Q1 2023 Sprouts Farmers Market Inc Earnings Call
Speaker 2: Good afternoon and thank you for standing by. Welcome to the first quarter, 2023 earnings conference call. At the time, all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session. Thank you.
Speaker 2: To ask a question during the session, you will need to press store 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press store 11 again. Please be advised that today's conference is being recorded.
Speaker 2: I would now like to hand the conference over to your speaker today, Susanna Livington, Vice President, and thus relations and treasurer. Please go ahead.
Speaker 3: Thank you and good afternoon everyone. We are pleased you are taking the time to join Sprouts on our first quarter 2023 earnings call. Jackson Claire, chief executive officer, and Chip Malloy, chief financial officer, are with me today. The earnings release announcing our first quarter 2023 results.
Speaker 3: The webcast of this call and quarterly slides can be accessed through the investor relations section of our website at investors.sprouts.com.
Speaker 3: During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2023 and beyond.
Speaker 3: These statements and bottled a subalrisk 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 filing 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 reference our non- GAAP measures to the comparable gap figures.
Speaker 4: With that, let me hand it over to Jack. Thanks, Susanna, and good afternoon, everyone. I want to begin our call by thanking our 31,000 team members for the continued dedication in creating a best-in-class experience for our customers, seeking fresh, high quality and healthy foods.
Speaker 4: We are pleased with our first quarter. We believe our long-term growth strategy is gaining traction and driving positive performance.
Speaker 4: Our results included comparable store sales growth of 3.1%, total sales growth of 6%, and adjusted deluded earnings per share growth of 24%. Our traffic trends are improving, and our newer stores on average are exceeding our internal expectations.
Speaker 4: During the first quarter we opened eight new stores, through our innovative and sprout brand offerings, improved our marketing spend, enhanced our supply chain, and developed positive programs for the environment.
Speaker 4: I'll follow up with more on our journey in just a bit. For now, let me hand it over to Chip to review our financial performance in the first quarter and our 2023 outlook.
Speaker 5: Okay
Speaker 6: Yes, thanks Jack, good afternoon everyone.
Speaker 6: combined with comparable store sales growth of 3.1% drove this increase.
Speaker 6: Comp sails were supported by positive comp transactions or traffic and a net increase in basket due to retail inflation partially all set by a slight decrease in items in the basket from a year over year perspective.
Speaker 6: We are also encouraged by the positive trends in our newer markets as we densify and create more brand awareness. And as Jack already pointed out, we are pleased that our new stores, on average, are exceeding our expectations. We continue to experience strong performances and categories with the most differentiation, such as grocery, bakery, dairy, and deli. Our Sprouts brand, now at 20% of total sales perform well as customers continue to seek uniqueness and quality.
Speaker 6: Our first quarter gross margin was 37.5%, an increase of approximately 20 basis points compared to last year. Category mixed shifts and continued promotional optimization contributed to the margin improvement. SGA for the quarter totaled $486 million.
Speaker 6: Excluding the impact of special items adjusted SGNA total $483 million an increase of 23 million.
Speaker 6: This increase was primarily driven by the addition of new stores.
Speaker 6: higher wages, utility costs, and higher e-commerce fees, partially offset by approximately $4 million shifted to the back half of the year.
Speaker 6: Store closure and other costs total approximately $28 million for the quarter and were primarily related to the charges associated with the decision to close 11th doors in 2023.
Speaker 6: Excluding the impact of special items, adjust its door closure and other costs were immaterial.
Speaker 6: Appreciation and amulization, exclusive of depreciation included in cost of sales, was 34 million for the quarter.
Speaker 6: Excluding special items associated with the store closing decision, the adjusted depreciation and amazement total $30 million.
Speaker 6: For the quarter, our earnings before interest in taxes were $102 million and interest expense was $2 million.
Speaker 6: Net income was $76 million. Diluted earnings per share for 73 cents.
Speaker 6: Excluding the impact of special items, adjusted earnings before interest and taxes were $137 million.
Speaker 6: Adjusted that income was 103 million and adjusted deluded orange for share were 98 cents
Speaker 6: an increase of 24% compared to the same period in the prior year.
Speaker 6: Now let's turn to the balance sheet and cash flow highlights. Ralph has always had robust cash flow generation and a strong balance sheet. During the first quarter, our cash generation allowed us to invest in our business by opening eight new stores.
Speaker 6: Purchasing the two previously licensed stores.
Speaker 6: spending 45 million in capital expenditures net of landlord reimbursement
Speaker 6: paying down $25 million of our bank revolver and returning $98 million to our owners by repurchasing 3 million shares.
Revolver, and 22 million of outstanding letters of credit.
Turning to our current expectations for 2023.
The consumer environment remains uncertain.
However, we remain committed to our business strategy, which we believe can continue to deliver ongoing profitable growth.
For the full year, we expect sales growth of 5% to 6% and comp sales growth of 2% to 3%.
We expect gross margins to be flat to slightly up and slight deleverage in SG&A.
The deleverage is due to the acceleration of new store growth, a new fee structure with our largest e-commerce partner and rising labor costs.
