SFM - Earnings call transcript Q3 2018 | Sprouts Farmers Market, Inc.

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Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Sprouts Farmers Market Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Following management's prepared remarks, we will be hosting a question-and-answer session and our instructions will be given at that time.

As a reminder, this conference call may be recorded for replay purposes. pleasure the my Ms. over now is to conference hand to It Livingston. Susannah Ma'am, you may begin.

Susannah Livingston

good morning, and you Thank everyone.

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

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

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

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

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

Amin N. Maredia

morning, Last Susannah. fifth bell everyone, for you, call a thanks public today. as year Good Thank NASDAQ to our month, joining the rang our we and on celebrate company.

technology in stores XX our for a return and label, the it strength testament years with which capital, office is deli store IPO, most accomplishments, I'm While much all our today, healthy enhancing talent doubling eating private XXX in our has across nearly continue store and proud five This have our ago. of extremely of entered is five business the back, and our our to five making build past to emphasis invested of changed was to model revenue many easy, during what and has looking to years states, industry the than new model, increase business count stronger in Since we of and support on affordable. this understandable, innovation will accelerated doubled years, team accomplished. EBITDA over which these from XXX scale and more other our continued resulting in and today than importantly,

All as remain on long-term extremely by excited this and of is an shareholder that team to talented brand we keeps supported on continue laser-focused build we Today, remain forward. building customers that value. a love I as our us moving trend

billion. results Turning Pennsylvania strong a had to and our trends, the $X.X These third new store by continued traffic Washington. states new were in openings positive comp as to of driven X.X% as quarter, We XX% with productivity. tonnage sales rose well strong of and

across cities states As Sprouts expands, model our the healthy offerings is and relevant bringing country. and in unique

Solid evolution our to operations, product continues of the store productivity. strong drive merchandising and innovation, new store

our new and two pipeline environment the years. quarter, two promotional year opened XX store coming During store opened have third consistent for year. fairly addition quarter, The the bringing additional And coast-to-coast. remained we new XX states total stores. the Since end strong we we to our XX now in new remains of the the this states, are with openings stores, the of for has

a an same strong this within primarily Despite produce. driven to stack continue across we and it comp to departments. and face regions the in X.X% proven various different continue While Sprouts overall drove our time, remains competitive, a environment third we two-year deflationary of our pricing the quarter. strategies our positive maintain headwind, At by

connection relationships the year, customer embraced customer our we members team technology. engagement are reflect improves In customers. experience, stores customer format, XXXX healthy design Sprouts customer enhance and between Now, to on incorporating the Sprouts. shopping I'd team focused like allows across always customers and to fresh has these meaningful our to which trends. further a discuss at service priorities strategic a small Every innovation, a our and offering. and sight creates build members, on innovative new enhancements area, year, latest the these our our clear This of Market deli few experience Corner Deli product

higher for ahead products organic quality continues category Today, the And new help product investments we further added Sprouts. at In we more margins half flexibility increased develop more Importantly, With consumers products resonating label and choose healthy engagement or drive stay when label meal Private and our in penetration our to offering stores, are drive our or and types of deli our our our and continue this label, our continue to authority private increasingly solutions more Sprouts with an great-tasting non-GMO ready-to-eat, to their we customers trends than decade in best unique believe business. provide experience of to in top-line with an will customers. foods organic expanded traffic Private want at grocery with resonating fresh our are offering more convenience and label and are full-service stores. to healthy it years private in and and many existing at our a healthy our gross has introductions now the lifestyle been a customers. of well heat meal have comes product offering it's of remains products very necessary of as than we only expanded food, in that and knowledge natural of that quality, messaging. private fit a for and customers. can half growth this XX% today, customer and and apply store. cooked value the exceptional to than label through new

our stores, early with the in grocery home XXXX. delivery grow to our most XXX to home the today. than U.S. delivery shopping markets today come we remains line percentage in in on and the small On of are with The major of continued front, has more Instacart covering partnership markets, remaining a

Our and serve to new the exciting experience loyalty strong to space customer involvement to outside this and early combined about continues allow trust, store. think ways execution brand in with and us the

tax to us members. Second, as to allow we $XX this team out our a team and differentiate additional continues and million culture Sprouts last quarter, in leadership invest an a and reform was in through fostering of catalyst called customer engagement. member year benefits to development pay

heritage third learn team the our about grocery The to ensure invited event is my This purpose of products of on company, people-led, year, favorite recently the company ever. sell. inspire and Fest, training events our we Sprouts understand direction they the the each growth build One leadership the and manager product, to to the and their firsthand. more importantly This largest and to in return of most than skills attributes for our strategic unique knowledgeable our is continue occurred purpose-driven XXX managers, brand to allows individual the which culture quarter. store of vendor's vitamin members our store leadership more

other unique scale. and and for continue building system giving in the that, our future in In summary, value, in efficiencies. me we're and Lastly Brad of the from that of at ever of rolled resonating every We markets environment greater half a with confidence will management, farmers smart in small-format learn Sprouts. very fresh at let the than accepted work ensure on savings focused – department results we starting the in-stock and that Overall, encouraging is the the learnings selection technology with seeing shrink changed, years new future out The the model are XXXX us item half our of early implementation allow in turn further back management on are right pleased more service to in the early future as is from over market a positions. and five remain cover XXXX the bakery guidance. to existing cost to and has back technology, rollouts. improve to while company-wide With health, is financial we store adoption expect to results, our call level growth speed be we change to the with all adapted results customers ago initiative

