Third Quarter 2026 Earnings Conference Call - SPROUTS FARMERS MARKET INC

Explicit Guidance:

• FY2026 Full Year (52-week basis):
  • Total sales growth: +4.3%.
  • Comparable store sales (comp): -1.7%.
  • Diluted EPS: ~$4.80 (assuming >$300M share repurchases).
  • EBIT: ~$605M.
  • Capital expenditures: ~$310M.
  • Effective tax rate: ~25%.
  • Store count: Expect 42 net new stores.
  • Share repurchases: Expected to exceed $300M (up from prior run-rate); $537M remaining on $1B authorization.
  • 53rd week impact (excluded from above): Adds ~$190M sales, ~$20M EBIT, and 16 cents EPS to FY2026 results if counted on a 53-week basis.
• Q4 2026 Guidance:
  • Comparable store sales: -2.0% to -4.0%.
  • Diluted EPS: $0.47 to $0.51.
  • Margin pressures included: ~90 bps gross margin deleverage (driven by deeper affordability investments) and ~170 bps SG&A deleverage (driven by fixed cost leverage from lower comps and higher labor/benefit costs).
• Long-term Margin Target:
  • EBIT margins expected to remain above 5% over the long term.

Business-Segment Outlook:

• Unit Growth & Expansion:
  • 2026 vintage stores outperforming expectations; recent vintages comping positively.
  • Pipeline remains strong with >105 executed leases and >160 approved stores.
  • Continued focus on opening 42 net new stores in 2026.
• E-commerce:
  • Sales growth of +12% in Q3; now represents >16% of total sales.
  • Expanded reach via Shipt platform launch in Q3; viewed as a key growth driver and proof point of the differentiated model.
• Product & Assortment:
  • Sprouts private label represents ~26% of sales, continuing to outpace national brands.
  • Focus on "entry points" (e.g., Sprouts brand eggs, almonds), "trust builders" (conventional produce), and "Target Customer KVIs" (organic grass-fed beef).
• Operational Levers:
  • Self-distribution expansion planned for next phase with selected Sprouts brand products to improve control over freshness, shrink, and inventory.
  • Technology modernization and selective AI application to connect data and scale efficiency.

Market and Competitive Outlook:

• Competitive Intensity:
  • Intensifying competition across channels (natural/organic retailers, mass, conventional players) chasing the health/wellness customer.
  • Customers migrating to value channels due to affordability pressures; Sprouts seeing increased competition on conventional produce and traditional items.
• Demand Trends:
  • Traffic, units, and frequency not recovering despite easing comparisons; pressure viewed as non-cyclical.
  • Decline driven by less engaged customers, but core customer behavior is also softening (fewer units per basket, softer trip frequency).
  • Affordability is the primary driver of customer choice and store traffic.
• Pricing Strategy Shift:
  • Rebuilding pricing strategy nationally in January 2026 (timing tied to high top-of-mind for healthy solutions).
  • Not a shift to broad discounting; focus on compelling value via differentiated assortment, Sprouts brand, and innovative products.
  • Holiday season investments include deeper price cuts on healthy/holiday staples to drive traffic.
• Market Opportunity:
  • Health and wellness market opportunity estimated at >$290B in the U.S. "food at home" segment.

Macro / Industry Outlook:

• Economic Environment:
  • Acknowledges a challenging consumer backdrop where affordability is the "key current issue."
  • Macro headwinds exacerbate competitive pressure; customers are making trade-offs.
• Cost Pressures:
  • Shrink: Identified as a persistent challenge and headwind, not yet recovered to target levels.
  • Fuel Costs: Elevated and a contributing factor to gross margin pressure.
  • Labor: Higher store labor and benefit costs contributing to SG&A deleverage in Q4.
• Specific Events:
  • Cyclospora: Reduced Q3 comps by ~60 bps; peaked in Aug/early Sept and improving but remains a slight headwind for Q4.

Strategic Initiatives:

• Pricing & Value Reset:
  • Immediate action in Q4 on key holiday items; national rollout of new pricing strategy in January 2027.
  • Specific price points tested: Wellness goals <$10, $29.99 family meals, $5 organic sourdough.
• Store Experience Refresh:
  • Evaluating opportunities to refresh legacy store experience to match new store performance.
  • Focus on improving merchandise discovery, highlighting freshness, and integrating foraging work.
• Loyalty & Data:
  • Accelerating use of first-party loyalty data to understand customer "need states" (e.g., gut health) beyond simple item attributes.
  • Leveraging data to drive personalized marketing and retail media partnerships.
• Supply Chain:
  • Next phase of self-distribution expansion to drive profitability and control shrink.

Risks and Headwinds to Outlook:

• Near-Term Margin Pressure:
  • Q4 2026 will likely be the margin trough due to deep investments in affordability, shrink challenges, and fixed cost deleverage.
  • Q1 2027 outlook dependent on customer response to new pricing; no specific guidance provided yet for 2027.
• Execution Risk:
  • Success hinges on customer response to the new pricing strategy; insufficient response could prolong the margin recovery.
  • Risk of further comp weakness if affordability investments do not restore traffic quickly.
• External Factors:
  • Continued elevation in fuel costs and shrink levels.
  • Intensifying competitive pricing by mass and conventional retailers.

Management Tone on the Future:

• Confidence Level:
  • Management expresses confidence in the long-term unit growth opportunity and the differentiated business model.
  • New CEO (Nick Conant) conveys urgency and conviction ("acting with conviction now") to prevent customer attrition, while acknowledging recent performance is "not where it needs to be."
  • Tone acknowledges a "meaningful response is required" and moves away from waiting for a cyclical recovery.
• Strategic Pivot:
  • Shift from item-elasticity to a "customer and solution model."
  • Commitment to "self-help" opportunities (self-distribution, retail media, vendor partnerships) to rebuild the margin profile over time.
  • Confidence in the "next chapter" driven by a strong culture and clear priorities.

Miscellaneous:

• Leadership Transition:
  • Jack Sinclair transitioning to Executive Chairman; Nick Conant becoming CEO.
  • Management emphasizes alignment on the challenges and actions required to reposition the business.
• Investment Pacing:
  • Investments in affordability and technology will affect near-term margins; scale and pace will be refined over the next several months based on customer response.
  • Specific guidance for 2027 will be provided in February 2027 after assessing the Q4 and holiday results.