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New stores drive Sprouts’ sales growth even as income and margin fall

Sprouts Farmers Market Sprouts Farmers Market produce
In first earnings call since starting in June, new CEO Jack Sinclair says Sprouts Farmers Market can chart its own course.

Although Sprouts Farmers Market reported an increase in net sales for the second quarter of fiscal 2019, the company’s executives are not satisfied.

The opening of new Sprouts stores—the company has added 26 stores and expanded to four new states since Aug. 2, 2018—spurred a 7% growth in net sales, the company reported Thursday.

But comparable-store sales grew just 0.1%, including a 170% increase in digital or ecommerce sales, said interim Chief Financial Officer Lawrence (“Chip”) Molloy during the morning earnings call.

Jack-Sinclair, new CEO, Sprouts Farmers Market June 2019Jack Sinclair, who became Sprouts’ chief executive officer on June 24, introduced himself to the call’s audience.

“In my years working in the United States, I’ve admired Sprouts from afar,” said Sinclair, who has worked in retail and grocery for more than 35 years. His experience includes eight years as the executive vice president of Walmart’s U.S. grocery division and 14 years with Safeway PLC in London, United Kingdom, overseeing operations, merchandising and marketing for more than 450 stores.

“Sprouts is a unique format and a unique brand. We have an opportunity to grow because we can expand access to fresh, healthy and affordable food,” he said. He plans to create a culture of transparency and accountability that focuses on listening to the stores and the customers to make improvements, he added.

“The future will be defined by those who follow the customers,” Sinclair said.

In discussing second-quarter results, Malloy said that April was Sprouts’ toughest month of the year as the availability of produce was limited.

The company saw its private-label sales increase to 14% of total sales, with 45% of transactions including at least one private-label product, Malloy said.

For the second quarter of 2019, Sprouts reported:

  • Net sales of $1.4 billion, a 7% increase from 2018.
  • Net income was $35 million, a decrease of 16.7% from 2018’s $42 million.
  • Gross profit of $465 million, a 6% increase from a year ago.
  • Gross profit margin of 32.8%, down 35 basis points or 0.35%.

Results for the first half of the year were mixed:

  • Net sales of $2.8 billion, an 8.5% increase from 2018.
  • Net income was $91.7 million, a 15.3% decrease from 2018’s $108.3 million.
  • Gross profit of $949 million, a 7.5% increase from a year ago.

When asked why new stores are generating strong sales, but comparable-store sales decrease, Malloy said the company works very hard on finding new markets and focusing on grand openings. However, it needs to do more with creating marketing and branding plans for those same stores as they mature.

Sprouts has lowered its expected results for the remainder of 2019, with comparable-store sales continuing to be flat and net sales growth of 7%-8%, compared with the previously projected growth of 9%-10%.

Sinclair said he is optimistic about Sprouts’ future, even as grocery competition continues to increase.

“The control that we have will allow us to chart our own course. The other guys would have to change to beat us, and they’re not likely to do that,” he said. “I’m feeling pretty confident that we’ve got both the people and the positioning that will allow us to chart our own course going forward.”

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