Sprouts to Dial Back New Stores

Sprouts Farmers Markets, which only months ago was touting growth through pursuit of bigger and more elaborate stores across an ever-widening geographic footprint, is dialing back its new-store plan for 2020 and intends to build stores smaller, simpler and tighter going forward.

The change of course—including efforts to unwind deals for a number of units in Sprouts’ new-store pipeline—comes as CEO Jack Sinclair assess the strengths and vulnerabilities of the chain he joined in late June. While Sinclair is still preparing a comprehensive strategy, including a model for new stores, he made it clear in a conference call this week that the bigger, service deli-focused models that his predecessors so enthusiastically spoke about were too expensive to build and market; that Sprouts rapid geographic expansion was outpacing its ability to service them effectively; and that smaller stores, in denser markets, closer to distribution points, are Sprouts’ better financial performers.

“After 100 days, I’m firmly of the belief that overcoming our challenges is within our own control,” Sinclair said while reviewing quarterly financial results. “While the size of our store prototype has only increased slightly over the last few years, the cost to build has increased significantly. As we’ve drifted a bit from the core elements of how we best serve our customers, new stores have been increasingly more complicated and become more expensive to operate and build. Interestingly, our smaller stores tend to be more productive than our larger stores.”

Chip Molloy, interim chief financial officer of Phoenix-based Sprouts, said costs to build new stores have shot up by 40% over the past four years.

Sprouts won’t be giving up on bigger stores entirely: Several of the approximately 20 units expected to open in 2020 are already in development. However, Molloy added, “we’ve done our best to unwind” some planned stores that were “on the fringe” in terms of costs or strain on the supply chain and will look at ways to reduce expenses in those that are still on the way.

Sprouts previously was on a pace for about 30 new units a year, with half of them in existing markets and the other half in new markets. That practice saw the company leap up the East and West coasts in recent years, with new stores opening in places such as Philadelphia and Seattle. The move to a more elaborate deli was intended to meet changing demands of consumers looking for more heat-and-eat and prepared foods solutions, but that initiative—for now at least—is moving to the back burner as Sinclair revisits the store model seeking what he sees as the best path to profitable growth.

Molloy said Sprouts could get back to the 30-store-a-year pace by 2021 but added, “we’re not approving those [new stores] yet until we really refine the way we want that prototype to look.”

Going forward it is likely that Sprouts would concentrate new stores in areas it can service efficiently from existing distribution. Sprouts currently self-distributes fresh products from five distribution centers—Colton and Union City, Calif.; Glendale, Ariz.; and Atlanta and Wilmer, Texas, near Dallas. The company’s dry grocery items are distributed mainly by KeHE.

Sinclair also signaled intentions to attack costs in other areas of the business, including its promotional practices, advertising and private label. He feels Sprouts has generally been more promotional than necessary and said results in its fiscal third quarter—a 1.5% comp increase that exceeded expectations—was achieved in spite of dialing down promos vs. the same period last year. Traffic was down slightly in the quarter, Sinclair confessed, but was unchanged from previous periods with more promotional intensity.

And while Sprouts has traditionally supported its consumer proposition with printed sales flyers, that practice is likely to change as well. Sinclair marveled at Sprouts’ practice of printing 21 million flyers every week and suggested the company could spend less pursuing alternatives such as digital advertising—a practice being tested now.

Private label will continue to be important for Sprouts, Sinclair said, but right now there’s too many brands. “We plan to build a cohesive private label brand, streamlining and improving our communication to customers that maximizes Sprouts' position as the affordable healthy living grocer.”

These changes, portending a profit-minded approach to growth, met with strong approval on Wall Street, has sent Sprouts stock up by more than 7%.

For the quarter, which ended Sept. 29, Sprouts saw sales improve by 8% to $1.4 billion on new stores and 1.5% comps. Gross margins were down slightly to 33.1% of sales. Net income dipped 31.6% to $26 million or 22 cents per share. The sales and earnings figures both exceeded consensus estimates.