Bradley Lukow

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

and driven solid quarter, new strong our lack and was the entirely For billion, of XX% the year, in up inflation prior produce enhancements our tonnage, growth over nonperishable productivity private $X.X deli in sales that comp label, almost of our positive low-XXs. related. the sales customers. continued by resonate continue were quarter, store with pressure third departments Overall, third year-to-date, growth traffic the consistent this X.X%, a Offsetting in to continued

us and full being confidence raising well-received guidance our Our a EPS sales testament of and new existing and to store range new provide year. strong, remains markets. bottom both the the These the for in comp our trends model productivity in tightening net end

of approximately increased primarily points by by consistent quarter, well expense higher to primarily investments members' third higher year. with store deleverage margin and categories, due gross year. partially our certain improved last was to an period to depreciation XX our gross the leverage XX.X%, increase million the the last rate and was by as to team $XXX margins by This our basis compared to Direct sales, driven of This basis million, X For expense. period plan to XX.X% points as same planned and increased merchandise to increased in in offset XX% was wages benefits, profit compared occupancy $XXX same XX% costs.

reflects lower interchange flat for see increased last million, year. leading sales expense on compared addition, XX% that customers use last strategic offset primarily In period higher X.X% more same credit investments were the our to from by costs pressure to SG&A we quarter, year. and continued shifting increased to expenses. to $XX a cards, of advertising this or to the item bonus This line to

compared X.X% when for period was this pre-opening was higher The Net increased sales previously decrease the costs the our by for operating by costs third due strategic XX to nearly margin investments earnings wage quarter discussed. year. well $XX was same quarter third points basis and period to than quarter increased year. a income same for share doubling our the driven of the from diluted XX openings decrease million points year to X% compared the quarter, last last third basis per As to $XX in of mainly $X.XX. store EBITDA as were last million, to our

with benefit to Tax an During tax method $X quarter, we the a Act. third conjunction due and calculation change, recorded Jobs million in the the of adoption adopted Cuts

fewer our to Excluding net and earnings a shares year-to-date. share per per repurchase $XX is last $XXX diluted due the strategic share and million $X.XX, net $X.XX, an liquidity, self-fund our solid year. continue sales, capital higher in same was or invested in due cash expenditures, the operating stores. we increase sheet We Shifting of primarily to growth outstanding XX% and million earnings reported effective $XXX to with share of period this over income improvement unit reimbursement, benefit, flows was tax The lower program. rate, for landlord primarily new and balance million initiatives of to

quarter, $XXX current million available XXX,XXX $XX million We third the for $XX the shares authorization. cash in approximately cash under with our million. repurchase we and During quarter share and repurchased ended equivalents

X.X XX, XX.X%, borrowings shareholders. million bringing X.X repurchased compared October million effective capital of lower decreased down credit debt common was million, invested a to we stock our Return shares to rate to returning capital our on on Year-to-date by times. million to Our to XX.X% of facility last $XXX $XXX through $XXX year. have tax revolving EBITDA aided net

benefit sales third Now, the let to XX% raising are end to EPS to year, XXXX year XX.X% range the the to of change. bottom Due to guidance. of performance the the solid by $X.XX the tax $X.XX, full quarter including method the $X.XX $X.XX earnings for me net for calculation we turn and a guidance to range our for continued in

year, to expect change returning As the well, to we XX% our quarter the to of the in method XX% sales tax a year and for new to this XX% range more tightened tax X.X% full under be to normalized effective our approximately we X%. comp adopted calculation have the into tax reform rate XXXX fourth quarter, to structure. growth Due

additional to the gross few We margins we A spend And on year-over-year. will all consistent we of open to slightly of CapEx are We guidance, to flat note million now prior guidance. million, projects. this in due our full at to our inflation the time. also net new stores of XXXX XXXX, XX items near be reimbursement, range $XXX a expect $XXX full-year. as landlord be to expect it which lastly, negative to And open relates year timing margins, to for with lowered

to the year, by investments deleverage primarily DSE basis tax XX from We reform expect wage to related the full points savings. approximately for additional

in take year, like XXXX quarter. more changes million, to SG&A with through expect the year-to-date fiscal the accounting interest expense for beginning interest $XX leases. continue we We a $XX some the the we significant capital We to approximately basis this on lease a financing to what discuss to full for in seen adopt on will year. prospective deleverage expect to related Below our of would consistent the have EBIT basis we million to and third approximately pending which including line, standard, also opportunity connection at be

we asset to on for charged of and and as a on current expense these the accounting classified an record standard, continue on sheet store with a basis. will we operating leases, recorded lease consistent the to all these Under these as lease currently rent related new standard. obligation to for leases be material. basis continue know, be the our straight-line with expect and and majority properties Rent and expense operating As be operating calculated the leases balance accounted will vast you will are amounts

we accounted as addition, XX In leases currently leases. financing have that approximately are store for

