Sprouts Farmers Market, Inc. Q3 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Sprout's Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Susannah Livingston, Vice President, Investor Relations and Treasury. Please go ahead.

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our third quarter 2025 earnings call. Jack Sinclair, Chief Executive Officer; Curtis Valentine, Chief Financial Officer; and Nick Konat, President and Chief Operating Officer, are with me today. The earnings release announcing our third quarter 2025 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 2025 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 financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures. With that, let me hand it over to Jack.

Thanks, Susannah, and good afternoon, everyone. In the third quarter, we delivered strong earnings growth, up 34% year-on-year with a 5.9% comp and strong new store performance. Our results continue to be driven by our execution on the key pillars of our strategy. We saw an increase in customer traffic as we effectively engaged with our target customers, while our most differentiated and attribute-based products continued to drive sales as we expand our store presence. In addition, our ongoing inventory management improvements in supply chain contributed to the expansion of our EBIT margin. Together, these achievements demonstrate the strength of our teams and the durability of our strategy. While it was a solid third quarter, it fell short of our top-line expectations. As the quarter progressed, our comp sales moderated faster than expected due to challenging year-on-year comparisons and signs of a softening consumer. Looking ahead, the investments we have made provide us with levers to manage our business and deliver earnings growth. Today, we'll walk you through our performance highlights, update you on our strategic initiatives and share how we're positioning Sprouts for the rest of 2025 and beyond. I want to thank the team for their ongoing commitment to supporting our customers on their health journey. For now, I'll hand it over to Curtis to review our third quarter financial results as well as our updated 2025 outlook.

Thanks, Jack, and good afternoon, everyone. In the third quarter, total sales were $2.2 billion, up $255 million or 13% compared to the same period last year. This growth was driven by a 5.9% increase in comparable store sales and the strong results from new stores. Traffic remained positive and accounted for approximately 40% of our third quarter comp. Our key points of differentiation continued to drive our sales with attribute-forward products growing faster than our core business. E-commerce sales grew 21%, representing approximately 15.5% of our total sales for the quarter, with good performance from all partners. Additionally, the Sprouts brand continues to resonate with our target customers and now represents more than 25% of our total sales for the quarter. While our third quarter yielded solid results, we expected more from our top line as we underestimated the impact of lapping strong numbers from last year against a softening consumer backdrop. We believe our strategy positions us well to capitalize on the surging interest in health and wellness. Last year, we saw outsized gains in new customers, substantially growing our customer base, and we have managed to maintain that customer base. Against that backdrop, we have managed our costs and margins effectively. Our third quarter gross margin was 38.7%, an increase of 60 basis points compared to the same period last year. This improvement was mainly attributable to improved shrink. SG&A for the quarter totaled $653 million, an increase of $73 million and 13 basis points of leverage compared to the same period last year. This improvement was largely driven by lower compensation expense, partially offset by increased benefit costs and pressure from our new store growth. Depreciation and amortization, excluding depreciation included in the cost of sales, was $39 million. For the third quarter, our earnings before interest and taxes were $157 million. Interest income was approximately $690,000, and our effective tax rate was 24%, including a benefit of $0.03 predominantly from a purchase discount for transferable tax credits. Net income was $120 million and diluted earnings per share were $1.22, an increase of 34% compared to the same period last year. During Q3, we opened 9 new stores, ending the quarter with 464 stores across 24 states. We are encouraged by our new store performance and the positive response we receive from customers as we enter new communities across the country. The team continues to improve our processes and partnerships to accelerate our development cycle, and our planned expansion into the Midwest and the Northeast is providing fertile ground for site approvals. We plan to open more stores in 2026 than in 2025 and believe we are on track to reach our goal of 10% unit growth by 2027. A strong and healthy balance sheet has supported our financial performance. Year-to-date, we generated $577 million in operating cash flow, which allowed us to self-fund our investments of $194 million in capital expenditures, net of landlord reimbursement to grow our business. We have also returned $342 million to our shareholders by repurchasing 2.4 million shares. We have $966 million remaining under our new $1 billion share repurchase authorization approved by the Board of Directors in August. We ended the third quarter with $322 million in cash and cash equivalents and $23 million of outstanding letters of credit. On July 25, we closed a $600 million revolving credit facility, which replaced our previous $700 million revolver. The terms and conditions are substantially similar to our previous agreement, with a new expiration date of July 2030. While we plan to fund operations and unit growth through our robust cash flow generation, this facility provides Sprouts with financial flexibility as we grow. Looking ahead for the remainder of this year, we are balancing the strength of our business strategy against consumer uncertainty and challenging year-over-year comp compares. For the full year, we expect total sales growth to be approximately 14% and comp sales to be approximately 7%. Given the strong execution of our real estate pipeline and fewer timeline delays, we now plan to open 37 new stores in 2025. Earnings before interest and taxes are expected to be between $675 million and $680 million, and earnings per share are expected to be between $5.24 and $5.28, assuming no additional share repurchases. That said, we expect to continue repurchasing shares opportunistically. We also expect our corporate tax rate to be approximately 24%, and during the year, we expect capital expenditures, net of landlord reimbursements, to be between $230 million and $250 million. For the fourth quarter, we expect comp sales to be in the range of 0% to 2% and earnings per share to be between $0.86 and $0.90. In the fourth quarter, year-over-year margin rates in both gross margin and SG&A are normalizing. Despite pressure to our top line, we expect to be able to grow EBIT dollars in line with our sales growth to deliver stable year-over-year margins in the fourth quarter. Despite facing challenging revenue comparisons, we remain confident that we have a resilient business capable of delivering solid earnings growth. This reflects our ongoing commitment to operational efficiency and disciplined cost management. These factors provide us with earnings stability while we continue to invest in our future growth. And with that, I'll turn it back to Jack.

