Q3 2023 Sprouts Farmers Market Inc Earnings Call
Thank you for standing by and welcome to Sprouts farmers market third 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 this session you will need to press star one on your telephone.
One to remove yourself from the queue simply press star one again.
A reminder, today's program is being recorded and now I would like to reduce your host for today's program.
Susannah Livingston, Vice President of Investor Relations and Treasurer. Please go ahead.
Thank you and good morning, everyone. We are pleased you're joining sprouts on our third quarter 2023 earnings call Jack Sinclair, Chief Executive Officer, Chip Malloy, Chief Financial Officer, and Curtis Valentine Senior Vice President of final.
With me today.
The earnings release announcing our third quarter 2023 results.
Cast 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.
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 morning, everyone I am pleased to announce another solid quarter for sprouts farmers market to us.
1000 team members commitment to serving our customers embracing operational excellence and cross functional teamwork drove comparable store sales growth of three 9% total sales growth of 8% and adjusted earnings per share growth of 7% in the third quarter.
Four years ago, we shifted our strategy, we started by defining our target customer segments health enthusiasts and innovation seekers. Those two segments constituted a $200 billion marketplace in the United States and we believe we could be the market leader in that space. We then stepped out.
To reach more of those customers by providing them with differentiated products and experiences that fulfill their needs and desires.
During our journey, we focused on several critical initiatives, including developing a smaller more profitable store prototype and accelerating store growth, while evolving an efficient supply chain that provides more freshness.
We focused on innovation and our assortment with a strong bias towards differentiated sprouts brand portfolio we.
We expanded our omni channel channel strategy and also shifted our marketing approach from weekly unprofitable discounts to messages highlighting differentiation Adil.
Additionally, we focused on implementing systems and processes to improve our operations better utilizing store labor and developing talent across the organization.
We're beginning to see the fruits of those investments and they are driving our performance. However, there is still plenty of work to be done to capture the opportunities in front of US we remain focused on improving all aspects of our business.
In a moment I'd like to turn it over to chip, who will provide a closer look at our third quarter financial performance and outlook for the remainder of the year before doing so I want to congratulate Curtis Valentine.
Currently senior Vice President of Finance, who.
Operator: Thank you for standing by and welcome to Sprouts Farmers Market 3rd 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 11 on your telephone. To remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded.
It will take over as our new Chief Financial Officer on January one 2024.
<unk> has been with sprites for over eight years and possesses a wealth of retail experience our board of directors leadership team and team members greatly respect and support customers and we all anticipate a seamless transition.
Operator: And now I'd like to introduce your host for today's program.
I want to congratulate chip on his upcoming retirement.
Susannah Livingston: Susannah Livingston, vice president of investor relations and treasurer, please go ahead. Thank you and good morning, everyone. We are pleased you are joining Sprouts on our third quarter 2023 earnings call. Jack Sinclair, Chief Executive Officer, Chip Maloy, Chief Financial Officer, and Curtis Valentine, Senior Vice President of Finance are with me today.
Positive contributions to sprouts as a member of our board and executive leadership over the last 10 years I am grateful for his partnership as we are shutdown unused strategy and more importantly, his friendship since I've been at sprouts.
You all the best with that I'll turn it over to chip for he says is curious part here on last earnings call.
Thank you Jack I appreciate the kind words.
Susannah Livingston: The earnings release announcing our third quarter 2023 results. The webcast of this call and quarterly slides can be accessed through the investor relations section of our website at investors.sprouts.com. 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 filing and the commentary on forward looking statements at the end of our release. A remarks today include references to non-gap measures. Please see the tables in our earnings release to reference style or non-gap measures to the comparable gap figures.
For the third quarter total sales were $1 7 billion up $122 million or 8% from the same period. In 2022. This increase was driven by a comparable store sales growth of three 9% and the addition of new stores.
Comp transactions, our proxy for traffic were positive every period of the quarter in stores and online.
As expected sequential increases in average unit retails and decreases and units per basket.
Lesson as we progressed through the quarter.
Our E Commerce sales grew 16% during the quarter, representing 12, 1% of our total sales.
We opened 10 new stores.
For the first three quarters of the year, we've opened 24, new stores all of the new prototype acquired two previously licensed stores and closed 11.
Jack Sinclair: With that, let me hand it over to Jack. Thanks, Susanna, and good morning, everyone. I am pleased to announce another solid quarter for Sprouts Farmers Market. A 31,000 team member's commitment to serving our customers embracing operational icons and cross-functional teamwork, growth comparable store sales growth of 3.9%, total sales growth of 8%, and adjusted earnings per share growth of 7% in the third quarter.
We ended the quarter with 401 stores.
From a category perspective, both perishable and non perishables and produce positive comp sales with particular strength in meat grocery dairy and frozen.
The quarter's performance was also supported by better in stocks, especially on our sprouts brand products.
Jack Sinclair: Four years ago, we shifted our strategy. We started by defining our target customer segments, health enthusiasts, and innovation seekers. Those two segments constituted a $200 billion marketplace in the United States, and we believe we could be the market leader in that space. We then set out to reach more of those customers by providing them with differentiated products and experiences that fulfill their needs and desires. During our journey, we focused on several critical initiatives, including developing a smaller, more profitable store prototype, and accelerating store growth, while evolving an efficient supply chain that provides more freshness.
Sprouts brand sales grew 14% and represented 25% of total sales as we continue to grow this innovative category of products only found at sprouts.
Unlike traditional grocery private labels are sprouts brand is positioned as better for you high quality and attribute friendly.
The value of the sprouts brand resonates with our core customers as we continue to receive recognition and rave reviews.
For example, the sprouts brand organic vanilla Kramer went viral on social media this past quarter for containing only four ingredients all of which are considered crude which is unheard of in the <unk> space.
Jack Sinclair: We focused on innovation in our assortment with a strong bias toward our differentiated Sprouts brand portfolio. We expanded our only challenge channel strategy, and also shifted our marketing approach from weekly, unprofitable discounts to messages highlighting our differentiation. Additionally, we've focused on implementing systems and processes to improve our operations, better utilizing store labour and developing talent across the organisation. We're beginning to see the fruits of those investments and they are driving our performance. However, there is still plenty of work to be done to capture the opportunities in front of us. We remain focused on improving all aspects of our business.
Turning to gross margin.
Third quarter gross margin was 36, 5%.
Excluding the impact of special items adjusted gross margin was 36, 6% a decrease of approximately 10 basis points compared to last year.
Slightly favorable merchandise margins offset by expected pressure from our new and recently expanded warehouses in California and Texas.
SG&A for the quarter totaled $503 million.
Excluding the impact of special items, adjusted SG&A totaled $502 million, an increase of $41 million representing.
Approximately 30 basis points of deleverage compared to the same period in 2022.
Jack Sinclair: In a moment, I'd like to turn it over to Chip, who will provide a closer look at our third quarter financial performance and outlook for the remainder of the year.
This expected deleverage was predominantly driven by new store openings wage increases and labor investments in our store sampling program.
Jack Sinclair: Before doing so, I want to congratulate Curtis Valentine, our current senior vice president of finance, who will take over as our new Chief Financial Officer on January 1, 2024. Curtis has been with Sprouts for over eight years and possesses a wealth of retail experience. Our Board of Directors, leadership team and team members greatly respect and support Curtis and we all anticipate a seamless transition.
Like most retailers, we expect wage increases to continue to apply some pressure for a couple more quarters when compared to the previous year. However, we are beginning to see labor markets loosen and wages stabilizing sequentially.
Store closures and other costs totaled approximately $3 million for the quarter, while depreciation and amortization. Excluding depreciation included in cost of sales was $32 million for the quarter.
Jack Sinclair: I want to congratulate Chip on his upcoming retirement and acknowledge his positive contributions to Sprouts as a member of our Board and executive leadership over the last ten years. I am grateful for his partnership as we have served in a new strategy and more importantly, his friendship since I have been at Sprouts. I wish you all the best.
Our earnings before interest and taxes were $88 million for the quarter, while interest expense was $2 million.
Net income was $65 million and diluted earnings per share were <unk> 64.
The impact of special items adjusted earnings before interest and taxes were $90 million in.
Chip Maloy: With that, I'll turn it over to Chip for what he says is his career's 40th and last earnings call. Thank you, Jack. I appreciate the kind words. For the third quarter, total sales were 1.7 billion, up 122 million or 8% from the same period in 2022. This increase was driven by a comparable store sales growth of 3.9% and the addition of these stores. Comp transactions are proxy for traffic, positive every period of the quarter in stores and online.
And adjusted net income was $67 million.
Adjusted diluted earnings per share were <unk> 65.
An increase of 7% compared to the same quarter in the prior year.
Our cash flow and balance sheet remained strong.
During the third quarter, our cash generation of $114 million allowed us to continue to invest in our business.
We spent $64 million in capital expenditures net of landlord reimbursements.
We also paid down $45 million of our bank revolver and returned $32 million to our owners by repurchasing 831000 shares.
Chip Maloy: While as expected, sequential increases in average unit retails and decreases in units per basket, lessened as we progressed to the quarter. Our e-commerce sales grew 16% during the quarter representing 12.1% of our total sales and we opened 10 new stores. For the first three quarters of the year, we've opened 24 new stores, all in a new prototype, acquired two previously licensed stores and closed 11. We ended the quarter with 401 stores.
We ended the third quarter with $252 million in cash and cash equivalents of $150 million outstanding on our $700 million revolver and $22 million of our outstanding letters of credit.
As we evaluate our expectations for the remainder of the year.
We continue to monitor customer spending and behaviors and the mixed excellent economic environment.
For the full year, we expect total sales growth of approximately six 5% to 7%.
Chip Maloy: From a category perspective, both perishable and non-perishables produced positive comp sales with particular strength in meat, grocery, dairy and frozen. The quarter's performance was also supported by veteran stocks, especially in our Sprouts brand products. Sprouts brand sales grew 14% and represented 20.5% of total sales. As we continue to grow, this innovative category of products only found at Sprouts. Unlike traditional grocery private labels, our Sprouts brand is positioned as better for you, high quality and attribute friendly.
Comp sales growth of approximately 3%.
Adjusted earnings before interest and taxes between $387 million and $393 million and adjusted earnings per share of between $2 77, and $2 81.
Assuming no additional share repurchases.
That said, we do expect to continue to repurchase shares opportunistically.
We are on track to open 30, new stores. This year all of which are smaller more cost effective current prototype <unk>.
