SFM - Earnings call transcript Q2 2018 | Sprouts Farmers Market, Inc.

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Operator

Good day, ladies and gentlemen, and welcome to Sprouts Farmers Markets Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time.

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Susannah Livingston. begin. may you Ma'am,

Susannah Livingston

good and morning, you, everyone. Thank

Chief pleased Sprouts on are Maredia, Officer website Executive announcing President are assessed section you and Chief Brad also earnings have join to Chief and Nielsen, Jim of the time call the Officer; Officer; release this today. our Financial about.sprouts.com. Amin and Lukow, taken call. We Operating second XXXX through XXXX Relations quarter at call The me the second our results, be the webcast of Investor on earnings can with our our XX-Q, quarter

management make risks materially statements. described in statements call, involve this actual uncertainties statements, During These XXXX from those of number cause may differ and including our statements to forward-looking regarding a guidance. the that forward-looking and expectations could certain results

Risk our please more SEC the along with information, For statements release commentary to earnings end issued filings refer at discussed our forward-looking on the of in Factors the today.

today non-GAAP include In addition, references our measures. to remarks

For in our measures reconciliation tables hand With let that, see release. it to figures, me please of the to earnings the Amin. GAAP our over non-GAAP

Amin N. Maredia

continue out you, resonate Sprouts' call an morning, Susannah. thanks start and joining today to customers. call in innovation continues leader Thank industry our today. rapidly-evolving to prices want with by and everyone, our addressing industry. a value position I be in for Sprouts Good the to health, and our

differentiation the in and across indicating Our country. existing geographies well, new of brand new and the when stores performing are new markets strength our entering communities very

strengths demonstrated quarter for EPS consistent remains tonnage line top perform traffic throughout in performance. been our very has and growth Our well, are existing double-digit These with and to and the business the strong. year both year-to-date. positive also Traffic continues and continued

our strategic to which to customer this which members, will our increased investments, plus improve in quarter, shortly, continue I and investments technology overall team speak Our experience.

quarters to strengthen will savings, two growth. with Even With behind range our end continue guidance of and these these quarter, flexibility third $X.XX solid us by we a to to operating competitive raising we start EPS efficiencies EPS good increased the for a give to the $X.XX. us are the $X.XX generate the We of double-digit and in investments, position. confident year bottom investments our which expect drive to to

to product For the our rose tonnage traffic second new merchandising and marketing to continued as driven store in a and strong The our continues business, quarter, new X%, innovation, core sales comp enhancements billion, XX% of store by $X.X as productivity driven new by in store solid productivity. be well positive programs.

continues momentum Our the the on-the-go departments shopper and sales geographies. label competitive promotional pricing continue remains private underpinned a making our Market looking meal strategies across positive to Deli on options. and destination growth for Corner be we environment to our and convenient focus maintain Overall, today's by for in all

are on On XX store growth our open seven coast-to-coast. many year. And second new this track states, including quarter, new stores brings to first covering major we we the our in presence which the store stores, South Carolina, to front, regions in XX opened

strong remains XX the and XX with pipeline Our years. coming approved signed leases for sites

mark, passed quarter, in great XXth XXX-store also During a of year this we second our achievement operations. our

been on in natural team members expand strategic to organic on innovation technology. the for driving our like product and focused its since would I a innovation, experience, food Now, and segment, has customer our XXXX force inception. priorities, Sprouts

are locally preferences, time, At label nurtured the brands, serve as grown and to same category national is sourced. many new researching that private trending leaders. whether We have brands products constantly or merchandising customer sales our team now and they and meet

a evolving to journey, staples messaging. proud as meet well offer our customers' standards specific like appeal engagement initiatives, just specialty attribute-based an and the items strict driving we're starting organic that broth sales XX% through Our ranging Today, meets and follow total us is of their label diet. reached exceptional to may who XX% as quality customers, is to increased carefully-curated designed living to positioning product grass-fed have vegan north to beef that everyday innovation products many mix of In healthy at from force revenue value. revenue like needs. Private be of of those introductions customer the growing products new label, and behind well private

label are productivity pleased existing in private SKUs, further to of our We comps. private see label is driving acceleration which

and innovations, together healthy are Deli the across food program. prepared Market become the enhancements of expansion our cornerstone Our ready-to-eat meals. and includes bolstering adding of and Corner sales to our our with ready-to-heat have that items our product initiative These department,

test success a continue to and merchandising product become for with meals on-the-go. Sprouts as We healthy to introductions great destination continues

we in XXX front, convenience and this partnership board markets. on more have expanded major service this to we today are convenience the year, with On stores most delivery our through Instacart with bringing our of coming home our

service our We best strong Instacart our and – scores products are customer have of platform, our the operational execution. reflecting pleased some the on the to freshness of

$XX have Second, was our team allow million this invest us this Jobs Cuts to as catalyst an we mentioned, Act Tax members. year a and to additional in

marked wage quarter and the of first incremental second benefit these quarter The investments.

grow help will store, to Shifting continue great of sales floor stocks. country. investments to ability in effectively. efficiencies further investments and members grow our across we retain service and management reducing enable and in shrink products as item of from out team and establish continued attract in ensure provide we to technology, stronger which improve will fresh on cost strong a the develop will the our implementation have great scale at technology foundation while all times, workforce a fresh that can Sprouts The and Our talent

quarter out The while visit the members, summary, this change happy this with remains the to a in results The departments. additional fresh term. we is selection customers, with XXXX. continue of the overall learnings we well our value, the across our operating the service, remain million on of system to will they're team and we by department the long confident daily health, our change project in is and completed to positive to be which been our With initial second I'm have that of to and stores adapt strategic and our strong on track XXX ability initiatives fundamental results focused our environment over the who rollout operations in For represents report on bakery embracing business track, resonate model, excitement. as XXXX. the continues deliver end year competitive, unique In

years over guidance. our Brad this XX innovative earlier have pleased in grocery Officer, to more over merchandising in success. I'm call results new past practices growth technologies, over business brings setting XXXX than us leadership share commitment the year innovation and hand financial Brad, and to natural to Dave With contributions it organic future will cover of and developing for significant the and up support experience joined to me has XXXX implementing Sprouts promoted let made to the merchandising I McGlinchey and our announced turn as and the fresh, in to that, and which to continued Merchandising Before Dave industry. Chief morning, we that and

