Sprouts Farmers Market, Inc. Q4 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Sprouts Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ 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 speaker today, Susannah Livingston.

Thank you, and good morning, everyone. We are pleased you have taken the time to join Sprouts on our fourth quarter and full year 2022 earnings call. Jack Sinclair, Chief Executive Officer; and Chip Molloy, Chief Financial Officer are with me today. The earnings release announcing our fourth quarter and full year 2022 results, the webcast of this call, and quarterly slides can be accessed through our Investor Relations section of our website. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2023 and beyond. These statements involve several risks and uncertainties that could cause 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 and the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP measures. Please see the tables in our earnings release to reconcile our non-GAAP measures to the comparable GAAP figures. With that, let me hand it over to Jack.

Thanks, Susannah, and good morning, everyone. We ended 2022 on a strong note with fourth quarter results that included comparable store sales growth of 2.9%, total sales growth of 6%, and diluted earnings per share growth of 31%. For the full year, our diluted earnings per share growth was 14%, which is in line with our long-term strategy. Highlights for the year include opening 16 new stores, 60% in our new smaller prototype, growing sales of our Sprouts brand to over $1 billion, increasing sales of local produce by over 100%, creating 1,600 new jobs, launching approximately 8,400 new innovative products and digitally connecting with 13% more customers. I want to take a moment to commend our 31,000 team members for driving these results in another very challenging year across the consumer landscape. Their continued dedication and commitment to making Sprouts a place for discovering healthy eating continues to make me proud. In a few moments, I’ll follow up with more on our journey in 2023. For now, let me hand it to Chip to review our financial performance in the fourth quarter, the full year, and our 2023 outlook.