This as be lease For charge lease the expense reclassification EBITDA, sheet these accounting in interest and and our the and and standard, are a respectively. buildings to decrease asset which in expense result and transitioned leases. operating these balance related included that in leases improvements we obligation increase assets forward. rent will expense, related will an we leases, interest reflected to our new to is the believe Under record depreciation a going on

straight-line In current basis. result addition, the to financing the expense be for expense rent to compared lease year. on net under model This a standard change a as this will in expense in straight-line a accounting recognition incremental will recorded

these of or accounting flows any Importantly, impact company. liquidity cash none changes the future have of the on will

to that, encouraged strong questions. our would remain remain working we're lease our across are foundation free through productivity the cash generation new wanted store to we we strategic current we provide expand still for While we you closing, to up In establishing the impacts XXXX. the process, and success accounting for we the confident a like that as investments the adoption country. healthy solid analysis that of with flow continue and With by experience for Operator? we open call ongoing

Operator

the Thank you, Haskett. sir. of And our first Gordon question will with Chuck come line from Grom

open. now is line Your

Chuck Grom

Hey. Thanks. Good morning.

on top-line, looks you down Just little tweaked like guidance your a the it bit.

Just reasons view. that your change, you could dissect in wondering for if the

Amin N. Maredia

Yeah. the lower what primarily business. or We the just on on based of inflation guidance did seeing we're deflation side our

continue in continues that's tonnage We deflation, see reflects. but some business and and to the strong so the level guidance overall traffic, hold terms to of of what

Chuck Grom

and benefits the where could be my wonder strategy couple management the your on over guys item follow-up. an think next just years. you P&L of you Okay. throughout And then, I update could fresh give if the

Bradley Lukow

It's Yeah. Brad.

of on departments roll initiatives recent management important all very next very fresh around which progress these calls, change critically robust implementation date. a right. third the now management pleased the We're to our cognizant and across in item program, to between As year. with is we get types of into talked quarter pretty we've fresh We're the have program to

the half next in to come So, start see of we're his basically the better will improved on third benefits Amin in terms and expect that the earlier And quarter the to shrink year, back year. positions, next as in-stock mentioned beginning track. remarks, – of of in we

track. So, on we're

Amin N. Maredia

that is level the reiterate we have think program the that right inventory I and want to ensure on again I intended also maximize sales And assist to both level of to have right just shrink. to the

exercise of in in-stock an well lower and it's So, sales shrink. as better sales both as

Chuck Grom

very Thanks Great. much.

Operator

UBS. our Carden Thank you. with And come Mark of line will from next question the

is now line Your open.

Mark Carden

higher to you question. on pass bit the taking front? for merch from been cost industry able headwinds the how have lot in able has wanted areas a have pressures? you seeing about dig through that fully to Can mix but freight? you've you like increased to talk margin. manage Or Thanks morning. And presumably through been Good on helped, I a been cost Thanks.

James Leroy Nielsen

It's Hi, Mark. Jim Nielsen.

excellent our bit the and better us From in relates attributes. to the investments to always And that product to in most but offset mandate have the yeah, more a price at relates side, strategic as process gross on able benefit be today nonperishable live people, have talked perspective, from here natural were side team And in but increases freight key some we a see process in on the a of the recently the in helped The us some that partners. today. of little as on side, very have there terms the in costs. investments added to foods, things pass us as And question looking As some It's out capital And we've And here that increases in around it label deli of is eat helping our passionate people that's on. those done to marketplace a ELD on been we've the of helping have margin, wants experience innovation that job the field starting we're extremely on of and to coupled the team the calls, at the did the focus great we've technology well retail that has guests been fuel healthier has with continue side. about partners I support our product, human supportive. then, then, your an the the also out the hundreds we side, those course, internally we we of mix through we market contracts, years the optimization. of as last redoing of of side, the really really it four contracts it's to really the mix are leading private and prior edge life. cost had of in freight, the it's and

Mark Carden

today? where has taking major Great. outside new you as conventional previously from that you seeing gains? have have similar follow-up, been in most some And you've markets store projects, renovation And customers its undertaking seeing place Sprouts of competitors noted competitors. Are Thanks. been a still attracted your share conventional patterns any

Amin N. Maredia

Yeah.

broadly the really think this across we've business continued And to I – differentiate spoke in just model board convenience. well. to resonate our our fresh, and health continues to – as Jim

So and our five step Sprouts, the It's drastically the VMS meat frozen ago, – continue versus across at if heat merchandising our grocery with it's back feel items, and produce and kudos cook and years store. in-house, It's a in quality evolve look, what years team a and three that's and and the you customer. carry, and at wider today we to and ready-to-eat, really HABA to products store to it's unique service-led department. to the And in look different in seafood. products selection quite quality made (XX:XX)

marketplace, when we've we it ever feel better fresh, comes that So and prepared at as convenient. Sprouts, than as health well positioned and particularly in to authentic been we're this

store feel stores really traffic very and continue strong our about to Brad productivity. core without And we drive our new talked good. So, cannibalization

move continuing well our certainly on what customers to focus So, overall, great it. at responding we're and we're to are and

Mark Carden

Great. Thanks again.

