Earnings Call Transcript - SFM Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Sprouts Farmers Market Second Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susannah Livingston, Vice President of Investor Relations and Treasury.

Susannah Livingston, Vice President of Investor Relations and Treasury

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our second quarter 2025 earnings call. Jack Sinclair, Chief Executive Officer; and Curtis Valentine, Chief Financial Officer, are with me today. Nick Konat, our President and Chief Operating Officer, had a family commitment and will not be joining us for this quarter. The earnings release announcing our second 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 to reconcile our non-GAAP financial measures to the comparable GAAP figures. With that, let me hand it over to Jack.

Jack L. Sinclair, CEO

Thanks, Susannah, and good afternoon, everyone. At Sprouts, we remain committed to our purpose to help people live and eat better. In an environment where consumers are becoming more mindful about what they eat and where it comes from, Sprouts stands apart. Our focus on fresh, local, and innovative natural and organic products, along with our knowledgeable team members and approachable stores, continues to resonate with our target customers. In the second quarter, we delivered strong results driven by our strategy to market to our target customers with a differentiated assortment, disciplined operations, advantaged supply chain, and ongoing store growth. Our sales increased 17%, supported by comparable store sales of 10.2% and robust new store performance. Our diluted earnings per share reached $1.35, reflecting a 44% increase compared to the same period last year. We are proud of how our team continues to execute, focusing on our customers, which in turn continues to deliver strong results. Today, we'll walk you through our performance highlights, update you on our strategic initiatives, and share how we're positioning Sprouts for continued success in the second half of the year and beyond. We're excited about our progress and remain focused on delivering innovative, fresh, and healthy foods that meet the evolving needs of our health-conscious consumers. I want to thank the team for their ongoing commitment to supporting our customers on their health journey. For now, I'll hand it to Curtis to review our second quarter financial results as well as our updated 2025 outlook.

Curtis Valentine, CFO

Thanks, Jack, and good afternoon, everyone. In the second quarter, total sales were $2.2 billion, up $327 million, or 17% compared to the same period last year. This growth was driven by a 10.2% increase in comparable store sales and the strong results from our new stores. The performance of our comps across categories, channels, and geography remains balanced, supported by new stores entering the comp base. Traffic was strong and accounted for the majority of our comp. As anticipated, it slightly moderated from the first quarter, which is not surprising given traffic was the main driver of last year's acceleration. Our e-commerce sales grew 27%, representing approximately 15% of our total sales for the quarter with good performance from all partners. Additionally, Sprouts brand contributed 24% to our total sales for the quarter. Our second-quarter gross margin was 38.8%, an increase of 91 basis points compared to the same period last year. This increase was primarily due to leveraging our inventory and category management improvements as well as leverage from our sales performance. SG&A for the quarter totaled $645 million, an increase of $89 million and 33 basis points of leverage compared to the same period last year. Our strong comp performance led to leverage mainly in labor and occupancy. Store closure and other costs totaled approximately $2 million for the quarter. These are primarily due to costs associated with exiting leases related to our 2023 store closures. Depreciation and amortization, excluding depreciation included in the cost of sales, was $37 million. For the second quarter, our earnings before interest and taxes were $179 million. Interest income was approximately $431,000, and our effective tax rate was 26%. Net income was $134 million and diluted earnings per share were $1.35, an increase of 44% compared to the same period last year. During the second quarter, we opened 12 new stores, ending the quarter with 455 stores across 24 states. A strong and healthy balance sheet has underpinned our financial performance. Year-to-date, we generated $410 million in operating cash flow, which allowed us to self-fund our investments of $138 million in capital expenditures, net of landlord reimbursement to grow our business. We have also returned $292 million to our shareholders by repurchasing 2 million shares. We have $158 million remaining under our current share repurchase authorization. We ended the second quarter with $261 million in cash and cash equivalents and $23 million of outstanding letters of credit. As you probably saw on July 25, we closed a $600 million revolving credit facility, which replaced our previously existing $700 million revolver. The terms and conditions are substantially similar to our previous agreement with the new expiration date of July 2030. While we plan to fund our operations and unit growth through our robust cash flow generation, this facility provides Sprouts with financial flexibility as we grow. An increasing number of customers are emphasizing the importance of quality, healthy food options and this positive trend, along with continued new store performance is inspiring our plans to expand into new markets. Looking ahead to the remainder of 2025, we are dedicated to achieving significant earnings growth while capitalizing on these emerging opportunities. For 2025, we expect total sales growth to be 14.5% to 16% and comp sales in the range of 7.5% to 9%. We still anticipate comp sales to moderate as we cycle the higher comps from late 2024. We plan to open at least 35 new stores. Earnings before interest and taxes are expected to be between $675 million and $690 million, and earnings per share are expected to be between $5.20 and $5.32, 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 24%. During the year, we expect capital expenditures net of landlord reimbursements to be between $230 million and $250 million. For the third quarter, we expect comp sales to be in the range of 6% to 8% and earnings per share to be between $1.12 and $1.16. As we have begun to lap last year's comp step changes, we continue to see consistent 2-year stack performance of approximately 15%. In the second quarter, we also benefited from some external tailwinds that pushed the 2-year stack above our run rate in May and June. While those tailwinds come and go, the approximately 15% 2-year stack remains consistent and gives us confidence in our increased comp guidance. Year-over-year margin rate in both gross margin and SG&A are expected to start normalizing in the third quarter as we compare to last year's improved shrink performance, and we work to derisk our supply chain, providing more flexibility and capacity. We anticipate continued EBIT margin expansion of approximately 40 to 50 basis points year-over-year. For the rest of 2025, we are confident in our strong financial foundation and successful execution of our strategic initiatives, which position us to deliver strong earnings growth in the second half.