Thanks, Jack, and good morning, everyone. For the fourth quarter, total sales were $1.6 billion, up $84 million or 6% from the same period in 2021, driven by new stores and comparable store sales growth of 2.9%. Comp sales were supported by an increase in basket due to retail inflation, partially offset by a slight reduction of items in the basket. Our e-commerce sales grew 16.5%, representing 11.4% of our total sales for the quarter. During the quarter, we also launched our partnership with DoorDash to acquire new customers and expand their access to Sprouts. DoorDash is now available in every store and continues to grow with each passing month. Deli continues to be a strong performer in the fourth quarter as healthy prepared meal solutions are favored by our customers in-store and online. We experienced relatively strong performances in categories with the most differentiation such as dairy, frozen, grocery, and bakery. Bulk is also experiencing a positive turnaround as customers take advantage of the value and flexibility our offering provides. Our fourth quarter gross margin was 36.3%, an increase of approximately 60 basis points compared to last year. As you may remember, during the fourth quarter of 2021, our margins compressed as our price changes lagged input cost. This past quarter, as we did during all of 2022, we kept our price changes more in line with input costs. SG&A for the quarter totaled $473 million, an increase of $24 million. New stores, additional marketing spend, increases in labor costs, and higher commodity prices were the primary drivers. Store closure and other costs relating to non-cash store asset impairments totaled approximately $8 million for the quarter. For the quarter, our earnings before interest and taxes were $62 million. Interest expense was $1 million, and our effective tax rate was 25%. Net income was $45 million and diluted earnings per share were $0.42, an increase of 31% compared to the same quarter in the prior year. During the fourth quarter, we opened seven new stores, spent $41 million in capital expenditures net of landlord reimbursements, and repurchased 1.5 million shares. For the fiscal year 2022, total sales increased 5% to $6.4 billion driven by new stores and comparable store sales growth of 2.2%. Comp sales for the full year were also supported by an increase in basket due to retail inflation, partially offset by a slight reduction of items in the basket. Our annual gross margin was 36.7%, up 45 basis points compared to last year. The year-over-year increase results from slightly less promotional mix, managing overall price changes more in line with cost increases and reducing shrink via operational improvements and system support. SG&A expenses for the year increased $107 million to $1.86 billion. The increase is due primarily to additional stores, inflationary conditions driving increases in store costs, credit card fees, and increased e-commerce fees associated with higher sales. The strides we’ve made in improving our labor management tools helped to offset rising labor costs. For the year, our earnings before interest and taxes were $358 million. Interest expense was $9 million, and our effective tax rate was 25%. Net income was $261 million, and diluted earnings per share were $2.39, an increase of 14% compared to the prior year. During the year, we opened 16 new stores, nine in our new smaller format, and closed four. We ended the year with 386 stores across 23 states. Now let’s turn to the balance sheet and cash flow highlights. We ended the year with $293 million in cash and cash equivalents, $250 million outstanding on our $700 million revolver, and $25 million of outstanding letters of credit. Cash flow generation remained strong for the year. We generated $371 million in operating cash flow and spent $112 million in capital expenditures net of landlord reimbursements. Our robust cash flow generation allowed us to invest in the growth of our business, predominantly new stores, while also returning cash to our owners through our ongoing share repurchase program. For the year, we repurchased 6.9 million shares of common stock for a total investment of $200 million. Our diluted weighted average shares outstanding were down 6% compared to last year, and we have $412 million remaining under our current share repurchase authorization. Turning to our current expectations for 2023. We continue to operate in a challenging consumer environment, focusing on what we can control to drive meaningful results. One area of focus is ensuring our store portfolio’s ongoing health and profitability. We are pleased with the performance of our more recent store openings, especially the smaller prototypes. We’re also encouraged by the momentum of those newer markets as we begin to densify and establish more brand awareness. In 2023, we plan to open at least 30 new stores, all of which are our current prototype. Back in early 2020, we considered closing some underperforming locations as we shifted our store growth strategy to a smaller, more productive prototype. We consciously decided not to close those stores as the pandemic struck, so our communities would continue to have access to fresh healthy groceries. We recently revisited that decision, and as you may have seen in our release this morning, we plan to close 11 stores in 2023. These stores, on average, are approximately 30% larger than our current prototype and generate negative four-wall cash flow. One store will close during the first quarter as its lease expires, and the remaining stores will close during the second quarter. Team members from the closed stores will be transferred to other stores if they so desire. On the supply chain front, we will relocate our Southern California distribution center to a larger brand-new facility in the second quarter. In addition to supporting our growing capacity needs, the facility’s location will reduce the miles traveled to our stores and is in a more robust labor market. There will be special transition costs associated with this relocation. The total cost for the store closings and supply chain transition will be approximately $40 million to $50 million pre-tax, of which close to 75% will be non-cash. With this backdrop, for the full year, we expect total sales growth of 4% to 6% and comp sales in the low single digits. We expect gross margins to be flat to slightly up and slight deleverage in SG&A costs. Adjusted earnings before interest and taxes are expected to be between $355 million and $370 million, and adjusted earnings per share are expected to be between $2.41 and $2.53, assuming no additional share repurchases. That said, we do expect to continue to repurchase shares opportunistically. Both adjusted EBIT and EPS exclude the store closing and supply chain transition costs. During the year, we expect capital expenditures net of landlord reimbursement to be between $210 million and $230 million. Most of the CapEx is for the 30 new stores and the new distribution center. Other areas include technology enhancements, ongoing refresh and remodel expenditures, merchandising initiatives, and maintenance. Ongoing, we expect CapEx to be approximately 3.5% of sales annually. For the first quarter of the year, we expect comp sales in the range of 1.5% to 2.5%, and adjusted earnings per share between $0.83 and $0.87. And with that, I’ll turn it back to Jack.