Bradley Lukow

XXXX. the Thank quarter second drivers our you, discussing some for by and Amin. of guidance then I'll begin the for review business

cannibalization produce quarter, basis over prior the and entirely of for second driven year-to-date sales points. X% comp up low was quarter, in basis X%, sales deflation consistent billion, XXX the new XXX were traffic and accelerated of the was For cost the driven year, by solid XX% almost points in XXs. productivity $X.X Overall tonnage, growth by just the range over to store

productivity labor Additionally, this see EPS in we the year. growth start a efforts a as higher quarter. our year, coupled quarter X% our comp momentum confidence our investments though the are the people private store of raise expenses, as in with departments in continued and well for bottom to resulting continue nonperishable good our and And to end in guidance and controlling the in our resulted third strong to improving technology in deli, label for

gross XX% same the increased quarter, same to last This and categories. also certain increase to sales Direct gross to million, in of deleverage was last by period the expense. primarily merchandise an points slightly-lower in to due depreciation XX.X% For higher $XXX $XXX primarily was training approximately compared was increased to rate This margin XX% XX and period expense store second to of XX basis consistent driven margins XX.X% investments wages, year. profit deleverage the to our basis decreased plan benefits, by year. our points million and team members' compared by our with

effective discussed. of to and XX% These our This of growth XX EBITDA our X.X% million Net wage in quarter, XXXX. expenditures, was to increase investments. second year primarily is approximately this to for repurchase $X.XX cash last investments same investment of for of sheet for planned an SG&A to expenses points increased invested same higher We've X.X% the our margin primarily continued to sales, Shifting solid new the last operating a the savings was costs The stores. sales and million improvement productivity. of compared technology second strategic increase I our support operating a of of timing of increased improvement is share our year. compared The per due one-third reminder, for by planned reform with balance million $X.XX, million, initiatives was the $XX $XX income million outstanding same earnings by capital well last over reported an unit to of mainly when strategic increased increased to were the million primarily members As incremental and basis our continued share to in the the for a net in to we due X period represents approximately that sales, flows to previously $XXX tax $XX liquidity, partially shares offset tax lower $XX year. to earnings team of from year-to-date. quarter XX% strategic due labor reimbursement, landlord per as and share diluted period deleverage decrease the $XX program. as the fewer period advertising in quarter rate or basis year. decrease X% driven points costs

ended have effective million and stock, of debt X.X compared Return lower was million capital through capital aided to XX.X%, to repurchase a cash facility, common the $XX We million million $XXX with current X.X the share $XXX second and million under cash quarter our $XX credit shares quarter, borrowed million our August in on X.X $XXX rate year. we During were X, returning by and tax XX.X% equivalents, to revolving Year-to-date last shares EBITDA. for available repurchased we authorizations $XXX times repurchased opportunistic net invested million. on million of shareholders.

let $X.XX, turn are first Now, in of Due earnings by the the and $X.XX of end performance full-year guidance XXXX a full XX% for XX% half guidance. resulting me range solid $X.XX bottom XXXX, to to of to to EPS of the our growth between year. the EPS in we raising

of following: between XX% year. CapEx and to year. full our landlord for are additional the of guidance. new million will our of items XXXX XX.X%; guidance in year Net X.X%; range $XXX of growth to all effective the sales million, the $XXX tax on full note we'll again, A open be comp and XX% maintaining approximately rate for the reimbursement We and the to sales XX net approximately stores for growth to be full-year X.X% XX.X% will few

inflation expect slightly negative the be We full-year. for to

deleverage relates year-over-year. to we it margins to to slightly continue As expect gross margins,

this For the in represent will tax the from investments year. highest the period started reform DSE, members quarter second the of team in deleverage our DSE and planned savings

expect to points we to forward, deleverage basis full the DSE approximately Looking for continue XX year. by

effective rate should our the to structure. interest long-term of under SG&A also that XX% we for $XX our be Below financing tax regards line, interest for roughly reform year to and approximately some rate, to tax expense the expect expect full the capital including to deleverage We related in we new the rate the tax and be expect leases. our EBIT half be With year. million, back

structure, unchanged. allocation remain priorities for As capital our capital

growth. unit First,

pulled investments regards third, later the to the we share and Second, the And, for some in opportunistic had shareholders. year. business. returning capital of buyback in repurchase the program, dollars to planned again, With were forward we that

that that, result the expect For in and to in questions. of new in up we'd to a those our technology we creation. like to and remain will are call our will debt ratio generation with benefits long-term strengthen solid in EBITDA value team year, business confident to conclusion, year coupled this range times. With for productivity shareholder X.X and the store free-cash-flow Operator? our healthy maintain open net X.X we In investments full members we the making

Operator

from first Barclays. Karen question comes Our of Short

is line open. Your

Karen Short

Hi. Thanks. A couple questions.

on in maybe just produce, a categories? terms deflation. then exactly bit a you're in you what So, any into produce guess, percent Can deflation on color talk quarter and in about the of third more give seeing I little little in and what decline other was the overall

James Leroy Nielsen

say Hi, in Brad the mentioned the was that Karen. I deflation it It's driver that Jim. will behind there. primary

environment. that over So, saw we're seeing the in Not to you the of We're was impact on driven index. in what storage apples improvements and in deals seeing crop PPI that a what category, the tariffs. related the today – by it saw X%, year-over-year and the we cold bit really veg of little much

We'll to year-over-year little bit to the move tariffs benefit on new – we we into more on grapes the would from and continue produce. impact in and Moving a quarter, improvements to you'll yields in be start slightly into those deflationary as from apples see the just anticipate crop.

