Sprouts Farmers Market, Inc. Q4 FY2025 Earnings Call

Good day, everyone, and welcome to Sprouts' Fourth Quarter and Full Year 2025 Earnings Call. Please note, this conference is being recorded. Now it's my pleasure to turn the call over to the Vice President of Investor Relations, Susannah Livingston. Please proceed.

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our fourth quarter and full year 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 fourth quarter and full year 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 2026 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. Good afternoon, everyone. In 2025, Sprouts delivered over 7% comp sales growth and achieved more than 40% earnings per share growth, reflecting the strength of our strategy. These strong results are a testament to the team's focus on our target customers and Sprouts' positioning to capitalize on the ongoing trends in healthy living. These are outstanding full year results. However, we are not happy with how the year finished as our comp momentum slowed. In 2025, we made progress on a number of key initiatives. New stores exceeded expectations. We launched our loyalty program and our expanded self-distribution supported both service levels and freshness. We introduced more than 7,000 new items, including more than 600 new products under the Sprouts brand. In addition, disciplined cost management and a continued system enhancement helped us build a margin profile that has seen significant expansion. This performance builds on what has been a remarkable multiyear journey for the business. Over that time, we've driven strong new customer growth, reinforced our business foundation and made meaningful progress towards our purpose of helping people live and eat better. At the same time, the macro environment remains uneven and consumers are increasingly value-focused. Against this backdrop, the health and wellness landscape continues to evolve. What began as a focus on natural and fresh has expanded into more targeted outcome-driven solutions with customers becoming more discerning, seeking innovation, quality, and transparency while also being highly value conscious. We believe our purpose and strategy position us well to address affordability and access, two of the most important challenges in healthy living today. While our conviction in the long-term algorithm remains strong, 2026 will be a challenging year as we lap some big numbers. We are very pleased with our new stores, our investments in self-distribution, our growing depth of customer data, and the continued advancement of our differentiated assortment. At the same time, we are disappointed with transactions and still learning how we can shape customer behavior through loyalty and personalization. In 2026, we are investing in the capabilities needed to fully exploit our loyalty data. We know we can do more. We also have the capacity in our P&L to help address the affordability challenges that many of our customers are facing. The team remains excited and confident in our ability to support our health enthusiast customers and drive growth in the years ahead. In a moment, I'll talk more about our plans for 2026. But for now, I'll hand it to Curtis to review our fourth quarter and full year financial results as well as our 2026 outlook.