Operator

with Wells come next from Edward of you. Kelly Fargo. our line question And Thank the will

Your line is open. now

Edward J. Kelly

back give traffic to just and on Hi, the are a both quarter, of morning. what bit And the wanted was little you the inflation total QX? what from and comps. I throughout color guys. us expecting Good comps the then, a standpoint? in cadence QX you Yeah. overall circle Could more on for

Amin N. Maredia

Yeah.

heard at of the stack this QX was and last two-year morning, and year as our were far cadence us QX. you As comps, QX X.X% X.X% for similar

plantings for more QX. fairly to expect a it's consistency terms early from year-end In where we and QX deflation, like see the limited one in then, of what have expect we'll deflation of our today. we still in part good And we'll terms QX look the in consistent primarily the produce, sitting of we're store. year And in – to QX XXXX so on it's call. guidance And and

the are good there. seeing we and controllables, and we're again, tonnage which So on really focus momentum traffic,

Edward J. Kelly

you to to And clarify, think Yeah. I did over overall quarter that? said was just last cost How X%. relative just deflation look QX

Bradley Lukow

The was than deflationary was the in more second quarter. third quarter it

Edward J. Kelly

Okay.

Bradley Lukow

I Again, in it's produce and cadence, bit little largely poultry area. the a the just mean

Edward J. Kelly

QX? worsen you Are that to expecting in

Bradley Lukow

worsen. currently to levels We're cost seeing pretty in the to Not quarter relative deflation consistent fourth QX.

Edward J. Kelly

quick just follow-up. And a Okay. then

know consensus As for next top-line drive you next reacceleration better want qualitatively that but number if think the was you don't I I probably curious for us much talk maybe it's early, – so and momentum you right, in about too about out you just items think next year. could year the has to help you can year the on

Amin N. Maredia

business remains mean, I overall in particularly And the also think that I non-perishable. particularly on the the are certain side. the fresh in non-perishables Yeah. areas strong, momentum quite then, that

and the this perhaps the upside. down, comment last be bit one I a that I So, make so to deflationary to the until more little provides give But into year two-year we'll known going full that certainly, as year, for is better certainly a year-end we'll the little next cannibalization. year of positioned it's year. settles would a basis, that's stack that the bit guidance been think a on call And wait extent

to to be for potentially down a relatively neutral bit year. cannibalization next expect We

expect to I puts broader some year-end of to what year. for takes, those but So, see next our and we'll really think provide call wait color we until are

Edward J. Kelly

Thanks, QX. in the luck guys, good right. and All

Operator

And line with Barclays. come Thank Short our question from next the will Karen you. of

now is open. Your line

Karen Short

Thanks. Hi.

range the the Just the at for implied year for full comps, comps, the XQ is wide. on guidance on looking so fairly

thinking low getting talk high Can on a a on the the little where little you – you're think XX to talk about mean, I'm basis bit that? if end bit So, kind end. of could of about wondering about in X.X% you we terms how should points I

Bradley Lukow

it's Brad. Karen, Yeah,

up of we're so, indicated, marketplace in everything that date third the the – we've I an consistent it's the relative quite the you very at seeing for sorry, standpoint. to you to what from terms we're competitive year quarter. year Also, our fourth As expectations mean seeing quarter in our range a inflation/deflation and the pretty are the if full tight perspective, fourth lines will, behavior midpoint, for if guidance. consistent to look implied

Karen Short

Okay. And then, in that terms of that's merchandise those pretty drivers margins, Jim, obviously of the the expected all margins things of because this stronger upside that Is you sustainable. was things fair than kind quarter. the of that merchandise something pointed to, mean, of terms comment? seem a surprise I in

James Leroy Nielsen

Yeah. Yeah.

So, is we the I improve talked product margins today, with margin. behind side that look keeping only and the The right landscape as capital stability is with forward and But the you have to look line as in going at what's here people continue landscape can't like XXXX, we'll thing on around assuming XXXX. the it's in and about competitive I as look the confident stays We're competitive that we tell stable. then side, human we're it. in gross assuming it about on-boarding technology to

Karen Short

accounting, so for you do amount the comment incremental is a sorry, interest net dollar in last could have Okay. obviously terms expense, give question, just XXXX? than And that is on change more going in up then, us going you of down for rent the Brad,

Bradley Lukow

leases. for as the range. we try speak, with bit so now it's working it mechanics would out in terms connection put bit a through for to right interest in depreciation little million come But the to is of a and I context just for a us charge $XX still We're premature year those little in with expected roughly depreciation XX million. and is today the $X number this you of It's around

under the versus know straight-line today timing The expense the to million will current convert obviously through in only debt model, that largely that there's which is difference straight-line going recognition is a rent to the go we more our expense, treatment, leases mechanics that is model. is which line. So, $XX expectation, we're a a working of those under above

time the point so, be you with give obviously And at when we touch new in numbers in this are that's we'll precise and year. we're in back basically able you where to

Karen Short

Got it. Thanks.

Bradley Lukow

welcome. You're

Operator

Thank will come from line of you. And Jefferies. Chris our the next with question Mandeville

line is now Your open.