Karen Short

just helpful. largely I Brad, lower margin That's expect several think in to occupancy, saying from you you deleverage coming then, originally, at this to be that some overall guidance, margins. call margin you've is but would just what said or gross Okay. merchandise did gross And categories slight looking talk

year. question cause which your are of for what's lower just on I is merchandise maybe explain And the then, guess, margins guidance first you it? So, seeing categories and the

Bradley Lukow

seeing merch a of bit couple second Sure. We quarter. deleverage just also tiny margins. lower of did We're a the see occupancy in categories slightly in

that first occupancy the think for and to our with half call that we're consistent of overall our back I related rate quarter were are pretty our expectations anticipating and our the we that of view comments about deleverage. gross deleverage margin year only in what much talked slight the is on

category marketplace. seeing spend, consistent we're promotional managing activity So, month, cetera. et from standpoint, in mix, a to obviously, you're pretty to your competitive month week the But, week, your

tracking plan. we're our to So,

Amin N. Maredia

the And Karen, to improving department as pricing technology, using standpoint. better we're a benefit how basket. well as we is forecast as well is to invest as from elasticity pricing, Like in enhance sales. plan helping our better program, promo And see driving the the that we current optimization, everyday really say the metrics which in only thing of then, would I us to our we as four-wall do continue the benefit merchandising we're starting

Karen Short

Great. helpful. really Thanks. That's

Operator

Thank you.

next from Markets. Our question with generation Wolf Andrew comes Capital Loop

Your line is open.

Andrew Wolf

Thanks.

would of side, industry while, just the set high-levels inflation mean, kind guys with just other not the is you so materialized? it to a On ask And why Or power inflation I view That's just basically been wanted bit the to demand natural you earlier in with produce have the of deflation. foods crops in where for we're thoughts expecting guys and kind of year a sort has kind in pricing question. have inflation. certainly pattern to a pricing still cycles? now any guidance your you for growing, expect versus more some I of lack of power is industry would do these conventional difficult. strong Do commodity or you can be high-level understand the of

James Leroy Nielsen

to Andy. through. the in able mean, a relative little nonperishable inflation of kind we're Hey, space to we ELD referring the environment, as bit pass I of It's the you're to are and that seeing Jim. natural

was yields primarily discussed lesser to this the meat. year-over-year So, and degree driven a crop we and that produce by

some different margin. natural we've are gross believe to we a we're order food side, been and space. in leader we the things sales optimize do in And follower So, the the produce fast in testing and

look cost if index, of again, year-over-year PPI see can some you produce, the at to relates significant it decreases. you as those So,

and So, is to really this lesser all produce, a degree meat.

Andrew Wolf

inflation don't tell grocery if us cost the your side you but I know would business? this, So, there dry is on of

James Leroy Nielsen

anticipate are and of not watch see starting is costs. And implications but early Yeah. channel those we I freight anticipated of at when as cost through, optimizing I see which to some the year. half movement more closely pass we this half. we're and and sales in just I would that make about starting through those we the coming through I up the proposed fuel significantly, those those indicators able to freight some of we of We're we're see think that increases those to through. We're QX mean, freight, pass talking to but and referred to sure looking we're back are those, proposed, – we were in back only pass as

Andrew Wolf

to training the wanted think you just automatically productivity. be elaborate I means? kind reference of about same I you and investment, But just talking investments, going cost would use Sometimes, these Amin, and you competitive you're we maintain when things. could efficiencies Sprouts' eventual and technology but labor Can to were price other said you investments wages, on positioning. what better to think that that And it obviously ask, efficiencies of I sort think

Amin N. Maredia

Sure.

Andrew Wolf

or levels Service something else.

Amin N. Maredia

great that's And Yeah. question. a

in well benefit we're drive shrink, We're of in continues putting is to the out but as peak stock managing intent we're the optimizing just same And which meat continued departments sure and make on as accelerate think the are investments a just mix in particularly business, accelerate, we for at on to technology overall I that then day, to is deli, the particularly we're wanted as to of parts bakery, to the to sales seafood. and in all terms fresh shrink. all in products the the we've and really sure our make purpose page our freshest floor. as driven hours, of really

in about, adoption see started the in-stock as in starting we good freshness seeing there stores and I to good bakery, positions and and So, that. as talked we're Brad

we we extent It's even what call or still take intended it to of position well do. overall it price the have we But call the labor margin us sales have gives that that in-stock what much some exact, to exercise on to is a as as we not industry to a it's that as extent as type and can enhance on ourselves productivity little to it But exactly really believe to So this early is the generate. benefit a a will to exercise. exercise does, do that, as shrink sales position of And a to standpoint. level a both little data shrink it early either and and work shrink. of flexibility stronger from greater it expect that's

So, move I we next in provides short, XX the it flexibility the forward. company XX, think more to as months over

Operator

Thank you.

Our with from question Chris next Mandeville comes Jefferies.

Your is open. line

Christopher Mandeville

you Hey. you have during comp seeing from you're just start and little the for Instacart? XQ. And a what bit transitioned to just remind QX Thanks about seeing Amazon good to along us that, then, impact from stores a referenced those can the of type what talk Brad, with gains question. of Can you you're quarter-to-date? that

Bradley Lukow

Sure.

