Q3 2024 Sprouts Farmers Market Inc Earnings Call

The End

Good day and thank you for sending by. Welcome to the Strauss Farmers Market, their quarter 2024 earnings conference call.

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After the Speakers presentation there will be a question and answer session.

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To withdraw your question, please first start one one again. Please be the lives of today's conference is being recorded. Oh, now I kind of conference over to your speaker today. Susannah Livingston, please go ahead.

Thank you and good afternoon everyone. We are pleased you are joining Sprouts on our third quarter, 2020-24 earnings call.

Chief Executive Officer and Curtis Valentine, Chief Financial Officer, are with me today. The earnings release announcing our third quarter, 2024 results, the webcast of this call, and financial slides can be accessed through our investor relations section of our website at investorsetsrout.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2024 and beyond.

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

For more information, please refer to the risk factors discussed in our SEC filings in 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 comparable GAAP figures. With that, let me hand it over to Jack.

Thanks Susannah and good afternoon everyone. The dedication and hard work of our 33,000 team members proved excellent results in the third quarter, surpassing our expectations.

Our sales increased by 14% compared to the third quarter of 2023, including an 8.4% increase in comparable store sales. Additionally, our diluted earnings per share grew by 40% from last year.

Firstly, I would like to express my gratitude to the teams in Florida, Georgia and the Carolinas for their amazing support of their communities during the recent hurricane season.

Much work still needs to be done, but our teams continue to demonstrate our core value of care as these communities recover.

The progress we've achieved in the business directly results from aligning our execution with our strategy. Focusing on our target customer drives all functions in our business.

It begins with our team members who provide exceptional service and create an outstanding in-store experience for our customers.

resulting in some of our highest customer service scores.

We are growing our assortment of differentiated, attribute-focused products to meet the demands of our health-enthusiast customers.

resulting in increased food traffic.

I'm especially encouraged by the collaboration and coordination across functions in executing exciting merchandising events and providing enhanced customer engagement, which has been instrumental to our success.

Whilst delivering in the short term, we're making significant investments in infrastructure to support the business's growth for many years to come.

I will talk more about these later. For now, I'll hand it to Curtis to review our financial performance in the third quarter and our 2024 outlook. Curtis?

Thanks Jack and good afternoon everyone. For the third quarter total sales were 1.9 billion up 232 million or 14% from the same period last year. This increase was driven by comparable store sales growth of 8.4% and the addition of new stores.

Our comp was split fairly evenly between traffic and basket, and we saw a strong traffic comp both in-store and online.

e-commerce sales also increased by 36% representing 14.5% of our total sales for the quarter. In addition, Sprouts brand contributed 23% to our total sales for the quarter.

Once again, the company's sales performance was healthy and balanced across all our key comp drivers, categories, and geographies.

While all business components remain strong, our sequential improvement from Q2 to Q3 was primarily driven by improved in-store traffic and strong comp performance from new vintages.

In addition, the consumers pivot toward food at home and a growing focus on healthy living is bringing additional customers to Sprouts.

We remain disciplined in executing our strategy, which allows us to capitalize on these tailwinds.

In the third quarter, our gross margin was 38.1%, approximately 150 basis points higher than the adjusted gross margin from last year.

This increase was due primarily to improved shrink as we lapped our challenges in the prior year and leveraged our improvements in inventory management.

In addition to our operational improvement, our step change in sales performance drove additional leverage in our supply chain and further reduced shrink, while our forecasting caught up to these new sales trends and our teams chased additional inventory.

For the quarter, SG&A totaled $580 million, an increase of $79 million, or approximately 50 basis points of de-leverage, compared to adjusted SG&A from the same period last year.

This fee leverage was due to higher incentive compensation for our teams, increased e-commerce fees, and spending against our planned $15 million investment in the business.

This was partially offset by leverage from the higher sales.

In the longer term, we remain focused on cost management and looking for opportunities to mitigate our cost headwinds.

Store closure and other costs totaled approximately $4 million for the quarter. These are primarily related to the ongoing occupancy costs from our 2023 store closures.

Depreciation and amortization, excluding depreciation included in cost of sales, was $34 million.

For the third quarter, our earnings before interest and taxes were $122 million, interest income was $1 million, and our effective tax rate was 25.8%.

Net income was $92 million and diluted earnings per share were $0.91, an increase of 40% compared to adjusted diluted earnings per share from the same period of the prior year.

We opened nine new stores during the third quarter.

ending with 428 stores across 23 states.

We are excited about the new store's success and expanding our growth to more communities.

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Our strong and healthy balance sheet has been the foundation of our financial performance. Through the third quarter, we generated $520 million in operating cash flow, which enabled us to self-fund our investments of $132 million in capital expenditures, net of landlord reimbursement, to grow our business.

With our robust cash generation, we paid down our outstanding credit revolver in the second quarter and returned $130 million to our shareholders by repurchasing nearly 1.9 million shares year-to-date.

We have $559 million remaining under our $600 million share repurchase authorization.

At quarter end, we have $310 million in cash and cash equivalents, no outstanding borrowings under our credit facility, and $20 million of letters of credit.

Turning to our outlook for the full year, we expect total sales growth to be approximately 12% and comp sales to be approximately 7%.

Adjusted earnings before interest and taxes are expected to be between $490 and $495 million and adjusted earnings per share are expected to be between $3.64 and $3.68, assuming no additional share of purchases.

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

We also expect our corporate tax rate to be approximately 25%.

During the year, we expect capital expenditures, net of landlord reimbursement, to be between $205 and $215 million.

We plan to open 33 new stores instead of our previous guidance of 35. Due to the impact of Hurricane Milton and to give the communities and our team members time to recover, we have decided to delay two planned store openings in Florida until the first quarter of 2025.

For the fourth quarter, we expect comp sales to range from approximately 8% to 10% and adjusted earnings per share to be between $0.67 and $0.71.

To add more color to our fourth quarter, we expect continued gross margin expansion of approximately 100 basis points, partially offset by continued pressure on SG&A due to new store deleverage, strategic investments, and higher e-commerce fees due to the continued strength of our online sales.