Christopher Mandeville

based just what two-year around one on XXXX implied the for Good of you and the better positioned that being referenced comments suggests your midpoint stack. guidance morning. Hey. ... just you reported of? based clarity X.X% that of on QX Or Is What's QX? of Amin, a the in that point in off

Amin N. Maredia

Yeah.

next specifically we to it's year. quite not Let And be slightly comments call me clarify. lines early around little the cannibalization deflation, I so we'll was speaking expect and to one-year, year deflationary lower to also two-year. see the then, then, where just but a the this yet, been year next And up.

to not the two-year. really one-year, the So, speaking

Christopher Mandeville

And XXXX looking I today, but official you. at it not at then, you're think again, we're Thank Okay. generally realize providing this guidance I point. all

what could expense with on you one-year, accounting we understand the going back this year. improvement considering leverage overall help things us SG&A? comments maybe on change is to XXXX I of your the investments the year, expense net made and given about management really until you do or and leverage If that DSE the hoping was can see fresh think item expect how in comps increase lease So, and a some benefit then half won't be

Bradley Lukow

I say, here's So, would Chris. what

accounting around cash an impact zero accounting fact reemphasize that all, this future just the we'd of on lease exercise. noise like all flows. It's First has to

million funded to in we this park to of X lap get lap tax minimum to this ahead through amount of for first the full out year of don't we as rate so reform if it's wage that that made year us second XX of increases headwind basis So, allowing the have would until quarter, this for We year, XXXX. the that us our previously, $XX points need that that's a XXXX year, in we've second, hit so bps about talked how the savings and that And beginning the about will otherwise investment we've spend future stated first of quarter. about quarter. we've investments

As to the in third training well, that share of into OpEx to FIM heavy-lifting helps. and with expense initiative get benefits happens quarter largely expected XXXX, Hopefully, lion's the the of the the first related half thereafter. and in

Christopher Mandeville

guys. does. Thanks, It

Bradley Lukow

You're welcome.

Operator

Thank question line the from with our Goldman of come you. Ken And next JPMorgan. will

open. now Your line is

Kenneth B. Goldman

think Hi. about you is I'll much to growth and stores about and and talking just still XXXX, talked I'm you. changed too if that? a which right about more change delivery to well, would whole number. to we if expected consider in the companies guys XX bit? forth. different annually the there's and early really want it hasn't dark lot that a ask for longer number is little so about Or you XX subject have do It even pushing is so think though continues have down I curious extremely ask even new you And it from term, about delivery stores

Amin N. Maredia

No, Ken. good a That's question.

think only fairly of XX states, Sprouts today, step penetrated you in. about we're but in back those if we're states strongly and about where half So, is that

of State in. added and markets stores long So stores the of some to new We've as – Washington in like recent our Maryland, runway of State that a – company, started just we've open Florida, sorry many, Mid-Atlantic, markets we've got a many got Washington.

to placing home So, where store into in one e-commerce have actually and of leverage but stores potential we changing today, to the low many business the sales, new the or and take Sprouts model down either the world of they shutting of in-store think better stores that will e-commerce of to relatively conventionals. positioned without cetera, strategy maximize of to and place the be duplicate we et is compared the to are we're we and in grow, benefits delivery, extent stores costs our having account of continue which can that

Kenneth B. Goldman

still label. Thank private quarter Okay. sort And think, rightfully that. talk which for I of question, broad goal sales. for wanted is another of you potential The you the to I up is then, XX% guys, ask every

but mix, sort players, as XX% as reasonably get me of your high still given a that never goal to of traditional supermarket know you'll already. your I as just strikes that You're product more some bit low. close

you higher shouldn't long be constructive given run, these brands? this store why the on So, in are how number

James Leroy Nielsen

Ken. that a a little the call. Hey, call, last good elevated bit. In actually It's I

Kenneth B. Goldman

Oh, I'm sorry. you did?

James Leroy Nielsen

back step well quickly, to there. we're just yeah, positioned But, real

penetration. attributes Brad We continue XX%, on but Top-line, the value, confident quality call, SKU more end. XXXX XX% that get we in is, around productivity product as maybe more the which the XX%. around of consumer XX% the where XX%, only to again, It's Amin mentioned And the to it's or taste XX% XX% not like, over hitting good we're feedback seeing. and it's just get that in right and mentioned

driven growth. So, XX% being new it's not count about is It's more SKU which baskets. a an in that of items by the basket, item productivity growth, is XX/XX

that So, Amin call the content propelling the brand's and or very has on doing XX% very, how fantastic as development it's productivity. differentiated resonating. mentioned The we're confident the product, early we're that's end And the tail or continue on of eating and on XXXX around work sourcing, experience going it's attributes crafted to XXXX. the been whether how of well, to harder the the

Kenneth B. Goldman

(XX:XX)

Amin N. Maredia

more wanted one Amin. our fresh. that is of is comparing if business just I this add is compared to remember again, comment XX% conventionals, to – we're Ken, to

of this as the where penetration, you start departments have some fresh about sales items and think much we don't when some bulk produce So, you to of label the other removing have and that private almost concentration. and the XX%

more have private we the concentration non-perishables. in to certainly so, products our some the but brands where And label non-perishables more the packaged of and perishable tends be in

So, north is non-perishable we the continue and big today and that giving to compare unique you emerging others we're our it can best, on number slightly grow we'll around manufacturers our mix. model customer product brands. the important to of and when to that But what's either of were to health Sprouts a or departments fresh from best can recognize private from from come label. come It can laser-focused the come or XX%

the at the end the day. is product of the have goal to our So, best customer for

So, appropriate balance at we'll this and is pace. brand I think grow good to the private the continue a label balance

Kenneth B. Goldman

Okay. Thanks so much.