We expect adjusted earnings before interest and taxes to be between 370 and $385 million.
Adjusted earnings per share should be between $2 58, and $2 68.
Which assumes no additional share repurchases.
Said, we do expect to continue to repurchase shares opportunistically.
We are on track to open at least 30 new stores this year.
All of which are in our current prototype and.
And we expect capital expenditures net of landlord reimbursements to be between 210 $230 million.
For the second quarter of the year.
We expect comp sales of approximately 3%.
And adjusted earnings per share between <unk> 61, and 65.
And with that I'll turn it back to Jack.
Thanks Kipp.
We're encouraged by our most recent performance are direct results of the strategic changes we've made over the past few years to differentiate ourselves as a <unk>.
<unk> health and food retailer we.
We believe these changes are gaining traction now that weren't on the other side of the pandemic.
This year, we're focused on expanding category leadership to reaching a unique assortment focusing on product innovation building, a more efficient and effective supply chain accelerating our store unit growth and growing customer engagement let.
Let me touch on a few highlights from each of these initiatives.
For the first quarter, our focus on curation and innovation is inspiring our customers we.
Stopped ourselves with innovative attribute friendly speciality products, which appeal to our target customers.
We are building a strong affinity for our sprouts brands, including many products only available at key seasonal change.
Our customers recognize that the sprouts brand provides quality offerings.
Tastes, great and are good for you.
And met the high inflationary environment, we brought in more value forward offerings, like multipack grocery items and value size meat and deli offerings.
While continuing to offer great pricing in our produce department and on important items, such as our sprouts brand cage free eggs at $3 99, and our healthy sandwiches at 499.
Moving on we continue to improve the efficiency of our supply chain touching both in store and distribution centers catching.
Categories like perpetual inventory computer assisted ordering.
<unk> are already experiencing better on shelf in stocks most categories will be completed the second quarter.
Removing the guesswork from our inventory process.
Our investment in the new Southern California, DC is on target to open later this month.
Not only will the new DC support our growing capacity needs.
And a more robust labor market, but it will also be LEED silver certified contained solar on the roof reduce miles on the road and carry on electrified jockey truck to ensure our sustainability efforts reached the Dcs.
In the first half of this year, we will complete. The addition of ripening rooms in our Arizona, Texas, and Southern California, Dcs, along with expanding our Texas DC later in the year. These initiatives will expand our capabilities improve our quality and freshness and leverage our supply chain to support our future use.
<unk> growth.
Speaking of unit growth or smaller more cost effective format is rolling out quickly. This year, we opened eight new stores in the first quarter all of this year's stores will be in the new prototype.
At the same time, we're experiencing an improved performance with our more recent vintages, especially in newer markets, where we're gaining density and growing brand awareness.
Pipeline is also growing with 90 approved new stores and 60 executed leases, helping us gain traction towards our goal of 10% unit growth per year.
We believe we will be on track to achieve that goal by 2024.
During the first quarter. We also purchased two previously licensed stores in Chula Vista, California. These two stores were part of a unique legacy licensing agreement. The purchase provides complete control of the sprouts brand and expansion opportunities in portions of the San Diego market that were previously.
Restricted by the agreement.
Yes.
Over 60% of our business is driven by our high frequency customers are.
Our goal is to drive our current core customers to shop, more often and to encourage trials from new customers, who are also within our target audience.
We will drive this growth through customer engagement.
First we are driving customer engagement in our stores as a foundational focus we're elevating the level of service in our stores to meet the needs of our customers and distinguish ourselves from the competition.
Team is focused on ramping ramping up our sampling program, particularly with our unique sprouts brands offerings, increasing speed at checkout and proactively helping our customers navigate store.
Finding products the outlined with the dietary needs.
Our customer survey scores already strong continue to rise.
Our second area of customer engagement has been expanding and improving sprouts unique omnichannel experience the flexibility of ordering online and picking up or having the sprouts favorites delivered provides a much desired option for our core audience. Our e-commerce growth continues to outpace our overall.
Growth signaling that our differentiated products resonate with customers. We recently improved our site design and digital experience to improve conversion on sales.
Our own site shop Dot surprise dot com.
<unk> and door dash partnerships continue to support our current customers' needs. While also bringing in new customers. Our E. Commerce sales represented 12, 2% of our total sales for the first quarter.
Our third area of customer engagement is targeting our core audience with data driven media.
We've improved the return on investment on our media spend with a more targeted driven approach to our media mix.
Leveraging our first party data and consumer insights to identify our customers better.
In many markets, we are still relatively new.
We're driving awareness with more storytelling about the brand speaking to our local approaches and presenting offers per trial.
In turn our awareness numbers have improved in markets like Florida, we have seen higher returns in our established markets by driving consideration and remind us to visit our stores.
Finally, we are deeply focused on our personalization strategy and are still in the early innings.
Customers are discerning in what they eat and our ability to know them shift content with them and provide office for what they love is driving spend.
