SFM - Earnings call transcript Q4 2018 | Sprouts Farmers Market, Inc.

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Operator

Good day, ladies and gentlemen, and welcome to the Sprouts Farmers Market Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Ms. Livingston. Susannah when proceed are you please ready. Ma'am,

Susannah Livingston

and you good morning, everyone. Thank

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

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

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

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

presentation our and peers margin. reclassifying For also sold the industry non-GAAP we of a cost a we the In costs statements many measures of to cost and and see buying GAAP please earnings figures, per or of our exclusion we pre-opening and voluntary compatibility separate depreciation as change financial cost in well from financial and income enhance had changes selling tables gross fourth line believe presentation our reconciliation voluntary operations, These SG&A. of and this that to meaningful we a store statements our quarter from of sales, buying SG&A income align general internally because statement of our cost in of classify on expense the store in manage the amortization made of to and sales with and review We made reclassifications occupancy income cost These with to change XXXX, DSE with share. combined from cost goods earnings no our and administration impact from item of profit. the a how provides consolidated more occupancy net release. direct

We retrospectively a file let now, hand earnings on today and change over have that applied in With our it this our included well at reconciliation have to as investors.sprouts.com. release Brad. website as me

Bradley Lukow

Thank today. improve industry latest the you consumer everyone, business evolve on call we morning, focusing and In by Susannah. continued trends. and thanks the Good for and to our joining Sprouts XXXX, model

ongoing of by results. financial tonnage grew more focus even of innovation, on offerings of continued Sprouts solid experience, the drove More the meal product total XX% top remained success now resulting label growth stores’ our underpin performance strategic team our guest continue initiatives in for the Throughout and and EBITDA XX% positive, our Our X%. of convenient sales. our sales country. the growth This above of enhance options focus across have expanded leading training strong Private business providing and growth in members line remodeled brand the adjusted XXXX, at XXs. and our company development year, X.X% sales to store in growth the $X.X our with been than delis year, customers. half comparable and vintage sales billion of supporting our to sales stores for low new new Traffic expectations, with of and of another to XX% store productivity to

XXX quick to more expanded the has of home click Sprouts’ Instacart at delivery than with partnership stores, affordable and of button. healthy Our providing products a

retention of million members, or our to our led in which an us one Reform approximately allowed generation Tax team to flow has savings increase cash strong XXXX $XX third Our invest in levels.

will that enable technology Our foundation investments scale us a efficiently. to establishing are strong

Our brand to both we continues and new strong, productivity to in the existing leading awareness new as expand across continued, also store markets. country, strengthen

quarter, fourth the store by along we resulted the net of with were a positive of X.X% traffic sales less comp with to year deflation, the in year. For driven up sales which prior ended Comparable stack XX% $X.X compared X.X%. basket two-year billion, product in

growth We another continued performance. to successful were departments store, program. supported non-perishable quarter see strengthened private across particularly the strong holiday by sales Fourth label in by also

strong We results along bar by excellent attribute-driven by the holiday trends across offerings new holiday And categories store-level we XXXX, each for continued our the with from products flavors. was raise execution to supported year. in country. backed key and This saw

opened the and fourth Virginia, have ended new to a Mid-Atlantic XXXX quarter, We the Louisiana, of pipeline stores beyond. stores this three XX New will Jersey, and new stores and for XXX Southeast. our our for we with to states year; and year, the openings robust stores, Sprouts and states total geographic two bringing new the in reach XX December. expand year two we markets in the During in new store closed expanding

markets. in combined program have us confidence to Over data accurately the number this in greater new in of a marketing process more stores we advertising markets This our of customers. core year. resulted pinpoint analytics to the sophisticated robust insights years, gives with past more us few addition stronger tools a sales with open to and have and new These performance selection site refine our more continued that the allow

community expect business our split versus markets confident of growth remain XX-XX, versus our in be We brand and new to for XXXX our a long-term discuss supported afterwards. new We landscape and return I'll initiatives. split over the in strong discuss historical unit Jim markets, existing elaborate to XXXX respectively. on-trend XX-XX pass to model, call our later engagement, roughly now growing competitive and greater in to to awareness. the detail on our financials by a I'll

James Nielsen

an This, innovative our promotions strategic pricing in and solid Thank retail you, with result consistently a enhanced comp, driving strategies and despite retail our in-store competitive from and performance a and improvement landscape. initiatives, experience. everyone. of resulted hello tailwinds Brad, proven in was continued X.X XXXX a differentiated execution our combined

XXXX similar the quarter costs. a Starting margin in experienced in to we We slight transportation benign to pressure the and fourth of XXXX industry, environment. with expect the rising from line inflationary in with competitive be assumption landscape relatively

expect continued to XXXX, back the throughout tapering cost first we and off forward to the increases the see Looking of half then year half.

strategic Now me XXXX to let the move priorities.

culture Before and eat live has statement: jumping and themselves, the been direction To into I a reiterate both strategic passion those educate, better life. Sprouts our to and want by healthier person priorities driven our always to inspire, that every empower of

and areas: rollout, systems trusted in-stock our future associated foundational members. with deliver consistent training, products; day. management. of is which planning sales business vast of will more our every Our will each XXXX. by across who costs to with we’ve and live allow for the valued department to in the and management will With focus expense fresh each development become implementation customers that execution. our With strategic and differentiated be customer of us country fresh to of and on continue initiatives our a our team The for life. to We item a are the strength through majority The want position, the support focused and product, on resource to our improve to of end continued of most expected key third resulting evolution growth; experience implementation with respect complete offerings; a production XXXX, learn ongoing system quarter, more experience; an enhancements healthier order four item improve higher completed management families plan in this departments we assisting Fresh operational optimize in to expected implementation improved product training

