Third Quarter 2026 Earnings Conference Call - SPROUTS FARMERS MARKET INC

Good day and thank you for standing by. Welcome to Sprouts Farmer's Market 3rd Quarter 2026 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. If you would like to ask a question, you can press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To restore your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Susanna Livingston. Please go ahead. Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our third quarter 2026 earnings call. Nick Conant, President, Chief Operating Officer, and incoming Chief Executive Officer, Curtis Valentine, Chief Financial Officer, and Jack Sinclair, Outgoing Chief Executive Officer, are with me today. The earnings release announcing our third quarter 2026 results, the webcast of this call, and financial 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 2026 and beyond. These statements involve several risks and uncertainties that could cause 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 and the commentary on forward- looking statements at the end of our earnings release. Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAP financial measures to the comparable GAAP figures. With that, let me hand it over to Jack. Thanks, Susanna. Good afternoon, everyone. Before we get into the quarter and an update in our business, I am looking forward to working with Sprouts in a different capacity as executive chairman. It has been the opportunity of a lifetime to be the CEO of Sprouts. We have grown the business. strengthened our competitive position and built a more resilient organization. I'm especially proud of the culture behind that progress and the thousands of team members who bring our purpose to life every day. I feel very good about entrusting Sprout's next chapter to Nick. He knows our company, our customers and our opportunities well. The board and I have great confidence in him, the broader leadership team and the long-term potential of Sprout. We recognize that our recent performance needs to improve. While the consumer environment and the cyclospora disruption affected the quarter, we also have work to do to strengthen our execution and customer proposition. In a few moments, Nick will outline the actions we are taking and the investments needed to support stronger performance. For now, I will turn it over to Curtis, who will discuss results and our updated outlook. Curtis. Thanks Jack and good afternoon everyone. Before I review the quarter, I want to thank Jack for his leadership of Sprouts and for the partnership over the years. I'm looking forward to working with him in his new role. For the third quarter, after seeing progress in our sales trajectory through July, comparable sales softened in August and September and did not improve as comparisons eased. Total sales were 2.3 billion, up 104 million or 5 percent compared to the same period last year. This growth was driven by strong new store performance, partially offset by a 0.9% decline in comparable store sales. The comp results reflect the cyclospora disruption, which reduced comparable store cells by approximately 60 basis points during the quarter. The decline was drivenby a 3.3% decrease in comp transactions, partially offset by a 2.5 percent increase in comp basket these factors inform both our revised outlook and the investments we will discuss new stores remain a key proof point around the overall potential of our model our 2026 vintage is outperforming our expectations and our recent vintages are comping positively reinforcing our confidence in the long-term unit growth opportunity E-commerce was another bright spot in the quarter, with sales growing 12% and representing more than 16% of total sales. This month, we also expanded our e-commerce reach with the launch of Shipt, our fourth platform. Sprout's brand also continued to outpace national brands in our stores and represented approximately 26% of sales. Both of these growth drivers benefit from our differentiated assortment and products customers often cannot find elsewhere. Gross margin for the third quarter was 38.2 percent, a decrease of 50 basis points compared to the same period last year. This primarily reflected higher shrink due to lower sales and the cyclospora disruption, as well as higher fuel costs. These pressures were partially offset by the benefits from self-distribution. SG&A for the quarter totaled $683 million, an increase of $30 million and a decrease of 10 basis points as a percentage of sales compared to the same period last year. This was primarily driven by fixed cost deleverage from lower comparable store sales, partially offset by lower incentive compensation compared to last year, We continue to pursue opportunities across the short, medium, and long term to manage costs effectively while supporting our strategic priorities. Depreciation and amortization, excluding depreciation included in the cost of sales, was $45 million. For the third quarter, our earnings before interest and taxes were $153 million. Interest expense was approximately $1 million, and our effective tax rate was 25%. Net income was $113 million, in diluted earnings per share, or $1.21, down 1% compared to the same period last year. Turning to unit