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Sprouts Farmers Market: Modest Growth as Staffing Levels Improve

Thomas Paulson
Aug 5, 2022
Sprouts Farmers Market: Modest Growth as Staffing Levels Improve

Key Sprouts Farmers Market Metrics

Improved in-stocks and merchandising initiatives (highlighting its value in fresh), progress in consultative selling, and better marketing lead to a modest improvement in Sprouts Farmers Market's comparable-store sales trend to +2% (along with earnings up 10%). These improvements also are the result of progress in getting staffing levels to their targets. Comp-store transactions were also positive, which given double-digit-plus inflation implies a sharply smaller basket which is the result of fewer units per basket. This includes the weight being down for produce (for example, fewer cherries in the bag).

  • Both sales and transactions improved on a YoY basis during the quarter; however, given that comps were +1.6% last quarter, and annual guidance of +1%-2% comps, that improvement would be modest. Placer data indicates that visitations declined by a mid- to high-single-digit clip for much of the quarter (below), suggesting that e-commerce (which grew +15% during the quarter and now represents 11.1% of sales) was a major contributor to overall transaction growth as was shorter "fill-in" visits with fewer items.

  • Trailing-twelve-month (TTM) sales per square foot of $589 increased $4 QoQ and is likely to be up +2%-4% over the next twelve months.
  • TTM EBITDA and free cash flow were $475M/$280M (representing 59% conversion) versus $494M/$181M in the year ago period. Over the next twelve months, EBITDA is likely to be even and FCF lower as the rate of store expansion ramps.
  • Profitability was modestly lower and will continue to attenuate as staffing and service levels increase over 2H22. However, that appears to be a controlled investment and it reflects, in our opinion, greater confidence by management in the direction of the business, its strategies for growth, and its consumer proposition.
  • Two new locations were opened during the quarter and three were closed, ending at 378. The company’s two new distribution centers (Aurora, CO and Orlando) are ramping up, which in addition to cutting out STEM miles, allows the company to expand in the Mid-Atlantic and California markets. Management plans to double its store count in Florida (representing approximately 60 locations). Capital is also being invested in more prepared meal cases in existing and new locations, 85% of the store base now offer prepared meals.
  • As shown in the table below, small-format grocery is lagging large-format due to trip consolidation (toward large-format) and shrinking items / weight per basket.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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