy I haven't seen a lot of volatility in pricing.

In our direct space in the natural and organic space, We obviously watch that pretty closely we're very sensitive to our project pricing and with that particular competitor that you're outlining where in a very good shape with regard to project pricing overall, that's something that we would pay a lot of attention to but we haven't seen that.

Anything that causes us.

Too much to worry about rates at the moment.

Great. Thanks, so much good luck guys.

Thank you.

Our next question comes from Karen short with Credit Suisse. You May proceed.

Okay.

Hey, Thanks, very much good to talk to you again.

A couple of questions with respect to your comp guidance.

And your results in <unk> can you just talk a little bit about what traffic versus ticket was in <unk> and then how are you thinking about traffic.

Versus tickets through 'twenty, three and then also triangulate that with what your expectations are for inflation in 'twenty three and then I just had one other question.

Sure Karen.

So traffic was just a hair down in the fourth quarter and then the ticket was up and we are picking that up through both.

Inflation or AUR offsetting a slight decline in units.

As we progress into the back half of the year and at the same time as the sequential units per basket slows that year over year that will improve and net net you kind of get into that low single digit range.

Okay. That's helpful. And then just wondering when you look at sales growth versus EBIT growth, obviously, I know you've given in terms of margins. So.

You did say I think on the <unk> that you saw.

EBIT margins would remain more or less steady and it looks like you're kind of guiding to a slight decline in EBIT margins. So I wanted to ask about that but I also just wanted to talk broadly about what you think the right relationships should be in sales growth versus EBIT growth.

Fundamentally yes.

Yes, we did guide in a way that suggests that operating margin will decline a hair.

We could we will get flat to some slight increase in gross through the year SG&A, we're managing it really tight working it really hard as you know with most of the retail landscape managing costs is becoming.

The challenge of the day and we're working through that we'll probably have a hair of deleverage. This year as we go forward to answer the second part I think it's a healthy if we think it's a healthy place to believe that our more operating margin would essentially stay flat and that our sales growth and earnings growth will grow appropriate.

Accordingly.

Great. Thanks very much.

Okay.

Thank you.

Our next question comes from John <unk> with Guggenheim You May proceed.

Good morning, Jack Chip you have Andrew <unk> on for John Hind Basel Nice results this quarter.

So you plan on enhancing customer engagement in 2023, calling out the launch of your new marketing campaign and further further personalization efforts.

That we were curious on where we stand with the loyalty program.

When it might launch and how much incremental wallet share at <unk>. Thank you.

Yes, thanks for the question.

Spending a lot we've done a lot of different experiments over the past couple of years in terms of trying to get our target customer and encouraging them to spend a little bit more and we've made some progress in different categories and made some progress at different times of the year, which we've been encouraged by we're looking at investing.

Affinity to the brand really truly love sprouts, and we were encouraging what we're looking at tactics as to how we can get them to extend and spend a little bit more on the one hand and on the second hand, how do we get more customers, who look like the customers that are lobbing is at the moment of which we know that a lot out there. So.

What we're doing and the broader customer communication and customer engagement is one trying to work directly with those customers that love us and to drive.

Periods for us for those customers that differentiate sprouts, so that can all of us becoming a member of a club and the grocery environment for loyalty, we're seeing to be very different for us going forward.

<unk> of what's happening with loyalty cards, if you like in the grocery space is that it's a pretty Asa zero sum game and everyone's got the carbs and nobody we don't want to be the next card in the wallet when people are the parts when people open up.

Thank you.

Our next question comes from Edward Kelly with Wells Fargo. You May proceed.

Hey, guys, you've got Anthony on for Ed. Thanks for taking my question.

So first I wanted to ask about trade down I know you guys said bulk sort of seeing a turnaround.

People care more about value can you just talk a little bit more about what youre seeing from consumers in terms of value seeking behavior and then how does that dynamic typically impact you based on what you've seen historically.

Yeah, well I think what I think across the industry youre seeing some trading down across the board Bulks one of the things that we've picked out because certainly when you look back at the history of spreads and you look forward people kind of migrate to bulk a little bit because that allows them to get the portion control and allows a significant price advantage.

<unk> per pound against equivalent things in packaged parts of the store. So we've got a pretty extensive range in that space and we've seen some encouraging trends in that category as people move into that and I think it's partly economics is partly because it team have done a really nice job in trying to put the right products in the right place at the right time in that space. So we've seen that as I said a little.

