Sprouts Farmers Market, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Sprouts Farmers Market First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today, Susanna Livingston. You may begin.

Thank you, and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our first quarter 2021 earnings call. Jack Sinclair. Chief Executive Officer, and Denise Polonis, Chief Financial Officer, are with me today. The earnings release announcing our first quarter 2021 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 reconciliation of our non-GAAP measures to the GAAP figures, please see the tables in our earnings release. With that, let me hand it over to Jack.

Thank you, Susanna, and good afternoon, everyone. Thank you for joining our call today. I'm very pleased with how we have navigated the current environment as we begin to cycle some of the positive impacts from the onset of the COVID pandemic last year. Combining our strong financial performance with the strategic opportunities ahead of us makes me very optimistic about the future of Sprout's. For the first quarter, we generated diluted EPS of 70 cents, up 52% from the first quarter of 2019, as our strategic initiatives in promotions and shrink continue to deliver strong, sustainable financial results. As I've stated before, I believe 2020 was a turning point for Sprouts, and we're continuing to build on that success and momentum this year. For 2021, our focus remains winning with our target customers, by building our brand through meaningful marketing in and out of the store, curated merchandise, building an efficient supply chain, and unit growth supported by a new format to further expand our reach. 2020 was a pivotal year, not just for Sprouts, but for Americans in general, as we all tried to stay healthy. As we kick off a new year, this same focus on health is top of mind. For Sprouts, this plays well into who we are, a fresh, natural and organic specialty retailer. Fresh produce has always been the mainstay of Sprouts, and it continues to be at the heart of our proposition, representing 22% of our business. In addition, what sets us apart from other grocers is the breadth of attribute-based products that we carry. Attribute-based trends like keto, paleo, organic, plant-based, gluten-free and functional are all themes focused on wellness. and play directly to our target customers. In 2020, our organic sales across the store increased 21% to $1.4 billion. And in produce, organic sales were up 23%, driven by the desire to eat healthier. We're becoming the leader in the attribute space, joined by our pioneering vendor community, becoming the destination for up and coming vendors in the food industry is a fundamental part of our merchandising strategy and something our target customer desires. We like to lean in and take risks on these young companies. No one else is collaborating with their teams like we are. We help drive their innovation and improve their ingredient panels, which results in exclusive market entries with leading-edge products for sprouts. Nut Pods Creamer is one such example. We started partnering with them back in 2018 as a small women-owned company. Over the years, we've partnered to create first-to-market flavors and value-sized offerings. And this week, a new zero-sugar sweetened option will be in our stores. The growth we have seen in nut pods and many others has been extraordinary, and we look forward to how much more we can do. In the long run, these relationships are creating a product innovation pipeline. keep our shelves full of unique, trending merchandise. As I've said before and will continue to say, we are not a traditional grocer, and as we grow and scale, we're evolving as the go-to food retailer for natural, organic, and attribute-based partnerships and product releases. In the first quarter, as in quarters past, attribute-led product offering drove revenue. The plant-based trend is one such offering that we continue to expand on our shelves, For example, Take-Two milk alternative made from rejuvenated barley and Brave Robot dairy-free ice cream are two products that help drive sales in dairy and frozen. Both deli and bakery continued to grow on top of last year's COVID run-up, fueled in part by innovation as well, like Sweet Earth plant-based chicken alternative meals in deli and strength from seasonal offerings and keto-based products in bakeries. In grocery, the team continued to drive forward our innovation pipeline, resulting in more than 400 new items in the first quarter, with still more to come this year. Many of these new products were the result of strategy work performed in 2020 to better serve our target customers. Throughout this year, we will bring even more new products to create that treasure hunt shopping experience, and we'll be highlighting these new items in our innovation centers, in our new stores, and our Find a New Favourite merchandising displays throughout all stores. Moving on to our brand. Though we have 362 stores across the country, we are behind from a brand recognition perspective. Our awareness is very low. In 2021, this will change. Our Where Goodness Grows campaign was kicked off late last year with our first foray into TV and many other digital mediums. This year, the brand changes will start to come alive in the physical assets, starting with our five new format stores. Eventually, they will be reflected in our product offering through a common design principle, completing the entire umbrella of the Sprouts brand. On the marketing front, our digital first initiatives designed to connect with more target customers continue to progress well. We're building our base of customers with emails up over 140% in the first quarter and website traffic growth of 39%. Importantly, email subscribers tend to have larger baskets than other customers, which is one reason why we remain focused in growing this number over time. Through our marketing journey, we have identified who our core customer is, have begun to increase our digital communications, and are starting to see this resonate with target customers. Through our data