Capital expenditures net of landlord reimbursements is expected to be between $190 and $210 million.
Chip Maloy: The value of the Sprouts brand resonates with our core customers as we continue to receive recognition and rave reviews. For example, the Sprouts brand organic vanilla creamer, when viral on social media, this past quarter, for containing only four ingredients, all of which are considered clean, which is unheard of in the creamer space. Starting to gross margin, the third quarter gross margin was 36.5%, excluding the impact of special items, adjusted gross margin, was 36.6%, a decrease of approximately 10 basis points compared to last year.
For the years fourth quarter, we expect comp sales of approximately 3% and adjusted earnings per share between <unk>, 42% and 46.
Before turning it over to Jack I too would like to congratulate Curtis.
I've worked with Curtis for a very long time at multiple retailers and I'm confident he will serve this company and its shareholders shareholders well for many years.
I also want to thank my 31000 teammates our board of directors and Jack for allowing me to play a small role in the sprouts journey.
Chip Maloy: Delightly favorable merchandise margins, also, by expected pressure from our new and recently expanded warehouses in California and Texas. SGNA, for the quarter, totaled $503 million. Excluding the impact of special items, adjusted SGNA, total $502 million, an increase of $41 million, representing approximately 30 basis points of delivery compared to the same period in 2022. This expected delivery was predominantly driven by new store openings, wage increases, and labor investments in our store sampling program.
With that let me turn it back to Jack.
Thanks Chip.
Signal the alignment of our merchandising marketing supply chain and operational initiatives propelling our strategy forward. The management team. We have built up over the past few years is growing together and our efforts are paying off.
I'm, particularly delighted by our solid traffic growth throughout the year.
We are steadily making progress on the unit growth front in 2021, we opened 12 stores in 2020 to 16 and this year. We're on track to open 30, all in the new more cost effective prototype.
Chip Maloy: Like most retailers, we expect wage increases to continue to apply some pressure for a couple more quarters in compared to the previous year. However, we are beginning to see labor markets loosen and wages stabilizing sequentially. Store closures and other costs totaled approximately $300 for a quarter, while depreciation and memorization excluding depreciation, including the cost of sales, was 32 million for the quarter. Our earnings before interest in taxes were $88 million for the quarter, while interest expense was $2 million.
Our pipeline remains strong with nearly 100 approved stores 60 executed leases and the expected opening of approximately 35 stores in 2024 with close to 70% in the back half.
Our supply chain continues to evolve and improve our new Southern California, DC is now fully operational and already improving freshness to our largest market our ripening rooms added in Arizona, Texas, Texas, and our new California, DC. This year increased sales and margins in avocados and bananas.
Together with the stores the teams have enhanced their processes without provided systems, leading to better in stocks and forecast.
Chip Maloy: Net income was $65 million, and deluded earnings per share were 64 cents. Excluding the impact of special items, adjusted earnings before interest in taxes were $90 million, and adjusted net income was $67 million. Adjusted deluded earnings per share were 65 cents, an increase of 7 percent compared to the same quarter in the prior year. Our cash flow and balance sheet remained strong. During the third quarter, our cash generation of $114 million allowed us to continue to invest in our business.
Continue to expand east we're closing in our Georgia, DC, optimizing our Florida DC network for more scale and ensuring freshness with our new partner in the northeast.
We continue to focus on innovation and differentiation, which sets us apart from other food retailers.
As chip noted our sprouts brand grew 14% in the quarter as we launch new meals snacks beverages and seasonal items.
Chip Maloy: We spent 64 million in capital expenditures, net of landlord reimbursements. We also paid down $25 million of our bank revolver, and returned $32 million to our owners by repurchasing $831,000 shares. We ended the third quarter with $252 million in cash and cash equivalents, $150 million outstanding on our $700 million revolver, and $22 million of our outstanding letters of credit.
Brian seasonal assortment expands yearly, bringing by classics like pumpkin, spiced, Apple cider, and adding new items like gluten free many maple cookies, making us more relevant each holiday.
Additionally, we are one of the fastest growing retailers of grass fed beef, making up over 50% of our beef sales.
We continue to expand in categories like frozen with the release of our daily free frozen desserts, and we have revitalized sampling to drive customers to rediscover these items and other gyms like our unique chili lime will to talk to your chips.
Chip Maloy: As we evaluate our expectations for the remainder of the year, we continue to monitor customer spending and behaviors in the next economic environment. For the full year, we expect total sales growth of approximately 6.5 to 7 percent. Comp Seals Growth of Approximately 3% Adjusted Ernie's Before Interest in Taxes Between $387 million and $393 million, and adjusted Ernie's for share of between $2.77 and $2.81 assuming no additional share repurchases. That said, we do expect to contain a repurchase shares opportunistically.
As well our innovation center is becoming more popular as we highlight new vendors and products, we highlighted mark tails for dry July to great fanfare, taking advantage of this growing trend.
Our merchants are rising to the challenge of bringing these products to life in the store and online.
Our new category management capabilities have helped us analyze more trends and insight data to understand customer shopping habits and desires.
Our teams are planning eylea in aligning the organization, even stronger behind key themes and seasons like back to school, which was up high single digits. This year.
Chip Maloy: We are on track to open 30 new stores this year, all of which are in our smaller, more cost-effective current prototype. Capital expenditures net of landlord reimbursements is expected to be between $190 and $210 million. For the year's fourth quarter, we expect comp sales of approximately 3% and adjusted Ernie's for share between $42 and $46 cents.
These events reflect our unique customer mindset as they think and shop differently when they come to sprouts as the quarter progressed. These changes resulted in improved brick and mortar traffic.
Digital and online marketing have been leaning heavily into video and social E mails in sepsis and tailing our unique story.
Chip Maloy: Before turning it over to Jack, I too would like to congratulate Curtis. I've worked with Curtis for a very long time. At multiple retailers and incompetent, he will serve this company as shareholders well for many years.
<unk> hand in hand, with maps and <unk> has been driving are solved by spreads campaign, which ties into how our products address understanding customers' needs.
E. Commerce has remained solid at over 12% of our total sales a dramatic increase from 2% in 2019.
Jack Sinclair: I also want to thank my 31,000 teammates, our board of directors and Jack, for allowing me to play a small role in the Sprouts journey. With that, let me turn it back to Jack. Thank you. A result of the alignment of our merchandising, marketing, supply chain and operational initiatives propelling our strategy forward. The management team we have built up over the past few years is going together and our efforts are paying off.
Research shows and online delivery customer is a valuable omnichannel customer as nearly 80% of our online customers also shop in store.
And as a bricks and mortar customer starts using e-commerce spending increases more than 30%.
Our awareness scores have also seen a 10% lift since the beginning of the year.
Jack Sinclair: I'm particularly delighted by our solid traffic growth throughout the year. We are steadily making progress on the unit growth front. In 2021, we open 12 stores in 2022, 16, and this year we're on track to open 30, all in the new, more cost-effective prototype. Our pipeline remains strong with nearly 100 approved stores, 60 executed leases and the expected opening of approximately 35 stores in 2024, with close to 70% in the back half.
These initiatives have resulted in more frequency from our existing customers and growth in new customers.
We are in the early days of our digital initiatives, but are encouraged by the initial results.
And store improved operational systems, aided honoring and planning as chip mentioned, our in stocks are improving and our store teams are delivering out objectives installed sampling and service stores were added to the store goals at the start of the year.
<unk> and the highest customer service stores in our company's history.
Jack Sinclair: Our supply chain continues to evolve and improve. Our new Southern California DC is now fully operational and already improving freshness to our largest market. Our ripening rooms added in Arizona, Texas, Texas and our new California DC this year increased sales and margins in other cadres and bananas. Together with the stores, the teams have enhanced their processes with the help of added systems leading to better in stocks and forecasts. As we continue to expand East, we're closing our Georgia DC, optimizing our Florida DC network from more scale and ensuring freshness with a new partner in the North East.
Since 2019, we've invested almost $400 million and our team members in the form of increased wages training and bonuses, resulting in improved retention and enhanced store experience for our customers.
We are also in the midst of developing a loyalty plan to further engage our customers on initial research told us our customers strongly desire a program from strides they want a program that helps some 11 eat better while driving innovation and differentiation for them to explore.
We are working through the structure and expect to release a somewhat pilot next year.
In the meantime, we continue to build more muscle around personalization with added data.
Jack Sinclair: We continue to focus on innovation and differentiation, which sets us apart from other food retailers. As chips noted, our sprouts brand grew 14% in the quarter as we launched new meals, snacks, beverages and seasonal items. Sprouts brand seasonal assortment expands yearly, bringing back classics like pumpkin-spaced apple cider and adding new items like our gluten-free, many maple cookies, making us more relevant each holiday. Additionally, we are one of the fastest growing retailers of grass-fed beef, making up over 50% of our beef sales.
<unk> knowledge.
Overall, our results demonstrate that our strategic initiatives are taking hold as we become a leader in the natural and organic space.
When we recently asked why customer sharper spreads they said, we own natural and organic and we carry differentiated products. This sentiment is precisely what we wanted when we started this journey four years ago, we still have a lot of opportunities to grow but all our combined efforts are beginning to resonate with our.
<unk>.
With that I'd like to turn it over for questions.
Great.
Certainly ladies and gentlemen, as a reminder, if you do have a question at this time. Please press star one on your telephone one moment for our first question.
Jack Sinclair: We continue to expand in categories like frozen, with the release of our daily-free frozen desserts, and we have revitalised sampling to drive customers to rediscover these items and other gems, like our unique chili-line rolled tortilla chips. As we highlight new vendors and products, we highlighted mocktails for dry July to great fanfare, taking advantage of this growing trend. Our merchants are rising to the challenge of bringing these products to life in the store and online.
And our first question comes from the line of Ken Goldman from Jpmorgan. Your question. Please hi, Thank you good morning, everybody.
Hey, Ken.
Just curious if we could get a little more detail on how you see the path ahead for your gross margin.
This was the first quarter in almost two years in which it didn't expand year on year, it's still doing.
Well, obviously, but just curious how we think about or should think about modeling.
Jack Sinclair: New category management capabilities have helped us analyse more trends and insight data to understand customer shopping habits and desires. Our teams are planning earlier and allowing the organisation even stronger behind key themes and seasons, like back to school, which results up high single digits this year. These events reflect our unique customer mindset as they think and shop differently when they come to Sprouts. As a quarter progress, these changes resulted in improved brick and mortar traffic.