We've seen a little bit of a trade down in the protein space across the across different proteins as people migrate to slightly cheaper cuts in that category. We have seen some trade into sprouts brand, which I think some combination of new products that we've put into that space and the sellers are chasing for a little bit better.

<unk> as you go through the assortment one of the things that happens in our environment, probably differently to the more traditional grocery environment is we've got customers who are very focused on the attributes and the products that we sell are very focused on.

We sell more plant based milk, then daily milk. So if you had a plant based chopper youre unlikely to translate to places where you can buy the whole plant based so.

The elements of trading down in about an hour environment I think is a little different to what it is in other places, but we are seeing that trend across the customer base coming into the store if that helps in any way.

Yeah. That's helpful. Thanks, and then.

I also just wanted to ask about the share repo you guys have been able to repurchase quite a lot of stock over the last couple of years.

And youre sitting on quite a bit of cash, but you also accelerating unit growth can you just talk about how youre thinking about the prospect of additional repo this year.

Well, we're always going to invest cash in the business first as we start to get closer and closer to that 10% unit growth a year.

I suspect it will be around three 5% of sales of our Capex is still gives us a lot of cash.

We're a share repurchase friendly company. Our goal is to try and see if we can reduce our share count anywhere from 4% to 6% a year.

Got it thank you.

Thank you.

Our next question comes from Cristina <unk> with Deutsche Bank You May proceed.

Hi, good morning team congratulations on the nice results.

I wanted to go ahead.

The fourth.

Just wanted to go back to the fourth quarter comp momentum, which was really nice to see that that's off.

Should be coming in better than even what your guidance called for so how.

How much of the improvement do you think as you made it to sprouts specific actions that you are doing on merchandising and differentiation and just overall marketing versus the overall macro with a little bit less commodity pressure on the consumer really outside of food inflation.

Well I think we always talk about what we can control and what we're doing with Ana and we saw a strong we saw a strong end to the quarter, which we were encouraged by we think first firstly, we were much better in stock and the holidays. Then when usually are partly because of the focus of the team on on some of the implementation of some of the systems that we have.

As we chase the volume in that space. So first of all I think <unk> was better and we're getting better at managing that both at the store level on the distribution with our distribution partners. So we think we'd probably take I would say that with us as.

As much as announced.

In the fourth quarter going into the holiday.

Our company.

Against the more traditional grocery businesses, we don't have those huge peaks for Thanksgiving and the holidays that other companies have and have always seen that as an opportunity for us and I think we saw the first kind of all the first parts of that coming alive in Q4 or as we worked through that.

Some of the category work I think has been pretty exciting we've seen some pretty strong our meat business has come a little bit better than maybe we expected to initially so probably some good category work. Some good installed work and a little bad marketing. We think we did a little better at the end of Q4 than maybe we had indicated in our.

In our discussions previously.

That's great. Thank you for that.

Jack and I guess, just on the unit growth, it's nice to see you reiterate the 30, new doors for the year.

You also talked about the model now that youre using for real estate selection as being much more precise forecasting these new opening.

What can you share in terms of how these new stores are opening up and as it relates to improving the unaided awareness I guess, where are you in that journey to get that number up in these newer markets and what is the job like how does it compare to establish mark yet.

Like in Arizona and California.

If we say, Florida and mid Atlantic.

Yes, you asked a lot of questions there.

Bye bye.

First thing is we introduced I'll, let chip.

Contributor royalty.

First thing is the new module that chip talked about in one of the answers a little while ago. We're much more comfortable that it is robust and that gives us more confidence and we've identified.

A lot of what we call seed points right around the country and as long as they are within 250 miles of our distribution center. The real estate team are chasing got hot and we know there's plenty of opportunities for us to keep keep that 10% growth plan that we're going to hit in 2024 in Manhattan will be able to do that for a long period of time and we're feeling more confident about the module.

Why are we feeling more confident that always takes a little time to China real estate change of strategy from a bigger store to a smaller store, there's always a pipeline that you're working your way through and Im kind of really this year all of them will be in the size of stores that we want them to be in the first four that we've opened we've been very encouraged by Mr. Very early data.

Point, but we've been encouraged by the first book and those have opened in both established markets and non established markets. We put a higher investment hot-blooded known established markets and we were pretty confident that this model that we've put in place is giving us more confidence going forward.

We've got what pick in stores in the right place with the right mix of people, who look like our target customers. So that's encouraging and in terms of the.

