Sprouts Farmers Market, Inc.

Good day and thank you for standing by. Welcome to SPROUT's second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Susanna Livingston, Vice President, Investor Relations and Treasury. Please go ahead.

Thank you and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our second quarter 2021 earnings call. Jack Sinclair, Chief Executive Officer, and Denise Polonis, Chief Financial Officer, are with me today. The earnings release announcing our second 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 filing, 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. In addition, because our results for the second quarter of 2020 were significantly impacted by the COVID-19 pandemic, this presentation will also include certain comparisons to results in the second quarter of 2019. With that, let me hand it over to Jack.

Thank you, Susannah, and good afternoon, everyone. Thank you for joining our call today. In early 2020, we embarked on a new strategy that led to a positive step change in our financial performance. which is strong and sustainable. While we have plenty of work ahead, I'm excited about the progress we have made and the continuation of our strong profitability this year. Due to the pandemic, results are down compared to last year. Our year-to-date 2021 sales are up 9.5% and our profit is up 56% compared to the pre-pandemic same period in 2019. We have made great strides in executing against many of our strategic priorities. We have a differentiated model and a great team in our stores, which gives me great confidence for the future. The creation of innovation centres through dedicated merchandising displays, an increase of seasonal and local produce, the opening of two new fresh distribution centres and the opening of our first new format store in July are among many changes that are driving our strategy forward. Plans are now in place to roll out our innovation centres to all our new stores and many of our existing stores in the back half of this year. Each month, these displays will showcase new-to-market, attribute-driven items like vegans, raw oat, butter popcorn, plant-based Wicked Foods and Brass Roots Organic Sasha Inchi Seeds. And thankfully, the country is in a place where we can start an active sampling programme, which is a new endeavour for sprouts and will prompt education, trial and purchase. We're leaning into why customers love sprouts, produce. Our produce pricing remains ultra-competitive, with prices significantly lower than the marketplace. We just went through a great cherry season, which showcased more than five different varieties from unique family-owned farms like the Orondo Ruby Cherries, and the Skylar red cherries with distinctively different flavour profiles than the common red cherries. We excel at great produce buying, and we're only getting better with our two new DCs added this year. Our organic produce is up to 35% of department sales, which we believe is one of the highest penetration rates in the industry. Our organic produce prices are very competitive. and we're now focused on getting some of our organic produce prices in line with conventionally priced items, making it a clear differentiator for sprouts. On the supply side, our Aurora, Colorado, D.C. is running strong, and the Florida, D.C. just opened in June, getting us back to our farmer's market heritage. We now have more than 85% of our stores within 250 miles of our D.C. Sprouts are sourcing practices, paired with our strong relationships with our local growers, are a part of how we bring the freshest produce to our customers all year long. With the addition of the Colorado DC, we have already noticed an uptick in produce sales in this region, as fresher produce and larger local selections are being recognized by our customers. Specifically, our ripening rooms for bananas and avocados in Florida and Colorado have contributed to significant improvements in sales for these products in these regions. Produce is in peak summer season in Colorado, and our local buying has increased substantially, and will gradually increase through the growing season, up to 20% of the department, or a 300% increase versus our past assortment in previous years. And with the addition of our Florida DC, we will be able to provide an even larger range of affordable organics and locally grown items during the fall growing season in this region. Creating this advantaged fresh supply chain has provided benefits this year which will ramp over time as we cycle the regional growing seasons and expand our business. All in all, this leg of the strategy is in very good shape as we head into the back half of the year and we begin to leverage the close proximity of our DCs to our stores. Our 35,000 team members in our stores continue to do a great job. We've restructured our store leadership to reduce their span of control. And in stores, we've restructured to ensure our team members can spend more of their time taking care of the customers. As planned, we opened one store in the second quarter in Reno, Nevada. And continuing with our plan, we've opened two more in the third quarter to date and remodeled one of our California stores. Two of those stores were in the new format. These new formats will make it easier for our health-minded and food-centric customers to explore the market's unique and attribute-driven products. Enhancements include all-new signage and decor featuring Sprout's new branding, an expanded frozen department offering easy, innovative meal solutions with more than 115 additional new items, including meat alternatives, and an expanded refrigerated section highlighting the latest plant-based foods. As a reminder, this new format will have a smaller footprint but more selling space per square foot, similar to many of our original Southern California stores. The smaller size is very efficient and keeps produce at the heart of the store while maintaining our familiar open layout and treasure hunt shopping experience. They also cost 20% less to build and we expect to have similar sales to our boxes that we have today. resulted in expected higher returns. Our plan is to open three more of these new format stores across the country this year. With all this said, sales were slower than we expected in the second quarter. While April experienced strong results, both top and bottom line, we were disappointed with May and June. Customers are enjoying travel and dining out again, and against this backdrop, marketing did not drive as much traffic as we would have expected. To be clear, our brand campaign has reached more target customers, increased awareness and purchase intent, which is a very important first step, but more will be needed. We're making necessary changes going forward as we continue to update our marketing mix with a test and learn approach. The intent is to convert awareness into increased traffic. Given the strength of our basket, we only need a modest increase in customers to fulfil our long-term strategic goals. Let me share a bit of what we have underway. In the third quarter, we're focused on refining our marketing to drive traffic with targeted call-to-action offers, unique partnerships, and continuing to push brand awareness. We're connecting with those customers who know us with more touch points to foster more loyalty. We've mailed goodness guides which highlight our seasonal produce offerings, as well as new offerings like our 100% grass-fed Angus steaks, and promote those find-a-new-favourite items, many of which are exclusive to Sprouts. We continue to offer weekly specials online through a digital ad, supported by extensive media both paid and owned. And we're expanding our full-size digital coupon freebies programme for Sprouts account holders to encourage trial of new products, drive traffic and grow our database. We're building an innovation network by cultivating partnerships with up-and-coming vendors in the food industry. For example, our Glow Slim Spice Fruit drove immediate customer interest and traffic to the vitamin department after being featured on the front cover of Women's World. And we're collaborating with many other vendor teams, becoming the destination for their products, like Daffy Water, Ketlin Fires Broan Broth, and Factories Pipcorn. Before I hand it off to Denise, I want to acknowledge the credible work the teams at our stores, DCs and in the support office continue to do week after week as we expand our business in markets across the country. Our strategic initiatives are laying the foundation to solidify our position as a highly profitable speciality grocer with a strong unit growth story, making me confident we are well on our way to delivering the growth and returns presented in our five-year strategy.