Into the fourth quarter and I know, it's a little early to talk about 2024, but any basic thoughts you'd have on that line item would be would be helpful.
Yes, Ken this is chip, we're really confident that we can manage the growth.
Right around flat this quarter it was down 10 bps.
That was really a drag from the expansion over distribution centers, both in Texas as we said on the call, Texas and California. There is a little deleverage there about our merch margins are hanging in there in fact, they were up some steady and traffic's up so we feel good about that and our merchants are really laser focus between mix and pricing et cetera.
Jack Sinclair: Digital and online marketing have been leaning heavily into video and social emails and searches, in telling our unique story. Marketing, candid hand with merchandising, has been driving our Salt to Buy Sprouts campaign, which ties into how our products address our discerning customers needs. E-commerce has remained solid at over 12% of our total sales, a dramatic increase from 2% in 2019. Our research shows an online delivery customer is a valuable omnichannel customer, as nearly 80% of our online customers also shop in store.
With.
To be flat next year.
Thanks, and just a quick follow up.
How is the competitive environment right now within produce or are you seeing anything unusual in terms of competitors discounting doing anything to gain customers in a way that might not be rational.
We haven't seen anything irrational so far candidates through project is always a volatile category as you know so things go up and down in different categories.
Parts of the category change at different times, but we've certainly not seen any significant investments from anybody on the protein in the project space.
Jack Sinclair: As a brick and mortar customer starts using e-commerce, they are spending increases more than 30%. Our awareness scores have also seen a 10% lift since the beginning of the year. These initiatives have resulted in more frequency from our existing customers and growth in new customers. We are in the early days of our digital initiatives, but are encouraged by the initial results. End store, improved operational systems, aided ordering and planning. As Chip mentioned, our end stocks are improving and our store teams are delivering our objectives.
Thanks, so much.
Thanks, Ken.
Thank you one moment for our next question.
And our next question comes from the line of fleet.
Fleet Jordan from Goldman Sachs. Your question. Please.
Hi, Good morning. Thank you for taking my question I just wanted to ask a follow up around gross margin.
Understand the pressure from the warehouse expansion, but just curious what was the biggest surprise since it did come.
Under a little bit to your flat guide and then how did promotions track to your plan.
Jack Sinclair: In stock, sampling and service stores were added to the store goals of the start of the year, resulting in the highest customer service stores in our company's history. Since 2019, we've invested almost $400 million in our team members in the form of increased wages, training and bonuses, resulting in improved retention and enhanced story experience for our customers. We are also in the midst of developing a loyalty plan to further engage our customers.
And.
I guess when can we start thinking about your ability to leverage that.
The warehouse expansion cost and when store growth to support that.
Yes, it's true so the growth as it relates to any surprise, we did guide to flat I mean, it was de minimis pushing a flat could be plus 10 or minus 10 is the way we look at it any surprise there shrink was a little higher nothing nothing scary were pretty low shrink business in general was a little higher than we expected.
Jack Sinclair: Our initial research told us our customers strongly desired a program from Sprice. They want a program that helps them live and eat better while driving out innovation and differentiation for them to explore. We're working through the structure and expect to release a summer pilot next year. In the meantime, we continue to build more muscle around personalization with added data and improved knowledge.
Other than that merch margins were really solid as I said they continue to stay solid the DMT. We will continue to be a drag for probably a couple of quarters and so we'll have to manage through that the merchants are working hard to try to manage through that and we.
We feel really confident I suspect Q4 might look similar to Q3, we might be flattish to maybe down a couple of basis points and then going into next year, we're feeling pretty good that we can manage around that to be really close to flat.
Jack Sinclair: Overall, our results demonstrate that our strategic initiatives are taking hold as we become a leader in the natural and organic space. When we recently asked why customers shop at Sprouts, they said we own natural and organic and we carried differentiated products. This sentiment is precisely what we wanted when we started this journey four years ago. We still have a lot of opportunities to grow, but all our combined efforts are beginning to resonate with our customers.
And we're very confident the investment in our distribution centers theres been a pay as dividends in the long run in terms of both the capabilities of drive and freshness to the customer and in terms of again, our cost long term costs.
Okay. Thank you and then my follow up is just on quarter to date trends. If you could provide any color there.
Just as your guide implies some deceleration.
Operator: With that, I'd like to turn it over for questions. Operator, certainly. Ladies and gentlemen as a reminder, if you do have a question at this time, please press star 11 on your telephone. One moment for our first question.
Yeah. So we're guiding to about a three comp and so we feel really good I mean, we're one month in and.
Phil solid around that three comp, we'll keep working towards there.
Okay. Thank you.
Ken Goldman: And our first question comes from the line of Ken Goldman from JP Morgan. Your question, please. Hi, thank you. Good morning, everybody. I can. Just curious if we could get a little more detail on how you see the path ahead for your gross margin. You know, this is the first quarter and almost two years in which it didn't expand year on year, still doing, you know, quite well, obviously, but just curious how we think about or should think about modeling. You know, into the fourth quarter, and I know it's a little early to talk about 2024, but any basic thoughts you'd have on that line item would be, would be helpful.
Thank you one moment for our next question.
And our next question comes from the line of refresh Parekh from Oppenheimer. Your question. Please good morning, and thanks for taking my question. So first on new stores. So as we look at new store productivity at least how we calculate it was above our expectation. So curious how new stores are performing versus your internal expectations.
And then what your specific new store productivity calculation is.
We're past as chubb's so.
There is a timing if youre looking at any given quarter and trial with new store productivity because of the timing of when they opened it can throw the numbers off so as it relates to US. We're just looking on our what we look on average how is our sales per square foot, averaging considering that we're putting new stores in the ground.
Chip Maloy: Yeah, Ken, this is chip. We're really confident that we can manage the course margin right around flat. This quarter, it was down 10 bits. That was really a drag from the expansion over distribution centers, both in Texas, as we said, on the call of texts in California. There's a little bit leverage there about our merch margins are hanging in there. In fact, there were some and steady and traffic's up. So we feel good about that. And our merchants are really laser focused between mix and pricing, et cetera, that to be flat next year.
And we're doing that we're continuing to see that stay relatively flat. Despite the fact that we're accelerating our store growth at lower volumes.
And we look at how our performance of new stores are relative to our pro forma as we feel that we're working towards those pro forma us and they are on track to.
To deliver the shareholder value that we've outlined in our in.
Chip Maloy: Thanks. And just a quick follow up. How is the competitive environment right now within produce? Are you seeing anything unusual in terms of competitors discounting, doing anything to gain customers in a way. That might not be rational. We haven't seen anything irrational so far, Ken, it's and produce is always a volatile category. You know, so things go up and down and different parts of the category change at different times, but we've certainly not seen any significant investments from anybody on the product in the produce space.
Our long term guidance with our store Montney store models.
And to sit here and I apologize, but to go through the new store productivity, we would probably be here 15 minutes trying to go through a spreadsheet I don't think.
We have a lot of value to any of those so maybe offline we can walk through it.
Yes, that's certainly spend more than 15 minutes talking to chip away at that pace.
I'm really pleased with the new store performance I mean, there's ups and downs across the different across the country and our less established markets more established markets, but we are opening stores right across the country at the moment I am pretty encouraged where we're at.
Operator: Thanks so much. Thanks, Ken. Thank you.
Jordan: One moment for our next question.
The way we set this off a few years ago and moving to smaller stores I think is definitely derisked the program going forward and we're feeling pretty confident with where we're at.
Chip Maloy: And our next question comes in the line. I'll lead Jordan from Goldman Sachs. Your question, please. Hi. Good morning. Thank you for taking my question. I just wanted to ask a follow up around gross margin. Understand the pressure from the warehouse expansion, but just curious what was the biggest surprise since it did come under a little bit to your flat guide. And then how did promotions track to your plan? I guess when should we start thinking about your ability to leverage the warehouse expansion cost and when store growth supports that?
And then maybe just one follow up question so.
4% comp there was deleveraged this quarter just any insight as you look into next year in terms of what type of comp.
You may need.
To deliver to leverage expenses.
Sure.
Yes.
Well as you as you remember we did guide to deleverage for the year, which imply the back half was going to ask some deleverage the acceleration of the new stores.
Lined with just wage pressures a bubble of wage pressures that we've all been working through is probably going to Cree and need to have.
Chip Maloy: Yeah, it's true. So the gross is it relates to any surprise. We did guide the flat. I mean, it was diminimous, plus you know, flat could be plus ten or minus ten is the way we look at it. Any surprise there, shrink was a little higher. Nothing, nothing, you know, scary. We're a pretty low shrink business in general. It was a little higher than we expected. But other than that, as I said, they continue to stay solid.
Slightly higher comp for the next couple of quarters to deliver some.
The high single digit earnings growth without share buyback, so it's going to take a little bit more.
I think once we get steady state and get through this timing of going from 16% to 30%.
Chip Maloy: The DNT will continue to be a drag for probably a couple quarters. And so we'll have to manage through that. The merchants are working hard to try to manage through that. And you know, we feel really confident. I suspect you for might look similar to Q3. We might be flatish to maybe down a couple basis points. And then and going into next year or feeling pretty good that we can manage around that to be really close to flat.
35, plus is just getting through that and then these wage pressures, but we're working hard at it.
Great. Thank you I'll pass it on.
Okay. 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.
Chip Maloy: And we are very confident the investment and our distribution centers has been appears evident in the long run in terms of both the capabilities of drive impressions to the customer. And in terms of getting our costs long term costs then.
Yeah, Hey, good morning, guys to Anthony on for Ed here, Thanks for taking our question.
I just wanted to dig in on the Q4 guidance a little bit it looks like it implies continued softness and margins I'm getting something like <unk>.
Jordan: Okay, thank you. And then my follow up is just on quarter to date trends. You could provide any color there. This is your guide implies some deceleration. Yeah, so we're guiding to about a three comp. And so we feel really good. I mean, we're a one month in and still sold around that three comp and you know, we'll keep working towards there. Okay. Thank you. One moment for our next question.
20 to 30 bps of EBIT margin compression at the midpoint I guess, one do you guys agree with that and then two can you just dig in a little more.
On whats driving that assumption and the different puts and takes just across gross margin and SG&A.
Yes, well on the gross side will probably be flattish to similar to this quarter, maybe down just a hair and then there'll be some delivered deleverage on SG&A as we implied all year the back half was going to be some deleverage on SG&A, what's causing that.
Again, we've had a really back half loaded new store growth year, that's that bubbles coming through.