of Sprouts curated items are staples and wide made that products label of can ingredients comprised private family of tastes great brand uniquely a with Our you is trust. household range and

than a private Our XX% driven our by year-over-year, that's sales size average grew basket larger basket. label XX%

balance the branded nearly We authority traffic, baskets. number of reinforcing see non-GMO is the only of private organic. not and products Sprouts it's of of continue healthy XX% items both label the number in private those our label are and Today, but living. loyalty to a our items driving products This to

more experience ago, we guest years whole destination. a desire. innovation prototype stores. where Meal trends. teams We of making our will the meal on label greater half elements highlight bars, guest merchandising are journey we and our solutions changing selection embarked are convenient growth and Customer shopping are design fresh stores. that over and preferences our more in confident evident freshly these new now ahead private that solutions of XX% and product and offerings focused sales. particularly trends pace are of These elevate sales at fast juice Three of those truly of are locations, our company centric including even on many eating to healthy. In customers' in meat, and of to salad years in deli and squeezed there customer departments ahead are these with These our a total exceed level, healthy us experience a a true staying what offering enhancements take differentiation and new convenient deli

in in Our third new XXXX. showcased prototype of our be approximately stores will one

is grow business, the in end offered We delivery be XXXX. stores than markets which to and all more will home of XXX by continue today

date, the operational sequential percentage to home of we're strong very strong and remains While sales sales highest execution. delivery to the value a fourth small and which strength attribute were brand to health in today, the continuing quarter a delivery see Home grow. and

give continue are. high click pickup. have promotional with our In team offers marketing, in mind or reaching journey. customers along with channels We started order is to wherever are XXXX, always our leading capabilities personalized bolstered multiple all of they partnerships they and top of and collect engagement industry engagement of content, across and customers geographies digital relevant when we In guests amplify caliber and we our handful a wherever a messaging our to with healthy test the convenience think in living through addition, customer will with of stores delivery invitations, to connecting internal customer And media guest we their built insights in companies.

products results website integrate through to new important We let a These live in our more markets. of guests our also last area is This who tools better it as points path benefits, and and reinforce programs in life. all and mobile their we pay and empower eat of passion clear noble [ph] our introduce people, drive providing guests job. rolled members remains experience. most wellness just focus segments a on our established a our way, for enhanced both authentic not this member members a and our will our on healthier We've do career team and team to out and approachable, build team as a have Sprouts priority, difference then a focused to app unified way. to shopping an team process. initiatives training hold the the work engaging, opportunity do every but I'll will and and top member with with To focus

Now and I'd guidance. Brad turn to to to the call back our cover XXXX financial results like

Bradley Lukow

Thank for drivers quarter then I'll some the review guidance business year you, for full XXXX. the and of fourth our Jim. highlight and

As this to Susannah believe we better expenses how consolidated greater our business. mentioned, on reclassified manage our aligns our as of beginning in statements and fourth the of quarter, and peers, compatibility we with transparency certain presentation enhances the many provides the results we of industry income,

so have these reflect We change applied comments retrospectively, changes. today all this

to decreased improvement the increased period quarter, by due well million, promotional rate For year. at profit primarily deleverage compared by was $XXX XX.X% to and SG&A claims, to well as of XX.X% to benefit. the as expenses, company's due XX XX% same to transportation tax a XX% basis the compared last points same This last margin primarily distribution reduced million, higher was to driven lower distribution the gross payroll of as costs our points benefit investments workers centers. This and to leverage period by XX an basis to fourth gross increased year. sales compensation as $XXX

California federal a in quarter, team our higher members, members. in the investments partially costs. occupancy quarter eliminating unemployment of benefit advertising in requirement its of This and offset fully a insurance in reduction tags to as fourth tax was resulted California as pay well team for payroll loan, fourth unemployment During higher XXXX. by planned the This state repaid the the wage

other one closure former $X last and sales with increased Store with to severance X.X% costs Executive of fourth quarter, the time of Officer. in two amortization of to well XX% million and non-cash This $XX associated compared our the two items period Chief million were depreciation million million year. stores, as the increase our to the special cost period quarter $X.X resignation For flat including $XX compared as charges XXXX. $X related cost same or in million same associated the for closure of of the

two cost, million. Excluding to of Adjusted severance closures X% the the quarter sales period EBITDA and margin million $XX fourth same when increased the by was investments last store in income to of X.X% to by decreased the compared points Net margin the earnings margin fourth year. quarter impact and diluted adjusted The discussed. in XX that EBITDA driven was I gross share $X.XX. was mainly for decrease wage and $XX reduction the per previously basis

higher excluding a adjusted rate items outstanding, of period repurchase or was diluted adjusted $XX sales, due year. our program. special improvement income Excluding was special fewer to effective over cents, compared net XX% same last to earnings an and primarily the XX% increase and of tax items, $X.XX lower to share share million This due per is $X.XX XX% shares

basis increased grew For XXXX label to increase XXXX, plan and in million This billion, investments fiscal points billion, Adjusted to XX% XX%. to net merchandising mainly XX XX% million, competitive up profit $XXX year. an X% was SG&A higher $X.X including EBITDA of environment. costs. attributed to strategies compared XXXX. XX% pressures $XX sales resulting X.X or our as of initiatives occupancy XX.X% billion, to of margin offerings increase in sales last advertising expansion the and and compared of total and to to year Gross increased a wage equal deli rate to offset private up X.X gross

benefits, $X.XX, an XX%. adjusted or Excluding earnings special tax of increase and share diluted one-time items per was $X.XX