Q1, we improved our speed and capability and outperformed our expectations as high if I noted. It is this is a longer journey, but we are committed to building capability.
And our customer is responding.
Lastly, our ESG efforts continue to develop and grow central to our identity is a genuine commitment to social and environmental responsibility. We work collaboratively with our supply chain partners community organization, and then just industry experts to understand our material.
And prioritize where we direct our environmental social and governance efforts.
In 2022, some of our highlights included nil.
Nearly 26% of total sales came from organic products approximately $200 million and sales of products produced by divest owned suppliers, we sold $145 million and local approach is less carbon intensive plant based product sales increased 21%.
We recovered 87% of food waste and we generated the equivalent of 27 million meals. We also recycled more than 800000 tons of plastic from customer return bikes on product shipping route.
This year, we have already launched new programs to better serve our customers our communities and the environment rescued organics in California on the launch of our elimination of single use bags at checkout.
Based on our ESG accomplishments sprouts was named one of the 100, most sustainable companies in the world by corporate Knights.
Better eating healthy is not a trend.
Fast growing movement of customers seeking a healthier lifestyle, even during challenging economic conditions.
Given our leadership and being a destination for health and wellness and innovation <unk> is well positioned to grow our commitment to our strategic changes is beginning to show results, attracting more customers and visits and doing so profitably.
Look forward to speaking with many of you in the coming months and with that I'd like to turn it over to the operator for questions operator.
As a reminder to ask a question. Please press star one on your telephone.
For your name to be announced to withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.
The first question comes from Mark Carden with UBS. Your line is now open.
Good afternoon. Thanks, so much for taking the questions. So to start three 1% comp came in meaningfully above your guidance the highest level you've seen through 2020 within that where are the biggest differences relative to your initial expectation traffic accelerate more than expected you called out the slight decrease in units per basket, but is that starting to stabilize a bit.
Faster than you expected or is it really something else driving it in the back half of the period.
Hey, Mark this is chip, it's generally is traffic.
And the units are in line with what we thought we had slightly better traffic in Q1 than we thought we were going to have at the beginning of the year.
Okay great.
And then just in terms of you talked about your new stores exceeding expectation now that you guys have had a few quarters or even building. The new prototype are you noticing any consistent differences in how customers are shopping new starts on a mix perspective relative to your legacy boxes.
Well, we've been encouraged by the news.
First of all we are encouraged by the the benefit so again by having smaller stores in terms of the cost of the stores and if it turns out they come but in terms of our customers is helping them I think post pandemic, we've seen an encouraging number in our vitamins and supplements department where people.
And unity people getting more kind of focused on immunity post pandemic and I think our stores have done a nice job, but kind of capturing that we've been encouraged by the bounce back in our bulk business, which took a bit of a hit through the pandemic through lots of operational challenges within different jurisdictions, even not being allowed to sell it. So that's worked quite well.
<unk> and <unk>.
And on two significant things in the store one is the meals case, we have been adding a lot of.
Ready meals cases with meals are targeted towards health and plant based and a little bit differentiated. So we're encouraged by that investment and we've also invested a lot of time and energy could not innovation center into most of our stores where youll find.
Our range of products.
So every month for every single product, where you wouldn't be able to find anywhere else. So the differentiation that comes from that innovation. So we've seen those tenants basis. So meals innovation vitamins bulk we've been encouraged by that.
Underpinning all of our grocery and dairy businesses and our frozen business have been mentioned pretty well.
I have been doing well, we invested quite a lot of space in frozen in a.
And on your stores and so we're encouraged by that but those returns as well.
Yeah.
Great. Thanks, so much guys and good luck.
Thanks, Mark please standby for next question.
The next question comes from Ken Goldman with JP Morgan. Your line is now open.
Good afternoon. Thank you.
I just wanted to get a quick sense of what Youre seeing from.
From the competitive environment. It doesn't seem like there's a significant amount of pricing pressure or intensification of promotions out there were certainly heading in that direction, but it doesn't feel like there's anything dramatic yet, but I'm just curious what youre seeing and what youre hearing out there and if there's anything that you are.
More or less concerned by then what you might have expected a few months ago.
Yes, Ken we kind of Havent seen as you say, we're not seeing a lot.
Dynamic changes in terms of how people are positioning.
We're certainly not seeing anything from any of the major players in this going forward advisor I've kind of always said on these calls we kind of watch projects a lot of detail and haven't seen much and not the other assortment. The range of assortment that we have is pretty differentiated from the other so we kind of alright, yes, we watch what other people are doing.
The piece that we watch most of these projects the other side of the equation and I haven't seen much but even if we did we feel as if we've got pretty we've got a strong moat in the assortment that we have and are differentiated.
The almost whatever happens going forward, we feel confident that the way we're building out our assortment and curating differentiation that we can withstand what may happen.
And in the pricing environment going forward.
Thanks, and then quick follow up speaking of produce obviously theres been a lot of rain in California in some locations too much I'm just curious what your forecast is for supply as a general rule in summer or whether you and whether you expect it to maybe be a net tailwind or headwind to your top and bottom lines might be too early but I'm just trying to get a sense of how you.