Operator

our Stephens, line of Bienvenu from come Inc. next And will question you. Thank the Ben with

Your line open. now is

Benjamin Bienvenu

Hey. Good guys. morning,

Bradley Lukow

morning. Good

Benjamin Bienvenu

ask I Instacart. want to about

neutral XQ. prior partnership the be in would expectation is think begin I to this that

your in you commentary have Could was potential have I think or just EBITDA to be that negative XQ. additive going that might for it what forward? in expectation and prior impact XQ the been been may there when comps clarify impact might

Bradley Lukow

it's Ben, Hi, Brad. Yeah.

we're given at last previously indicate exceed which did now into we Instacart levels starting you As we a standpoint quarter QX or when off exceed to coming transitioning on at call, the Amazon compare into second to headwind and both to from the our and year. more it in basically starting did QX markets platform, we at the and experience were comp

fourth customer we expect very expectation solid a as Sprouts And leader would XXXX I that expect is from that from perspective that it's quarter to the adoption been a we're total delivery customer and forward. that today up going is continue proud and continue service really that we're very fairly we'll on neutral of seeing based overall a So, will the of home and ramp has into on perspective. what our scores

Benjamin Bienvenu

then, And relates merchandise I Great. question it to gross follow-up have Okay. as on margins. margin a

mix, did mix to forward? you or margins talked forward it positively just private improve going impact mix, how mix relates about up exclusive programs, improved did to margins just merchandise the improve clarify, merchandise as of thinking some gross about And you talk going margins? for your merchandise Just it label, could about then, deli of could margins drive expectations

Bradley Lukow

our can see strong in departments. We a growth with merch add in to and of was improvement combination third then margin, quarter, which as importantly, continue a private obviously Certainly, on Jim customers growth start we initiative nonperishable And Yeah. see that's the rate. bit with the very that the out fact strongly margin it to of I'll gross we margin continued very we traffic. in comes continue that a the resonating strong higher increased really push label, deli in little see on.

that quarter. point view in was a from third increase three of a it mix of drove year-over-year So, an the those

James Leroy Nielsen

that and what other in to enhancing we deli fact of over And that to margin know need wouldn't time. that look that we label have consumer. add time is of than being anticipating some we that that it's much balance terms will I will enhance a we the to relevant private Yeah. we The more and we talked do as gross competitive about whole idea over forward. mix overall have make the investments to just

So we're anticipating flat look gross into we margin XXXX. forward as

Operator

And come Bank. the Paul our Thank with Trussell of next line you. will question from Deutsche

Your line open. is now

Paul Trussell

Good morning.

into incremental wage takes circle Thank towards your is then, wanted DSE to helpful. of a view think also get which conversation that this and color is as the well, that XXXX, curious you you've the as maybe we additional past And puts at just won't some just you. investments about markets, before, around spend you back and new that be advertising just to XXXX, wage move would we the other bit the or within made some more two a expenses the been your from view over topic head be other expense and investments as necessary on has of enough standpoint little as to puts healthcare, takes into and as is second year competitive from quarter Just of that move and a beyond time?

Amin N. Maredia

Yeah.

questions. some I think you've pretty asked broad

the the the million think compression $XX spoke that natural way the Brad investments. I quarter to to in of some related broad first

But There our be have to place over broadly fairly gross spoke required then on technology use timing In overall cost one, our to spoke EBITDA of timing. of margin. margin three to and some neutral neutral as change our goals we many to P&L terms speaking a to just years, the technology the where rollout to of and more the those the to state Brad required some two, help feel the to, in you next initiatives the initiatives a get offset that That's place Jim said, those investments well-positioned are would goals. broadly. relatively the to and certainly get overall, to to we are out. and it is to in of to try is pressures is management that goal be overall, roll them closer putting try

to of speaking we'll the really I have Jim Brad and answer lay to spoke sort through what any that competitive I and how that's broadly specificity But necessary. as environment if think is side to it's would extent it helpful that we'll the to add those let incremental brings headwind, the always work here.

Bradley Lukow

see quarter the together certainly great next of item management, expectations investment incremental a greater operational fresh and say, today experiencing because rollout these are that for with push year resale OpEx still the we advertising just opportunity continue will of an will but back you that for team's making. we're also Paul, of the lapping looking the well us offsets digital continue XXXX on the mentioned, to And to timing some customer investment, we that we'll and would those as seeing of savings largely advantage is we'll healthcare. these to offset that again not be through to job I'd we I space runway that with piece we're where first the Yeah. nice labor the which wage the of and through we're that that ahead get in benefits a goods the on first the start pressure drive And half that procurement take to half. done certainly we the pressures productivity including add investments of

got three systems over stable Our we view the years. as the is we've well several longer EBIT these of as look margins merchandising five tailwinds years, to initiatives term, next the out initiatives all over as to years because the have

James Leroy Nielsen

times, about we hate because this, is talk Paul. three to always don't we follow I Jim. And generally Hey, wage. but do This up

about look but to capacity, enhancing the strategic team's been I classes, about overall the think only geographies strategic also one benefits. plan but job and we very the make want not the entire that wages, investments in at benefit in we so

So, incentives. store to are subject today now team in our members all

an price. We bonuses, every-day it's talent and whole as we've retain promotional for marketplaces, helping us have move service then, on sell, really ultimately so of Brad on purpose-driven bonuses, is that And which acquire talent really driving into just that mentioned. of top that created productivity the star that all clerk culture people-powered performance we pay we goods discount which is measure, getting that new culture do that or XX% regular

Paul Trussell

the appreciate I color.

