Good day, thank you for standing by. Welcome to the Sprouts Farmers Market Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there'll be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Susannah Livingston. Please go ahead.

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our Second Quarter 2024 Earnings Call. Jack Sinclair, Chief Executive Officer and Curtis Valentine, Chief Financial Officer are with me today. The earnings release announcing our second 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 statement. 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 comparable GAAP figures. With that, let me hand it over to Jack.

Thanks Susannah and good afternoon, everyone. We've seen impressive growth in the second quarter. Our sales grew by 12% compared to the second quarter of 2023, including a 6.7% increase in comparable store sales. And our diluted earnings per share grew by more than 32% from last year's adjusted diluted earnings per share. These results are a direct outcome of consistently executing and evolving our long-term strategy over the past few years. Our health enthusiast target customers continue to respond positively to our differentiated product assortment and unique shopping experience. As consumer preferences shift towards healthier living, we anticipate there will be even more health enthusiasts in the future than there are today, bolstering our confidence in the long-term potential of Sprouts. As always, the key factor in all of this is our incredible team. Their teamwork and commitment to excellence are the driving forces propelling us forward. It is an exciting time as we continue to expand, with significant opportunities still to come. I'll follow up with more later, but for now I'll hand it over to Curtis to review our financial performance in the second quarter and our 2024 outlook.

Thanks, Jack, and good afternoon everyone. For the second quarter, total sales were $1.9 billion, up $201 million or 12% in the same period last year. This increase was driven by comparable store sales growth of 6.7% and the addition of new stores. For the quarter, we had a healthy balance across all of our key comp drivers. Traffic and ticket, e-commerce and brick and mortar, new and older stores, as well as strong results in all geographies. E-commerce sales also increased by 30%, representing 14% of our total sales for the quarter, highlighting our commitment to meeting the evolving needs of our omnichannel customers, however they choose to engage with Sprouts. In addition, Sprouts brand contributed 22% to our total sales for the quarter. The company's sales performance was strong across all categories as well. We focused on improving stock levels, introducing innovative products with healthy attributes, getting the right assortment locally, and adjusting planograms, leading to improved performance in our physical stores, along with continued steady e-commerce growth. In particular, during the second quarter, we benefited from early and strong seasonal produce and saw the business strengthen more than anticipated with this kick-off of summer. In the second quarter, our gross margin was 37.9%, approximately 80 basis points higher than adjusted gross margin for the same period last year. This improvement was mainly due to our better performance in managing our inventory, as well as benefit from promotional optimization and sales leverage in our supply chain. We're pleased to see that the investments we've made in our inventory systems, data, and processes over the last several years have given the teams the tools they need to drive these results. SG&A for the quarter totaled $556 million, an increase of $63 million, or approximately 20 basis points of deleverage compared to adjusted SG&A from the same period last year. This deleverage is primarily due to spending against our planned $15 million of strategic investments in 2024 and the pressure we continue to feel from new store openings as we grow. In addition, our strong sales have resulted in increased e-commerce fees and higher incentive compensation for our teams, partially offset by leverage from these higher sales. Store closure and other costs totaled approximately $3 million for the quarter. These are primarily related to ongoing occupancy costs from our 2023 store closures. Depreciation and amortization, excluding depreciation included in the cost of sales, was $31 million. For the second quarter, our earnings before interest and taxes were $127 million. Interest was positive $139,000 due to the paydown of our revolver and our invested cash, and our effective tax rate was 25%. Net income was $95 million and diluted earnings per share were $0.94, an increase of 32% compared to adjusted diluted earnings per share from the same period the prior year. Our strong and healthy balance sheet has been the foundation of our financial performance. Year-to-date, we generated $311 million in operating cash flow, which enabled us to self-fund our investments of $89 million in capital expenditures, net of landlord reimbursement, to grow our business. With our robust cash generation, we also paid down all $125 million of our outstanding revolver and returned $104 million to our shareholders through purchasing nearly 1.6 million shares. We have $585 million remaining under our new $600 million share repurchase authorization. At quarter end, we had $177 million in cash and cash equivalents, no outstanding borrowings under our credit facility, and $20 million of letters of credit. Turning to our outlook, for the full year, we expect total sales growth to be between 9% to 10% and comp sales in the range of 4% to 5%. We plan to open approximately 35 new stores with the majority of our remaining openings in the fourth quarter. Adjusted earnings before interest and taxes are expected to be between $445 million and $455 million. And adjusted earnings per share are expected to be between $3.29 and $3.37, 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 more color, we expect gross margins to be up in the second half in-line with our first half margin expansion as we expect to maintain our recent improvements. For the year, we expect continued pressure on SG&A due to ongoing wage and benefits pressure, new storage deleverage, and our strategic investments. In the longer term, we remain focused on cost management and looking for opportunities to mitigate these cost headwinds. For the third quarter, we expect comp sales to range from approximately 3.5% to 4.5% and adjusted earnings per share between $0.71 and $0.75. And with that, I'll turn it back to Jack.