Do that.
Well as.
Volatility and less going forward than it has been quite tight over the last few months, there's been some challenges both in terms of weather and some of the challenges of getting the crops in the ground. So there has been some issues in terms of making what I think we're feeling more confident than less confident going forward on produce sourcing we think there'll be there'll be some ups and downs depending on.
It all plays out, but I think if anything we're feeling more confident rather than less confidence about being able to I'd say.
Quite hard on trying to source more and more organic products and I think that's something that will play well to our customers and we think we will probably be in a good shape through the summer to work that went through and we're also working pretty hard more more than ever on local sourcing. So as we've opened our Orlando distribution Center, Florida when it <unk>.
Later in the year it'll be in good shape for us and so I think we are probably more positive than less positive about the supply challenges going forward.
Great. Thanks, so much.
Please standby for next question.
The next question comes from Edward Kelly with Wells Fargo. Your line is now open.
Hi, good afternoon guys.
Okay.
Yes, I wanted to ask about your expectation for inflation as the year progresses I mean, it does certainly look like.
The pricing aspect is easing quite a bit kind of curious as to what's in your guidance for that and then how do you think.
Consumer behavior.
Your own traffic items in the basket things like that change as the year progresses.
There is concern that as it flows right that hurts the comp, but I don't think that Thats, how you would necessarily see it in the guidance.
No.
Just curious as to what the rest of US are missing for those that are that are worried about that.
Well, let me, let me do some macro comments and I'll pass on the chest to do some of the specifics in the metal with US I think the context of food inflation has been quite unusual in the last year and Theres a lot of them.
Micro factors, particularly.
The kind of availability of fertilizer in green and some of the pressures that have come from the Ukraine, Russia situation I'm not sure that's going to go away and the volatility of this come from that which certainly flowing through in terms of different commodities across the marketplace.
Our cash going forward is that clearly, we're not going to double down it's not going to carry on as there is going to kind of going on but we're certainly not expecting any deflation going forward as the year goes on within the forecast that we put in place with regarding to the <unk> question on the chip.
Yes, Ed.
So we've kind of always thought from the beginning of the year.
Our traffic would be relatively flat for the year, we assume that we would continue to get AUR.
Benefits from inflation as those continue to all those changes that happened last year, all the way up through the end of last year in some cases, continuing to that would flow through but start to dissipate from a year over year perspective, and more stabilization sequentially and then as it relates to anything thats in the basket Similarly, but just the <unk>.
Units have been down year over year, but as you start to get through the year you start to see the sequential declines stabilize and therefore your comp net net comes out about where we guided and it's a mix.
Wireless traffic with.
Less benefit from AUR.
A little less worse hit from units.
Great. Thank you and then just a follow up on <unk>.
SG&A you talked about.
Deleverage you did leverage.
This quarter.
Seems like maybe that deleverage is more back half weighted.
Maybe could you talk about that I know there is a new E comm fee structure I'm not sure of the magnitude of that either and then just the last part of all this is that you haven't had any EPS just adjustments for the last couple of years.
I'm curious as to what we're seeing this quarter do you expect more adjustments going forward.
Or is this kind of like a one and done around the store closures.
Yes, so as it relates to SG&A SG&A is as we migrate through the year there will be some deleverage in the back half as you.
Sorted through.
It's driven by three things one is the acceleration of the store growth. The second is E. Commerce fees as you mentioned because we got out of her exclusive contract that structure changed which was a decision that we made.
And then thirdly labor costs on the stores specifically.
Last year we.
We bought the cost per labor hour increases at the beginning of the year.
Not really what we wanted to do but it was hard to staff the stores, but beginning in the second half of last year, we're able to.
Find some efficiencies via a lot of the systems, we've been implementing over the years and we were able to take some hours out of the stores. So thats running through to the first half. This year, but then you start to get into the back half when those those efficiencies will now have been anniversaried. So we'll get some slight deleverage in the back half of the year.
That will be slightly negative for the year.
And just on the one timers just curious.
Farmers. Thank you, yes, so the one timers or it will still have a little bit going forward. So most of it's behind us as it relates to the store closings, but net net we approximated around $45 million for the full year. All in we just did 35. So we've got about 10 to go some of that will be in supply chain costs.
As it relates to the San Diego or the southern California, DC, some transition costs, there and theres a little bit more on the store closing is really around severance.
Got it thank you.
Please standby for our next question.
The next question comes from Michael Mancini with Evercore. Your line is now open.
Hey, Thanks for taking the question I just wanted to ask to start off if you could discuss a little bit more the health of the consumer and particularly what you found in terms of the mix impact as well as any kind of geographic color that you can share of how comps were in the quarter by region.
Yes, Michael we've seen a pretty consistent pattern across the country on this there is some difference in terms of.
With some of our stores in the less developed market overall, the consumer behavior is probably been pretty consistent across the country certainly there's pressure on the consumer the one thing we've always said about our business is when you have a differentiated food assortment. The people that are interested in vegetarians are key towards a paleo specific.
