Sprouts Farmers Market, Inc. Q1 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker Susannah Livingston, Vice President of Investor Relations and Treasurer. Please begin.

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our first quarter 2024 earnings call. Jack Sinclair, Chief Executive Officer; and Curtis Valentine, Chief Financial Officer are with me today. The earnings release announcing our first quarter 2024 results, the webcast of this call and financial 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 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, everyone. I want to start by thanking our 32,000 hardworking team members who work together to create a great experience for our customers, which in turn delivered impressive financial results. Our sales have grown by 9% with comparable store sales growing by 4% and diluted earnings per share growing by 14% compared to adjusted diluted earnings per share in the same period last year. These positive results reflect the effectiveness of our strategy and the exceptional execution by our team. It has been a strong start to the year, and we're encouraged by the continued momentum in our business. Our entire approach across the business remains centered around our target customer. We have aligned our merchandising, marketing, operations, new-store design, and supply chain strategies to provide the freshest, most innovative, attribute-driven products in the marketplace. We have also created a unique and easy-to-shop format with great service. During the first quarter, we organized Sprouts brand in organic events, which were highly successful. These events and others led to positive customer traffic growth in the first quarter. We are pleased to bring Sprouts to more communities across the country. The new store program continues to gather pace. We opened 7 for the quarter and are on track for the year, and we're committed to helping our customers live and eat better with every new store opening across the country. I'll follow up with more on our journey in just a bit, but for now, I'll hand it over to Curtis to review our financial performance in the first quarter and our 2024 outlook. Curtis?

Thanks, Jack, and good afternoon, everyone. For the first quarter, total sales were $1.9 billion, up $150 million or 9% from the same period last year. This increase was driven by comparable store sales growth of 4% and the addition of new stores. We had another quarter of positive traffic, and as expected, average unit retails and units per basket continued to stabilize sequentially. Our business continues to be resilient. Our comp performance highlights the categories with the most differentiation, such as grocery, dairy, frozen and meat continue to attract our target customers and drive our results. Sprouts Brand growth continued to outpace total company performance and contributed 21% of our total sales for the quarter. Our e-commerce sales grew approximately 25%, representing 14% of our total sales for the quarter. This included incremental sales from our recently launched Uber Eats partnership, and all 3 of our online partners joined us in promoting healthy trends to create momentum in the new year. The fact that so many of our target customers seek out Sprouts online continues to highlight the appeal of our differentiated assortment. Our first quarter gross margin was 38.3%, an increase of approximately 80 basis points from the same period of the prior year. This improvement was primarily due to a significant turnaround in our fresh shrink performance, driven by our continued focus on inventory management. We also continue to see year-over-year margin improvement due to promotional optimization efforts carrying over from 2023. SG&A for the quarter totaled $540 million, an increase of $57 million or approximately 80 basis points of deleverage compared to adjusted SG&A from the same period of the prior year. As anticipated, the first quarter was impacted by approximately $4 million in holiday pay, with New Year's Day falling in the first day of fiscal 2024. Our strong sales performance led to higher e-commerce fees as well as higher incentive compensation for the team. Last quarter, we shared our plan to invest $15 million in 2024 to build a foundation for sustainable long-term earnings growth, and we are on track with approximately $2 million spent in the first quarter. Store closure and other costs totaled approximately $2 million for the quarter. These are primarily related to the ongoing occupancy costs from our 2023 store closures. Depreciation and amortization, excluding depreciation included in the cost of sales, was $32 million. For the quarter, our earnings before interest and taxes were $148 million. Interest expense was approximately $1 million, and our effective tax rate was 23%. Net income was $114 million, and diluted earnings per share were $1.12, an increase of 14% compared to adjusted diluted earnings per share from the same period of the prior year. During the first quarter, we opened 7 new stores, ending the quarter with 414 stores across 23 states. A strong and healthy balance sheet has underpinned our financial performance. We generated $220 million in operating cash flow, allowing us to self-fund our investments of $46 million in capital expenditures, net of landlord reimbursement to grow the business. We also returned $60 million to our shareholders by repurchasing nearly 1 million shares. We have $148 million remaining under our current share repurchase authorization. We ended the quarter with $312 million in cash and cash equivalents, $125 million outstanding on our $700 million revolver, and $21 million of our outstanding letters of credit. Turning to our outlook. For the full year, we expect total sales growth to be between 7% to 8% and comp sales in the range of 2.5% 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 $415 million and $425 million, and adjusted earnings per share are expected to be between $3.05 and $3.13, 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 25%. 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 to the full year, we expect gross margins to be up as we continue to focus on initiatives to improve shrink and annualize our promotional optimization work from 2023. On the cost front, we expect ongoing wage increases, new store deleverage, and our strategic investments to pressure SG&A, resulting in an additional deleverage in 2024. For the second quarter of the year, we expect comp sales in the range of 3% to 4% and adjusted earnings per share between $0.75 and $0.79. We are expecting more moderate year-over-year impacts in both gross margins and SG&A as we lap fewer outliers in our second quarter comparison, resulting in gross margins up slightly, while SG&A will deleverage slightly. And with that, I'll turn it back to Jack.