Now and shifting to liquidity. the balance sheet

times. continue We $XXX returning million total new primarily landlord at shareholders ended expenditures with outstanding Year-to-date million. We available our XXX,XXX of $XXX board credit and EBITDA with of ended $XXX million prior we We stock X% operating allocation million to the on generate continued the current coming invested ratio year year XXXX authorization. have cash operations our equivalents, a a $X for stores. in million $XXX million cash We or throughout shares, in and $XXX in XX, of $XX X.X million reimbursement from with to million. with solid revolving debt flows facility net $XXX net cash capital for year investment the capital February capital under repurchased investment repurchase through strategy, repurchasing of shares our to million. of shares common we XX.X for XXXX, share of total a Consistent

few to the turn a XXXX, to about for we went of beginning before guidance accounting Now, I the wanted effect XXXX. at lease of impact say that into new the words standard

line charged store accounted we are straight for previously, lease and operating spoken As as on a the properties with all about of our vast majority rent expense have basis. leases we

billion, be Now record approximately standard, $X.X under be accounting will leases accounting will rent of had for there on previous standard, leases of to the the new leases. accounted we financing balance we lease that and change no continue as an these as and but for expense XX leases. related operating Under obligation operating these calculation store asset sheet classified the will in were the

result going expense decrease to reclassified been rent with recognition interest $XX straight related to the result pre-tax straight For the under compared these reflected balance million on a to expense, a expense will per all interest This $XX sheet lease respectively. a to the buildings and leases, expense due net reducing lease a standard, depreciation leases and share of and assets and being impacts $X.XX financing accounting of and or previous basis. rent recorded charge now asset on a to EBITDA will in of were These expense operating obligation new the these improvements forward. financing standard as we related our an line have in million the change model our are incremental expense $X recorded XXXX. and reclassification in XX Under million thereby increase to and leases line for

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

to guidance. turn me let Now, XXXX

expect X.X% growth sales by year, net year the growth XX.X%, full growth and the For we range to X%. comp of X% driven store of new between to in sales

We open will XX stores. new approximately

also will XXXX, XX December As which previously sales will is one by stores. have growth two renewed. leases other announced. who be a in two result to that will impacted stores of of stores relocated we a location XXXX, be closed new well, and approximately of the addition the expire not which in This we will store net Net we will in

which in tax normalized XXXX, options. tax in the from to XXX approximately both a $X.XX, as from per $X.XX due impact exercise share a expect the we expect lease increase I negative XX% rate that a higher pre-IPO mainly and well point non-cash standards, to rate be of to is of cycling of diluted $X.XX XXXX basis range in And change We earnings the discussed. as this expiring reflects the accounting

diluted reflected XXXX are earnings purposes, XXXX, share impacts compatibility adjusted for per share For $X.XX results than if $X.XX. of lower and per as same share, been per or rate per $X.XX adjusted tax lease earnings XXXX share reported diluted would the accounting have

to in net our to range We of million $XXX be the of CapEx reimbursement. $XXX also expect million landlord

to in to primarily range would items comp our the environment Now on XXXX the above environment. environment sales the well as year. below prior and comp a the inflationary few note to a as changes flat guidance. compared would inflationary year range be related guidance the The additional The reflect full of midpoint as midpoint competitive

slightly one per XXXX. the opening fires stores have year in going slowed into California and this XX expect pushed store We to openings approximately forward. are as Northern construction continue level to below open XXXX

more majority in to XXXX be prior be to remaining pipeline compared store will with stores weeks in addition, third plan XXXX of each QX open to and open our will and store loaded In selling XXXX. in result back the for QX stores We coupled eight of the quarter. the than in with This new the stores lower fewer year. two the in

We higher nearly by associated costs improves to new gross flat year-over-year, in the centers promotional pricing the margins distribution at optimization, with more markets. as and expect stores cost offset and be transportation team company's new increased

the January full SG&A the is accounting adoption to that We reported by line for which change in new occupancy expense XXXX, expect basis this line began now the to being due deleverage in year. points, Due of standard lease deliver the will SG&A the standard. in accounting XX

that XX In the year as of addition, quarter benefit with beginning of we and investment management from year growth. other that wage to health position the which fresh and for cycling the XX the important scale recognize the systems and in as increased between implementations, well well made increased efficiencies last term of began expect training and XXXX. item drive as will investments we for will pressure at associated long points account these we business allow second headwind costs they us basis Being total the profitable company, additional an technology us growth for critically XXXX, full and are

higher addition similar continue depreciation to XXXX. equipment in and amortization deleverage more construction and costs We remodels in due expect to in to XXXX to to XXXX,

with $X.XX the to of relates the for the credit first the allocation the the had share expect capital And capital leases. benefit of of amortization interest facility of a it of interest expense The capital quarter our lease largest per options. unchanged. from expense of structure, associated interest remaining million, exercise our priorities obligation four be the in remain fees as XXXX and tax occur pre-IPO quarter our the related will $XX XXXX, and reflecting We the impact the to to approximately headwind first as

returning First, shareholders. unit third, growth; the investments in capital second, and business; to

service This As leases. the reclassification practices, XX to adjusted And X.X approximately continue number consistent of strong to for open the on into strategic EBITDA prior are expect range needs meet today foundation, leases confident health, value With us to shareholder financial our differentiation long X.X with is consumer our closing, operating for selection investments future. repurchases, our that value, we up X.X solid debt Operator? of to evolve target to new past term like the ratio share the model debt creating drive our standard. equivalent establishing we the X.X remain In further net the and will for a net range and to the leases of in positioning that, times. results to unique We that continued financing to focused accounting under times we'd creation. operating questions. excludes to the for call be and