growth, we opened 15 new stores, representing our largest quarterly opening cadence. We also closed one underperforming store at lease expiration, resulting in 504 stores across 25 states at the end of the quarter. Year-to-date, Sprouts has opened 27 net new stores. Our pipeline remains strong with more than 105 executed leases and over 160 approved new stores, and we continue to expect 42 net new stores in 2026. Our balance sheet and cash generation continue to provide flexibility. Year to date, we have generated $555 million in operating cash flow and invested $275 million dollars in capital expenditures net of landlord reimbursement. We returned $299 million dollars to our shareholders through the third quarter by repurchasing 3.9 million shares and have $537 million remaining on our $1 billion share repurchase authorization. Based on current activity, we now expect full-year share rep purchases to exceed $300 million. We ended the quarter with $229 million in cash and cash equivalents and $22 million of outstanding letters of credit. Turning to our outlook, recent trends support a more measured view for the remainder of the year. Traffic, units, and frequency are not recovering, even against easier compares that began late in the third quarter. This was an important signal that the pressure on the business was not cyclical and that a more meaningful response is required. Our revised outlook reflects those recent trends and the actions we are taking to increase and accelerate investments to improve affordability and to strengthen the long-term health of the business. We are listening to our customer, and we need to respond now to help them live and eat better in a challenging backdrop. As a reminder, 2026 is a 53-week year, with the extra week falling at the end of the fourth quarter. For the full year, on a 52-week basis, we now expect total sales growth of approximately 4.3 percent and comparable store sales of approximately negative 1.7%. We continue to expect to open 42 net new stores. Earnings before interest and taxes are expected to be approximately $605 million. We expect our corporate tax rate to be approximately 25% and capital expenditures net of landlord reimbursements to be approximately $310 million. Diluted earnings per share are expected to be approximately $4.80, assuming more than $300 million in share repurchases. For the fourth quarter, we expect comparable store sales to be between negative 2 to negative 4 percent, and diluted earnings per share to be 47 cents and 51 cents. This includes gross margin deleverage of approximately 90 basis points, driven by deeper investments and affordability, and SG&A deleverage of approximately 170 basis points, driven by fixed cost deleverage due to lower than expected comps and higher store labor and benefits costs. Our full year outlook is presented on a 52-week basis. We now expect the additional 53rd week to contribute approximately $190 million of sales, $20 million in EBIT, and 16 cents of diluted earnings per share. As Nick will discuss more in a moment, we know our challenges and are taking significant actions to address our performance for the long term. These actions include investments in affordability, technology, and supply chain. While we plan for near-term margin pressure as we reset the business for long-term growth, we expect EBIT margins to remain above 5%. From there, we remain committed to using the self-help opportunities we've previously discussed to rebuild our margin profile over time. Over the next several months, we will assess customer response and refine the scale and pace of our investments accordingly. And with that, let me hand it over to Nick. Thank you, Curtis. And Jack, thank you for your leadership, your partnership, and your commitment to Sprouts. Look forward to continue working together in our new capacities. For the past four years, I've had the opportunity to help shape and execute our strategy. That experience has given me a deep understanding of what makes Sprouts distinctive, where we need to improve, and how much potential remains ahead of us. We operate in the health and wellness market with a target customer who is focused on healthy, fresh, and innovative ways to meet their nutrition needs. These customers remain an attractive and growing segment of the U.S. food at home market with an estimated market opportunity more than $290 billion. We have a unique position in the market. Our curated assortment and product innovation continue to differentiate Sprouts. Strong recent store openings across established and newer markets reinforce the appeal of our proposition, while our strong store pipeline and smaller format model provide a long runway for discipline growth. These strengths give us confidence in our model at the same time our recent performance is not where it needs to be we understand why we are taking actions to improve it competition is intensifying affordability is a bigger driver of choice and the target customers needs are constantly evolving sprouts must evolve faster as well our level of innovation investment and execution must rise to meet the customer and market opportunity in front of us. Our customers continue to tell us they love Sprouts, particularly our shopping experience