Thanks, Curtis. We remain committed to serving our health enthusiasts with products that help them live and eat better. Our team is dedicated to finding innovative and distinctive products with attributes such as organic, gluten-free, grass-fed, or vegan that set us apart from others. The success of our foraging program has continued as sales in our innovation center continue to grow, and we believe we have become the destination for exciting entrepreneurial food companies to introduce their unique products to the marketplace. This innovative spirit lives within our Sprouts brand and culinary teams as they continue to add hundreds of new items like hot honey chicken tenders, non-dairy frozen desserts, and flavored cauliflower rice. Additionally, as I mentioned earlier, in-store experience and customer engagement remain paramount for us. Part of our appeal is our friendly and knowledgeable team members who help customers navigate the differentiated assortment available to them. The team's dedication to our customers in the first quarter resulted in some of the highest customer service scores in our history, a remarkable achievement. Sprouts is incredibly fortunate to have the support of many customers who truly love our brand. As a complementary shop, we have an opportunity to deepen our engagement with our customers and grow their share of wallet through a loyalty program. Our vision is to distinguish our program by enhancing what our brand already does, helping our customers in their passion to live and eat better. This is a multi-year endeavor that will enable Sprouts to build a thriving community where our customers can engage with our brand and we can provide them with personalized content catering to their unique shopping preferences. Our upcoming beta launch of Sprouts Rewards in 2 markets this quarter is just the beginning. And we're excited to continuously improve the program by incorporating feedback from our customers and team members to enhance the experience, functionality, and technology over time. One of the reasons our customers and team members love Sprouts is because our values are aligned. We all care deeply for our communities on the planet. We recently published our 2023 impact report highlighting our work in areas we believe matter most to our target customers, areas such as responsible sourcing of sustainable products, waste reduction, and supporting the communities we serve. In 2023, $3.3 billion of our sales were from products with social or environmental attributes. Our transition to reusable bags removed approximately 130 million single-use bags from circulation, and our store donated 29 million meals to those in need within our communities. It was exciting to see our team members support our Healthy Communities Foundation by donating over 5,500 service hours to build school gardens that help kids grow healthy through nutrition education. I encourage you to read through the report to get a flavor of our focus areas and impact. I was delighted with the opening of several new stores during the fourth quarter from Cudahy, California, to Burtonsville, Maryland. In the first quarter, we launched 7 new stores and are on track to open approximately 35 by the end of the year. We have an extensive pipeline of approximately 100 approved new stores and 70 executed leases, a testament to our commitment to expanding our brand and access to healthy foods in more communities across the country. We've also seen improved new-store openings this year and we attribute much of this success to better brand awareness as we continue to densify markets, and we have growing confidence in our real estate site selection model, which continues to evolve. These improved openings, coupled with continued comp momentum in newer markets and our robust pipeline, will support our growth aspirations. Internally, our team is making great progress in building a best-in-class workplace through our values and culture. Our retention rates are currently at an all-time high, which is a tribute to the intentionality behind this work. We're seeing improvement across the board in our team member engagement scores and believe this focus on culture is translating into the great customer service scores that we're seeing. We know that our journey towards improving our culture is ongoing and we are excited for the progress we've made thus far. In addition to the culture work, we're focused on preparing our leaders for growth. We aim to have a pool of skilled team members ready for future assignments. We typically promote close to 60% of store managers from within. To prepare them for leadership roles, we have developed assistant store manager leadership tracks, over 30 graduated this year from our initial cohort and another 50 team members entered the program in 2024. In closing, the continued momentum we are seeing is a demonstration of the effectiveness of our execution. We're delighted to receive encouraging feedback from our customers, which confirms that our collective efforts are making a meaningful impact. Our store, distribution center, and support office teams are ambitious for Sprouts' future and are determined to deliver on the opportunities that lie ahead. Moving forward, we remain focused on execution, both day-to-day in our stores and on our investments for the future, all while keeping customers our top priority. Thank you for your support, and we look forward to connecting with many of you in the coming months. And with that, I'd like to turn it over for questions.

