Good day, and thank you for standing by and welcome to the Sprouts Farmers Market Fourth Quarter 2023 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, Vice-President, Investor Relations and Treasurer. You may begin.

Thank you and good afternoon, everyone. We are pleased you are joining Sprouts on our fourth-quarter and full-year 2023 Earnings Call. Jack Sinclair, Chief Executive Officer; and Curtis Valentine, Chief Financial Officer are with me today. The earnings release announcing our fourth-quarter and full-year 2023 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website at [email protected]. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2024 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 afternoon. As we review our year-end accomplishments, I am once again pleased with our performance and encouraged about our future. We grew sales 7% for the year while maintaining our stable margin with a slight expansion in 2023. Moreover, our adjusted diluted earnings per share rose 19%, demonstrating attractive profit growth. Our strategic approach and specialty positioning allow us to focus on a highly profitable slice of the $1.6 trillion food-at-home space instead of competing with everyone for every customer. We believe these results clearly indicate that this strategic shift is resonating with our target customers. We are becoming a leading specialty food retailer. We continue to focus on our target customers, striving to deliver more of what they want: a broader assortment of differentiated, healthy, fresh, high-quality products that are hard to find anywhere else. Approximately 15% of our assortment was new, including 400 new Sprouts brand products. We ended the year with the company's best customer service scores by focusing on the customer experience through better service and improving our in-stocks. As part of expanding access to our differentiated assortment, we opened 13 new stores in our new smaller prototype, and we experienced good momentum, especially in Florida. We created capacity in the supply chain to support our long-term growth by establishing a new distribution center in Southern California, expanding our Texas distribution center, and adding ripening rooms to improve product quality. None of this would have been possible without our amazing team. In 2023, we continued fostering a workplace culture that we believe will maintain a sustainable and profitable business for years to come. We enhanced our development programs for team members so that everyone can grow a great career at Sprouts. We created approximately 3,000 new jobs and promoted 20% of our 32,000 team members in 2023. I am also pleased to announce another internal promotion to our executive leadership team. Duston Hamilton has replaced Dan Sanders as our Chief Stores Officer. Duston had been serving as our Regional VP of California, delivering great results and building a team steeped in our values. Dan has decided to retire in March after eight years at Sprouts and many more years in the industry. I want to thank Dan for his lasting impact on Sprouts. In summary, our achievements in 2023 have positioned us well for the future, and we will continue working to unlock Sprouts' full potential. I will talk more about our journey in 2024 in a few moments. For now, I will hand it over to Curtis to review our 2023 financial performance in the fourth quarter, the full year, and our 2024 outlook.