Rupesh Parikh: And our next question comes from the line of Rupesh, public from Oppenheimer. Your question, please. Good morning. And thanks for taking my question. So first on new store. So as we look at new store productivity, at least how we calculate it was above our expectations. They're curious how new stores are performing versus your internal expectations and then what your specific new store productivity calculation is. I don't know the past is chip.
We've got some wage increases that were working through.
Okay, and then just on inflation I guess are you still contemplating inflation in that mid single digit range for Q4.
And then any early read in terms of how we should be thinking about 'twenty four.
Yes.
Rupesh Parikh: So, you know, we don't, there's a timing. If you're looking at any given quarter and trial with new store productivity, because of the timing and when the opening can throw the numbers off. So as it relates to us, you know, we're just looking on our what we look on average. How is our sales for square foot averaging considering that we're putting new stores in the ground. And we're doing that we're continuing to see that stay relatively flat despite the fact that we're accelerating our store growth at lower volumes.
So inflation, we had said on the last call that we expected for the back half to be low to mid single digits and that was an average for the whole half so thats been coming down year over year that that inflation rate driven as a year over year compare and that is coming down as we expected.
And.
Prices are stabilizing as we expected it but at the same time the units per basket is stabilizing as well.
Rupesh Parikh: And we look at how our performance and new stores are relative to our performance. We feel, you know, that we're working towards those performance and they're on track to deliver the shoulder value that we've outlined in our in our long term guidance with our store model.
So our expectations as we go into the three comp for Q4 is it'll feel it's getting closer and closer to what I would call normalization. We've got we're expecting some positive traffic and we'll still gets a little bit of AUR increases from a year over year perspective.
Chip Maloy: So, to sit here and apologize, but to go through the new store productivity, we would probably be here 15 minutes trying to go through a spreadsheet that I don't think would be of a lot of value to any of us, so maybe offline we can walk through it. Yeah, I certainly spend more than 15 minutes talking to you about this. I've really treated the new store performance. I mean, there's not some downs across the different cut across the country in our less established markets and have more established markets, but we're opening stores right across the country at the moment.
The units will start to be in a very less dilutive environment and as that flows through to next year. We feel like at this point. It's early in the budget stages for us and we don't have a crystal ball, but the idea that we're getting to a place of normalcy or it's about driving a little bit of traffic you get a little bit of AUR.
The teams are working really hard to get a little bit more units in the basket.
And.
The thing that encourages us Anthony about going into next year as the traffic trends, we're seeing pretty strong traffic in both breaks in March are strong traffic in our E Comm business and Canada gives us confidence that the assortment that we have been putting together has got differentiation. So the context of the marketplace that chip out lanes I think is.
Chip Maloy: I'm pretty encouraged where we're at and the way we set this off a few years ago and moving to smaller stores, I think is definitely due risk to the program going forward. And we're feeling great content in the world right now.
Rupesh Parikh: Great, and then maybe just one follow-up question. So, you know, I know almost 4% comp, there was the Labyrinth Disquiter. Does any insight, you know, as you look into next year, in terms of what type of comp, you may need to deliver to Labyrinth Expenses? Yeah, well as you, as you remember, we did guide to do Labyrinth for the year, which implies the backup was going to ask to do Labyrinth. The acceleration of the new stores combined with just wage pressures, a bubble of wage pressures that we've all been working through is probably going to create a need to have, you know, a slightly higher comp for the next couple quarters to deliver some, you know, high single digit earnings growth without share of our back.
Buying on we're not going to see the level of inflation in 2020 quarter that we've seen in the last couple of years, but the unit. The unit trend has been encouraging and not sent in the slow slowing down.
The context that we're really encouraged but as traffic going into 2024, which should sustain.
Our topline business going forward.
Alright, thanks, guys.
Thanks, Thank you.
Q1 moment for our next question.
And our next question comes from the line of Mark Carden from UBS. Your question. Please.
Okay.
This is actually Zane Burke encore remark, thanks, a lot for taking our questions.
Rupesh Parikh: So it's going to take a little bit more. But I think once we did steady state and get through this timing of going from 16 to 30 to, you know, 35 plus. Is just getting through that and then these wage pressures, but we're working hard on it. Great, thank you all possible. Thank you.
Just on the quarter, what have you seen with respect to the consumer behavior through the quarter in light of some of the recent precious consumers are facing any change in patterns relative to last quarter or is it pretty consistent overall, whether it be <unk>.
Operator: One moment for our next question.
<unk> paid down tomorrow affordable options.
More private label.
I don't think we've seen any really significant different trend in Q3 than we did across Q1, two beyond the point that chip outlined a minute ago, which was inflation the level of inflation is flattening a little bit we're still seeing inflation as we predicted on the unit. The unit change is not slowing down as much customers are spending as much money.
Edward Kelly: And our next question comes from the line of Edward Kelly from Wells Fargo. Your question, please. Yeah, hey, good morning guys. Anthony on Fred here. Thanks for taking our question. I just wanted to dig in on the Q4 guidance little bit. It looks like it implies continued softness and margins. I'm getting something like 20 to 30 bits of even margin compression at the midpoint. I guess one, do you guys agree with that?
On.
<unk>.
We're very encouraged by the trends towards.
Assortment I think people I think the pandemic drove this a little bit I think people are trending towards more of a community more about <unk>.
Edward Kelly: And then two, can you just dig in a little more on what's driving that assumption and the different puts and takes just a cross growth margin and SGNA? Yeah, well, on the gross side, we'll probably be flatish to similar to this quarter, maybe down to stare. And then there'll be some delivered the leverage on SGNA as we implied all year, the back half was going to be sent to leverage on SGNA. But what's causing that again, as again, we've had a really back half loaded new store growth here that's that bubble's coming through. And we've got some wage increases that were working through it.
Tribute based products understanding and we're seeing that across our portfolio, whether it would be plant based whether it'd be grass fed, but those kind of attribute based products Quito and paleo and gluten free we're seeing real strong trends in those spaces and I think that's being driven by the pandemic as much as <unk> has announced that it has.
It has been some trade down in certain places in terms of cuts of meat not kind of thing, but by and large the trends in Q3 or in line with what we've been what we've been seeing and as I said on the last conversation.
Encouraged by the traffic trends coming and we think that's driven by some kind of macro issues around the type of customer our target customers that may not be being merit and other places.
Chip Maloy: Okay. And then just an inflation, I guess, are you still contemplating inflation in that mid single digit range for Q4? And then any early read in terms of how we should be thinking about 24? Yeah, as inflation, we had said on the last call that we expected for the back half to be loading the single digits. And that was an average for the whole half. So that's been coming down your year that that inflation rate driven is a year over your compare.
Thank you appreciate that.
Secondly, in the event comp slows comps slow next year.
I was curious if you would prioritize market share gains or protecting your margins.
Also can you please remind us some of the levers you can pull to manage expression.
Chip Maloy: And that is coming down as we expected it. And prices are stabilizing as we expected it, but at the same time, the basket is stabilizing as well. So our expectations as we go into the three comp for Q4s, it'll feel it's getting closer and closer to what I would call normalization. We've got we're expecting some positive traffic and will still gets a little bit of a UR increases from a year earlier perspective and the units will start to be in a very less dilutive environment.
Pump slow next year.
First of all with the.
The context.
Market share and margin is not the way, we think about our business our market share.
We concern ourselves with the target customer, we have which remember is only something like $200 billion of the $1 two trillion marketplace, where concern ourselves with the target customer and growing share of wallet with that target customer and not see entire focus on the market share that we really pay attention to is the market share of <unk>.
Chip Maloy: And as that flows through the next year, we feel like at this point, you know, it's early in the budget stages for us. And we don't have a crystal ball with the idea that we're getting to a place of normalcy where it's about driving a little bit of traffic, you get a little bit of a UR. And the teams are working really hard to get a little bit more units in the basket.
Sean organic and Thats something.
We've had a good run on that over the last few years and we are encouraged by the trends at the moment in that space. So when I. When you talk about market share. We think it's all about looking after our target customers.
Being increasingly relevant to them and we don't see a promotional solution or a margin investment solution to do that the way to do that is to get the right products in the store delivering.
Chip Maloy: And the thing that encourages us, Anthony, about going into next year is the traffic trends. We're seeing pretty strong traffic in both bricks and mortar, strong traffic in our e-commerce business. And it kind of gives us confidence that the assortment that we've been putting together has got differentiation. So the context of the marketplace that chip out lines, I think, is bang on. We're not going to see the level of inflation in 2024 that we've seen in the last couple of years.
Our customer service scores that high and again, some really good scores on that in terms of looking after the customer and getting them, what they want and this target customer environment that we're in.
So we don't see that dynamic calls, we're going to have to invest margin to get growth in top line sales. We think we talk about how can we recapture that target customers better and better and intend to leave we got some opportunities to be more efficient in our business going forward.
Chip Maloy: But the unit trend has been encouraging. In that sense, in that the slowdown is slowing down. And the context that we're really encouraged about is traffic going into 2024, which should sustain our top line business going forward. Thanks, guys. Thanks. Thank you. Thank you one moment for our next question.
Clearly some wage pressures, which is obviously not such a bad thing.
We'll be driving our business to make sure that we get as much efficiency as we can in terms of the replenishment into our stores in terms of handling pricing in our stores in terms of handling a registered in the checkouts in the stores. There's a number of things that we can do in our distribution centers that we've invested in going forward too and some investments in systems in it. So we've got some.
Scott Mushkin: And our next question comes from the line of Mark Carden from UBS. Your question, please. This is actually Zayn Burak on for Mark. Thanks a lot for taking our questions. Just on the quarter, what have you seen with respect to the consumer behavior through the quarter in light of some of the recent precious consumers are facing any change in patterns relative to last quarter or is it pretty consistent overall, whether it be.
Opportunities to drive some efficiencies going forward, if not maybe cover some of the SG&A challenges that we're going to face over the next couple of years.
Very helpful. Thanks, very much and good luck this quarter.
Thank you. Thank you.
Thank you one moment for our next question.
Scott Mushkin: UPT's trade down to more affordable options and more private label. I don't think we've seen any really significant different trend in Q3 and we did across Q1 to beyond the point that chip outlined a little minute ago, which was inflation. The level of inflation is flattening out a little bit. We're still seeing inflation as we predicted and the unit, the unit change is not slowing down as much customers are spending as much money on foods.
And our next question comes from the line of Mike Montana from Evercore ISI. Your question. Please.