Thanks, Chip. Nearly three years ago, we embarked on a journey under a new strategy that corresponded directly with a global pandemic. As the noise of the erratic past few years begins to fade, our progress is clear. We are a stronger, more profitable company and expect to sustain this business performance. Our mission was to transform Sprouts into a more relevant healthy living brand. We defined a clear-cut target customer, then sought to expand and market our product differentiation to our customers, reduce our store size to reinforce our farmers market appeal, grow our store base, integrate and expand our supply chain, inspire our team, and drive attractive profit growth along the way. Despite all the challenges in the world in the last few years, this strategy has progressed and resulted in a financially stronger company. The past few years, we have reset our margin structure, improved our labor productivity, and implemented needed systems. Since 2019, our gross margins have improved by 300 basis points. We estimate that about two-thirds of this was through decisive actions to promote more effectively. The remaining one-third were operational improvements such as less shrink from an expanded and well-placed fresh supply chain and systems that improved our ordering and in-stock positions. As part of our improved strategy, we intentionally changed our tactics to narrow our focus on our health-conscious target customers, and we also made numerous investments in our business, such as increased wages for team members and systems for improved labor management, inventory, and financials among others. As a result, our EBIT margins improved by 170 basis points. Our three years earnings per share CAGR was 24%, and our EBIT per square foot increased by 49%. Our ROIC has also improved by 270 basis points, all in line with our strategic goals. These foundational initiatives have allowed us to move onto the next leg of our journey. We have plenty of work to do. To build on this foundation in 2023, we’ll be focused on growing customer engagement, expanding category leadership, product innovation, a more efficient and effective supply chain, and accelerating our store unit growth. On the customer front, we continue to focus on driving engagement with health enthusiasts. Last quarter, we conducted a comprehensive research study to understand better what is most important to our customers post-pandemic. They consistently told us they’re looking for us to help them take new measures to be healthy. Freshness, quality, innovative variety, and commitment to sustainability are all key drivers for our customers. These learnings prompted us to pivot our marketing positioning to launch our new 'Find Your Healthy' campaign in January. The campaign connects by sharing several ways customers can create their own health journey at Sprouts and is anchored by what customers tell us they love: our fresh, high quality and innovative products you can’t find anywhere else. This differentiates us and creates a sense of discovery for our customers. As I stated at the beginning of the call, Sprouts brand hit $1 billion in sales late last year, a remarkable accomplishment, largely due to our focus on innovation. We plan to accelerate this growth even more in 2023; you will see additional new Sprouts brand products, an increased focus on seasonal programs, and a brand style and packaging redesign that is already showing promising results. In 2022, we invested in growing our convenience meals and plan to double down again in 2023. We bring differentiation to this growing category with higher quality and healthier options. Our customers will find even more chef-driven creations in seasonal offerings, added plant-based and health attribute options, and additional family meals. We doubled our local produce sales in 2022, with more than 11% of our produce sales now from local growers. We believe our relationships with farmers, scale, and expertise in fresh produce enable us to own and grow this space. That advantage led to the launch of a rescued organics produce program in California, benefiting our farmers and customers and helping to combat food waste. The farmer gets the added benefit of selling produce that is still completely fresh and tasty, but it could have otherwise ended up being wasted all because of a regular shape, sizes, or blemishes. So customers can buy delicious organic fruits and vegetables, which simply don’t meet visual specifications at a great price. We also learned that our customers strongly desire to engage with Sprouts more often, especially regarding more convenient occasions. A proof point of this is that our e-commerce growth has been one of the fastest in grocery at 400% since 2019. Building on this last quarter, Sprouts launched a partnership with DoorDash to provide a new channel of e-commerce focused on the convenience of delivery to customers. These channels offer new opportunities for engagement for our high value customers. Lastly, to connect with customers more effectively, we are scaling our personalization efforts to develop a stronger one-to-one relationship. We’re investing significantly with the right partners to build a more robust marketing and technology platform. These investments will continue to be a top priority to meet customer needs for additional engagement, ultimately boosting customer loyalty. Chip has briefly spoken about investments to create an advantaged supply chain from which we can grow. More than 85% of our stores are within 250 miles of our distribution channels, up 20% from 2019. This year we’ll be focused on investments at our current DCs, replacing our Southern California DC and expanding our Texas DC to account for growing demand while adding ripening rooms to our Arizona, Texas, and Southern California DCs to deliver even better produce to our customers. As we expand our brick-and-mortar capabilities, we are also expanding our supply chain systems, allowing us to leverage our technology better to ensure we have the right products in the right location for our customers to enjoy. This includes a DC replenishment system expansion and perpetual inventory computer-assisted ordering at our store operations. We started implementing PICAO in 2022 and have experienced much success. Produce, dairy, frozen, and grocery are benefiting on the sales front from better in-stocks and optimized inventory levels with more fast-moving items and fewer slow movers. We have reduced our shrink by improving terms and freshness from transitioning to adjusted just-in-time replenishment model, and we have experienced labor savings by allowing the computer to do the work for us. Lastly, on the real estate front, we are expanding with our new 23,000 square foot store, and every store opened this year will be in our new format. We’re excited about our robust pipeline of more than 80 approved stores and nearly 60 executed leases. We have already opened four new stores in this first quarter with a plan to open at least 30 stores this year, and we are on track to reach our 10% unit growth starting in 2024. In summary, we remain focused on advancing our strategy to differentiate Sprouts further as a unique specialty retailer focused on health and wellness while expanding our footprint with an advantaged unique store format. We will also continue efforts to manage all costs during these uncertain times effectively. I firmly believe these general principles will guide us through another year of success, and I look forward to sharing our progress. With that, I’d like to turn it over for questions.