Thanks Curtis. We are optimistic about the momentum of our business and the path towards expansion. Our team is more aligned than ever and is committed to winning with our target customers through our differentiated assortment and unique store experience. Moreover, we look forward to the future and the opportunities that loyalty, enhanced personalization and expansion will bring. While the second quarter yielded exceptional results, we recognize that a significant work ahead. We are unwavering in our focus on collaboration and execution to unlock Sprouts' full potential. We are making great progress in becoming our customers' go-to destination for health and wellness products. Our unique product assortment is curated specifically for our target customers and sets us apart due to the attributes, freshness and quality we deliver. We continue to see customers seeking the type of products and experience we offer. In our second quarter, we saw increased frequency from our existing customers, as well as growth in new customers. Our foraging team continues to drive our unique assortment through both Sprouts brand and emerging brands on our In-store Innovation Center. Sales continue to grow in this space, and we have a strong process to bring the best products quickly to our shelves. One such successful product was Cymbiotika, a new line of supplements highlighted on the Innovation Center, allowing us to educate customers about the product's benefits. In addition, Sprouts’ brand continues to expand with more than 200 new items released through the second quarter, resulting in growing comp sales above the company average. In addition, we've been investing in our category management capabilities to support our merchants and we're seeing strong performance from that investment across our business. The teams are using this improved capability to make stronger assortment decisions, merchandise more effectively in-store, and improve the online customer journey. As a result, we're seeing better performance in category resets. On the store experience fronts, we have strengthened store operations and fortified our supply chain foundation. The IT, supply chain and operations teams have collaborated to improve our inventory management with new programs, processes and tools. These improvements have empowered our store team members to manage fresh inventory better, improving freshness for our customers and significantly improving shrink. Our merchandising, marketing and operations teams are collaborating to deliver unique events that create a distinctive store experience. During the second quarter we held a unique Cherry Festival. The event not only promoted the cherry season in produce but also featured nearly 40 Sprouts brand products such as dark chocolate, cherry popcorn, cherry blossom lemonade and cherry infused deli meals and marinades throughout the store. Our marketing team leveraged our social media and digital platforms to create buzz and our operations team brought the event to life in the store with creative displays and sampling to create a one-of-a-kind Sprouts experience. On the marketing front, we're excited about the increased traffic and brand awareness driven by optimizing our media mix and targeting our customers through creative partnerships with influencers and celebrities. We will continue to take a regionally driven approach to our media strategy and refine our personalization efforts to create a more engaging customer experience. On loyalty, we recently started the beta test of the Sprouts rewards program in Tucson and Nashville, one older market and one newer market. We're in the test and learn phase of this project, as we gather feedback from our team and customers. We're very early in our journey to build a loyalty program that excites and engages our customers while increasing their share of wallet with Sprouts. Given our business momentum, we're eager to expand into more communities and provide access to even more health-focused target customers. We continue to improve our site selection process and are pleased with the results from our 2024 openings thus far. We've seen strong openings from coast to coast. We're customizing our grand opening approach to establish stronger local connections. This involves focusing partnerships with local news stations to drive awareness and excitement of Sprouts joining the neighborhood. Our plans include unique community engagement activities for each store opening. For example, in Bakersfield, California, Sprouts participated in the Earth Day Festival and distributed confetti made of seeds and basil plants to all the attendees. In Aberdeen, New Jersey we invited important community members to join us including Aberdeen native Laurie Hernandez, a former Olympic gymnast. We're also excited to leverage our recently announced partnership with the Southeastern Conference to support female athletes while increasing our brand awareness in many emerging markets where we are building new stores. We will open approximately 35 new stores by the end of the year, with more than half of the remaining openings in the fourth quarter. Despite the challenging development environment, the real estate team is doing a terrific job. Given the success of our new stores, we are dedicated to expanding our brand with over 110 approved new stores and more than 70 executed leases in the pipeline for the next few years. Our success wouldn't be possible without a winning culture and a talent engine capable of supporting growth through the recruitment, development and rewards program that strengthen team member retention. We continue to invest in our culture and have better aligned our total rewards program to our business performance, incentivizing our teams to take ownership of their business and participate in our shared success. We're proud that every team member in every store can earn a bonus with strong sales performance and we believe that collectively these differentiated incentive programs are motivating our team members to deliver outstanding customer experiences and contribute to our business momentum. In closing, our second quarter results have bolstered our confidence in our strategy. Our focus on our target customers will unlock the full potential of our business and prepare us for the future. We're dedicated to maintaining a high level of execution, responding to opportunities with urgency, and investing in long-term sustainable earnings growth. Our teams are motivated by our progress, the challenges that await us and the even greater opportunities on the horizon. We're excited to share our progress and connect with many of you in the coming months. With that, I'd like to turn over for questions.