<unk>, you're asking about new markets and how we're performing on and have been delighted and just shout out to the team in Tampa is a market that we were pretty immature in a couple of years ago. We've now got decent critical mass of stores in that market and we're seeing that what you should start to see in terms of two years and three year comps I mean, it's not a data point that <unk>.

Extra probably across the business, but there are certain data points and are an established our less established markets in Florida, particularly that we're feeling comfortable about and in some elements of the mid Atlantic we have seen some when you get to the two to three year plan on some of these stores is encouraging and when you get critical mass when you got enough stores all in one place.

We got our strength both in terms of being able to recruit customer knows who we are and from a marketing point of view you can get efficient on your spend we've got a lot of work to do to really make sure that people do know who we are in an established market and the marketing team are working hard to that.

Charles you want to.

Paul on a little bit when you think about the strength of the quarter.

We had we had a strong quarter in California, but the other places where we're seeing strength mid Atlantic and Florida, where we're really starting to get that brand awareness, we're starting to see the strength build and over indexing as you would expect in those markets, but it's now encouraging it feels like it's starting to get that brand awareness.

That's great. Thank you for answering all of your questions. Good luck.

Thanks Kristina.

Thank you.

Our next question comes from Kelly Bania with BMO capital you May proceed.

Hi, This is Ben wood on for Kelly Danielle. Thank you for taking our questions.

We first wanted to.

Discuss the comment on the trade between units and basket, increasing potentially as inflation comes off a little bit if you don't mind.

It seems like in general that groceries are guiding to a pretty meaningful comp deceleration is it inflation potentially abate. What are you guys seeing that gives you the confidence that units will accelerate throughout the year to potentially offset that expected slowdown of completion.

To help us think about units and basket drivers would be helpful.

Ben.

For starters, our expectations are not units will accelerate in the basket. Our expectation is that the sequential fleet of units will slow and mitigate and when you do that year over year. Your compares get to where it's not a negative year over year, it's flat or flat to even could be slightly up.

That's our expectation.

We don't expect as inflation comes down that will accelerate those units I know we've seen some data points that would support what Jeff just said certain categories, you've already seen a kind of baked dilution. If the inflation is not that it has gone to deflation, but it has not been as much inflation. So categories like the meat category, where you have seen that kind of flattening out of <unk>.

<unk>.

The relative and again just to emphasize chip's points the relative reduction in units per basket slows down and not just from a math point of view as back to the number that we need going forward. So that's the basic assumption in it and I think if you look back in history, and it's always dangerous to go too far but when you see changes.

Price elasticity changes when price.

When price inflation dilutes. So I think we're feeling that there is enough data points to give us some confidence in how were articulating how our basket is going to evolve going forward.

Great. That's super helpful. And then I just wanted to talk about SG&A, a little bit it seems like SG&A.

<unk> growth in 2022 came in a little bit ahead of expectations. So just wondering if you could walk us through the puts and takes there and how that compared to your plan and then just looking forward.

How is the current labor environment, and what is your forecast going forward and what's contemplated in guidance.

Well as it relates to SG&A for the for this past year I think we were very articulate in the script, but they're seeing we're fighting labor cost.

Fighting that but we're managing that we're managing through.

<unk> software that we need to do packaging type stuff for meals et cetera. So we've seen cost increases there that we're working really hard to manage against and then the other side of SG&A as our E. Comm business says outpaces, our business grow through E comm fees that hit the SG&A line, so theres or.

The big areas and of course, new stores hit the SG&A line as well, it's going to be kind of the same battle going into 2023, we're going to continue to work through.

Obviously labor labor wages don't come down, but the rate of growth has slowed and we still have other opportunities within the SG&A line and try to manage through that but net net it's a challenging environment there and we're working it really hard we do expect a slight some slight deleverage this year, but on.

<unk> our goal is always to try to keep it in line with sales and the broader labor and vitamin that you touched on in your question is an interesting kind of dynamic as we again play playing out from the pandemic. We're finding it we're getting more applications than we've ever had we're getting better quality applications than we've ever had and not something that change.

<unk> fairly substantially over the last six months or so and that kind of supports chip's point, that's the pace at which a wage inflation has gone up is likely to its not going to go back down and nor would we want it to but it's likely to slow down in terms of what is kind of an effect going forward and we're very focused on retention in our business.

And working hard to make sure that the good people that we have in our stores, we can retain them and get to a better level or not and that will help our SG&A as SG&A as well going forward, but it is a very volatile labor environment.