Thank you. Our first question comes from Rupesh Parikh with Oppenheimer. You may proceed.

Great. This is actually Erica Eiler on for Rupesh. Thanks for taking our questions. So first I wanted to touch on comps here. So comp growth obviously accelerated on a multi-year basis, so I was hoping to get a better sense of what you’re seeing from the consumer here, from a trade-down perspective or any other notable changes in consumer behavior lately?

Well, I think the pattern over the past going into the fourth quarter was kind of consistent to what it’s been throughout the year. We’ve seen steady traffic, which we’ve been encouraged by, and in terms of the consumer behavior with the level of food inflation, you’ve seen a trade-down as we’ve talked about. People have been trading down in terms of both the number of items in the basket and trading down in certain categories. You’ve seen a little bit of a trade-down in the protein space; you’ve seen a little bit of a trade-down. You can see the strength of our Sprouts brand business. You’ve seen a little bit of a trade into that as well. So I think the consumer behavior in Q4 was pretty consistent with what it was throughout the year of 2022, and I think we’re seeing that same pattern as we go through this year.

Okay, that’s helpful. And then we know you have a difficult comparison with the King Soopers strike from last year, and then we’ve seen industry headwinds lately in the vitamin category. So just curious if there’s any more color you can provide to us quarter-to-date trends at this juncture, and then just any commentary on the vitamin category performance here.

Well, specifically to the vitamin category. What you’re finding there is the patterns are trending very much around the ups and downs of COVID comparisons from the previous year. There were such extreme numbers in different directions across different years, so you’re seeing that pattern continue. The cold and flu affects the vitamin business pretty significantly as well. So, we see some great months and not-so-great months. It’s fairly volatile and continues to be a very important category for us, and we’re very excited about the people that are operating in the middle of that vitamin department. What works really well for Sprouts is that in the vitamin department, we’ve got a lot of expertise of people who can really understand how vitamins and supplements can help our customers. So, we’re excited about the team and excited about what’s happening, but there’s a lot of volatility in that. Maybe Chip could talk a little bit about the broader context of your question.

Yes, sure. So as we were going through the end of the year, obviously, we’re competing against Omicron towards the end of the year and then into the beginning of this year, while we were competing against the King Soopers strike at the beginning of this year. So our comp compares are a little bit more difficult coming into the beginning of the year, but we’re seeing it, we’re past that now; we’re steady and you can see in our guidance, we feel pretty good. We’re guiding to a 1.5% to 2.5% comp for the quarter.

Okay, great. I’ll pass the line.

Thanks.

Thank you. Our next question comes from Mark Carden with UBS. You may proceed.

Good morning. Thanks so much for taking the questions and nice quarter. So you guys noted that you’re looking to close 11 new stores following your real estate review. Are these stores being replaced ultimately by newer store prototypes in similar geographies? What were some of the local markets simply too weak to support a Sprouts longer term? And then just longer term, how should we think about additional closures in the years ahead and any potential impacts on your long-term 10% unit growth algorithm?

