Sprouts Farmers Market, Inc. Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to Sprouts Fourth Quarter and Full Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Vice President, Investor Relations and Treasury, Susannah Livingston.

Thank you, and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our Fourth Quarter and Full Year 2020 Earnings Call. Jack Sinclair, Chief Executive Officer; and Denise Paulonis, Chief Financial Officer, are with me today. The earnings release announcing our fourth quarter and full year 2020 results, the webcast of this call, and quarterly slides can be accessed through the Investor Relations section of our website at investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2021 and beyond. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings, along with the commentary on forward-looking statements at the end of our earnings release issued today. Our remarks today include references to non-GAAP measures. For a reconciliation of our non-GAAP measures to the GAAP figures, please see the tables in our earnings release. Also, please note that full year 2020 was 53 weeks with the extra week falling in the fourth quarter, making it a 14-week quarter. With that, let me hand it over to Jack.

Thank you, Susannah, and good afternoon, everyone. Thank you for joining our call today. There is no doubt that 2020 was a year like no other. As the calendar has turned and we reflect on the year, the events of 2020 have only made Sprouts stronger. We generated a robust top line with sales up 15%, record earnings, and operating cash flow of nearly $500 million. While absorbing costs associated with an increase in e-commerce sales, the opening of 22 new stores, and the payment of record bonuses to frontline team members. I'm delighted we have paid these bonuses to our team members during such challenging circumstances. Clearly, we have some tailwinds from COVID. However, our strategic initiatives are fueling our performance and will continue to have lasting impacts. We anticipate further non-COVID-related improvements in our business in 2021 and beyond. These improvements will come as our strategy further comes alive. Winning with our target customers, our redefined brand and marketing platform, reverting back to smaller formats, strong unit growth, a focused and disciplined supply chain, and best-in-class customer service. Sprouts is uniquely positioned as a specialty grocer. We lead with a fresh produce selection highlighted in the center of our store, carry a different assortment of food, and provide a smaller format experience that strongly resonates with today's customer, who is focused more than ever on health, wellness, and innovative products. We are not a traditional grocer, and we are confident regarding our future financial targets...

Thanks, Jack and good afternoon, everyone. We finished the year strong with fourth quarter net sales growing 17% to $1.6 billion and comparable store sales up 3.7% compared to the same period last year. Coupling this growth with ongoing strategic changes resulted in robust profitability with adjusted EBIT, up 102%. As a reminder, 2020 included a 53rd week in the fourth quarter. This extra week added approximately $122 million to sales, $16 million to EBIT, and $0.10 to diluted earnings per share. The additional week is not included in our comp sales calculation. There are four key points I want to highlight today to reinforce the strength of Sprouts' strategy...

Hey guys, thanks for taking my question. So I just wanted to poke in a little bit on margins. I think Denise you talked about that, you know, don't look at our gross margins like other grocers. But conceptually you guys used to run at a higher EBIT margin than you've run the last couple of years. I'm wondering, if you could kind of thought of as you redo the business a little bit, bring in new merchandise, make the stores more efficient, where do you think EBIT margins could maybe go. And then with that, my expectation is you're going to spend less on these stores. And so if this works, it seems like you would have ROIC that would go meaningfully higher. And I just want to see if I'm thinking about it right and get some color on that and then I'll yield? Thank you.

Sure. So Scott, thanks for the question. I think just to kick things off, if we put it all in perspective, the business has a very strong EBIT margin at its outset from the IPO. If you think about what happened in the last few years, a lot of the promotion and promotion activity, which is trying to serve absolutely everyone and everything, really wasn't working right? To put it simply at this point what we're reverting back to is not running loss-leading promotions, because that's not the game we can win. Ultimately, I think we believe that we can get back towards our IPO EBIT margins, which we clearly were able to do this past year, but we all recognize that part of that had a bit of COVID tailwind associated with it...

And Scott, just to reiterate what Denise was saying. There's further opportunities that will come with more maturity in our business. Our supply chain costs, the opportunities that we've got in terms of really being clear with our -- the exclusivity in our vendor base. And how we can work very closely with them to drive efficiency and move this -- the fact that we've got 68% of our products all based on attribute-driven assortment allows us to manage that independently of everything else that's going on in the industry. And that's why we're feeling pretty confident about the investment profile...

Good afternoon. Thanks for taking my question. So I had a question on your EBIT guidance. I was curious if you can just give any more color in terms of how to think about the split between the gross margin and SG&A within the EBIT guide?

