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New strategies start to pay off for Sprouts Farmers Market

Sprouts Farmers Market logo
For the third consecutive quarter—as well as for fiscal 2019—Sprouts reported an 8% increase in net sales. Adjusted net income for the fiscal year dropped more than 10%, however.

Sprouts Farmers Market continued its streak of sales growth through the fourth quarter of fiscal 2018, ending the year with an 8% increase, the company announced Thursday afternoon.

"I'm delighted that during the fourth quarter we drew positive comps as well as an improved margin profile well ahead of our expectations—a testament to the changes we're making," CEO Jack Sinclair said during the afternoon conference call.

Fourth-quarter sales comparable store sales increased 1.5%, but customer traffic was down, said interim Chief Financial Officer Lawrence "Chip" Malloy.

The company reported positive results in sales and income for the fourth quarter:

  • Net sales of $1.4 billion, an 8% increase from the same period in 2018.
  • Comparable store sales growth of 1.5% and two-year comparable store sales growth of 3.8%.
  • Gross profit was $468.9 million, up 11.4% from $420.9 million in Q4 of 2018.
  • Gross margin was 34.4%, an increase of 120 basis points from the same period a year ago.
  • Net income of $32 million, compared with net income of $13 million and adjusted net income of $24 million from the same period in 2018.
  • Diluted earnings per share of $0.27, compared with diluted earnings per share of $0.10 and adjusted diluted earnings per share of $0.19 from the same period in 2018.

The leadership team will continue to drive comparable store sales and customer traffic as it works on stabilizing Sprouts' profit margin, Malloy said.

Results for the fiscal year, which ended Dec. 29, were more mixed:

  • Net sales of $5.6 billion, an 8% increase from 2018.
  • Comparable store sales growth of 1.1% and two-year comparable store sales growth of 3.2%.
  • Gross profit was $1.89 billion for the year, an 8.4% increase over the $1.74 billion in fiscal 2018.
  • Gross margin was 33.6%, an increase of 5 basis points.
  • Net income and adjusted net income of $150 million, compared with net income of $159 million and adjusted net income of $168 million in 2018.
  • Diluted earnings and adjusted diluted earnings per share of $1.25, compared with diluted earnings per share of $1.22 and adjusted diluted earnings per share of $1.29 in 2018.

While company executives are enthusiastic about the most recent results, they also are cautious about how fiscal 2020 might turn out. Comparable store sales growth is projected to be 0% to 1% this year. Net sales for a 52-week year are expected to grow 5.5%-6.5%, plus an additional $120 million because fiscal 2020 includes 53 weeks.

"Although we are encouraged by our fourth-quarter results, and optimistic about the direction we are heading, our strategic work is still ongoing. Therefore, this outlook only factors our current business and does not factor any potential strategic changes," Malloy said.

Some of the company's strategic changes—particularly pricing adjustments and marketing aimed more at the core customer—could continue to reduce customer count in the short term, Malloy said.

Becoming a bigger, more efficient company

"We're keenly aware that our traffic remains negative. We're taking a long-term view, and we know as we move toward a new marketing strategy, a stronger everyday price position and pulling back on unprofitable promotions may result in continued traffic headwinds," Sinclair said. "We expect an adjustment period, and then profitable customers will respond. Sinclair was appointed CEO of Sprouts on June 24.

"Marketing will evolve to promote more brand awareness," he added. Already, Sprouts has refined its promotions to target core customers instead of those who are bargain-hunting among natural and general retailers.

This new strategy has performed above expectations, Malloy said, as the company is promoting products that are profitable, not chasing the competition to the bottom.

"To be clear, we're still promoting and providing to our customers, but we're doing so differently," Sinclair said. "We've focused our promotional activity by responding to opportunities in the marketplace, rather than reacting to promotional pricing elsewhere."

The company is changing its traditional growth models, as well. Instead of opening 30 stores that are 30,000 square feet large, Sprouts will open smaller stores that will be cheaper to build and operate, the CEO said. In addition, the company will enter new markets with more stores, as opening just a few stores in a new city or state strains the distribution system.

The company plans to open 20 stores in 2020, Malloy said. As of Thursday, it had 340 stores in 22 states, after opening 28 and closing one in fiscal 2019.

"All markets, both existing and new, will be supported by a more effective and efficient supply chain," with the goal of lowering costs and improving freshness of food, particularly produce," Sinclair said. "Our supply chain has been disjointed with our growth. This will be corrected in short order, and it will separate us from our competitors who lack this infrastructure."

Thursday was Malloy's last day as interim CFO, as Denise Paulonis takes over in that position on Friday. Malloy will continue to serve on the board of directors.

Two new men have also joined the board: Joel Anderson, who became a board member in November, was previously president and CEO of Walmart.com and an executive at Toys R Us; and Doug Rauch, who was president of Trader Joe's Co. for 14 years, as well as chief executive officer of Conscious Capitalism Inc., which is dedicated to using business as a force for good.

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