Thanks, Jack, and good afternoon, everyone. In the fourth quarter, total sales were $2.1 billion, up $152 million or 8% compared to the same period last year. This growth was driven by a 1.6% increase in comparable store sales and the strong results from new stores. Our key points of differentiation continued to drive our sales with attribute-forward products growing faster than our core business. E-commerce sales grew 15%, representing approximately 15.5% of our total sales for the quarter. Additionally, Sprouts brand continues to resonate, now making up nearly 26% of our total sales for the quarter. Basket drove our comp with traffic ending slightly negative after a disappointing holiday season and finish to the quarter. We effectively managed costs and margins against this backdrop. Gross margin for the fourth quarter was 38.0%, a decrease of 10 basis points compared to the same period last year, primarily due to shrink, partially offset by the benefits from our move to self-distribution in meat. In addition, the rapid adoption of our loyalty program did put some pressure on gross margins. We look forward to utilizing this data to further engage our target customers and drive sales behavior. SG&A for the quarter totaled $653 million, an increase of $38 million and 41 basis points of leverage compared to the same period last year. This improvement was largely driven by lower incentive compensation expense and effective cost management. Depreciation and amortization, excluding depreciation included in the cost of sales was $39 million. For the fourth quarter, our earnings before interest and taxes were $123 million. Interest income was approximately $581,000 and our effective tax rate was 27%. Net income was $90 million and diluted earnings per share were $0.92, an increase of 16% compared to the same period last year. For fiscal year 2025, total sales increased nearly 14% to $8.8 billion, driven by comparable store sales growth of 7.3% and strong new store performance. Our focus on innovation and differentiation resonated well with our target customers, driving overall sales. Additionally, we were happy to see that our new stores exceeded our expectations for the second consecutive year. Gross margin was 38.8%, an increase of 70 basis points compared to gross margin in the prior year. This was predominantly driven by improvements in shrink from our investments in inventory management over the last couple of years as well as leverage from increased sales early in the year. SG&A expenses for the year totaled $2.6 billion, an increase of $283 million or 45 basis points of leverage compared to SG&A last year. This leverage is mainly attributable to sales leverage from strong comp performance early in the year. Store closures and other costs totaled $5.6 million due to ongoing occupancy costs from our 2023 store closures and disaster recovery costs. Depreciation and amortization, excluding depreciation included in the cost of sales, was $150 million. For 2025, our earnings before interest and taxes were $686 million. Interest income was $2.6 million, and our effective tax rate was approximately 24%. Net income was $524 million and diluted earnings per share were $5.31, an increase of 42% compared to the prior year's diluted earnings per share. Sprouts ended the year with 477 stores across 24 states. Looking ahead, there are over 140 approved new stores and more than 95 executed leases in our pipeline. A strong and healthy balance sheet has underpinned our financial performance. For the year, we generated $716 million in operating cash flow, which enabled self-funding of investments in capital expenditures of $224 million, net of landlord reimbursement. We also returned $472 million to our shareholders by repurchasing 4 million shares and have $836 million remaining under our new $1 billion share repurchase authorization. The year ended with $257 million in cash and cash equivalents and $23 million of outstanding letters of credit. We have been encouraged by our strong sales and customer growth in recent years. However, the challenge of lapping this growth has been more difficult than we anticipated, particularly with our lower engaged customers who are visiting less often and purchasing fewer items as they navigate economic challenges. We are encouraged to see our loyalty members increasing their frequency and spend, but know that there is still significant opportunity ahead. Our customer engagement and personalization capabilities are still maturing, and our customer is telling us they need greater support in making healthy living more affordable. We are well positioned to do more for our customers as we look ahead to 2026. As for our outlook, it's important to note that fiscal year 2026 will be a 53-week year with the extra week falling at the end of the fourth quarter. We estimate the impact from the 53rd week to be approximately $200 million in sales, $28 million in income before interest and taxes and $0.21 in diluted earnings per share. For the full year, on a 52-week basis, we expect total sales growth to be between 4.5% and 6.5% and comp sales to be between negative 1% and positive 1%. We plan to open at least 40 stores in 2026. Earnings before interest and taxes are expected to be between $675 million and $695 million, and earnings per share are expected to be between $5.28 and $5.44, which includes some share repurchases. With our strong cash generation, we plan to utilize our free cash flow to repurchase our shares and would expect to spend at least $300 million on this program in 2026, which is included in our EPS outlook. Year-to-date, we have already deployed $100 million towards share repurchase, and we'll continue to take a disciplined opportunistic approach when we see a disconnect between our share price and our long-term fundamentals. We also expect our corporate tax rate to be approximately 25.5%. During the year, we expect capital expenditures net of landlord reimbursements to be between $280 million and $310 million. For the first quarter, we expect comp sales to be in the range of negative 3% to negative 1% and earnings per share to be between $1.66 and $1.70, which includes the impact of a higher tax rate due to year-over-year share price changes and the related stock-based compensation tax impacts. In the first quarter, we expect EBIT margin pressure of approximately 85 basis points due to fixed cost deleverage and the impact of our loyalty program. To add some additional color to the full year guide, we expect the first half of the year to be challenging as we lap double-digit comp comparisons. We anticipate sequential comp improvement thereafter as we rebuild towards our long-term financial algorithm late in the year. EBIT margins are expected to face some early year headwinds due to fixed cost deleverage and higher-than-expected sign-ups for our loyalty program. We expect that this will stabilize later in the year as we leverage our investments in self-distribution and anniversary the loyalty rollout while still experiencing modest new store growth pressure in the second half as our pipeline is weighted more heavily to Q3 and Q4. While we expect to experience short-term growth headwinds as we stabilize our business after two years of significant growth, we remain confident in our strategy and our ability to return to our long-term growth algorithm.