Thanks, Curtis. Over the years, we have built a strong foundation for sustainable long-term value creation. We focus on driving growth through differentiated innovation, strengthening our operations, enhancing our digital capabilities to deepen customer engagement, and expanding our store footprint, all while investing in our talent and technology. Together, these elements form the cornerstone of our strategy, positioning us to compete effectively. The broader health and wellness movement in the United States continues to gain popularity. With this in mind, we remain committed to expanding and strengthening our unique product offering. We continue to see strong customer demand for our attribute-driven products, which remain a key driver of our sales growth. Currently, more than one-third of our sales come from organic products, and we'll continue investing in this important attribute for our customers, ensuring they have access to the best in organic offerings at a great value. The supplement sector is also evolving within our stores, focusing on areas such as longevity, women's health, and gut health—trends that resonate with our health enthusiast customers. The Sprouts brand now accounts for more than 25% of our sales and with a robust product pipeline planned for the next three years, we are committed to continuing our growth. What makes our Sprouts brand unique are our innovative products and flavors, such as herb-stuffed potato chips and maple-flavored coconut pillows, new for this year's fall season. In the third quarter, we launched new wellness bowls, each priced under $10. These bowls feature attributes like grass-fed beef, organic tofu, and responsibly-sourced salmon. They're packed with protein, bold flavors such as sesame garlic ponzu, and high-quality fresh ingredients at a fantastic price. Our customers are responding well, and we're pleased with the early results. As we look to the future of forging, we're investing to ensure that we continue to lead in this space, supported by a robust pipeline of innovation and deep partnerships with entrepreneurial brands that view Sprouts as the ideal launch platform. These partnerships energize us, and together, we're excited to introduce approximately 7,000 new products for 2025 that align with our customers' values and lifestyles. To stay ahead in a rapidly evolving market, we're expanding the capabilities of our forging team to better anticipate emerging trends and customer needs. Over the past year and into early 2025, we expanded our customer base, attracting a meaningful number of new shoppers, and we are pleased to see that the vast majority have remained engaged. On the marketing front, we continue to partner with our influencers, extend our reach in new markets and have started utilizing our Sprouts Rewards to engage with our customers. Speaking of the Sprouts Rewards loyalty program, it's fully launched this week, marking an essential step in our customer engagement and personalization journey. We have seen good growth in our identifiable customers, and the stores are taking ownership of this important initiative. Although it's still early in the program, we observe encouraging indications of increased shopping frequency and sales per customer in our early rollout geographies, and we are excited to see our progress in the coming months. On the supply chain front, we're excited about our ongoing transition to self-distribution in fresh meat and seafood. It has been a difficult year for us in the meat category as multiple third-party supply disruptions led to availability challenges and customer disruption, further underscoring the importance of controlling our destiny through self-distribution. Through October, we have successfully completed the transition at four of our existing distribution centers, leading to increased delivery frequency to our stores and improved fill rates. Looking ahead, we anticipate completing this transition by the second quarter of 2026 with the opening of our new Northern California distribution center, further solidifying our commitment to operational excellence. The new stores we've opened this year are performing well, both in terms of top line revenue and bottom line profitability. Additionally, last year's vintage is entering the comp base well, further validating the effectiveness of our model. We're particularly pleased about our robust new store pipeline, which currently includes 140 approved locations. This highlights the strength of our brand and also demonstrates the scalability of our format. We are confident that we will be able to meet the evolving needs of our customers while also achieving our ambitious growth targets. To that end, we are pleased that we plan to open 37 stores in 2025, exceeding our original target of 35. We're excited to welcome 3,700 new Sproutees to our team and to expand access for our target customers, allowing us to bring the Sprouts experience to more communities nationwide. The effective execution of our strategic initiative is made possible by the dedication and talent of our team members throughout the organization. Central to our culture is a shared belief in our purpose and values, which form the foundation of our long-term success. I want to express my gratitude to our 35,000 team members for their unwavering commitment to serving our customers every day. We acknowledge the challenges of sustaining the momentum built from last year's exceptional results alongside an evolving consumer backdrop. We have an amazing business that has significant potential. We are confident in the resilience of our business model and are dedicated to investing in our foundations for sustainable long-term earnings growth. Thank you for joining us today. We look forward to sharing more of this journey with you in the quarters to come. And with that, I'd like to turn it over for questions.