<unk> tend to be kind of Brazilian irrespective of the of the economic circumstances. So we've seen a bit of a consistency in how consumers reacted to the categories, where we got very significant differentiation and that's been part of the strategy all along.
<unk> REIT differently. So the behavior, we've seen has been consistent across the country and we've seen strength in those areas, where we're differentiated.
That's given us some encouragement that the strategy we've put in place is strong.
I would add Michael So Michael I would add we saw some.
California, which is a big market huge market for US, California is really strong.
Florida is really strong we put a lot of new stores in that area as the stores are starting to comp that's been really good for us Holistically in Arizona, which is our home market has been solid so.
We've had a couple.
<unk>, but I think some of that is not really consumer driven as Jack mentioned, where it's not really one consumers different than the other I think some of it is just where we have strengthen and historically.
And to monetize it.
Got it thank you and just to follow up on the cost side. I think you may have mentioned of 4 million shift in SG&A into year end. So I just wanted to understand that as well as the impairment cost of around $30 million was there any store operating expense in that or was that strictly closure related.
That was closure related.
Are there some depreciation in the total number it should be totally outline for you.
Our release, so we have I.
I apologize Michael is first part.
Just two I think you may have mentioned of $4 million shift in SG&A spend of $4 million. So yes. So we have some initiatives.
Internal initiatives really are kind of shifting to the third quarter that we thought we would get done in the first quarter. So those are just a shift in some cost.
Got it thank you.
Please standby for our next question.
The next question comes from route pitch per week with Oppenheimer. Your line is now open.
Good afternoon, and thanks for taking my question. So just going back to your commentary on E. Commerce growth you guys called out strong double digit growth and I know you are also lapping Amit compares to a very strong growth number just curious on the sustainability of that.
Mentum there and then I know you added door docs just curious how <unk> played out is you've added another provider there.
Well, we've been pleased to replace where the door dash.
The launch of the door Dodge customers seem to have reacted well to and it seems to have brought some new customers.
Platform. The way we are thinking about E. Com is very much on an omnichannel basis that the customer will choose how they want to access.
To transact with spreads.
The thing this encouraged us about e-commerce growth is that.
Most of the environment is relatively easy for people to buy from whomever they feel like and the fact that they can only get the assortment from sprouts that we sale gives me some confidence that customers are navigating their way to our curated assortment and a very positive way in the context of we're very pleased with.
We do with both <unk> and door dash and customers can choose how best to access E. Com at the same time pick up business is growing as well over the period of time.
And store traffic is going up a little bit so again, a nice balance across the three but our E. Commerce business has has been very strong over the course of the last year and we're encouraged by it.
Great and then one question just on traffic. So if you look at your initiatives or is there anything you can point to in terms of what's driving that positive traffic and then.
<unk> been sourcing I've seen from stamp sampling in store experience with greatly improved so just curious if theres anything youre pointing to and getting 12.
Yes of course.
That's the big bucket I think the media what's been more effective than it had been nothing we're communicating a little bit more effectively with our target customers than we were so I'm encouraged by that I'm encouraged by the in store work that you referenced the fact that we're going to get getting post the pandemic can have the window the sales of creating this sampling.
Environment for an innovative product in the stores.
Having to reinvent not a little bit and the teams are doing work on that and making a lot of progress I'm trying to make that come alive. So.
The combination of all media.
Media and in store execution, I think is contributing to the increasingly tactically we're testing a lot of different things to be more personalised and how do we communicate with our customers and we think we are getting some benefits.
But were really on the early innings of that one and I'm pretty I'm quite excited about the future and on what we can do as we get better and better identify the target customers, we're up to 18% of our customers. Kevin is that information now, which we didn't have before and that's something that will such an upside as we do that going forward.
It gives us a lot of runway going forward and these initiatives.
Great. Thank you.
Please standby for next question.
The next question comes from Cristina <unk> with Deutsche Bank. Your line is now open.
Hi, good afternoon, and congratulations on a great quarter.
I wanted to thanks Kristina.
Hey, Jack just wanted to follow up on the personalization, especially because it sounds very exciting, but as we think about the effect of inflation on crowd with the items per basket decreasing by those one or two you and Ed do you see the moderation in inflation, especially in fresh foods as an opportunity to really start to add those.
Items back and this is where I think personalization comes in I know, it's early days, but are you finding success.
Drive those fleet more frequent trips and with more items per basket with your targeted consumer.
We're making some progress on trying to figure out exactly how to do that more effectively inflation is clearly led to volume drops across the industry. We are seeing across our basket as we've talked about over the last few calls what tends to happen and we've seen it in category by category when the inflation comes down a little bit.
The level of unit.
<unk> production changes opex, so the level of reduction changes a bit and that balances itself out and we've seen that in a couple of categories over the course of the last little while the key to the personalization question that Youre asking Kristina is how do we target more specifically and very specifically to that the past the sampling.
Program in stores, we're seeing very good results on our cash grew by product by product basis, when we get those products in front of people. We've been very encouraged by that move C that will doubling down on that over the next little while will be important in trying to increase the number of units per basket and we do think the mitigation of inflation on the execution inside.