Yes. Well, specifically strategically, when I got this job a few years ago now, we set out a strategy very clearly about the smaller stores being more effective going forward in terms of returns and what we expected to be able to deliver in terms of returns from those stores. As we’ve looked at the store portfolio, that strategy playing out really made us take a very hard look at those stores that are a little bit bigger. They’re lovely stores that were built by the previous team a little bit bigger and not the kind of, and in certain locations, we picked the wrong locations; we would’ve acted sooner on these stores had it not been for the pandemic. We didn’t think it was appropriate to shut grocery stores in the middle of a pandemic in terms of giving access to healthy foods. So the specifics on the 11 stores, you won’t see direct replacements coming in those geographies going forward because they’re probably in the wrong place, and they’re probably, the leases aren’t quite where we want them to be, but going forward, there’ll always be leases that we’ve got to deal with. But this is a kind of one and done; let’s clear up a big chunk of some of the stores from our strategy that we laid out three years ago. And as I say, we would probably have acted a little bit sooner on these had it not been for the pandemic. Chip?

And I’d just add as we go forward, we have a much more robust modeling. We instituted a new system last year. We are mitigating the risk of opening those stores. The new models give us a much better location, sort of main and main, and we’re not opening up 30,000, 40,000 square foot stores.

Got it. That’s helpful. And then as a follow-up, there’s been some press that one of your largest natural organic competitors has been getting more aggressive on pricing. Are you seeing any ripple effects impacting the broader natural organic space, and do you see any more likelihood of competitors becoming less rational in the near ahead?

Well, we haven’t seen too much irrationality in terms of what’s happening in our space. We’re very confident that we’ve got a strategy that we can follow, and we’re sticking to our guns on our strategy. I haven’t seen a lot of volatility in pricing outside in our direct space in the natural and organic space. We obviously watch that pretty closely. We’re very sensitive to our produce pricing, and with that particular competitor that you’re outlining, we’re in very good shape with regard to produce pricing. Overall, that’s something that we would pay a lot of attention to, but we haven’t seen anything that causes us too much to worry about right at the moment.

Great. Thanks so much. Good luck, guys.

Thank you.

Thank you.

Thank you. Our next question comes from Karen Short with Credit Suisse. You may proceed.

Hey, thanks very much. Good to talk to you again. A couple of questions with respect to your comp guidance and your results in 4Q. Can you just talk a little bit about what traffic versus ticket was in 4Q, and then how you’re thinking about traffic versus ticket throughout 2023? And then also triangulate that with what your expectations are for inflation in 2023. And then I just had one other question.

Sure, Karen. So traffic was just a hair down in the fourth quarter, and then the ticket was up. We’re picking that up through both inflation or AUR, which is offsetting a slight decline in units. As we go into the year this year, we feel good about traffic. It’s so far year-to-date, it’s up slightly. Our expectations are that we’ll maintain traffic pretty steady throughout the year. Our expectations are inflation will still be with us year-over-year, but it will start to decline as we progress into the back half of the year. And at the same time as the sequential units for basket slows that year-over-year, that will improve and net-net you kind of get into that low single-digit range.

Okay, that’s helpful. And then just wondering, when you look at sales growth versus EBIT growth, obviously, I know what you’ve given in terms of margins; so you did say, I think on 3Q that you thought EBIT margins would remain more or less steady. And it looks like you’re kind of guiding to a slight decline in EBIT margins. So I want to ask about that, but I also just want to talk just broadly about what you think the right relationship should be on sales growth versus EBIT growth.

Well, fundamentally yes, we did guide in a way that suggests that operating margin will decline here. We could we’ll get flat to some slight increase in gross through the year. SG&A, we’re managing it really tight. We’re working it hard, as you know, with most of the retail landscape. Managing costs is becoming the challenge of the day, and we’re working through that. We’ll probably have a hair of leverage this year as we go forward. To answer the second part, I think it’s a healthy position to believe that our operating margin would essentially stay flat and that our sales growth and earnings growth will grow appropriately.

Great. Thanks very much.

Thank you. Our next question comes from John Heinbockel with Guggenheim. You may proceed.