Our first question will be coming from Leah Jordan of Goldman Sachs.

Great job on the quarter. Just wanted to start off on the comp. What was the primary driver for the outperformance versus your expectations? How did traffic trend throughout the quarter? And what do you attribute to the recent market share gain?

Leah, thanks for the note there. So yes, comps outperformed, it's really coming from a lot of different things. I think it's a little bit of everything just being a little bit better than we expected. So continued positive, solid traffic, the average unit retails stabilizing as expected and the business just continuing to hum along. So we're pleased with the performance in Q1.

Yes, we are experiencing positive traffic in both our e-commerce and physical stores. The performance in these channels has been encouraging, and we feel optimistic about it. Overall, everything appears to be in good condition. Regarding your question about market share, it is challenging for us to measure. We focus on our own performance rather than the broader grocery market share. However, since the pandemic, shoppers have become more comfortable exploring various shopping options, which benefits us as a complementary retailer.

That's very helpful. I wanted to ask about gross margin. It showed strong growth this quarter, and you mentioned some tailwinds earlier. How should we view it for the rest of the year? How much of the increase will slow down due to promotional optimization for the remainder of the year? You mentioned it would increase for the full year. Can you provide more detail compared to last quarter when you indicated it would rise by 20 to 25 basis points given the strong performance in the first quarter?

Yes, sure. I think, so for the year, I would say up approximately $50 million now. So certainly, we got better flow-through in the first quarter than we expected, and it was really a shrink story. And we talked about it on the last call, but we had challenges throughout last year and particularly in the second half. And really credit to the teams, they got on top of it late last year. And that turnaround just happened a little faster than we expected and resulted in really good performance. Really just a focus on inventory management and some of the things that we're investing in, and the teams really working together, be it operations, merchandising, some of our analytics teams and our IT team coming together to help the business figure things out and get things moving in the right direction. But yes, for the full year, I expect it to be up about $50 million on the growth side.

And one moment for our next question. And our next question will be coming from Mark Carden of UBS.

Nice quarter. So to start, maybe a follow-up on that last gross margin question. Obviously, a lot is going right now, clearly benefited from shedding coupon clippers. 1Q is historically your strongest quarter from a seasonality perspective, the strong performance inventory management. Just thinking about 1Q relative to maybe 1Q next year, was this pretty much a perfect backdrop for you guys? Are you approaching upper bound or do you still see more room to go from here? So in other words, when you think about the benefit in the back half of the year, is that just these current tailwinds or do you see really more room to scale up?

Yes. I think we're pleased; there's a lot in that. So I'll try to tackle them piece by piece. But we feel good about our margins. Certainly, bottom line, we expect to be a stable business, and the gains we're experiencing there in gross margin, there's nothing in there that was particularly one-time in nature. It was a soft compare year-over-year, which definitely helped from an overall magnitude perspective. It won't be quite that big going forward. But again, we feel good about the work that we're doing, and we feel like it's sustainable and that we're kind of changing the water level and shrink here moving forward, and it will be a little bit better here in 2024 than it was in 2023. And longer-term, we talk about it a fair amount. We're still a fairly immature business, so there are opportunities. There are pressure points as well, and net-net, we plan to manage the business to stable on the bottom line and continue to grow the business.

And, Mark, the gross margins particularly, there's kind of buckets that we look at, shrink certainly has been a big benefit for us in this quarter. And I think there's continued opportunity. As Curtis said, the immaturity in our business, as we get better at managing inventory with some of the systems that we put in and are applying increasingly more effectively, I think there's some further benefits on that going forward. We're getting a little bit better at promoting more effectively and understanding the elasticities. Well, that's been an ongoing thing over the last few years. And I think we're just gradually getting a little bit better at being efficient at promoting when we do promote. And there have been some drivers on mix, which I think will continue to help us in terms of mix towards organic and mix towards some of the more attribute-based products that we work increasingly getting a reputation for. I think those three buckets will help us going forward.

Great. That's helpful. And then as a follow up, we've heard about some pressure on restaurant demand recently. Do you think Sprouts has been experiencing much trade-in from outside of food at home? Have you seen any uptick in prepared food sales or do you think it's mainly just coming from within food at home?