Thanks, Curtis. While we're not happy with our current business performance and our 2026 outlook, we believe strongly in the long-term potential of Sprouts and our ability to take the necessary steps to reaccelerate growth. Over the years, Sprouts has built a strong foundation for sustainable long-term value creation. As always, we recognize the future is more important than the past. The exceptional growth we've seen over the last two years was supported in part by the broad expansion of the U.S. health and wellness movement, where Sprouts is uniquely positioned with the right products and customer experience to serve as a top destination for healthy discovery. Growing from this elevated base of new customers now requires sharper execution, deeper customer engagement, and better affordability for our customers. In 2026, we are focused on preparing for our next phase of growth by leveraging our operational strengths and advancing our forging customer engagement real estate and supply chain initiatives, along with targeted investments in talent, technology, and affordability that reinforce our unique value proposition. We are positioning Sprouts for long-term success. Our top priority is serving the needs of our target customer. Launched last year, our loyalty program exceeded sign-up expectations and significantly broadened our customer insights. We expect the program to deliver a behavioral shift over time. We are pleased to see our most engaged customers increasing their frequency and to see some customers join our rewards program and significantly increase both frequency and spend at Sprouts. Yet we see opportunities to deepen engagement further, while by driving additional frequency, expanding participation across more categories, or encouraging trial of innovative new items. Beginning in 2026, we've enhanced our loyalty program to provide more value and are investing in our personalization capabilities to increase program effectiveness. As we have spoken about many times, our customers come to us for a variety of solutions to support their healthy living journey. Better understanding these customer cohorts and personalizing how we engage with the needs remains a critical growth lever. In 2026, we're adding new talent with deep expertise in data analytics and customer engagement to fully unlock this potential. Health and wellness continues to provide tailwinds in the marketplace, and we will stay ahead by offering more unique products. The forging team continues to source products from around the world and is leading in evolving trends. We've established ourselves as the retailer of choice for launching new health and wellness products, supported by our commitment to nurturing and growing emerging brands as they scale. We'd like to thank all our vendors for their partnership, especially those who have trusted us to launch their trending products. Their innovation, combined with our customers' growing appetite for discovery in health and wellness continues to be a key driver of our success. By the end of 2025, our organic sales mix grew to more than 30% of our total sales, and this trend remains a key focus for us. On the docket for 2026 are more products with on-trend attributes such as no seed oils, gut health and longevity. Also, you will see organic grass-fed whey protein, functional hydration beverages such as tractors, a modern take on the hay market and products like Elevate Organics formulated to heal the body and the planet through regenerative farming practices. These are just a few examples of what this team is delivering to our customers. Sprouts brands have now surpassed $2 billion, continuing to outperform overall company performance. Rather than replicating national brands, our goal is to offer customers products that complement their favorites while delivering something distinctly Sprouts, high-quality innovation at a great value. The team has developed a robust three-year innovation pipeline designed to meet the evolving needs of our health-oriented customers, focusing on products they trust and actively seek out. The launch of our new hemp wellness bowls is a terrific example of the intersection of health and affordability. The success of this new offering shows that customers respond when we deliver both in a compelling way. Next week, customers will see our new sweet heat seasonal event come to life across our stores with an exciting set of limited-time products only found at Sprouts. We continue to drive market-leading healthy innovation and our stores help bring it to life for our customers. Our teams remain focused on delivering our unique customer experience, educating shoppers and showcasing our differentiated assortment. I continue to be so proud of how our teams execute in stores for our customers. New stores continue to perform well. This strong performance reinforces our confidence in our growth path. Our robust new store pipeline now includes over 140 approved locations and plans to open 40-plus new stores in 2026. We are also excited to have entered a new state earlier this year with the addition of our first New York store, expanding our presence in the Northeast. While nearly all of our 2026 openings will be in our existing footprint, the team is also looking forward to 2027 and beyond. We are approving sites in both the Midwest and the Northeast to lay the foundation for further future growth. On the supply chain front, the transition to self-distribution for fresh meat is progressing very well, strengthening our control over our fresh categories. Today, 75% of our stores are serviced with fresh meat from our distribution centers. Our Northern California facility is on track to be fully operational by early in the second quarter, completing our self-distribution rollout. Stores are already benefiting from increased delivery frequency with fresh meat products now arriving alongside daily produce shipments. We're also continuing to invest in our forecasting and replenishment capability that we expect will enable Sprouts to scale and grow. We believe the cost efficiencies from these initiatives and other investments will allow us to support our customers with a more affordable, healthy living journey while also maintaining our strong margin profile in the long term. Lastly, the Sprouts team remains the heart of the organization with ongoing investments in the development to drive the business and key initiatives forward. We continue to invest in our talent engine pipeline to support our future growth. Our ongoing investments in our team have helped maintain a low turnover, and that stability is reflected in the consistently exceptional customer experience scores we received, many of whom tell us time and again, I love Sprouts. We extend our gratitude to our more than 36,000 team members for their commitment to serving customers every day. I also want to thank Scott Neal and wish him the very best in his retirement. As our Chief Merchant, Scott has driven outstanding growth in our business while furthering our strategy of differentiation. As well, we welcome both Don Clark, our new Chief Merchandising Officer; and Mandy Rassi, our new Chief Customer Officer. We look forward to their contributions as we scale our business for continued growth. In summary, while the near-term backdrop is challenging, the steps we are taking today are strengthening the business and reinforcing our ability to grow our $290 billion total addressable health and wellness market. It's amazing to reflect on our growth from a single store in Chandler, Arizona in 2002 to more than 500 stores by the year-end, serving over 14 million customers walking through our doors every quarter. The health and wellness movement remains strong, and Sprouts' unique positioning continues to set us apart. By managing costs with discipline and investing behind the capabilities that differentiate us, we are confident in our ability to create long-term growth and value for our shareholders. We appreciate your continued interest in Sprouts and look forward to keeping you updated on our progress throughout the year. And with that, I'd like to turn it over for questions.