Operator

And with come Instructions] our [Operator Scott Mushkin of the from you. will line first Research. question Thank Wolfe

line open. Your is

Scott Mushkin

the questions detail. guys, Hey my for thanks taking for thanks and all

little what that guess is you becoming question my testing aggressive and to of will and about we Where are is Jim And the So it a can I us and how do that something scalable that's to seems more the necessary, rollout think see we, almost give it pickup. it for this bit financials? I first should said like a goes guys? more and something

James Nielsen

Hey, Scott, Jim. it's

indicator a group get on success. itself, As good It's to to big the the small stores, a multiple markets. it it's for of fairly level a but relates us of enough set in test

the of just tailwind performing us delivery front. In well, extremely our it less. home home real and we on with overall stakes it’s for EBITDA delivery, to in the have terms still slightly But for it, home will impact, so one, be sales but as; somewhat see table is line delivery

in that we’ll to year. we're be. fiscal move as apprised accelerate, it to of the if great you the get into do we If needs consumer we'll prepared response, continue and this year continue performance to keep to So, we

Scott Mushkin

get through so is is we year has how how year news it margins my the about to gross margins. into are and we in about How do environment, side, are in And been guys as competitive Perfect. gross food coming there more next the Obviously, lot competitive the you go we go we with environment on a think trending? And follow-up packaged it? of has then as material of right it of has thinking change a CAGNY, the late? out but now

James Nielsen

we about margins. gross projection is to the call, on be talked As our flat

seeing on deal the we've been on the that related FAM, group cost working of all help kind are side year. with offset some increases margin any We those management, freight. initiatives to MP&A throughout non-perishables But will pressures the the of

If year in recall did you last QX. gross in we nice do that beat a margin have

So flat initiatives full year driven by that experiencing be will really some strategic of the we're the offset tailwinds from cost the will half the in increases first year. the of

Scott Mushkin

environment? competitive the And

James Nielsen

about, is us industry, Competitive of the quarters, the same through. prior environment we’re starting see promotionally cost in to be pass years, the throughout. as talked to in line relates increases it anticipated as the At freight to with shelf we've prior and people some

you As bit squeeze. a of is there know, a

seeing So cost on the people and lag we're shelf, the are pass sharp not through we're we through does but have seeing some a on bit seeing increases. pricing, of so a increases, pass at it,

Operator

Thank you.

Our comes the BMO line from next question Kelly Bania with Capital. of

Your open. line is

Kelly Bania

thanks for questions. the Hi, taking

help? term terms own well? in Just to something platforms to and in with guess curious being ways just that would able in of as that food their the looking are longer you're retailers because digital Is to are on terms and of network looking or media stand that at I of at advertising spend, that or leverage some where with testing asked on of the you participate employees different Sprouts follow-up that your I pursuing click-and-collect. of kind retailers other Instacart’s

James Nielsen

questions Yeah, so lot there in there's Kelly. a It's Jim. of

a second. on Let's unified not We're step platform back for a today.

order So app to Instacart. back go delivery, go when to you you and Sprouts to you go home

year of platform. the the will part half a First back on unified be of

begin our will costs. and these Sprouts of order reflective to offers community be promotions our we to right will with content there our out more personalization in of so put some it we'll partner give vendor customers the better to type offset also be to own to So have experience, able and

platform. we great nice at to opportunity year, as a look click-and-collect, So, half there experience. as relates reunify a we the label, Again, it back we is such the the got to and as that of we've white go in-store

the do and today, don't. it's that click-and-collect go at of those look some you people that generally well If back really with

by growth fantastic. And even area in sales coverage which the today, on the as stakes guys to home we I for back So by we'll of to it's more Instacart. the driven And accelerate want year in home being still back anticipate today We're go pace is delivery solid click-and-collect. back is color the score Instacart promoter XXX% in click-and-collect the you is and and delivery be those us. But of for though we're has that we'll to over relates see just and do $XX. delivery driven the home of net a And much table stores over our stronger for XXX it for to know folks time. it XX%, year, the we also XX% half sequential that basket half area. growth us us, rollout coverage execute in to give picking utilizing been closer about and continues because talk best-in-class you

So about is app at really execution. the rating the X.X

So between on net success delivery promoter the home seeing, execution great score and we're front. the

Kelly Bania

had to first it inflation, you just is which quarter? had you sounds produce us others what to as Okay, there little that's maybe too, a how with ranges very do flipped of think guidance helpful. what seeing from And environment and in like into particularly we competitive are inflation just can market it understand in guess had year, the I about the both sides inflation, then your bit help you're the there for seeing but like sounded comp the the

Bradley Lukow

add just neutral a of our midpoint guidance refocus inflationary I'll reflect here. the sort range, the Brad. whole X.X we environment X, on it's range in When the on of would let it's Kelly, year. set Hey, start middle to and for really we but are Jim

We that. little want Jimmy in comment of maybe are a there's produce. tightness because starting to components see produce some to bit And on inflation of some

James Nielsen

Yeah.

second year. been full some guys so being as So full before as first we the due Mexico, us. California. you've to that we when know, variability, inflationary, the you side California, with has into QX side on having and improving anticipate again biggest progress the But What today through anticipate new with quarter quarter nothing Northern the is west of through the of we this weather. the benign most to all us, slightly the is are the challenges Mexico, back seeing That challenging And half is and quarter. but

by driven before, inflation then slight I produce we of those some non-perishable of slightly mentioned quarter a and just anticipating So cost are becoming as department. the increases seeing in a inflationary

Operator

And of comes you. line Cerankosky Chuck question Thank with from Research. Northcoast next the our

Your is open. line

Chuck Cerankosky

everyone. morning, been you. has Thank Good question answered. My

Operator

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

Your line open. is

Edward Kelly

guys. Hi morning. Good

Just in quickly the conflict guidance are above what just and the comp of the Does of you Can is in a the the QX? the on are mean midpoint then you about QX the today seeing how guide. the and so talk in inflationary. you that far cadence follow-up QX, throughout quarter that mostly

