Q2 2023 Sprouts Farmers Market Inc Earnings Call
Thank you for standing by and welcome to the Sprouts farmers market second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone.
Yourself from the queue simply press Star one again as a reminder, today's program is being recorded and now I'd like to introduce your host for today's program Susannah Livingston, Vice President of Investor Relations and Treasurer. Please go ahead.
And good afternoon, everyone.
Please you were taking the time to join sprouts on our second quarter 2023 earnings call, Jack Sinclair, Chief Executive Officer, and Chip Molloy, Chief Financial Officer are with me today the earnings release announcing our second quarter 2023 results. The webcast of this call and quarterly slides.
Can be accessed through the Investor Relations section of our website at investors that sprouts dotcom.
During this call management may make certain forward looking statements, including statements regarding our expectations for 2023 and beyond.
These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward looking statements for more information. Please refer to the risk factors discussed in our SEC filings and the commentary on forward looking statements at the end of our earnings release.
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, Suzanne and good afternoon, everyone I'm pleased to announce another solid quarter for sprouts farmers market.
41000 team members delivered comparable store sales growth of three 2% total sales growth of 6% and adjusted earnings per share growth of 25% in the second quarter.
Their efforts to provide a unique in store and online experience differentiated products and superior customer service all continued to establish <unk> as a go to healthy speciality food retailer.
During the quarter, we opened six new stores and are on a path to open at least 30 for the full year, allowing us to profitably expand our reach to new health enthusiasts and innovation seeking customers.
During the quarter, we also relocated our southern California distribution center to a new larger facility and we simultaneously expanded uptake DC.
These distribution centers will allow us to bring fresher products to our customer base, while providing capacity for growth in those markets for years to come.
In a moment I would like to turn it over to chip, who will provide a closer look at our second quarter financial performance.
Our outlook for the remainder of the year before doing so I want to take a few moments to thank chip for his 10 plus years of service to sprouts. As you may have seen in our release. This afternoon chip has decided to retire at the end of this year.
<unk> has been a tremendous asset as a member of our board and the executive leadership team.
Danone personal basis I valued under enjoyed our partnership with that I'll turn it over to chip.
Thanks, Jack and good afternoon, everyone.
For the second quarter total sales were $1 7 billion up $97 million or 6% from the same period in 2022.
This increase was driven by adding new stores combined with comparable store sales growth of three 2%.
We experienced positive comp transactions, our proxy for traffic throughout the quarter combined with a net increase in basket.
The basket increase was similar to the last several quarters, where the increase in retail inflation was partially offset by a slight decrease in the number of items in the basket from a year over year perspective.
As expected moving into the third quarter, we are beginning to see a slight tapering of both the year over year price inflation and the unit declines.
Our E Commerce sales grew 16% during the quarter, representing 12, 1% of our total sales are.
New markets continue to show encouraging trends driven by density of stores and increased brand awareness.
On the product front, our strongest performing categories remain the ones with the most differentiation such as grocery bakery dairy and proteins further supporting our strategic decision to focus on these key departments important to the sprouts customer.
Our private label or Sprouts brand sales grew 12% and represented 20% of total sales as innovation seekers value uniqueness and quality only to be found at sprouts.
Turning to gross margin.
Second quarter gross margin was 37%.
Excluding the impact of special items adjusted gross margin was 37, 1% an increase of approximately 70 basis points compared to last year.
Category mix shifts and continued promotional optimization contributed to this accretion.
SG&A for the quarter totaled $498 million.
Excluding the impact of special items, adjusted SG&A totaled $494 million, an increase of $32 million from the same period in 2022.
This increase was primarily driven by the addition of new stores and higher e-commerce fees.
Like many other retailers over the last several quarters, we have been experiencing rising labor costs. More recently, we've also invested in a more engaging store bonus program and additional labor hours for sampling to support the businesses long term growth to.
To date, our operations and information technology teams have done a remarkable job of offsetting those increases with new processes and technologies, while enhancing the customer experience.
Examples include the implementation of <unk> fresh item management, a new labor management system installation of self checkouts and more efficient sequencing social tags.
Store closures and other costs totaled approximately $2 million for the quarter.
While depreciation and amortization exclusive of the depreciation included in cost of sales was $34 million for the quarter.
Excluding special items associated with our store closure decision and the prior quarter, the adjusted depreciation and amortization totaled $32 million.
For the quarter, our earnings before interest and taxes were $92 million, while interest expense was $2 million.
Net income was $67 million and diluted earnings per share were <unk> 65.
Excluding the impact of special items adjusted earnings before interest and taxes were $100 million and adjusted net income was $73 million.
Adjusted diluted earnings per share were <unk> 71.
An increase of 25% compared to the same quarter in the prior year.
Now, let's turn to our cash flow and balance sheet, which remains robust and strong.
During the second quarter, our cash generation allowed us to first and foremost invest in our business, including opening six new stores, the new distribution center, expanding a distribution center and investment and convenience meal fixtures.
In total we spent $48 million in capital expenditures net of landlord reimbursement.