As we're guidance range on being year we first stack. a here call, out regards quarter, with to sitting X.X% we that previous there. in we about the that our to And for very comp in quarter confident the where full third And clearly increase fairly-meaningful out two-year X.X%. talked put today, our we set the are sales the results in

elements is Instacart from impact We're year. having on into program. satisfaction the absolutely to according continue pleased in seeing scores, to from the year. seeing line in adoption with X.X% based to Obviously, and and so period, balance the negative a plan are number add talked would expectations an the slight the expectations weekly to and very But the markets. results our And and our So, more internal We're during expect for customers, adoption. more are tracking for Instacart. XXXX, we seeing to as we continue absolutely we plan that service, a the about for we X.X% of we standpoint and operational strong transition full increased very we're our full tremendous customer year our expect and that with through sales of in we're with

Amin N. Maredia

One is us apart. unique for from stores placed standpoint that thing expansion piece because on Sprouts, would the I bit the are Instacart area a add little further it benefits in a it's trade

minutes that So, they products we're inconvenience store. XX, driving away pretty to excited the to take about from that to more customers eliminate to live our extent the continuing XX, XX

Christopher Mandeville

observed I a just but crimped as in this, far towards follow-up. apologize has Or go numbers maybe would continuation deflation actually the are really than little bit? a quick better for quarter-to-date to trending you comps you as say Brad, the that QX? what

Bradley Lukow

expectations. of today. we're half to well tracking the again, meaningful sitting two-year clearly in year our very And, the the and comfortable here We're stack regards has with very a back step-up

Christopher Mandeville

All right. Thanks, guys.

Bradley Lukow

Sure.

Operator

Thank you.

comes Our JPMorgan. Ken Goldman next question from with

open. is line Your

Kenneth B. Goldman

late, guessing some and the possibility end reform if investment Hi. forth. the price asked up so range, reason that think of part forgive so about haven't I please indicated Thank of maybe the really year, to you. a incremental the of of I the of end, jumped if led you already. considered at you guidance price today the the this of range me on was you that start that I'm yet. lower took talking But little matching had kind lower is really investments EPS seen you were competitors, tax the that,

sense and the pricing or environment competitive relative still the get where is whether a today of that of heightened to trying competitive your the Just rationality levels. you're rationality really and factors seeing guidance possibility how in

Amin N. Maredia

and remains from as to competition perspective. Jim it competitive. competitive give then standpoint, Yeah. to I'll From guidance speak a it a Brad said,

We And to – have framework technology disciplines. stronger helping that's our competition. starting even us good help then, of have disciplines around really with

was recall, for to in period think XXXX, if driven whereas categories, the today comps the you category, It's deflation one of we conventional had different back XXXX, produce. of of lot think which negative than years, you in extended to retailers. some particularly is deflation past this I is what's multiple when to year starting in lead

more much getting started people aggressive. So,

on different particularly more different, it and the as would – at it frame competitive, is it remains I in environment phrase So, rational ad back today. very maybe XXXX. than I think, while promotions,

with us continue and seeing So as and to traffic tonnage stay strong in the our consistency what results good that in plan we're and business. allows consistent really to execute

Bradley Lukow

I Ken. so that heels investments of in our that would of February, right a would do was would price we cost you're at tax perspective, full-year And downside go just was recently-announced the whether context end Yeah, and into incrementally uncertainty beginning incremental the there around year. latter, of that saw issued because reform, the what say labor uncertainty clearly, guidance it in those of any in versus reinvestment on we our And, the companies of savings from guidance labor. wider increases. absolutely to the right, the lower was of range the

clearly, over to-date seeing environment, up here gave through us and EBITDA year-over-year half year by certainly today X% pretty bump the the stable $X.XX. sitting confidence first the the of we're it end Now, bottom with a to

Kenneth B. Goldman

The also? Can quick little was cutting follow-up earlier. a out a you I bit much. very ask call Thank

that you for gave You a number quarter. Could for us? deflation the repeat again

Bradley Lukow

Just over X% total company on cost deflation...

Amin N. Maredia

the quarter. For second

Bradley Lukow

quarter. ...in second the

Kenneth B. Goldman

In the second quarter.

Amin N. Maredia

Yes.

the we a Yeah. would year, For overall. slight the for deflation expect

Bradley Lukow

Overall.

Just slight.

Kenneth B. Goldman

you Thank much. Great. so Okay.

Bradley Lukow

welcome. You're

Operator

Edward next question comes from Fargo. Our with Kelly Wells

line Your open. is

Edward J. Kelly

guys. Hi. Good morning,

your So, picture, could an seems beyond to think early labor in XXXX. cycle, (XX:XX) sort I I in year, actually it technology. a but thinking looking of investments, investment you just like sort at about have bigger deflation, improvement question next of know, it's bit see of quite just about a things the

is productivity very obviously store New good.

takes bigger we what of on see think and thinking about sort next puts meaningful are we we here, acceleration more as year? thinking right are performance? the things some in the Just could picture track how in And about about

Amin N. Maredia

Yeah.

in marketing a call right think the from broader perspective, And and put early even continue some have at team job continues to we It's meat business, we're we to those starting deli our at better core point. from we're merchandising But some productivity that. this new look our and relooking when develop resonate what program, work the the of and can in with would has the and done sales a and we how team results business which our store new see stores as in fantastic too I'll seafood starting trying and things to is that well. to aside. we really program newer a stores perspective, customers, I inflation great merchandise from XXXX at see innovations you're of to

program. we're our So, about excited new store

First.

really a only to from our the is way. Second, really quality, to uniqueness, deli program the not customer product and I trend, perspective, attributes strides starting – starting the private more in label the the think hit the of meaningful a are with

starting think, good number look in I was to we're items, quarter but this we've but only alluded from we're growth before, alluded to unit this that – we label us forward not private given increased as see also starting to see set. of of or acceleration penetration our existing

great there. work So,

continuing in course. the the from we driving and its a feel standpoint, – in industry do what to really sales be We'll to let departments. some inflation got core play about leader a good going do it's we've think, I puts-and-takes So, deflation and