Bradley Lukow

quite look full-year. we've broad in not We're predict at range with of produce going the comment we weeks. tried inflation happen of and to beyond the six where difficult quarter. would We what specific sales enough where four to this are got for predict years in are XX% a to our were very broader the on are last year, couple because We accurately to deflation we frankly, business your went if we comfortable that

largely to higher full-year, wanted So guidance broader what we week-to-week, markets. variability approach would have full-year range. different be certain the you'll in again, But maybe the quarter-to-quarter, some a range. really commodity midpoint a and to around be happens expecting due in took And we slightly that for

Edward Kelly

any seeing And the with inflation competition then that through you you're issue see just there far, is all so and what front? with in pass do that at in

James Nielsen

a there's As Again, it we're seeing to the on see the relates I non-perishable starting you're But to of that bit is, some through. said produce we're just retailers increases - us a to inflation side, pass markets seeing tight before, related of the weather. it's lag. as the freight

up go some X%, XX%. up go X%, don't those will so those And X%, of

obviously those But are through time. retailers windows passing very they're dollar-for-dollar. of So short

the items on some as of being and So the you'd of giving relates promote and the is through to out stuff key that the inability putting fruit like just are and seeing tightness, some we're it you we coming to seeing to. of the veg produce tightness passed Mexico

Edward Kelly

here. look you're I that in the timeframe average why again? be still guess? for more about, taking extort something then in And were real quick think algorithm. And you a be getting normal what's stuff think about around was attacks then step returning cards, at was I even of and how below sort a and is back things have time growth we a you year how this guess, call going more to what still would thinking that the the of to terms evolved like ago, I just it this the in asked normal thinking And below year normal. About on are I algorithm XXXX, a that were you

Bradley Lukow

Yeah, it's Brad.

around out our were both roll important In we've system first we internally original item great then a what had and started terms the to with some expectations of and little investors management conversations this and because bit started into beyond that meat. timing into we've had that's bakery implementation, we as fresh learnings very

in and going the a last there's investment look going live scalability but term drive going pure going that to place of up customer more going work earlier around connect other the tremendous XXXX the with in more digital, are beyond loyalty, financials, this us cost is of doing customers Jim systems of to us as scalability associated forward. personalization, in second to And I'd good I organization pushes implementation. so it we terms there's and alluded important think throughout quarter so get and pretty way. organization say store undertaking, to area a for give to standing didn't we're that that it's from so we're foundational to want and into with we're been XXXX. we across all the put us is efficiency in the number perspective XXXX. very our rush very we network important Also a in efficiency going workday later meaningful the which of year, a that with the to just significant the It's initiatives critically the live that's ensure long a

look through back tax and you step XXX in swings all the points we So rate. basis

have into some XXXX will drive XXXX. - up, the beyond leverage able in quite frankly then will initiatives scale step the on to a will be be and and XXXX strategic the of line Beyond lot dollar spent will flat able which

are in going as team back So to next us the here critical a with a management of infrastructure our looked investments efficiency we're we there's I scalability at, take and level and from and long we that technology are step really and where think, customer. to the in game playing terms some

strongly of term ongoing, we that believe we this XXXX. an algorithm through through so is long get double-digit XXXX the and half growth EPS first once in And the

Edward Kelly

you. Thank

Bradley Lukow

You're welcome.

Operator

Ken question Thank next JP Morgan. Goldman the line you. And from our of comes with

Your line open. is

Ken Goldman

Thank Hi, good you. morning.

southeast this, renewed, the you mentioned to country You it of deal Just it. is? the public, be are out of really past on it's not if would that store help is and risk that us trying you right now? you did store well a it one to what figure is as part the Can working out given which that's to you want us hold tell make or the concerns quarter. stores a as to the - stock of I would don't But which not out this close too big

James Nielsen

were to with Hey in stores our up in want back Nielsen. expectation. but The Jim would Ken, and southeast, that line southeast performing the say is it's two the I

were that of has we good the comp well and for open stores and a some to marketplace. so we the in we today overall tempo just dramatically right the in real Alabama. our as of decisions real process are quickly. into went years, we entered take probably estate decision as selection, some terms roughly those great the estate learnings Those changed made. some XXX Atlanta, Georgia too had real estate driving we as bad of decisions market really went it's seven So which of But time over We them in out

line a overall contributing and nothing So our comp. markets, providing to tailwind expectations both for in with with wrong the us

Bradley Lukow

We the location time at context Sprouts add is close just this was associated it. proximity ago. with of specific location. would acquisition, on or I lease because an we to store the this existing acquisition haven't which this the years that essentially disclosed of was from years or very location Jim, an we top And don't is location and haven't the give announced disclosed So to but want an old the

economic made end day two of at systemic so out at nothing consolidation an the this so So stores a really the just here sense, of by we end in there's place, fact it is the from - standpoint it day, close the so ran whatsoever.

Ken Goldman

I get thoughts which these on be I'm well, review to stock so that follow-up, really stores more forward maybe two see not, guys theses for guess is, three on to should which trying get expecting it a trying a is years what are because hey, a of as sense we store are are that here for be a we Okay, the your or it'll maybe there? one my is functioning one bear of doing go a the follow-up that deeper sense is stores just closings one than two that just shouldn't year.