No, I believe we have seen some benefits from that. I am very pleased with the investments made by the team inside the stores. We have installed several new cabinets to enhance the meals area for both the meat and dairy sectors, and we have experienced positive results from those changes. Our frozen business has performed well; the main factors contributing to this come from consumers choosing to eat at home rather than at restaurants. I do think we are experiencing some advantages from this trend. It's uncertain how the economy will shape up over the next six, nine, or twelve months, but I believe it is more likely that we will continue to benefit rather than face disadvantages.

And one moment for our next question. Our next question will come from Michael Montani of Evercore ISI.

I wanted to focus in on two areas, if I could. One was just on shrink. I think for you all, it's more a story of efficiency gains versus theft. But just wondering if you can give us some incremental color there, Jack, in terms of what you've seen and what the opportunity could be? And then secondly, on the wage and benefit front. So can you just provide an update about what you all are experiencing there and what you're looking for this year in that line item?

Certainly, Mike. I'll have Curtis provide additional details, but regarding shrink, we have seen improvements, especially in our fresh shrink. As you pointed out, we are less affected by theft compared to many non-food retailers, primarily because our products are highly differentiated, making them harder to steal and resell. We are not encountering the same level of issues as others, although we remain vigilant. The significant benefit comes from how we manage our fresh inventory, which represents a larger portion of our offerings than most competitors. This presents greater opportunities as we enhance our replenishment systems. We have an initiative called FARM, which stands for Forecasting Allocation Replenishment Management, that is helping us optimize inventory levels in stores at the appropriate times. We are still developing this system, so there is ongoing opportunity here. I’m very pleased with the advancements made by our teams in operations, with strong support from both the merchants and IT teams. Regarding wages and benefits, we are optimistic about the retention rates at our stores, which we believe positively impacts our operations. Higher retention reduces costs for training and enrollment, and our significant improvement in retention reassures me that our teams are effectively managing relationships, as I mentioned earlier. The efforts we have made towards building a strong culture with clear values and purpose are starting to yield better retention outcomes. We expect wages to continue increasing in our projections. One of the reasons for our success in retention is our commitment to clearly communicating the benefits we offer, including healthcare and bonuses. Many stores distribute bonuses that benefit everyone, and over 90% of the leadership team in each store received a bonus, a trend that is on the rise and self-financed. We are very encouraged by the success of our bonus programs. Curtis, would you like to add anything?

No, I think the only detail regarding shrink is that about 75% of it is related to the fresh side. To provide some context, the issue of theft is relatively minor for us, as Jack mentioned.

One moment for our next question. And our next question will be coming from John Heinbockel of Guggenheim Securities.

So Jack, let me start with what do you want to learn from the two test markets with the loyalty program? And then what do you think the benefit lies, right, traffic, basket? And I don't know if it's hard for you to figure out your wallet share. But how do you think about that?

Yes, John, great questions that relate to the fact that the benefits will manifest in 2025. The efforts in 2024 are focused on ensuring our infrastructure and marketing technology are properly set up to create an efficient and seamless experience for customers. We will be testing two markets to determine the effectiveness of our approach and to resolve any issues that arise. By the end of the year, we plan to expand this pilot to include more stores. Throughout 2024, we will refine our methods in preparation for 2025, and this will be an ongoing learning process. As you mentioned, we anticipate an increase in the share of wallet among our target customers. Our goal is to gain a deeper understanding of these customers so that we can enhance their engagement. We have some metrics to gauge our current share of wallet, which is in the low double-digits but not significantly above that range. This context sets our expectations for increasing the share of wallet from our target customers, which will help fund our initiatives moving forward. The benefits will be evident in 2025, while the important learnings will occur in 2024. These learnings will focus on technology and marketing as well as a deeper understanding of our customers, helping us foster a sense of belonging within the Sprouts ecosystem. The team is putting in considerable effort behind the scenes, and we're eager to see the outcomes.

Maybe second thing, right, you're obviously adding a lot of stores this year and you did last year a little bit in the Northeast. So when you think about the timing, right, of that DC, how do you think about that now? And how far can you push the envelope? I know the idea was going well beyond or potentially well beyond produce in all of the DCs. How far can you push that?

We have created the infrastructure that gives us choice, and relating back to our FARM initiative, once we establish our replenishment mode, we will have numerous options. We aim to have greater control over our Sprouts brand business moving forward. We believe there are aspects of our fresh business that we can manage more effectively. We have the capacity to do this. While we haven't quite reached this in the Northeast yet, we are working diligently to determine the best distribution strategies and the opportunities available to us. I am optimistic that we will have this in place by 2026 at the latest. Our current efforts are generating these options, and as we approach 2025, you will certainly see us expanding beyond just produce.

And one moment for our next question. Our next question will come from Rupesh Parikh of Oppenheimer & Co.