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

Thanks Curtis. We've made significant progress this year against our strategy and are seeing positive outcomes.

Our successes include enhancing our product assortment, improving customer engagement and experience, and operational advancements, all while strengthening our unique culture.

Our target customers are at the center of our strategy.

and these same customers are part of a growing community around a healthier lifestyle. That community includes entrepreneurs, growers and suppliers and we at Sprouts are proud to be part of this movement. This has inspired us to update and roll out our purpose to our internal teams.

to help people live and eat better.

This purpose has always been in our DNA, but needed to be put into simple words that resonate with every team member, from a cashier in Greenville, SC, to a vice president in our store support office.

This purpose drives everything we do, and will help us maintain our focus on serving our team members, communities and customers into the future.

while we strive to make the world a little bit better, product by product and store by store.

On the topic of products, our differentiated assortment is thoughtfully curated and designed to cater to our health-enthusiast customers.

To highlight a few examples, we are consistently expanding our range of organic produce, which is experiencing faster growth than our conventional produce.

Organic products now compromise more than 46% of our total produce sales.

Our protein programs have expanded by offering only non-antibiotic chicken and pasture-raised brands such as Pasture Bird.

We've taken advantage of the consumers' pivot back towards food at home by increasing our meal solutions across our fresh and frozen departments, with items like our grass-fed beef, stuffed peppers, black garlic marinated NEE chicken skewers.

and our organic grass-fed meatballs. These unique, natural products you can only find at Sprouts and they lead our category growth.

Thank you for watching.

Our ongoing innovation efforts continue to be a differentiator for us. This year over 170 new items have transitioned from our Innovation Centre to our inline shelves, as Sprouts is becoming a vendor of choice for new trend forward brands.

Our foraging team also continues to explore new tastes and trends.

from across the globe, from trade shows to restaurants for inspiration.

Our Sprouse brand continues to grow and gain affinity with unique items and attributes that our customers desire.

We have released more than 300 new Sprouts brand items this year, such as Italian made stuffed gnocchi, frozen risottos sourced from Italy, and our latest Moroccan and al pastor flavoured chickpeas.

We're very excited about the launch of our new line of more than 130 premium body care and home fragrance items called Real Root by Sprouts this past month.

They are free from many things including parabens, phthalates, artificial fragrances and colours.

These products help customers live healthier, nurturing inner and outer well-being.

On the customer engagement front, our marketing efforts have successfully attracted more customers to visit our stores. We continue to tailor our marketing strategy to target our unique customers and adjust our media approach based on regional and market differences.

One area that has played a key role in our acceleration is social media. Our team has brought our unique assortment and experience to life and has found willing partners with many influencers and celebrities whose products and purposes align with ours.

Their energy and passion inspire us. What is even more encouraging is seeing authentic posts from our customers, sharing their experiences in store and with our products.

As a result of our marketing efforts, we're seeing more new customers, improved customer retention and increased shopping frequency, leading to strong comm traffic momentum.

Additionally, we're seeing more customers from younger cohorts which bodes well for the future.

To further support our long-term customer engagement, we're investing in technology to build a customer data foundation to tailor and personalize our customer communications.

Our new loyalty program will be our data acquisition engine for personalization efforts.

While still early, we're pleased with the progress we're making and the learnings we're gathering from our loyalty test.

Thank you to the teams in Nashville and Tucson for their support and enthusiasm.

Sign ups and scans are meeting and even slightly exceeding our early goals. We plan to extend this test to a couple more markets in early 2025 to accelerate our learnings that will inform our rollout later in 2025.

A differentiated assortment and strong marketing are key, but it doesn't tell the full story of our 2-3 performance.

Outstanding collaboration and execution across functions are required to bring it all together and deliver these results. Our supply chain, merchanting, marketing, IT and operations teams have been aligning early and often, working seamlessly to ensure we deliver an exceptional in-store experience.

As part of our continuous efforts to showcase differentiated and attribute-driven products, we are organizing customer-centric events for an engaging and enhanced customer experience.

In July we debuted the first Sprouts brand Discovery Days. It was well received and drove outside growth for our brand. Stores have embraced the opportunity to go big and we saw some tremendous displays and sampling showcasing better for you products such as our rebranded coconut rolls and fall seasonal items.

We also had an outstanding back-to-school event, focusing on our healthy school snacks and lunch offerings, and our chef-created deli and meat meals for those busy evenings.

On top of this work, our operations team was laser-focused on delivering exceptional customer service and an in-store experience that fosters long-term loyalty.

This commitment to bringing our unique products to life through exemplary service, engaging sampling and in-store execution continues to set us apart and win customers.

We also optimized our operations by advancing our technology and processes, improving in stock, reducing shrink, boosting sales and enhancing the customer shopping experience.

Regarding our team, we've worked hard to create a culture that attracts, develops and retains top talent.

building Sprouties for the long term. We recently held our annual Sprouts Con conference which brought together all our store managers and various department managers with over 1,600 team members in attendance.

During the event, the operations team learned about our business initiatives, received leadership development training, and were introduced to new products in our innovation pipeline.

some through live vendor pitch slams. Over 1500 vendors attended our private show to discuss their products, allowing each team member to bring back their knowledge to their stores and share it with their customers and fellow team members.

Our HR teams are focused on coaching and leadership training this year to build new leaders and our talent engine to support our growth objectives. They're doing a great job.

As we acknowledge that we have some macro tailwinds at our back, we are putting in the effort to establish a strong foundation that will enable the business to thrive in every environment. Our third quarter results and overall momentum continue to confirm our belief in our target customer focus strategy.

That said, we know there is plenty of work to do, and each day presents new challenges.

We are more committed than ever to making healthier options available to our customers in as many communities as possible.

Our results enable us to keep investing in our growth.

With the outstanding support of our team members across the company, we are confident we will continue to deliver value to our shareholders.

We're enthusiastic about the opportunities ahead and our teams are rising to the challenge. We look forward to updating you on our progress and connecting with many of you in the coming months.

And with that, I'd like to turn it over for questions. Operator?

Thank you, and at this time we will conduct a question and answer session. As a reminder to ask a question you need to press star 1 1 on your telephone and wait for name to be announced. To withdraw your question, please press star 1 1 again.