and the differentiated products that help meet their individual needs. At the same time, they're looking for us to make healthy eating more affordable and to help them meet their evolving nutrition and health goals. That is the larger opportunity for Sprouts to become an even more relevant and trusted partner, Leveraging our strengths with innovative products, practical meal and health solutions, and greater value, giving them more reasons to shop with us. As I step into the CEO role, we have more work to do, but our immediate priorities are clear. Improving comparable sales and customer traffic. We are already taking actions that will affect the fourth quarter and shape our plan for 2027. Today, we need to do more to support our customers and strengthen the Sprouts proposition to be more accessible and affordable. Our efforts to date have not been enough, and our current pricing strategy has not delivered against that goal. This means making more meaningful price investments across a broader range of products. To that end, we are rebuilding our pricing strategy and will roll it out nationally in January, when Sprouts is most top of mind for healthy solutions. This is not a shift to broad-based discounting or an effort to compete on price alone. Our objective is to offer more compelling value within our differentiated proposition by offering a greater role for Sprouts brand, innovative products across price points, value on healthy essentials, convenient meal solutions, and a personalized experience to help customers discover and save. We have seen encouraging customer response to a certain innovation, such as wellness goals priced below $10, $29.99 family meals for $4, and fresh-baked organic sourdough for $5. These are examples of how sprouts can combine differentiation, quality, convenience, and value in ways meaningful to our customers. We need to build on that response and go further. For the holidays, we are going to be reducing prices on healthy and holiday staples across the country, a deeper investment on the key items most important to our customer and what drives them into stores. Supply chain will remain a significant self-help lever to drive profitability. Greater control over freshness, service levels, inventory, and shrink will help us respond faster to changes in demand and improve execution over time. We are now planning the next phase of self-distribution, with a selection of Sprouts brand products representing a logical next step as we look to expand the benefits of our network. Technology will also be another critical enabler. Modernizing our systems and selectively applying AI will help us connect data across the business, move faster, and scale more efficiently. The growing amount of first-party data captured through loyalty will deepen our understanding of customers, while giving our marketing teams better insights into reaching prospective customers who most resemble our loyal shoppers. We recognize these investments will affect our near-term margins. Our immediate priority is to strengthen the customer proposition and support healthier traffic and sales. over time we believe stronger sales performance together with expanded self-distribution improved retail media vendor partnership sourcing initiatives and continued cost savings can help us rebuild profitability and create long-term shareholder value as we look ahead to 2027 and beyond we have three jobs to do all grounded in serving our customers better and giving them more reasons to choose sprouts. First is to grow our reach. We will continue opening high-quality new stores and expanding e-commerce, bringing sprouts to more customers and making it easier for them to find the unique items they need. Second is strengthening our model. We need to accelerate the differentiation that brings customers to sprouts and make healthy eating more affordable. That means increasing the pace and impact of innovation, investing where value matters most, and improving freshness and availability, all while preserving the distinctive experience our customers value. We are also evaluating opportunities to refresh the experience in our stores and make our products and solutions easier to discover. And third, build what's next. We have the potential to become a stronger partner in our customers' health journeys. Our foraging team will keep Sprouts at the forefront for their health and wellness needs, partnering with emerging brands early in their journey and developing practical solutions to their evolving priorities through our Sprouts brand. Connecting that differentiated assortment with deeper customer insights and more personalized engagement will help us deliver practical solutions that are relevant and easy to discover. In addition, our culture will remain a fundamental differentiator in how we win. Our approachable, knowledgeable team members and their personal connections with customers are central to what makes Sprouts distinctive. As we grow, we will continue to strengthen that culture, both in the experience we deliver to customers and in the opportunities we create for team members to learn, grow, and build careers. That commitment underpins the freshness, service, and consistent executions customers experience in every