Thank you. Today's first question comes from John Heinbockel of Guggenheim. Your line is open.

Hey, Jack, can you discuss the foraging process? I understand that a key part of what you're doing is avoiding product overlap with Walmart or conventional retailers. Could you explain how you find that product, secure exclusives for a certain period, and consider whether to discontinue items that have become too mainstream?

Yeah, the foraging team, we put that together a couple of years ago and that team has done a really amazing job in terms of finding products that are not sold anywhere else. I think I've said in the past that there's some really interesting entrepreneurial food entrepreneurs in the country who are bringing a lot of interesting products, but we're getting more products than we can put on the shelves at the moment because we've become a bit of a go-to place for people to bring products to the market. We're really focusing on those types of products with appropriate ingredients, no additives, none of the bad stuff in products, and a lot of positive ingredients. And that's something that they've been working very hard on. The process itself is they're spending a lot of time going around all the shows around the country, making ourselves available. We have open sessions where people can bring those products to us and we call them 'pitch slams.' These pitch slams have been bringing us a lot of interesting products. The exciting thing for us is that we can be a stepping stone for a lot of these people to, in time, two years or three years down the line, go somewhere else with the product. We're very comfortable being the kind of beta test for these kinds of products to get things started and maintain that differentiation. The innovation center that we put into the store allows us to put products that aren't being sold anywhere else straight into our system quickly. If they sell, then probably about 25% of them move over quite quickly into the main fixtures. In due course, those products will disappear from our business in a few years down the line as new products come in behind it. We're very much encouraging this entrepreneurial industry to see Sprouts as the destination for their products. We watch a lot of what's happening online as well, some of the online businesses that tend to start some of these interesting products. This approach is coming together pretty well for us, John. Thanks.

And then secondly, maybe as a follow-up, what's your thought on when you'll know enough on the loyalty program to expand? And I know right now, it's a points-based system, right, I think 2% back basically. Any early thoughts on customers, whether the structure is right, do they want to see something else or different? Do you think you need to change it before you go into new markets? What's your take on that?

Well, it's very, very early days. We've clearly got a lot of thoughts on this one, John. We've been spending a lot of time trying to get this right. There's been a lot of work behind the scenes to make sure the technology behind it works effectively and the customer experience is seamless. We've been in three days in the two markets that we're in and they've worked very well for the three days that we've been operating. So we're encouraged by the start. As much as anything else, the technologies worked, which is always something that we’ve spent a lot of time making sure works. As this evolves, the key is to get data from customers. When you're a specialized retailer like we are, and a targeted retailer with a limited customer base, we have to understand at a personal level much more information and getting that data is the key to moving forward. This will allow us to create this feeling of specialty among our customers. We've got a very unique proposition, and we want people to feel very special by being part of this loyalty club almost. We'll see how it goes. We're getting the data. We're very pleased with the start, and we're very pleased with the work that's been done across the IT operations and marketing teams to make this come alive. We'll be in a better position in the next two or three board meetings to share more about how we see this going forward.

Thank you.

Thanks, John.

Thank you, one moment for the next question. And our next question will be coming from Leah Jordan of Goldman Sachs. Your line is open.

Thank you. Good afternoon, Jack and Curtis. Great job to you and the entire team. I want to start off on the new store growth. It sounds like the majority of the stores still to open this year will come in the fourth quarter. I think previously you were talking about the back half. Just curious, was that really just a clarification point at this point in the year or are you seeing some slippage on timing? You know, and as you kind of build into 2025, I know it's a little early, but there are long lead times now. You know, how are you thinking about new store growth then? Should we be caught up by the fourth quarter and we're on a pretty steady cadence into next year or what's your visibility right now?

Yeah. So Leah, I think this year, a little bit of clarification just to make sure that we get it right by quarter for you. And a little bit of this is a challenging environment, I think the interest rates staying higher for longer is creating some timing challenges. I think developers are not in a rush to develop when the interest rate is as high as it is. The economics are more challenging when it stays that high, and this makes it a little bit challenging. We have seen some slippage. So there is some caution in there to make sure that we get the quarters right, and then we are seeing some slippage. Overall, I think those things just move in or out further. We're not ready to guide for next year, but I think those challenges will persist until the interest rates come down and probably come down somewhat dramatically. We'll have more updates, obviously, on the next call as we're thinking about next year, but the pipeline's healthy. We have 110 sites approved from a real estate committee standpoint and over 70 signed leases. So we've got a lot of strong organic growth ahead of us. And, you know, we're just trying to navigate the situation. I think the other thing I would just add is we're not going to compromise on the quality of the sites we pick, the development and the building itself. So, we're going to be choosy. We're going to do it the right way. And if that means we don't quite get to 10% similar to this year, so be it. But we'll have more updates for you next time.

