Retailers

Modest Comps, Soaring Profits Mark Sprouts Q3

'We're playing our own game,' CEO Jack Sinclair says
Photograph courtesy of Sprouts Farmers Market

Another quarter of rapidly climbing profits—amid comp-store sales that were relatively modest in the pandemic-affected food retailing world—are all part of the plan for Sprouts Farmers Market, CEO Jack Sinclair said this week.

“The reality is, we’re playing our own game in the middle of this pandemic,” Sinclair said while reviewing the Phoenix-based natural food merchant's financial results in the fiscal third quarter.

Sinclair was referring to a pre-pandemic strategic vision to draw back on pricing and promotions and focus on attracting what Sinclair said was a more discerning—and profitable—customer. That effort showed in gross-profit margins of 37.1%—a 400-basis-point increase—and net income of $60 million on sales of $1.6 billion in its fiscal third quarter, which ended Sept. 27.

Net income grew by 130.8% and sales climbed by 9.5%, behind strong performing new stores and a comp sales of 4.2%. The latter figure is considerably lower the comp figures posted by conventional peers, but Sinclair said he expected that, and isn’t particularly concerned.

“Relative comps … is not something that we, quite frankly, are worrying a lot about,” Sinclair said in response to an analyst question during a conference Oct. 28 discussing the results, according to a Sentieo transcript.

Sprouts officials acknowledged the chain was lapping a period of intense promotions a year ago which drew the kinds of shoppers that chain would prefer not to have anymore—so-called “cherry pickers” taking advantage of the chain’s tendency then to offer market-leading prices on fresh produce. Pandemic shopping trends in the meantime—customers consolidating trips, high sales of conventional grocery items and paper goods—also worked against Sprouts’ strengths in the quarter.

These affects, they said, were expected while the chain works to recast its fresh presentation behind higher quality and unique finds, eschewing the highly price-sensitive shoppers that helped build comps but weighed on the profit line. In the meantime, Sprouts will work to lower operating costs behind smaller and denser stores supported by new infrastructure designed to service them more efficiently, including plans to add new fresh distribution centers in places such as Florida and Colorado next year.

“Trip consolidation appears to be a new norm during the pandemic. We don’t believe we benefit from this trend, as we only carry a limited assortment of traditional CPG products like paper goods and cleaning supplies,” Chief Financial Officer Denise Paulonis said. “As well, our geographic mix of stores is more weighted to regions of the country that saw slower overall food-at-home growth later in the quarter, as indicated by credit card data.”

Sinclair acknowledged Sprouts is experimenting with various tactics—primarily digital messaging that, for example, recently highlighted fresh fish varieties and led to a sales increase in that department during the quarter—that could deliver traffic as needed but emphasized that “the thing that I’ve been trying to do is reestablish the base business model in the business, which is getting us to a point where we are operating without compromising our margin to drive the sales.”

Sprouts is also kicking a new marketing into gear to support the developing rebranding. As reported first by WGB, a new logo appeared during the quarter as well as a new slogan—Where Goodness Grows—and approach to advertising.

Sinclair said the campaign “drives home our farmers market experience by highlighting produce, the heart of our store, and inspires health enthusiasts and experience seekers to engage with our brand. To date, the new branding has been well-received. We continue to see our Net Promoter Scores among our frequent shoppers ranked best-in-class with our peers.”

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