Sprouts Farmers Market, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to SPROUT's fourth quarter and full year 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your touch-tone telephone. Please be advised that today's conference is being recorded. Should you require any further assistance, please press star zero. I would now like to hand the conference over to your host, Vice President, Investor Relations and Treasury, Susanna Livingston.

Thank you, and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our fourth quarter and full year 2020 earnings call. Jack Sinclair, Chief Executive Officer, and Denise Polonis, Chief Financial Officer, are with me today. The earnings release announcing our fourth quarter and full year 2020 results, the webcast of this call, and quarterly slides can be accessed through the investor relations section of our website at investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2021 and beyond. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings, along with the commentary on forward-looking statements at the end of our earnings release issued today. Our remarks today include references to non-GAAP measures. For a reconciliation of our non-GAAP measures to the GAAP figures, please see the tables in our earnings release. Also, please note that full year 2020 was 53 weeks, with the extra week falling in the fourth quarter, making it a 14-week quarter. With that, let me hand it over to Jack.

Thank you, Susannah, and good afternoon, everyone. Thank you for joining our call today. There is no doubt that 2020 was a year like no other. As the calendar has turned and we reflect on the year, the events of 2020 have only made Sprouts stronger. we generated a robust top line with sales up 15%, record earnings, and operating cash flow of nearly $500 million. While absorbing costs associated with an increase in e-commerce sales, the opening of 22 new stores, and the payment of record bonuses to frontline team members, I am delighted we have paid these bonuses to our team members during such challenging circumstances. Clearly, we have some tailwinds from COVID. However, our strategic initiatives are fueling our performance and will continue to have lasting impacts. We anticipate further non-COVID-related improvements in our business in 2021 and beyond. These improvements will come as our strategy further comes alive, winning with our target customers, a redefined brand and marketing platform, reverting back to smaller formats, strong unit growth, a focused and disciplined supply chain and best-in-class customer service. Sprouts is uniquely positioned as a speciality grocer. We lead with a fresh produce selection highlighted in the centre of our store, carry a different assortment of food and provide a smaller format experience that strongly resonates with today's customer who is focused more than ever on health, wellness and innovative products. We are not a traditional grocer. and we are confident regarding our future financial targets. Before I go further, I want to give a heartfelt thanks to all the team members at Sprouts for their service to our customers in unprecedented years. The teams from our stores, distribution centres and corporate support office worked tirelessly together to make lasting positive changes to the company, all the while improving access to healthy foods across the country. Our customers also expressed gratitude in many ways, from meaningful words of thanks to our Heroic Store team members to a record-year grab-and-give promotion, up 30%, that supports local food banks during the holiday season. The Sprouts Healthy Communities Foundation's work advancing nutrition education and access to fresh foods shifted quickly to help our communities, schools and non-profit organisations grow. and helped our nonprofit organizations rapidly change their programming in response to the coronavirus. The foundation awarded $1.6 million in grants to 130 local nonprofit organizations to provide an estimated 350,000 students with nutrition programs, vegetables to food insecure individuals and families, fund a Denver citywide distribution of home to grow garden kits, among other support. Customer behaviour during the pandemic is well documented. Consumers made fewer trips, shopped in less retailers, prepared more food at home and shopped more food online. As a result, our business had less trips and bigger baskets. We're starting to see this trend change and we're expecting this to evolve through the year. As it was a headwind to us in 2020, we're optimistic it could be a tailwind to us in 2021 as the vaccine rolls out. Additionally, many of you have asked about our target customers. We're pleased to see that post the first wave of the pandemic, our transaction and basket performance with our target customer is stronger than similar metrics for our non-target segments, particularly those coupon clippers. While we are still early in our strategy execution, This reinforces our conviction of our focus on target customers that represent approximately $200 billion of food and beverage grocery sales. Our differentiation runs deep at Sprouts, with over 68% of our products being attribute-driven, like keto, paleo, plant-based, or of course organic. We are much different than other grocers. In case you're wondering, as we were going through this analysis, we decided all produce was vegan. As well, maintaining a natural health regimen continues to be important to our core customers and is especially heightened during these times. This trend resulted in organics for the total store representing 23% of our sales and an increase of 45% in our alternative meats, from brands like Beyond, Impossible, and products like Daring, where we were first to market. As we aspire to be the leader for developing and carrying new products in the natural and organic space, the merchandising team is bringing in more brands and owned brand exclusives to Sprouts, like Clo-Clo Vegan Pizza, Muala Keto Milk, also both first to market at Sprouts. These partnerships with our vendors keep the innovation flywheel moving Overall, 2020 brought the addition of more than 5,100 new branded and private label items, which contributed more than 35% of our sales growth. Our private label holiday program had a record performance, even with fewer items introduced, as we focused on seasonal trends like our pumpkin spice almond butter and holiday favorites like our dark cocoa kettle corn. We've highlighted this strength in product differentiation, even more this year with a Find a New Favourite campaign. All these healthy lifestyle choices have become woven into the daily lives of our core consumers, and we believe these habits are here to stay. As it relates to strategy, we have only begun to scratch the surface of our strategy in 2020, with changes to marketing, our brand, a margin reset, and an omnichannel ecosystem. COVID allowed us to accelerate our switch from print to digital channels by years, resulting in more efficient media spend with a vastly expanded and targeted reach, not to mention a positive environmental impact by averting 60,000 metric tonnes of CO2 annually. Through our efforts, our customer database grew tremendously in 2020, with customer emails growing 50%, and downloading of our Sprouts mobile app increasing nearly 60%. In total, we have surpassed 3 million email addresses