sources, we continue to see positive trends and data points suggesting that we are winning disproportionately with our target customers. As well, we continue to see customer counts improving, ending the quarter with the highest we have seen since last April when the pandemic sets in. In addition, we noted in one of our customer surveys that the majority of our customers who reduced or eliminated trips to Sprouts during the pandemic expect to return post-pandemic. These are all steps in the right direction for our marketing strategy, and we look forward to increased sales from these initiatives as the year progresses. When I first joined Sprouts, I noted that our supply chain was disjointed, with stores too far from our distribution centres. So I'm very excited about the opening of our fresh distribution center in Aurora, Colorado, serving 45 stores and bringing us to six DCs across the country. The opening went well, and we are now supplying all stores in our Colorado, Utah, and New Mexico region, a testament to the strength of the team. This new DC, along with the new Florida DC to be opened this quarter, will create a faster supply chain and building our goal to have our DCs within a 250-mile radius of our stores. In addition, they will allow us to serve more stores and customers with fresher produce, aided with the benefit of ripening rooms, and allowing us to support local farmers. In season, our local produce offering in Colorado will increase by more than four times our past assortment. The Colorado DC will house produce from family-owned Strohar Farms, who have been growing potatoes in Colorado since 1910, family-owned Petroco Farms, only 30 minutes from our D.C., who grow everything from leafy greens to sweet corn and peppers, as well as Hazeldale exotic organic mushrooms grown year-round in temperature-controlled sheds, among others. These farming relationships will expand with our new local sourcing team housed out of the D.C. with a wealth of experience in local sourcing. This sourcing model is being replicated across all our distribution centres to ensure we are supplied with seasonal and locally relevant produce in every store. With this initiative, we will also decrease the miles our trucks drive, therefore reducing our greenhouse gas emissions and creating operational efficiencies like less shrink and a reduction in food waste. I can unequivocally say this piece of our strategy is good for our customers, our business and our planet. Our investments in 2021 go beyond the DCs. Considering we're a young company, we were only 54 stores a decade ago, we have opportunities to invest and upgrade our systems that support and drive our future growth. A few of the investments this year are focused on perpetual inventory, replenishment, computer-assisted ordering, labor management, and a new human capital management system. These projects are intended to improve in stock improve our label productivity and overall store conditions, and provide team members with an efficient, modern HR access point. As for unit growth, our pipeline remains strong, with deals reaching out to 2024. As planned, we didn't open any stores in the first quarter as we were developing a new format. Continuing with our plan, we have one store scheduled to open in Q2. And as stated before, COVID pushed most all of our openings to the back half of the year, and we remain on track to open approximately 20 new stores this year. By the end of July, we will have two new format stores open, a new store and one remodel of an existing store. In walking a virtual 3D rendition of the new store, consumers overwhelmingly gave it positive marks on the low profile and overall feel. while also rating the store better than their current store experience. As a reminder, this new format will have a smaller footprint, but more selling space per square foot, cost 20% less to build, and we expect to have similar sales to our boxes today, resulting in expected higher returns. One last topic. Last week we issued our 2020 Environmental, Social and Governance Report, that highlights the tremendous work our team has accomplished during the year, bringing positive change to our nation's health, which goes well beyond the food we sell. From our response to the COVID-19 pandemic to our efforts to reduce our environmental footprint and improve the well-being of our many stakeholders, we've made great progress on our journey to improving our sustainability program. We've done great work reducing our climate impact by decreasing our normalized carbon emission on a square foot basis, aided by our strategy to switch to digital marketing from print. Our team's focus on waste reduction has reached a new milestone at almost 60% landfill diversion rate, rooted in our drive to increase food security for our communities through donating the equivalent of 23 million meals to local food banks. Developing the next generation of leaders To grow with Sprouts is of great importance to me and the future of Sprouts. In 2020, we promoted 7,200 team members, half of whom were ethnically diverse team members, and we filled 72% of store manager positions with internal candidates, ensuring at Sprouts you can create a career, not just a job. I encourage you to review all the details in the ESG report, which will give you good insight to the work we're doing. I'm very convinced we can do good by doing good for our customers and for all our stakeholders. Before I hand it off to Denise, I want to acknowledge the incredible work the teams at the stores, DCs, and in the support office continue to do week after week. They're driving customer engagement and sales, supported by their depth of knowledge in the natural and organic space. As you've heard me state before, we're only in the early innings of our strategic changes, with many improvements still to come. And yet one constant remains through the changes we have all gone through. People want healthy foods now more than ever, which is at Sprouts. At Sprouts is all we do. Now let me hand off to Denise to discuss our financials in more detail, as well as our 2021 outlook. Denise?