Yes. Good morning, Thanks for taking the question just wanted to ask about SG&A dollar growth into the fourth quarter and then I understand it's early but into C. Y 24, as well. So if we think about store growth accelerating towards 10%.
Even though there are a little bit smaller stores.
Scott Mushkin: And we're very encouraged by the trends towards our assortment. I think people, I think the pandemic drove this a little bit. I think people are trending towards more about and you know, saying more about attribute based products, understanding what and we're seeing that across our portfolio, whether it be plant based, whether it be grass fed, those kind of attribute based products, keto and paleo and gluten free. We're seeing real strong trends in those spaces.
Should we be thinking about double digit increases in SG&A as a total company level.
Scott Mushkin: And I think that's been driven by the pandemic as much as anything else. There's a little bit has been some trade down in certain places in terms of cuts and meat and that kind of thing. But by and large, the trends in Q3 are in line with what we've been, what we've been seeing and what, as I said in the last conversation, we're encouraged by the traffic trends that are coming in. And we think that's driven by some kind of micro issues around other type of customer and our target customers that may not be being mirrored in other places. Thank you appreciate that.
And then does that suggest two 5% to 3% comps or more to lever just wanted to ask that and then had a follow up.
Yes, as it relates to the remainder of this year. The SG&A dollar growth pure dollar growth in Q4 will look similar to the growth in Q3.
Some of that is again.
New stores predominantly in the wages side of the house as it relates to next year.
Again, we're in the we're just beginning our budget process for next year, it's too early to tell that said.
Certainly we're an organization that works really hard to deliver value to the shareholders and create shareholder value. So we're going to we'll be.
Knowing that we have some wage pressures will continue through next year, we're looking under every rock and corner. This find places for efficiencies as Jack said, so we can deliver meaningful results next year as well.
Jack Sinclair: And secondly, in the event comp slows, comp slow next year. I was curious if you would prioritize market share gains or protecting your margins. And also can you please remind us some of the leverage you can pull to manage expenses with comp slow next year. Oh, first of all, the context of market share margin is not the way we think about our business or market share. We concern ourselves with the target customer that we have, which remembers only something like 200 billion of the 1.2 trillion marketplace.
Okay, and then just in terms of the comp of three nine for this quarter can you share what was.
The traffic contribution to that as well as how much inflation was there year over year in the number.
Well, we don't we don't give specifics on traffic, but we had solid positive traffic and as we had said the inflation has come through similar to what we said at the end of.
Q2 that we expected low to mid single digit inflation through the back half of the year and it's on the high end of that in Q3, but it's been coming down.
Jack Sinclair: We're concerned ourselves with the target customer and growing share of wallet with that target customer. And that's the entire focus. And the market share that we really pay attention to is the market share of natural and organic. And that's something that we've got had a good run on that over the last few years. And we're encouraged by the trends at the moment in that space. So when you talk about market share, we think it's all about looking after our target customers and being increasingly relevant to them.
Thank you.
Thanks.
Thank you one moment for our next question.
And our next question.
Comes from the line of Scott Luskin from RFID capital Your question. Please.
Great.
Thanks, guys and chip.
I'm going to Miss you, but.
I am sure you got big plans for retirement or going forward. So congratulations.
Jack Sinclair: And we don't see a promotional solution or a margin investment solution to do that. The way to do that is to get the right products in the store. To get the customer service scores are high. And we're getting some really good scores on that in terms of looking after the customer and giving them what they want in this target customer environment that we're in. So we don't see this dynamic of we're going to have to invest margin to get growth in top line sales.
Thanks Scott.
So I guess.
You guys are trending a little bit different than the industry. Because if you look at the industry overall volumes really are not budging as inflation comes down.
And as a result of that at least our data is showing competition is ramping up certain markets. Just the way it's very regional so I guess as you look at 'twenty four.
What.
Jack Sinclair: We think we talk about how can we look after that target customer better and better. And in terms of leave, we've got some opportunities to be more efficient in our business going forward. I mean, there's clearly some wage pressures, which is actually not such a bad thing. And we'll be driving our business to make sure that we get as much efficiency as we can in terms of the replenishment into our stores.
What will make you guys book much different than the industry.
If these trends continue.
Yes, I think Scott we've talked about this a lot. We just don't think what are the same as everybody else in the grocery space is the way things are evolving and developing we've got very specific assortment, that's very different to other people. We sell a bulk we sell of vitamins and supplements, we sell a huge amount of project.
Jack Sinclair: In terms of handling pricing in our stores, in terms of handling our registers and the checkouts in the stores. There's a number of things that we can do in our distribution centers that we invested in going forward. So and some investments in systems and IT. So we've got some opportunities to drive some efficiencies going forward. That may be covers some of the SGNA challenges that we're going to face over the next couple of years. Very helpful. Thanks very much. I'm good luck this quarter. Thank you. One moment for our next question.
Relative to the rest of the industry dynamics.
Dynamics make the mix that we evolve and what happens in our business very different so I find it very difficult to compare comp sales across the grocery sector, we look to our own comp sales and our own ability to grow within the target customers that we have and that's the entire focus of the events that we do get some context for that in terms of.
We are the natural and organic Mexico is and where the share goes in that space, but we feel that if we continue to do and we're on a good trend at the moment. We continue to do what we're doing which is doubling down on assortment differentiation doubling down on customer service and sampling and creating an environment inside the store this exciting doubling down on digital.
Michael Montani: And our next question comes from the line of Mike Montani from Evercore ISI. Your question please. Good morning. Thanks for taking the question. I just wanted to ask about SG&A dollar growth into the fourth quarter and then understand it's early, but into CY-24 as well. So if we think about, you know, store growth accelerating towards 10%, even though they're a little bit smaller stores, you know, should we be thinking about double-digit increases in SG&A at the total company level? And then, you know, does that suggest two and a half to three percent comps or more to lever? I just wanted to ask that and then head to follow up.
Chip Maloy: Yeah, as it relates to the remainder of this year, the SG&A dollar growth, your dollar growth in Q4 will look similar to the growth in Q3. Some of that is, again, as the two stores predominantly and then the wages side of the house. As it relates to next year, again, we're just beginning our budget process for next year. It's too early to tell that said, you know, certainly we're an organization that works really hard to deliver value to the shareholders and create your older values.
Side of our business in terms of communicating more directly and in a more personal way that we've got the ability to grow a little better share of wallet of our target customers and what happens with the rest of the grocery industry, whether some regions have in a bottle and pricing are not.
It Hasnt really changed and I don't mean, it to seven day next week kind of dismissive, but ultimately it doesn't really matter because if we do the right thing by our target customers. We can grow our business and we can make sure that we deliver against the aspirations of our shareholders and the team here and the team here in Phoenix.
Opportunities in front of us, but the opportunities about the target customers that we have and it's less about us being very promotional against an environment, that's changing or that kind of dynamic that we kind of get sucked into that conversation.
<unk> is our target customers and delivering against that target customer and assortment in service and in the quality of our store business in front of those customers.
Chip Maloy: So we're going to, we'll be knowing that we have some wage pressures that we'll continue to next year. We're looking under every rock in corner to find places for efficiencies as Jack said so we can deliver meaningful results next year as well.
If that helps Scott I would also follow on a little bit.
John I would follow on a little bit and just remind all of us.
Those highly sensitive price promotion customers.
Michael Montani: And then, just in terms of the comp of 39 for this quarter, can you share what was, you know, the traffic contribution to that as well as how much inflation was there year over year in the number? Well, we don't, we don't give specific traffic, but we had solid positive traffic. And as we had said, the inflation has come through similar to what we said at the end of Q2 that we expected, mode of mid single digit inflation through the back half of the year. And it's on the high end of that in Q3, but it's been coming down. Thank you. Thanks. Thank you.
We.
Ask them to step away lightly years ago.
So that is not the model that we're in.
As we sit here now we're not we're no longer losing volumes our volumes have stabilized. So a really good place and we're really focused on the things like JAKKS our traffic solid.
And things like standpoint to get people to put that extra extra thing in the basket. Our in stocks are improving our innovation centers or adding new items into the stores that people are getting excited about and then when they start to take off or if they take off they become inline.
Sprouts. So I think we're doing a lot of things that are working towards the ecosystem that we're working with.
Scott Mushkin: One moment for our next question. And our next question comes to the line of Scott Mexican from R5 Capital. Your question, please. Great. Thanks, guys. And Chip, I'm going to miss you, but I'm sure you've got big plans for retirement going forward, so congratulations. Thanks, Scott. So, I guess you guys are trending a little bit different than the industry because if you look at the industry overall volumes really are not budging as inflation comes down. And as a result of that, you know, at least our data is showing competition is ramping up. It's in certain markets, just the way it's very regional.
<unk>.
So thats, great color guys, and so still still a little Thunder for my follow up question, but I guess looking at the deck you had on.
On your website.
And the economic model going forward.
It said low single digit comps is kind of what you expect.
Let's just say that this idea that specialty is going to grab more share and view as part of that that industry will grab more share and then we look at the store base.
The growth in the number of stores.
You talked me through why it wouldn't be higher than low single digits. It seems like you could be setting the stage for four 5% comp.
Jack Sinclair: So, I guess as you look at 24, you know, what, you know, what will make you guys to look much different than the industry, if these trends continue. Yeah, I think, Scott, we've talked about this a lot. We just don't think we're the same as everybody else in this grocery space as the way things are evolving and developing. We've got a very specific assortment that's very different to other people. We sell a lot of bulk.
Not two three.
Hey, Scott, that's a really reasonable point of view, Kevin what we're doing I do fundamentally believe there's going to be more health enthusiasts in the future than it is today and there are certainly more today than there was five years ago. So the trend is in line with what we're trying to do I think importantly, as in terms of the model that we're building in in terms of the that kind of algorithm that we're putting in front of us.
So I think it's appropriate to be prudent and I think that's exactly where we're being at the moment I don't disagree with your fundamental point and don't underestimate the aspiration that we would have as a business to be in a very different place we would like to be in a different place, but I think it's very appropriate that we put the right numbers in front of where the R&D we're comfortable with.
Jack Sinclair: We sell a lot of vitamins and supplements. We sell a huge amount of produce relative to the rest of the industry. Those kind of dynamics make the mix that we evolve and what happens in our business very different. So I find it very difficult to compare comp sales across the grocery sector. We look at our own comp sales and our own ability to grow within the target customers that we have. And that's the entire focus of the business.
And that allows us to manage our business around that number as opposed to manage our business under a number that is.
