Third Quarter 2026 Earnings Conference Call - SPROUTS FARMERS MARKET INC

Financial Performance:

• Total sales reached $2.3 billion (up 5% YoY), driven by new store openings (+104 million) but offset by a 0.9% decline in comparable store sales (comp sales).
• Comp sales were negatively impacted by a 3.3% drop in transactions, partially mitigated by a 2.5% increase in basket size; the cyclospora disruption contributed approximately 60 basis points to the comp decline.
• E-commerce sales grew 12%, now representing over 16% of total revenue, following the launch of the Shipt platform as the fourth channel.
• Gross margin decreased to 38.2% (down 50 bps YoY) due to higher shrink, lower sales volume deleverage, and elevated fuel costs.
• SG&A totaled $683 million; while the absolute amount rose $30 million, it decreased 10 bps as a percentage of sales due to lower incentive compensation.
• Net income was $113 million with diluted EPS of $1.21 (down 1% YoY); EBIT was $153 million.
• Operating cash flow for the year-to-date was $555 million; capital expenditures net of landlord reimbursement were $275 million.
• Share repurchases totaled $299 million (3.9 million shares), with $537 million remaining on the $1 billion authorization, anticipating full-year buybacks exceeding $300 million.

Guidance and Future Outlook:

• Full-year 2026 sales growth revised to approximately 4.3% (on a 52-week basis); comparable store sales expected to decline by approximately 1.7%.
• Full-year EBIT guidance set at approximately $605 million; diluted EPS expected to be ~$4.80.
• Fourth-quarter comparable store sales guidance lowered to a decline of 2% to 4%; Q4 diluted EPS guidance set at $0.47–$0.51.
• Q4 gross margin expected to deleverage by ~90 bps and SG&A by ~170 bps due to fixed cost leverage issues and deeper affordability investments.
• New store count remains unchanged at 42 net new stores for 2026; pipeline includes 105+ executed leases and 160+ approved stores.
• Long-term target for EBIT margins remains above 5%, though near-term margins will face pressure as the business resets; self-help initiatives (self-distribution, retail media) are expected to restore margins over time.
• 53rd week of 2026 expected to contribute ~$190 million in sales, $20 million in EBIT, and $0.16 in EPS.

Business Segments and Product Lines:

• Store Expansion: Opened 15 new stores in Q3 (largest quarterly cadence); 27 net new stores YTD; 2026 vintage vintages outperforming expectations with positive comping in recent vintages.
• Product Strategy: Shift from item-based pricing elasticity to a "customer and solution model" focusing on affordability across three buckets: entry points (e.g., Sprouts brand cage-free eggs), trust builders (e.g., conventional produce), and target customer KVIs (e.g., organic grass-fed beef).
• Pricing Overhaul: Rebuilding pricing strategy to launch nationally in January 2026; immediate holiday price reductions on healthy staples to drive traffic.
• Innovation & Brand: Sprouts brand represents ~26% of sales and continues to outpace national brands; strong performance in fresh-baked organic sourdough ($5), $10 wellness goals, and $4 family meals.
• E-commerce: Expanding reach with Shipt launch; basket sizes are larger, and customers are increasingly omni-channel.
• Supply Chain: Planning next phase of self-distribution for Sprouts brand products to control freshness, service, and shrink.

Market and Competitive Landscape:

• Targeting a $290 billion health and wellness "at-home" market; competition is intensifying across natural/organic retailers, conventional players, and mass merchants.
• Macro environment and affordability concerns are driving customer migration to value channels; traffic decline observed across income cohorts, though most severe among less engaged/lower-income shoppers.
• Core customer engagement is softening, indicating the need for a broader strategic response rather than just targeting low-engagement segments.
• Sprouts differentiates via curated assortment, foraging team partnerships, and a distinctive store experience, but must accelerate innovation to compete on affordability.

Risks and Challenges:

• Cyclospora Disruption: Continued headwind, though improving, previously impacted comp sales by ~60 bps.
• Shrink & Inflation: Elevated shrink levels and fuel costs are pressuring margins; shrink is a key area for operational improvement.
• Competitive Pressure: Intense competition on price and assortment in conventional produce and key healthy essentials.
• Execution Consistency: Inconsistencies in store execution, particularly in produce, impacting freshness and customer experience.
• Margin Compression: Aggressive price investments required to restore traffic will significantly impact Q4 and 2027 gross margins.

Management Commentary and Tone:

• Leadership Transition: Jack Sinclair steps down as CEO to become Executive Chairman; Nick Conant assumes the CEO role.
• Tone: Management acknowledges performance gaps with "urgency and conviction," admitting current pricing strategies were "not enough" and "too narrow."
• Strategic Shift: Emphasis on "broadening" investments to rebuild the customer proposition, focusing on affordability and value rather than broad discounting.
• Confidence: Despite near-term pressure, leadership expresses strong confidence in the long-term unit growth model, new store productivity, and the differentiated brand proposition.

Analyst Questions and Answers:

• Margin Outlook: Analysts questioned the 100 bps gross margin swing; Management confirmed Q4 is the expected low point due to holiday seasonality, new store vintage impact, and deep affordability investments, not indicative of long-term trough.
• Pricing Breadth: In response to concerns about limited scope, Management clarified the need for broader investment across entry points, trust builders, and KVIs to move traffic, citing previous tests as successful but insufficient in scale.
• New Store vs. Core: Clarified that new stores continue to outperform core stores; the divergence highlights the need to address core store execution and traffic specifically.
• E-commerce & Data: Discussed Shipt integration and the use of loyalty data to drive AI, retail media, and personalized marketing; noted that "agentic shopping" has not negatively impacted current data quality.
• Competitive Landscape: Confirmed competition is rising from mass merchants (e.g., Walmart) on produce execution; Sprouts plans to improve velocity via pricing to drive freshness and simplify assortment.

Other Key Points:

• Marketing Strategy: Marketing efforts in Q1 will focus on launching the new pricing strategy and utilizing loyalty data for acquisition and retention.
• Store Refresh: Initiating tests to refresh legacy store experiences based on the success metrics of new store concepts.
• Self-Distribution: Viewed as a critical "self-help" lever to improve margins over the long term by controlling inventory and shrink.
• Shareholder Returns: Full-year share repurchases expected to exceed $300 million, supported by strong cash generation.