How Sprouts Plans to Avoid 'BankruptcyGate'

Gina Acosta
a woman smiling for the camera
How Sprouts Plans to Avoid 'BankruptcyGate'
Sprout's value proposition is what differentiates it from natural food counterparts such as Lucky's Market and Earth Fare, both of which have recently gone bankrupt

It looks like Sprouts Farmers Market’s value proposition and business model are helping the grocer avoid the fate of bankrupt specialty competitors -- at least for now.

The Phoenix-based natural foods chain not only exceeded its fourth-quarter guidance, but it also named a blockbuster new board member who's poised to help the retailer take the next step in its evolution as a highly differentiated natural grocer.

Doug Rauch, the legendary grocery veteran who shepherded Trader Joe’s stores to cult status across the world, is joining the Sprouts board of directors, effective Feb. 25.

“We are thrilled to add Doug to our board of directors,” said Sprouts CEO Jack Sinclair. “Doug is a seasoned grocery veteran whose decades of experience at one of the most well-regarded retailers in the industry will be invaluable to our company as we continue to develop our long-term strategy.”

Rauch spent 31 years with Trader Joe’s, including 14 years as a president. He was instrumental in the growth of that chain from nine stores in California to a national chain, as well as the development of its prized buying philosophy and the creation of its unique private label food program. Rauch joins new board member Joel Anderson, CEO of Five Below, and new CFO Denise Paulonis, all recent additions to the company.

“Sprouts shares my beliefs of making healthy living affordable to everyday grocery shoppers and conducting its business in a way that is also good for the planet, and I look forward to working with the board and management team to help guide the company’s path forward,” Rauch said.

"Making healthy living affordable to everyday grocery shoppers" is exactly what Sinclair believes is keeping Sprouts on a path to long-term profitability and sustained sales growth. During a fourth-quarter earnings call late Thursday, Sinclair said that his company's value proposition is what differentiates Sprouts from natural food players such as Lucky's Market and Earth Fare, which have both gone bankrupt in the past month.

"We are aware of what's going on in the marketplace, but we're creating a lot of differentiation with the type of products we are putting in. Our fresh produce operation is better than most and will stay better than most. Our bulk operation is pretty unique; our vitamin operation is pretty unique. And our grocery is differentiated because the products that we're selling are totally different to what you can find in conventional or mass-market competitors. Also, we have a strong cash-generative business with a strong balance sheet, which I think contrasts a little bit with some of the more direct competitors in this space. And they didn't really have the scale that we have," Sinclair noted.

He added that Sprouts is also taking transformative steps toward sustained profitability such as building smaller stores that cost less to operate, expanding private label, and paring down promotions and assortments to drive long-term growth for the company.

Now, apparently, those steps also include paring down the grocer's prepared foods and dairy offerings.

"I think some things we probably have learned from one or two of those [bankrupt] competitors is, if you spend too much money and too much capital and invest too much in labor in certain categories, and particularly in dairy and prepared foods, you can put yourself in a place where it's very difficult to make the returns that you'd want to make. And that's something that we will be reversing and have been working on the past few months," Sinclair said.

Sinclair also said Sprouts intends to keep expanding; the company plans to open 20 new stores this year. That's down from 22 new stores opened in 2019. And the company hinted at where it plans to expand next (coincidentally, the same places where a lot of Lucky's and Earth Fare stores are located).

"Both Georgia and Florida performed better during the fourth quarter," Sinclair said. "We've got 16 stores in Georgia, and 15 in Florida. Both of those markets represent significant opportunities going forward to us."

Sinclair also mentioned expansion opportunities in the mid-Atlantic, Southern California and parts of the Southwest.

But possibly the most interesting nugget Sinclair provided during the earnings call was a comment about the retailer's strategic shift to a "treasure hunt approach."

"Over the last several months, we challenged ourselves to make key fundamental shifts in how we run our business. We refined and balanced our promotional strategies to target our core customer and eliminate inefficient promotions. We focused our promotional activity by responding to opportunities in the marketplace rather than reacting to promotional pricing elsewhere, resulting in improved cost of merchandise. We focused on display and presentation of items that differentiate us in the marketplace and provide uniqueness to the customer," Sinclair said. "All these changes have created a platform from which we can build our brand to be known as a treasure hunt for healthy eating across this country."

For the fourth quarter ended Dec. 29, Sprouts beat its guidance on net sales by posting $1.4 billion in revenue, an 8% increase from the same period in 2018. It also beat guidance on same-store sales, which grew 1.5%; the grocer posted two-year same-store sales growth of 3.8%. The company reported a fourth-quarter profit of $31.6 million. On a per-share basis, the grocer said that it had net income of 27 cents. The results beat Wall Street expectations. Net income was $32 million, compared with $13 million and adjusted net income of $24 million from the same period in 2018. 

For fiscal 2019, the company reported profit of $149.6 million, or $1.25 per share. Revenue was reported as $5.63 billion. 

Sprouts expects full-year earnings to be $1.17 to $1.23 per share.

The company's shares have dropped 17% since the beginning of the year. In the final minutes of trading on Thursday, Feb. 20, shares hit $16.05, a decline of 34% in the last 12 months.

"The retail landscape remains fluid and we continue to evolve how we connect with our customers," Sinclair said. "I remain confident in the team's ability to focus on creating a more efficient business while implementing a strategic plan to position us for long-term profitable growth."

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