Bradley Lukow

Yeah.

would I sight the plans the across had new last of network. of We stores company's whatsoever come to there's the in of been renewal change not certainly So years had that exercise. has ongoing couple review say the this assessment up no for on of performance and line

think the in now versus XXs seen of what to we've couple of in that low new row used markets. opening XX-XX based anchor And is new that the we on a in be I terms is percentage XX% our years that markets the lowest stores new existing of fact the we performance on a which we has and of of Florida and productivity, in growth performance given us there. us historical confidence in markets really is store term important scale for long accelerating great see model above Mid-Atlantic growth of and of

think more more The is So awareness in Florida resonating opening we stores feeling bullish. very improving and really the and brand get I as and we're Mid-Atlantic. up

growth. prospects the So term long we're about feeling for well really

Operator

you. Thank

comes Chris question of Mandeville next line from Jefferies. Our with the

Your line is open.

Chris Mandeville

good Hey, morning.

to XXXX? did On terms we transition the help for of need your first for for the Instacart anything is the guide to in to in mind how XXXX? maybe just comps, us there understand holiday that shifts And can of contributes ask, numbers keep I how then influence the quarter, half that

James Nielsen

It's Jim Nielsen. Hey Chris.

of to a of like add growth the it The going unified the liked mentioned, half rate material, back delivery, tailwind Instacart we but be here and with as It's the of additions, significant platform trajectory. not trajectory. our we a again, part line the business to far we're As the add the is like today. not significant it's some We top we a the home the from to on overall material wasn't able comp. year, as

Chris Mandeville

the about suggest year-on-year inflation could. of specific here with to think comparison, inflation to be was it or the help I breakdown. points kind me to think to when deflation respect about flat assume of X contribution if And maybe front, to then X.X a maybe modest maybe mix? QX. can contributes the you XXXX coming as would what this in from fair more as follow-up flip just if Is I you with on seem the as Instacart remainder to the go traffic And it benign in Brad, comp could to the maybe well through just we that

Bradley Lukow

driving the standpoint, What Starting baked which deflation, which above But production fourth we regards view deflation. little saw in We're quarter, from was year into better from year-over-year, about very of Yes. inflation wanted cost a overall full a an produce is a less inflation a points, slightly so with because the point to in slightly context than our with skewed basis tight squeeze come was a more we're X%. see was of call a those again, with bit we'll neutral bit sort out to items. XXX the get neutral of in around in of a quarter, from to to margin inflationary midpoint back little But terms we're we point availability. heavily the difficult little guidance significant pressures as of predict. flow of some on view. is our in as fourth And assuming tightness year. the in the seeing comp a Jim half expectation few environment. move which said, a deflation bit witnessed categories, don't in and we we our company is of really produce a a total But cost of And bit

Chris Mandeville

Okay, you. thank

Bradley Lukow

Sure.

Operator

Thank you.

comes Our Trussell next from of question Paul Bank. Deutsche with the line

line is open. Your

Paul Trussell

morning. good and you Thank

pressures training some earnings months the that outlined XX and back of and algorithm. to next over before to return double-digit from obviously expense You kind technology investments XX

what what group we of latest early the stores the should What's - stores. offerings prototype? the you difference Thanks. that over of cetera. you centric then future you've or mentioned comp help of squeezed versus the will to understand balance meat needed call, And think to are the thresholds And that obviously number in juice, related the initiatives what's how somewhat et the think and customer about think in leverage about rollout SG&A? how embarking that, now in solutions, us be can deli half if been on a performance your I into fresh Just to the

Bradley Lukow

thanks, Sure, Paul.

below us So regards at to that well years when standpoint in significantly XXXX, these the X% around and the look it continue important in to back we're about as to to we with invest grow solutions. And Obviously, investment really from we scale. increased stores our leverage identical SG&A, of scaling a our enable leverage X%. core dollars next we've couple through over and context think are

basis look XXXX, XX points that the up year. which dollars we is we're the when spending at step However, prior from in

out able Mid-Atlantic really we've Florida, and markets. really lower new start investment, beyond, base changes XXXX these well a new leveraging forward, flat to amount operational as of say have going it's into more grown run forward markets, team which service sort I up us these a field the would investment. at rate and should have be of of as But look to we dollar scaled execute to still into we into your a we'll As Plus yes, and enable comp.

have have XX% going expanded of And our those a us so allow markets point to to extremely that that is From identify leverage. pleased. view, we're offering. as we in of about some Yes, deli stores we get

not. We deli that do enhanced meat this place what both and resonated seeing XXXX. And about comps say in all have stores experience and I'd the we out And in that the prototype stores in will the And have spend we're those dollar a with those experience are compared of that and sales new the has penetration the that eight into seafood stores really most and presentation new takes to of the is elements really improvement new enhanced an the the roll marked and excited customer. proto deli we're seeing additional deli customer meat to and level marked that in entire in seafood. increases in

excited our really dinnertime every store younger to on results today's much about our in terms allows in. beyond proto of at historically to trend we becomes single and date, the millennial with in consumer lunchtime over puts XXXX, solutions a us and meal to we're it really expectation haven't us So cater which indexed is that population full and because that's

Paul Trussell

color. the for you Thank

Bradley Lukow

you. Thank

Operator

you. Thank

from the Loop Wolf comes Andrew line of Capital with question next Our Markets.

open. is line Your

Andrew Wolf

Are operating putting identify. deleveraging are is from mainly margins you they a sort leverage it new is to in getting the scale. - giving are new it growth the What improving, that the basically coming algorithm which of leverage add you that you're the technology investments. sense and as the stores the out markets leverage more there I'm your you at was or of Thanks. about markets you what aggregate, markets. just you as could wondering markets, follow-up those new think the certain as in if talking you Brad, comment I Good Brad, margin on morning. to I call were in just in idea just saying either

