New Stores, Resilient Profits to Support Sprouts, Officials Say

Officials of Sprouts Farmers Market say they expect the higher margin rate achieved by its ongoing strategic reset in 2020 should withstand what looks to be a more challenging 2021 on the sales front.

The Phoenix-based specialty natural food merchant—which is pursuing an opportunity to improve the quality of its customer base by focusing on product distinctions over commodity pricing, supported by smaller and less complicated stores and a more efficient supply chain—made the proclamation while reviewing a fourth consecutive quarter of robust and rising gross margins this week.

For the 14-week fiscal fourth quarter that ended Jan. 3, Sprouts said sales totaled $1.6 billion, a 17% improvement over the 13-week fourth quarter of 2020, or an 8% increase excluding the extra week. Comparable-store sales were up by 3.7%, and gross profits soared by 25% to $588 million or 36.7% of sales, a 235-basis-point improvement on last year’s fourth quarter, when the first benefits of a revamped promotional strategy arrived in the form of an eye-opening 120-basis point improvement. The fourth-quarter figures all exceeded analyst estimates and the company’s own sales guidance.

But with some COVID benefits expected to dissipate and the company approaching 2020’s swollen sales figures, Sprouts guided to flat 2021 revenues despite 20 new stores on the horizon, and low- to mid-single-digit comparable-store sales declines. The higher margins experienced in 2020, however, are more structural in nature, Chief Financial Officer Denise Paulonis told analysts.

“Moving from print to digital ads and to more everyday pricing, supported by meaningful promotions, are substantial changes for the company,” Paulonis said in a conference call, according to Sentieo transcript. “Our initiatives on shrink and better buying also contributed to this margin change and is one of the reasons we have confidence that we can retain a majority of this improvement.”

Sprouts’ growing profits over the last year were supported primarily by an abrupt pullback in promotional pricing as part of CEO Jack Sinclair’s prescription for the brand, but also by a reduction in shrink aided by higher COVID sales volumes and other impacts of the pandemic. Paulonis said margins this year would see “modest” reductions as the company cycles COVID-related benefits to shrink, and the opportunistic buying that came with foodservice shutdowns.

Shutting down in-store salad bars also helped reduce waste, but that’s a benefit to shrink that will continue this year at Sprouts, in part because the simplified store format contemplated in its strategy is heading that way. Between intentions to reduce store complexity and ongoing health and hygiene concerns, there’s little enthusiasm for the practice from the retailer or its shoppers, CEO Jack Sinclair said.

“I think the hygiene aspect of salad bars is going to make less people—not everybody, but less people—interested in it going forward,” Sinclair said. “I think this hygiene issue is going to be an ongoing issue post-pandemic, and that will make preparing food in a supermarket or a store environment a bigger challenge in terms of making sure it’s being done effectively and done right."

Salad bars have been “a part of our business, but not a huge part, and we’re thinking very hard about how to do that effectively,” Sinclair added. “I don’t think it'll get anything like back to where it was.”

Sprouts big gains in profits in 2020 came with annual comps of 6.9%—a relatively small figure among food retailers that reflected industrywide trends of larger baskets, less store traffic and growing e-commerce. It is also a relatively easier hurdle to clear this year. Officials said they were optimistic that traffic trends, for one, would improve along with the vaccine roll out.

E-commerce at Sprouts—carried out through employee-picked pickup and delivery orders arriving from Instacart—comprised 11% of sales in the quarter and increased by 290% year over year. Officials said this arrangement—accompanied by an effort to convince shoppers to use its own storefront vs. the Instacart Marketplace—was a benefit to the company because it was generating larger baskets and collecting more shopper data. Using store employees to execute the labor is also more efficient than with crowdsourced pickers, officials said.

“Our e-commerce basket remains really strong,” Sinclair said. “We know that our target customers—these health enthusiasts and innovation seekers, experience seekers—have got so much upside in their spend. We just need a bigger share of their wallet, and that’s one of the things I think we're getting from the e-commerce business.”

E-commerce growth will also encounter steep year-over-year comparisons this year, Sinclair added, “but if you get to 2022, food e-commerce will be at a higher level than it was in 2019.”