We also paid down $50 million of our bank revolver and returned $50 million to our owners by repurchasing one 4 million shares.
We ended the second quarter with $250 million in cash and cash equivalents of $175 million outstanding on our 700 million revolver and 22 million of outstanding letters of credit.
As we evaluate our expectations for the remainder of the year, we continue to monitor consumer spending and behaviors in a dynamic environment and focus on controlling what we can control.
For the full year, we continue to expect sales growth in the range of 5% to 6% and comp sales growth of 2% to 3%.
We expect gross margins to be slightly up and a slight deleverage in SG&A due predominantly to the acceleration of new store growth and rising labor cost.
Deleverage will be a bit more in third quarter, mainly due to timing shifts we mentioned last quarter.
We are raising expected adjusted earnings before interest and taxes to be between 378% and $390 million and adjusted earnings per share to be between $2 68, and $2 76.
Which assumes no additional share repurchases that said, we do expect to continue to repurchase shares opportunistically.
As Jack mentioned in his opening remarks, we're on track to open at least 30, new stores. This year all of which are in our current prototype.
Capital expenditures net of landlord reversed reimbursements should be between 190 and $210 million.
For the third quarter, we expect comp sales of low single digits and adjusted earnings per share between <unk> 59 and 63.
With that let me turn it back to Jack Jack.
Thanks Chip, we continue to be encouraged by our performance to date driven by the strategic changes we've made over the past few years, our differentiated products are resonating with our core customer segments supply chain continues to get stronger and more efficient we are accelerating our store growth with.
New prototype, we are improving customer experience, both in store and online and slowly, but surely connecting more effectively with covenants and potential customers.
As I have mentioned many times, we are speciality food retailer, we curate products that contain attributes appealing to the health enthusiast customer.
For example in proteins more than 50% of our beef sales our grass fed more than 50% of our chicken sales at organic and 90% of our grocery sales have specific diet attributes such as beacon and non GMO.
Even in projects, which many consider a commodity over 40% of our sales on organic this is a significant difference from other grocers.
Our innovation seekers are also painting, a treasure trove of products from locally sourced projects to our private label Sprouts brand.
In the second quarter, we focused on our seasonal projects assortments in each region and shared the local growth stories in store.
For the second quarter at approximately 19% of our project sales or from local farms.
As chip mentioned Sprouts brand continues to be a growth driver for us with penetration over 20% next year.
We have driven the brand through active sampling e-commerce and store merchandising improvements and redesigned packaging. Our team has released over 200, new sprouts brand items. This year focusing on relevant taste profiles and health attributes. We were honored this year to receive many vertex awards.
Including retailer of the year on several several gold silver and bronze awards for our curated products with eliminating the guesswork of finding healthy alternatives because differentiated healthy options are who we are and what we sell.
As I mentioned earlier during the second quarter, we were busy improving our supply chain.
We successfully opened our new launch our southern California, DC in Fullerton in May and closed the Colton, California, DC that we outgrew in late June .
We doubled the size of our Texas, DC and added ripening capabilities in our Texas and Arizona Dcs.
These expansions through our DC square footage by approximately 40% coupled with our recently opened DC in Colorado, and Florida. These expansions allow us to support our 10% store growth, while improving our project quality and freshness.
As for unit growth a smaller most cost effective format continues to rollout.
We opened six new stores in the second quarter, bringing us to 14, new stores year to date all in the new prototype.
Our pipeline is also growing with nearly 100 approved new stores and more than 60 executed leases.
<unk> gained traction towards our goal of 10% unit growth per year, starting in 2024.
Our recent vintages continue to perform as expected as we focus on great store locations, increasing our marketing reach for greater awareness on highlighting our unique attribute driven products, both in and out of store.
We continue to work on our Omnichannel experience as I have mentioned, we rolled out a more active sampling program to help support trial on basket growth, although unique and healthy offerings, including <unk> brand products.
And while our enhanced customer service program is just off the ground, we're seeing scores for any store satisfaction improve beyond our <unk> goals.
Online we are pleased with our sales and customer growth in all three of our channels ends to comp door dash and outerwear shop dot strokes dot com.
Over the last several quarters, we have significantly enhanced our e-commerce platforms, including our site redesign and optimized SaaS functionality to create a more personalised and relevant customer experience with improved products shopping our menu redesign and rolling out our <unk> flyer.
Communicating and connecting with customers more effectively continues to be a top priority and opportunity for sprouts.
Almost 80% of our media is now span on digital aimed at driving more shopping occasions, with our target customers and supported by data driven plans.
Our find your healthy creative campaign is evolving to use more enticing foot photography to communicate communicate freshness and move away from that <unk>.
Our new creative approach is designed to work in tandem with our digital media plan that focuses on each stage of the customer journey.
As we all know linking transactions with individual customers provides valuable data and better insights into their needs and once we are still in the test and learn phase with our personalization efforts. These lendings are helping to data thinking as we build towards a more robust and relevant loyalty program.
This is a multiyear journey that we believe could provide significant future benefits.
In summary, we believe we are making progress in growing our business and establishing our brand as the healthy speciality retailer of choice in a challenging macro environment.
