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Sprouts Farmers Market moves forward with new stores, strategy

Sprouts Farmers Market new logo 2020 moving forward with strategies
Sales suffered in Q2 as consumers returned to eating at restaurants, traveling; company will tweak marketing to increase traffic, CEO says.

 Sprouts Farmers Market continues to move forward on its strategic plan, even as second-quarter sales were disappointing, company executives said after earnings were released Thursday afternoon.

"We have made great strides in executing against many of our priorities," CEO Jack Sinclair said during Thursday's earnings call. The company's differentiated model and great teams in stores gives him great confidence in the future.

The company has created innovation centers with dedicated merchandising displays in stores, increased its offerings of seasonal and local produce, opened two new fresh produce distribution centers and, in July, opened its first new format store, he explained.

Jack-Sinclair, new CEO, Sprouts Farmers Market June 2019All new stores and many existing stores will receive innovation centers in the second half of 2021, Sinclair said. Every month, the innovation centers will present "new-to-market, attribute-driven items" such as vegan and plant-based meals and snacks.

"And finally, the country is in a place where we can start an active sampling program, which is a new endeavor for Sprouts, and will prompt education, trial and purchase," he said.

Of course, Sprouts wouldn't be Sprouts without fresh produce. Recently, the company featured five unique types of cherries that feature distinct flavor profiles from family owned farms, Sinclair said.

Organic produce now accounts for 35% of fresh produce sales, "which we believe is one of the highest penetration rates in the industry," he said. Although Sprouts' organic produce prices are competitive, Sinclair said the company is trying to move organic prices more in line with conventional produce.

Getting fresher produce to the stores has been another goal for Sinclair and his team. With two new distribution centers open in Colorado and Florida, more than 85% of Sprouts stores are within 250 miles of a distribution center, he said.

Stores served by the Colorado DC, which opened before the Florida location, are seeing produce sales rise and offering more local options, as well, he said. Sprouts' purchase of local produce will continue to increase during the growing season: "up to 20% of the department, or a 300% increase versus our past assortment in previous years," Sinclair said.

Q2 sales weren't as high as expected

"Sales were slower than we expected in the second quarter. While April experienced strong results, both top and bottom line, we were disappointed with May and June," Sinclair said, noting that consumers are returning to restaurants and once again traveling.

He also acknowledged that the company's marketing campaigns did not drive the expected amount of customer traffic. They are using a test-and-learn approach to increase awareness and traffic; only a slight increase is needed, he said, because basket size is so high.

Chief Financial Officer Denise Paulonis reported that e-commerce accounted for 10.1% of sale for the quarter, an increase of more than 350% from the second quarter of FY20. Through Instacart and Sprouts' own shopping site, the company is collecting meaningful data from about two-thirds of e-commerce customers, she said.

Sprouts reported these Q2 results:

  • Net sales of $1.5 billion, a 7% decrease from the same period in 2020 and a 7% increase from the same period in 2019.
  • Comparable store sales growth of -10.0% and two-year comparable store sales growth of -0.6%.
  • Net income of $61 million compared to net income of $67 million and adjusted net income of $70 million in the same period in 2020; compared to net income of $35 million from the same period in 2019.
  • Diluted earnings per share of $0.52 compared to $0.57 diluted earnings per share and adjusted diluted earnings per share of $0.59 in the same period in 2020; compared to $0.30 diluted earnings per share from the same period in 2019.
  • Gross profit decreased 10.2% to $550 million.
  • Gross profit margin was 36.1%, a 115 basis points decrease from the same period in 2020 and a 330 basis points increase compared with Q2 2019.

Year to date, sales are up 9.5% and profit is up 56% compared to the same period in fiscal 2019. Net sales for the first half of the year total $3.1 billion.

For FY2021, Sprouts issued new guidance. It expects net sales to drop slightly, in the low single digits, compared to 2020. Comparable store sales are predicted to fall between 5% and 7%, inclusive, while adjusted diluted EPS will come in between $1.90 and $2.02, inclusive.

Sprouts opened one new store in Reno, Nevada, during the quarter, giving the chain 363 stores in 23 states as of July 4. Two more have opened since the beginning of this third quarter and one California store was remodeled, Sinclair said.

The new format stores have a smaller footprint but more shopping area, and cost 20% less to build, the company has said.

The openings of seven new stores are planned for the fourth quarter of 2021, but they might be delayed because of supply chain delays affecting the construction industry.

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