Also, congrats on a nice quarter. So just on the e-commerce front. So as you've added Uber Eats, just curious if you're seeing the incrementality at this point you would have expected with these additional partners.

Yes. We are really pleased with all 3 partners. We've seen strong business out of all 3. They did a really nice job in the new year. The healthy fresh start to the year that everyone goes through. It's a big time for us, and they were great partners in that respect. And yes, it's been incremental as expected. So we've added both partners over the last 2 years and seen really strong results.

And the good thing about it, Rupesh, is you've got DoorDash and Uber Eats, which have both got a kind of different customer base. So I think we're bringing some access to the assortment that we have to a slightly broader base. So it's been working well, as Curtis said.

They play a little differently geographically too. So again, it's allowing us to access new and different customers. And it's an increasingly omnichannel world, and then that helps us as well from a convenience standpoint for those customers that are a little further away from our stores.

Great. I have a follow-up question regarding the current macro concerns. Your business appears to be performing well, but I am curious about your observations regarding consumer behavior. Are there any new trends or changes that you have noticed with your consumers?

Well, one of the things we've always talked about is that we feel pretty confident that the assortment that we have, if you're a vegan, you're going to stay a vegan irrespective of what's going to happen in the macro world. So we feel there's some protection, if you like, from the macroeconomic environment. I think there is a lot of uncertainty, and we continue to watch it very closely. We believe that what we are doing and targeting those specific health enthusiast customers, there's a few more of them. Again, whatever happens in the macro environment, and we feel that that's going to stand us in good stead going forward over the next couple of years as that customer base continues to grow, and we continue to work hard at serving that customer base appropriately. So again, I don't want to dismiss the macro environment, but it's something that we think we're a little bit shielded from, almost from whatever happens here. And to be honest, Rupesh, your guess is as good as mine as to what's going to happen in the macro environment.

And one moment for our next question. Our next question will come from Scott Mushkin of R5 Capital.

So kind of a two-part question here. So I mean, obviously, margins have been trending up, and you talked about it being stable. But just from like a company philosophy perspective versus margin rate versus margin dollars, where do you kind of think the rate is kind of where you want it to be, and you're going to focus more on the dollars and even accelerating sales more?

Yes, Scott, let me have a start at that and then I'll pass it on to Curtis to talk specifically on the margins. Our primary focus is traffic and top line. Everything we're doing is making sure that we're serving our target customers better and better. And we will be able to manage our margin within that context, but we'll be sensitive to it in terms of how that works going forward. Having said that, I think the elements of what we talked about in terms of shrink, in terms of the mix of the product and a better thinking around our promotion, our evolving thinking on our promotion gives us opportunities going forward. But at no stage will we compromise margin or customer top line, if there's an interaction between it. So far, we haven't hit that point, and I'm feeling pretty confident about that we can manage both pretty effectively. But as I say, the important thing for us is traffic.

And, Scott, I'd just add to that. I mean, I think about it on the bottom line and EBIT margins being stable, and we feel really good about being able to do that in the short-term, long term, et cetera, to what Jack spoke about. And sometimes, that will mean a little bit of investment in SG&A, like an inventory management investment so that we can get a better shrink. So we're going to work the immaturity in our business. And sometimes that will fall in a gross benefit and sometimes that will be an SG&A benefit. But really, we're focused on that bottom line stability and maintaining that going forward, and we feel pretty good about being able to do that.

So my follow-up question to that is, let's just say the strength in the business continues. Obviously, you guys have had a nice little string of quarters. And it seems like the customers coming your way, macro may not matter as much. So if this strength of the business continues, what areas would you invest in more over the next couple of years?

I think it's the same places we're investing this year will be key components, right? So inventory management, we've talked about the technology underpinnings for scalability. We'll continue to work on that and make sure we have the right foundation to continue to grow. And then loyalty will be a multi-year journey that we'll continue to improve upon. And I think the last piece is team and talent is critical for us and we've got to continue to find store managers, department managers, and great team members who engage with the customer, take care of our target customers and provide a great experience in the store. So those will be the places that we'll continue to double down and make sure that we've got the right foundation and we're scalable for the long haul.

We need to invest in our supply chain moving forward, as it will be important for us to ensure that we can supply a wider range of areas than we currently do. While this is not an immediate priority, there are many locations in the country without a Sprouts store. We will continue to accelerate our efforts as we experience success and strength in our business.

And one moment for our next question. Our next question will be coming from Robert Ohmes of Bank of America.

