Retailers

Sprouts Profits Soar Behind Q1 COVID Boost

Margins reach 36.6% as promotional drawback meets home consumption wave
Photograph courtesy of Sprouts Farmers Markets

Sprouts Farmers Markets said sales in its fiscal first quarter jumped by 16% and comps rose by 10.6%, driven by a consumer shift in food consumed at home.

The Phoenix-based natural foods retailer said sales remain elevated as the COVID pandemic continues into its fiscal second quarter, with comps of 7.2% in April and big increases in digital sales that coincided with the imposition of social distancing measures.

Net sales in the first quarter, which ended March 29, totaled $1.6 billion with approximately $146 million attributable to a surge in buying following the declaration of a national emergency due to the coronavirus pandemic in March. That event contributed to a quarterly comp growth of about 9.6%. In February, Sprouts had forecasted comps in the quarter in the range of flat to 1%.

“I am inspired by our hardworking and profoundly dedicated 32,000 team members who have served under the most difficult of circumstances to ensure our customers have healthy food to feed their families,” CEO Jack Sinclair said in a statement. “During the first quarter, the COVID-19 crisis led to a significant increase in sales as consumers bought more food to consume at home. As we navigate these ever-changing circumstances, we remain steadfast and decisive, prioritizing team member and customer safety and remaining in-stock on fresh, healthy food for our communities, all the while not losing sight of our transformational strategy that will set us up for long-term success.”  

Sprouts turned the added volume into a boom in profits, with net income climbing 62.8% to $92 million and gross profit of a percent of sales swelling to 36.1%—a 180-basis point improvement on the same period last year. Those figures were driven by a more measured promotional stance as well as a positive mix and reduced shrink that came along with the higher sales volumes.

The period marks the second straight quarter in which Sprouts demonstrated a pronounced margin increase. Its fourth-quarter results—though absent of the volume surge—also showed profit benefits of Sinclair’s moves to reduce commodity price promotions and turn focus instead to unique offerings in stores, which generated 34.4% margins. Sprouts noted, however, that expenses incurred during the pandemic would weigh heavily on second-quarter results, and “we do not believe we will sustain the same level of operating margin expansion experienced in the first quarter.”

Expenses in the first quarter increased by 16% to $436 million, or 26.5% of sales. Leverage from increased sales related to the COVID-19 pandemic was largely offset by increased bonuses paid to employees, incremental e-commerce fees as more customers adopted digital solutions, as well as continued pressure from higher healthcare, labor and occupancy costs.

Sprouts said social distancing “has changed consumer behavior from customers consolidating trips and increasing use of e-commerce services.” E-commerce represented 13% of the retailer’s sales in April, with 7.2% comps in the month despite the closure of stores on Easter Sunday.

Sprouts also formalized drivers of a long-term growth strategy under Sinclair, who took office last summer. These steps include winning more sales from existing shoppers through unique products and expanded offerings, including e-commerce; reducing both the size and the cost of new stores; revamping its fresh supply network to locate distribution centers closer to stores; and refining its marketing approach to better communicate its points of difference to shoppers.

Sprouts said it would measure its growth against the following long-term targets:

  • New store cost to build reduced by approximately 20%.
  • New store cash on cash returns of approximately 40%.
  • 10 percent or more unit growth annually.
  • Low single-digit comps.
  • Stable to expanding EBIT margins.
  • Low double-digit earnings growth.

While the current environment affects the precise timing of when these strategies will impact our results, I am confident all these initiatives will improve our store performance, drive efficiencies, establish a tremendous unit growth trajectory and accelerate our future earnings,” Sinclair said.

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