Jack Sinclair: We do get some context with that in terms of where the natural organic mix goes and where the share goes in that space. But we feel that if we continue to do and we're on a good trend at the moment, we continue to do what we're doing, which is doubling down on assortment differentiation, doubling down on customer service and sampling and creating an environment inside the store that's exciting, doubling down on the digital side of our business in terms of communicating more directly in a more personal way that we've got the ability to grow a little bit of share of wallet of our target customers.
Professional than fundamental.
Fundamentally underlying R. R.
Our algorithm going forward.
Perfect. Thanks, guys and thanks for the answers.
Thanks Scott.
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.
My first question Jack I, just wanted to clarify I think you said 35 stores for next year.
Jack Sinclair: And what happens within the rest of the grocery industry, whether some regions have an a battle on pricing or not, hasn't really got, I know it sounds a little and I don't mean it to sound in this way kind of dismissive. But ultimately, it doesn't really matter. Because if we do the right thing by our target customers, we can grow our business and we can make sure that we deliver against the aspirations of our shareholders and the team here and the team here in Phoenix.
Thought you guys had been saying that you might be working towards 40 stores for next year is is 40 off the table for next year.
This is chip.
Not not really where we are as we look at the stores and the opening of stores.
Our expectation is we could have more than 35%.
Have several in the tail end of the year, So it's pretty back half loaded and if we have any slippage. We just don't want to provide a number out there. If there is slippage in the middle of the year. So right now we feel really confident 135.
Jack Sinclair: The opportunities in front of us, but the opportunities about the target customers that we have, and it's less about us being very promotional against an environment that's changing or that kind of dynamic, but we kind of get sucked into that conversation. Our priorities, our target customers, and delivering against that target customer and assortment in service and in the quality of of our store business in front of the customer. If that helps, I would also call on a little bit.
Have more in the pipeline is just we're kind of managing that there's Q4 slippage.
And I think it's appropriate to do that in the context of the market construction is a little bit uncertain in certain locations and that's the only reason we have been a bit cautious of it I like we said in the script, we've got 100 signed off site.
Jack Sinclair: I would call on a little bit and just remind all of us that it was highly sensitive price promotion customers. We asked them to step away politely years ago, and so that is not the model that we were in and as we hear now, we're no longer losing volumes. Our volumes have stabilized a really good place, and we're really focused on the things like jacks or traffic solid and things like sampling to get people to put that extra bot extra thing in the basket.
<unk> been saying through our real estate team ago, I think 65% or 17 leases already signed so we've got plenty in the pipeline to make this work. This is just really trying to reflect what might happen in December November December next year as opposed to January February.
75% comfortable maybe we got a few more.
Got it that's really helpful. And then just on the digital strength is that can you talk more about what you guys are doing to drive digital or is it.
Also related to the door dash partnership working better than expected or instant cartsville performing well any help on that would be great.
Jack Sinclair: Our in stocks are improving. Our innovation centers are adding new items into the stores that people are getting excited about. And then when they start to take off, or if they take off, they become in line and yet sprouts. So I think we're doing a lot of things that are working towards the ecosystem that we're working with them.
Well, we're comfortable with our partnerships with both ends to come.
Industrial come into the business and added some added some value to us in terms of understanding the customer and using some of that dynamic and some of that information I think we'll be able to use more of that going forward. So I'm quite excited about the relationship with both of them not just with our own E Commerce business, which has been pretty strong for us, but also in terms of the data and the understanding of how we can use that.
Jack Sinclair: So that's great caller guys, and so it's still a little thunder for my follow-up question, but I guess looking at the deck you had on your website and the economic model going forward, where it said low single digit comps is kind of what you expect. Let's just say that this idea that specialty is going to grab more share and you as part of that industry will grab more share. And then we look at the store base and the growth in the number of stores.
Information to help us communicate digitally if you look back over the last three or four years in terms of our communication, we fundamentally changed us from a paper based communications play to a much more digital based communication play and we've made some progress on the personalization side of digital communication, while I've been very pleased with.
And the marketing communication is that there's so many different one of the team has done and things that the marketing team comment alloys theres. So many stories that you can tell for our business because we've got such a.
Jack Sinclair: It talked me through why it wouldn't be higher than low single digits. It seems like you could be setting the stage for five percent comp, not two, three. Scott, that's a really reasonable point of view given what we're doing. I do fundamentally believe there's going to be more health enthusiasts in the future than there is today and there's certainly more today than there was five years ago. So the trend is in line with what we're trying to do.
Alrighty of attribute based stories to tell people, whether it be gluten free are key to our <unk> client base stock that those stories can come alive in a way to make them come alive and the way they've done it really I think quite successfully and it will get better is how we've communicated digitally and how we're picking the right we've changed our media agency.
Jack Sinclair: I think, importantly, in terms of the model that we're building, and in terms of the kind of algorithm that we're putting in front of our investors. I think it's appropriate to be prudent, and I think that's exactly where we're being at the moment. I don't disagree with your fundamental point. I'm doing on the rest of the aspiration that we would have as a business to be in a very different place. We would like to be in a different place, but I think it's very appropriate that we put the right numbers in front of where they are and comfortable with, and that allows us to manage our business around that number as opposed to manage our business under a number that is more aspirational than fundamentally underlying our algorithm going forward. Perfect.
Operating in a different way with the right around our media.
China got a bit more bespoke.
And I think we've made some progress on that and basically going forward digital is going to be the digital communication is going to be the key to what we're doing going forward and we've made some progress, but I'll go a long way to go.
Got it thanks Jack.
Thank you.
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.
Hey, guys. Thanks for taking my question and I'll add my congratulations to you chip as well.
Scott Mushkin: Thanks, guys. Thanks for the answers. Thanks, Scott.
Robbie Owens: Thank you, one moment for our next question. And our next question comes in the line of Robbie Owens from Think of America. Your question, please. Oh, hey, thanks for taking my question. My first question, Jack, I just wanted to clarify.
So question on the customer engagement focus that you've had in 'twenty to me right you've launched new marketing you have personalization efforts.
As we think about the consistent positive traffic that you've been seeing can you maybe talk about how much incremental wallet share you are taking and what are you seeing on customer frequency across your various cohorts and just how to think about the runway there to engage the lowest quartile of quintile of your customer base.
Chip Maloy: I think you said 35 stores for next year, and I thought you guys had been saying that you might be working towards 40 stores for next year, is 40 off the table for next year? This is Chip. Not really where we are as we look at the stores and open stores. Our expectation is we could have more than 35. We have several in the tail end of the year. It's pretty back half loaded.
Yes, you said a lot there in my question.
They.
Made some progress in terms of hydro communicate.
We're gaining trough, we're gaining new customers.
Well a few more.
Trips from existing customers and as we talked in the script, it's becoming an omnichannel game for US is a really successful customers are ones that are playing in both digital both that E com and in the physical bricks and mortar business. So we're seeing some progress on both sides of that equation, both new customers and existing customers all of them play into this.
Chip Maloy: And if we have any slippage, you know, we just don't want to provide a number out there. There's slippage in the middle of the year. So right now, we feel really confident on 35. We have more in the pipeline. It's just we're kind of managing it. There's keyboard slippage. And I think it's appropriate to do that in the context of the construction is a little bit uncertain in certain locations. And that's the only reason we've been a bit cautious about it.
Space of this health enthusiast, we continue to get more and more data on that space and continue to work hard at making sure that we really understand how much share of wallet. We're growing I think it would be probably premature for me to talk numbers on that specifically, we've got some information on that and we'll look at being able to articulate that better.
Chip Maloy: I like we said in the script, we've got 100 signed off sites that are being signed through our real estate committee. And we've got 65 or 70 releases already signed. So we've got plenty in the pipeline to make this work. This is just really trying to reflect what might happen in December in November to December next year. So we're supposed to January February. And for 35, 7 October, maybe we'll get a few more.
Jack Sinclair: God, that's that's really helpful.
Going forward in the future, but specifically.
The work that we've been doing has been very much about targeting those customers digitally communicating those customers on trying to bring that we don't have a big share of Peoples' total grocery spend we just need a little bit more to make that come alive, and that's kind of what's been happening over the last few quarters as we see traffic.
Jack Sinclair: And then just on the digital strength, is that can you talk more about what you guys are doing to drive digital? Or is it, you know, also related to the door dash partnership working better than expected or Instacart still performing well? Any help on that would be great. Well, we're comfortable with our partnership with both Instacart. I've come into the business and added some added some value to us in terms of understanding the customer and using some of that dynamic and some of that information.
Growing both in terms of.
E Comm traffic breakthrough markup traffic and encouragingly, we're seeing a consistent traffic growth across the nation as well whether it be in our blessing established markets in Florida in our more established markets in California, and all points in between we're seeing a consistent pattern across the board, which is giving us a lot of encouragement.
Jack Sinclair: I think we'll be able to use more of that going forward. So I'm quite excited about the relationship with both of them. Not just with around the e-commerce business, which has been pretty strong for us, but also in terms of the data and the understanding how we can use that information to help us communicate digitally.
<unk>.
Got it that's great and just a follow up question on unit growth. It sounds like 35 is the number that you feel very confident in for 2024, but as it relates to opening the stores on time and staffing.
Jack Sinclair: If you look back over the last three or four years in terms of our communication, we fundamentally changed this from a paper-based communication play to a much more digital-based communication play. And we've made some progress on the personalization side of digital communication. What I've been very pleased with in the marketing communication is that there's so many different, one of the things that the marketing team comment a lot, is there's so many stories that you can tell for our business.
Is there any difficulty that you might be having in terms of recruiting labor and retaining them or that's really just you trying to be more sort of conservative with the opening schedule and potentially do better than what you're planning for.
Well certainly the 35 is based on potential exited construction challenges going forward as opposed to labor challenges going forward.
If anything it's got a level, but you are seeing more applications for jobs in our company than we've ever seen before and the quality of applications getting better as you know it was quite a challenging environment through the pandemic in terms of filling our stores and filling the jobs that we had and we were catching up on cost up and beyond on that in terms of the quality of applications of <unk>.
Jack Sinclair: Because we've got such a variety of attribute-based stories to tell people whether it be gluten-free or keto or paleo or plant-based or that those stories can come alive. And the way to make them come alive and the way they've done it really, I think, quite successfully and it will get better is how we've communicated digitally and how we're picking the right and we've changed our media agency. We're operating in a different way with the right around our media and trying to get a bit more bespoke than what we do.