And we're the as call because additional our fresh then, So, as what we'll really benefit halfway item better will program we'll provide management we're to P&L, probably year-end focused what think we tracking. down controllables. the be the the visibility we program color of through of that be on and on go have

of more business health feeling to starting it's business and feel so consistent today. the and our So, positive in terms of our better we're and

James Leroy Nielsen

we're on is as space. on called thing a better and out great and talent. two one that of the here operations The Dave the about would terms We McGlinchey today our chief that senior really we leaders you as senior in tailwind people leadership He's merchandising someone to only putting who bringing position could catch brought in I'm that me board have reports in in excited the add pedigree. well I is

of we're do helpful. in to training But about our be stores continuing continue the product ongoing meat, that stores. service out knowledgeable management the that around intentionality So, upper middle service to going is we in kind program talked our building customer to that the to that in we

Fest. Sprouts space our We're bringing and having for both two department we of in them grocery the we're managers week, and our next educate fact, In the straight days. vitamins all

could other that of strong think I friendly knowledgeable as continue adjusting kind that the is provide service, as could direction of beyond. in terms everybody XXXX in as well tailwinds

Edward J. Kelly

guys. Thanks, Great.

Operator

Thank you.

question with Chuck Cerankosky next Research. Our from Northcoast comes

line open. Your is

Chuck Cerankosky

everyone. us be increase more et store seeing on employee any you turnover, anticipate – in so morning, quarter. what you're Good lower or Could cetera? the compensation, give benefits Nice customer in from engagement, detail

Amin N. Maredia

team continuing meaningful in come attacking member higher member still what to engagement a fairly better a Yeah. and areas we And is And team our training get that's stand We're have member good survey, to We're that great change mission Jim our our what in team understanding And and alluded on see we we're some step seeing team and at. the question. retention. thinking. based really we can for. scores the disciplines

We see that team our on And we're starting have spending both over of service we operational that training. that Sprouts to that around our service know this So, from of don't well-positioned very talked see in purpose feel in customer element to and perspective, key a stores. retention a we're the make as aggressive lot to to well very to of differentiate want benefits Jim really and sure of sort turnover, of to in last drive board years, to execution scores in industry from management we terms in starting a as in terms continue and but deliver want we in to terms the a and about because stop. people is service. that's the and couple the model perspective, can investing pay intentionality of close we're and been what team we getting best-in-class

James Leroy Nielsen

only fully staffed, the gains the our strength, ability add close would which in think, been brand be mentioned last I was The is we've XXX% in to we thing as staffed to time quarter, I XXX% first weeks. XX I were the staffed,

in starting profession beyond The organization that this one, up assembled potential having But the through resonate. the great got moving think, and is really department for that So, I as a arena. we've growth, that, is us a the here. recruiting long-term we've to high helping brand

Chuck Cerankosky

Thank you.

Operator

comes question Guggenheim next with Heinbockel John Our from Securities.

line Your is open.

John Heinbockel

new roughly Two, what's brand, your so about of private couple brand you with How in When customers, mature, one? the education Jim. you questions at more for look think to those private process. that higher a Actually, think maybe brand. on that versus private you is customers going loyal private much penetration about brand happen allocation mature number space those when speaking with penetration,

greater that time? lot are do a Or margins you think private you right, ultimately then, here, pricing? better do put back get a over So the third brand get actually better? into Or as much gets? lot you that And scale getting piece will how

James Leroy Nielsen

right. All

I'll nail for So, John. all them one question, right. All you.

John Heinbockel

That's it.

James Leroy Nielsen

of quality in likened as to that products, for So, of of Early penetration, XXX of kind year, giving a launches, existing a quarter. but taper is in terms tailwinds of of what's up finish getting on, from lot people items. points the and brands. I'd in were of trust the bit, confidence XX% the have around that the acceleration the now better over seeing the a We packaging, should existing. our item basis new we're lot much we the acceleration us those

So, we're seeing XX% seeing in growth increase we're also an but baskets, traffic. in

So, good adoption a those we're to items. having

that based the that is to that's space. I that trends talked and get great bit products XXXX really have think from the XX% mentioned we closer rate just it we the a pipeline, seen change to in that step run on can before. XX% to some penetration, what have we just I of So, we about. the a have, in we've And probably by which of

it the is or store any area do got and of you've that we to space shelf foot, shelf, square optimize the out. look, on to sales As prove relates the we per the what on

the but industry, just a it's label math, helped wouldn't our have game in simple a big years us couple of helped innovation, next step They've done great We So, private over vendor partners. strategic of products. we with I have love that see – dominance. a of the of lot propel us exclusive partners that change

the in bigger power, So, allocated. as positioned somewhat relates we buying over to continue not that's of margin, terms through. couple to as here we'd be of it years, we be how and anticipate and the get cost bigger the some necessarily it We're that organization our also slight have I'd next muted pass to And competition. to see it relief against brands, take priced and CPG against would not only extremely category an able as but in already well in

John Heinbockel

Okay. Thank you.

James Leroy Nielsen

Yes.

Operator

Thank you.