Our first question comes from Ed Kelly with Wells Fargo.

I guess I wanted to start with current comp momentum. You talked about some slowdown into holiday disappointing into the year, and it seems like that's continued into Q1. I was hoping maybe you could unpack what you think is driving that additional step down where you are running currently versus the comp guidance that you've given for the quarter? And then as part of this, Jack, you have mentioned the idea of maybe investing in some value for your customers. And I think that's an idea that maybe price and promo, you've kind of resisted that idea historically. Just curious as to how deep of an investment you think you will be making there.

I'll let Curtis discuss the specific numbers. First and foremost, we're dealing with an uncertain macro environment and facing some tough comparisons from last year, particularly in Q1 due to factors that won't occur again this quarter. This is one reason for the current situation. Additionally, our customers are expressing their appreciation for our business but are seeking help with affordability. This feedback has prompted us to explore various options regarding pricing and promotions. The positive aspect for our business is that we have the capacity to invest if needed to support our customers under the current circumstances. This gives us more flexibility in finding the right actions to address the affordability issue. Our team is carefully considering what measures we can take, which may include promotions, personalization, or adjustments to pricing. We're examining this closely and will take appropriate actions, as we have the capacity to do so. Now, Curtis, do you want to discuss the numbers?

Yes. On the step down, Ed, really, the primary thing is that customer lapping issue as we kind of look back, it's a low engaged customer that we really brought in with new customers, with reactivated customers, at the new year last year in the fourth quarter last year, and there were some of those viral moments and eggs and things like that, that were driving customers our way. So as we get up against it, it's just been challenging. And I don't think the macro helps in that respect. It makes it more challenging. And the combination of factors has made it difficult. Year-to-date, we are right at the midpoint of the guide. We're about a little over halfway through the quarter, and we are past the King Soopers' strike lapping that we had last year. That's behind us, but we're right at the midpoint of the guide here year-to-date.

Our next question comes from the line of Seth Sigman with Barclays. Going to move to the next question comes from the line of Leah Jordan with Goldman Sachs.

I just wanted to ask about the comp guide. See if you can just walk through how you're thinking about traffic versus ticket as we go through the year. What have you assumed of any contribution from loyalty? And then I understand you have the difficult lap in the front half. But at the end of the day, the natural and organic category is still growing pretty nicely across grocery. So, I guess, why do you think you've been more challenged in this current backdrop? And has anything changed in the competitive landscape? Or just more detail on what gives you the confidence that you can get back to that positive growth in the back half?