And the first question comes from Michael Montani with Evercore.

I just wanted to ask, we've had some questions about concerns around competition that might be potentially encroaching on your core consumer. I just wanted to see how you would respond to that, if there were other cyclical temporal headwinds that we should be thinking about in the quarter and how that could play out in the fourth quarter? And also, do you see this as a function of competition? Or is it something else?

Well, I think what we talked about in the script there, Mike, was very much that we're lapping some tough numbers from last year. At the same time, we feel like things are getting a little bit more difficult for the consumer. So putting that into context, we always look at what our competitors are doing and how they are playing in the market. But our strategy is pretty clear. We have 7,500 new innovative products launched. I haven't seen anyone else launching that many innovations and differentiations. We're building a lot of stores—up to 37 stores, which we're really confident about—and we have a great pipeline of stores coming through. We're very excited about the loyalty and personalization work. So in the context of all of that, I think we are well shielded from what we've seen with our competitors. As I say, we're confident about the future, Mike.

And the next question comes from Seth Sigman with Barclays.

There's a concern in the market that there have been some unique drivers helping your business over the last 12 months. You've had great performance and the concern is that those drivers are going away. As you reflect on that and the current slowdown that you're seeing, is there anything you would call out that's proving more difficult to lap? And then you talked about keeping your customers. You grew your customers quite a bit last year. I mean, how are you seeing that play out? Are we seeing perhaps a change in spending behavior, lower spend per customer?

Hi Seth, this is Curtis. We've seen some pockets where we've had outsized growth and gains. We've talked about those on the call. Certainly, last October was our strongest month that we've compared against—a 13% comp. February, we had some help from a competitor's strike, which helped us. Then in May and June, we had strong months due to a good customer season from produce and challenges in the industry from supply issues. We're always well-positioned to capitalize in those moments. But we don't see anything structural outside of those types of things that we're up against. We are observing a bit of softness in some of our middle-income trade areas and younger demographics, where we've seen the business soften more than the rest of the business. Those are the things we're pointing out related to the customer pressure.

