(Photo courtesy Sprouts)


Sprouts Farmers Market set new expectations for 2019 growth with its second-quarter earnings report, and the adjustments had analysts on the subsequent earnings call asking executives to explain why new stores have been performing fairly well but sales in existing stores have not grown as desired.

Sprouts reported net sales for the second quarter at $1.4 billion, up 7% from the same period in 2018.

“Net sales growth was driven by strong performance in new stores opened and a 0.1% increase in comparable store sales,” Sprouts wrote in a news release.

Net income for the quarter was $35 million, down from $42 million last year.

At the conclusion of the first quarter, guidance from Sprouts had included an expectation for 9-10.5% net sales growth and 1.5-3% comparable store sales growth for 2019. In the second-quarter earnings report, Sprouts adjusted its forecast to 7-8% net sales growth and flat comparable store sales growth.

Jack Sinclair, the new CEO of the retailer, and interim chief financial officer Chip Molloy, a member of the company’s board of directors, describing stabilizing margin as an important goal.

“We’ve had a situation where we’ve got ourselves a little bit mixed up between, are we at EDLP pricing, are we worried about EDLP pricing, or are we worried about high-low pricing,” Sinclair said on the earnings call Aug. 1. “There’s no reason why within the context of a very clear promotional strategy we can’t get ourselves into a place where as food prices go up or down that we can retain the perspective of having a retail price inflation in line with those changes.

“There’s no reason why we need to be not able to pass through margins as cost prices change,” Sinclair said. “And there’s a volatility, probably more volatility in the fresh food space, that we have to manage probably a little bit more carefully going forward.”

One analyst on the earnings call expressed skepticism that Sprouts would be able to improve its margins given the fiercely competitive grocery environment.

Molloy explained that he believes the company’s unique positioning gives Sprouts the ability to deliver in that area.

“We do have a differentiated product, we do have a differentiated experience, and we’re not a conventional grocery store,” Molloy said. “We’re allowing the conventionals to drive our business as opposed to leveraging the strengths that we have in our business and going forward and marching forward, and in that business case, there is an ability to stabilize your margins.”

Looking ahead

Branding is another area in which the executives suggested room for improvement.

“We do have really good new store productivity,” Molloy said. “I think that’s a sign that says this brand hunts, it hunts in new markets. It’s really encouraging to see the new customers that we’re attracting in those new markets, that we’re going to and being able to attract them early. That’s very encouraging.

“I’d also say on the other side is we work really hard for the grand opening, and then we don’t always come back later with a really good marketing plan and a really good branding plan and really helping the customers throughout the marketplace understand who we are and what we stand for, and so we need to do a better job there,” Molloy said. “And with that comes, when you’re building the kind of square footage even that we’re building today, there should be a natural comp coming from the maturation of the stores that we believe should be higher, and it’s not to our satisfaction today.”

He noted that in addition to finding ways to drive more growth in existing stores, Sprouts also needs to get more out of its new stores.

“There’s a lot of work to be done on the new store front, I believe, as well — where we put the stores, the concentration of new stores, the cost of new stores, the size of new stores, how much money we invest in new stores in the very beginning — for all intents and purposes sort of juicing up the front end,” Molloy said. “There’s work and analysis that needs to be done there that I think there’s a tremendous amount of opportunity in the future to change that trajectory in a positive way. But of course with new real estate that’s going to take 18-24 months to see that change in a meaningful way.”

Produce

Sinclair described Sprouts’ presentation of fresh produce as one of the unique elements of the retailer. He fielded a question about the company’s ability to source fruits and vegetables effectively, and he responded with some positive comments on the company’s produce sourcing team and its network of distribution centers.

“They can take advantage of the opportunities that exist in growing seasons across the country effectively, and the expertise of our team is pretty good, so I’ve been pretty impressed by the opportunity that these guys have got in terms of as we open new stores in different places that we can source effectively through the knowledge and working with the growers and maybe expanding the repertoire that we’re operating locally because we build on that expertise,” Sinclair said. “And I think we’re well placed to grow in different markets because of that.”


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