That's very helpful. Thank you. Okay. So then just switching over to gross margin, again, another quarter, really solid expansion here. You guys have been doing that for a long time now. I know there are a lot of company-specific factors that are driving that, which is great to see that you highlighted in the prepared remarks. But I think just at a higher level, would love to hear you guys kind of discuss, you know, how you think about the puts and takes between letting all those tailwinds flow through to the bottom line versus reinvesting for the long term. You know, how do you think about those trade-offs?

Well, from a pricing point of view, we spend a lot of time making sure we're at the right price, as you identified in your question. There are quite a number of things that are part of us being a young and mature business that we're working our way through. I think shrink is a good example of the progress that we've made on that and there's further progress to be made. There are a number of things that we can do to continue to make progress on gross margin and we're working our way through that. How do we think? We're going to invest appropriately in our business going forward. The one thing that we don't think is appropriate to invest is the gross margin level because we've established ourselves as this differentiated assortment which gives us a position that we can control our own margins going forward and that's something that's a good place to be. As you can see from our top line, it doesn't seem to be something that's constraining our top line in terms of what we're working at the moment. I kind of see that as the trend going forward.

And I'd just add that, Leah, as long as traffic is healthy and we're seeing units stabilize, which they are, and they flattened out, we're going to let the elasticities dictate how we price our differentiated assortment. So, we feel like we're in a pretty good place right now, and we'll watch that closely and manage it as we need to.

Thank you. Makes a ton of sense. Appreciate it.

Thanks.

Thank you. One moment for the next question. And our next question will be coming from Mark Carden of UBS. Your line is open.

Good afternoon. Thanks so much for taking our questions. So to start, even with some of the macro uncertainty out there, your comp is obviously holding up really well. I know you guys shed some of your coupon flippers, but are you seeing any pressure from the lower end of your current customer base? Or does your focus on serving key attributes really just keep you more in play than others, and you see customers just prioritizing more spend on your assortment?

Yeah, I think we lost the coupon clippers long ago, if I'm honest, Mark. So that dynamic, which is clearly a real dynamic in the marketplace at the moment, doesn't seem to be affecting us. The thing we've always said is that the nature of our assortment, whether it's attribute-based, whether it be keto or paleo or vegan or vegetarian or dairy or non-dairy plant-based, all those trends, if you get into that space and your food purchase, you can tend to stick with it almost irrespective of what the broader economic circumstances around you are. I think that's what's given us a little bit of a moat here in terms of our customer base and their dietary needs and their dietary requirements. However, they're coming at it. One of the things we're working hard at is to understand that even better as we do work on this personalization work. But more and more, we're seeing that our customers are resilient to the external environment that's going on around them. And so yeah, we're feeling good about that.

Okay, great. And then it sounds like you're making further progress with your marketing message in your newer markets. How did your comp compare in new geographies versus legacy geographies in Q2, when you think about similar vintages? Did the gap narrow at all? What do you think on that front?

I think our comps generally comes down to really the age of the store. We're seeing really strong comps from our newer vintages and we tend to be a little heavier weight into the non-established with our pipeline being kind of 50-50 and just not a huge base of stores in those markets. So a little bit stronger comps in those geographies, but generally from Q1 to Q2, it was strength across the board. All regions improved, and we have a really healthy balance across the entire country.

Great, thanks so much. Good luck, guys.

Thanks, Mark.

Thank you. One moment for the next question. And our next question will be coming from Rupesh Parikh of Oppenheimer. Your line is open.

Good afternoon. Thanks for taking my question. Also, congrats on a really strong quarter. So I just wanted to go back to the comp outperformance. So now you're basically comping almost double your long-term algorithm for low single-digit comps. I guess, what do you attribute to the overperformance versus your longer-term algorithm? Then how do you guys feel about the sustainability? Because I know in Q3, you do expect a slight shift versus what you just reported on the comp-line.