Thanks, Jack, and good afternoon, everyone. For the fourth quarter, total sales were $1.7 billion, up $122 million or 8% from the same period last year. This increase was driven by comparable store sales growth of 3.3% and the addition of new stores. Traffic was positive both in-store and online throughout the quarter. As expected, average unit retails and units per basket continued to stabilize sequentially. Our e-commerce sales grew approximately 17%, representing 12.4% of our total sales for the quarter. During the quarter, we also launched our partnership with Uber Eats to acquire new customers and expand their access to Sprouts. Along with Instacart and DoorDash, we now have three e-commerce partnerships performing well, highlighting the appeal of our differentiated assortment. We continue to see strong performance in categories with the most differentiation, including grocery, dairy, frozen, and meat. Sprouts has experienced exceptional growth in attribute-driven categories within these departments such as grass-fed beef and no antibiotic-ever proteins. These categories have gained popularity due to their superior quality and health benefits, making them a top choice for our customers who prioritize healthy eating. This was true during the holidays with strong growth from the return of Sprouts brand seasonal favorites and our convenient attribute-based holiday meal bundles. Sprouts brand made up 21% of our total sales in the fourth quarter as our unique products continue to appeal to our target customers. Our fourth quarter gross margin was 36.5%, an increase of nearly 20 basis points from the same period last year. Favorable merchandise margins were partially offset by the expected pressure from our new and recently expanded distribution centers. SG&A for the quarter totaled $513 million, an increase of $41 million or approximately 25 basis points of deleverage from the same period of the prior year. We continue to see pressure from wages and benefits. This was partially offset by a positive impact from holiday pay, with New Year's Day shifting into fiscal 2024. Store closure and other costs totaled approximately $5 million for the quarter. This is primarily related to noncash store asset impairments and ongoing occupancy costs from store closures. For the quarter, our earnings before interest and taxes were $69 million. Interest expense was $400,000 and our effective tax rate was 27%. Net income was $50 million, and diluted earnings per share were $0.49, an increase of 17% from the same period last year. For the fiscal year 2023, total sales increased 7% to $6.8 billion driven by comparable store sales growth of 3.4% and new stores. Comparable sales for the full year were also supported by an increase in basket due to retail inflation and positive traffic, partially offset by a slight reduction of items in the basket. Our e-commerce sales grew 15%, which accounted for 12.2% of our total sales for the year. Our focus on innovation and assortment differentiation continues to resonate with our target customers and drive our sales. Attribute-driven products such as organic, grass-fed, vegan, and keto, grew faster than the company average throughout the year. Gross margin, both on a GAAP basis and adjusted to exclude the impact of special items, was 36.9%, an increase of approximately 25 basis points compared to adjusted gross margin in the prior year. The year-over-year increase resulted from continued promotion optimization and category mix shifts slightly offset by pressure from higher distribution costs from our new and recently expanded warehouses. SG&A expenses for the year, both on a GAAP basis and adjusted to exclude the impact of special items, totaled $2 billion, an increase of $136 million or approximately 15 basis points of deleverage on an adjusted basis. The increase in cost is mainly attributable to the opening of new stores, and increased investments in team member wages, restructured store bonuses, and training. In addition, we experienced higher e-commerce and credit card fees linked to higher sales. Labor efficiencies and contract savings partially offset this as the team continued to find ways to manage costs despite the challenging inflationary environment. For fiscal year 2023, store closures and other costs totaled $39 million, primarily related to the charges associated with the decision to close 11 stores earlier in the year. Excluding the impact of special items, store closures and other costs were $11 million. Depreciation and amortization, excluding depreciation included in the cost of sales, was $132 million. Excluding the impact of special items associated with the store closing decision, the adjusted depreciation and amortization totaled $126 million. For the year, our earnings before interest and taxes were $350 million. Interest expense was $6.5 million. Our effective tax rate was 25%, net income was $259 million and diluted earnings per share were $2.50. Excluding the impact of special items, adjusted earnings before interest and taxes were $396 million, and adjusted net income was $293 million. Adjusted diluted earnings per share were $2.84, an increase of 19% compared to the prior year. During the year, we opened 30 new stores, acquired two previously licensed stores and closed 11 stores. All 30, 2023 openings were our new smaller format store. We ended the year with 407 stores across 23 states. Our financial performance has been underpinned by a strong and healthy balance sheet. We generated $465 million in operating cash flow, which allowed us to invest $213 million in capital expenditures, net of landlord reimbursement to grow our business. With our robust cash flow, we also paid down $125 million of our bank revolver and returned $203 million to our owners by repurchasing 5.9 million shares. We ended the year with $202 million in cash and cash equivalents, $125 million outstanding on our $700 million revolver and $22 million of outstanding letters of credit. Our diluted weighted average shares outstanding were down 5.3% compared to the last year, and we have $208 million remaining under our current share repurchase authorization. Since 2019, we have made significant improvements to our business operations. We changed our strategy, streamlined our store labor model and implemented key systems to support our growth. We also increased compensation and added training hours for our store team members, a critical investment to create the differentiated store experience our target customers love. As a result, our gross margins have improved by 300 basis points, and our adjusted EBIT margins improved by approximately 190 basis points. Our four-year adjusted diluted earnings per share CAGR was 23%, and our adjusted EBIT per square foot increased by 59%. All in line with our strategic targets. While we're pleased with our progress, significant opportunities remain. As we look ahead to our expectations for 2024, we remain focused on delivering earnings growth while investing to unlock our opportunities and drive sustainable growth for years to come. We are planning to invest approximately $15 million, primarily focused on the build-out of our loyalty program. We also continue to invest in our technology and data foundation to improve our inventory management and scale our personalization capabilities. For the full year, we expect total sales growth to be 5.5% to 7.5% and comparable sales in the range of 1.5% to 3.5%. We plan to open approximately 35 new stores, all in our current prototype. Adjusted earnings before interest and taxes are expected to be between $397 million and $412 million, and adjusted earnings per share are expected to be between $2.85 and $2.95 assuming no additional share repurchases. That said, we do expect to continue to repurchase shares opportunistically. We also expect our corporate tax rate to be approximately 26%. During the year, we expect capital expenditures, net of landlord reimbursements, to be between $225 million and $245 million. To add a bit more color, we expect gross margins to be up as we continue to focus on initiatives to improve shrink and annualize the promotional optimization work from 2023. On the cost front, we expect ongoing wage increases and our strategic investments to pressure SG&A, resulting in additional deleverage in 2024. Most of our CapEx spend will be for new stores, with the remainder focused on technology enhancements, merchandising initiatives, and store refresh and maintenance. For the first quarter of the year, we expect comparable sales in the range of approximately 2.5% to 3.5% and adjusted earnings per share between $0.98 and $1.02. Our SG&A will face additional pressure in quarter one due to strategic initiative investment and the timing shift of holiday pay for New Year's Day, which fell on the first day of fiscal 2024. And with that, I'll turn it back to Jack.