Jack L. Sinclair, CEO

Thanks, Curtis. We leveraged our strategic initiatives in the second quarter, which delivered excellent results and set us up for an exciting future. We keep reinvesting in our business by developing innovative products and enhancing our operations, both in stores and across the supply chain. Additionally, we're driving engagement with our customers through targeted service strategies and carefully chosen store locations. We also continue to prioritize investing in our team members who play a vital role in driving these results. Customers are increasingly drawn to Sprouts due to our strengths in identifying trendy offerings, providing fresh and quality food, and launching innovative products rich in health-driven attributes. Innovation is a cornerstone of our strategy, and our consistent launch of new products keeps our selection fresh and exciting. Our innovation center continues to grow in sales with baskets that contain innovation items being more than double the size of our overall company basket. We remain focused on the categories that matter to our target customers. The Sprouts brand continues to excel with plans to release over 350 new products this year alone. Our success is driven by our strong emphasis on attributes, high-quality items, and the discovery of products through seasonally themed events. Growth in organic products is on the rise, now accounting for nearly one-third of our total sales and over 50% of our produce sales, thanks to our organic first merchandising initiatives. Additionally, we continue to expand our SKU count in trending categories such as no seed oils and high-protein items. We now offer more than 3,700 high-protein products with 450 new items set to be released this year. Our focus on attribute-driven products is resulting in increased sales that surpass the rest of the business and outpace overall grocery industry growth. These efforts reinforce and strengthen Sprouts' leadership in the better-for-you segment, allowing us to capitalize quickly on key market trends. As you know, we've been building an advantaged supply chain that is a strategic priority, enabling scalable growth for the future. Fresh is the most important category for us. We've been building capacity over the years to take on more self-distribution. This includes expanding capacity in existing markets, such as our Northern California DC in early 2026 and building new capacity in our expansion markets. By taking control of key product categories such as meat and seafood, we are taking critical steps towards self-sufficiency. This approach allows us more control over our supply chain while minimizing operational and supply chain risk. Although there's significant work to do, we will begin in-sourcing fresh meat and seafood this quarter in Orlando and continue the work through the second quarter of 2026. We will continue to focus on new DC expansion in the next 3 to 5 years to support our continued growth. The Sprouts Reward loyalty program launched in Arizona this month, marking an important step in our Sprouts customer engagement and personalization journey. The results of our test and pilot programs have boosted our confidence in the program's potential, showing that loyalty members are shopping more frequently, growing at a faster rate, and spending more. Our teams are excited and prepared to support the full rollout, which remains on track for the end of this year. This initiative presents a significant opportunity for us to better understand and serve our target customers, ultimately, using these insights across our business to enhance the customer experience and create long-term value. Currently, we are seeing strong customer acquisition and an increase in share of wallet. Our customer experience is improving across all channels. In-store performance has strengthened due to better in-stocks, fresher products, and superior service. Additionally, our e-commerce platform continues to grow with shop.sprouts.com experiencing the fastest increase in penetration. It has been exciting to witness the evolution of our marketing approach, which has transitioned from paper to digital to targeted marketing and now to genuinely personalized outreach, leveraging customer data to foster more meaningful and engaging customer experiences. Building great stores remains the foundation of our growth strategy, and we're on track to open 35 locations this year. New stores this year are opening with solid top and bottom line results, and last year's vintage is entering the comp base strong, reinforcing the effectiveness of our model. We continue to expand our footprint to enhance accessibility for more customers across the country. With a robust pipeline of over 130 approved locations, including recent approvals in the Midwest and the Northeast, we are poised for continued momentum. From sea to shining sea, new stores are delivering strong performance, underscoring the strength of our brand and the scalability of our format. The great results and strong execution of our initiatives are possible because of our team members across the business. At the heart of our culture, our team believes in our purpose and values, which serves as the basis for long-term success. To support our future growth, we have developed a robust talent engine that focuses on our team members' recruitment, development, and engagement. Key initiatives include the Fast Track program to develop future store managers, the Assistant Store Manager University, and our robust onboarding process. We have also implemented monthly talent planning reviews for our field to ensure we remain ahead of our needs and opportunities. As a result of these intentional culture-building and training efforts, we have significantly reduced turnover, creating a more stable, engaged, and high-performing team. I want to express my gratitude to our 35,000 team members for their hard work, which continues to deliver outstanding results. As we look ahead, we remain confident in our strategic direction and Sprouts' unique position within the specialty food retail landscape. Our journey is not just about growing stores or improving margins; it's about deepening our connection with customers who seek real food, fresh quality ingredients, and innovative products that meet their unique needs. We've been making progress, but we know there's much more to do, whether it's expanding our footprint, strengthening our supply chain, or continuing to innovate. We're committed to building a resilient, purpose-driven company that delivers long-term value to our shareholders and positively impacts the communities we serve. Thank you for joining us today. We look forward to sharing more of this journey in the quarters to come. With that, I'd like to turn it over to the operator for questions.