Jack, can you talk a little more about the new store performance in the first quarter? It was a pretty significant improvement in your new store productivity. And I know you mentioned a little bit. Any more color on where stores opened a lot, say, earlier in the quarter, like how is there such a dramatic improvement in new store productivity?

We opened seven stores, and we were very pleased with their performance, particularly six of them. This reflects the early success of our new store model, which is helping us choose more effective locations for new openings. This is promising news. Looking back to when we opened stores during the pandemic, it was challenging to attract customers because people were hesitant to visit public places for grocery shopping, a topic we've discussed frequently in recent years. We are improving our store model and marketing strategies. By focusing our stores in certain regions, we are increasing brand awareness in areas where we were less known. Our efforts in Florida have been beneficial, with a growing number of stores there, which is also supporting our expansion efforts. Moving forward, I anticipate significant advantages as we continue our store program, particularly in the Mid-Atlantic region where we have many stores planned. This concentration in our store portfolio should yield substantial benefits.

Are there any additional regional differences to highlight? You mentioned Florida, but were there any regions that performed particularly well this quarter compared to others, or any notable differences between new and existing markets?

No, I think the trends have been pretty consistent for us. We're not seeing any major departures from what we've seen the last several quarters. The new markets are performing well. We're excited for the momentum, but it's kind of come in similar to what we've seen in prior quarters.

We are very encouraged by our success in locations like Burtonsville, Maryland, thanks to the team's excellent work. This gives us a lot of confidence. Interestingly, we expect to perform well in California, but we are also seeing positive results outside of that state. This trend is very encouraging, especially in Florida, as we mentioned.

One moment for our next question. Our next question will be coming from Kelly Bania of BMO Capital Market.

This is Kelly Bania. Just wanted to follow up on the e-commerce topic. Are DoorDash and Instacart still growing? I assume maybe some of the outsized growth here is coming from the newest partner at Uber. But just wondering if you could talk about that. And also just the fee structures, are they similar for Sprouts and for consumers across the three? Or is there any preference, I guess, from your vantage point between the different partners? And then also just to follow up on competition with e-commerce, would you expect any competitive impact from Whole Foods given the new membership model that they recently announced with Amazon?

I'll cover kind of the first couple of those, and maybe I'll let Jack cover the last one. But on e-commerce, all three are really performing well for us. So we're really pleased with the results in all three, and I won't get very specific, but definitely all three are growing, and we're seeing strong overall e-commerce performance. On the fee structure, again, I won't get into specifics there, but we're comfortable with the fees we have. We work closely with our partners. And for us, there's really no preference between the three, wherever the customer wants us to be, we're happy to be there for them. And if they want to go through the stores, great. If they want to go through Instacart, great; DoorDash, Uber Eats. However, they want to engage with us, we're happy to have them.

To reiterate what Curtis said, we are very satisfied with all three of our partners. They perform excellently for us, and they are all contributing positively to our e-commerce growth. Regarding the Amazon and Whole Foods situation, we are keeping a close eye on Whole Foods as Amazon has made numerous statements concerning food and fresh products. We believe our position is quite strong in comparison to Whole Foods, which is how I see this context. When it comes to the value of produce, especially organic produce, we believe we are in a solid position for our customers, regardless of any delivery fees. We offer good relative value on fresh produce, which is a significant part of our business, though less so for them. We monitor that closely and keep an eye on pricing compared to Whole Foods, particularly for everything except produce, and we feel confident in that area. We track these developments closely, but we believe we are well positioned against Whole Foods in terms of product and pricing, regardless of delivery charges. This is one reason we think our e-commerce business is performing so well. The unique value we provide makes it hard to justify switching to another service for grocery shopping at Sprouts without significant differentiation. This gives us confidence, although we will continue to observe the situation carefully.

One moment for our next question. And our next question will come from Chuck Cerankosky of Northcoast Research.

Jack and Curtis, can you talk about inflation and the 4% comps, how much was in there? And how are your customers reacting to categories or SKUs that are inflating more than the average?

Yes. So from the kind of comp driver makeup, solid positive traffic again this quarter and then continued stabilization in the AUR and unit story. So a little bit less inflation this quarter than last. And we're really to that place now where it has stabilized. We're low-single-digit inflation. We're still slightly negative on the unit side, but getting closer to flat with each passing kind of quarter and month. And it's all playing out as we had anticipated. And then from a customer perspective, we're not really seeing a material change in our trajectory and trends there. I think the similar things that we were talking about in prior quarters are continuing to play out, but no major reaction or change in customer behavior as it relates to inflation or price there.