And the number of applications retention rates are there is a good level as we've ever been in our company and I think thats part of how we built the culture in here one of the things is there is a DNA DNA in our company that people actually.
Jack Sinclair: And I think we've made some progress on that and basically going forward, digital is going to be the future, digital communication is going to be the key to what we're doing going forward. And we've made some progress, but I've got a long way to go. Got it. Thanks, Jack. Thank you.
Like working in an environment, where they think they are doing good for the good for the planet and good for the customers and good for the community. So we feel as if retention retention renewals in a good space and applications that are in a good space. So labor is getting people in the stores isn't a challenge. The 35 is more based on that isn't going to be some slippage from November December into.
Krisztina Katai: One moment for our next question. And our next question comes from the line of Christina Katai from Deutsche Bank. Your question, please. Hey guys, thanks for taking a question and my congratulations to YouTube as well. So, question on the customer engagement focus that you've had in 23, right? You've launched new marketing, you have personalization efforts. And with that as we think about the consistent positive traffic that you've been seeing, can you maybe talk about how much incremental wallet share you were taking?
January next year.
I'd also add that I think.
Our store operations teams or HR teams marketing teams are doing a really nice job of building that muscle opening up quite a few stores in the short amount of time. When you just look at how many stores. We open this quarter, it's a pretty big number for us and we're getting better at it each and every quarter. So I think.
The talent, there and I think we've really developed the muscle and how to do it.
That's great. Thank you so much best of luck.
Thank you.
Thank you one moment for our next question.
Krisztina Katai: And what are you seeing on customer frequency across your various cohorts and just how to think about the runway there to engage the lowest quartile or quintile of your customer base? Yeah, you said a lot there in my question. We've made some progress in terms of how we communicate. We were gaining traffic, gaining a few more trips from existing customers. And as we talked in the script, it's becoming an omnichannel game for us that the really successful customers are ones that are playing in both digit of both e-commerce and in the physical bricks and mortar business.
And our next question comes from the line of John <unk> from Guggenheim Partners. Your question. Please.
Good morning, This Sanders Meyer on for Jon Michael.
Can you walk us through how the produce distribution centers work in terms of initial productivity.
And the path from margin dilution to accretion and also how do you expect these Pcs Pcs to benefit gross margin at maturity.
So as it relates to the dilution we added a lot it's DC dependent somewhat where it's located how many miles going to take off of the ground how big it is.
Krisztina Katai: So, we're seeing some progress on both sides of that equation, both new customers and existing customers, all of them play into this space of this health enthusiasm. We continue to get more and more data on that space and continue to work hard at making sure that we really understand how much share of wallet we're growing. I think it would be probably premature or need to talk numbers on that specifically. We've got some some information on that and we'll work at being able to articulate that better going forward in the future.
In this situation, we went to a much bigger DC in southern California, So its bigger space Thats underutilized, because we're going to grow into it and then we expanded a bunch of space and taxes again, we're going to grow into it so from a dilution perspective, the expectations they are probably going to be.
Dilutive for the.
The 12 months. The first 12 months that there are open and then at that point, probably a push and then you'll get leverage probably you probably get leverage out of it.
Krisztina Katai: But specifically, the work that we've been doing has been very much about targeting those customers, digitally communicating those customers and trying to bring this. We don't have a big share of people's total grocery spend. We just need a little bit more to make this come alive. And that's kind of what's been happening over the last few quarters as we see traffic growing both in terms of econ traffic, breaking the marker traffic.
Could it be 24 months from opening the 36, you start to get some leverage because you've created real.
<unk> created capacity that you are now building into that Youre starting to leverage.
On the capacity deal support that store programs that we've got in California, We've built distribution center in Florida, Thats going to support it we've built capacity in Dallas and Wilmar in Texas to support. So we've now got capacity to support the new stores that are coming onboard going forward. It gives us some options in terms of distributing more broadly outside the project space as well.
Krisztina Katai: And encouragingly, we're seeing a consistent traffic growth across the nation as well, whether it be in our less established markets in Florida and our more established markets in California. And all points in between. We're seeing a consistent patch on across the board, which is giving us a lot of encouragement. Got it. That's great.
So as Kevin has a lot of options in terms of efficiency and I'm anticipating.
In the not too distant.
Jack Sinclair: And just a follow-up question on unit growth. It sounds like 35 is the number that you feel very confident in for 2024. But is it related to opening the stores on time and staffing them? Is there any difficulty that you might be having in terms of recruiting labor and retaining them or that's really just you trying to be more sort of conservative with the opening schedule and potentially do better than what you're planning for?
Future two to three year window will start to get some efficiencies in our distribution costs.
Got it thank you and follow up what is the early read on the 2024 pipeline of stores, especially.
In the context of the new DC, So I guess the clustering by market.
Well, we said in our release that we think <unk> got approximately 35 stores in 2024 beyond that we've got 100 sites that we've signed off in our real estate and real.
Jack Sinclair: Well, certainly the 35 is based on potential either construction challenges going forward as opposed to labor challenges going forward. If anything, it's got a little bit. You are seeing more applications for jobs in our company than we've ever seen before. And the quality of applications again better as you know, it was quite a challenging environment through the pandemic in terms of filling our stores and filling the jobs that we we had.
Our real estate committees and we've got 17 leases that were already already signed that continues the real estate <unk>, probably six seven stores a month at the moment in terms of guiding to this portfolio. So we feel confident going through 'twenty four 'twenty five 'twenty six that our store portfolio growth will be in line with what we've been anticipating.
Jack Sinclair: We were catching up and caught up and beyond on that in terms of the quality of applications that were again in the number of applications retention rates are as good a level as we've been in our company. And I think that's part of how we build the culture in here. One of the things is there's a DNA but there's a DNA in our company that people actually like working in an environment where they think they're doing good for the good for the planet and good for the customers and good for the community.
Jack Sinclair: So we feel as a retention retention. We know it's in a good space and applications are in a good space. So labor isn't getting people in the stores isn't a challenge. The 35 is more based on that is going to be some slippage from November to December into January next year. But I would also add that I think our store operations teams are HR teams marketing teams are doing a really nice job of building that muscle opening up quite a few stores and a short amount of time.
All the way through.
But 24, I think gas specifics there, but we are seeing approximately 75% and I think maybe your question was leaning in towards like what markets and if that's the case, it's probably going to be about a 50 50.
Between what we call established non established market. So think about it from Florida up the east coast is probably going to be 50% of those stores in the southwest of the West coast is going to be the other 50.
Great. Thank you.
Thanks.
Thank you one moment for our next question.
Jack Sinclair: We just look at how many stores we open this quarter, you know, it's a pretty big number for us and we're getting better at it each and every quarter. So I think I think the talent's there and I think we've really developed the muscle and how to do it.
And our next question.
From the line of Chuck Cerankosky from Northcoast Research your question. Please.
Operator: That's great. Thank you so much. Best of luck. Thank you. Thank you one moment for our next question.
Chuck you might have your phone on mute.
Okay.
Still not hearing you chip.
Would you like me to move on to the next question.
Yes, let's do that and then we can come back to Chuck if we can catch them at the end.
One moment.
John Heinbockel: And our next question comes to the line of John Heinbockel from Kuggenheim Partners. Your question, please.
Our next question comes from the line of Kelly Bania from BMO capital markets. Your question. Please.
Anders Meyer: Morning, this is Anders Meyer on for John Heinbockel. Can you walk us through how the produce distribution centers work in terms of initial productivity and the path from margin dilution to accretion and also how do you expect these DCs to benefit gross margin at maturity? So as it relates to the dilution, you know, we added a lot, it's DC dependent somewhat where it's located, how many miles you're going to take off the ground, how big it is.
Hi, Good morning. This is Ben wood on for Kelly. Thank you for taking our questions.
So I wanted to start by asking maybe the inflation question a little differently.
We've in the past you guys have talked about sprouts inflation tracking similar to food at home CPI, which we estimate decelerated about 300 basis points quarter over quarter I'm wondering if that was consistent to the magnitude of slowdown you saw and then can you provide any details on the sub category level help us understand pricing and unit from some of your major.
Anders Meyer: In this situation, we went to a much bigger DC in Southern California. It's bigger space that's underutilized because we're going to grow into it. And then we expanded a bunch of space and taxes. Again, we're going to grow into it. So from a dilution perspective, the expectations, they're probably going to be diluted for the 12 months, the first 12 months that they're open. And then at that point, probably a push. And then you'll get leverage.
He is like vitamins produce center store.
And finally, you mentioned units are improving but is that in the categories you guys would've expected them to.
Okay.
As it relates to the if you talk to.
<unk>, that's probably about right, it's not too far off.
As it relates I'll skip to the unit one.
<unk>.
Anders Meyer: Probably you'll probably get leverage out of it. It's going to be 24 months out of opening the 36. You start to get some leverage because you've created real, you've created capacity that you're now building into that you're starting to leverage. And the capacity will support the store programs that we've got in California. We built distribution centers in Florida. It's going to support it. We've built capacity in dollars and in Wilmer and Texas to support it.
As the units are theyre, continuing to stabilize and thats across as we've mentioned many times the area, where we had our biggest challenge was in produce which is as we said that was sort of a trade down right.
Mers instead of trading down they were trading out.
<unk> unit.
We have the most number of units in the basket our produce and has the lowest price point units are beginning to see that stabilize as well so across our categories.
Anders Meyer: So we've now got capacity to support the new stores that are coming on board. Going forward, it gives us some options in terms of distributing, but more broadly outside the produce space as well. So it's given us a lot of options in terms of efficiency. And I'm anticipating that in the not too distant future two, three year window, we'll start to get some efficiencies in our distribution costs. Got it. Thank you. And follow up.
Getting from a units perspective, it's getting what I would call healthier in the fact that they are stabilizing.
What was the other question Ben Lebow the category. So maybe although you have to have that little bit Ben.
Our inflation number is always going to be a little bit different because of the mix dynamic in our business. There is a little bit of a project is always a bit more volatile and we've got a bigger proportion of projects in our business. So we've got to watch that we have been encouraged by what's been happening in our project business as chip said in terms of your decline in units just slowing down a little bit and we're seeing.
Chip Maloy: What is the early read on the 2024 pipeline of stores, especially in the context of the new DC? So I guess the clustering by market? Well, we said in our release that we think we'll get approximately 35 stores in 2024. Beyond that, we've got a hundred sites that we've signed off in our real estate, real estate committees and we've got 70 leases that are already signed. That continues. The real estate committee sees probably six seven stores a month at the moment in terms of adding to this portfolio.