That said there is more work to do to capture the opportunities in front of us. Fortunately, we have a talented team in place.
Well positioned to succeed and grow.
With that I'd like to turn it over to quest for questions operator.
Certainly one moment for our first question and as a reminder, if you have a question. Please press star one one.
And our first question comes from the line of Ken Goldman from Jpmorgan. Your question. Please.
Hi, Thank you.
Chip congrats on your pending retirement.
I was curious Tim.
Typically when a retirement as announced the company will either.
Now its successor or at least we'll say that a search is underway in this case the phrasing was that our search will take place.
Just didn't know if that's indicative of any element of suddenness or anything we should think about in terms of the timing I assume there is nothing there I just wanted to ask and make sure.
No absolutely cannot search is underway, we should should've been clearer announced exit if we Didnt express <unk> out because it is a step to underway.
And it's not until theres not suddenly settle on.
We've been thinking about this for some time chips be thinking about at some time at home and you won't see something Shetland, Yes, Ken This is.
It's been planned for a while in my head and timing is right.
Been a great great Ron here.
They are 10 plus years and that's.
I'm, just I'm ready to go out to pasture. Finally, I've tried to retire a couple of other times a failed miserably with Osama I think I'm going to go.
You've been there during an interesting 10 years, so congrats to you.
I just wanted to also ask.
The competitive environment.
Certainly still seems from what we can tell to be rational clearly, there's a bit more promoting going on it seems to be paid for mostly by the vendors. The manufacturers just wanted to get a little bit of a broader sense for how you see that for the rest of the year, what youre factoring into your guidance.
You would agree that it's still within the boundaries of what you might consider rational if thats the case.
Yes, I think you've described it exactly right in the context of the competitive dynamic doesn't seem to be changing dramatically and certainly we are we don't have slightly different place in all of the things that we sell are very different to how you would describe that competitive dynamic. So we're watching it we watch our project pricing.
Very carefully and learned we're in good shape on that and we're not seeing a lot of things that cause that gives us cause for.
Any concern in that space.
Okay.
Great. Thank you so much.
Thanks, Ken.
Thank you one moment for our next question.
And our next question comes from the line of.
Jordan from Goldman Sachs. Your question. Please.
Good afternoon. Thank you for taking my question I.
I just wanted to touch on on volumes, you said that they were improving sequentially, but still in declines just any color on the magnitude of how that's improving there and then should we think that it's coming back from the produce side is that's where the the challenge was last year or just can you talk about how the trends in fresh produce.
Overall, our to the total store decline.
Yes, Leo this is Joe so overall, we're seeing as we had expected.
In all honestly last year, we expected it to within the Ukraine incident happened, but we expected at the beginning of the year that is the year, where progress there'll be less top line benefit associated with AUR and that the units per basket would start to stabilize so you get less negative.
Every year, we're beginning and starting to see it late in the quarter and beginning to see it into the third quarter, where it's happening just as we thought we are seeing less benefit from AUR and youre starting to see a stabilized sequentially and the same thing for units you are beginning to see less negative per.
Units and it's beginning to stabilize and it's in there.
Just starting to get to that number.
Slightly under 10, and that's where we are hanging out units per basket.
And regarding the fresh side of the.
The question Leah.
Areas like meat, we have seen a slowdown in the rate of inflation and we've also seen and encourage new change in terms of the unit volume that's been going through and that so the way chip described almost 18 months ago, how that's playing through as high we're expecting it to play through going forward you have seen a little bit reduction in.
Terms of the ace of inflation, not going not going into a negative but the pace of installations slowing down.
Dilution in units is changing and volatile categories like avocado as youre seeing some pretty dramatic changes in that were the pricing changes and you see a pretty immediate change in unit volume. So we will watch it closely we don't have any.
<unk> is a big part of our business as you know so we watch that and Theres always been volatility in <unk> projects not remains the case.
Okay.
Okay, great. Thank you and just on my follow up I wanted to check in on the <unk> comp guide.
Single digit it's just a bit more vague than you guys typically give so curious if you're seeing anything different.
Behavior wise from the consumer or is that more just a function of maybe uncertainty on the deflation outlook. So any color there and maybe some some quarter to date color as well. Thank you.
Yes.
We.
It's a little less a little water, obviously those singles can be one to three years.
We feel solid about that and.
How that unit versus AUR in how it transpires through the quarter as I would say, it's it's fragile.
Fundamentally comes out but right now we feel really comfortable that we're.
We're going to be in that range.
Okay. Thank you.
Thanks, Dave.
One moment for our next question.
And our next question comes from the line of John <unk>.
From Guggenheim Your question please.
Hey, Jack can you dive into.
The <unk> target customer segments.
Segment.
In terms of.
Growth in new new households, right of that group.
Any insight you have on wallet share.
Just curious how they're performing relative to the overall base.
In terms of the acquisition and how much of their wallet do you think you have today.
Well, we've got a low percentage of the wallet, but you've always had in terms of the health enthusiasts and the innovation seekers. The encouraging thing that when I look at data about not shown organic which is the kind of.
