Retailers

Sprouts Drives Profits Even Higher in Q2

High pandemic demand, promotional reset, sales leverage drive 450-basis-point gross margin increase
Photograph courtesy of Sprouts Farmers Market

Sprouts Farmers Market showed another healthy jump in profits during its fiscal second quarter as a pullback in promotions met strong COVID demand and pushed gross margins to a heady 37.3% of sales.

In the quarter, which ended June 28, the Phoenix-based natural foods chain grew sales by 16% to $1.6 billion and saw same-store sales increase by 9.1%. Gross margin as a percent of sales was up 450 basis points from the same period a year ago and represented a sequential increase from 36.6% gross margins in the first quarter, which in both periods were influenced by reeling in Sprouts’ historic high-low promotional strategy under new CEO Jack Sinclair. Higher sales volumes also triggered outsized improvement in shrink and cost leverage and cycled heavy promotions in the year-ago period.

Sinclair joined the company a little over a year ago and has now delivered three consecutive quarters of eye-opening profit growth as he seeks to transition the company behind unique product offerings some have compared to a natural-foods focused Trader Joe’s and roll back a historic emphasis on heavily promoted fresh goods that marked the strategy of his predecessors.

“I am proud of how our Sprouts team members have navigated these unprecedented circumstances we live in today. Our culture rooted in respect, inclusion and caring for one another has shone through in everything our team members do for our customers and for each other,” Sinclair said in a release accompanying the earnings report. “Our strong second quarter performance was driven by the strategic changes we have begun to implement across our business and the continued positive impact on demand from the COVID-19 pandemic. As we head into the second half of the year, our early strategic wins give me confidence in our long-term direction, and our team members’ dedication assures me we will continue to provide our communities and customers healthy food for their families.”  

Sprouts said it was anticipating that benefits of the food-at-home shift that came with the coronavirus lockdowns—including growing digital sales—would remain at elevated levels in the near term, but it declined to provide longer-term financial guidance. Comps in the month of July are estimated to grow by 9%, with e-commerce comprising 11% of total sales, Sprouts said.

“The trajectory of the COVID-19 situation remains uncertain, clouding the impact to the food retail industry over the coming quarters,” Denise Paulonis, chief financial officer of Sprouts Farmers Market, said in a release. “While our sales continue at elevated levels, so do additional costs associated with our team members and stores. Predicting specific outcomes remains difficult, and accordingly, we are not stating a new outlook range.  We remain confident in the financial strength of our business and our new long-term growth strategy presented last quarter.”

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