Yeah, so on the acceleration front, it was just, I mean, we had a really strong quarter across the board. You know, everything really worked in Q2. We got an early produce season and then the strength of the season was good throughout. We really saw a step change in the business as we got into the summer kind of months and that was really where it took off. What do we attribute it to? I mean, I think it's the same things we've talked about for several quarters running. I think we have the right strategy that really works for our target customer. I think the teams are doing a great job executing and collaborating to bring it to life. We put a lot into the team and the culture and winning begets winning. And it's really good energy and a good vibe in the stores and the store experience. So a little bit of everything's working. We had some tailwinds, like I said, with the seasonal piece. As far as the guide goes, we don't expect everything to be perfect forever. Something will go bump in the night. In Q2, the things that were working stayed working, and the things that were struggling a little bit got better. But it's a pretty rare moment to have everything working all at once, and that's kind of where we were in Q2. We're going to plan our business appropriately towards the high end of that low single-digit algorithm. We're going to manage our costs as a result, not get too over-excited. If things continue great, then we'll have some upside, and we'll let that drop to the bottom line.

And I think the other thing you touched upon regarding the micro environment here, the sector of the market is just growing a little bit faster than maybe we all thought it would. I think this attribute-based sensitivity to ingredients, health enthusiasts, customer-conscious consumers, I think there's just maybe been a little bit of growth in that space and we've probably benefited from that as well.

Okay, great. Thank you. I will pass the line.

Thank you. One moment for the next question. And our next question will be coming from Michael Montani of Evercore. Your line is open.

Hey, this is Mike. Thanks for taking the question. I just wanted to confirm on the margin side, it sounds like you all were looking for a similar level of gross margin expansion in the back half of the year. So I just wanted to make sure I understood kind of the drivers of that piece of it. And then also, if I'm seeing this right, it's about a flattish EBIT margin, so then anticipating SG&A dollars kind of grow at a similar pace as well. So, just hoping you could help out with that.

Yep. Mike, that's spot on. You know, we've been in the mid-80s of margin expansion on the gross and expecting that in that range for the second half, pretty consistently by quarter. And then the offset with SG&A and the pressures we're experiencing.

Got it. And then maybe on the comp side, if I could, if you were to parse out new store contribution as well as Uber Eats, I was thinking about new stores, maybe 150 bps to 200 bps, and then another, call it 100 bps, 150 bps from Uber Eats, but just wanted to see if there was any incremental color that you could share on that front.

Yeah, I don't think we'll give specifics. I would say it's really been strong across the board. Again, it was really healthy. Brick and mortar really was the piece that accelerated in the quarter and we had some traffic acceleration largely in brick and mortar. The e-comm business has been pretty consistent from quarter to quarter for us, so really healthy strong across the board, really pleased with how the comps are coming in again. New stores are performing; core stores are performing. It's been a nice balance for us.

Okay, great. Thanks for taking the questions and good luck.

Thanks.

Thank you. One moment for the next question. And our next question will be coming from Ken Goldman of JPMorgan. Your line is open.

Hi, I think that's for me. Is that for Ken? We'll see in a second.

Hi, Ken.

I just had one question. I don't know if you can answer it, but obviously things sound terrific across the board. A couple of questions I am getting are really on the new stores into next year and if there is any chance that you guys can give us any kind of color as to what you meant by what you've said last quarter in this quarter about interest rates and maybe some challenges in terms of the timing there. I know you're not quite prepared to talk about next year yet, but I think some people are kind of looking for any kind of sense of rough magnitude as to what those comments should have us think about in terms of incremental store count. Thank you.

We will provide clearer information in the future. Currently, we have 110 leases signed for stores and over 70 leases finalized. Our comments regarding interest rates pertain to the timing of opening these stores. We have a substantial pipeline ready, and we are in a solid position in that respect. This pipeline is continuously growing, as we have mentioned in previous quarters. We plan to open many new stores next year, and we will have more specific numbers at our next meeting. However, there are pressures related to interest rates that are affecting the speed of our development. All our programs are currently built to suit, which is causing delays in our openings. The number of openings we have in Q4 is higher than I would have preferred due to these delays caused by various challenges. Our team is doing an excellent job in getting these stores opened, and I take great pride in their efforts. As I mentioned, we will provide clearer updates moving forward. Curtis, would you like to add anything?

Yeah, Ken, we're not going backwards from where we are. It's going to be in the same neighborhood, and it'll just be a question of when the tail-end of next year as the timing becomes more clear. Just know how many we can do specifically.

That's helpful. Thank you. And then I heard you mention a little bit about traffic accelerating. Can you just give us a little bit of detail on what you saw from AUR and basket size trends during the quarter? And then very quickly, if you have any comments on 3Q comps to-date, if they're more or less in line with your guidance.

Traffic has shown an increase. The 6.7 comp was nearly evenly split, though slightly more influenced by basket size than traffic. It’s a combination of average unit retail and traffic. The units have stabilized, remaining just slightly negative in the second quarter. We believe we have a stable situation with low single-digit inflation and stable unit performance as we look ahead, expecting traffic and average unit retail to continue improving while units remain flat.

Just 3Q comp to-date if it's more or less in line with where you've guided.