Yes. Leah, it's Curtis. On the guide front, from a traffic basket perspective, we'll see in the full year guide, slight pressure on traffic. It should get sequentially better as the year progresses. The first half will be challenged, and then we'll see sequential improvement as the compares soften a bit. And then the basket will be just the flip of that, slightly up and offsetting to the flat midpoint in the guidance. As far as the confidence to get back to where we've been before, it's really just we have good strength in pieces of our strategy right now. New stores are performing really well. Attribute-based SKUs are performing really well. We continue to be pleased with the innovation and forging piece and the partnership with emerging brands and vendors. Those are all still going strong for us. We've had two great years of growth. We had two really strong years of sequential improvement prior to that, too. And so we feel like those are the building blocks for how we'll get back to where we need to go. As we mentioned earlier, we need to do a little bit more for the customer in this moment. We're going to be working on our personalization and customer engagement capabilities throughout the year and accelerating some resource there. Those are the pieces that should help us get back. And yes, we're expecting to be a part of that sequential improvement. The things that we're doing, we're assuming will help us get back to where we want to be and embedded in the guide. And then there's obviously just a lot of uncertainty and a long year ahead of us as it relates to the consumer pressure and our customer lapping conversations. So a balance of those things embedded in the guidance.

So, with regard to the competitive scenario, clear, that you are referring to, I think the great thing about our company is it's all in our own hands. We've got the capacity to do what it needs to do in the marketplace. We're not seeing anything really dramatic coming at us from different. We think this is a kind of lapping challenge and an affordability challenge that everybody is having to look at carefully. And the consumer uncertainty that's come from the affordability, it's not really reflected itself in a huge competitive space. We are watching really closely whether the products that we have, the differentiated products that we have are priced appropriately within the market. But it's not about what other people are pricing because they don't sell these things, and it's about how do we give the right balance of the assortment, the right balance of price points, the right balance. And that's what we think we've got to do in the context of this affordability. Inflation has clearly driven some significant increases on pricing on coffee, on meat, and it's affected some of the less engaged customers who are visiting less often and purchasing fewer items as they navigate economic challenges. We are watching that closely, and we'll take the action that we need to take. But the great thing is it's all in our own hands.

Okay. That's very helpful. So I mean, it sounds like the lap is a big issue here. So that kind of leads to my next question around the right margin profile for this business. So you've had some really nice expansion over the last couple of years. And I think when we've talked before, it's, hey, we wouldn't really be giving that back. But today's guide is implying a notable margin decline. We're hearing more about investing in value in the last question and in the prepared remarks. So, I guess, assuming you look back on algo in the back half, what is the right margin profile for this business? How do you think about the ongoing level of investment that's needed here? And just kind of the pressure that you're seeing today, what is temporary investment versus deleverage? Just kind of how do we think about the long-term margin profile?

Leah, it's Curtis. Yes. So I think, yes, the midpoint of the guide, there's a pressure on EBIT margins. That's primarily if we look at the full year fixed cost deleverage, occupancy depreciation deleverage as we think about the full year, around that, still fairly stable. And obviously, there'll be a shape of it from first half and second half. But we've made investments in the business over the last few years to create some space, inventory management, self-distribution. We've talked a lot about those. And then as we look ahead, we also feel like there's plenty of things left for us to go after and levers to pull in the longer term. And so continued improvement, inventory management, category management, additional self-distribution down the line. There's lots of opportunity for us to go. And in fact, the challenge is we've seen the business go up and then the business come back down. And that just highlights that there's still room and maturity for us to go get in the business and inefficiencies for us to capture. So in the medium and long term, we still think there's investments to be made that can drive profitability that we can use to address affordability and take care of our customer. And that's how we're thinking about it.

Our next question comes from the line of Rupesh Parikh with Oppenheimer.

Just going to store openings and new store productivity, just curious how they continue to perform as you got into Q4. And then new store productivity does look a little lighter in Q4. Just curious if the timing or if there's anything else to discuss there.

Rupesh, it's Curtis. Yes, really pleased with the new stores. The performance continues to be strong there. The '25 vintage outperformed our box economics expectations, not quite as strong as the '24 vintage, but still really strong. The performance has been consistent with our expectations as it relates to established markets, non-established markets, kind of East Coast, West Coast. It's been pretty consistent, and we're really pleased to see the response we're getting when we bring this to new communities. And it really reinforces for us the confidence in the long term and our ability to return to our algorithm. And then the new store productivity, that does get a little bit bouncy from quarter to quarter, mix of stores and where we're opening them and year-over-year comparisons. But overall, really pleased with the new store performance.

We are now consistently building both the new models and the new V6 that we initiated some time ago, and we have surpassed 100 units of those. We can enhance their efficiency moving forward as our team is focusing on learning how to construct them more cost-effectively, execute them more quickly, and operate them more efficiently. There is significant positive progress happening behind the scenes. With customers responding positively to the new stores, we have ample opportunity to improve efficiencies.