Operator, Operator

Our first question comes from Leah Jordan with Goldman Sachs.

Leah Dianne Jordan, Analyst

Jack, Curtis, great job to you and the team on the quarter. Just wanted to see if you could provide some more detail on the loyalty program. I know it's been rolling out across the country, still more to go. But I guess what has surprised you so far as you've rolled it out to more regions? And then maybe what have you adapted now in your approach and any learnings over the past few months as it's been in some of your initial locations for longer?

Jack L. Sinclair, CEO

Yes, the initial rollout began in 35 stores, and last week we expanded this to nearly all our stores in Arizona, bringing the total to around 70 or 75 stores as we continue our nationwide rollout. We're seeing encouraging results, with more people signing up and consumer responses exceeding our expectations. We've invested significant time and resources to ensure the execution and customer experience are smooth, and we've gained valuable insights to eliminate any issues in the sign-up process. We're confident in our progress and plan to complete the rollout by the end of October, anticipating that it will yield substantial benefits next year. Our focus has been on effective execution, and the data we're collecting will help us improve our communication, merchandising, and store placement strategies. I'm excited about the journey we're currently on.

Leah Dianne Jordan, Analyst

That's very helpful. And we'll look forward to hearing more on that. I guess for a follow-up, I just wanted to switch over to digital. It continues to be very strong for you guys. Just more color on the trends there. And also curious how engagement maybe is different for each of your partners? And is there any divergence as they mature at different rates? And then on your comments in the prepared remarks, you talked about sprouts.com being the fastest increase in penetration. So curious what you're doing differently there that's driving that.

Curtis Valentine, CFO

Sure. I think it's been pretty consistent and balanced. The same story continues as we move from quarter to quarter. We have three excellent partners, all of whom are growing well. Our team on the shop.sprouts.com front is continuing to learn how to effectively engage customers and collaborate with our partners. They are making solid progress. This channel had the lowest starting point, so it is experiencing strong growth. The main difference is that the Instacart basket is about twice the size of the brick-and-mortar basket, making it somewhat larger. The baskets from Uber Eats and DoorDash tend to focus more on convenience and include staples like milk, eggs, and bread for immediate meals. Other than that, the mix remains consistent across various categories. All partners are growing well, providing excellent service to customers, and are valuable partners for us.

