Sprouts Farmers Market produced consistent results during Q1 2023, albeit the 2-year comparable-sakes CAGR improved +100 bps to +2%. Should the trend continue (which the company has fore), Q2 2023 could see a similar improvement. The improvement is a surprise given weak industry traffic trends, higher prices, and notable deceleration in comps at some of the larger conventional grocers. (Recall our recent Anchor piece on the grocers where we shared our view that the driver of industry growth would soon transition from national branded packaged food price inflation to retailer brand disruptive products and value. Something that others are noticing as well, including the WSJ.)
On its Q1 2023 update call, CEO Jack Sinclair stated that traffic was “improving” and that has led to upside in management’s expectations for the quarter (our data indicates this as well, as shown below). However, this was true for March but that is against last year’s period of steepening declines (and not true for April). Nevertheless, we estimate that comparable transactions excluding third-party delivery orders (Instacart and DoorDash) were down slightly, which was improved from last year. Why the shift? We suspect that the company’s work around differentiation is yielding positive results. CFO Chip Malloy shared that the Sprouts’ brand (i.e., its private label product) is “now at 20% of total sales, performed well as customers continue to seek uniqueness and quality.” Sinclair also added, “Our customers recognize that the Sprouts brand provides quality offerings that taste great and are good for you. Amid the high inflationary environment, we brought in more value-forward offerings like multipack grocery items and value-sized meat and daily offerings while continuing to offer great pricing in our produce department and on important items such as our Sprouts brand, cage-free eggs at $3.99 and our healthy sandwiches at $4.99.” Better in-stocks and flowing fresher produce were also contributors to the improved results.
Sprouts remains on track to open at least 30 new stores in 2023, the new store prototype is beating its proformas, and sales productivity improved $2 quarter-over-quarter to $600 per square foot. Sinclair added, “Our pipeline is also growing with 90 approved new stores and 60 executed leases helping us gain traction towards our goal of 10% unit growth per year. We believe we will be on track to achieve that goal by 2024.” The better quarter emboldened management to raise its sales and profit guidance for the year by approximately +1% and +6%, respectively. From the Q1 update comments, it is clear that driving better traffic is a priority for management (i.e., they see it as an opportunity for improvement).
