As we've shared in the past, there are several significant macro trends affecting visits, share-of-stomach gains from out-of-home and the increase in frequency, offset by basket size, offset by the ongoing cycling of the reduction in expanded / emergency SNAP benefits that were temporarily supporting lower-income households during the pandemic (those began to roll off in February 2023). New headwinds in 2024, services inflation, etc. we touched on above. To the point of a more challenging 2024, Albertsons recently warned of a difficult first half of 2024. We will learn more about the industry with Walmart, the largest food-at-home retailer in the U.S., reporting next week.
Ahold Delhaize: A Remodeled Lion Roars
Ahold Delhaize reported another soft quarter for its U.S. business, with underlying comps down -0.5%. Unsurprisingly, the Stop & Shop banner is the drag, which we reported on a quarter ago. Additionally, like with Albertsons Companies, the growth pharmacy and GLP-1s offset much of the decline from lapsed SNAP payments. Margins were pressured by store labor and higher shrink (this is YoY as the rate of shoplifting is stable QoQ). CEO Frans Muller said, “We see in the first quarter positive trends in volume, in our brands, in all our brands, by the way, and we have a couple of brands which are already in positive volume territory.” [i.e two are up, and the remaining three, down.] Muller continued, “This has to do with the fact that not only us as a retailer, but also our vendors, our manufacturers [are] looking forward to a positive volume growth.” Note the “looking forward” not “realizing. Management also highlighted good results with remodels in Wilmington/Greenville, North Carolina and Placer data confirms strong results as well, shown below.
When we wrote about Albertsons we discussed the growing importance of modernized/contemporized mobile apps and digital engagement that highlight loyalty benefits. This is true for Ahold as well with Muller saying, “So we invested a lot in loyalty system and hyper-personalized offers. So that's why we can be much more pointed to customers on value, but also in specific offers when we talk about diets and preferences, and so on. So you will see, and you see in the U.S...growth of our private label share. And what we've tried to do, of course, is that we try to avoid that customers are leaving us as a supermarket brand…” This strategy aligns with our view that growth in grocery, in the near term, will come from retailers that can put forth the best quality and value private label offering in the marketplace. Right now, all are hearing Aldi’s and Trader Joe’s “thunder.”
Regarding omnichannel, Muller said, “Our decision to orient our online fulfillment capabilities towards more efficient less asset-intense, same-day delivery models, such as click and collect is really paying off. Our online sales in the U.S. grew 5% year-over-year in the first quarter on a like-for-like basis, fueled by new customer growth as well as strong retention of existing e-commerce customers. We continue to make steps to further improve our e-commerce performance driven by, first of all, labor efficiencies and cost rationalizations in all channels, transitioning from low-efficient fulfillment centers to our flexible store-first network strategy. And the launch of our partnership with DoorDash is already off to a strong start with 1,800 stores across all five brands, now live with the DoorDash marketplace.” They will have more to say at a May 23 investor day. Also of note, they disposed of their business and financial interest in FreshDirect.
Sprouts Farmers Market: Continues to Grow, Store Class of 2023, Solid
Last week, Sprouts Farmers Market produced strong results, with sales driven by traffic, new stores, and more third-party delivery partnerships. “Click” sales grew +25% as they added Uber Eats to its delivery partnerships. Brick comps grew +1.1% and new stores added +3.7% to growth. Profits and cash generation were solid, allowing CEO Jack Sinclair to say, “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 this 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.”
The chart below looks at the 2023 opening class, and the maturation is quite impressive given that half the class opened in the second half of the year, thus allowing for three or more months of maturation. Per Sprouts Financials, new store productivity calculates out at 70%; we’d expect visits productivity to lead sales productivity as households first test out the offering, and if acceptable, then make it an increasing amount of their routine.
Sinclair also noted: “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 them...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 this 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’ve also recently written about how market share-taking grocers are those that have modernized tech stacks and mobile apps that allow for sharply targeted price promotions to reward loyalty – saving money now being a high priority for households. Sprouts' is just beginning a loyalty program; Sinclair said, “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 in their passion to live and eat better. This is a multi-year 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 Rewards in two markets this quarter is just the beginning.”
Grocery Outlet
Grocery Outlet Holding’s reported disappointing financial results due to a material decline in profit margins with the release reading,” As previously disclosed, the company experienced disruptions as a result of the implementation of new technology platforms in late August 2023. Such disruptions are estimated to have negatively impacted gross margin by 210 basis points in the first quarter.” And CEO RJ Sheedy said, “Our results were incrementally impacted by unforeseen systems transition costs that surfaced at the end of the quarter. We are all very disappointed with our poor Q1 2024 results, and we are committed to getting these system impacts behind us very soon.” The system conversion issues have continued into Q2 2024 and will impact earnings for the quarter. (Contributing to the 210 was warehouse product going past expiry. Recall also that Grocery Outlet recently brought in new IT and supply chain leadership.)
If there were a brand problem resulting from worsening out-of-stocks, we’d expect to see sustained decline in traffic, which per Placer is not the case (the depression in April is solely the Easter shift.) Comps sales increased by +3.7% with transactions up +7%; however, the -2.9% decline of average transaction size (fewer units), combined with the -210 bps in gross implies that the company is putting more value in front of the consumer to drive sales. Moreover, the added value resulting in no gross profit dollars growth, while expenses rose +11%, resulting in a decline of 37% in EBITDA. In our analysis on 99 Cents Only’s demise, we observed that the increase in competition for consumer consumables spending was putting pressure on industry profitability, an incremental pressure that 99 Cents couldn’t withstand. Here again, we see evidence of an imbalance between too much supply/shelf space of grocery items (added during the pandemic and last year): increased competition, combined with a consumer that is shopping around for value, resulting is an operator getting hit. We expect to see the story to be repeated for several brands this earnings season.
Also of import as they are key differentiators in the current environment, Sheedy said, “We completed the rollout of our personalization app to all Grocery Outlet stores during the first quarter. The app allows us to communicate our weekly deals to customers and customize their treasure hunt experience...Over time, we believe the app will create increased customer loyalty through greater engagement, which will help drive trip frequency and share of wallet. Finally, we are very excited to be introducing our private label program to stores in the third quarter. As we have previously discussed, this is a program that we have been working on for the past year, which we believe will become another key differentiator providing even more value and excitement for our customers.” Solid execution on the app and private label program will be growth drivers in 2025 and beyond.