Speaker Change: Please stand by when we go to the Q&A roster. One moment for a first question.

Speaker Change: Our first question will come from Mark Carden from UBS. Your line is open.

Mark Carden: Afternoon, thanks so much for taking the questions. So another really strong comp for you guys this quarter. How is the cadence of the comp from month to month? Did you guys see much of an impact from that hurricane to your sales? And is it fair to assume there's been a bit of an acceleration thus far in 4Q to date, just given the midpoint of your guidance range?

Mark Carden: Hey Mark, it's Curtis. We had a good quarter. There was a little bit of acceleration later in the quarter and a little bit of benefit from the hurricanes, but we're not

heavily penetrated in the southeast and and you know fortunately you know Helene kind of missed our our stores

and then the Florida, Milton certainly impacted Florida. So there's a little bit of pull forward there. Neither was quite as bad as it was anticipated to be.

but not a huge driver to the quarter overall and yes saw a little bit of acceleration late and you know good momentum heading into the to what we've seen so far in P10.

Great, and then as a follow-up, you talked about some stronger comp performance in your newer vintages. How much of a contribution do you think you're getting from your waterfall at this point? And how should we think about this going forward as you further ramp your store growth? Has this changed at all structurally? Thank you.

No structural changes. I'll take that in reverse order. I think we talked over the last few calls that the stores from a couple years ago kind of started a little lower than our box economics, you know, kind of algorithm view, but they've been comping faster. So we they're kind of playing out as expected and we think that they'll get to that kind of mature state that we that we have in our box economics.

You know, I'll give specifics, but, you know, we're kind of getting...

I don't know a little over call it a hundred a little more than a hundred basis points probably from those from those new or recent vintages So we really look at you know, three or four years worth of stores that are comping is out comping the kind of core And they're they're doing a nice job for us

and Mark. We're very, we're very kind of excited by stores that have been on the ground for two or three years. I think there was a little bit of it when we opened during COVID, they were probably smaller than we'd like to start with.

so we're getting a benefit from that. But overall, in markets where we haven't been well established, we're seeing a really strong response from the consumers in those markets.

Speaker Change: Great. Thanks so much, and good luck, guys.

Mark Carden: Thanks.

One moment for our next question.

Our next question comes from Rupesh Parikh from Oppenheimer. Your line is open.

Rupesh Parikh: Good afternoon, thanks for taking my question and congrats on a very strong quarter. So just going back to, you know, obviously, you know, a strong guy for Q4 on the comp side. How do you guys feel about the sustainability, the complementum that you're seeing in the business? Is this something that you believe can continue to next year? And just just want to get a sense of if there's anything unsustainable in terms of what you guys are seeing right now.

Well, I think the first thing we want to say is there's a huge upside in our customer base. We've still got a very small share of our customers' wallet, and we're doing some things that seem to be stimulating the customers pretty well. I'm very excited by how our marketing teams are shaping the message and using media effectively and being very thoughtful about that. I think we've learned a lot this year, which we'll be able to use even more effectively next year. So I think that's an encouraging sign for us.

Rupesh Parikh: The execution at store level continues to get better and better and stocks are getting better, the execution behind that. We've invested a lot of money in infrastructure and systems over the last couple of years in terms of getting our business more in stock and more in tune with what needs to happen on a day-to-day basis in the stores. So I'm very encouraged that our operation execution will continue to drive some comp sales for us, encourage that our marketing teams will continue to get better and better.

Rupesh Parikh: picking the right messages and sending those messages in the right place.

Rupesh Parikh: So there's a lot of encouragement in our business and there's a lot of upside to go with our customers. Curtis, I don't know whether you want to expand on that?

Speaker Change: Yeah, no, I think, you know, we've had a few, we've called out a few one-timers, again, the hurricanes was a little bit of a helper, produce season was pretty strong, we've added channels.

Speaker Change: As Jack says, for now we've got good momentum, expect that to continue when we come up against it later next year. We feel really confident in a two to four algorithm comp that we can do that in any environment. We're certainly building a business to deliver results in any environment.

Great, maybe just one follow-up question. So I know this quarter you weren't able to leverage SG&I just given some of the loyalty program investments, you know, higher incentive comp. Any insight in terms of, you know, what you think could be a normalized leverage point as we look beyond this year?

Rupesh Parikh: Yep.

I'll just say it will normalize next year. Certainly we've gotten one-time things in there with the incentive and the investments that will go away and will help offset some of the pressure points in the business from growth.

Rupesh Parikh: and Wages and Econ.

And then things are getting a little bit better again. Ecom won't have quite the penetration jump that it had this year, so there'll be less pressure from that. The labor market's been pretty good for us, so a little bit less pressure there.

Rupesh Parikh: although we'll continue to invest in talent. And so it'll be a much more normalized 2025. Teams are working through the budget process right now, and so we'll have more specifics when we get to February, but we should have a much more normal year in 2025.

Great. Thank you, Pastor Molloy.

Thank you. One moment for our next question.

Our next question comes from Christina Katai from Deutsche Bank. Your line is open.

Hi, good afternoon, and I add my congratulations as well. I wanted to ask about new store performance, which came in very strong, I think, based on our calculations. It improved around 90% compared to the previous, around mid-70s.

Rupesh Parikh: Can you talk a little about what you see as some of the bigger drivers behind this improvement? Anything you can share in terms of how some of the most recent vintages are ramping relative to those that are a couple of years old? And could this be the higher level of NSP, the normal range going forward?

Yeah, Christina, we're very encouraged by the 1, 2, 3 and 4 year vintages. They're all playing a pretty strong role in terms of how they're coming through comp-wise. Why are we getting a little bit better? And we are getting a little bit better opening stores. One, I think, is our marketing teams are getting more honed in terms of being very specific by market in terms of how bringing our brand to that marketplace.

Rupesh Parikh: And the second thing is, I think our teams behind the scenes are picking even the work that we've been doing in terms of getting the modeling right, so that we understand where to build stores.

these stores and you see the lines of people outside, and a lot of people come in and there's.

