Sprouts CEO: ‘We’re Focused on Growth, Not Comps’

In the wake of a fiscal first quarter in which profits came in way above expectations and sales well below them, officials of Sprouts Farmers Market found themselves peppered with questions from analysts wanting to know when sales would recover—and what that might cost.

The collision of Sprouts’ ongoing market repositioning amid the pandemic’s effect on traffic at niche-focused food retailers presented a sales-earnings conundrum that in food retailing, is typically reversed. Same-store sales in the period plummeted by 9.4%—analysts had expected a 6.4% decrease—but the Phoenix-based retailer beat earnings expectations anyway behind its move to banish nearly all vestiges of its high-low promotional pricing heritage and reposition itself as an aspirational health and wellness brand with a more discerning clientele.

According to Sprouts CEO Jack Sinclair, this positioning will generate higher sales as new stores open and as more target shoppers—what he calls “health enthusiasts and innovation seekers”—come to discover  or rediscover it through a new branding campaign. In the meantime, the chain is disproportionately suffering from the trip consolidation trend that accompanied COVID but is seeing gross margins soar on the promotional and assortment changes—namely, more attribute-based products and organics among 400 new items hitting shelves in the quarter—and on behind-the-scenes efficiencies.

“We’re focused on growth, not comps,” Sinclair remarked during the question-and-answer session at the conference call, according to a Sentieo transcript. “That’s the real kind of focus in our business. I think it’s interesting: A lot of the grocery guys are hitting higher comps. If you look at the actual underlying growth of the business is significantly less than the comp number. We’re exactly the opposite to that.”

Sales of $1.6 billion in the quarter ended April 4 declined by 4%, and net earnings of $83 million were down by 9.8% to $82 million. Gross profit for the quarter decreased 1.3% to $586 million, resulting in a gross profit margin of 37.2% of sales, an increase of 114 basis points compared to the same period in 2020. Sprouts said the increase was attributable to “sustainable” strategic changes, including promotional activities and shrink initiatives.

Some analysts were suspect. “Margins Aren't Sustainable, Sales Are” was the title of a Barclays’ research note reviewing the quarter. The company’s forecast for performance in the current second quarter—Chief Financial Officer Denise Paulonis said comps would be negative again as Sprouts continues lapping the pandemic but that traffic was improving and baskets were “pretty much in line” with the same figures ago—also triggered some confusion. Barclays’ note cited data suggesting baskets were decreasing as traffic rebounds.

Scott Mushkin, an analyst for R5 Capital, was more positive on Sprouts’ business prospects but conceded that “it is simply hard for investors to get excited about the equity without seeing that the efforts by management are actually leading to sale momentum, in our opinion.” He suggested management step up efforts to buy its own stock. Sprouts shares were trading down slightly on the day following the earnings announcement.

Based on Sprouts’ research, customers have indicated intentions to return shopping there as the pandemic fades—and that is beginning to play out.

“We ended the quarter with the highest customer counts we’ve seen since the start of the pandemic. So a nice positive direction, and more customers starting to come into the store. We’re also seeing that customer count, in particular, with the reactivated and reacquired customers … the same ones who told us they had stopped shopping with us because of the pandemic.

“We've been very pleased to see that while traffic has turned positive at the end of the quarter and into Q2, we're actually holding our basket pretty much in line with where we were coming through last year rather than there being a trade-off between that basket and traffic number,” Paulonis added.

Moves to improve costs and productivity are at work in new distribution centers closer to stores—the first of these has opened in Colorado—and new investments in inventory, labor and human resources systems and in a forthcoming store prototype that will be smaller, more efficient and more productive than its predecessors, Sinclair said.

Sprouts has plans for 20 new stores this year—most of those later in the year. The chain’s first new store of 2021 is expected to open May 12 in Reno, Nev.

Four new units and one renovation on the schedule will conform to Sprouts’ new format.

“In walking a virtual 3D rendition of the new store, consumers overwhelmingly gave positive marks on the low profile and overall feel while also rating the store better than the current store experience,” Sinclair said. “This new format will have a smaller footprint, but more selling space per square foot.” It will cost about 20% less to build.