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

Our next question comes from Kendall Toscano with Bank of America You May proceed.

Hi, Thanks for taking my question and congrats on a great quarter.

So the first thing I wanted to ask Chris just.

More of a clarification on the around the 11 store closures.

You mentioned that these are in larger.

<unk> formats versus the new format Youre going with.

Can you just remind us now that you've been opening stores in this smaller format for.

Few years now, what's the kind of breakdown in the portfolio as between the smaller format in our larger format stores and then I guess the clarification kind of just around.

How should we think about.

11 store closures this year versus.

You guys potentially reevaluating the portfolio going forward and maybe deciding to close additional underperforming stores or is this kind of just really a onetime thing.

Specifically to the question as we said in there that had been part of our strategy going forward, how do we move from.

Some of the building.

The building of stores going forward. Our plan is to build them at 23000 square feet. We've only really got that move in in the last six to nine months relative to the strategy that we outlined two or three years ago. We didn't some of these bigger stores that weren't performing the way we would want them to we would probably have closed them before now because of the.

The strategy that we had in place, but it would have been the wrong thing to do in the communities.

Grocery stores are operating and given what's happened in the last couple of years, but this is the intention behind that says let's get this out the way that will always be one or two stores going forward around if the if the rent goes up or that will release. His arms race. So there will always be one or two things going forward in any portfolio, but this is the big analysis of our portfolio.

We did early on and we were very comfortable that this is a kind of as close to one and done as it can be without one or two other things.

One or two things that might happen around.

Leases or something like that but it's not something that we are seeing a significant this is not part of an ongoing exercise. This is a kind of as I say, a one and done thing chip you want to just.

Okay.

It might be a little bit of a pile on but if you go back to 2019 and when we started to shift our strategy and thought about it very hard very hard.

We're building boxes at that point, there were over 30000 square feet. They were very expensive and we felt like it was a better better economics to build them smaller.

We're convinced and are still convinced that we wouldn't lose sales by having a smaller box. They were just too big and unproductive and so we evaluated at all at that point.

We also went through the entire list of stores that were where we were going to build them, but yet they were bigger and in those cases, where we could get out of the potential lease. We went ahead and moved away from those in 2019, and those where we couldn't we try to scale those back as much as we can.

Two smaller boxes. So we have kind of a I'll call. It we were sort of in the middle of this strategy, where we actually built some boxes that werent 32, but we got under 25 and got them 24, but now we're in a place where everything we're building as our new prototype very close to our 23000 square foot. Thank goodness, we decided.

To build them smaller given the cost increases that have happened over the last couple of years on construction costs et cetera. So we feel really good about where we are we've got some prototypes.

Prototypes in the ground and are doing well, we feel really good about the stores that we've just recently opened the ones that we've even opened this quarter. They are coming out of the blocks in a really good place.

Renew it or the trade areas move, but we won't see any store closings of this magnitude anytime that we know anytime in the near term next several years.

Got it that's helpful. Thanks.

And then one other question.

It was just on the <unk>.

In terms of January trends.

Something we had seen in the data is that it looked like there was a bit of a shift away from food at home spending towards food away from home spending in January I know you mentioned <unk>.

Traffic being up.

Quarter to date.

<unk> I was just curious if you could speak to whether or not you've seen anything like that with your customers.

Well our business first coming out of the blocks in January again, we were comping against.

The King Soopers strike in Colorado, we have several stores in Colorado. We are also confident against the AUM across so.

We saw the comps were weaker in the beginning of the quarter as we expect as they've improved since traffic's been study, though even were positive traffic even against those comps last year that I. Just described so we're encouraged by that.

Do you think about our deli business, which is which has been a very positive business for us both last year and it continues to be strong going in this year as consumers are looking for prepared meals quick too quick to be able to savings of time, but our deli meals are really high quality.

All of these are good for you the tastes great and so that's another business that you can see where the consumer is they are chasing that idea of.

A complete meal at home, but easy it's easy to make.

And I think the contrast between food at home and food away from home is kind of getting blocked a little bit by categories like the meals things that we have guys convenience it seems to be driving the biggest influence here. So.

We think we're well placed and we're certainly doubling down and investing in both equipment and cabinets.

Product development to make sure that we're.

<unk> convenient within the context of this healthy healthy target customers that we have so.

As I say I think that fusion between away from home and home is kind of getting a bit blocked.

Thank you this.

This concludes the Q&A session I would now like to turn the call back over to Jack Sinclair for any further remarks.

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

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