Rupesh Parikh: genuinely surprised by the assortment and the offer and excited by it so it certainly gives us a lot of confidence in the future as a as we get a little bit better

honing this new store program. And Christina, I'll just add a couple of things. One is density matters. So as we've opened more and more stores in some of our larger markets, certainly you're getting word of mouth and awareness.

before we even start the new store program, which is great. And then on the productivity calc itself, the denominator is advantageous because we're open in smaller stores. So that's a little bit of why it would be better than that kind of historical 75% on that new store productivity calc.

Great, thanks. And just for a follow-up, I wanted to ask about your sort of target customer segments, but really tie it in with some of the newer households that have started to shop with you. How are they performing in terms of frequency or wallet share relative to your overall base? Just any insights that you could share in terms of, you know, how we should think about their stickiness and then potential contribution on a go-forward basis. Thank you.

Sure. A little on the newer customers we're seeing, we're seeing the frequency increase, which means we're seeing some smaller baskets. So we're seeing more.

transactions in kind of a, you know, 2, 3, 4, 5 unit range. So there's a little bit of a mixed headwind there. We're also, or mixed change there, so to speak.

Rupesh Parikh: I think we're also really pleased because we're seeing a lot of younger customers coming into our stores. So in that 18 to 34 cohort is one of the ones where we've seen the strongest growth.

I think that's a credit to our marketing team and the work they're doing in social media.

and bringing in those younger customers. So a little bit of color around the customer.

cohorts and frequency increase. But we're pleased with where we're headed there. And I think the stickiness, Christina, kind of comes from this growing interest in health and attribute based products. I think increasingly it's very clear that the people that are getting interested in this get more and more interested. And we're finding that that's.

Rupesh Parikh: contributing to, I think, the increased number of people that are coming back in more consistently than they were in the past.

Thank you for watching. Please subscribe to my channel. I hope you enjoyed this video. If you have any questions, please leave a comment. I will try to answer as many as possible.

Speaker Change: Thank you. One moment for our next question.

Speaker Change: Christina went away.

Our next question comes from Jacob Aiken-Phillips from Melius Research. Your line is open.

Jacob Aiken-Phillips: Hi, everyone. Thanks for the question. So I got, I'm curious, just doing the math, it seems like 4Q might be a little conservative, or at least there's like a slowdown in comp sales. So just curious your thoughts on that. And then, I guess going forward, a lot of people are asking, like, if you can continue to maintain these comp sales, because your valuation is kind of high. So I'm just wondering, what are the bigger drivers, not just in 2025, but over the next two or three years for developing those comps?

Speaker Change: I'll cover the first part and I'll let Jack cover drivers. Well I think the one year is an acceleration at the midpoint and slightly higher than the 8.4 and Q3 in the two years

Speaker Change: flat to Q3, so I don't think it's a deceleration in the guide or in the performance, in the way we've guided the business. And then, you know, we feel good about what we alluded to a few minutes ago, but I'll let Jack cover some of the drivers and why we feel good about the sales.

Yeah, we feel very confident that our top lane can continue to...

Speaker Change: Moving the right direction and that will flow through in terms of bringing it through in terms of our earnings

So we're feeling confident that our customers are in good shape, that the customers that shop with us are pretty resilient to any economic conditions that come at them. We're pretty confident that we're taking some, as I said earlier, marketing, operational and merchandising initiatives that should continue to drive a little bit more share of wallet of the existing customers that we have. And this health trend is a very real one. And it's one that I think we're probably benefiting from that tailwind at the moment. And I think that tailwind isn't going to go away anytime soon. So I think that gives us some confidence that we can comp the comp going forward.

We don't think the share price is too high at all, sir.

Speaker Change: I wasn't trying to say it was too high, just talking about growth. What about just the same from a bottom line perspective for 4Q? You beat and raise every quarter, you don't consider 4Q conservative?

I think it's again the midpoint kind of put it right in line with what we delivered in Q3 certainly we aspire to to beat what we've said we were certainly going to deliver what we say and we aspire to beat it every quarter so

We've got some, you know, there's some things going on in the fourth quarter. We've got an election next week and we've got the holidays after that.

and then we'll head into our healthy new year and fresh start. So a lot going on in the last part of the quarter. Continues to be pressure on the consumer and so we'll see how it all plays out as they're moving their way through the holiday, but we feel good about our guidance.

Speaker Change: Thanks, and congrats on the quarter.

Thanks, Jacob. Appreciate it. One moment.

One moment for our next question.

Speaker Change: Our next question will come from Ken Goldman from J.P. Morgan. Your line is open.

Hi, good afternoon and thank you.

I don't want to say leaning on its vendors, but maybe asking its vendors to work with it a little closer in terms of costs per item to help fund that growth so that those vendors can grow successfully with you.

Speaker Change: I don't want to go into more detail than that, other than, you know, there have been a couple articles and a couple people asking about it. I'm just trying to get a sense of how valid that is, and if it is valid, you know, what has the receptivity been among some of your vendors to the idea that, you know, maybe they want to share in some of the investment side of your growth, if that's a fair question?

Of course, it's a fair question, Ken. I think it's something our vendors are our lifeblood of how we're going to operate going forward and how we've operated going past. Differentiation comes from a set of vendors, who, as I said in the script, who are enthusiastic, who are very innovative, creative, entrepreneurial. And we're working very hard with all of that

group of of entrepreneurs and businesses and companies to try and we want to try and be at the head of the curve in terms of these innovative products and we're working very hard at that. And as we build new stores and as we build

our comp momentum and build our customer momentum. What we bring is some some efficiency to how we work. We have been and becoming less so a relatively immature company and how we work with our vendors.

Speaker Change: can drive real efficiency for the vendors and our aspiration and we are we're having very

detailed conversations with our vendors and it's about how can we make them more efficient, how can we become more efficient, how can that efficiency drive into better opportunities for our customer and for our customers to get access to products and better opportunities, quite frankly, for us to make a little bit more margin. You've seen our margins over the last few years. So this combination of efficiency with the vendor, I'm envisaging that our vendors will become much more profitable working with us going forward and we're getting a really good dialogue going with our companies on that and it's really intense work.

and it's great the merchants are doing really good work and the vendors are responding really well because they can see the opportunity and they're very excited about this customer base that we have which is pretty unique and pretty differentiated so it's become a really it's been a very enthusiastic

Speaker Change: Reception.

dialogue that we think is going to stand us in good stead for many years to come in terms of the way we're operating and it's been part of us growing up as a company. Ken.