Which we can get very good data on in terms of our market share market share is encouragingly growing within that space and significantly different to the kind of the more traditional products that we have so a lot of business is continuing to focus on differentiation. So that we can attract and appeal to a small <unk>.
Share growth that we need from those target customers and where we're seeing some encouraging market share data in the last little while I'm very encouraged by the traffic that's coming in on the traffic's coming in both digitally both e-commerce and in bricks and mortar. So we're seeing a nice balance of both.
So we're creating this omnichannel customer who's very soon.
With the curated assortment that we've got on the data that <unk> got and we'll get more data going forward, but the data that we've got so far suggests that we're growing share with those target customers, which has always been the intent since we really pivoted the strategy around this target customer base.
Okay.
So when you say low single digit rate that.
Your share of the market as opposed to.
<unk> share of individual customers wallet as I know you don't have a loyalty program, but I'm just curious right with your best customers what percent of your wallet of their wallet do you think youre getting food is it.
Is it 15%, 20% or not not that not that high.
No I'd say, it's relatively low I don't have the exact number and thats why the opportunity is so big in front of US we don't need much of a growth to make the numbers really add up over the next few years and that's why we're so confident of what are the strategies, we got a little share of our customers' wallet, which is the nature of our assortment we've said all.
All along that we're not going to try and win on conventional products with conventional grocers, we're going to run on that.
Well then take that assortment that we have on not on the basis of what we're looking out to the moment us moving in the right direction and we continue to have confidence that the growth in share of wallet that we will get with those target customers on more than fulfill our long term plans.
Alright, and then just lastly, you think youll have a loyalty program.
It will probably be more affinity and loyalty but.
When do you think you'll have something out there in the next 12 months or longer you think.
We're working very hard on this and it will evolve and develop and I don't think youre going to wake up one day and how that exactly the way we want to have it. We will then we're getting more data from our customers will increasingly get more data from our customers and what we then do with that we are in the process of figuring that one out and exactly how that manifests itself.
And how it plays into the marketplace, we'll certainly been about positioned to know exactly next.
Next year on this one.
Thank you.
Thanks, John .
Thank you one moment for our next question.
And our next question comes from the line of Mark Carden from UBS. Your question. Please.
Afternoon. Thanks, so much for taking the question and chip congratulations on the retirement, so another strong comp and it seems like Youre seeing some nice market share gains. When you think about your store base are you seeing much of a deviation in results between your newer markets in your legacy markets, you guys talked about improving brand awareness.
Near where you want to be from a recognition perspective, and some of your newer markets or is there still a lot more runway on that front.
Well the certainly runway in our newer markets, we have a very clear kind of position it takes a little bit longer than in the in Florida and the mid Atlantic in certain pockets of the country to get the stores up and running and moving the way we want to do I've been very encouraged by Florida, though in terms of where we've been because those stores are no big it we're now getting some.
Critical mass in tons like <unk>, we're seeing some encouraging two year numbers of our Florida business, which suggests kind of how we thought about as I said, it takes a little bit longer and unique critical mass from a marketing point of view, we've got a bit of work to do to build on that in the mid Atlantic market, but we've got time, we've got.
Not the plans in terms of the stores that we talked about are very much about consolidating the store base around Orion tighter market. So that we can get the effective marketing in place. It takes a lot longer we're not known and it goes a bit faster in places, where we are known and we're flexing our marketing communications.
Well not as well as we go forward.
Great.
We remain on track to reach your 30 store target for this year I know, it's still a little bit early but any update on how youre thinking about unit growth next year would you still expect to return to your algorithm or some of the headwinds.
There has been impact we would be helpful.
Sorry, yes, yes, well, we're comfortable on the SaaS, a number and maybe a couple more than that this year, but.
In 2008, and 2024 will be on track for 10%.
Thanks, so much and get all the sites approved on that as well so we've got our confidence in that.
Fantastic. Thanks again.
Thanks.
Thank you one moment for our next question.
And our next question comes from the line of Karen short from Credit Suisse. Your question. Please.
Hey, Thanks, very much and I Echo my congratulations chip for retirement.
So I did want to just ask two things.
Looking at the second half sales growth versus EBIT growth.
Compared to what you just did in <unk>.
That's significant.
Divergence I guess in those numbers. So I know there is a lot of moving parts, but wondering if you could just parse out what those two components would be for that Delta and then so.
So specifically puts and takes on gross margin and SG&A and then what specific inflation number are you thinking about for the second half.
Karen This is <unk> first thanks for the congratulations I appreciate it.
As it relates to the second half really nothing's changed since our guidance within the year and even last quarter I think.
We gave enough details to suggest that in the back half we wouldn't see the same kind of profitability gains predominantly because number one I think our margins are going to get our gross margins are generally going to be flat in the back half of the year and on the SG&A front, we're going to have some deleverage specifically in the third quarter.
And that the pieces of that or a couple one theres a little bit of timing in the third quarter.
Talk about last quarter.