Thanks, Curtis. Our initiatives for 2024 will continue to strengthen our foundation while setting the table for sustainable long-term growth. This year, we plan to drive even more innovation in Sprouts brand and across the store, win more loyalty from our target customers, strengthen and improve our advantaged supply chain, develop a best-in-class team across the business, and build exceptional stores. Our intent is to become a leading provider in attribute, health-driven categories, such as organic, vegan, grass-fed, and Keto, prioritizing winning and gaining market share in these differentiated categories. To achieve this, our foraging team is searching far and wide for new health trends and working with niche vendors to find differentiated products such as low caffeine snacks, Popadelics, a snackable mushroom chip, and matcha bubble tea drops. Looking ahead, we will continue launching new Sprouts brand products, expand our seasonal in and out programs, leverage our innovation centers in-store, and engage more sampling to drive trial and basket. This focuses on our Sprouts brand, continuing to deliver growth ahead of company performance and provide customers with products they value and trust. In 2024, we have an opportunity to gain new health enthusiasts and increase our share of wallet among existing customers. We'll continue to prioritize store execution to provide a great in-store experience and exceptional customer service while maintaining an omnichannel approach to meet customers wherever they are. I am particularly excited about our plans to introduce the first iteration of our new loyalty program this summer. We see a big opportunity to grow share of wallet with our target customers by getting them to visit more often and add additional items to their basket. The program is designed to grow our identifiable customer base and gather valuable data on their preferences, enabling us to personalize the experience to their specific needs. We are also optimistic about how the data will potentially unlock value across our business by deepening our insights on customers, aiding in Sprouts' brands product development, improving customer acquisition, and providing a new asset to utilize with our vendors to grow our mutual business. We are investing to develop a long-term value driver for Sprouts. 2024 will be dedicated to testing the concept, listening to our customers' feedback, and establishing a program ready for full launch in 2025. We've made significant progress in creating an advantaged supply chain to support our future growth. In 2024, we will improve our in-stocks by adding PICAO to our deli meat and bakery departments. We will also enhance our supply chain data and technology foundation. Over the last few years, we've improved our systems for production planning, computer-assisted ordering, and produce replenishment. There’s now an opportunity to connect the data and processes that rely on these systems to improve our overall forecasting and ordering. This will enable a more disciplined inventory management process allowing us to further leverage our supply chain in the future. Our team is the most important part of our business, and we have concentrated on building a best-in-class workplace culture and values over the past few years. While it is always an ongoing process, we have made significant improvements. As a result, our team member retention rate improved by more than 20% in 2023, which has led to improved store performance and supports our continued store growth. To provide more opportunities to our team while driving for results, we restructured our store bonus plan, prioritizing customer service, being in stock, and faster growth. This year, our main focus is to develop our leaders for growth. We will improve our training, focus on talent development, and create clear career paths for leaders at all levels. This is critical for achieving our growth aspirations. We have blended fresh perspectives and external expertise with internal promotions at the Executive VP and Director levels to create a deep bench to support our growth. Our team is coming together to execute our strategic priorities and support our stores and customers. Lastly, we will accelerate unit growth again in 2024. In the first quarter of this year, we have already opened four new stores and plan to open approximately 35 total for the year. We have a robust pipeline of over 100 approved stores and nearly 70 executed leases. And we continue to improve our site selection process to maintain a strong pipeline moving forward. In closing, our main focus is executing our strategy to establish Sprouts as an exceptional specialty retailer with a differentiated better-for-you offering. Our results demonstrate that our strategic initiatives are paying off, and I am confident these principles will guide us through another successful year. Our collected efforts are resonating well with our customers, and our team is ready to face the many opportunities ahead. I am excited to share our progress as the year unfolds. And with that, I would like to turn it over for questions.

One moment for our first question. Our first question comes from John Heinbockel from Guggenheim Partners. Your line is now open.