Bradley Lukow

ago, we Thanks, a years we Andrew. at that challenges entered we I went look think had some we as Georgia. into When we - market Sure. three

standpoint job the nice go-to-market comps a from out, our a as and fantastic improving offering day done only we but are team merchandising day I well. and seeing think an margin in in, operational has maturation not

in go new deleverage Florida of you into In opportunities costs as terms margin and large Mid-Atlantic, terms you in we do operational the are on that for advertising have and us until of identify pressure markets costs. But year, where we're we're opening many trend are now we've seen and seeing. this excited stores into Florida from the beginning why the we're entry Florida of very so that to about we

pressure like identified eventually, where as we're definitely those So stores, that And leverage obviously areas today stores can identify, of in get yes, number the take PLDC longer see put Mid-Atlantic stores. we halls three we to requisite will doing new in we'll going new the DC. open we to overtime a off the to coming be that those we we're until EBITDA service have which

Andrew Wolf

that helps. Got it,

quantify follow-up in unrelated the the state as how a payroll more comp is of Just well, tax? as well workers Could quick help guess you of the California lowering quarter coming this much I to a insurance question, its housekeeping.

Bradley Lukow

Sure. penny That was a and about the quarter.

Andrew Wolf

the And does go any of that forward like payroll tax?

Bradley Lukow

Yeah.

because benefit that few we've the payroll had for onetime was last years. tax it So extra

we then is And XXXX expectation to side wouldn't tax. least XXXX. our the from so to unemployment it and At apples-to-apples extra that be remains see on return that would California

be over an 'XX from 'XX. to but neutral was 'XX would So a in point that win 'XX of a year-over-year it view,

Andrew Wolf

Got it. appreciate it. I Thank you.

Operator

Thank you.

UBS. question next Our line of from comes with the Mark Carden

Your line is open.

Mark Carden

question. the taking for lot a Thanks morning. Good

historically you and environment. And just this and on algorithm So term guide higher same being why on you elected you five to as guys go questions, three store inflation bit long building sales to your talked about not a you comp some alluded can about a bit a talk business the to have outlook?

or reflective fundamentally mainly changed? if Thanks. this prospects some So conservatism around growth produce

Bradley Lukow

guidance it's I didn't XXXX, just Mark. think inflation try look, obviously Thanks, and costs. some back in really original And on No, if and that our sat to said, reflect predict. and really difficult out back contemplated we've too we play then

think more zero range range we a would inflationary of assume environment. it's where the So a prudent guidance comp the midpoint give to

through. three maybe able a higher to is And whereby higher inflationary environment so environment what that could take would competitive two, you're an or you that pass be the such

the or that's a temporary put there's fourth quarter, some Jim bit always customary As deflation inflation because we that of did initial squeeze in squeeze. saw that a some when on reduce commented,

into So I would that rather take in we'd swings be range that the any prudent give and in think a guidance deflation. sufficient inflation we account have

Mark Carden

strategy some prototype. Is attract one great. you prepared to And you new sales we start Okay, your markets, with food the having apart? as more your accelerate rethink you success been ability guys stores could Mid-Atlantic placement good example, have densely populated future For and spacing further opening see areas? cause beyond shoppers just urban expanding your to to store stores more in Thanks. seem millennial

Bradley Lukow

are prototype the be urban, you better they're new the well. an to you those when it urban five perform - We've locations, two much suburban deem in attract urban got performing what total, done Yeah. does We of us versus we've gives of an to in great millennial think environment. environment consumer a more two and opportunity and actually extremely would

urban specifically we have in prototype with it that it markets. of, kind more yes, up new So trade opens areas

Operator

you. Thank

Our line Karen comes the from next question Barclays. of with Short

Your is open. line

Karen Short

thanks. you Hi, candidates? the mentioned little just I'm wondering to and/or give respect just timeline if with internal thoughts could a the but executive search so because this wasn't on update on curious

Bradley Lukow

Hi Karen, it's Brad.

search. was on conduct the external last of engaged internal externally has we end notch a As the search after I said the guess and call has it top embarked to November, firm board on and a

so together In a and us keeping working and we XX and range and it takes meantime, down the Jim strategic track the of typically I running our are on before, months. heads absolutely said as keeping business just on And priority.

hear. you'll we an update, So have when

Karen Short

and and adjusted are as just change fiscal an model both basis. give might those expense you and kind on on Okay. the talk a the of think because wondering forward, as modeling, I in And we little you And I little of if annual going forward, then and color be store general, the then productivity like to may impact XXXX new terms just comp general, go the how just that then could how waterfall? in just new in thinking bit can interest about prototypes, a guess, beyond, rent of

any So be would commentary helpful? directional just

Bradley Lukow

accelerated meat, couple the Certainly XXs Too store in margin. it's of low comp productivity tell but particularly Sure. last seeing also has model sales, of the our we because bakery young are in out seafood, to waterfall to new deli, so lift very the XX% prototype a there, for enhanced and historical is the over impact early on from an years. nice new what the incremental both in

new overall locations expense are two But of financial I I think attracting will interest is the in crowd, importantly, long more important much this expense. demographics. just to these bullish term of we was very So question, your of on millennial us. at certainly prospects is lease regards same interest which enhance in do a the the are With critically to accounting, across for the So maybe we returns. want resonating time, with how clarify? really around points And our to that all

with expense million as in we XXXX. to XXXX So financing from interest reduction those XX $XX mentioned leases associated

guidance interest this facility whole for our about of around includes around is company, more the a was of that question $XX and the your million If as amortization dollars fees. million a year expense

swapped debt think that million out. out I roughly have hedged it's was We $XXX of

our rate year roughly so for this be interest average would weighted And X.X%.

So positioned. we well think we're

to to debt be our XX% is in expect net of arrangement. a five XX out swapped year total We

Operator

Thank you.