Jack L. Sinclair, CEO

We're encouraged by the shop.sprouts.com evolution and development because it gives us some confidence that the customers are navigating directly to the Sprouts brand as part of that context. That's something that the team has been working on for a number of years now, and it's really beginning to come together. We think that will build more loyalty going forward.

Operator, Operator

Our next question comes from Edward Kelly with Wells Fargo.

Edward Joseph Kelly, Analyst

Nice quarter. I wanted to ask you about the comp and the cadence and momentum. So you talked about a stable sort of 15%-ish 2-year before May and June acceleration. So I was hoping you could speak to that acceleration. Curious if it was related to the disruption across the industry with UNFI. And then I'm curious what you've seen so far in July. And that kind of dovetails into guidance because the guidance for 6% to 8% in Q3, 6% is 15%, right? So you've guided the midpoint a little bit better than that. I'm just kind of curious about the sustainability of the current trend and how you were thinking about it all with guidance.

Curtis Valentine, CFO

Sure. Thanks, Edward. This is Curtis. In May and June, the main factor was a very strong produce season, with excellent organic crops and availability. The team has done an outstanding job and is well positioned, working closely with the growers. Our focus is on local and organic first, and a successful organic season allowed us to capitalize effectively. In May and June, we witnessed a nice increase in the produce business. There was also a significant disruption in the natural organic space, but it had a limited impact on us due to our smaller presence in that area. Some customers turned to us when they couldn't find products elsewhere, which helped as well, particularly in June. Overall, the May-June performance exceeded 15%. However, as the quarter continues, both factors have stabilized, and we have returned to about a 15% two-year stack growth rate. Through July, the figures have hovered around the midpoint from a two-year stack perspective. The consistency we've experienced boosts our confidence in the guidance; since we increased last September, seven out of eleven periods have stayed in that 15% range, with only a few instances of external factors allowing us to achieve stronger results. This consistency supports our guidance moving forward.

Edward Joseph Kelly, Analyst

Great. That's good color. And then just a quick follow-up on the gross margin, another strong quarter. You talked about trends normalizing kind of from here into the back half. But self-distribution and meat and seafood is rolling in. I'm curious as to how that impacts gross margin. And then loyalty is also ramping. Not sure if there's some investment that takes place as that rolls out too. So if you could just maybe speak to the outlook for the gross margin and how those things might impact it.

Jack L. Sinclair, CEO

With regard to self-distribution, Ed, we're going through a transition period. We will get long-term benefits on the margin, but that's not going to come through this year to the extent that it will in the future. As we manage the transition, we've got some issues that we're trying to deal with effectively in terms of how we're managing the margin. The loyalty will have some costs associated with it, but ultimately, loyalty will be about driving the top line. We think the margin over time, as we gain support for the initiatives, will enable us to neutralize any margin impact from loyalty going forward. Curtis, you may talk about the...

Curtis Valentine, CFO

Yes. It's playing out as we expected, Ed. The first half was a little bit better. Certainly, the supply disruptions that we've seen in both quarters help a little bit on the shrink line, as we talked about last quarter. We're expecting that to stabilize and normalize here in the second half. The comps for us are normalized, so a little less supply chain leverage. We've got distribution investments, and then we're up against tougher comparisons with shrink. Those are the key factors, but really, it's playing out as we'd expected.

Operator, Operator

Our next question comes from Mike Montani with Evercore ISI.

Michael David Montani, Analyst

Just wanted to ask if I could, on the margin front first. Could you discuss if there was any kind of impact either on the COGS front or even in SG&A due to some of the UNFI issues that they had in the supply chain? And then similarly, from the loyalty program?

Curtis Valentine, CFO

Yes. So no, loyalty is just rolling out here in the third quarter. So no impact there. We had the same 30 stores that were on the pilot, but they were on as of Q1. So no change in the loyalty story for Q2. On the disruption front, first off, it was great working with UNFI. It was a difficult challenging period, but they worked really closely with the teams. We were able to flow product through it, albeit manually. It was helpful to do that. So it was pretty minimally disruptive to us, as it's a small portion of our business. Just some product flow was a little bit challenging. We didn't promote as much in the second quarter as a result. But largely, we were able to mitigate through it, and we're kind of on the other side of it.

Jack L. Sinclair, CEO

There was no margin impact from the disruption.

