Sprouts Farmers Market, Inc. (NASDAQ:SFM) Q1 2024 Earnings Call Transcript May 1, 2024
Sprouts Farmers Market, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Susannah Livingston, Vice President, Investor Relations and Treasurer. Please begin.
Susannah Livingston: Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our first quarter 2024 earnings call. Jack Sinclair, Chief Executive Officer; and Curtis Valentine, Chief Financial Officer are with me today. The earnings release announcing our first quarter 2024 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website at investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2024 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements.
For more information, please refer to the risk factors discussed in our SEC filings and the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP measures. Please see the tables in our earnings release to reconcile our non-GAAP measures to the comparable GAAP figures. With that, let me hand it over to Jack.
Jack Sinclair: Thanks, Susannah and good afternoon, everyone. I want to start by thanking our 42,000 hardworking team members, who worked together to create a great experience for our customers, which in turn delivered impressive financial results. Our sales have grown by 9% with comparable store sales growing by 4% and diluted earnings per share growing by 14%, compared to adjusted diluted earnings per share in the same period last year. These positive results reflect the effectiveness of our strategy and the exceptional execution by our team. It has been a strong start to the year and we’re encouraged by the continued momentum in our business. Our entire approach across the business remains centered around our target customer.
We’ve aligned our merchandising, marketing, operations, new store design and supply chain strategies to provide the freshest most innovative attribute driven products in the marketplace. We’ve also created a unique and easy to shop format with great service. During the first quarter, we organized Sprouts brand and organic events, which were highly successful. These events and others led to positive customer traffic growth in the first quarter. We are pleased to bring Sprouts to more communities across the country. The new store program continues to gather pace. We opened seven for the quarter and are on track for the year, And we’re committed to helping our customer live and eat better with every new store opening across the country. I’ll follow-up with more on our journey in just a bit, But for now, I’ll hand you over to Curtis to review our financial performance in the first quarter and our 2024 outlook.
Curtis?
Curtis Valentine: Thanks, Jack, and good afternoon, everyone. For the first quarter, total sales were $1.9 billion up $150 million or 9% from the same period last year. This increase was driven by comparable store sales growth of 4% and the addition of new stores. We had another quarter of positive traffic and as expected, average unit retails and units per basket continued to stabilize sequentially. Our business continues to be resilient. Our comp performance highlights the categories with the most differentiation such as grocery, dairy, frozen and meat continue to attract our target customers and drive our results. Sprouts brand growth continued to outpace total company performance and contributed 21% of our total sales for the quarter.
Our e-commerce sales grew approximately 25%, representing 14% of our total sales for the quarter. This included incremental sales from our recently launched Uber Eats partnership and all three of our online partners joined us in promoting healthy trends to create momentum in the New Year. The fact so many of our target customers seek out Sprouts online continues to highlight the appeal of our differentiated assortment. Our first quarter gross margin was 38.3%, an increase of approximately 80 basis points from the same period of the prior year. This improvement was primarily due to a significant turnaround in our fresh shrink performance, driven by our continued focus on inventory management. We also continue to see year-over-year margin improvement due to promotional optimization efforts carrying over from 2023.
SG&A for the quarter totaled $540 million, an increase of $57 million or approximately 80 basis points of deleverage compared to adjusted SG&A from the same period of the prior year. As anticipated, the first quarter was impacted by approximately $4 million in holiday pay, with the New Year’s Day falling in the 1st day of fiscal 2024. Our strong sales performance led to higher e-commerce fees, as well as higher incentive compensation for the team. Last quarter, we shared our plan to invest $15 million in 2024 to build a foundation for sustainable long-term earnings growth and we are on track with approximately $2 million spend in the first quarter. Store closure and other costs totaled approximately $2 million for the quarter. These are primarily related to the ongoing occupancy costs from our 2023 store closures.
Depreciation and amortization, excluding depreciation included in the cost of sales was $32 million. For the quarter, our earnings before interest and taxes were $148 million, interest expense was approximately $1 million and our effective tax rate was 23%. Net income was $114 million and diluted earnings per share were $1.12, an increase of 14% compared to adjusted diluted earnings per share from the same period of the prior year. During the first quarter, we opened seven new stores ending the quarter with 414 stores across 23 states. A strong and healthy balance sheet has underpinned our financial performance. We generated $220 million in operating cash flow, allowing us to self-fund our investments of $46 million in capital expenditures, net of landlord reimbursement to grow the business.
We also returned $60 million to our shareholders by repurchasing nearly 1 million shares. We have $148 million remaining under our current share repurchase authorization. We ended the quarter with $312 million in cash and cash equivalents, $125 million outstanding on our $700 million revolver and $21 million of our outstanding letters of credit. Turning to our outlook, for the full-year, we expect total sales growth to be between 7% to 8% and comp sales in the range of 2.5% to 3.5%. We plan to open approximately 35 new stores, all in our current prototype. Adjusted earnings before interest and taxes are expected to be between $415 million and $425 million and adjusted earnings per share are expected to be between $3.05 and $3.13 assuming no additional share repurchases.