Second is as we get through this as we start to accelerate the store growth that will put a strain on the P&L and thirdly as labor costs are being oil for everyone for a long time as we said on the call. We take the labor cost and the store growth is we've really done a great. Our teams have done a great job of mitigating that transitioned through.
But at the moment as we get we start to lap some things we did last year, I guess, a little bit more difficult to mitigate those cost increases.
The good news is at least on the labor the labor the labor rates are beginning to stabilize so it won't be as difficult next year, but for the back half of the Europe's a little bit of a stream and as we accelerate the store growth.
How that math works, but again next year middle of next year, we'll start to be in that stable place with a number of stores are going in the ground every year.
Okay and inflation.
Oh inflation, so on the inflation front.
Our thought in the beginning of the year was always going to be in double digits in the beginning of the year from a year over year perspective, and then sequentially as you migrated through the year that you would be then.
By the third and fourth quarter.
Mid single digits year over year, and that seems to be starting to play out.
Okay. Thanks, so much.
Okay.
Thank you one moment for our next question.
And our next question comes from the line of Cristina <unk> from Deutsche Bank. Your question. Please.
Hi, Good afternoon, I wanted to add my congratulations to Jeff on the retirement as well.
I have a follow up question on gross margin, which obviously was quite strong in the second quarter and I think that's despite some rising promotion throughout the period. So maybe can you talk about the drivers behind the gross margin you mentioned.
Better promotional.
Average.
What are some of the other offsets that you're finding.
Really drive that performance there.
For example, some of.
The scrap funded promotions to seem like us like last week sale any private label items and then within that as well just my question on this you know how you view your current price gaps and just how willing at sprouts.
To retain traffic and market share in exchange for managing margins at these levels. Thank you.
Thanks, Kristina I'll talk about the margin and then Jack will talk about the.
So from a margin perspective, we did come into the quarter, we were expecting some margin accretion.
Did we did over perform on that line.
It is.
Partially driven by mix both within the categories and then overall for the company category to category as we see some of our higher margin businesses are growing faster than some of our lower than within the categories. Some of the items.
Subcategories, if you will in the organics are growing faster than than more commoditized. So that's helping also as we've talked about promo effectiveness, we're continuing to see ourselves more on the ERP and lessen the promotional front and then thirdly, a little bit we probably over performed a little bit on.
Just like probably five or six quarters ago.
<unk> costs rising we got behind it a little bit teeny bit ahead at this time.
That's sort of a transitory so doug.
I wouldn't count on that going forward and as we look for the rest of the year, but really getting to that place, where we think the margins are going to become more and more stable.
Year over year.
So yes, Kristina the margins in good shape, and we're comfortable the way, it's being managed and price gaps play a key role, particularly in our projects business, where we spend a lot of time looking at where we are we're very aggressive on organic projects and we've talked a little bit about how successful that's been for us the whole context of our produce price gap.
<unk> is in a good shape and we're comfortable where we're at.
We continue to look at it and continue to be where we've always been there.
Other things that we will account pricing I'm very pleased the way the bulk pricing given that not a lot of other people sell bulk foods. The fact that we're able to sell loose volatile on commodity items for customers, where they can control.
The volume that our purchasing portion control, we're operating about 20% cheaper than our packaged goods on the equivalent items. So that's been an important part of our pricing mechanism going forward and our <unk>.
On our base business, our grocery business, our daily business, our frozen business sales such a different assortment that will look a lot of elasticity on pricing as opposed to GAAP and spend a lot of time working out what the right price is to maximize the volume. So it's very much in line with how we've been working our pricing all the way through.
As chip said, we've made some progress on the margin and we continue to watch our price gap.
Thank you for that and just as a follow up on E Commerce, which was strong yet again I think you said it grew 16% in the quarter can.
Can you talk about the what impact the expanded partnership had with door dash on your same store sales and then just generally how are you thinking about the sustainability of that E. Comm momentum once you really start to lap that.
So our national expansion.
Well as I say, we are very focused on being an omnichannel retailer that the customer will take us where they want to take us with regard to we want customers who are focused on our assortment based on our differentiated curated assortment and they seem to be navigating the thing thats encouraging Christina for US is that we're seeing traffic growth in both E comm.
And in our bricks and mortars business and its kind of equal between the two.
The two of them <unk> has enhanced our growth on <unk> in traffic a little bit in terms of working that through and we're pleased with the partnership with both <unk> and door Dash again, it's allowing the customer to choose how they want to engage with us and as the data business is a little bit more immediate people are looking for faster delivery relative to the <unk>.
But both of them are performing well for us and we're encouraged by the progress that we're making both on both of them.
But I would add in the door to ashes. It is helping but it's still a less than 1% of the contribution of the call.
Okay.
Thank you so much and best of luck.
Thanks.
Thank you one moment for our next question.
And our next question comes from the line of Michael in Montana from Evercore ISI. Your question. Please.
Hey, good evening. Thanks for taking the question also extend congratulations to chip as well.
I wanted to ask first off if I could if you could provide some additional color.
What drove the comp this quarter was it more transaction size or transaction counts and then also intra quarter trends and geographic trends. If there's anything additional you could share on the color front there.