Very helpful. I'll pass it on. Thank you, Jack.

Thank you.

Thank you. One moment for our next question.

Our next question comes from Robby Oams from Bank of America. Your line is open.

Oh, hey Jack and Sprouts. Great quarter. Hey Jack, you mentioned social media as part of the, played a role in the acceleration here.

Can you talk a little more about how impactful social media has been and maybe with that when you think about an 8-10% comp in the 4th quarter, what's the difference between being at 10% in the 4th quarter versus 8% in your mind?

Well I'll let Curtis do the 10 and the 8 conversation.

in social media is a is literally on, I'll misquote the numbers, but we've gone from millions to billions of impressions when you get into the real specifics of what's happening on social media for as our team. I've done a lot of work on this in terms of really bringing forward.

Speaker Change: the messaging around very specific messages that have resonated well. We've had some support from some really interesting celebrities as well as part of that, which clearly drives a lot of product interest in our products. And we see some pretty extraordinary responses. We've got a product called Seamoss out there at the moment, which has really responded, amazingly responded to, I'm not quite sure what we all do with Seamoss, but they're buying it and it's doing a lot. It's doing some real positive things in terms of

coming from a social media post.

and all of a sudden we're chasing inventory to try and be able to hold on to it. So it's the number of impressions that we're getting and the number of social media posts we're sending out and the support that we're getting from different entities and enterprises and celebrities behind those social media posts which is driving impressions which is also driving both transactions.

and some very specific sales on specific products going forward.

Speaker Change: That's really the kind of the message of social media which we are excited about Robbie.

That sounds great. And on eight, yeah, Robbie, on eight to ten, I mean, you know, we're running, you know, those kind of numbers towards the end of Q3, if it's going to get a little better, if the holiday comes in well, and we do well there.

You know, again, I think we feel pretty good about where we are, and we've been a little surprised by the uptick in the last couple of quarters. We've seen a couple of step changes.

in our business, and not that we're surprised the business is getting better, but more, you know, the magnitude of the step changes and...

Speaker Change: and how quick they've come. So I think that's just wanting to see a little bit more of that and watching those, you know, us hold onto those kind of gains over a longer period of time.

But if some of that is a little bit macro or one-time in nature, that would be the way it goes down a little bit. But we feel pretty good about our range and our momentum. Sounds great. Thanks so much.

Speaker Change: Thanks Robbie.

Speaker Change: One moment for our next question.

Speaker Change: Thank you.

Our next question comes from Scott Mushkin from R5 Capital. Your line is open.

Hey guys, thanks for taking my questions.

So I think I asked this question last time actually or maybe it's two times ago But you know thinking about the uses of capital, I think you paid down almost all your debt Obviously, you're generating a ton of cash. So, you know when we think about uses of capital How should we think of it and then I have a follow-up

Thank you. Thank you. Thank you.

Yeah, so always first, you know, first and foremost, we'll invest in the business in our three to three and a half percent, you know, range on capital we feel good about.

going forward, and we're looking for ways to kind of continue to be, you know, to expand our growth on the store side, get back to that kind of 10%, but we'll start there always.

And then we get down to the excess free cash flow. It's always what's the most effective way to get it back to the shareholder. And so at the high interest rates, it was the debt pay down. Right now, it's more or less a push between kind of hanging on to it and what we can get investing it with the banks versus buying back shares.

So we're doing a little bit of both, and I think we'll continue to manage it kind of dynamically as we watch what happens with interest rates.

We feel good about where we are. As Jack said earlier with the share price, we'll continue to buy shares as we move into

2025, and we'll just watch, you know, the interest rate piece on.

how aggressively we would pursue that.

And then on the M&A front, any thoughts there?

Well we're being very specific, we've got to think about does it tie up with our target customer base and those opportunities are few and far between, Scott, so we'll always look at things that come at us, but it's not something that's at the forefront of our mind at the moment.

I'm sorry, I'm sorry, I'm sorry, I'm sorry, I'm sorry

Speaker Change: Okay, and then this is my follow-up question. So when you guys obviously have a lot of, you know, ability to think about the store, the store of the future, or maybe even things that you could bring into older stores that, you know, might help sustain a very strong comp, even if the trend slows down a little bit. So anything on the front burner that way that we should be thinking about?

more meal cases than they've ever had before. They've got new innovation centers that they didn't have before. You've got new facilities in our vitamins department that we didn't have before. So a number of things have been happening gradually over every store.

And we've clearly got a very interesting portfolio of different sizes, shapes and sizes. In time we may take a look at it. At the moment we're spending most of our capital and most of our energy on making sure the size of our stores are right that we're building going forward. But there are some opportunities product-wise and category-wise that we will put back into the existing store fleet as we have done over the last couple of years. And that'll be within the capital that we have allocated.

Perfect. Thanks, guys.

Thanks, Scott.

Speaker Change: Thank you. One moment for our next question.

Speaker Change: Our next question will come from the line of Edward Kelly from Wells Fargo. Your line is open.

Hi. Good afternoon, guys. Nice quarter. I wanted to ask you about store growth. Obviously, you've got a good, healthy pipeline now. You're ramping up to your goal of 10% unit growth.

How do you think about the sustainability of that over time? And I ask the question because, you know, you're going to open up 33 stores this year, but pretty soon it'll be, you know, close to 50.

Is there a ceiling on, you know, the number of stores or are you building, you know, like the capabilities internally to sustain the percent growth and continue to drive the number higher over time?

Ed, it's Curtis. Yes, we are, we're looking at that pretty closely right now, really looking at process, we're looking at cost to build, we're looking at ways to really go faster in the pipeline and continue to find better sites. Certainly, you know, Jack mentioned the analytics we've put into it and the confidence we're gaining in our ability to select sites, you know, so that should open up opportunities for us.