Our next question is from Michael Montani with Evercore ISI.

I had a two-parter. One was, can you share the new store opening cadence by quarter for the year? And then the other question was, if you look at 4Q, can you just parse out what you saw in terms of inflation versus transaction counts? And is the 300 bps softening you've had sequentially so far? Is that basically all transaction counts?

Yes, it's Curtis. I'll address your questions in reverse order. In the fourth quarter, we've mainly seen a decline in traffic, with some pressure on unit sales. We're encountering unit pressure again due to affordability issues and inflation challenges. Inflation continues to align with our expectations, remaining in the low single digits similar to the Consumer Price Index. Our focus on premium products is increasing our Average Unit Retail, along with organic items and value packs we've introduced over time. Certain categories, like coffee and meat, are experiencing inflation that contributes to this increase. Overall, we're observing some unit sales pressure across all customer segments, and the traffic issue is largely due to lower engagement from some customers. Regarding the new store openings, our schedule is again backloaded, as I mentioned earlier. We plan to open six stores in the first quarter, with nine in the second quarter, aiming for a balanced opening throughout Q2 and Q3 to reach our target of 40 for the year. The outlook for 2027 looks promising, with a more evenly distributed timing for new store openings, though we will have another back-weighted period in 2026.

We plan to avoid any activities in November and December, especially after Thanksgiving, and we are quite confident we can achieve this goal this year.

Our next question comes from the line of Mark Carden with UBS.

So just building on the topic of affordability, you guys have mentioned in the past that you tend to be more of a secondary or a tertiary shop for customers. I know your assortment is largely unique, but do you believe you've seen much in the way of wallet share shift on some of the categories where you might overlap with a Costco or another grocer where they tend to shop? I know you called out eggs perhaps in the lap, but does anything else jump out? Or do you think it's more just a function of consumers controlling their own shrink, so to speak, as conditions remain challenging?

I'll let Nick have a go at that one, Mike.

Mark, it's Nick. On the customer side, our share of wallet is mostly stable. We experienced a slight decrease in Q4, but overall it remains strong. This suggests that our innovations and differentiations are effective, and we are not witnessing significant declines in wallet share toward more traditional channels. We are definitely observing consumers leaning towards value, which is part of our strategy to meet them where they are and deliver value. However, it's important to recognize that it’s not solely about price. While that’s a common assumption, our focus is on what we excel at, which is innovation and differentiation. Our business is thriving when we offer health-focused products at great values, such as our Bowl program under $10 and our Sprouts brand organic program along with $5 sandwiches. These offerings have led to strong customer purchases. We also need to innovate further in this area while emphasizing personalization, loyalty, and maintaining competitive produce pricing. Additionally, as Jack mentioned, we need to be strategic in our pricing and promotions to sustain and grow our share during this period.

Our next question comes from the line of Tom Palmer with JPMorgan.

I wanted to ask on shrink. It was not mentioned as one of the potential margin headwinds for this year. I know last year, it was called out as a pretty substantial tailwind, especially in the first couple of quarters of the year. And I think there was a little bit of a question of how much of that was double-digit comps driving shrink lower versus all your work with inventory management. So, now as you lap that, I guess, any update on what you're seeing with shrink and maybe how much of it you're holding on to versus your expectation?

Tom, it's Curtis. Yes, it was a little bit of pressure on shrink or a favorability last year as we had the strong comps. We are up against that. Certainly in the fourth quarter, that's part of the story. And then in the first and second quarters, we'll be up against that a little bit. But we do feel like we've made sequential improvement there over the years. and that the team is prepared for that. I think where it really gets challenging is when you get those whipsaws in sales, right? The big acceleration that we saw and now a bit of the deceleration that we've seen as the business has settled and moderated, that's where it's really challenging. I think we've got a good handle on where we are here as we're sitting here in the first quarter, and the teams are continuing to put work and investment into that to prepare us for later in the year. And so on the balance for the year, we do expect shrink to be fairly stable, and it will just be a little bit choppy quarter-to-quarter.

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

Curtis, could you provide more detail on the gross margin assumptions in your guidance for 2026? Should we view it as occupancy deleverage in the weaker comp quarters, leading to more pressure on gross margin? Additionally, can you clarify how much merchandise margin might change or decrease in 2026?