mentioned you also Just adoption on rates. healthy to follow up Instacart,

color of curious of the of be a to speak maybe – would if out, stores early you percent that penetration helpful. any Instacart customer utilizing or incremental and roll basket the base the few that it not of learnings past additional any the before, some shopper Just other was size learnings sales Sprouts could over months known

Amin N. Maredia

Yeah.

well I it's our brand think very that just converting broadly Brad the about well. the into growth health trust and the scores. high and resonating and going online is is talked

the incrementality, stores other overall In model delivery, able conventionals of Sprouts to of more to overall delivery of tend to for of one company. benefits value-add cost the are profitability it is offset to which compared see home to additional more to key out, is for spread terms because to be the our we be

see other that the our expect of in-store strong penetration quite private to compared significantly is to so very message label and becomes easier retailers label the and you online way are online well of Instacart in online private certainly – market component experience than baskets private So, and store. things in-store we label. other that's they is unique one sometimes are that certainly would And quite we're like seeing around the as than is many higher

ways channels looking customer. health really looking it with going really to test feel couple the customer and see customer resonates add we XXXX it resonating starting to other the about to explore other out-of-store a channels are overall, into to and at a good from of maybe perspective So how and the value and

Paul Trussell

Thank you. of Best luck.

Operator

our of the line with Sinisi Stanley. you. question And Morgan will from Thank Vincent come next

is now line open. Your

Vincent J. Sinisi

of sounds I said you wanted It deli, who the guys. what been new your you mean, into I And for design. materially to further much inside a us notable from mentioned of the morning, reallocation however new stores do in go many spaces ready-to-eat few of question. then, may format, be what kind I you areas. early it's haven't seeing, but kind look this there from helpful the I more different? these of that call I of designs having would XXXX of phone on you be be stores Is prototype – for might Thanks are my taking very this of guess don't expansion Good growth? kind us? how Great. all in might on are to maybe know guess for looking there any as Hey. at the at for the that new point, out be long these

Amin N. Maredia

Yes.

our on our is how So really product of on and can meat and and overall, the about what early focused enhance meat cut in-house product has call, allocation that we talked label and and and continued are deli focus we seafood private fresh as over on – to I our evolve time.

departments what is improve particularly allocation is significantly experience to store how different, we Overall, millennials. it's resonating to better. broader a telling of us we we materially at take the space not the customer customer better base, a but what do customer So, can look with in the is the the and can wanted

the some separate production So, service like in we that. to sort store. the the of also really to wanted elements elements of And we customer

merchandising will a going but new just be little it looking is it's focus company do we've of to laser if and there of sort five our is Early, with continued it's a tweak well what with has thoughtful But you something were early today to indications very to the it. tweak put stores to out enhancements, will, very on resonating these the we we're experience. continue and prototype, and always So forward, test done. continue we'll it customer

meat a XXXX be and deli fresh and pretty and case maybe to prototype platform it of on will it's be And our and the so, we're in and sort of that bakery. impact going beer then having stores at forward. and the third our on see excited will that new And wine fresh seafood

overall very going new help think store, I will it and the So our positive forward. store productivity to

Vincent J. Sinisi

on And you. Okay. then, Thank Instacart. maybe question a just helpful. That's

or that us typical Could were the five-to-seven-minute the early you some early, case that maybe between as out, in still with an the you that maybe distance think going give of update build either think large guys versus the the continue stores I and is on in currently test orders time. I mentioned of if to had are you another? online kind your coming future one were initiatives, of if the you majority to drive outside of your

Amin N. Maredia

Yes.

away, equation, to XX you if if broadly, something So, solves another good I point where it minutes trying think positive get to the to two a point, to here go Sprouts, development point is we from you're the more online just retailer seeing to is new convenience solve perspective. quickly, that you're but we your and valuable we're natural incrementality, go we between so helps generally and minutes the still is program stores might around that I how our e-commerce input about really think growing And at think the process about pace to as spacing our think selection store this at. as a new grow that way it cities continues been store to XX, it's

it positive. XXXX. it's And looking a the one We're could like see or so, said in customer other test those to of I we'll, likely net-net currently at a and couple if we two add of to earlier, value think channels

Vincent J. Sinisi

luck, guys. of Perfect. Best Okay.

Operator

next question of Credit our the come Frommer with And you. from Thank will line Judah Suisse.

on (USA) than to. if you as Frommer what expensive Or good. us Vinnie that productivity you follow-up just - I the anything's for given store Thanks they Suisse departments now return public natural guys. more today mean, that Hi, there? more you came the Maybe new Do still used open. they question. store Your kind store of because stores return have are well? But changed trajectory LLC Can changed a the waterfall asking. open with? remains the has is kind with very C. first, help model clearly, the Judah Credit changed, of comp service the to new the has and line Securities taking was have

Bradley Lukow

the meat I mix departments the in go-to-market are new resulted the opening stronger few out up relevance, Hey, has particularly stores, markets, in the in more average would weekly the sales Judah. strategy say advance what model new improved improved last Brad. we the and has store and seafood the in It's and only and because the financial return over and seeing of in merchandising gates. of much advertising years

interesting? financial a is - a though, but we'll but a the changed buying does it Suisse Judah model. more Or on use two the store expanded with credit day food, Securities returns Frommer year rate. comp And more over C. provides build one still that it of maybe throughout all find relevance customer's time? are and growth those Credit you IRR it comp Thanks. does the consumer So core model, by more year from for customers clearly, and like solutions, card being would (USA) one you that perspective the be mutes of at quick specifically basket more do departments mute better the do, that in Well, this deli, rate, prepared ramp there two that sense. all driven color the long on is given just any that. What customer, things LLC that makes that with take kind and meal core traffic natural Is