So Jack, I wanted to start by discussing how you are adding new items while simultaneously reducing store space. Could you elaborate on the process of selecting which items to keep and how you plan your layout in terms of removing products that aren't selling well? Also, it seems like you’re not expanding vertically with your space, so is it a matter of replacing each item one-for-one, or how are you managing that?

It's a great question and it really goes to the core of our business strategy. When we decreased our square footage from 32,000 to 23,000, our main focus was on reducing non-customer-facing space rather than just cutting selling space. This approach allowed us to maintain our SKU count, except for a few items in our vitamins and harbor department. Moving forward with the foraging team, we established an innovation center in our stores that enables us to quickly introduce new items that the team discovers. These products are placed in the innovation center, which adds extra SKUs that wouldn't have been there otherwise. This setup gives us a couple of months to evaluate product sales and understand customer responses. I have been very pleased with customer engagement, as it has created a treasure hunt experience with new items, allowing customers to curate their own selections. Our customers show great discernment in this area, which reinforces what we are doing. As sales occur in the innovation center, the products that perform well are incorporated into our original planograms, while underperforming items are removed. Essentially, the innovation center slightly increases our SKU count. As items are added and removed, we manage the overall number to ensure they fit into our planograms within the existing fixtures. This operation model is crucial for us, and our business relies on offering a broad assortment. We aim to constantly introduce more products into our stores rather than scaling back.

All right. Maybe...

Hope that answers your question, John.

That was great. I wanted to ask about the loyalty program. I assume the $15 million is an operating expense rather than a capital expense. Is there a cost expected beyond 2024 that relates to this $15 million? I also assume you have considered the potential top-line uplift for the business case. You might not share the specifics, but can you provide an estimate to help us understand the ROI?

The $15 million is not solely dedicated to the loyalty program; it encompasses other areas as well. However, everything is focused on future business investments, addressing infrastructure issues, tackling fundamental challenges, and enhancing IT along with the loyalty program we are developing. We are very enthusiastic about it, and the benefits are expected to materialize in 2025. We have established figures regarding these benefits, but we will likely not disclose that information today.

And John, the $15 million is operating expenses. As a general principle for the future, we will manage and plan for it moving forward.

Okay. Thank you.

Thanks, John.

And thank you. And one moment for our next question. And our next question comes from Mark Carden from UBS. Your line is now open.

Good afternoon, and thanks so much for taking my questions. So to start, you guys have now outgrown the broader census category for several consecutive quarters. At this stage, are you still seeing much pressure from mainstream players adding to the natural organic offerings? Has that largely played out at this point? And then what else jumps out to you with respect to your ability to really buck the trend and grow sales faster than the overall channel?

We've discussed this quite a bit over the past few quarters, Mark. We strive to maintain a distinct product assortment, and while we observe what competitors are doing, our focus remains on our specific niche. We feel confident in leading this niche, as I've mentioned before. Other companies are introducing a few keto products, but they simply don't have the diverse selection necessary to truly appeal to our target customers. Additionally, this represents a small share of the market, so it's not advantageous for conventional retailers to pursue it aggressively, as it could disrupt their existing product layouts and plans. Over the past few quarters, we have noticed that this situation hasn't affected our relevance to our target customers and our ability to offer a compelling assortment.

Got it. That makes sense. And then as a quick follow-up, how did your comp trend from month to month? And what have you seen in 1Q to date?

Yeah. Comp trends through the fourth quarter is pretty stable, Mark. It's been a good solid performance, no major ups and downs, and we're pleased with the business and where it's running. We're not going to talk about the intra-quarter here, but it's certainly baked into our guidance.

Great. Thanks so much. Good luck, guys.

Thanks, Mark.

And thank you. And one moment for our next question. And our next question comes from Edward Kelly from Wells Fargo. Your line is now open.

Hey, everyone. It's Anthony filling in for Ed. We appreciate you answering our questions. Looking at the comp guidance, you projected 2.5% growth at the midpoint for this year, which seems to align with where you set guidance last year, even with a less favorable inflation outlook. I understand there are unique factors at play and you may be seeing some benefits from elasticity. Could you elaborate on what gives you confidence in this outlook as we consider the underlying drivers?

The business has been quite solid for us and remains steady. We are effectively driving traffic, and this trend is expected to continue. We are noticing that unit sales and average retail prices are stabilizing as we predicted. Additionally, as you mentioned, we are observing unit sales rebounding and stabilizing as the average retail prices decline due to disinflation. Overall, we are pleased with the business's performance and believe we can maintain this momentum. From a two-year perspective, the results have been consistent with what we have seen in recent quarters.