It's a strip thanks again.
So as it relates to the quarter. It was a really from period to period. It was a pretty stable quarter. So we had positive comp transactions throughout the quarter every single period slightly.
Again, we saw AUR benefit from inflation and we saw a little bit of unit decline similar to what we've seen as you got late in the quarter, we started to see that tapering off both the AUR in the unit decline, so thats kind of the mix of the transactions, but our mix of the of the call.
As it relates to.
Geography was again, we see.
It's been pretty stable across the geographies I will say that some of our getting comps like Florida and the mid Atlantic where we have a mix.
Higher mix of newer stores, you get a little bit extra there from a call, but generally we feel really good those markets. Those onesie twosies markets have been a little bit of a challenge for us those places where we have just.
Well density and there is they are pretty far away examples that we have one store in Louisiana.
A couple in Oklahoma, we have.
Sort of Onesie Twosies, there are just not performing as well because we just don't have brand density. So that plays out as to the story of why we want to densify our markets.
Got you and then if I could just follow up on the SG&A front wanted to see basically.
What you would need to see in terms of a leverage point from the comps in order to get natural leverage given the accelerated store growth and the wage inflation Youre seeing and then has there been any deceleration I guess to start the quarter or was the low single digit guide potentially looking at what could come but you haven't seen it yet.
Well I'll address the first part so when we're growing we're at this place where we're going to be growing 10% a year you really do need if your gross margins are stable to keep your operating margin generally flat. So that leverage point you need a three comp to be able to do that.
The long over the long haul annual annual to annual.
Any given quarter you could have some puts and takes we are a little bit of it.
Call It a take in the third quarter, which we've talked about but outside of that you need you need about a three comp to be able to that and what was the second question again.
I just wanted to see kind of low single digit guide right. So the midpoint Cologuard analogic.
Yes, yes, yes, we're a little or a little earlier in the quarter than we were last quarter. So we feel I mean, we feel solid about the quarter feel good about the guide for <unk>.
As it relates to what's in front of us.
This is no different than what we said last call. We said we were going to be essentially a three comp for the year, we were tracking to recall what.
We set a two to three for the year, we were tracking to a three so that implied a one to three for the back half and here we are in the back half.
We're just we're tracking on for that so that's where we think we will be.
Got it thank you.
Thank you one moment for our next question.
Okay.
Our next question comes from the line of.
<unk> parekh.
Rick from Oppenheimer. Your question please.
Good afternoon, and thanks for taking my question and also chip congrats on your pending retirement.
I just wanted to go back to the traffic from that traffic has been positive year to date. So just curious as you look at your initiatives in stores, where do you think has been key in driving that positive traffic that you continue to say.
Sure.
Yes, I think what we've been trying to do is increase the customer engagement both in store and our store. So the in store space of it what we've been doing is <unk> got in the way of being of being engaging with customers being able to talk to customers and data customers in all of our customers come into our store and are looking for advice, whether it be in the vitamins.
And sub plunge department, whether it be on certain dietary thing. So we're trying to engage much more the team being able to engage sampling program has been wound up pretty substantially and I think the fact that we've got so many new innovative items with good this innovation table in our stores, which features SaaS to 40 items every quarter.
So that are completely unique to sprouts, and we're doing a lot of sampling on not seeing a lot of success in the strength category in the snacks category and those type of initiatives. So sampling has been a big thing engaging with the customer in the store and making sure that we're providing a faster cleaner checkout service as well. So we're very pleased by.
The customer service scores that we gave which we measure significantly with no bonus to store as part of the bonus program.
There is a customer service measure that we get and the numbers are not are very encouraging and ahead of where we expected them to be so there's a lot going on inside the store the store, where we're finding we're finding ways to make it easier for people to navigate through the e-commerce experience with us whether it would be when we.
Good pictures on the on the website people can immediately access directly into the product enable to purchase the product. We've made a lot of progress we've got a lot more to go but we've made some progress on our App. We made some progress on our website. So let's just this whole principle and that comes under the umbrella.
And the operating team have been doing a lot of work to try and make the experience when you come into a store superior to the experience you would get in other grocery stores.
Great and then maybe just one follow up question. So just on the consumer are you guys seeing any shifts in consumer behavior, whether trade down or anything different versus what you saw last quarter.
I think that trend continues a little bit there's a little bit of trade diamond across the marketplace and there is a little bit of trade down in our business people buying slightly cheaper so things people buying slightly less items as they go through the store. So yes, there is a little bit of trade down.
So we've said often our customer base, who are in our stores to buy our unique assortment whether it be dietary based are key to our paleo vegan based on they tend to stick to the that's what their diet is and thats, what they buy they might trade around a little bit so the behavior hasnt changed dramatically in Q2 to Q1.
We're not seeing a lot of changes in that dynamic.
Great. Thank you I'll pass it along.
Thanks, Nick.
Thank you one moment for our next question.
And our next question comes from the line of Kelly Bania from BMO capital markets. Your question. Please.
Okay.
Hi, good evening, and congrats as well to you chip.
