Sprouts continues focus on new, unusual products to grow basket size

Sprouts Farmers Market reported positive comparative store sales and an increase in comparative transactions in the first quarter of 2022, the company reported Wednesday.

"We are pleased with solid first quarter results, and believe it is a sign that many of the strategic changes we've made over the past couple of years are beginning to materialize," CEO Jack Sinclair said during the company's afternoon earnings call. "The turn to positive comp sales supported by positive comp transactions, while at the same time maintaining stable gross margins was extremely encouraging." The first quarter ended April 3.

The company continues to focus on differentiating itself from other grocers by carrying new and unusual products.

"We believe this is one of the primary reasons are target customers love to shop at Sprouts," Sinclair said. To further support that strategy, the company promoted Kim Coffin, who has 10 years' experience at Sprouts, to senior vice president and "chief forager." Previously, she was vice president of grocery at the company. Sprouts' merchandising team continues to search for new, unique products that fit the latest healthy trends and tastes.

The stores are designed to be flexible and the company can shelve new products in a week, the CEO said. During the first quarter, Sprouts released more than 1,000 new items and reorganized the produce department to improve freshness and seasonality.

Related:Sprouts Farmers Market tries new marketing strategy to increase sales

"With our local produce sales growing steadily, these teams have developing ever stronger relationships with smaller local farmers," Sinclair said. "We're giving long-term commitments to these growers, which provides fresher products and cost benefits that we are proud to pass on to our customers in better pricing."

Molloy added, "We continue to experience strength in our deli business as consumers search for both healthy and easy meal options. We also experienced strength in those areas with our greatest breadth of differentiated product, such as grocery, dairy and vitamins."

In Southern California, Sprouts is building a new, larger distribution center that will feature ripening rooms, solar power, LEED certification and charging stations for electric trucks.  

Sprouts opened six stores during the first quarter and plans to open between 15 and 20 this year, Sinclair said.

Getting customers to buy more per trip

Although transaction counts are up, shoppers are buying "one to two fewer items" per trip than they did a year ago, Sinclair said.

Chief Financial Officer Chip Malloy said, "We can speculate a variety of reasons as to why the fewer units—rising gas and utility prices, prices, a flight of precious discretionary dollars to more experiential offerings, such as travel or restaurants etc.

Sinclair said the company is focusing on what it can control.

"It is important for us to control what we can control and focus efforts not only on incremental traffic, but also building basket, especially as the consumers' wallets get squeezed," he said. "A few of our focus areas include in-stocks, bringing back a selling culture to our stores, key merchandising solutions and basket-level promotions." The company has begun installing new systems to reduce the number of out-of-stock products in the stores. The change is being made department by department across the chain, with dairy and frozen foods first. The transition should be complete by early 2023, he said.

Sprouts is bringing back in-store sampling, which was discontinued when the COVID-19 pandemic hit the United States in March 2020; implementing innovation centers that highlight new products; and increasing its offering of prepared foods.

"Our customers are telling us that they like the convenience of prepared so we're stepping up our exposure to heat-and-eat daily meals and prepared one-pan meals as time becomes a more precious commodity for our consumers," Sinclair said.  

"Finally, as it relates to basket promotions, we're having some success shifting towards house or department discounts as opposed to specific items. We find these programs not only drive incremental traffic, but also deliver baskets that are two (times) the average," he continued.

Financial results positive, but…

Sprouts reported increases in net sales, comparable store sales and EBITDA for the first quarter:

The company also spent $600 million buying back 1.5 million shares of stock during the quarter.

Although the number of transactions in comparable stores increased compared to the previous year, the company cautioned that sales growth for the fiscal year will be at the low end of the outlook the company provided at the end of fiscal 2021.

"For the full year, we now expect total sales growth, comparable store sales growth and earnings per share to be at the low end of the outlook provided during our last earnings release. We still expect to open between 15-20 new stores. For the second quarter of 2022, we expect comparable stores sales growth to be relatively flat and diluted earnings per share of $0.49 to $0.53," Molloy said.