Okay. That's helpful. And then just on the private brand growth. I know that's been a strength for you guys these last few quarters and beyond really. But can you just give us your updated thoughts on where that can ultimately go? And as you think about new product launches or additional SKUs in the pipeline, just how to think about growth in that category in '24?

We are very pleased with the evolution of the Sprouts brand over the past few quarters. Our focus has been on emphasizing the attributes that appeal to our target customers. The seasonal programs have come together well, marking a significant development for our Sprouts brand business. The redesign implemented by the team has yielded positive results, and we are seeing considerable growth when we refresh items to align with the modern Sprouts brand image. I am confident in this direction. Looking ahead, we anticipate continued growth for the Sprouts brand as we launch new products. Our business strategy is not solely about the percentage of sales from the Sprouts brand; it’s about ensuring differentiation, whether through branded or Sprouts products. I am particularly pleased that the Sprouts brand is becoming less commoditized and focused on differentiated items. That remains the team's priority, and they are doing an excellent job.

Thanks guys.

Thanks.

And thank you. And one moment for our next question. And our next question comes from Leah Jordan from Goldman Sachs. Your line is now open.

Thank you. Good afternoon. I first wanted to ask about gross margin. See, if you could provide more detail on the drivers to the merch margin expansion that you saw in the fourth quarter. And then you also mentioned that gross margin should be up in '24. Just any color on the magnitude we should expect there or any detail on puts and takes that you're thinking about. Thank you.

Hi, Leah. It's Curtis. For Q4, yes, the difference there, we had a shrink, it was a little bit challenged in Q3. And again, ours is a little different. It's more about the fresh than it is the broader retail trends you're seeing around fresh, but had some challenges in the third quarter, as we spoke about last time, and the team has done a nice job bringing that back in line. And so that was really the difference from Q3 to Q4. Outside of that, we're still experiencing the pressure from the expanded distribution centers, and the merchant teams are doing a nice job managing the product margins. As we look ahead to 2024, expecting those things to continue as well, I think from how much will it expand in '24, I think we're probably looking at about 20, 25 basis points of the gross margin expansion for 2024.

Okay. Great. Thank you. And then for my follow-up, I just wanted to ask about labor. You had mentioned you're still seeing pressure there. Just any update on what you're seeing in the labor market overall? Maybe some color on California specifically would be helpful. And what are ways you're thinking through mitigating that cost pressure as you move throughout the year?

I will allow Curtis to discuss some numbers shortly, Leah. It's clear how important our team members are, and we've been working diligently on this as we mentioned. The changes to the bonus program have provided significant opportunities for our employees to earn more than before, and we're pleased with their response. When we experience less turnover in our workforce, it helps us save money and enhances customer service as well. Therefore, we're focused on improving our employee retention and the bonus program. Regarding California, which we are monitoring closely, all our employees are earning above the $20 minimum that is often discussed. We are in a strong position there. We are receiving a high volume of job applications, with an encouraging quality of candidates as well. Overall, we feel positive about our situation. That said, there are specific numbers related to recent developments that Curtis will address.

Yes. So we're certainly carrying some additional cost into the year as it relates to the year-over-year, and we'll expect that to continue. So we're planning into just slightly less mid-single digits on the lower end of mid-single digits for our year-over-year growth in wages. As it relates to kind of how do we mitigate? Well, we're constantly looking really under every rock as it relates to SG&A and looking for ways to be more efficient. The team works really hard at it, and we'll continue to work hard at it and look for offsets in our business.

Great. Thank you.

Thank you.

And one moment for our next question. And our next question comes from Rupesh Parikh from Oppenheimer and Company.

Good afternoon, and thanks for taking my questions. Also, congrats on a nice quarter. So just going back to your new store commentary, it sounds like your BARDA stores are doing really well. But as you look at your collective class of new store openings, just curious how they're performing? Any surprises thus far? And then are they meeting your expectations from a ramp perspective?

Yes. Rakesh, thanks. Yes, they're right in line with how we're expecting to perform. So the new stores, we're pleased with them. We've talked about it a little over the last few quarters, no major deviations from the trends we're seeing there. We're starting a little lower, particularly in the places where we have lower awareness, and we're ramping faster. That's really been the story in Florida. We're seeing really strong comps in Florida. Overall, they're performing as expected, and we're seeing good results across the country.