Our Prykull with of Chris from question line Goldman the comes Sachs. next

Your open. line is

Chris Prykull

clarify wanted XXXX. And out ongoing guess the were of on expect most margin rate in like half? growth aggressively I you I you to be Thanks the half roll again have, until pressure EPS question normalized a made then questions. that to guys. back that first base in store as you peers earlier, wouldn't just comment if sort morning, algorithm why for Good that the dilutive? click-and-collect more that to will already follow-up, across think a the your more taking I a response algorithm the Ed's of

Bradley Lukow

the from of pretty terms you And not implementation, management other period half a and will we're quarter into system management algorithm the updated finishing Also like on of XXXX. item in to that of optimize over end back significant initiative time. learn the lot system of XXXX. customer the in fresh just a the third XXXX a system till work any of again, digital how standpoint be completing So of change loyalty

total what at when to dollar spend I equal XXXX. we look So XXXX, will be we very spend in in think expect to

a through growth implementations. system these think And on in as this in rather think move we that at new we number as those markets which we XXXX, operational sit we'd I from move I back XX% to just of EPS XX% on of and double-digit timing new be and team. markets So this point our deleveraging is pressure the as big know, in return the on in we to puts, I existing prudent year of stores specific said, advertising where terms and expectations

prospects at digital consumers think put point just I are foundational of a of long this systems company terms new engagement important term point growing view, from X% growth really will a our and we're growing of still these So level high critically a years from and view. And bullish with from growth our unit in and very many around we're that. we perspective a more us of see of

the we we're earlier, and of don't important term for underpin that's timing. that it's get off playing these investments. until the think yeah as I we said long So But so what

James Nielsen

Hey Chris, it's Jim.

not. is to whether process We're Just margin early to, it's it's dilutive. question, margin dilutive in follow-up or click-and-collect early it you too on tell really the

margins in mentioned that response say so. pickup delivery to the as will today, guys data it you because feedback that more comp of get simply tailwind the then for coming. said that with see and or is margin not dilutive home customer and qualitative, behind we calls providing we I Brad now, we'll more gross us today like and small quantitative is as up As get more I the consumer give

Chris Prykull

itself Great. contract to much, know pressure, color. That's versus past existing to really if On from helpful pressure just trying an costs, freight understand how trucking versus XXXX And are up be spot why in rates to the versus incremental are could markets we're distribute being squeeze a that I having rates new down I the maybe markets, in mean hour. see market is I what much and how then you just guess more did know one but XXXX, I still pressure would I XXXX?

James Nielsen

Yeah.

distribution, just the our that primarily company, company miles like So for for is service primarily the deleverage coming it produce that geographies, small our the freight from miles. new contract but majority internally the is base to were of it's costs for increases for so was some

to we're are into, side, But not terms in now. most drive there's are with the there. there the non-perishable of back hit relates As market that it been of to half just negative earlier are through the in impact tail those in fun the some a in impact to VLD, They so of and miles cost produce, just in bit allowed overall the terms obviously increases distributor of goods the there's market, been general a cost some flowing really a seeing relief of little the that year.

a these There's And notification, they retailer now would a through retail. just at increase. flowing to of we and have before accept timing give things a level are price of some

carry this of market this and is just over year to the XXXX. stable to relatively is from So some be going

Operator

Thank for you. we one further have time And question.

with line last Securities. the comes Heinbockel of John Guggenheim question from Our

open. is line Your

John Heinbockel

impact fresh two the So, maturation about management the on P&L. item think things, and quick the of guys. When you

and first, the the in I come sales when shrink first. of shrink you But cost pieces, would improve - sales or way the the around? guess terms So think most other I goes all shrink, improve I sales mean, training the of but the of improves part which those two guess before

James Nielsen

to of dial sales Jim. in set of it around estimates you because we down focused The have up those minimum organization your projections way Hi, terms we're John, levels. it's kind is organizationally,

year. is we'll And piece sales of this going which making that kind throughout we're so happening we shrink sure we the the sales, started of with the secondary idea first optimize to see optimize and keep the

meats shrink more the nice out, So they're deli, levels. benefits we brought and meet hand as and technology we're to of and then will we've newer QX and see kind drive rolled QX the on the be bakery as on helping gone us But rolled tailwinds out as FEM sales. up we we to through starting the optimize deli

John Heinbockel

the And basket. then label about talked you penetration lastly, private in

part think shopper's what loyal about fresh that in non, prominent is any a of of private brand the when label desire to So you a the the willingness their on impact private does shop loyal or basket have no? basket that more is shop store, in versus

James Nielsen

customers likely department be specific it's of department. of shop produce experiencing they're that I I or first private to our fresh What's regardless mean going XX% mean our not, pretty label so,

awareness Fresh the the label experience that members. tape, the new in year. label. is being what's thoughtful for true the gateway innovation, gateway the we're many team didn't engage And in it's launch this making that the not we items better better We're private that providing I sure high the is and private messaging, So team We to providing is it. fresh. tailwind member making innovation around around really process putting the very level better our we've got so content, think can sure adoption

baskets, our coming, new nice not gross penetrations we're years. XXX so what the top and see very baskets item thoughtful growth, in So three items from products year, XX% you'll of percent XX all we more XX, and talk It's over plus course next the that is coming growth. about line, comp,

John Heinbockel

Okay, thank you.

Operator

would Thank to that And Mr. the question-and-answer today's for back to session. I now Brad call closing like you. concludes remarks. turn Lukow

Bradley Lukow

us Thank today. you for you just on road. call would next everyone few the the extend we look appreciation very And much. Jim. forward on And weeks seeing to I like that over our the to joined

Operator

This concludes in gentlemen, participating conference. and today's for program. the you Ladies thank

disconnect. have You day. Everyone, may great all a

Sprouts Farmers Market (SFM) 21 Feb 192018 Q4 Earnings call transcript