We are starting the quarter on a positive note. As mentioned, we experienced a strong summer, which continued into late July. We are looking forward to the back-to-school season, as it represents a shift in our business with different products and events. This is when we saw significant growth last year, so we are eager to see how this unfolds over the next four to six weeks as various regions return to school.

Thanks very much.

Thanks, Ken.

Thank you. One moment while we prepare for the next question. Next question will be coming from Robby Ohmes of Bank of America. Your line is open.

Thanks for taking my question. My first question is just can you, either Jack or Curtis, remind us about the profitability of e-commerce? It did accelerate sequentially again and it's up nicely in penetration year-over-year. Is that also supporting gross margin?

Yeah, I think it's the profitability bottom-line. It's just slightly dilutive because of the fee structure. But on a basket basis, they're typically larger baskets and so stronger net dollar profitability and a little bit diluted from a rate perspective. Margin rate wise, generally the mix is pretty close from brick and mortar to online. There isn't a material difference in margin rate, so it's not a huge story or driver within the gross margin story.

And I think that's fine. What Curtis said there in terms of the mix is quite unusual. Our mix of fresh produce in our e-comm business is probably much stronger than you would find in most food retailers that are using that. So that encourages our assortment and our product offer is being very thoughtfully used by our customer base. And there's a confidence in what we sell, which gives us a lot of confidence in our assortment going forward.

Gotcha. That's really helpful. And Jack, I think you mentioned the regional merchandising opportunity. Can you remind us where you are at now on regionalization of assortment and where you think that could go?

Well, it's very particular in our produce business, which is so important to us. It's very, very seasonal. I was in Colorado over the weekend and, you know, the peaches are just arriving, but there's only a few weeks that it'll be snowing soon, so there's only so much you can do in certain times of the year. Across the country, we've invested in each distribution center in having close relationships with local farmers, so that when things are ready, we are in a position to take advantage of that. We're working pretty hard at that going forward. Is there further to go? I think no doubt there's further to go. If we can get more commitments to our supply base, giving two, three, four, five year commitments. That's the kind of thing we want to work at, so that we're in a better place to do that going forward. Some of our individual categories give us some opportunities beyond produce to do a little bit more than we've done so far. Some of the innovation centers, for example, we've talked to a lot of producers who just haven't got enough volume to supply all of our stores even. What we do with those guys is try and work them into a regional assortment so we can launch them in a few stores rather than all of our stores. This strategy sets us apart and allows us to be differentiated in all sorts of local ways going forward.

That's great. Thanks, Jack.

Thanks.

Thank you. One moment for the next question. Our next question will be coming from Kelly Bania of BMO Capital Markets. Your line is open.

Hi, I think that was me. This is Kelly Bania from BMO.

Yes, it's you, Kelly. Thanks.

Thanks. So I have a couple of questions. One, just wanted to ask about promotional effectiveness, and it sounds like that's still a gross margin driver. Can you just help us understand which categories at this stage you are still finding opportunities there to refine your promotional effectiveness and how much that's contributing to the gross margin as well as the gross margin outlook that's kind of been bumped here for the back half.

I won't go into specific categories since there isn't a significant story to tell. Jack frequently discusses the inefficiencies and immaturity in our business, and I believe we are simply learning to better use tools, data, and processes to improve our decision-making. The category management we mentioned earlier is starting to fall into place, and we are becoming more effective and efficient as a team. Our merchants are doing a commendable job managing this, providing appropriate promotions for our target customers without overspending on items that won't attract traffic or sales. This contributed modestly to the first half, and we have already experienced some benefits from last year, so we don't expect it to drive significant results in the second half. It's more about inventory management, which certainly affects shrink, as we have noted, but it also aids in markdown management as we phase out old products and introduce new ones. We have achieved some improvements in both areas. We have invested in SG&A over the past few years, equipping our teams with the necessary tools to manage margins more effectively. Overall, I am pleased with our progress in this area.

Specifically to that, each of the merchants are working through basically on elasticity. We talked about this in a number of the calls in the last couple of years. The data that we're getting and trying to understand exactly how elastic certain products are on a promotional basis and using more information, more systems, is leading us to be smarter about how we invest any money in product promotions.

That's helpful. And then maybe just to follow up on SG&A, so still be leveraged a little bit, despite comps coming in quite strong. I was just curious if there's anything impacting SG&A, any pull forward or timing considerations, or is it maybe just impacted by the growth of e-comm which was still quite strong? Just trying to think about how that SG&A came in relative to your plan.