Speaker Change: But we're working on all those things with the intent of trying to get back to that 10%. We're seeing really good results with the stores.

It's been been great for us the last few years, so we'd love to open up a few more stores as we go forward, and we've been in that kind of high single-digit range, so really confident in our ability to deliver that high single-digit piece.

working our way back to 10. I think your question is a good one, but I think it's probably more five, seven, 10 years out. We believe we can ramp up, improve the capability, invest in the teams.

and get ourselves to that kind of 50 range.

Speaker Change: And we're working our way towards that.

Speaker Change: And I think if you look at the numbers,

we've only got 428 stores at the moment and there's huge swathes of the country that we don't have stores whether it be Chicago in the Midwest whether it be Boston and the New England and the Northeast there's huge places where there's lots of customers who look like exactly the kind of customers that we're chasing after so there's plenty of opportunity and as Curtis and the finance teams are being appropriately disciplined about making sure we don't open stores willy-nilly in the wrong place and we're being very focused on that so I think we can do more but we're going to make sure we do it carefully and appropriately.

And can I ask you, how are you thinking about?

store density versus new markets. Under prior management, I remember at the time there was some growing headwind associated with cannibalization. Obviously, you're not having that issue at the moment, but I'm just curious how your thoughts around store density

you know, have evolved and your appetite, you know, to really sort of push into new markets as opposed to, you know, infill, especially infill into some of the older markets that you're in.

Yeah, we believe we've got opportunities in both. The density is important and it can drive some marketing very significantly. When you go to new markets, it's better not to have one store, we better have a few stores ready to go so that it can all come alive appropriately. And I think the opportunity, if we start with, is there enough customers in that catchment area, have we got a distribution center within 250 miles? If it fulfills that, I do believe our cannibalization modeling has got significantly, really got good in the last little while. So I'm very encouraged by the fact that we're understanding cannibalization better than we ever had.

And sometimes it makes some sense to build one very close and sometimes it doesn't, but our modeling's been getting better and better and every time I look at new store sales, I look at what the impact, what we forecast for cannibalization, and it feels like we're getting both of them pretty in tune at the moment.

Yeah, I'll just add a couple things that I think, one is that kind of 8% this will be the second year in a row of 8% so that kind of 8% ish growth is in our run rate from a cannibalization perspective.

Speaker Change: And I think as we build more confidence in the process and in the program, you know, that'll allow us to maybe shift the mix a bit and be more aggressive into newer markets.

Speaker Change: We're looking in the Midwest now, we're looking in the Northeast now, be a few years away before we start to land sites there, but we're building our plans and I think we're using our learnings from these last few years to really be a lot smarter when we go in, the better we get at that.

The lower that, you know, if we can take cost out, we can take parts of the process out, some of the inefficiency there, we can build them.

faster, cheaper, and as the interest rates come down, the economics improve there as well, and that allows us to go faster. So we're hoping those things are going to line up for us here in the next couple years, and we'll kind of manage accordingly.

Thank you. One moment for our next question.

Our next question comes from John Heimbachel from Guggenheim. Your line is open.

Hey Jack, can you talk about how the foraging process has evolved?

Speaker Change: Right, so you think about how many new items you're introducing a year. Are all of those going through the Innovation Center first to prove themselves and then into the planogram?

when you think about taking items out, right? I don't think it's one for one, one in, one out, but taking items out at the right time, you know, because I know you don't want them to go mainstream. How are you, you know, sort of managing that process now maybe versus, you know, a couple of years ago?

Yeah, well, that's a good question. It's been a journey over the last couple of years, John. We've been committed to bringing innovative, differentiated products to our customers. The foraging team have done an amazing job really making us the destination for those type of products, those entrepreneurs, those new, innovative ideas. Part of that, I think I said the last time when we spoke about this,

on the call was we're doing a lot, we're taking a lot of pitch slams where lots of suppliers can get access to us to see a lot of product.

We're spending a lot of time in exhibitions and going to chase around the world looking at different things and different opportunities, different initiatives.

It allows us to not go to all stores as well so that smaller vendors can have enough inventory to give us the opportunity. So we've learned that a little bit, that we can't necessarily go to all stores day one, that we've got to build that up with a vendor base when these are some of these smaller suppliers.

and the transition from the Innovation Centre to the main store, about 25% of the products are finding their way into the main shelf, which does involve rejigging, and it means there's a lot of change. And I think our customers are appreciating the fact that new things are coming in so consistently.

and we're learning how to do that better as well, how to forecast it right, how to work with our vendors effectively, but as I said, this has been an evolution and a learning curve and we'll continue to learn on this, John.

And then a quick follow-up, supply chain, right? So I know at some point you'll build Mid-Atlantic. It's probably too early for Midwest. What else are you thinking about? I know you had a facility in Atlanta that didn't work out. Do you go back there to get more capacity in the Southeast?

Speaker Change: We might need to do that because at the moment we're shipping it a little bit too far into the Atlanta business and our Georgia business is doing really well. So, yeah, we're going to need something south of the Midwest, the Mid-Atlantic going forward. When we need to do that, we're not quite sure, but we're probably going to need a DC in both the Mid-Atlantic and closer to closer to Atlanta.

John, I'd add Northern California too is a place where we need to expand space and expand capacity with our growth so we're we're looking at that right now and looking for solutions in Northern California.

Speaker Change: Thank you guys.

Thanks John. One moment for our next question.

Speaker Change: Our next question will come flying to Michael Montani from Evercore ISI. Your line is open.

Thanks for taking the question and congrats on the quarter.

Thanks. Thanks Mike.

Just wanted to ask if I could on two fronts, one was on the core consumer that you're seeing you mentioned obviously the healthy eating tailwinds just wondering if you're seeing any variation you know in terms of the low to middle income consumer versus your upper income core if you could like discuss that a little bit further.

Speaker Change: Thank you for watching. See you next time.

Well we've talked a little bit about how our segmentation works. What we tend to find is we're not as directly related to

to earnings as we are to education level and that people, and I say this with hesitancy, people that have spent a bit more time thinking about what they eat and how they eat.