Great. And then my follow-up question. And again, I'm not looking for explicit guidance for 2025. But as you look at the business, I know your longer-term algorithm is for low double-digit earnings growth. Clearly, you have a headwind related to the loyalty program this year. But is this business now in the position to get closer to lower double-digit earnings growth in the coming years?

Well, certainly, we talked a lot in the script about sustainable long-term growth. And so that's our goal is through 2024. We need to make some investments to keep the forward progress we've got moving and to set us up for that in the long term. Certainly not guiding into 2024 here yet, as you mentioned, but we're moving in that direction, and those investments are an important piece of that.

Yeah. It's early to give guidance for 2025, Rupesh. But having said that, we're very confident about our future and the investments we're making this year will certainly help us in 2025.

Great. Thank you.

Thanks.

And thank you. And one moment for our next question. And our next question comes from Ken Goldman from JPMorgan. Your line is now open.

Hi. Thank you. I didn't quite understand your response to the question about the $15 million in OpEx that you're spending this year? And how you think about that from an ongoing perspective? Could you just kind of repeat your answer or clarify it? I just didn't know if that was something that continues after 2024. And maybe I just misunderstood.

No, I'll clarify, Ken. I think yes, $15 million in OpEx here in 2024, and that's really to get the loyalty program going along with some technology foundational investments. So not expecting that level of investment to continue going forward.

So just to build on the previous question, I'm curious if we're mistaken here. You have less than $15 million allocated for the loyalty card investment in 2025. You've mentioned that wage inflation is becoming less of a challenge, and it seems to be trending that way for next year. You'll benefit from the loyalty card, and it appears you're preparing for an acceleration. Additionally, with new stores that are ramping up this year, potentially from a lower base, that could also assist with your comparisons next year. What are we missing regarding potential tailwinds as we think about 2025? Are we incorrect to view it as an acceleration year for you, even though it's too early to provide specifics?

I think you said it with your last remarks there. I think it is a little bit early for us to get very buoyant about it. But we certainly believe that understanding our customers more and navigating our way through trying to drive a larger share of wallet of our target customers will provide growth for us in the future. And that's certainly why we're investing this money this year with the premise that it's going to come in terms of top line in 2025 and beyond. And it's part of an ongoing process of how do we understand our customers better. If we're going to be a really great specialty grocer, we've got to understand that customer even better than we do at the moment. And that's the key work behind it. And we'll learn a lot this year from the work that we're putting in, in terms of what it will be able to do. As we get towards the end of 2024, I think we'll be more able to have a conversation about what it's actually going to mean for us in '25 and '26.

Thank you.

Thanks.

And thank you. And one moment for our next question. And our next question comes from Scott Mushkin from R5 Capital. Your line is now open.

Hey, guys. Thanks for taking my question. And it's kind of along the same lines of what Ken and Rupesh were talking about. Kind of looking out at the kind of medium- and longer-term algorithm on growth here, especially with the new store builds, it's hard for me to kind of understand how you wouldn't normalize the comp at least 4%. And if the base stores are growing decently and with all the new stores coming in and just trying to like talk me out of that, like why wouldn't that be the case?

Well, I don't think we'll change your mind on that. We certainly aim to achieve that level of comparable sales growth as we look to the future. However, 2025 and 2026 are still quite far off, and there is currently some pressure on consumers. We need to execute effectively and deliver on our investments and initiatives in 2024. Nevertheless, we are definitely working towards achieving sustainable comparable sales growth for 2025 and beyond.

And you guys said you're happy with your new stores. I assume there's a maturation process going there and you're seeing that come through. But if you take a step back and now that you're getting a lot of the smaller box formats in the ground, like what's working better than maybe you thought? And maybe what's a little worse? And what are you going to tweak?

Yeah. I've been really pleased with frozen foods, which is something we talked about a lot when we introduced a new format. That's performing really well, and I'm very pleased with the space that we invested in that. I'm very pleased with meals, how we're doing with prepared meals, and we put a lot of emphasis on that, in terms of our new format stores, and that's flowing through well. We're encouraged by, as I said earlier, our innovation center in terms of what that's doing for our stores. So there's kind of two or three high points in it. One of the areas that we invested in that hasn't been as strong maybe is the plant-based meat investment. Plant-based dairy is doing very well, and our dairy business is doing well. But plant-based meat was a big trend, and that's probably not come through as well as we would have liked it to do. But overall, in total, it's coming through the way we'd like it. I like the fact that we've got meat at the front of the store in terms of what that's doing to drive center of plate. So I think, by and large, the things that we put in place have worked pretty well.

Guys, thanks. I appreciate you taking my questions.

Thanks, Scott. Thank you.