Good morning, Jack, Chip. You have Anders Myhre on for John Heinbockel. Nice results this quarter. So you plan on enhancing customer engagement in 2023, calling out the launch of your new marketing campaign and further personalization efforts. With that, we were curious about where we stand with the loyalty program, when it might launch, and how much incremental wallet share might drive. Thank you.

Yes. Thanks for the question. We’ve done a lot of different experiments over the past couple of years to try and get at our target customer and encouraging them to spend a little bit more. We’ve made some progress in different categories and made some progress at different times of the year, which we’ve been encouraged by. We’re looking at investing a little bit of money to understand what we can do to inspire our customers to come a little bit more often or spend a little bit more. We’ve got a customer base that really loves Sprouts, and we’re encouraging looking at tactics to get them to extend their spending. And on the second hand, how do we get more customers who look like the customers that are loving us right now? We know there are lots out there. So, the work we’re doing in broader customer communication and engagement is about trying to work directly with those customers that love us and drive at more customers who should be loving us. As we’ve talked about, there’s a significant opportunity for us to increase the number of people who are giving us their information. We’re relatively low compared to competitors in terms of the number of customers that scan their information when they come through the register. We’re working hard to make an experience distinctly Sprouts so that they can almost become a member of a club. The grocery environment for loyalty is very different for us going forward. Our interpretation of what’s happening with loyalty cards in the grocery space is that it’s a pretty zero-sum game, and everyone has cards. We don’t want to be the next card in someone’s wallet. So we’re working very hard at differentiating ourselves in that space. The timing of that will involve investing some money this year, and we’ll make progress, but this will be a multi-year effort to get where we need to get to.

Thank you.

Thank you. Our next question comes from Edward Kelly with Wells Fargo. You may proceed.

Hey guys, you’ve got Anthony on for Ed. Thanks for taking our question. So first, I wanted to ask about trade-down. I know you said bulk sort of seeing a turnaround as people care more about value. Can you just talk a little bit more about what you’re seeing from consumers in terms of value-seeking behavior, and then how does that dynamic typically impact you based on what you’ve seen historically?

Yes. Well, I think it’s across the industry. You’re seeing some trading down across the board. One of the things that we’ve picked out is that people migrate to bulk a little bit because it allows them to get portion control and offers a significant price advantage per pound against equivalent things in packaged parts of the store. So we’ve got a pretty extensive range in that space and we’ve seen some encouraging trends in that category as people move into it. I think economics play a role, but also the team has done a really nice job of putting the right products in the right place at the right time in that space. We’re seeing a little bit of a trade-down in the protein space as people migrate to slightly cheaper cuts in that category. We’ve seen some trade into the Sprouts brand, which I think is a combination of new products that we’ve introduced and this pursuit for better value as you go through the assortment. Customers focused on the attributes of the products we sell are very focused and are likely to seek plant-based options. So, the elements of trading down in our environment I think are a little different than elsewhere, but we are seeing that trend across our customer base coming into the store.

Yes. That’s helpful. Thanks. And then I also just wanted to ask about the share repurchase. You guys have been able to purchase quite a lot of stock over the last couple of years, and you’re still sitting on quite a bit of cash, but you’re also accelerating unit growth. Can you just talk about how you’re thinking about the prospect of additional repurchase this year?

Yes. Well, we’re always going to invest cash in the business first. As we start to get closer to that 10% unit growth a year, I suspect that we’ll be around 3.5% of sales or CapEx, which still gives us a lot of cash. And we’re a share repurchase-friendly company. Our goal is to try and see if we can reduce our share count by anywhere from 4% to 6% a year.

Got it. Thank you.

Thank you. Our next question comes from Krisztina Katai with Deutsche Bank. You may proceed.

Hi, good morning, team. Congratulations on the nice results. Wanted to go back to the fourth quarter complements and which was really nice to see that step up, especially coming in better than even what your guidance called for. So how much of the improvement do you think is related to Sprouts specific actions that you are doing on merchandising and differentiation? And just overall marketing versus the overall macro with just a little bit less commodity pressure on the consumer really outside of food inflation?