Our next question Research. comes Wolfe from Scott Mushkin with

Your open. line is

Scott A. Mushkin

guys. Hey, Thanks for taking my questions.

there's since I acquired side. Foods been reductions by with went has obviously Foods produce Amazon, particularly some Whole Prime data pretty in the Whole just we Week big So, about wanted and fresh to talk on shows through our

that Our Prime for data discounts the vitamin to probably area. at next XX% shows going also week on members start they're

you a you wanted marketplaces on some a in get I Los to So, there. like Houston doing Angeles think but seeing just Thanks. is Denver out some insight or insight guys to you or just what maybe just and not this directly get a on are what

Amin N. Maredia

say overall into own consistent consistent. terms stores, core third we we at is very when tonnage year, Sprouts here broad any is look deployed first this we by store put not being don't our particularly in to strong are speak our core I months and last and the those as specific very accelerating, we the traffic competitors have traffic stay quarter, six stores what cannibalized – different over when new is it, far I'll of openings, Yeah. our performance. see which is competitors. year speak period are call And obviously as will because But to strategies overall during concerned, and that as different and

has So, with of value, selection. that a model to and our business lot around do health, service overall

and pillar obviously competitive So, any marketplace. we in the it's one price in remain not

to probably think, what there's do feel and think, competitor lot on And Sprouts. concern one I about a or good around what to-date pretty can laser-focused our of we're So, seeing seeing. I we business not other or we're

Amin N. Maredia

comps drivers it's speak our of may margin there competitors. what your to hard on the or we what it's have made may doing the to they be doing investments terms what It's to there's are business. because see. seeing to it happening, but of hard what to may other only It's be it's can clearly to know in we And see what to – hard comment out estimates in comment lot industry around I industry,

James Leroy Nielsen

be And, to related kind is which space coming only in the focused thing just space not from natural of Scott, you're I customer. macro requires on that here, add the as that to this trying health-enthusiast-type a but would just – higher touch

not price, we've think We've is As done data-driven price we're trend side, following. deli against the strong about label a space on that enhancements about which done products leading, in enhancing some making private the better talked We're always of sure team consumer we is the the just trend other when – we've here about where a the making we the of job there, really but talked fantastic advantage But carry, we're going and on the those the natural decisions tomorrow. you had produce decisions. end. has

as way So, current there's go our the a to to to get it specialty space. long to price position natural relates

Scott A. Mushkin

Guys. thoughts. right. your for All Thanks

Operator

you. Thank

Lynch. of next Merrill question Our comes America with Bank Robby Ohmes from

open. Your line is

Marisa Sullivan

in And then the the I back does a the and Robby Instacart Sullivan just Instacart the Marisa just year? in then the what back you on Ohmes. from transition it's QX when if discussion like want impacts will transition headwind half tailwind? quantify circle into Hi, turn for can and to of see Thanks. a look it earlier to

James Leroy Nielsen

Yeah.

period, And a the that today, commenced terms our we're the consistent previous seeing plans of hit that So there's headwind the talked call in in we number the as service more our pointed adoption in our of we last do quarter. a bit with once on performance get in out of the I that's have quarter no now and about again stores what and fourth that line think on second and we growth of expectations what is we which the our in offering into and – by becomes we're customers, the quarter is. sight transition

Marisa Sullivan

to Got expect it it. quarter? a tailwind become Do in you the fourth

Amin N. Maredia

certainly acceleration we we're next it a based of sort the year, seeing We expect transition continued on then that going positive. as will in that into would period is see path we and Yeah. to

Marisa Sullivan

doing just Got Can incremental spend. really some this cost? incremental you talked more quickly, about what that's in it. on are expenses differently If I guys an space follow-up driving the can us being just give you detail advertising you

Amin N. Maredia

Yeah.

markets And We awareness we well, as that worked plan the our the I that being in is driver this become it new so into both store where entered entered more leading being our openings. parts we the ahead well in want core of one we're intentional of year market think, in openings. Carolinas. brand to markets in store year, learned terms last that major marketing of strong we grassroots, is the primary of ensure the the and our of Mid-Atlantic that's first extremely our part

James Leroy Nielsen

we at effectively. cost very and today we able to you an of as about as that Marisa, sales can and perspective would are to look would space cost do, not distribution and things But currently. prompt I can freight, digital And we when long only the the term, only you paper advertising add look forward do we're do of paper, what talk and obviously those look headwinds all you them from

good out, beyond. you So, it relates XXXX should to and it look as to be benefits advertising as out P&L there the

Marisa Sullivan

you. Thank it. Got

Operator

you. Thank

Bank. with next question Deutsche Our Paul from comes Trussell

is open. Your line

Paul Trussell

Good morning.

On the build DC the store the you have helping east on obviously footprint, Georgia you coast. out

performance If to then, you in was of you store? additional (XX:XX). about (XX:XX) up and And can performance units, the the that I XQ. it, saw just apologize about down talk product for I regional ask if the also business areas in wanted Mid-Atlantic the category fresh other but missed How

James Leroy Nielsen

in we in the what region. how in Mid-Atlantic, can go our about positioned second and in to terms that just bring of terms sequence of and customer opened pretty we be ask. region I'll see We're store. we you the competition the Yeah. excited value

And, very to are second we question, the performing two to getting also. and stores question? To time in start first lot again, there. second your a the grassroots brand around So, so a you drive last repeat your early market awareness question well, – can spend the there good of

Paul Trussell

Sure.

about product Just mix performance.

James Leroy Nielsen

yeah. Oh,

nonperishables the very well. as performing I in we remarks, think, opening product mix performance remarks, is is, said is

the our to continues food pleased the area. very also of performance and tonnage with in good good very momentum see and area, continuing really perishable seafood. overall stepping is the seeing deli But healthy meat We're the move. to we're in store we're the tonnage side, where back, On

Paul Trussell

Thank you.