And thank you. And one moment for our next question. And our next question comes from Mike Montani from Evercore ISI. Your line is now open.

Good afternoon, and thanks for taking the question. I was just hoping to unpack a little bit for the quarter and then in the guidance for the full year. If you could just unpack a little bit what you saw in terms of traffic and how you're thinking about the traffic. Would that be up next year? And then also in terms of inflation, is that kind of 2% to 3% in the fourth quarter? And how much of that do you have baked into the guide for the comp?

Yeah. So I'll take it from the fourth quarter. Yes, I saw positive traffic again in the fourth quarter. Really, the shape of it didn't change materially from the third quarter other than average unit retail and units stabilizing a bit. Average unit retail is slightly higher than what you were describing there, Mike, in the fourth quarter. As we look ahead to '24, it will be slight positive traffic again. We are expecting inflation and average unit retail to be slightly up. And then we'll have slightly lower units as the offset there. We're expecting units to flatten out as everything kind of normalizes and stabilizes finally, hopefully, in 2024. We've said that a couple of years running now. And not all the way there yet, but pretty close, and that's what we're expecting for 2024.

Thank you and good luck.

Thanks, Mike.

And thank you. One moment for our next question. And our next question comes from Bill Kirk from Roth MKM. Your line is now open.

Hey, good afternoon. So I think you've lapped adding DoorDash as an incremental e-commerce partner. So if 4Q e-commerce was up 17% year-over-year, I guess, what happens to that growth rate now that the partners are mostly the same year-over-year?

We recently brought in another partner, Uber Eats. I'm really encouraged by the growth we're seeing in our omnichannel strategy, especially in e-commerce. Customers are drawn to our offerings because they stand out. The success we're experiencing in e-commerce reflects the efforts of our merchants and foraging team in bringing products to the marketplace. Looking ahead, we will adapt to customer preferences. They can choose from DoorDash, Uber Eats, and Instacart, all of which have been excellent partners for us. We're very satisfied with our relationships with these e-commerce providers. Moving forward, we will continue to perform within the guidance Curtis discussed. Would you like to elaborate on that?

Yes. I just think, Bill, the timing of it is pretty close, right? I think we launched Uber about one year after DoorDash, and DoorDash ramped up throughout the year. And so they'll continue to contribute to the comp, not to the same degree, clearly, as last year. But Uber has basically launched, right, one year later. So those two things should kind of neutralize themselves.

Okay. Awesome. And then as a follow-up, it seems to me like produce input prices are a bit more deflationary than maybe your produce prices on the shelf. First, I guess, is that fair? And then if it is, is that dynamic in place as a way to refine a customer base towards more profitable households? Or would it be more of a temporary industry-wide dynamic, and the two would eventually match?

There is considerable volatility in pricing, making it challenging to provide clear answers about changes from one week to another, let alone over the course of a year. We are very pleased with our organic produce business, which differentiates us from conventional grocers, Walmart, and club channels. Our strong organic segment benefits from solid long-term relationships with our vendors, positioning us well to manage price fluctuations. While I may not fully address your question, we believe our pricing strategy for organic produce will serve us well moving forward. We are committed to enhancing the quality and freshness of our produce through investments in physical distribution, as well as systems for replenishment and forecasting, to ensure we improve freshness for our customers. Ultimately, the volatility makes it difficult to give a definitive answer to your inquiry.

And I'll just add, Bill, we're going to look just a bit different because of that organic mix than everybody else. And so that will play a part in that too.

Okay, very helpful. Thank you guys.

Thanks.

And one moment for our next question. And our next question comes from Kendall Toscano from Bank of America. Your line is now open.

Hi. Thanks for taking my question. Congrats on a great quarter. My question was just basically about inflation and what you're seeing on center store. And I guess what you would expect heading into 2024, is there anything from suppliers that they're pushing back on price at all? Any color there?

I think, I assume when you say center store, you mean in the non-perishables, which is different for us.

Yeah.

But I think certainly, fresh is the more volatile piece, as Jack just alluded to. And so as we think about the non-perishables, I think that's a little bit more in line with what the macro newsprint is on that, and our fresh business tends to be the more volatile piece. As I mentioned earlier, we're on the higher end of low single digits is what we're experiencing currently in Q4, and we'll watch that stabilize here in 2024.

There is still volatility in commodity pricing, particularly with items like cocoa and sugar, which are seeing significant price increases. This may impact us, but other commodities are trending downward. However, our non-perishable business has a lot of differentiation in what we offer, which means the factors affecting larger consumer packaged goods available in conventional stores are less likely to influence us. We've managed to navigate these fluctuations without being significantly impacted by them.