The stores will help us drive that on top of that the personalization communication with these additional customers that we've got coming as information will allow us to promote more directly and that will be a key fact, so the business is focusing in on two things one how do we get more transactions into the stores and secondly, how do we drive the basket in terms of when we.
Get people into the stores onto the E comm system.
Chip tune in.
Our expectations Christina.
As inflation dissipates.
We're not assuming for now that Youll see a massive reversal in units in the basket, we will just see it.
A similar stabilization.
So all the things that Jack is talking about our opportunities to drive better results than what we are assuming today.
Great. Thank you for that.
And then just a follow up and then it does sound like industry promotions remains very rational but.
Now that the supply chain is in a much better place large peers seem to be back to their historical in stock and service levels and trade spend is starting to return, especially in center of store and I know that your overlap is relatively limited, but does that change at all the way that you view your price gap currently.
Well I think we constantly as I said earlier, we constantly look at what other people are doing we feel as if a lot of categories. We've got real differentiation. Other people don't sell a lot of vitamins and supplements were not seeing that category under pressure bulk gives us a huge opportunity in a tough environment.
People get involved in our proportion of sales and plant based in Quito and Paleo, it's just very different to what other people have so we don't look at we don't see the context of a big grocery price war really directly.
I don't think it will happen, but if it did happen we don't see that significantly affecting our major categories that we have as I said earlier, we constantly luca produce pricing and that's something we'll pay a lot of attention to going forward, but we're certainly feeling that the margin growth that we've had with the state where we will be able to maintain that going forward.
In the context of what might happen or might not happen in a grocery environment.
A competitive grocery environment.
Great. Thank you so much best of luck.
Please standby for our next question.
The next question comes from Jordan <unk> with Goldman Sachs. Your line is now open.
Good afternoon. Thank you for taking my question and.
First I wanted to ask about produce how are you thinking about your price gaps in that category, specifically and has there been any change kind of the strategy around 10% to 15% below traditional.
Well, you've got a lot of context to that question Lyanne. It's a good question, it's something that is a quarter of <unk>.
We think a lot of boats. So different competitors are approaching I've always approached projects in a different way and we've got even bigger gaps for not against some people in the marketplace and we're good smaller gaps against other people in the marketplace. We tend to find the Texas market is more competitive than some other markets the Florida market less competitive.
The California market less competitive our focus again, we're trying to be very aggressive on organic pricing. So you would find the organic projects, which is a much bigger proportion of our sales than anyone else's sales in the project space, We've got bigger and wider gaps in what you just alluded to in your question. So.
So I'm a bit novel around more commoditize.
Commoditized products and we think that's a space that we can win as other people margin up on organic we are trying to be flatter on those margins. So we've got opportunity to be really differentiated on price and organic opportunities across the marketplace, where we're most competitive some places more competitive but everywhere we with us.
I ought to be.
On average given all the volatility at the best point in the marketplace. Some places we're much much better than just being the best.
Okay, Great. That's very helpful. Thank you.
Thanks, Please standby for our next question.
Okay.
The next question comes from Karen short with Credit Suisse. Your line is now open.
Hey, thanks very much.
A couple of questions. So when you look at the charges that you took this quarter for the closed stores can you maybe.
Try to.
Give us some color because the dollar amount per store.
Hi.
So that's my first question and then my second question is just looking forward on actual.
New store productivity, how we should think about that going forward as a percent.
But the dollar amount.
Or is it kind of more.
It's right in line with what we guided to.
It's in line with what we guided to at the beginning of the year.
So we took.
$8 million and store closure and other costs. This quarter, we also had.
$4 million in depreciation and then we had some SG&A cost couple of million dollars that we have $35 million when you're closing the stores youre, having to take the entire asset costs and write the asset down net of any sort of lam or any sort of sub leasing. So if you have a store this year.
Left on its lease it's not just we closed some stores they weren't all hold stores that we closed and they still had years left on their leases and so that asset is going to get written down quite a bit when you think about a store that may be.
Still a seven eight years left on its lease.
Okay, but to be clear so going forward there should be no more store closures. These were like the only the only expenses.
There shouldnt be going forward, we should in the second quarter Youre going to see a little bit of one offs and supply chain, which is up in cost of goods.
$1 million.
Second quarter, you'll see a little bit of SG&A, and then youll see on the store closure line, you'll see you won't see anything on the store closure line going forward.
Okay, and then so going forward as you open stores, what would be the right way to think about it.
New store productivity and demo.
Oh, it's creeping up but we don't have I mean, we have a target.
Steve you an algorithm as it relates to export from your zero to year five but as you can see in the math.
Put differently, our math has increased its gotten better around 75% or better.
Okay.
So as we model it and again I get it like it is timing and it depends on when in the quarter, but if I'm modeling it I should look at.
Store productivity is like 75% is that fair, yes, if your if your model if youre going back if you try to get out of the algorithm. The algorithm early hasnt changed the way, we've assumed that youre going to come out of the come out at $13 million on average kind of cautious three eight to get and that's a 75% of maturity.