Operator

you. Thank

Our Judah Frommer with next question from Suisse. comes Credit

it in for guys. Your LLC (USA) area another Maybe on the specifically Hi, still - one Suisse look open. try just Judah line is and Thanks battleground Credit my out produce the seems like If fresh a are we first in Securities to past question. taking environment. produce, C. deflation Frommer competitive industry.

just So, or versus the Maybe Instacart. on the parse deflation of customers through could then seeing what through follow-up customer quick coming out there? are even fresh rest and Are you you are Instacart Sprouts, competitively if store? to a you you of in kind and getting data

Amin N. Maredia

Yeah.

answer we'll Instacart. do order. I'll it reverse So,

label, data working anything to see data, through good that Instacart.com, going through then So, is we're membership, we there. are on we the but many that doing And of through Instacart.com, of label. in Instacart.com who our coming access provided there that customers data, there benefit we're also affirmation anything that's we provide and terms and excited sites, white have as the so have The $XXX we're many use have customer Instacart, that's long use and a retailers, of both to the there, private through as customers some coming a and label also customers our has multiple they which about. white data, mix enhancements

see to in can data interesting So, we're future able go other let cover customer be and Jim, the we that. starting to question. some the things around with Jim where I'll

James Leroy Nielsen

in are change. extremely But on country of in quarters that everyday it making just prior Yeah, change an step with spend, those what in retailers everyday consistent But the that. no this of we're to pleased. across And of the handful there's activity, a been perspective. relates price side price promotional there general investments fresh has and not the terms is a competitive seeing business in as material

better the we our about digital, navigate seafood, the the through we and customer vehicles on. we're helping in As have service specialty but have marketing It's educated points them where different the to we identified we just the deeper look a even something great at look put in our ready-to-cook we and focused attributes. organics, that We've new marinated where our experience those help look value about have continue in of of produce, the specifically we front. know, and done we is to create difference natural points we products and we relates in that And sell meat. different then have grade add you tell of from plan to the and a program. step print engagement of cryolock store we customer change lead But very not around terms And meals customer no items job to products stuff a to of one-pan products as continue of difference even person meat and as and (XX:XX) in those and meat, messaging more how only communicating assortment, do at it that the different that the into and – on have, together it's accelerate kind service them the competitive launches. that's real of to a store growers in messaging some

in activity arenas. any pricing terms space both of step everyday Suisse C. see (USA) promotional you. So overall, the those Securities in don't Thank feel very LLC and Frommer comfortable changes in prior quarter Great. of Credit - Judah or of

Operator

Thank you.

Rupesh from with comes question Oppenheimer. Parikh next Our

Your open. line is

Erica Eiler

morning. Rupesh. Thanks actually for Erica taking on question. This our Good is Eiler for

that impact just apples about and thinking seeing an to tariffs curious cold the business deflation. the with tariffs regards from you're was bit I before on you're of food how a you impact on So, of storage. little mentioned potential

James Leroy Nielsen

going so have Yeah. and cold supply. heavier so crop to not assumptions want that making hate again much say the little into a headwinds, because you bit Look, only inherently category it's too you you transition, so I had itself as projecting, storage, – a I'm we're apples storage clean

potential those really you some that you've cold the put got materially October, have back grapes half, could you've can got So, apples into November. storage in negative but through impact,

of not it's now, Right see. terms we'll grapes. So, deflationary in super

But In would this better as have year, today, cost that opportunity in it's us that growers pressure backed and create gets up but of this these crop to cost step. you move tree good exported a side. storage, the year that half the see of category. foot we're not and goes discounts, side anticipate So, harvested big the for little be back little promotional in that continue a the gross watch. to everything try the a some or on next bit margin doing bit to the longer can as nut excessive insights said, that that get will I you data, accretive potentially a drive at we'll could lot things we – continues cold a in of the

are It there puts implication. but it's early So, really takes and XXXX. too really will ends, both to more tell on the overall be of of a

Erica Eiler

Okay. Great. Thanks for the thoughts.

Operator

you. Thank

with comes Inc. question next Our Bienvenu Stephens, from Ben

Your is line open.

Benjamin Bienvenu

Hi. morning. Thanks. Good

And of offering daypart I'm You continued seeing continued program the – the then within across success where the the and opportunity the you're highlighted look to the long-term the deli the the think penetration within day total in you of across hear how made bit both about opportunity. more store success. then, you success has private deli, the at around as curious the share of little a lion's

Amin N. Maredia

we had been good invested effort around really Yeah. and some Where we're programs. has our ready-to-eat time

really to the ready-to-eat some years if store you where the walk today things added and taking fresh ago, people have are two that We home. there, our it's products compared

where the and good adding shop the days multiple days. are for two, on three the X also the seeing items the evening to the then we're for so o'clock people next traffic So, or for in weekends weekdays basket

see is step health year, of we're last the taste our and head of So, of about our some we're new and continuing pretty our has to that changed, launches. We starting program one things notice profile the are to meaningfully besides chef that it. develop a recent nicely customers and home excited hired products

the case next of And day. heat home to quick go so then that's deli for same or really tailwinds and in providing that day good a program. lot The

James Leroy Nielsen

about on seeing to we great we three of we about Customer these thing the XX% respond stores ForeSee have seeing is I XX% only deli stores, making We're would and deli think, stores customers these those and I – scores on talked Sprouts more but for next the you we're The side scores that qualitative are their the Service as look with our customers the at add quantitative, about components, – the can which XXX are think over have years as get the shop. primary elements. our

a So, as elements have other we uptick baseline we're seeing nice don't consumers. that that our against the the from stores

there well. So, nice gravity as

Operator

you. Thank

Our Stanley. Vincent Morgan from with next question Sinisi comes

is line Your open.

