Sprouts Farmers Market calls its merchants "foragers" in that they are seeking out unique and exceptional natural and organic items that are difficult to find at other retailers. With this "surprise and delight" approach with its shoppers, Sprouts seeks to create separation from other larger grocers and mass via its sharply curated selection. Our data suggests that this approach is working despite the cycle turning negative for grocery (i.e., little sales growth and margin pressure), which demonstrates idiosyncrasy and strong execution. This deserves celebration and analysis.
For Q2 2024, Sprouts produced an eye-popping +6.7% increase in comparable-store sales and 80 bps of gross margin expansion; those produced 30% earnings growth. The 3-year comparable-store sales CAGR improved +300 basis points to +12.3%. Sprouts’ shopper frequency is up roughly 8% on a per location basis (below).
Using Experian Mosaic segmentation, large gains were made in Striving Foward, Steadfast Conventionalists, and Ambitious Dreamers.
12 new Sprouts locations were added in the first half of 2024 and 23 are planned for the second half, which should take the total number of stores to 447. Store openings from the past two years continue to perform strongly, which is what’s partially behind the strong sales increases. As shown in the table below, the 2022 class of stores ramped strongly during the first half of 2024, going from around 90% of the chainwide average for visits per location to nearly 100%.
Additionally, the 2023 class is now outperforming the 2022, on an equivalent time period, by mid-single-digits (below). CEO Jack Sinclair noted, “Given our business momentum, we're eager to expand into more communities and provide access to even more health-focused target customers… We are customizing our grand opening approach to establish stronger local connections. This involves focusing partnerships with local news stations to drive awareness and excitement of Sprouts joining the neighborhood. Our plans include unique community engagement activities for each store opening.”
In describing the company's outperformance relative to the industry, Sprouts CFO Curtis Valentine said, “The company's sales performance was strong across all categories as well. We focused on improving stock levels, introducing innovative products with healthy attributes, getting the right assortment locally and adjusting planograms, leading to improved performance in our physical stores, along with continued steady e-commerce growth. In particular, during the second quarter, we benefited from early and strong seasonal produce and saw the business strengthen more than anticipated with this kickoff of summer...I think our comps generally comes down to really age of store. We're seeing really strong comps from our newer vintages, and we tend to be a little heavier weight into the non-established there with our pipeline being kind of 50-50 and just not a huge base of stores in those markets...But generally, from Q1 to Q2, it was strength across the board. All regions improved and we have a really healthy balance across the entire country.” (This aligns with the chart above.)
Sinclair continued, “We're making great progress in becoming our customers' go-to destination for health and wellness products. Our unique product assortment is curated specifically for our target customers and sets us apart due to the attributes, freshness and quality we deliver. We continue to see customers seeking the type of product and experience we offer. In our second quarter, we saw increased frequency from our existing customers as well as growth in new customers. Our foraging team continues to drive our unique assortment through both Sprouts brand and emerging brands on our in-store innovation center. Sales continue to grow in this space, and we have a strong process to bring the best products quickly to our shelves...The foraging team, we put that together a couple of years ago now, and that team have done a really amazing job in terms of finding products that are not sold anywhere else. I think I've said in the past that there's some really interesting entrepreneurial food--entrepreneurs in the country who are bringing a lot of interesting food products--but we're getting more products than actually we can put on the shelves at the moment because we've become a bit of a go-to place for people to bring products to the market and things that are really focusing on those type of products with appropriate ingredients, no additives, none of the bad stuff in product and a lot of positive ingredients. And that's something that they've been working very hard on. The process itself is that they're spending a lot of time going around all the shores around the country, making ourselves available...The teams are using this improved capability to make stronger assortment decisions, merchandise more effectively in store and improve the online customer journey. As a result, we're seeing better performance in category resets. On the store experience front, we have strengthened store operations and fortified our supply chain foundation. The IT, supply chain and operations teams have collaborated to improve our inventory management with new programs, processes and tools. These improvements have empowered our store team members to manage fresh inventory better, improving freshness for our customers and significantly improving strength.”