And youre going to see it's going to take them.
Breakeven in year, one and.
And it's going to be by year, four will be 30% to 35% year on year cash return.
Okay. So nothing changed on the Algarve generally no nothing's really changed I mean, we're I.
I mean, it's really early we just we just opened stores that we opened later last year were opened this year were encouraged because theyre coming out of the gates better than on average than we thought they were going to come out of the <unk> performance.
We're talking about stores that are anywhere from there not even a year old yet. So we are encouraged that we are doing.
Better than what we thought when we model them.
But there time will tell.
I am Ken we're kind of encouraged that the new stores are opening a little bit and I think post I think is hot during the pandemic to open stores again huge number straightaway as customers were less reluctant to try new things, we're definitely seeing a strength in the latest stores that we've opened the last dozen or so stores that we've opened as the pandemic starts to kind of unwind.
So we are encouraged by the against the number of the chips talking about.
Okay. Jack if you don't mind me asking.
Question. So obviously those the new format is very different right you only have one entrance like your phone.
On ROIC.
<unk>.
But is there any inclination to change what the new format looks like as it relates to.
Balancing our ROIC CE relative to sales.
Because.
The kiosks.
Understand what youre doing in terms of our <unk> debt.
So the principle behind what we did those few years ago.
Was that we would hold the same absolute level of sales on much smaller stores, which gives you a much better return the intent wasn't just to get ROIC up. The intent was can we give the proposition to the customer that is effective in a 23000 square foot store as it is in a 30000 square foot to one of my observations and I think we talked about it.
Thats my observations, where theres a lot of empty space and there's a lot of space.
The non customer facing parts of the store that we can squeeze that will allow us to get the same assortment in place at the same time is as I see.
Same assortment and getting the same kind of sales on a much smaller cost basin by and large that's the kind of path that we're on the numbers going forward. We are certainly tweaking things I'm really pleased we did one door to be honest with you because vitamins and supplements on one side that in control of that everyone knows about what's happening with the challenges of selling.
Things in from a crane point of view, we're very pleased but not in terms of how that's working for us. So we are tweaking a few things where we are.
Wanes, we're looking at how we're handling our bakery when we're looking at where we should have our meals Pfizer. So we're tweaking things, but the basic principle of what were operating two we're very encouraged by.
Okay. Thank you.
Thanks, Ken.
Please standby for next question.
Okay.
Yes.
The next question comes from Chuck Cerankosky with Northcoast Research. Your line is now open.
Good evening, everyone great quarter.
Thanks, Jack and chip could you give us an idea of what inflation was through the first quarter and where you think it will be at year end and then how that might be.
Would be reflected in volume.
Well.
First quarter is still teetering on double digits.
We expect by the end of the year that will be from a year over year perspective will be significantly lower than that but at the same time the units per basket not as I said earlier, we're not expecting to reverse and units per basket, we're expecting sequentially that they will stabilize.
And as they do than you have.
Call It high singles loss on units this year down in the low.
Low singles year over year, while sequentially or flat.
When you say single.
Youre talking about percentage changes.
Yes, Sir yes, Sir.
As a percentage right now apart from inflation are you able to discern from your customers whether they have.
Whether it's economic anxiety that's affecting.
Affecting the basket size number of units in the basket because it sounds like you're making great progress in delivering value with bulk.
And the private label items.
And the value packs and things like the meat Department.
So we've talked about that's a little bit Chuck our project business is seeing a little bit of a reduction and we think as part of this is we think people managing shrink at home rather than buying two pockets of solid you'll buy one pocket of solid so youre doing you don't run out of it as a home and Thats one of the things I think people are paying a lot more attention to.
And that's a trend that we've certainly seen in our business, where the units are coming down a little bit in our project space you only need to buy one drove redrawn to punish the strawberries and that would be the one of the biggest drivers to the numbers in terms of our customers are reacting to across the other part of the store. We're seeing some as you said, we're seeing some we're encouraged by some of the numbers that we're seeing there.
Which again ties up with this kind of if you've got specifically that specific dietary needs are specific interest in certain attributes you tend to not compromise yourself on not one, but where you can compromise yourself Hello version not buying quite so much them projects not as what we see in our customers in the morning.
Alright. Thank you good luck for the rest of the year.
Thanks, Chuck Please standby for next question.
Okay.
The next question comes from Robbie <unk> with Bank of America. Your line is now open.
Hey, Thanks for taking my question I actually have a few modeling follow up questions.
I think these are probably mostly for you chip.
The first would be adjusted DNA was about $30 million in the first quarter is that the type of number we should use for DNA roughly for the next three quarters.
Yes, there'll be some.
Slightly higher between $3 35 for the next three quarters.
Got you and then.
Might have missed it the store closings did you did you close all 11 in the first quarter or.
Or are they closing in the second quarter some of them are.
We closed one in the first quarter. The other 10 are in the second quarter, but when you make the decision to close the stores is when you have to book the charge. So since we made the decision in Q1, we had to take a charge in Q1.
