Sprouts Farmers Market sees green in its differentiation strategy

A differentiated product assortment and growing omnichannel presence are helping boost sales and traffic at Sprouts Farmers Market. But the specialty grocer told analysts Tuesday it believes there’s ample opportunity to steal a greater share of its core shoppers’ grocery dollars.

The Phoenix-based grocer, which has a renewed focus on store growth, reported same-store sales growth of 3.2% for the second quarter ended July 2. Sprouts’ net sales rose 6%, to $1.7 billion, from the year-ago period. Gross margin was 37%, up slightly from 36.4% during the second quarter of 2022.

“And that’s why the opportunity is so big in front of us,” CEO Jack Sinclair said. “We don’t need much of a growth to make the numbers really add up over the next few years … We’ve got a low share of our customers’ wallet, which is the nature of our assortment. We’ve said all along that we’re not going to try and win on conventional products with conventional grocers. We’re going to win on the differentiated assortment that we have.”

Sprouts on Tuesday also announced the retirement of CFO Lawrence “Chip” Molloy, who will depart at the end of the year after a decade with the company. An internal and external search is underway to find a successor.

Earlier this year, Sprouts announced plans to close 11 unprofitable stores. It shuttered the bulk of those locations during the second quarter while opening six new stores. All of Sprouts’ new locations have a smaller footprint than the closed stores.

Sprouts has opened 14 new locations this year, with plans to end the year with more than 30 grand openings. The grocer on Tuesday said its real estate pipeline has grown to nearly 100 approved new sites and more than 60 executed leases, “helping us gain traction” towards the goal of 10% annual unit growth, beginning in 2024, Sinclair said.

Sprouts’ product assortment focuses on natural and organic foods. And Sinclair made clear that the 391-store chain is not looking to be all things to all shoppers.

“We are a specialty food retailer,” he said. “We curate products that contain attributes appealing to the health-enthusiast customer.”

More than half of beef sold at Sprouts is grass-fed, more than 50% of chicken sold is organic, more than 40% of produce sold is organic and about 90% of all of the retailer’s grocery sales have specific diet attributes, such as vegan and non-GMO, he noted.

During the second quarter, Sprouts focused on seasonal produce assortments in each region, sharing stories of local growers in-store. About 19% of produce sales during the period came from local farms.

Sprouts has added about 200 new store-brand products this year, increasing penetration to more than 20%.

The grocer said it is working to capture sales both in-store and via digital channels. In-store, that includes a more-robust product sampling offering, Sinclair said. And online, Sprouts has seen growth across Instacart, DoorDash and its own site.

“We’re creating this omnichannel customer who’s very in tune with the curated assortment that we’ve got and the data that I have got, and we’ll get more data going forward,” he said. “But the data that we’ve got so far suggests that we’re growing share with those target customers, which has always been the intent since we really pivoted the strategy around this target customer base.”