Third Quarter 2026 Earnings Conference Call - SPROUTS FARMERS MARKET INC

Explicit Guidance:

• FY2026 Full Year (52-week basis): Total sales growth of approximately 4.3%; Comparable store sales (comp) of approximately -1.7%; EBIT of approximately $605 million; Diluted EPS of approximately $4.80 (assuming >$300M in share repurchases); Effective tax rate of ~25%; Capital expenditures (net of landlord reimbursement) of ~$310 million.
• FY2027 Guidance Timeline: Specific comp and margin guidance for 2027 to be updated in February based on customer response to current investments.
• FY2026 Q4 Guidance: Comparable store sales between -2% and -4%; Diluted EPS between $0.47 and $0.51; Gross margin deleverage of ~90 bps; SG&A deleverage of ~170 bps due to fixed cost leverage and higher labor/benefit costs.
• FY2026 "53rd Week" Impact: Expected to contribute ~$190M in sales, $20M in EBIT, and $0.16 in diluted EPS (added to the 52-week full-year guidance).
• Share Repurchases: Full-year 2026 buybacks expected to exceed $300 million; $537M remaining on $1B authorization.
• Long-term Margin Target: EBIT margins expected to remain above 5% once the reset is complete, serving as a floor for future planning.

Business-Segment Outlook:

• Store Growth: Expectation to open 42 net new stores in 2026; Pipeline remains strong with 105+ executed leases and 160+ approved stores.
• Unit Performance: 2026 store vintage outperforming expectations; recent vintages comping positively. Core store performance is under pressure, while new stores continue to perform well.
• E-commerce: Sales growth of 12% in Q3, representing >16% of total sales; expansion to Shipt platform launched; viewed as a long-term growth driver.
• Private Label: Sprouts brand represents ~26% of sales and continues to outpace national brands.
• Pricing & Assortment: Rebuilding pricing strategy to roll out nationally in January 2026; immediate holiday investments in healthy staples (e.g., organic sourdough for $5, family meals for $4). Focus on three pricing buckets: entry points (Sprouts brand), "trust builders" (conventional produce), and Target Customer KVIs (e.g., organic grass-fed beef).

Market and Competitive Outlook:

• Competitive Landscape: Intensifying competition from both natural/organic retailers and mass/conventional players; customers migrating to value channels due to affordability pressures.
• Customer Behavior: Traffic, units, and frequency are not recovering despite easier comps; decline driven by less engaged customers, with early signs of softening in the core customer base.
• Pricing Dynamics: Competition expected to remain intense in conventional produce and traditional price points; strategy shifting from item elasticity to a "customer and solution" model.
• Demand Trends: Customers prioritize affordability and fresh solutions; innovation in health, convenience, and value is driving positive responses in specific categories (frozen, bakery, deli) but insufficient to reverse overall traffic declines.

Macro / Industry Outlook:

• Consumer Environment: Challenging backdrop where affordability is the primary driver of customer choice; consumer environment described as "cyclical" but requiring a "more meaningful response" to structural execution issues.
• Input Costs: Fuel costs remain elevated; shrink levels remain above target due to lower sales and specific disruptions, contributing to margin pressure.
• Regulatory/Supply: No specific new regulations mentioned; focus remains on supply chain self-help (self-distribution expansion) to control freshness and shrink.
• Cyclospora: Disruption impacted Q3 by ~60 bps, peaked in August/early September, and is progressively improving but remains a slight headwind for Q4.

Strategic Initiatives:

• Pricing Strategy Overhaul: Rebuilding pricing strategy to launch nationally in January 2027 (referred to as "January" in transcript context for the major rollout, though transcript says "January" relative to the call in late 2026/early 2027 timeframe); immediate holiday price reductions on key items to test responsiveness.
• Supply Chain: Expanding self-distribution to Sprouts brand products to improve freshness, service, and inventory control; planned for the near-term.
• Technology & Data: Modernizing systems and selectively applying AI; leveraging loyalty program first-party data to drive personalization, acquisition, and merchandising decisions.
• Store Refresh: Evaluating opportunities to refresh legacy store experience, improve product discovery, and apply insights from new store success to the core fleet.
• Leadership Transition: Nick Conant assumes CEO role; Jack Sinclair becomes Executive Chairman.
• Marketing: Shifting to a data-driven approach to acquire and serve customers; affordability investments will be central to Q1 2027 marketing narrative.

Risks and Headwinds to Outlook:

• Customer Response: Success of the outlook depends heavily on customer response to new pricing and affordability investments; if response is weak, further pacing adjustments may be needed.
• Margin Pressure: Near-term margin compression expected due to deeper affordability investments, shrink, fuel costs, and fixed cost deleverage (lower comp volume).
• Core Store Performance: Continued weakness in comparable store sales and transactions for existing fleet; risk of further margin deterioration if comps do not recover.
• External Factors: Ongoing challenges with shrink management, fuel costs, and macroeconomic affordability pressures.
• Execution Risks: Need to successfully implement new store refresh concepts and supply chain expansions; success relies on data accuracy and operational execution.

Management Tone on the Future:

• Confidence Level: Management expresses confidence in the long-term model, the "health and wellness" market opportunity ($290B+), and the unit growth potential, but admits current execution is insufficient.
• Urgency: Emphasizes "urgency" in taking action, noting previous efforts were "not deep enough or broad enough."
• Caveats: Explicitly states that near-term margin pressure is expected and that the Q4 2026 outlook represents a "low point" before a return to >5% EBIT margins.
• Strategic Shift: Signals a decisive pivot from a previous strategy to a more aggressive focus on affordability and value without abandoning differentiation.