Sprouts Farmers Market Confident in Long-Term Growth Potential
Healthy grocer Sprouts Farmers Market surpassed its own expectations in its third quarter ended Sept. 29. Sales increased by 14% compared with the third quarter of 2023, including an 8.4% increase in comparable-store sales, while diluted earnings per share grew by 40% from last year.
"The third quarter was another exceptional performance by our Sprouts team," said CEO Jack Sinclair. "We are driving robust traffic growth and continue to execute at a very high level. We remain confident in our long-term growth potential."
In Q3, total sales were $1.9 billion, up $232 million from the same period last year. “Our comp was split fairly evenly between traffic and basket, and we saw a strong traffic comp both in store and online,” said CFO Curtis Valentine during the company’s earning call.
E-commerce sales increased by 36%, representing 14.5% of total sales for the quarter.
“Once again, the company's sales performance was healthy and balanced across all our key comp drivers, categories and geographies,” added Valentine. “In addition, the consumer's pivot toward food-at-home and a growing focus on healthy living is bringing additional customers to Sprouts."
According to a recent report from research firm Placer.ai, Sprouts' foot traffic during Q3 increased 8.1% year-over-year (YoY), and the average number of visits to each location was up 2.6%. Additionally, during September, visits were up 8.1% YoY, and they were also up 8.5% in August, and 7.9% in July.
To meet the needs of its health-conscious customers, Sprouts is growing its assortment of differentiated products. This includes store brands, which contributed 23% to total sales for the latest quarter. The specialty retailer released more than 300 new Sprouts Brand items this year. Most recently, it launched a new line of more than 130 premium body care and home fragrance items called Real Root by Sprouts.
The grocer also expanded its range of organic produce, which is experiencing faster growth than its conventional produce. Organic products now comprise more than 46% of total produce.
In the meat department, Sprouts’ protein programs grew by offering only non-antibiotic chicken and pasture-raised brands. Plus, the grocer has taken advantage of the consumer’s pivot back toward food at home by increasing its meal solutions across the fresh and frozen departments.
“I'm especially encouraged by the collaboration and coordination across functions in executing, exciting merchandising events and providing enhanced customer engagement, which has been instrumental to our success,” said Sinclair.
To showcase its differentiated products, Sprouts held several in-store experiences throughout Q3. In July, it debuted the first Sprouts Brand Discovery Days, during which customers explored the latest trends and new better-for-you products. The retailer’s back-to-school event also focused on healthy school snacks and lunch offerings.
Another area that plays a key role in Sprouts’ customer engagement is social media. “Our team has brought our unique assortment and experience to life and has found willing partners with many influencers and celebrities, whose products and purposes align with ours,” explained Sinclair. “What is even more encouraging is seeing authentic posts from our customers, sharing their experiences in-store and with our products.”
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Sprouts is also pleased with the progress it’s making and the learnings it’s gathering from its two-market (Tucson, Ariz., and Nashville, Tenn.) testing phase of a new loyalty program. The company plans to extend this test to a couple more markets in early 2025 to accelerate learnings that will inform its rollout later in 2025.
Meanwhile, gross margin in Q3 was 38.1%, approximately 150 basis points higher than the adjusted gross margin from last year. Valentine explained that this increase was due primarily to improved shrink.
SG&A totaled $580 million, an increase of $79 million, or approximately 50 basis points of deleverage, compared with adjusted SG&A from the same period last year. These results were due to higher incentive compensation for associates, increased e-commerce fees, and spending against a planned $15 million investment in the business.
Sprouts opened nine new stores during Q3, resulting in 428 locations across 23 states.
“Through the third quarter, we generated $520 million in operating cash flow, which enabled us to self-fund our investments of $132 million in capital expenditures, net of landlord reimbursement, to grow our business,” said Valentine.
The company has nearly 110 approved new stores and more than 70 executed leases in the pipeline for the years ahead.
“We are more committed than ever to making healthier options available to our customers in as many communities as possible,” noted Sinclair.
For its outlook, the healthy grocer expects total sales growth to be approximately 12% for the full year and comp sales to be approximately 7%. Adjusted earnings before interest and taxes are expected to be between $490 million $495 million, with adjusted earnings per share from $3.64 to $3.68, assuming no additional share repurchases.
For the full year, Sprouts anticipates capital expenditures, net of landlord reimbursement, to be between $205 million and $215 million. The company plans to open 33 new stores instead of the previous guidance of 35 after deciding to delay two store openings in Florida, due to the impact of Hurricane Milton, until the first quarter of 2025.
Phoenix-based Sprouts employs approximately 33,000 associates and operates more than 420 stores in 23 states nationwide. The specialty retailer is No. 51 on The PG 100, Progressive Grocer’s 2024 list of the top food and consumables retailers in North America.