Vincent J. Sinisi

morning, Good my Thanks taking guys. Terrific. for question.

kind holistically, go produce of produce in you're know, more quarter this results great. we second. deflation a – would maybe in saw your Just relationships with where seeing But is of were the heavier what that. to just we're supplier from, I wanted line to kind of for last kind sourcing course which the than Obviously, compare back how you folks of now of still versus as time deflation today certainly remember expectations

we dealing seems but you how or get if a as certainly maybe just versus a past? into half the cost back you're from So, relationships the promotion like so further would anything well your far, now changes with compare it supplier standpoint,

James Leroy Nielsen

our we or going can Yeah. highest you and from now. quality eat delivered level two and product step today customers days the is as to back for I'm to our you of customers eat what three can an want only organization, that

to get So, we're closer just to source. the trying

are supply, Not of prices time around well well our us innovations our the products in some what that's for to on it's have, focus of of different and be served customers the may complaints ago we growers. It's saying tell quality so with really going couldn't quality, breadth have. innovation, they are of really you on new materially going of terms quality potential it's the And consistency marketplace, and long of a product, in those. focus change, assortment, So, that could and a positioning they us our terms innovation. minimal we of insights went a of And to quality. direct that look more right, the us only with about

long-term business. I not to boat from unless of a decision think that in products any a old ten everybody what cost, same is broker that's you for overall terms in is strategic is buy growth want high good days that

Vincent J. Sinisi

then, Okay, maybe That's just a And fast Jim. fair, Thank you. follow-up.

kind that obviously in said you today. advertising, folks in about I still around of doing Instacart, Is of it's be is store? on great. discover of more that? stores Just think advertising XXX much through or part early days Instacart or the but you're whether are increase letting guys in some it you That How would

Amin N. Maredia

Good question.

previously, do As the that for was attaches, once on customer spoken wanted customer to service the were scores that think sure we they long-term. early about had we solid execution solid because we make our attach can a and

for only not continued say launch as the as topnotch the So, we've is we monitor execution well that today but we I started our launch slower first initially the as would closely to quarter, in – execution. accelerated And the our well home across of starting now and been so marketing we customer messaging response most accelerating. our month have is including channels the driving delivery or as as digital. awareness – We're in-store the to integrating last

that and just we'll accelerate and innovative good as this drive direction we're starting with that to to Instacart grow ourselves, as well with taking ideas about come up awareness business. So, greater continue feel to and

Operator

you. Thank

comes Capital. question with BMO Kelly next Our from Bania

Your line is open.

Kelly Ann Bania

for Thanks in. morning. Good fitting Hi. me

Just and to wanted you that. if challenges working just still or and the all? that are on-time through that any deliveries are seems have fill freight pretty to at ask or guys – just though market about seeing challenges you're so freight. in curious out with there are seeing or you far But as you been It rates immune

James Leroy Nielsen

Hi, Jim. Kelly. It's

better not third-party deliveries, higher impact own. no to negative now better is the arena. that and you not the suggesting data And market could you planned rates helping challenges. we if to – do play you're seeing our as obviously, But only would here well-focused, fill Where not and not on spot well building the for we that but are but to distribution, needs relates having I'd well forecast freight, the on-time any not rate is decisions it as people in access opportunities rate what better from the us to-date have I'm – if likened making again, our experience, cost, are business. just to As fill see that that better and impact in only you fill

Kelly Ann Bania

just maybe one then, on Okay. another Instacart. Great. And

you're delivery maybe going others in their to solutions, next considering curious term focus delivery proprietary the else in be groceries? that if As click is investing several with other for a still enough but and is talked on of you over or I just maybe think know own option, considering really years, collect longer Sprouts Instacart? about of terms the anything or technology you

Amin N. Maredia

pick whether fully we're – some Yeah, the on I think so experience delivery, integrate and to Sprouts that experience think wants that app. on into do store looking deeper that to ensure our we're customer on that content to continuing a at enhancements and enhancements it want because developing to or our look on push for and website, either at the the and at the we cart channel wants is is Sprouts.com full it's important home we shopping custom to us up

we've So, of there. roadmap making got a good enhancements

technologies, look is it's But over evolves, come certainly and could all think structure whether and to other from options technologies, we'll what execute think sure our continue customer own voice efficient of that's it's which to think its and many at go today and customer really Sprouts close of I cost they're – a a then build I certainly own. the more fulfill you has as platform want to retailers, has we doorstep. you but Instacart be groceries avail evolve, a that a their where able course make element. capability good as or to – on that ultimately, and can can things from the as So, network in at that Sprouts do as not, it's lowest there, the matter to your company wants driverless delivery than first technologies Once and technologies, saying time, leverage

Kelly Ann Bania

Thanks.

Operator

Thank question-and-answer to you. call Amin remarks. the back I'd closing concludes session. Maredia the for This like turn to over

Amin N. Maredia

you. we right I time, weren't questions the think the but and engagement you to after or much. make Thank for Thank and two to to forward needed get look out Thanks many very you you call. able shortly analysts, the sure with much. very of three to speaking we And we'll we reach here

Operator

concludes your have today's and day. this conference. wonderful for Thanks and Ladies gentlemen, participation a

Susannah Livingston	Sprouts Farmers Markets, Inc.
Amin N. Maredia	Sprouts Farmers Markets, Inc.
Bradley Lukow	Sprouts Farmers Markets, Inc.
James Leroy Nielsen	Sprouts Farmers Markets, Inc.
Karen Short	Barclays Capital, Inc.
Andrew Wolf	Loop Capital Markets LLC
Christopher Mandeville	Jefferies LLC
Kenneth B. Goldman	JPMorgan Securities LLC
Edward J. Kelly	Wells Fargo Securities LLC
Chuck Cerankosky	Northcoast Research Partners LLC
John Heinbockel	Guggenheim Securities LLC
Scott A. Mushkin	Wolfe Research LLC
Marisa Sullivan	Bank of America Merrill Lynch
Paul Trussell	Deutsche Bank Securities, Inc.
Judah C. Frommer	Credit Suisse Securities (NYSE:USA) LLC
Erica Eiler	Oppenheimer & Co., Inc.
Benjamin Bienvenu	Stephens, Inc.
Vincent J. Sinisi	Morgan Stanley & Co. LLC
Kelly Ann Bania	BMO Capital Markets (United States)

Sprouts Farmers Market (SFM) 2 Aug 182018 Q2 Earnings call transcript