<unk>.
I was hoping we could go back a little bit to the gross margin I think chip if I heard you correctly you said you.
Youre expecting flat in the second half I think that means flat on a year over year basis for the second half.
Maybe correct me if I'm wrong, there, but can you talk about the factors.
That are supporting that and I guess just given.
Other grocers and obviously a lot of other retailers talking about shrink maybe you can just update us on where you are on the various buckets of shrink.
Yeah.
Especially as you mentioned I think rolling out to more self checkout.
Yes, Kelly so as it relates to margins I did mean flat from a year over year perspective, So we're expecting to be pretty darn stable. Both in Q3, and Q4 from a year over year perspective, and as it relates to shrink Jack was going to I.
And I think the dynamic in retail.
A lot of challenges in across the retail industry on the amount of them SaaS, that's going on organized crime behind it we are not seeing that dynamic to the same extent as youre hearing from the other retailers principally because.
<unk> sales are still a niche and so differentiated though not quite as easy to sell on when people take things from US. We do have a couple of stores that were watching on vitamins and supplements and things like that so we are definitely not seeing the dynamic that you are hearing about from other people. We continue to work hard at making sure strengthen our pilots.
Which is all about fresh foods.
Or are we putting the right amount to the store and how we can make some progress on that and we're feeling that we've got a lot of progress to make there, but we've made some progress as well as we work on our systems and our replenishment to make sure that in the stores, where the right Jangaweed talked often in these calls about P. ICAO perpetual inventory computer.
Assisted offering that programs rolling out across the chain and we made some progress im trying to get the right amount of product into the store at the right time on these new distribution centers on helping us do that as well, but I want to do on systems that strength I think we've got strength under control and it's a different dynamic to other retailers Kelly.
That's helpful.
Thank you talked about a favorable product mix shift, but I haven't.
I think I heard just about vitamins and supplements in particular, how is that category doing in.
Any any color you can share on just the trends in that category.
Yes, well we've been encouraged that there is a law post COVID-19 upsides and people buying products for immunity and we're certainly seeing that cold and flu season, clearly makes a difference one way or the other and high without walks from one quarter to the next but underlying it we're very pleased with the teams are working in our.
Items, and supplement department, but providing a lot of guidance and advice to our to our customers when they come in.
Photos were encouraged by it.
Yes.
Over index.
Related to the.
Company call. So its comp was better than the company comp.
Okay.
Okay.
Thank you.
One moment for our next question.
And our next question comes from the line of Robbie <unk> from Bank of America. Your question. Please.
Oh, Hey, Thanks for taking my question and chip congrats on the retirement.
My question is just when I when we listen to.
The thoughts on gross margin and labor and then the.
New stores hitting the P&L can you give us any sort of ways to think about.
Whether you can keep the gross margin and the EBIT margin in similar ranges for 2024 versus what you've achieved in 2023.
Yeah Ravi <unk>.
First thank you for the congrats so we think about it's still early to think about next year. Obviously, we have a multiyear plan we try to work from.
Just beginning to think about next year, but our goal is to keep the gross margins flat.
And we'll continue to work to have our operating margins close to being flat, which means on the SG&A front, we're going to constantly have to do work there may be quarters, just like this year I mentioned, the third quarter is a little bit dilutive on the SG&A line, but I do think the teams are rallied around those opportunities to find ways.
To leverage or at least to ensure that we're not delevering on the SG&A line. So there is still opportunities to go after it as it gets a little harder over time, but I think the teams are ready to go do that.
Terrific Thats really helpful. Thanks.
Thank you one moment for our next question.
And our next question comes from the line of Chuck Cerankosky from Northcoast.
Research your question please.
Good evening everyone.
Could you guys either one of you comment on the inflation, you're seeing in the cost of private label merchandise and then could you. Please give me your outlook on where you think that growth rate is headed as the economy normalizes thats been obviously very strong growth in due.
Your customers stay with it and keep buying or does or do they migrate back to branded products.
Well, let me start chunk, but the second part of your context, which was where are we in terms of.
Our sprouts brand product is now operating and the way that our private brand would operate across the traditional grocery space. We're trying to make sure that everything we're putting in value that is differentiated and has a very it doesn't have a commodity space to it. So we believe the growth in our <unk> or 'twenty.
No well continue as the team that's been put in place in that space continue to find differentiated products that fit our target customers and we've made a ton of progress on that and I'm very encouraged not just for the health enthusiasts for this innovation seek other we have we're doing we're doing a really nice job of bringing products.
To the market that you can't find anywhere else under the <unk> brand. So I'm encouraged by that and I think youll continue to grow almost irrespective of how the economy grows I think has a mix as a mix of our business. Our first fund will be strong going forward in terms of cost base again for the same reason we are having.
Impact on the cost side of of Sprouts brand, it's very much about how the commodities are playing through and there has been some volatility in commodity and commodity prices how that plays into our brand.
It's difficult to say exactly I think chip talked Dalian about what's going to happen.