Yeah. Sure. Hi. Rupesh. I would just start by saying, when we look back and I talked about that we scenario planned a number of different outcomes that are there. You'll see the widest range of our guidance is around our comp sales. And a lot of that is around the uncertainty that we can't control in the marketplace. I think what we feel really confident that we can control is how we think about our gross margins and how we manage our expenses, which gives us great confidence in what we can deliver this year...

Just to reinforce that. The fact that we've got distribution centers closer to our stores gives us much more mileage in terms of the new distribution centers will help us significantly reduce shrink and throwaways of the store. The fact that we're investing in self-checkout operations in our stores, which we're a little bit behind the eight ball on that, in terms of how we can do that effectively. Costs inside the store, cost to supplying the stores, as well as this kind of more local buying and focused on buying things that are unique to ourselves. We're a unique business, and we're able to manage these things within our own way as we mature on some of the supply chain shrink initiatives...

Hi. It's Tom Palmer on for Ken. Thank you for the question. I wanted to ask on the comp side, just to kick off maybe. So comps, at least relative to the low single-digit guidance you'd given, came in a little bit better than you've guided to in the fourth quarter. So I was wondering, first how sales trends progressed over the course of the quarter? And then, maybe just get an update on the first quarter what you're seeing thus far?

The quarter four numbers we improved in December relative to October and November, partly because we were trying some different things in terms of how we could stimulate demand and partly because of the restaurant closures in California. So we've got a benefit from that I think probably improved the trends that we were getting in October November. And January, it's a very volatile time in the marketplace. There's been a lot of crazy things happened in January and February, around restaurants opening and closing, around weather challenges that we had in Texas, which were obviously very significant last week. But overall, we're feeling pretty comfortable about where we are in terms of our sales so far against the guidance that we've put out.

Hey. Thank you. I was wondering if you guys could compare and contrast the economics of an e-com purchase versus an in-store purchase, both maybe basket size, contribution margin. And then, just follow-up housekeeping. I believe you guys incurred about $135 million of COVID-related costs in 2020. Just wondering how we should think about that impacting the P&L in 2021?

Sure. So on the e-com, when you think about the fundamentals of what's the same and what's different, what's fundamentally different is the basket size. An e-commerce order is more than twice the size of an in-store order and that's a pretty big pick and a pretty big efficient transaction for us to have. Our in-store basket is somewhere in the low 40s so really healthy e-commerce basket that comes through. When you think about the margins of the business it's really interesting. We've watched more consumers more broadly to shop the store on e-commerce than they would have before. So before where you would have seen a very different mix profile of what went into that basket. You see a bit more normalized mix to what would happen in-store. You're still probably a little lighter on produce. You're going to be a little lighter on some vitamins or some POBA, things that require more customer service that you might want as you came into the store. But the gross margin profile of in-store and online are very comparable. And e-commerce tends to be slightly more profitable but we're watching that mix change as well...

Hi. Thanks for taking my questions. Just a follow-up on the bonuses and pay. How are you guys thinking about wage rates? Maybe remind us what your entry starting wage is? And are you guys seeing pressure? I saw Costco went up another buck today. And just your thoughts on that?

Sure. I think to be really frank this year has been an amazing year for us to appreciate the value of the people that we've got working in our stores. I think, I'm really gratified by the fact that the kind of everyday population now regard grocery workers in a much higher esteem. And we've always held our people in high esteem. And it is very going to be very relevant going forward in terms of how we properly incent and reward the people working in our stores, the 33,000, 35,000 people that are working in our stores. What we tried to do this year is increase the amount of money that we have paid to that group of people with the people working in the stores through bonuses that you can see from our numbers we've been more than able to afford to do that...

And I'll just add two points to that. I think you put it in perspective; we have more than a majority of our team members above $15 an hour today and over 80% of our full-time team members are over $15 an hour. The second part I also mention is because we have so many new stores coming online and we do have these opportunities for growth, we're really focused in addition to pay for performance as Jack was talking about with incentives, the ability to promote people and have upward mobility for folks in our store...

Well, some of the -- on some of the things, I think it's difficult to tell exactly how that's going to play out going forward. I don't think salad bars are -- I think the hygiene aspect of salad bars is going to make less people into -- not everybody, but less people interested in it going forward. I think the same thing applies to all of olive bars. We're working very hard at making sure we can give customers the options that they want in those spaces without having to feel that they're compromising in any way around hygiene... Thank you very much for your attention and your time. We're very excited about the quarter and very excited about the future and I look forward to continuing the dialogue with you over the coming months, and very excited about showing you the new format stores when we get the chance to do that. It will be nice to actually physically have meetings with people in the future and in the meantime stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.