Yes. And Chuck, the categories that you see the most volatility are the fresh produce areas. When you see avocados going up dramatically or coming down dramatically, we will double down and either sell a bit less or sell a bit more. And customers do react to price in the fresh produce space linked to the inflationary trends that are happening in that category. And it's very volatile, which is one of the reasons our inflation doesn't quite mirror what you see with everybody else. And but to Curtis's point, we're not seeing any specific categories that are going up so much that we're worried about the unit volume any more than we kind of always have been.

And you've made a lot of strides in private label and that's being helped by people looking for value with the inflation even as it slows down. How is that trading off with all the new products in your innovation centers?

Yes, we are striving for balance in our approach. We are not operating in the private label sector focused on trading down or commoditizing against established brands. Our proposition is clear: we will offer an innovative and differentiated Sprouts Brand. The relabeling and new products our team has introduced have shown promising results. Currently, Sprouts Brand comprises 21% of our business, which is a significant increase from 16%, driven by our commitment to differentiation, as well as our branded products featured in the innovation center. We aim to position ourselves as the go-to destination for new entrepreneurial offerings in the health-based attribute space. Our innovation centers, which are present in all our stores and are performing well, showcase strong, lesser-known brands that resonate with our customers and team members. Our focus will remain on delivering quality differentiated Sprouts Brand products alongside top-notch branded items. We will steer clear of traditional branded items typically found in conventional supermarkets and major retailers like Walmart. Our goal is to remain as distinct as possible, which we believe will benefit us moving forward.

And one moment for our next question. And our next question comes from Robert Dickerson of Jefferies.

This might sound like kind of a random question, but I'm going to ask it. I'm just curious, how is your frozen department doing? And I just ask because I follow all the groceries, but also follow companies that produce frozen products, let's say, frozen food in general has been kind of relatively weaker over the past year or so on the volume side versus a lot of the other stores. But again, you have differentiated product. So I'm curious, would you say, oh, our frozen department, we're seeing a little bit of that pressure or maybe you're not, which would clearly be a differentiating factor?

Yes, Robert, it's a relevant question. We often consider the trends in different categories. During the pandemic, our frozen business experienced significant growth along with the broader market. We have increased our shelf space for frozen products in our new stores because we believe this category is well-suited for attribute-based offerings, including vegetarian and plant-based options. We've seen great success, particularly with some of the Sprouts Brand items in the frozen section. While I can't say for certain what is happening in the overall market, we've noticed strong comparable sales in our frozen category, and I'm optimistic about it. I can't confirm whether this aligns with broader market trends, but this is our current situation.

Yes. And I think, Rob, I would just attribute that to it's a differentiation story. In our departments and categories where we have the most differentiation, those are the departments that have been drivers for us for comp, and frozen is among those. And the team does a great job with the assortment, making it different as Jack alluded to, and that just fits well within that broader story of where we're different, we continue to do well.

Yes. Great. And then I guess maybe just a broader question. I know you continue to highlight your newer stores or some of the smaller stores, merchandiser stores with more prioritized categories that maybe have better growth potential. If you're going from, I don't know, 30,000 square feet, 25,000. I mean, these are like drastic changes on the box size. I mean they're smaller, better economics, everything that's great. I'm just curious, like, then where do you trim? Does produce get a little bit smaller, 35% of the store? I'm just trying to understand, I guess, more broadly kind of now if you open up a new store now, where would you view those better growth areas?

Yes. The 23,000 square foot stores that we're building will be our focus going forward. This year, we have 35,000 square foot stores, but next year, most of them will be 23,000 square feet. We significantly reduced the non-customer-facing space, integrating areas for dairy, bakery, and meat to create more back room space. Consequently, in our vitamins and supplements department, we have slightly fewer SKUs, but in frozen, we actually increased the number of SKUs, and the SKU count in the remaining categories remains largely unchanged. We continue to prioritize produce as a key business driver and have allocated a bit more space to frozen, grocery, and dairy, while possibly reducing space in bulk and other areas. Overall, aside from vitamins, we've maintained a similar SKU count, with slight increases in frozen and grocery.

I think the key point, Rob, is that when we approached 30,000 square feet before Jack arrived, it wasn't related to the assortment or the proposition; it was due to fixtures and unproductive space. Therefore, it was not difficult for us to return to '23 without affecting the assortments.