Crane vein, saying and how does that knock on effect of in terms of cost prices for raw materials going into into products processed products across the country I think that's a little bit uncertain, but we are pretty confident we can we will certainly be able to manage the product side of this and the team are very focused on making sure that we're buying.
These products are the most effective price we can.
Thank you for that and chip good luck to you.
Thanks Chuck.
Thank you one moment for our next question.
And our next question comes from the line of Edward Kelly from Wells Fargo. Your question. Please.
Hi, guys good afternoon and congrats.
Congrats again.
I wanted to ask about inflation a follow up one on Karen's question I thought I heard you say that you expect inflation to be in the mid single digits.
In the back half of the year I just wanted to clarify that.
So can you talk about the drivers of that level.
Yeah. So the drivers of that would just be the prices that are already in place today and as they play out year over year, that's how it's going to play out.
Okay.
And then a follow up.
Is it related to your promotional strategy.
And.
This is dynamic promotional intensity versus engagement we've heard.
Some talk in the marketplace about.
Increased promotional engagement for things like E Mail for instance, with customers that may be attached to certain stores.
It makes it look like intensity is growing but I don't know it might just be engagements is growing and I don't know how about in New York.
Level.
We can we can.
Sorry, Ed.
Areas are obviously saw that yes, how your strategy is evolving because obviously your margin does not suggest intensity picking up now.
It seems like it might be engagement.
We are getting better engagement SaaS suddenly, we're getting back to us and in the right E mails to the right people. So that we're not diluting the effect of that will get much better for us as we get more data from our customers and become increasingly personalize the nature of our offer are.
The nature of our proposition to the customer does rely on us being very passionate lives in the off our people who've got particular dietary needs less communicate in simple terms, we don't wanted to communicating meet grass fed meat offers to the vegan customer and that we've got and we've got all of them. So getting more precise in how we do it.
Probably what youre, what youre seeing in that kind of dialogue about the promotional intensity, we as a business of no intention of investing a ton of margin behind promotions, but we've got a law of intention of making sure. Our promotions are more targeted more accurate and more precise in terms of driving business for us.
Great. Thank you.
Thanks.
Thank you one moment for our final question for today.
Okay.
And our final question for today comes from the line of Scott <unk> from <unk> capital. Your question. Please.
Hey, guys. Thanks for taking my questions and chip I think we're all going to miss shifts, so, but not yet because youre going to be around for a little bit longer.
I will.
So my first question is more housekeeping I know you guys said you were going to close I think you said 11 stores this year.
Looks like a bunch of those were in the second quarter, how do we how should we look at net new openings as we move forward and what your expectation for net openings. This year and how do we think about next.
Well, if you think about we will have close to 11% sure and we will open at least 30, so just doing the math there.
30, myeloma finance guys.
Yes.
That's a net of 19 plus provides us.
Hey, Jeff.
Additives question asset.
A net 19 ish.
All of this year and then as we think next year next year, we're targeting 10% unit growth there shouldnt be any.
There shouldnt be any closures like we did this year is there a one or two off that we might end up as the leases expire there might be but generally we should be looking at 10% net growth.
2024 and beyond.
Okay.
Thanks for the clarification. There. So then my next question and I think it's kind of been touched on a little bit, but I just wanted to get out of it maybe a little more around kind of the glide path on earnings as we progress forward.
Thinking about the comp I think it's going to come in this year, which came in the middle of your range of two and a half.
A big acceleration.
Next year. It just seems like the earnings growth could be more muted or am I thinking about things wrong.
Well I think if we if you think about it.
We're trying to drive towards.
All three ish plus comp.
And we're trying to keep our gross margins flat and our SG&A then would grow in line with top line, which would be call. It high singles.
On top line, so to 10 ish.
That gives you an operating margin is flat and you get earnings growth in the high singles pretty share buyback can we do that I think we have a lot of confidence.
We more than some of your peers that we can really keep our gross margin stable with a ton of confidence there with our differentiated product and we go to market differentiated customer base, we feel like we can keep that as it relates to the cost basis.
Yes, right now.
We are accelerating store growth. So we have to manage through that the good news. The other thing that's been hitting US has been labor cost labor cost growth is beginning to decelerate. So I think going into next year, we'll be in a better place that we can manage that and I think as I said earlier and I know it sounds <unk>.
Over simplified, but we have we have an aligned team here and aligned building in line stores that knows that we really want to manage our costs and keep them under control. So we're always looking for opportunities and there is we will be able to have confidence we'll be able to do that we've made a lot of investments in our stores.
Support office over the last couple of years, and we're getting to a place where that does not need to grow nearly like it has we had to put in new systems, we add more people to invest across the board we invested in merch planning, we invested in financial planning we've been all over the board, we're getting to a place where we can begin to layer.
Average the corporate part of it is just about managing labor at that point in the stores.
Alright, great. Thank you for taking the question.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Jack Sinclair for any further remarks.
Thanks, very much everyone for all the questions and your attention and thanks again to chip and congratulations on his retirement as Scott just said he has got a bit more work to do because he is not going until the end of the year.
We look forward to working through the next few months together. Thanks.
Thanks again for your attention.
Sure.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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