Yes, sure, Robbie. The first half will be a bit pressured. I'll talk about it in terms of EBIT margins and the drivers there, and you'll get a little bit of the color on both sides underneath that. But yes, the fixed cost deleverage certainly pressured with a negative comp here in the first half, that will be challenging. primarily occupancy and depreciation. There's lots of moving parts. We've got cost work that we've done that will help and other new store growth pressure and things like that. But net-net, it's really a fixed cost story. On top of that, we've got the loyalty program that we saw good adoption and uptake in people opting into the program that puts a little bit of pressure on the rewards and the points that we're absorbing there. So there'll be a little bit of pressure there that falls into the gross margin in the first half. And then as we get later in the year, we'll be leveraging those investments in self-distribution. We'll be anniversarying the loyalty program, and that compare will get a little easier, and we'll get back to kind of a more stable EBIT margin as we think about the second half.

Robbie, as I said in the script, I think there's real capacity in our organization to make sure we can deliver the algorithm long term in terms of the net margin going forward. So we're feeling pretty confident about that in the future.

Our next question comes from the line of Kelly Bania with BMO Capital Markets.

The outlook for earnings in 2026 appears to be fairly flat, with perhaps a low single-digit increase in EPS. This doesn't suggest to me any significant investment in affordability for your customers. I'm curious about what plans you have in this regard, such as pricing promotions. I understand the loyalty program is being rolled out and modifications have been made there. Is that something that could progress? Are you still evaluating the level of investment in affordability for your customers? Also, do you believe that introducing more affordable pricing could help reduce the volatility in your comparisons and provide better insulation from the macroeconomic pressures you’re experiencing?

We believe that customers are asking us to do a bit more to assist them. As I mentioned in previous questions, customers are generally positive about our product range and the service they receive in stores, as well as the types of locations they visit. This indicates confidence. However, given the current challenging environment, customers are looking for additional support from us. We're conducting several tests to determine how we can address this need. To elaborate further on our plans, I'll hand it over to Nick, who will provide more insight into what we are considering, though nothing is finalized yet, and we are still evaluating the outcomes of our tests.

Kelly, it's Nick. To address your question about affordability, there are several aspects to consider. The main focus is leveraging our strengths by evaluating our product assortment and making necessary adjustments. Frankly, it appears we've shifted towards a more premium offering in recent years. However, there is a lot of potential with our innovative and accessible healthy products that align more with value. It's essential to ensure we maintain a balanced assortment across categories, and our teams are actively working on this to provide options at every price point for all our customers. This is a crucial part of our strategy. We're already seeing positive outcomes from initiatives like our deli meals and bowls program. We're committed to competitive pricing in produce, and this strategy will persist. As Jack pointed out, while some products overlap, our priority is to remain competitive. We won’t compete on price alone; our edge comes from our assortment, innovation, and differentiation. Nevertheless, there are certain products we must consistently get right to maintain customer trust. We have various strategies to support this without needing substantial investments, which is reflected in our financials. Lastly, enhancing our personalization and analytics capabilities is vital for adding value for customers and ensuring access to the products they seek.

Our next question comes from the line of Chuck Cerankosky with Northcoast Research.

When you're looking at the loyalty program, how has the vendor participation been? And I'm looking at it as an offset to the strong sign-ups from customers. And is that something that is less than expected? And perhaps, is there any conflict with the vendors as they look to Sprouts' own brand product introductions as part of the loyalty program?

Chuck, it's Nick. To be honest, we are just beginning to unlock vendor participation in the loyalty and personalization program at the start of this year. The focus in 2025 and 2026 was on launching this capability, developing it, and starting to collect data, conduct testing, and gather insights. This year presents a great opportunity for us to begin realizing more value from it. We're just getting started with vendor participation in the fiscal year. The good news is that this initiative benefits both our vendors and us. Our vendors, particularly the emerging ones, are eager to connect with their target audience, customers who meet specific key attributes, whether they are in the organic or gluten-free categories. We can offer them excellent access to these customers with a strong return on investment that helps them promote their products. For us, this also means introducing these products to customers who have expressed a desire for new offerings and driving long-term value. So, we're in the early stages of this effort, and I believe we will continue to discover ways to unlock value for both our vendors and ourselves throughout the year.