Well, I think we always talk about what we can control and what we are doing within it. We saw a strong end to the quarter, which we were encouraged by. We think firstly, we were much better in stock during the holidays, partly because of the focus from the team on implementing some of the systems we’ve been talking about. So in certain categories, we saw a really strong end to the quarter; we think because of the PICAO investment. You saw our grocery business strong, our dairy business strong, and one or two of the key seasonal businesses were strong. We believe we could do even better seasonally next year as we chase volume in that space. So first of all, I think in stock was better, and we’re getting better at managing that both at the store and distribution level with our partners. We also think some specific marketing activity stimulated some business going into the holidays. Some of the category work has been pretty exciting. Our meat business has come in better than maybe we expected initially. So, we believe there are good in-stock and marketing efforts that led to improved performance in Q4.

That’s great. Thank you for that, Jack. And I guess just on the unit growth, it’s nice to see you reiterate those 30 new doors for the year. You also talked about the model now that you’re using for real estate selection just being much more precise with forecasting these new openings. I guess, what can you share in terms of how these new stores are opening up? And as it relates to improving the unaided awareness, where are you on that journey to get that number up in these newer markets, and what is the gap? Like how does it compare to established markets like in Arizona and California versus, if we say, Florida and Mid-Atlantic?

Yes. You asked a lot of questions there. I’m trying to work them through in my mind. The first thing, as we introduced, and I’ll let Chip contribute as well, is that the new model Chip talked about gives us more confidence in our real estate strategy. We’ve identified many seed points across the country. As long as they’re within 250 miles of our distribution center, our real estate team is pursuing that hard. We know there are plenty of opportunities for us to maintain this 10% growth plan, which we expect to initiate in 2024. In terms of the performance of recent stores, the first four we’ve opened have been very encouraging. They’ve opened in both established and non-established markets. We’ve been very pleased with the performance in Tampa, which was once an immature market for us. We are encouraged about the critical mass of stores in a given area as they help with recruitment, as customers increasingly become aware of our brand. We still have work to do in terms of expanding awareness in less established markets, and the marketing team is working hard at that. Chip, do you want to add anything?

I’ll just follow on a little bit. When I think about the strength of the quarter, we had a strong quarter in California, but the other places where we’re seeing strength are in Mid-Atlantic and Florida, where we’re starting to build that brand awareness, and we’re starting to see strong performance over indexing as you would expect in those markets. So it’s encouraging; we’re starting to see that brand awareness grow.

That’s great. Thank you for answering all of those questions. Good luck.

Thanks, Krisztina.

Thank you. Our next question comes from Kelly Bania with BMO Capital. You may proceed.

Hi. This is Ben Wood on for Kelly Bania. Thank you for taking our questions. We first wanted to discuss the comment on the trade between units and basket increasing potentially as inflation comes off a little bit. It seems like in general that grocers are guiding to a pretty meaningful comp deceleration as inflation potentially abates. What are you guys seeing that gives you the confidence that units will accelerate throughout the year to potentially offset that expected slowdown in inflation? Anything to help us think about units and basket drivers would be helpful.

Ben, for starters, our expectations are not that units will accelerate in the basket. Our expectation is that the sequential bleed of units will slow and mitigate. And when you do that year-over-year, your compares get to where it’s not negative year-over-year; it’s flat or even slightly up. But that’s our expectation. We don’t expect as inflation comes down that it will accelerate those units.

And we’ve seen some data points that support what Chip just said. Certain categories have already seen a decline in inflation, not that it’s gone to deflation, but it’s not been as much inflation. So, categories like the meat category have seen this flattening of inflation. The relative reduction in units per basket slows down, which adds back to the number we need going forward. This is a basic assumption based on historical pricing and elasticity changes. We’re feeling that there are enough data points to give us some confidence.

Great. That’s super helpful.