Got it. That's really helpful. And then as a follow-up, just could you remind me of the 35 stores you're opening next year, what the focus is between new and existing markets?

Kendall, it's about fifty-fifty, about half in kind of existing established markets, and then half on really the East Coast and Florida and the Mid-Atlantic as the drivers there.

We've opened four this year. One of our highlights is a really nice store we just launched in Cuddy, Los Angeles. We've also established a great store in Miami. Currently, we're expanding across the country, including Maryland. It's quite exciting to see us developing the Sprouts brand nationwide.

I think the only other note Kendall, on the new stores for this year is they're going to be back half loaded about two thirds are going to open in the second half of the year.

Got it. Thanks for the help.

Thank you.

And thank you. One moment for our next question. And our next question comes from Krisztina Katai from Deutsche Bank. Your line is now open.

Hi, good afternoon. I wanted to ask about the customer strategy. So you have a lot more insights into overall purchasing patterns than you even did a year ago. So I wonder if you could quantify maybe how data is helping you in driving increased traffic or customer frequency? And just how do you think about the uplift opportunity, especially as you're gearing up for a loyalty program launch?

Well, we're still fairly immature in that space, right? We talk about kind of low double digits of identifiable customers and high double digits, call it, 19% of our transactions that we can identify. So we've got a long ways to go there. We're really excited for the opportunity with loyalty and getting the test out there in the middle of the year. But we've got a long ways to go on our ability to do that. I think the team has done some early work, some good work around some personalization testing. We've done some vitamins retargeting and things like that. We've gone after organic and attributes within segments of our customers. And so this year and part of the investment in loyalty about getting the foundation and the data foundation right to be able to really do that at scale. And so we'll be working hard on that this year, and we're excited for what that could do for us down the line.

Thank you for that. And I was just wondering if you could give a bit more color in terms of what your actual mature stores are doing from a comp perspective. You obviously have a waterfall benefit. But just wondering how mature stores are comping versus the newer ones? And if there's any update on the waterfall benefit that we should keep in mind for the next couple of years? Thank you.

Yeah. No problem. So again, we've talked a lot good momentum in the newer markets and strong comps, especially in those places where we're not as established. They start a little lower and they're seeing a really strong comps. So it's contributing to our comp for sure, and the mature stores are comping well. I won't get into specifics per se. I think the only other thing to think about is just the newer stores, again, at a little bit lower volume as they start not as impactful on the comp base as the mature stores. So that will impact that kind of spread between the new and the comp stores or the mature stores.

And thank you. And one moment for our next question. And our next question comes from Kelly Banial from BMO Capital Markets. Your line is now open.

Hi. Thanks for taking our questions. Wanted to go back to the discussion of gross margin, I believe your long-term plan there was kind of for a flattish gross margin. You clearly see some opportunity to take that up this year. But I was just curious if you could talk about if anything has changed long term? Do you see more opportunity to continue to take that up? And maybe can you just help us understand the opportunity? I think you called out shrink and promotional optimization. Maybe you could just elaborate on the factors driving that this year and maybe long term?

Sure. Long term, we expect to maintain stable margins. Currently, we are facing some challenges related to shrink, particularly in the second half of the year. Our operations team has worked effectively in Q4 to address this issue, and we believe there will be opportunities to improve our shrink numbers in the second half of next year. Additionally, our merchants have been successful in optimizing promotions and managing our business mix, which will continue to contribute positively from our performance in the first half of 2023. Finally, the supply chain pressures we've faced due to increased square footage will start to ease as we move into the second half of the year after we navigate the first half.

Can you provide some insight into the guidance range? It seems fairly narrow for the full year. I'm curious about how you see the situation, particularly at the low end of the comp range. Is it possible to achieve flat earnings under those conditions? It would be helpful to understand your plans to manage this.

I think we experienced some gross margin expansion, and we need to focus on controlling costs and finding ways to mitigate the pressures we are facing. As we approach the lower end of the range, it becomes more challenging due to fixed costs, but we remain confident in our guidance and the ranges we've provided, and we believe we can achieve our targets.

Thank you.

And thank you. And I'm showing no further questions. I would now like to turn the call back over to Jack Sinclair for closing remarks.

Yeah. Thanks everyone for spending some time with us this afternoon. We appreciate your interest in our company, and we look forward to bringing you up to date through the year as our business evolves. Thanks ever so much.

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