And our next question will come from Leah Jordan with Goldman Sachs.

I'll kind of stick with the same theme around the comp slowdown. Just seeing if you could provide some more detail on the key surprises versus your expectations because this was a notable miss beneath your guidance. Has there been any major difference across the regions or product categories? I think ultimately, you've historically talked about your offering being resilient to macro pressures as people are committed to their diets, but now you're talking about a softer consumer. Ultimately, has something shifted around your value proposition today? How do you view it? And I guess, why don't you see the need to invest a bit more to reengage your core consumer as you're really implying market share losses in the fourth quarter?

Well, first, we are lapping some tough numbers from last year, and we may have underestimated that challenge. This happened through the quarter as opposed to at the quarter's end. We are anticipating a challenging environment ahead. The health and wellness macro trends are still strong for us, and we see real opportunity in doubling down on our loyalty program. We do experience some macro pressures that will come through the marketplace, but we are not seeing anything dramatic in terms of the competitive dynamic. We are managing our margins and costs effectively, as you can see from our results.

Yes, as for the miss in Q3, Leah, we saw the impact of the first step change in comp in May and June, but did not really recognize that underlying pressure until the end of Q3, when the drop-off happened. We're now faced with 10+ comps in September and 13+ in October, so we need to be cautious as we approach the next months.

Okay. That's super helpful. And I was going to ask about the comparisons in November and December. So that's really helpful. I guess my related follow-up would be for looking into '26. As we think about the first half of the year, you're going to have some difficult laps. You just talked about how you sailed through it in March last year. How should we think about the building blocks for comp next year in terms of driving engagement and lapping that as well?

From the building blocks point of view, I’ll let Curtis discuss the numbers. We have real confidence in our innovation pipeline coming through that, alongside our store pipeline, will be key drivers for future growth. We're also optimistic about the loyalty and personalization efforts that we have in place, which have yet to yield results but hold enormous potential.

Yes, we are early in our budgeting process for the upcoming year and will get into more specifics in February. We do anticipate having a challenging first half due to the double-digit comps we will face but remain optimistic about the second half based on our building blocks.

And the next question will come from Mark Carden with UBS.

To start, you guys called out strength in your most differentiated products even with the slowdown. Do you think customers are spreading out their shopping more and becoming more price-sensitive on some of the less differentiated items like, say, produce? Have you seen shifts in what you think your overall wallet share is for customers today? And just how you're thinking about the broader promotional environment over the next few periods?

Yes, thanks, Mark. On the differentiation front, we measure that closely since it's strategically important to us, and we haven't seen our levels of differentiation wane at all in the last year, even amid the business dynamics. Our most differentiated and innovative products continue to grow, and we are confident about our future prospects. Regarding the share of wallet, we're actually seeing our share hold and slightly improve. We're not experiencing an exodus of customers; rather, we're noticing some customers are spending a bit less towards the end of their baskets.

Got it. That's helpful. You're seeing a lot of strength in private label with penetration climbing again this quarter. Given the softening of the consumer that you talked about, any changes to how you're thinking about the pace of adding additional SKUs to your assortment?

Sure. We've been on a pretty aggressive pace adding hundreds of SKUs each year, and our team has done an amazing job of doing that. Our Sprouts brand program focuses on unique items that health enthusiasts can't find elsewhere. So we will continue to fill that pipeline and overinvest in that space to capture the momentum we have.

We've got some pretty exciting plans going forward in terms of what's happening next year, with notably engaging holiday products. So the investment in Sprouts brand will continue aggressively.

And the next question will come from Ed Kelly with Wells Fargo.

I was curious if you could talk a bit more about the fourth quarter comp expectation and what you've seen so far quarter-to-date. Obviously, the October compare is tougher. But have you seen any stabilization yet in the two-year as it pertains to October? And then what's the assumption that's built into the comp guidance as you think about the quarter itself?

Hi Ed, this is Curtis. Quarter-to-date, we are just north of 1% up against that 13% last year for October. The two-year has started to stabilize a little bit here in the last six to eight weeks, but we have seen fluctuations week-to-week in both the one-year and two-year metrics, which makes us a little cautious. We are also up against 10.5% in both November and December, so we are carefully monitoring the performance.