Yeah, I think certainly e-comm, you know, staying at that 14% level, you know, we're pleased with that. That wasn't exactly what we were counting on as we laid out the year. So there's a little bit of extra pressure there. Really, the big driver, we reset our incentive comp plans for the year based on performance. So, you know, paying a lot more bonus to the stores, to the teams, and accruing for that for our long-term incentive as well. So it's mainly just catching that up here in the second quarter was one of the one-timers. Of course, our investments, right? We've got another $4 million of the $15 million that we spent here in Q2, and so that was a little bit of a drainer as well. So I think to take away the incentive and the investment pieces, and we would have been leveraged.

And those are investments we're feeling really positive about the fact that we are providing every store, every team member in every store with the opportunity to earn a bonus based on strong sales performance. I don't know anyone else that's doing that. That's something we see as a real positive in terms of driving the positivity in our business at the moment. These investments we are putting in, because we're putting some good numbers on the Board, it's giving us some space to do the kind of things that we need to do to make appropriate IT investments, appropriate investments behind our personalization work, appropriate investments behind the supply chain. It's allowing us to put ourselves in a much better place going forward.

Thank you.

Thanks Kelly.

Thank you. One moment for the next question. And our next question is coming from Krisztina Katai of Deutsche Bank. Your line is open.

Hi, good afternoon and congrats on a very strong quarter.

Thank you Krisztina.

Hi Jack. I wanted to ask about your produce business, in particular the usual 10% to 15% discount you have relative to traditional grocers. So can you just update us on where the gaps are today? And then two, is that we hear a lot of food retailers talk about leaning into the fresh department in particular. So do you see them doing anything differently price wise or merchandising wise to drive traffic or frequency?

We've discussed this before, Krisztina. We closely monitor produce pricing and are particularly optimistic about our organic produce pricing. While competitors are focusing on conventional products, we've managed to increase our lead in organic produce, which now accounts for over 45% of our produce business. This segment continues to grow, and we are encouraged by this trend. Overall, we are in a strong position compared to others in this market and do not observe an overly aggressive competitive environment. There are occasional promotions highlighted in ads, but we are far from the days when coupon clipping was a major factor for customers. Our produce pricing remains strong, and our focus is shifting towards emphasizing our organic produce differentiation. We are collaborating closely with growers to enhance the availability of organic products in the future. Overall, our produce sector is performing well.

Got it. And then just as a follow-up, I think you said that you grew frequency with existing customers and then you also saw new customer additions. So, maybe can you talk about what you're seeing in purchase behavior-wise with your two core customer segments that you're targeting and where you are with them on wallet share today versus even maybe a year ago relative to where you would like to be. Thank you.

Yeah, sure. Krisztina, this is Curtis. I think that's a piece that we're excited to get after as we get into loyalty and we gather more and more data. So we can have a more crisp answer there. But certainly, you know, really pleased with the frequency piece. That's a big opportunity for us and how often folks come in and saw that go in the right direction for us. As far as the two segments, we believe we're gaining share of wallet and everything we look at tells us we are. So really pleased with the direction we're headed on customer engagement and looking forward to getting even more and more data to better engage with them and tell that story.

We still have many opportunities to increase our share of wallet with our target customers. As we've mentioned before, we are dealing with a very small amount, just a few crumbs at the table, and we can accelerate our growth significantly compared to the past few years. This is where our focus on loyalty and personalization becomes crucial.

Thanks, best of luck.

Thank you.

Thank you.

Thank you. One moment for the next question, please. And the next question will be coming from Edward Kelly of Wells Fargo. Your line is open.

Hi, guys. I think that's me.

Hi, Edward.

Great quarter. I wanted to ask about digital. Achieving 30% growth in digital is impressive, especially following the 25% growth last quarter. How do you see the potential for digital penetration evolving over time, considering it's currently at 14%? It seems like there will be significant pressure as we move into next year. What are your thoughts on the sustainability of this digital growth?

Sorry, I think you cut out there? Can you?

Sorry, you just cut for a minute. It was a follow-up to the sustainability of what was you asked about?

Yeah, the sustainability of digital growth and where you think penetration can go over time.

Okay, yeah, we are very pleased with how our digital business is going, and it reflects the fact that we're very indifferent to how the customer shops with us. We believe that our assortment and our proposition fits well with our target customers, and they will be omnichannel who will choose how best to access our products. We want them in our stores, we want them to come and pick up from our stores, and we want them to get delivery via some of our different mechanisms of getting it to people's homes. That increase, that 14% is something that I'm not sure how much, it will probably tweak up a little bit. I don't think it's going to go over the long term dramatically more than that. I don't see that, and it certainly will be what it will be, though, and we'll take what happens, how our customer shapes us in that direction. We want to understand our customer better and make sure we're reflecting the assortment that's appropriate for that target customer. So the sustainability of our, I think it might tweak up a little bit. That's not what I would have said a couple of years ago coming out of the pandemic. I think things have changed a little bit, and customers are feeling more comfortable about using digital within our environment than maybe they were pre-pandemic. Remember, we're only at 2% of our sales pre-pandemic, so there has been quite an evolution. I think as we start to understand the customers, that will tweak up a little bit more. But I don't think it's going to be huge.