Michael David Montani, Analyst

Okay. And then just a follow-up was on the new stores. If you could talk about what you're seeing in terms of new store performance and how to think about the opening cadence for the rest of the year.

Jack L. Sinclair, CEO

Well, we're committed to the 35 stores for the rest of the year, and we opened 12 very successful stores. We're absolutely delighted with the way the new store format is working. I think we're up to 100 of our V6 format now, so all the stores have been opened in the new format, which gives us some consistency in terms of execution and rollout. We're feeling confident in the number of stores for the rest of the year. The encouraging thing is we're seeing strong performance in markets that were traditionally not well known. We're very encouraged by the progress we're making in the Mid-Atlantic. The Florida store is really coming alive now in terms of the new stores that are opening. By and large, we're performing well.

Curtis Valentine, CFO

And cadence-wise, Mike, we had 12 in the second quarter, 9 in the third quarter, and 11 in the fourth quarter is kind of where we are. Any impacts from the weather this time of year will be the only thing that might change that.

Operator, Operator

Our next question comes from Rupesh Parikh with Oppenheimer.

Rupesh Dhinoj Parikh, Analyst

Congratulations on a strong quarter. I'll begin with two macro questions. First, regarding inflation, I am interested in what you are observing in the business and your expectations moving forward. Secondly, on the consumer side, your business continues to perform well. Are you noticing any changes in consumer dynamics?

Curtis Valentine, CFO

On the inflation front, it's been pretty consistent from quarter to quarter. We're seeing a similar pattern in line with CPI as we typically do. Obviously, our fresh business is a little more volatile, but it's tracking in line with that. We've got some mix helpers as we move to organic and work on some value-packed items. It's a similar story to Q1 on inflation and AUR front.

Jack L. Sinclair, CEO

In terms of the customer side of things, what we're seeing is our customer seems to be quite resilient. There's still a lot of uncertainty going forward that we're not quite sure about. But if we look at the numbers and how our customers are reacting, I think we’ve always said that our customer base is focused on what they eat and how they eat. So I think we've got some resilience almost irrespective of what happens in the macro economy. We're not seeing significant changes in dynamics among other grocery retailers. Our business has proven pretty resilient, as you can see from the numbers.

Operator, Operator

Our next question comes from John Heinbockel with Guggenheim.

John Edward Heinbockel, Analyst

I wanted to follow up on that one. Jack, can you talk about wallet share? Where do you think you are today? Is 20% an ambitious goal? It doesn’t seem too far-fetched, and if you were to achieve that, where do you see the biggest opportunities? Is it in prepared foods?

Jack L. Sinclair, CEO

Prepared foods is certainly one of them. But I think as people switch their diets, it's about consumer preferences shifting to what we sell—products that are more attribute-driven, food with more health benefits. That whole trend should allow us to grow from the 13% that we currently talk about. Whether we'll reach 20%, I'm not sure, but we believe we can make significant progress in closing that gap, especially as more consumers lean towards healthier options. We'll enhance our prepared meals offerings and vitamins and supplements, which are another category we’re focusing on for growth. So there's a wealth of opportunities to grow our share of wallet from 13% upward.

John Edward Heinbockel, Analyst

And then as a follow-up, right? AUV will likely end up higher for various reasons, including market growth and your initiatives, but at the same time, you've reduced the size of the box. How do you think about capacity within a typical box? And if the answer isn't bigger stores, is the answer more density and will that inevitably raise cannibalization within the comp?

Jack L. Sinclair, CEO

Certainly, we're not going to change the size of the box. We're going to work harder to make the box more efficient. Our operational team is doing a great job on that. They're focusing on how we utilize space behind the scenes in our stores, how we manage inventory and how goods flow through the backroom into the store. There's a lot of work being done in that area, which gives us opportunities to expand capacity even within our existing store structures. And we’ll look closely at where to open new stores, especially in growth markets, but for now, your observation on density is accurate. As we scale, it can and may lead to some cannibalization, but we’re not overly concerned at this point. Frankly, our challenge is making sure our stores are always busy enough to justify another nearby store.

Operator, Operator

Thank you. I would now like to turn the call back over to Jack Sinclair for any closing remarks.

Jack L. Sinclair, CEO

Yes. Thanks, everyone, for your attention. We really appreciate your interest in our business and look forward to updating you in the future months to come. Thank you very much for your attention.

Operator, Operator

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.