And then I just wanted to talk about SG&A a little bit. It seems like SG&A growth in 2022 came in a little bit ahead of expectations. So just wondering if you could walk us through the puts and takes there and how that compared to your plans. And then just looking forward, how’s the current labor environment and what is your forecast going forward and what’s contemplated in guidance? Well, as it relates to SG&A for the past year, I think we were very articulate in the script, but SG&A were fighting labor costs, we’re battling that, but we’re managing it through operational improvements we’ve made in our stores. We’re managing through that, but certainly, it’s a pressure that continues on the cost per labor hour. We’ve seen cost increases on supplies that directly affect the store source. So, we’ve seen cost increases there, and we’re working hard to manage against that. The other side of SG&A includes our e-commerce business, which has outpaced our business growth and the associated fees that hit the SG&A line. Those are the big areas. And of course, new stores also hit the SG&A line. It’s going to be the same battle going into 2023. We’re going to manage through those supply lines. We’ll have more stores next year than we had this year, which puts pressure on SG&A. We do expect some slight leverage this year, but our goal is to keep it in line with sales. As for the broader labor environment, we’re getting more applications than ever and better quality applications than ever. That’s changed substantially over the last six months or so. The pace of wage inflation may not come down, but it’s likely to slow down in terms of its effects going forward. Our focus is on retention and making sure our good people stay with us, which will help SG&A looking forward. It’s a volatile labor environment, but we are focusing on attracting and retaining quality people.

Thank you. Our next question comes from Kendall Toscano with Bank of America. You may proceed.

Hi, thanks for taking my question, and congrats on that great quarter. So the first thing I wanted to ask was just more of a clarification on the 11 store closures. You mentioned that these are in larger formats versus the new format you’re going with. Can you just remind us now that you’ve been opening stores in this smaller format for a few years now, what the kind of breakdown in the portfolio is between the smaller format and the larger format stores? And then I guess the clarification kind of is just around how should we think about the 11 store closures this year versus you guys potentially reevaluating the portfolio going forward and maybe deciding to close additional underperforming stores? Or is this kind of really a one-time thing?

Specifically to the question, as we said earlier, this has been part of our strategy going forward. Our plan is to build stores at around 23,000 square feet. We’ve only successfully transitioned to that strategy in the last six to nine months. We didn’t close larger, underperforming stores before that. However, the intention behind the 11 closures is to clean up a large chunk of stores from the strategy we laid out three years ago. Going forward, there will always be one or two stores to consider, depending on leases and market conditions. But this is a one-time cleanup. We’re not seeing significant closures going forward. Chip?

Yes, and if you go back to 2019 when we started to shift our strategy, we were building boxes over 30,000 square feet. Those stores were very expensive, and we felt it was better economics to build smaller. We were convinced we wouldn’t lose sales by having smaller boxes. We evaluated all potential new builds for this reason. While we built some 25 to 40,000 square foot stores, every store we’re building now is in the new prototype. That’s where we made our strategy shift. We feel confident with our expectations for our new stores and are seeing strong results from the recently opened ones. As Jack said, this is a thorough review of our portfolio. We might have one or two closures in our future, but we don’t expect a significant number of them.

Got it. That’s helpful. Thanks. And then one other question was just on the, in terms of January trends; something we’d seen in the data is that it looked like there was a bit of a shift away from food-at-home spending towards food away-from-home spending in January. I know you mentioned traffic being up quarter-to-date for 1Q. So, I was just curious if you could speak to whether or not you’d seen anything like that with your customers.

Well, our business first coming out of the blocks in January. Again, we were in a difficult comparison against the King Soopers strike in Colorado and the Omicron variant. We were also facing a tough comparison against those in January of the previous year. Our traffic has been steady and even positive despite these comps. Our deli business has been very strong in both the past year and continues to be strong going into this year as customers are looking for quick, healthy meal solutions. Our deli meals are high quality, saving time for customers. The contrast between food at home and food away from home becomes blurred with categories like these, that provide convenience. We believe we are well-placed to meet this consumer demand, and are doubling down on our investments in this area.

Thank you. This concludes the Q&A session. I’d now like to turn the call back over to Jack Sinclair for any further remarks.

Well, thank you everyone for the questions. Thanks to everyone listening to the call. We appreciate your interest in our business and look forward to updating you throughout the year as we go through 2023. So take care, everyone. Thanks so much.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.