And I just add a little color; it's really all three partners driving it. So it's not all an Uber Eats story. We're really pleased with DoorDash's year two growth. They continue to ramp up. And Instacart, our longest-term partner, has had a great year and is driving growth as well. So it's really balanced across the three partners as far as that penetration jump we saw up to 14%.

Great. And just a quick follow-up on SG&A. Obviously, you've had investment in SG&A this year. Are you at the point where you cycle out of 2024 and we can start to think about more normalized SG&A growth on a per-store basis, like a more normalized comp to leverage SG&A? I know you're not going to get guidance for 2025, but I'm just kind of curious where you are in the investment cycle.

Yeah, it definitely should be more normalized as we get to 2025. We won't get super specific this early yet on exactly what that looks like, but it's not going to be in the 80% range that it's going to look like here this year. There are certainly some one-timers with investment. There's the incentive comp piece that goes the other way or normalizes back to 100% next year. The underlying pressures will still be there with new stores, with wages, with e-commerce. But again, even the e-commerce people we just discussed will be a little bit muted. We've got our step change here this year of having those partners jump on and that will normalize a little bit as well. It should be a more normal year next year.

Thank you.

Thanks.

Thank you. One moment for the next question, please. And the next question will be coming from Karen Short of Melius Research. Your line is open.

Oh, hi. It's Karen Short from Melius. Good to talk to you again. It's been a while.

Hi, Karen.

It's been a while. So I had a couple of questions related to comps. So can you just give an update on, first thing is cannibalization? The second is a waterfall on new stores? And then the third is, actually this is a little more tangential. When you think looking forward if an assuming Kroger and Albertsons actually does change hands to C&S, how do you think about that opportunity?

Sure, I'll address the first two questions and leave the third one for Jack since he prefers to answer that. Regarding cannibalization, as we increase the number of stores from 30 last year to 35 this year, there will be some incremental cannibalization. Our pipeline is split evenly between non-established and established markets, and we don't anticipate significant cannibalization in the non-established areas. We are observing more of it in the established markets, which is consistent with our expectations, and it's slightly offsetting. The second part of your question about the new store waterfall indicates that the comps have been really strong in recent vintages, slightly outperforming our box economics. They started at a lower volume, but we believe they will reach their optimal levels over time. I would mention that since these new stores have lower initial volumes, they don't impact the overall performance as significantly compared to the core. However, we're seeing strong double-digit comps as they complete their first year. I'll let Jack handle the Kroger and Albertsons question.

Yeah, Karen, I think Kroger and Albertsons, whether it happens or doesn't happen, I've really got no idea. I've got no more insight than anyone reading the newspapers like everyone else. The way we look at it, both of these companies have got some good brands in all sorts of different markets where we operate and some where we don't operate. We see ourselves not competing with either of them. We see ourselves as a complementary retailer. I've always talked about this: we're not trying to win traffic from the big conventional supermarkets. We're trying to win a share of wallet of our target customers. It’s not meant to sound arrogant in any way, but it doesn't matter if we keep focusing on looking after our target customers and trying to understand them better and grow that share of wallet with that target customer. It almost doesn't matter what the other guys do. If anything, I just want to be as close to them as I can if they've got big traffic. Because we feed off the traffic of some of these higher volume kind of conventional grocers. So I hope that makes sense, but we're focused on the customer side of it, not so much of what might be happening corporately with two very big businesses.

No, that makes sense. And then just a follow up on new store productivity. Obviously, it was very high. But how do you think about that going forward, given the heavy weight on new store openings in Q4?

Yeah, I think we never really count on more than what we kind of talked about historically in the approximately 75% range. I think that gets a little better with the smaller square footage and we expect the top-line to be about the same in those new stores, but we don't count on anything more than that. We kind of take the openings as they come quarter by quarter and then we address it in the reforecast from there. So we are pleased with the new stores and the momentum particularly in the newer markets and we're happy with the openings we've seen as Jack mentioned from sea to shining sea. So we've seen some good ones on the West Coast, we've seen some good ones in Florida, and some good ones in the East Coast, and it's given us a lot of encouragement for the expansion plan forward.

Okay, thank you so much.

Thanks, Karen.

Thank you. And there are no more questions in the queue for today. I would now like to turn the call over to Jack Sinclair for closing remarks. Please go ahead.

Well, as always, we appreciate your interest in our business. Thanks very much for taking some time to listen to us today, and we look forward to talking to you again in the near future. Take care, everyone.

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