Speaker Change: tend to be. We're definitely drifting younger in our customer base and that's coming about partly because what I was talking about in social media, partly because that group of people are more thoughtful and thinking much more about what they eat and how they eat.

And as dietary trends have evolved, we're tending to find these are getting almost narrower and narrower as a customer base. You've got very specific gluten-free, dairy allergens, vegan, vegetarian. Those specific dietary issues are becoming, I think, as we evolve our assortment, we're attracting the customers that are really thinking about that. So, Mike, I'm not...

Speaker Change: I don't really think we talk well or know well about how our income levels are, but we know really well about what the dietary trends are coming through and that's what's driving our customer base.

Speaker Change: Gotcha, and then maybe if I could follow up on the margin front, you know, obviously you gave some color into the fourth quarter of the 100 bps of gross and then some SG&AD leverage.

So I was wondering if you could peel back the onion a little further in terms of what's driving that outlook and then...

I guess longer term, you know, it seems like there's been good progress and shrink from a waste perspective, but there could be a lot more to go.

as well as the vendor leverage seems like a pretty new thing in our discussion. So just kind of wondering, you know, does that provide opportunity for margins to actually move higher over time, or do you feel they're at a level that's sustainable now?

Speaker Change: Thank you. Bye.

Hey Mike, so I'll start with the shorter term on the kind of Q3, Q4 in the margin space. It's strength is the big driver. We've talked about it the last couple quarters.

The team has really gotten after it, so we're pleased with...

you know how how quickly they've gotten to some of the inefficiencies that we felt like we had and shrank over the longer term and they're you know pulling that a little bit into this year as you saw with the third quarter result.

Speaker Change: That was also our easiest compare from a shrink perspective, so we were starting to get our arms around it last year in the fourth quarter, later in the fourth quarter, so the compare is a little bit tougher for us.

And so that's why it'll be a little maybe less than what it was in Q3.

You know, on the longer term, I'll point back to really confident in our algorithm, stable bottom line.

Speaker Change: We feel really good about that, the parts and pieces.

Speaker Change: you know, we'll deal with year to year. We've made investments in that inventory management space that's part of driving that gross margin expansion. So we'll continue to balance where we need to make the investments in order to drive the business. And that could be in gross, it could be in SG&A, but we're really good, really confident in a stable bottom line going forward. And that goes the same for next year off of this new higher jumping off point and what we guided today. So

feel good about that and we've got levers in growth, we've got levers in SG&A and and we'll manage through that year to year.

Great, thanks and good luck.

Speaker Change: Thanks.

Speaker Change: Thank you. One moment for our next question.

Speaker Change: Our next question comes from Kelly Bania from BMO Capital Markets. Your line is open.

Thank you.

Hi, wondering if you could talk a little bit more about the e-commerce growth. Obviously, that continues to accelerate to a pretty meaningful level here. Can you just unpack it maybe a little bit by digital partner, whether that's Instacart or Uber or Dash, or by new customer versus existing customer? Just try to think a little bit about what that longer term growth rate or penetration for e-commerce could look like. And then to follow up,

I guess I'm surprised we haven't gotten to any questions on the loyalty test and if you're willing to talk about just how that is going and any early learnings or tweaks to that as you as you test that.

Sure, so e-commerce, we're delighted with our e-commerce business. It's evolving and developing really well. We've given those omni-channel customers the option of now operating through DoorDash and Uber Eats and the Instacart business continues to do well. Our customers are

truly omni-channel. And I think the encouraging thing about it, and I've said this in the past, Kelly, we're very encouraged by the fact that our mix

Our mix within our e-com business is the same as our mix within our...

our bricks and mortar business.

brakes and mortar business is pretty unusual and it shows that the assortment and what we have is we've got a lot of trust with our target customers who are navigating their way through between different channels and whether they collect it at the store, whether they get it delivered or whether they go into the store and buy it. We're seeing steady growth in all of those issues over the course of the last certainly in Q3 we saw it strongly in everything.

I think e-commerce will continue to creep up a little bit going forward. What it'll actually be will be determined by our customers, and we'll let them, the customers, take us where they need to take us. And I'm just sort of linking it to the loyalty camp program a little bit.

Speaker Change: what we're getting from that in the first.

few stores that we're involved in is understanding how to get our customers to scan, how to get our customers to sign up. Those are the two key initiatives on it and we're seeing numbers that are very encouraging in the Tucson and Nashville markets on the back of that. What we then do with that information and how we navigate, that's what we're learning. We're learning how to

Speaker Change: understand the customer that's coming from that information and coming from those scanning data.

and that's something that we're right in the middle of learning and we're going to extend it to a few more stores over the course of the next little while and that'll allow us to learn even more and then the rollout program of how to really navigate our way through how do we stimulate our customers to be have more affinity to the Sprouts brand going forward.

That will start to come towards the end of 2025 and we're pretty encouraged of the way it's at at the moment and we're taking the time to really learn to create the kind of program that's very unique in the marketplace and not a kind of me-too grocery program.

Thank you. One moment for our next question.

Speaker Change: Thank you.

Speaker Change: And our next question will come from the line of Robert Dickerson from Jeffries. Your line is open.

Great, thanks so much.

I have a general question as to what's changed, right, relative to earlier part of the year. Clearly now the updated guide is...

much more attractive, let's say, than it was nine months ago. And then, you know, it also, you know, you're, you're saying it, well, that should also continue in the fourth quarter. So I'm just curious, like, it seems like maybe there was just not as much success baked in, but you weren't being conservative, right? And maybe now units were growing, and maybe there could be a little macro tailwind, but doesn't sound like you're really calling out much.

coming from a hurricane or better produce or what have you. So I'm just kind of curious, like, what shocked you, so to speak, on the upside over the past few months?

Well, yeah, I think you called it there. It surprised us at how quickly it's accelerated. We saw pretty good acceleration through the last couple of years and into the first quarter up to the four. And then it's really taken off the last few quarters. What's driving it under the covers is brick and mortar traffic. Same thing that was part of our acceleration from Q2 to Q3. That's been the biggest change. We're getting more customers into our stores.