Think of it.
Got it and can you give us.
The rough new store openings by quarter.
Second.
So we should have.
We ended Q1 at 395.
We will in Q2 call. It $3 92 in Q3 and 401, and then Q4 407.
Plus or minus.
Got you.
Those are opening that's our total store yes.
Yes.
I think we can I think we can back into it which I will get back into that.
That's helpful and the last one.
For both of you is just the.
The adjusted EBIT margin was with Super high or very nice this quarter. How are you thinking about the sustainable EBIT margin annually for sprouts.
We've talked in longer term.
This year and longer term should we be thinking like a six plus.
Yes, I think the adjusted EBIT margin six pluses.
We're looking at based on our guidance for the full year. I mean, this was a big quarter of course first quarters are always going to be our highest quarter because that's our biggest your biggest quarter of the year from a sales perspective as people get answer there.
New year's diets.
We're in the mid fives.
And I suspect as we go out into the.
Out years, as we think about our algorithm.
We're probably looking at flat growths.
And then we're probably going to work hard to be flat on G&A. So our operating margin will be call. It a push while we're still.
Growing 10% square footage.
Got it that's tremendously helpful. Thanks, so much guys.
Thank you please standby for our next question.
The next question comes from Kelly Bania with BMO capital markets. Your line is now open.
Hi, good evening, thanks for taking our question.
Was curious if you could.
Talk a little bit about the magnitude of traffic I think I heard.
Earlier question about maybe double digit inflation and a high single digit decline in units per basket.
So just curious if you could talk about the magnitude of traffic and how that trended.
So the traffic in the first part of the quarter was down we were cycling the omicron and the King Soopers strike from last year and the rebound.
And net net.
We don't give the number but it was.
It wasn't tiny but it wasn't huge it was.
If we could do it every quarter that number that's where we'd be.
Okay. Okay.
And I kind of touched on a little bit Q1, maybe.
Seasonally strong, but as we look at this gross margin.
This quarter and even for the past really two years. Your Q1 gross margin is typically your highest.
And then it kind of moderate from there maybe by 80 to 100 basis points does that.
A similar kind of pattern that we should expect this year.
Or maybe just any other factors that as you think about and are planning gross margin.
Any any color you could share.
So that is very similar that's driven by two things in Q1. One is just your thorough volumes, we get a little bit more leverage on your distribution and transportation.
Fixed costs associated with <unk> and the second is just.
The mix of the product the fact that Youre, just our biggest quarter of the year or is this a slightly different mix than any of the other three quarters.
Okay.
That's very helpful and maybe I'll just add one more.
Since those are quick, but I think I heard you say, 60% of your business was from high frequency customers and that sounded like a new insight kidney and was curious if you could maybe talk about.
How you are getting that.
What.
What youre doing with that and what Youre seeing in terms of traffic from those high frequency customers versus maybe.
The other 40%, maybe just expand on that data point, a little bit for us.
Wow.
Those are our most important customers and we're trying to get more of them and it's about getting them to spend more in the basket as your identity, we're getting better and better at identifying and Nebraska exactly who those people out as part of this exercise 18% of our customers I know, we're now sharing we'll get much closer to the information on them and our high frequency customer.
The people are really resonating with the assortment that we have and have specific needs around it.
Those are group of people that we are going to invest a lot more time clearly if you can get lifetime value of those tenant customers, that's going to be a big part of our personalization efforts going forward and as part of the links to being a very tight specialist retailer as opposed to a broad mass market retailer and I think thats kind of an <unk>.
Courage and that those people are beginning to spend a little bit more with us and we think they are operating in a very omnichannel way with us as well, which we're able to understand a little bit better than we have in the past and we will get better going forward, but certainly identifying an important group of people that were spending a lot time thinking.
Yeah.
Thank you.
Okay.
Thanks Kelly.
I show no further questions at this time I would now like to turn the conference back to Jack Sinclair for closing remark.
Well. Thank you everybody for taking the time to listen to our story.
I appreciate your commitment to us and thanks ever so much take care.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Hmm.
Sure.
Okay.
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
[music].
Yes.
[music].
Okay.
Yes.
<unk>.
Yes.
[music].
Okay.
[music].
Yeah.
Yes.
Yes.
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Yes.
Yes.
Okay.
Okay.
Okay.
[music].
Yeah.
Okay.
Okay.
[music].
Okay.
Yes.
[music].
Okay.
Okay.
Yes.
[music].
Okay.
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Hum.
Okay.
[music].
Okay.
Sure.
Yes.
Yes.
[music].
Okay.
[music].
Yes.
Yes.
Yes.
[music].
Okay.
Okay.
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
[music].
Yes.
Okay.
[music].
Yes.
Yes.
Okay.
Okay.
Okay.
[music].
Yes.
Yes.
Yes.
Okay.
Sure.
Yes.
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
[music].
Okay.
Yes.
Yes.
[music].
Yes.
[music].
Okay.
Yes.
[music].
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
[music].
Sure.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.