Nick, I would say that there is no real conflict with the vendors regarding the Sprouts brand. On the contrary, we have positioned ourselves as a destination for innovation and differentiation. We're putting in a lot of effort in this area. The forging team is performing well, launching numerous products, and providing opportunities and a starting point for their brands. As I mentioned, there are no cuts; it's quite the opposite.

Our next question comes from the line of Scott Marks with Jefferies.

I wanted to just follow up on this notion of some pressure on units, some of those comments earlier. Are you seeing maybe more impact on certain categories or departments or even attribute-based items than others? And wondering how that impacts margin mix. And then obviously, as you work through kind of the ways to create value, how does that inform your thinking about changes across different parts of the store, let's say?

We are noticing variations across different categories. For example, in coffee and meat, there is significant inflation and noticeable unit effects. In the produce segment, consumers are being cautious with their purchases, buying fewer units due to the volatile pricing in that area. We are closely monitoring these changes. It is our responsibility to minimize the effects of inflation on certain categories and to support our customers who are expressing concerns about rising costs. Therefore, we are observing distinct trends across various categories. We have an elasticity model in place, which allows us to assess pricing if products are not selling as effectively. This is our current approach.

Scott, the only thing I'll just add to your question, I think there's not really any mix pressure based on how the sales are moving. So there's not any pressure on the mix driven by our sales. I think the only other thing I'd add to Jack's comment is, for us, the biggest unit challenges, there's some category piece, but just in that less engaged customer. The customer we gained last year that are putting less units in the basket for that group is where we're seeing it more so than, say, our core customer.

Our next question comes from the line of John Heinbockel with Guggenheim Securities.

Jack, so to follow up on that last one, how are your target or core cohorts performing behaviorally, right, and their view on affordability? And then is affordability more an issue in reality or perception and how you think about maybe altering marketing, the marketing message beyond personalization to address affordability?

Well, we're certainly taking a good look at our marketing messaging and being the kind of focusing on that. We think there's some real affordability issues rather than being for the customers. And what we found is our loyalty data has given this really clearly, those loyal customers to us are spending a little bit more money with us. It's the less engaged customers that Curtis outlined, I think, in the script, which is specifically those are the customers that are drifting, are coming less often and spending a little bit less from us. And the feedback we're getting from them is that's an affordability crisis in terms of the affordability crisis that exists in the marketplace is affecting them more so than our loyal customers.

Our next question comes from the line of Krisztina Katai with Deutsche Bank.

So I wanted to follow up on the attribute-based products that continue to perform well for you guys. Can you talk about planned SKU launches for 2026? And then within that, how are you thinking about the price points where you want to add more products or where you maybe double down a little bit to further deliver on the value that the customer is looking for? Or just maybe just talk about how you see the current assortment within the stores? And just to what degree do you think that some of these assortment changes need to happen? I would love to get your thoughts there.

Yes, it's a great question. Nick just touched on it. So I'll let Nick expand on how to explain what we're doing there.

Krisztina, to start, I feel very positive about our product variety regarding key health attributes like protein, fiber, grass-fed, gluten-free, and organic. Our goal is to offer a wide range across these attributes throughout the store, not just in specific areas. I believe we are well positioned. However, we can improve by ensuring that access to these attributes is available at more affordable price points. We need to create more options for organic and gluten-free products at entry-level prices. This will help us achieve a better balance based on customer needs and requests. You can expect us to focus on innovation and product launches that maintain this balance while emphasizing health and wellness attributes that differentiate us. We will not change our core offerings; instead, we will continue to support the health and wellness focus that makes us stand out. We plan to introduce approximately 6,000 to 7,000 new items this year and continue growing the Sprouts brand, which is designed around customer demand for innovation. Our strategy does not involve competing against national brands. We will keep launching hundreds of new items in the Sprouts brand across both fresh and non-perishable categories. Additionally, we're excited about our partnership with the Haymaker product from Tractor and Elevate, which has seen significant customer interest. Our marketing and merchandising teams will intensify their efforts on larger launches as we progress through the year.

Thank you. Ladies and gentlemen, this will conclude our Q&A session, and I will pass it back to Jack Sinclair for closing comments.

Yes. Thanks, everybody, for your attention and your interest in working with Sprouts and talking to us today. So I wish you all the very best. Take care.

And this concludes our conference. Thank you for participating. You may now disconnect.