Okay, great. And then maybe just another quick one for me. I'm just curious, as you enter a new market or expand a pre-existing market in an area where there hasn't been a Sprouts, right? You opened the store. As you open that store, is this essentially kind of like word-of-mouth? I mean, I'm sure you have for signage and people drive by the store and they see it, but are there other ways to just try to kind of welcome the community, so to speak, to the actual store without having to spend a fair amount of capital to do so?

Yes, we definitely consider the demographics of the area when opening a store to ensure there are enough health-conscious individuals nearby. Our marketing teams have become skilled at reaching out to potential customers about 4 to 6 weeks before a store opens. We tailor our marketing strategies for each location; for instance, our approach will differ significantly between a store in Cudahy, Los Angeles, and one in Aberdeen, New Jersey. We focus on effective ways to generate excitement prior to opening, including getting visible locations and engaging with local mayors to help build awareness. Overall, our marketing teams are performing excellently in this regard.

And I'll just reinforce Jack's earlier comments around the density in the market helps. Certainly, when you open the 10th store in a market, it's easier than the first. And there is some word of mouth, and just having the building up and the signage up as people drive by, the more and more stores you put in, the easier that gets. And all those things are coming together to help with new store performance.

Okay. And our next question will come from Krisztina Katai of Deutsche Bank.

This is Jessica Taylor on for Krisztina. Just wanted to go back to private label a little bit. And in the past and today, you talked about how you watch your competitors' interest but don't worry too much given the product and customer differentiation. So now the largest retailer has announced a new private label brand that's really aiming to increase its share from this set of customers who are more attribute driven and who are more health conscious. So how does this kind of change your view on how you're watching that competitor and competitors in general who might follow that lead? And how does it kind of impact your go-to-market strategy for your private label and attribute-driven items?

Yes, that's a great question, Jessica. I've been following with interest the recent initiative, though we haven't fully engaged with it yet. I can’t quite recall the name; is it called Better For or something similar?

Better goods. Better foods.

I see it as a tiering strategy in your branded approach, aimed at encouraging customers to opt for higher quality products rather than specific attributes. It doesn't appear to be a health-focused initiative but rather a way to enhance quality. This reflects a common practice from my experience in the U.K. It feels more like a tiering exercise than an attribute-driven one, although there are elements like oat milk involved. Our association with Trader Joe's is positive, and I perceive it as an opportunity to attract some customers from that market. Our Sprouts Brand is committed to being unique and not merely encouraging customers to upgrade to similar products. Therefore, our approach remains unchanged. We have a specific target audience that is highly relevant to our business, and we can offer 30 keto products. I don’t believe this Better For initiative will focus on attributes, but we will monitor its evolution closely. Walmart tends to make a significant impact with whatever they do.

Yes, that's true. And just a follow-up, can you talk a little bit about the cadence through the quarter for comp trends and any month-to-date or quarter-to-date trends?

Sure. I'll take that one. We won't get too specific here in the intra-quarter, but pretty consistent from a comp perspective throughout Q1. Always Q1 is always a little bit noisy. There's usually some weather events and things like that, and you'll see some weeks up and some weeks down, but generally pretty consistent for us in the quarter. And then certainly within Q2 here, we're comfortable within our guidance range with where the business is trending at the moment.

And our last question will be coming from Edward Kelly of Wells Fargo.

Yes, this is Evan Ketterhagen on for Ed. I know we talked a lot about e-comm already, but just wanted to touch on it a bit more here. We assume that your online sales are included in the overall comp. But could you guys just confirm if that's correct and if that also includes your Uber Eats partnership that started up more recently? And then the 25% growth this quarter, a bit of an acceleration versus prior quarters. Do you think that the bad weather in January might have played a role there? Or should we just expect a higher rate of growth going forward with the increased number of partnerships that you have?

Yes. So first part of it, yes, it's embedded in our comp and included in our comp. And certainly, some of the acceleration would be the new partnership with Uber Eats, which launched kind of mid-to-late Q4 and has been ramping up. And then the last part is a good question. Yes, we definitely see that when there's kind of significant weather events, it tends to move some people into e-commerce and out of the stores. And so through the first kind of half of the quarter, we had a few of those and saw that phenomenon. I would add too, again, all three partners recognizing kind of that health trend at the beginning of the year. That's our Super Bowl as Sprouts, and they were right there with us and doing the best they could to capture that with our target customers. And so we had a lot of activity going on in those first 6 weeks of the quarter with us, with our partners to try to take advantage of that. And so I think all three of those things are contributing to that stronger e-commerce growth.

I would now like to hand the call back to Jack for closing remarks.

Yes. Thanks, everyone, for your attention and your support. And we look forward to catching up with you in due course. So thanks ever so much. Take care.

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