Okay. And then just a follow-up, Jack, you mentioned on the loyalty side that you were encouraged by some things you have seen so far. I was wondering if you could elaborate on that. How are you thinking about utilizing the loyalty card? What you can do to push on that and the potential contribution you think it might begin to deliver?

We won't commit to specifics, Ed, but it's a great question central to our strategy. We're encouraged by the execution this week, where all stores now have access as we have rolled this out nationally. We're happy with the number of customers signing up and those scanning their cards, allowing us to better understand customer behavior. This will inform our personalized journey and help target our offerings more effectively. There’s a real opportunity in 2026 to build even further growth from our loyalty program.

Just to add a bit more context, we see potential to drive customer behavior through loyalty with increased frequency and sales per customer. Now that we have rolled out the program nationally, we can better focus on how to maximize its effectiveness for 2026.

And the next question will come from Tom Palmer with JPMorgan.

I know you don't always give too much detail here, but I thought I'd ask about some of the changes in customer behavior. First, I think you made a reference to smaller baskets, not fewer customer visits driving the comp slowdown. I just want to make sure I heard that right. Secondly, are you seeing any notable shifts when we think regionally or in certain departments of the store? I'm wondering if anything stands out on that side.

Hi Thomas, it's Curtis. Yes, you heard that correctly. It has been traffic that has slowed down a bit. While traffic is still positive, it has decelerated, and we're experiencing a bit of pressure on the end of the basket as consumers manage their spending—similar to what we saw during the inflationary period. This has affected units per basket.

Okay. And then just on the fourth quarter, Curtis, you noted the expectation for margin to be flat year-over-year. I want to clarify: is that for both gross margin and SG&A, or is one kind of moving in one direction and the other in the opposite?

Yes, we are aiming for stable EBIT margins. There will be a little bit of pressure due to a 0% to 2% comp. However, we expect to achieve some positive growth in that area.

And the next question will come from Rupesh Parikh with Oppenheimer.

Given the moderation that you've seen in your business recently, does this impact how aggressively you invest next year? Are there levers to pull if you see further softening?

Yes, we will continue to invest in the business. We will always make smart choices about how we allocate resources against priority projects. We've had good investments over the last two years, creating levers for us. We are working hard on inventory management and category management to drive gross margin gains, with room for further improvement, and we're focused on indirect costs.

We remain dedicated to building stores and expanding our footprint. The new stores are performing well, and we’re excited about self-distribution capabilities which will bring benefits in terms of inventory and margins. We are fully committed to investing in our innovation pipeline and our loyalty program.

On the capital allocation front, it sounds like you're going to continue buyback shares, but has your approach changed given the uncertain environment while your stock is also lower?

Yes, we will be more aggressive depending on where the shares settle out. We plan to buy opportunistically as the year progresses and we feel excited about the $1 billion share repurchase authorization.

And the next question will come from John Heinbockel with Guggenheim.

Two operational things. Has your thought changed now that you've rolled out loyalty regarding how much data you need and how much history to market effectively to your base? Additionally, how do you size the opportunity in in-stock, given that natural and organic fill rates are not where they need to be?

On the loyalty question, the more data we gather, the better we can personalize and drive behavior. The loyalty program is a long-term play to enhance comps. We can leverage existing data, and as we gather more, we anticipate greater engagement from customers. Yes, I do want to emphasize our customers are not as frequent shoppers as those at conventional grocers. It may take time to see behavioral absorption, but we will leverage current data to drive better engagement.

Regarding the supply chain and in-stock, we've focused significantly on meat this year and expect that will help in-stocks, but natural and organic remain longer in terms of fill-rate challenges. We're working hard with our partners to improve forecasting and anticipating demand. There’s upside in terms of sales in achieving better in-stock numbers, but we haven't put a clear figure on that yet.

A follow-up for Curtis. The breakeven comp has been close to 4%. How much do you think you can reduce that?