Speaker Change: Certainly, the things we highlighted in the script that the marketing teams are doing here, they're doing a great job and I think we've made

substantial progress here in the last 12 to 18 months.

and the team's done a really good job. So, I think it's a little bit of everything working. And that's pretty rare, too. Certainly, I haven't seen a lot of that in my career, where everything's going in the right direction at the same time. And that's kind of what's happened here. The things that were working in Q1 continue to work.

We've made some improvements in the parts of the business that weren't working as well. And then we've got these tailwinds sending people our way, and the team's doing a great job executing our strategy and taking advantage when we bring new customers in. We're showing them a good experience and giving them reasons to come back.

And Robert, there's really strong momentum in the business. Exactly why we're getting the exact numbers is difficult for us to call, but there's tailwinds. The execution in stores is as good as it's been. We've got great marketing. The merchants are working well. There's momentum across the board. And when you get momentum, it usually...

kind of fuels itself, and we're just trying to keep that running at the moment, Robert.

Speaker Change: Okay, great. Yeah, I mean it just...

I mean, look, you know, it all makes logical sense and, you know, you had the comment earlier about, you know, as you build some critical mass.

in certain markets, right? It's Word of Now, clearly the health and wellness and just the feeling of the in-store experience.

is clearly on trend. But then, you know, I step back to the longer-term algo, right?

the two to four percent. I think this came up a little earlier. I'm just going to circle back. You know, definitely gives you confidence in the two to four, right, for next year. But now, you know, you're also saying, well, midpoint of the range, it's nine in the fourth quarter. So like

You know, like why couldn't it be above ALGA, at least in the first half of the year, right? I mean your comps get a little more challenging, but like what would preclude you from actually being able to be above ALGA?

Yeah, I think Robbis, Curtis, I think, you know...

We're not going to slow it down from getting to that place. I think we'll have good momentum as we head into the year. We'll have a better update when we get to February. We aspire to deliver these types of numbers as long as we can. That will be up against those tougher numbers in the second half. And I think about it more in terms of that. We feel confident we can deliver on that two to four on this higher base we're on. We should have some tailwinds early in the year. So our next year, maybe it's towards the higher end of that

two to four. But, you know, again, I want to get through the election, see how the consumer does through the holidays, get through our healthy fresh start, and then we'll be a little more pinpoint when we get to February.

Thank you.

Speaker Change: Great, and then just one one more easy quick one for Q4 SG&A

I know, you know, you're saying, you know, SG&A would be up, it's up clearly in Q3, it's a little bit of an offset on the gross margin. It was up, let's say, say almost like 80 million year over year in Q3 in dollar terms. Is that like, should we be thinking kind of a similar amount or maybe it's a little bit larger given kind of the seasonal aspects of the business, just trying to gauge?

how you're thinking about the actual SG&A Q4. That's it. Thanks.

Yeah, I think about it, we talk about it and think about a little bit more in terms of the basis points and all of the raw dollar numbers on off the top of my head, but I think it's going to be pretty similar in the 4th quarter is kind of what we're anticipating to what we see what we saw here in the 3rd quarter.

Thank you. One moment for our next question.

Speaker Change: Thank you. Thank you.

And our last question for today will come from the line of Leah Jordan from Goldman Sachs. Your line is open.

Thank you. Good afternoon. I just wanted to dig into some basket trends a little bit more. First, where are we on the volume recovery for the average basket? Have we gotten back to flat? And then second, we're seeing inflation reemerge in various commodities. So I guess what's your view on inflation from here? And how are you thinking about AUR as a comp driver going forward?

and Jack Sinclair. Thank you.

So on the AUR as a comp driver, we expect it to be a part of driving our comp when we get into, you know, we're kind of, I would say we're stable and normalized now. We're seeing those trends play out as you would anticipate. Our business is always a little more volatile. It's going to be a little more up and down with the fresh aspect of our business.

Speaker Change: So we'll see it in different parts of our business, but we expect that to be a driver. But we are in that kind of stable space and have been for the last few quarters.

On the unit front, we're driving more units year on year. I think some of the things we're seeing the mix a little bit with value packs. We talked about some smaller baskets as we get more customers in who are trying us or we get more customers back who are maybe doing an infill shop.

Speaker Change: you know, that's having a mixed impact. But when you get down to the kind of core of our business.

kind of apples-to-apples skews year-over-year.

We're in that low single digit from an inflation standpoint, and we're seeing units flatten.

so or they are flat here in the third quarter on that kind of set of core skews so

It's played out as expected.

Speaker Change: going forward. I think it'll play out similarly here in the fourth quarter as far as

the mix between traffic and units and AUR. Yeah and the movement's encouraging as to where we're at at the moment and with regard to inflation there is some volatility in the fresh markets across the across the it's always well and it's more volatile for us because we've got a bigger produce mix than everybody else so we are seeing some volatility both ups and downs and I think that's back to a more normalized kind of inflation environment where there's a lot of volatility and fresh dependent on

certain seasonal aspects and whether and availability of labour and things like that so there's a lot to talk about that in the industry, but overall inflation's definitely settled down.

Speaker Change: Bye.

Okay great and then for my follow-up I just wanted to see if you could comment on the competitive environment and how it's maybe changed over the last few months I mean obviously you guys are performing well but just we're hearing more about you know price investments within produce from others so just how do you think about that I know you're very differentiated but but curious what you're seeing there

Well, as you know, Leo, we spend a lot of time watching our produce pricing, given it's such an important part of our business. We're very focused on organic produce pricing and feel we're in very good shape there. We're not seeing a lot of aggressive investment in produce across the board. There's one or two little pockets in different geographies, and we're watching that closely. But the volatility outside of that market, outside of our produce comparisons, doesn't really affect us too much. I think there is potentially some volatility amongst the conventional grocers and what Walmart are doing and all that kind of stuff. But it doesn't really affect us too much. We pay a lot of attention to certain people on produce pricing in certain markets, and we haven't seen anything that's put us in a place that we're kind of concerned about it.

Speaker Change: Great, thank you.

Thank you. Thanks. I'd like to turn it back over to Jack Sinclair for any closing remarks.

Well, thank you everybody for your interest in our company and we look forward to updating you in due course. Take care, everyone.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

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