driven by our team members in the store through fun operational competitions like Sign Up Showdown. Our new brand campaign, Sprouts, Where Goodness Grows, was released in the fall and is building awareness by reaching more customers through our first-ever commercials, doubling brand awareness, brand favorability, purchase intent, and the key brand attribute sells high-quality products. Our quick rollout of pickup at every store in the spring of 2020 and the release of shop.sprouts.com in the summer boosted our omnichannel presence, allowing our customers to shop in a way that works best for them. Our go-to-market strategy has changed our financials for the long term with our thoughtful approach to better everyday pricing, purposeful promotions, getting back to our roots of a produce buying organization which is nimble and flexible. With additional investments we're making in systems and process improvements in our stores, we continue to make further advances in shrink. As we mature our go-forward pricing and promotion strategy, we continue to test different ways to stimulate new customers and transactions. With more arrows in our quiver, we can now invest from a position of strength, which we continue to do. While there is much more to do to bring our brand promise to life, we are pleased with our progress in 2020. In particular, I am pleased with our strengthened leadership team, which is combining the best of the original Sprouts team with experienced executives brought in from the outside. They all share a passion for our mission, and despite the strange WebEx and Zoom environment we're all living in, the team is working very effectively together. Coupled with our new store growth, we're already markedly expanding our earnings from 2019, as demonstrated in our 2021 outlook issued today. Looking forward, I'd like to highlight a few pillars of our strategy that we expect will show results this year, specifically marketing, unit growth and format, and our distribution channels. First, Our new brand and marketing program is vital to attracting more spend from our core customers. And while it was released in the fall, much of the heavy lifting occurred towards the end of last year. Many of our customers today fall into one of two target customer segments, health enthusiast or experience seeker. However, we're only capturing a small percentage of target customers available in our markets due to low brand awareness. Once those customers are acquired, they have a strong affinity to our stores, as seen in our net promoter scores. We started working with media partners, one being Verizon, who has over 350 billion daily proprietary data signals at their fingertips. We specifically target our core customer using this vast amount of data. Our marketing now spans a diverse mix of high affinity TV, radio, and streaming to help build brand awareness and accelerate the reach of our message. More personal digital touchpoints like location-based shopping behavior, social media profiles, and contextual targeting will help to drive individual spend. This marketing program will continue to provide value to our customers as it builds the Sprouts name in a more meaningful way. For example, where we used to do anonymous marketing through our print ads, we are now utilizing customer data for digital-driven ongoing targeted communications. Our unit growth story remains one of the best out there for retail. Since last year, the real estate team has been actively finding new locations which meet our strategic expansion plans. We plan to open approximately 20 stores in 2021, slightly below our targeted 10 plus percent growth, primarily due to COVID-related slowdowns. A handful of these stores will be in our new format and the majority will be built with a smaller footprint of 25,000 square feet or less, providing improved box economics as they grow. As we look through the year, we will remodel an existing store with parts of the new format early in the summer, and our first ground-up new store format will open later in the summer in Phoenix. These first stores and a few others will pilot many of the new changes prior to opening our 2022 vintage, all in the new format. Building on the foundation of our heritage, produce will remain the heart of the store, highlighted by a low-profile farmer's market experience as well as personal connections with team members and a treasure hunt feel. We've cut back non-productive space in the store to allow for a very similar number of SKUs. You will also see expanded departments meaningful to our target customers, attribute messaging throughout the store to highlight our differentiated products and an innovation centre to showcase new offerings. The innovation centre is an important feature in the new stores allowing our customers to see and taste new creations from Sprouse and our vendors. In fact, we will roll out enhanced innovation centres to many existing stores throughout the year. The 2022 pipeline is already filling up and we plan to be at our targeted 10 plus percent unit growth next year. We will open two new fresh distribution centres this year, one in Colorado next month and one in Florida in early summer. These openings will drive us closer to our goal of having our stores within 250 miles of our DCs to optimise our supply chain efficiencies and result in carbon savings of nearly 3,000 metric tonnes of CO2 from reduced miles on the roads. Local DCs also support our desire to work with local farmers to expand the selection of unique seasonal produce and guarantee freshness to our customers. For instance, with the opening of our Colorado DC next month, we'll be doubling our local produce offering and introducing more variety categories, like yellow flesh watermelon and numerous varieties of cooking greens. And we're also partnering with some young and expanding indoor and vertical growers to provide local microgreens and lettuces, which provide farm-to-fork in hours, not days. With the addition of these two DCs, our fresh produce product network will increase to seven DCs, and the new DCs will include additional features such as ripening rooms to serve our stores with a fresher selection. As well, we are currently exploring how to nearly double the dollars that we self-distribute through our DCs in future years by adding catteries like dairy, bulk, and some grocery items. We look forward to sharing both the new DC and the new format with you all later in the year. Sprouts has set itself on a new but familiar path. We remain a high growth speciality grocer and in keeping with our heritage, carry unique healthy products with a farmer's market experience. And we're evolving by reformatting to highlight our in-store experience and improve box economics, aligning our fresh distribution centres closer to our stores and attracting more of our target customer spend. We're confident this balance will result in strong total sales growth while securing our financial returns to provide compelling value for our shareholders. We believe we are on a stronger foundation than the beginning of 2020, and we look forward to building on this with the many opportunities and growth that still lie ahead. While we have much work in front of us, 2021 will deliver strong results. Now let me hand it off to Denise to discuss our financials in more detail, as well as our 2021 outlook. Denise?