That said, we do expect to continue to repurchase shares opportunistically. We also expect our corporate tax rate to be approximately 25%. During the year, we expect capital expenditures net of landlord reimbursements to be between $225 million and $245 million. To add a bit more color to the full-year, we expect gross margins to be up as we continue to focus on initiatives to improve shrink and annualize our promotional optimization work from 2023. On the cost front, we expect ongoing wage increases, new store deleverage and our strategic investments to pressure SG&A resulting in additional deleverage in 2024. For the second quarter of the year, we expect comp sales in the range of 3% to 4% and adjusted earnings per share between $0.75 and $0.79.
We are expecting more moderate year-over-year impacts in both gross margins and SG&A as we lap fewer outliers in our second quarter comparison, resulting in gross margins up slightly, while SG&A will deleverage slightly. And with that, I’ll turn it back to Jack.
Jack Sinclair: Thanks, Curtis. We remain committed to serving our customers, our health enthusiasts with products that help them live and be better. Our team is dedicated to finding innovative and distinctive products with attributes such as organic, gluten free, grass fed or vegan that set us apart from others. The success of our foraging program has continued as sales on our innovation center continue to grow and we believe we have become the destination for exciting entrepreneurial food companies to introduce their unique products to the marketplace. This innovative spirit lives within our Sprouts brand and culinary teams as they continue to add hundreds of new items like hot honey chicken tenders, non-dairy frozen desserts, and flavored cauliflower rice.
Additionally, as I mentioned earlier, in store experience and customer engagement remain paramount for us. Part of our appeal is our friendly and knowledgeable team members who help customers navigate differentiated assortment available to them. The team’s dedication to our customers in the first quarter resulted in some of the highest customer service scores in our history, a remarkable achievement. Sprouts is incredibly fortunate to have the support of many customers who truly love our brand. As a complementary shop, we have an opportunity to deepen our engagement with our customers and grow their share of wallet through a loyalty program. Our vision is to distinguish our program by enhancing what our brand already does, helping our customers and their passion to live and be better.
This is a multiyear endeavor that will enable Sprouts to build a thriving community where our customers can engage with our brand and we can provide them with personalized content catering to their unique shopping preferences. Our upcoming beta launch of Sprouts Reward in two markets this quarter is just the beginning, and we’re excited to continuously improve the program by incorporating feedback from our customers and team members to enhance the experience, functionality, and technology over time. One of the reasons our customers and team members love Sprouts is because our values are aligned. We all care deeply for our communities and the planet. We recently published our 2023 impact report highlighting our work in areas we believe matter most to our target customers.
Areas such as responsible sourcing of sustainable products, waste reduction, and supporting the communities we serve. In 2023, $3.3 billion of our sales were from products with social or environmental attributes. Our transition to reusable bags removed approximately 130 million single use bags from circulation and our stores donated 29 million meals to those in need within our communities. It was exciting to see our team members support our Healthy Communities Foundation by donating over 5,500 service hours to build school gardens that help kids grow healthy through nutrition education. I encourage you to read through the report to get a flavor of our focus areas and impact. I was delighted with the opening of several new stores during first quarter from Cuddy, California to Bartonsville, Maryland.
In the first quarter, we launched seven new stores and are on track to open approximately 35 by the end of the year. We have an extensive pipeline of approximately 100 approved new stores and 70 executed leases, a testament to our commitment to expanding our brand and access to healthy foods in more communities across the country. We’ve also seen improved new store openings this year and we attribute much of the success to better brand awareness as we continue to densify markets and we have growing confidence in our real estate site selection model, which continues to evolve. These improved openings coupled with continued comp momentum in newer markets and our robust pipeline will support our growth aspirations. Internally, our team is making great progress in building a best-in-class workplace through our values and culture.
Our retention rates are currently at an all-time high, which is a tribute to the intentionality behind this work. We’re seeing improvement across the board in our team member engagement scores and believe this focus on culture is translating into the great customer service scores that we’re seeing. We know that our journey towards improving our culture is ongoing and we are excited for the progress we’ve made thus far. In addition to the culture work, we’re focused on preparing our leaders for growth. We aim to have a pool of skilled team members ready for future assignments. We typically promote close to 60% of store managers from within. To prepare them for leadership roles, we have developed Assistant Store Manager leadership tracks. Over 30 graduated this year from our initial cohort and another 50 team members entered the program in 2024.
In closing, the continued momentum we are seeing is a demonstration of the effectiveness of our execution. We’re delighted to receive encouraging feedback from our customers, which confirms that our collective efforts are making a meaningful impact. Our store distribution center and supporter office teams are ambitious for Sprouts future and are determined to deliver on the opportunities that lie ahead. Moving forward, we remain focused on execution, both day-to-day in our stores and on our investments for the future, all while keeping customers our top priority. Thank you for your support and we look forward to connecting with many of you in the coming months. And with that, I’d like to turn it over for questions. Operator?
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