Amin N. Maredia

of continue that is bit that is, I time. of the have To see that one your to ramp ramp longer to little question around over that. historically ramp, sort departments to takes So, department a we several mix time taken think (XX:XX) those longer see continue VMS to and we departments

of the customer and a good again, the In is many really terms are using where uses about Sprouts this occasions store for customers how store, reasons. is, how we feel positioned, where different

been store of full been And something chips shop. program other and is our store, to so, we've to using what just ready of or talked to enhanced has the grocery about deli basket we've the for how and and a traffic want a enhancing sandwich, in cook in as for our or just lunch X well we're come because the for pick well. which mix ready-to-heat coming overall, more XX into foot or store doing is we're the in program, the Brad occasions been broader seeing store to And are greater for grab a tonight whether in as o'clock what and that's customers, dinner do across in meeting come to overall expansive they way as traffic us up a that in the come focus seeing is adding needs but the have speaks to drink just program, o'clock, customers prototype customers traffic, as are overall to which departments greater the the the what

overall all business. very So to the positive news

James Leroy Nielsen

only the it's the us concept new around more is And store relativity giving concept millennials. the other with

as So, done, historically of you that with lot the with that things a different think and concept. we hadn't urban just we're environments resonating better millennials

Bradley Lukow

a pressure pressure continues and otherwise puts as expenses. a rates, as on as fact last LLC a This Credit - You that to has those issuers increasingly able are also it increases Great. around with been the notwithstanding (USA) card had does on very that cards, some better a higher more Securities expenses. C. more approach negotiated is Suisse shield overall been the larger facing question over carry and years, with the that overall something particular, remain of interchange two which Judah industry credit issuing over Thanks time and premium tender to interchange industry rate we've zero it card much. the the Frommer in cash

Bradley Lukow

you. Thank

Operator

come Merrill Thank will you. from of of Robby And line Ohmes our America Lynch. the question next Bank with

is Your open. now line

Robert Ohmes

Thanks guys. Hey, me in getting for here. Hello.

with pickup price any ones. I quick is is can clarify had rolled the versus just driven Can Sprouts, where a happens Kroger from deflation? one across out, produce your Thanks. their question on in of on the say, color you like much or locations, of real driven it guys something out Walmart give a that? pickup is you market to then, And a what other competitive of rolling a at two Just kind stores street deflation and cost just Kroger how the

James Leroy Nielsen

the cost And, based produce, deflation driven. Robby, it's on all side and

So (XX:XX)

Bradley Lukow

ahead. Go Yeah.

Amin N. Maredia

Yeah.

seeing we to obviously set of about particular competitive in As any particular action competitor our competitor but one not a far any talk in as any from way. don't impact any standpoint, numbers, meaningful activity of date any one we're

I that would in So describe the there discernable. to any how noise the is it's impact, extent is It's it. system not

Bradley Lukow

seen a be resonating with model and is which model, we we Yeah. cannibalizing customers accretive also Robby, a that of executing a there's that's footprint that much the add, are have adoption because would to have distance I'd click-and-collect really we've conventional really very solid competitors. Naturally, footprint largely between tight our greater delivery stores if significantly you than network. as of your more compared it store where

we're So, we've taken. that with pleased approach the very

Robert Ohmes

That's great. Thanks so much, guys.

Bradley Lukow

you. Thank

Operator

this the any for to I Ladies for would closing or remarks. is the and all questions Executive we now time Mr. over conference comments like back Chief today. have Amin hand gentlemen, Maredia, to Officer,

Amin N. Maredia

the ever marketplace the today Yes. beginning wanted to Thank feel has we really the it saying call is by just all the better about end in Sprouts positioned of given we what with I you. today, it talked before. started is things is we than that that the on call

to we're up years the with has they're go return and business last the cash the how on cash continued several resonating Our model customer. into enhancements the making to over

Brad And the is Thanks. I business going model this are a over shareholder and time the you we and the road. as look on company, about and how seeing for time and forward future will and excited really so, where Jim, it thank add you value to

Operator

today's all you conclude a participation disconnect. conference. we Everybody, wonderful Ladies day. have This and our your on and for program thank gentlemen, does may

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.
Chuck Grom	Gordon Haskett Research Advisors
Mark Carden	UBS Securities LLC
Edward J. Kelly	Wells Fargo Securities LLC
Karen Short	Barclays Capital, Inc.
Christopher Mandeville	Jefferies LLC
Kenneth B. Goldman	JPMorgan Securities LLC
Benjamin Bienvenu	Stephens, Inc.
Paul Trussell	Deutsche Bank Securities, Inc.
Vincent J. Sinisi	Morgan Stanley & Co. LLC
Judah C. Frommer	Credit Suisse Securities (NYSE:USA) LLC
Robert Ohmes	Bank of America Merrill Lynch

Sprouts Farmers Market (SFM) 1 Nov 182018 Q3 Earnings call transcript