New CEO Pledges Change as Sprouts' Q2 Misses Mark

In the midst of a leadership transition and a challenging sales environment, Sprouts Farmers Markets posted financial results that fell short of estimates in its fiscal second quarter, and it sharply dialed down expectations for the remainder of the year.

The Phoenix-based natural foods retailer said sales for the period, which ended June 30, increased by 7% to $1.4 billion but comps managed to increase by only 0.1%. Net income tumbled by 16.7% to $35 million and earnings per share of 30 cents fell short of analyst expectations of 33 cents per share.

Sprouts operated for much of the period shorthanded in the front office, with an ongoing CEO search and interim duties handled by since-departed CFO Brad Lukow. In addition, President and COO Jim Nielsen, who was to be acting as co-interim CEO with Lukow, was out on medical leave.

Sprouts named Jack Sinclair as its new CEO June 24 as Lukow departed. Sprouts board member Chip Molloy was named interim CFO at that time. Sinclair this week said Nielsen has transitioned to an advisory role through March 2020, and in remarks in a conference call he said creating a “world class” leadership team was among his charges.

“We are grateful to have Jack Sinclair join the Sprouts team as our new chief executive officer and are confident his insightful grocery experience makes him well-positioned to strategically advance Sprouts’ unique model and improve its performance as the brand expands its footprint,” Molloy said in a release accompanying the quarterly results.

In remarks in a conference call, Sinclair expressed confidence in Sprouts’ brand foundation and its prospects but said “it was in our own hands” to improve performance. He specifically is looking to stabilize margins through a more concise price and promotional strategy that can better withstand swings in inflation. The company said its numbers were affected in the second quarter in part by holding back a portion of its own cost increases from shelf prices.

“The mix of EDLP and high-low has gotten out of sync,” Sinclair said. He said the company would also review its real-estate strategies—not necessarily to slow down the pace of new store growth but to address the size, store cost and locations, saying the company could likely decrease the size of its stores and place them more concentrated geographically.

Results through the first half of the year prompted the company to revise its financial guidance for the fiscal year sharply downward.

Sales growth previously forecast at 9% to 10.5% is now expected at 7% to 8%; comps, previously forecast in the range of 1.5% to 3%, are now expected to be flat for the year. Earnings per share are now forecast for a range of $1.05 to $1.09 vs. a previous call for $1.18 to $1.24.