We do think about it in the short term. We believe we can manage with the levers we have created. Longer term, it's challenging to sustain low comps, but we don't expect to be in a 0 to 2 comp for a long period. We're focused on efficiencies and automation to help balance costs as we move into the future.

And the next question comes from Robbie Ohmes with Bank of America.

You gave thoughts on fourth quarter gross margin being up a little. When you come up against tough comparisons in the first half of '26, any thoughts on gross margin puts and takes as you go through that?

It's a bit early to discuss '26 openly as we want to finalize our planning process. That being said, we are aiming for stable margins moving forward, and there are levers invested to help manage pressures we face today.

How narrow is the customer pressure you're seeing? Is it limited to a certain demographic? And is there any shift in your marketing approach?

The pressure on customers is evident in lower and middle-income demographics, which is somewhat more pronounced in those areas, although the pressure exists across the board. We’re working to determine how best to respond but maintain a strong commitment to differentiated pricing.

We have a strong story to tell regarding innovation and freshness. We're refining our communication to market value, while ensuring we deliver quality and health at fair prices to capitalize on existing momentum.

And the next question comes from Scott Mushkin with R5 Capital.

Could you share insights regarding the competitive environment? Our research, especially in Texas, indicates hypercompetition in produce. Where do you perceive your pricing standing in relation to fresh baskets, and who do you see as your competitors? If traditional markets become hypercompetitive, how might that impact your strategy?

We monitor produce pricing closely, especially in Texas, where it has become more competitive due to H-E-B's expansion. However, our new store openings have performed well in these markets. While the pricing landscape in Texas is aggressive, we believe we hold a strong advantage in produce nationally. We're watching this closely but feel confident in our overall performance.

When considering Amazon's actions, particularly related to Whole Foods, how directly do they compete with you? How sensitive are you to their pricing strategy?

We track Amazon closely, and they are direct competitors selling many of the same items. However, data indicates that there's no significant change in performance between stores facing these competitors and those elsewhere. Our model allows us to differentiate ourselves, and we remain optimistic about our positioning in the marketplace.

And the next question comes from Scott Marks with Jefferies.

Can you provide an update regarding any cannibalization factors impacting existing markets due to new store openings?

The cannibalization factor remains in the range of 125 to 150 basis points. As we ramp up the number of new stores, that may grow, but it aligns with our expectations.

Also, regarding SNAP spend, how exposed is your business to that, and have you observed any effects due to policy changes or government shutdown?

Our SNAP spend is about 2% to 3% historically. It has limited impact, but the current conditions of government policies could hurt consumers indirectly.

And the next question comes from Benjamin Wood with BMO Capital.

I've observed a more aggressive approach towards price and promotions recently compared to past strategies focusing on product attributes and seasonal highlights. Is that the case?

We're not making significant changes to our promotional philosophy. Our customers define value through quality, innovation, freshness, and health, which remain at the core of our strategy. We will continue to test and learn how to optimize our offerings but will maintain a consistent approach to protecting our margins and value proposition.

If consumer softness continues, would that prompt you to reconsider your promotional strategies?

Currently, no, we wouldn't reconsider our strategy. While we're always monitoring pricing related to competition, we believe that our unique offering positions us well even amidst economic fluctuations.

And the next question will come from Chuck Cerankosky with Northcoast Research.

In what way, if any, would Sprouts slow down new store openings due to increased caution from shoppers?

We are very positive about our new stores, showing strong performance and good comps from second, third, and fourth-year openings. The data tells us that customers want Sprouts and a Sprouts-like solution. We have no intention of backing off our expansion plans at the moment.

We are excited about helping people live and eat better, reaching communities that don't have access to our brand. Our strong new store openings fulfilled our mission, so expanding our efforts continues to motivate us.

We have no intention of decreasing promotion but will continue to adjust marketing strategies to local markets to reflect the values we uphold. We focus on community engagement and storytelling around our unique offerings.

I see no further questions in the queue at this time. I would now like to turn the call back over to Jack for closing remarks.

Thanks, everybody, for taking the time, asking great questions, and showing interest in our company. We look forward to continuing the dialogue with you going forward. Thanks again. Take care.

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