Chip Maloy: So we feel confident going through 24, 25, 26 that our store portfolio growth will be in line with what we've been anticipating all the way through. But 24, I think specifically about where we're saying approximately 35. And I think maybe your question was leaning in towards like what markets and if that's the case, it's probably going to be about a 50 50 between what we call established and non-established markets. So think about it from Florida, the East Coast is probably going to be 50% of those stores and the Southwest or the West Coast going to be the other 50. Thank you.
Some strength in our bananas business in avocados business, given we've invested in.
A significant capabilities in terms of improving the quality of the.
<unk> in the presentation of those products. So our projects business has seen some encouragement I've been really pleased by Danny frozen grocery, where we get real attribute differentiation and that's flowing through really strongly in terms of our business and is probably slowing down a little bit in terms of inflation in that space as well in line with what we would it would may be in line with what you.
In terms of your question so we're feeling that.
Dynamics that change our inflation number but the overall story that chip has been.
Been talking about in the call and in previous calls where you see a slowing down of the.
That level of EUR, two and that decline in units is slowing down at the same time is coming coming into sync, which is what we think is going to happen going forward.
Great. That's helpful. And then just a follow up on the previous line of questioning on on digital by RMR.
Operator: One moment for our next question. And our next question comes from the line of Chuck Cerankosky from North Coast Research. Your question please. Chuck, you might have your phone on mute. Still not hearing you, Chuck. Would you like me to move on to the next question? Yeah, let's do that and then we can come back to Chuck if we can catch him at the end. All right, one moment. Our next question comes from the line of Kelly Bania from BMO Capital Markets.
Digital has been a pretty solid contributor to comp year to date I was wondering if you could help kind of quantify how much of digital growth has been driven by the incremental new partnership with door Dash and then as we think about Q4, which I believe is when you would start to lap the initial door dash rollout.
What are your expectations for digital growth.
You start to lap.
Well I think as we said in this call we see omni channel is the key to our business going forward. The way customers are navigating an uncommitted drifting between coming to the store and using online is driving basket and driving share of wallet, that's important to us with our target customer.
So digital plays a key part E. Com plays a key part in that whole dynamic going forward and as the cotton door Dodge have been great partners. This year the door dash our business is now.
Operator: Your question please. Hi, good morning. This is Ben Wood for Kelly. Thank you for taking our questions. So one of the start by asking maybe the inflation question a little differently. We believe in the past. You guys have talked about Sprouts, inflation, tracking, similar to food at home CPI, which we estimate accelerated about 300 basis points quarter over quarter. Wondering if that was consistent to the magnitude of slowdown you saw. And then can you provide any details on the sub category level?
We saw when I joined the company, we were at 2% mix. We're now running around 12% makes in terms of.
E comm business and that steadily and <unk>.
Deadly growing electrical that as we go through but as I say the customers are using online are definitely using coming to the store as well, which I think is an unusual mix quite how much omnichannel, we've got which again gives us a lot of confidence to our assortment on our curated assortment thats differentiated is proving very relevant.
Operator: Help us understand pricing and units and some of your major categories like vitamins, produce, center store. And finally you mentioned units are improving, but is that in the categories you guys would have expected them to? As it relates to the inflation, that's probably about right. It's not too far off. As it relates, I'll skip to the unit one. The units are, they're continuing to stabilize and that's across, as we've mentioned many times the area where we had our biggest challenge was in produce, which is as we said, that was sort of a trade down, right?
I think that's more what we can do with door dash and Ireland and stick up to really understand that target customer. So that we can communicate more effectively through some of the digital mediums that we've got going forward. So.
It's an encouraging picture, but it is not something we don't think of our business size.
On non E. Com, we think of our business is omnichannel and that we're providing a service and providing an assortment for that target customer however, they choose to engage with us.
Great. Thank you guys.
Thanks.
Thank you one moment for our next question.
Operator: Our customers instead of trading down, they were trading out a produce unit that we have the most number of units in the basket are produce and it's a lowest price point unit for beginning to see that stabilize as well. So across our categories, it's getting from a unit's perspective, it's getting what I would call healthier in the fact that they're stabilizing. What was the other question then? About the categories. So maybe I'll capture that a little bit, Ben.
And our next question comes from the line of Bill Kirk from Ross Your question. Please.
Good morning, everybody chip by my by my Count. This is your third attempt at retirement, so hopefully hopefully third time's a charm.
Third party Im sorry, very good pine belt.
No.
Jack you touched on this any Jeff touched on it but at times I think you've quantified like roughly how many shoppers that you have good data on so could you remind us like what that percentage is today like the percentage that you know and then with these new programs that we've been talking about what does that percentage become over time.
Operator: Our out-and-flation number is always going to be a little bit different because of the makes dynamic in our business. There's a little bit of it. Produce is always a bit more volatile and we've got a bigger proportion of produce in our business. So we've got to watch that. We have been encouraged by what's been happening in our produce business, as Chip said, in terms of this decline in units just slowing down a little bit and we're seeing some strength in our bananas business and avocados business, given we've invested in significant capabilities in terms of improving the quality of the preparation and the presentation of those products.
So youre this today and you go to what over a few years.
Yes, well I think we've talked about in the past and the combination of different ways, we get to it comes to around 13% of our customers that we've got good information on which is pretty low.
We anticipate that we're doing in terms of the loyalty that we've talked about the work that we're doing in terms of understanding how this digital communication work, we can get that higher than where it is but it doesn't need to get to the kind of numbers that you see in the more traditional grocery space. We can we don't anticipate that going it doesn't need to go to <unk>.
Operator: Our produce business has seen some encouragement. I've been really pleased by dairy, frozen grocery where we get real attribute differentiation and that's flowing through really strongly in terms of our business and it's probably slowing down a little bit in terms of inflation and that space as well in line with what we may be in line with what you talked about in terms of your question. So there's dynamics that change our inflation number but the overall story that Chip's been we've been talking about now in the call and in previous calls where you see a slowing down of the level of AUR and the decline in units is flowing down at the same time.
Really high for us to make a lot of progress on this in terms of communicating it I don't want to commit myself to numbers on that because we haven't quite got that nailed, but we're doing a lot of work going on at Bell.
And we do have a pilot next year the loyalty program part of the purpose of that is to actually be able to get a lot more information to be able to connect with our customers a lot more in the early stages of that I suspect.
Operator: So it's coming coming into sync which is what we think is going to happen going forward. Great. That's helpful. And then, just to follow up on the previous line of questioning on, on digital, by our math, digital has been a pretty solid contributor to comp, year to date. I'm wondering if you could help kind of quantify how much of digital growth has been driven by the incremental new partnership with DoorDash. And then as we think about Q4, which I believe is when you would start to lap the initial DoorDash rollout, what are your expectations for digital growth as you start to lap?
That number will grow pretty dramatically in the early stages of that and we'll be able to talk to those customers at least on a broad base.
Basis, and then to be able to get down to the individual customer level.
Would we be a little bit longer journey, but I think we're on the right Road.
Thank you that that's the only question I had and good luck on all fronts guys.
Great. Thanks, Bill appreciate it.
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.
Yes, thanks, everybody for your interest in our company and LNR.
Operator: Well, as we said in the in this call, we see on the channel as the key to our business going forward, the way customers are navigating and and community drifting between coming to the store and using online is driving basket and driving this share wallet that's important to us with our target customer. So digital plays a key part, econ plays a key part in that whole dynamic going forward. Instacart and DoorDash have been great partners this year.
The OEM numbers in a few months' time, so we look forward to that and I wish everybody a happy Halloween.
Take care.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Operator: The DoorDash, our business is now, what we saw when I joined the company, we were at 2% mix, we're now running around a 12% mix in terms of our e-con business. And that's steadily growing a little bit as we go through. But as I say, the customers that are using online are definitely using coming to the store as well, which I think is an unusual mix, quite how much on the channel we've got, which again, there's a lot of confidence that our assortment and our curated assortment that's differentiated is proving very relevant.
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Operator: And I think there's more what we can do with DoorDash and Instacart to really understand that target customer so that we can communicate more effectively through some of the digital regions that we've got going forward. So it's an encouraging picture, but it's not something we don't think of our business as e-con and non-e-con, we think of our businesses on the channel and we're providing a service and providing an assortment for that target customer. However, they choose to engage with us. Great. Thank you guys. Thanks. Thank you. One moment for our next question.
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Bill Kirk: And our next question comes from the line of Bill Kirk from Ross. Your question, please.
Jack Sinclair: Good morning, everybody. Chip, by my count, this is your third attempt at retirement. So hopefully, hopefully, third time's a charm. Third time, sorry. I was very good five, Bill. Jack, you touched on this and you just touched on it, but at times, I think you've quantified roughly how many shoppers that you have good data on. So could you remind us what that percentage is today, like the percentage that you know? And then with these new programs that we've been talking about, what has that percentage become over time?
Jack Sinclair: So you're this today and you go to what over a few years? Yeah, well, I think we've talked about in the past. The combination of different ways we get to it comes to around 13% of our customers that we've got good information on, which is pretty low. We anticipate the work that we're doing in terms of the loyalty that we've talked about the work that we're doing in terms of understanding how this digital communication works.
Jack Sinclair: We can get that higher than where it is, but it doesn't need to get to the kind of numbers that you see in the more traditional grocery space. We don't anticipate it going, it doesn't need to go terribly high for us to make a lot of progress on this in terms of communicating it. I don't want to commit myself to numbers on that because we haven't quite got that nailed, but we're doing a lot of work going on here, Bill.
Jack Sinclair: We do have the pilot next year, the royalty program. Part of the purpose of that is to actually be able to get a lot more information, be able to connect with our customers a lot more. In the early stages of that, I suspect that number will grow pretty dramatically in the early stages of that. And we'll be able to talk to those customers at least on a broad basis. And then to be able to get down to the individual customer will probably be a little bit longer journey. But I think we're on the right road for that.
[music].
Operator: Thank you. That's the only question I had and good luck on all fronts guys. Thank you.
Jack Sinclair: This does conclude the question and answer session of today's program. I'd like to hand the program back to Jackson Claire for any further remarks. Yeah, thanks everybody for your interest in our company and it'll not be long before you fill your numbers in a few months time. So we look forward to that and I wish everybody a happy Halloween. Take care. Thank you, ladies and gentlemen, for your participation in today's conference.
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[music].
Operator: This does conclude the program. You may now disconnect. Good day. . [inaudible] She's got a lot of money. She's got a lot of money.
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