store. In summary, we are clear on our direction, put the customer at the center, extend our differentiation, improve affordability, and build the capabilities to unlock value for our customer and our business. We are clear in our priorities and are moving with urgency while continuing to refine our longer-term plans. Sprouts has a differentiated model, a large and growing customer segment, compelling unit growth, and a great team and culture that's hard to replicate. This gives me confidence in our next chapter and our ability to create long-term value for our customers, team members, and shareholders. Now I will turn the call back to Jack. Thanks, Nick. Before we close, I want to thank our team members across the company. The progress we have made in helping people live and eat better is a tribute to the thousands of team members who show up every day committed to our purpose, our customers, and each other. My greatest privilege has been working alongside this team and watching what can be accomplished when we work together. As Executive Chairman, I am aligned with Nick and the leadership team on the challenges we need to solve and the actions we are taking. These changes are required to meet the needs of our customer. We will be working closely over the next few months on our short and long-term actions that will reposition Sprouts for future growth. And with that, we would like to turn it over to put questions to the operator. Thank you. As a reminder, if you would like ask a question, please press star 1-1 on your telephone. If you would to remove yourself from the queue, press star on one again. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. Our first question will be coming from the line of Seth Sigmund of Barclays. Your line is open. Hey, everyone. Thanks for taking the question. A few key questions here. So when we look at the fourth quarter guidance and the implications beyond, it's a really big change in margins versus what was implied before. it looks like a 100 basis point swing, at least on the gross margin. I understand the urgency, but what gives you confidence to make such an aggressive change now? Maybe you could speak to the testing, the case studies that you've seen that give you confidence to make the big changes in the investments that you're speaking to here in the fourth quarter. Thank you. Yeah, thanks, Seth. It's Nick. We've been paying very close attention to what's going on with our customer. And as we look at what's happening in business right now, as I mentioned in the call, we are focused right now on getting our customer back in our stores and driving sales and transactions. And as you look at, what we've seen from the customer, both in what they tell us and how they respond with their wallet, affordability is the key current issue we need to address and solve. um we we made it clear they made it clear to us that what we are doing isn't far enough we have confidence in what we're doing because a lot of the things we did early in the year have shown promise like i mentioned we've been invested in innovation with health and value together we've seen the customer respond but it wasn't deep enough or broad enough to move the customer and move transactions as we need and so rather than wait uh over you know a longer period of time we're acting with conviction now because we believe in the long-term health of the model. We're not going to let the customer fade away from us when I make moves to get them here and to get the business back on track and recognize the potential of the long term model with a healthy customer, strong market, great performance in new stores and additional growth. And Seth, this is Curtis. I just add, I mean, the other part of Q4 is shrink's not where we want it to be right now either. So we expected that to be a tailwind, and it's continuing to be a challenge. So from a year-over-year perspective, again, shrink isn't where we want it to be. And then, obviously, we've got the fuel challenge that continues to be elevated. So a couple other pieces within the fourth quarter. But, again. So we're likely to take bold action now to take care of the customer and keep moving forward with that. Okay. That's helpful. Look, I guess the message is that this is not a one-quarter dynamic. So some of these investments are going to wrap into next year. Can you give us some perspective today on what the total level of investment should look like from a gross margin perspective? I guess the concern would be that your gross margins are still significantly above where a lot of other folks in the industry are today. And so where does that need to get reset to? And then just the last piece related to that, maybe you could speak to the ways that you can fund that, whether it's through media or vendor funding or supply chain. how should we be thinking about those as potential offsets to these investments? Thank you. Yeah. Yeah, thanks, Seth. It's Curtis again. Yeah so we can we put the kind of the five percent in there to help you know understand what the what the level could be. Obviously we're going to take dramatic action here with the with the gross margin bit and get the affordability investments in the next wave of those going in the very near term and short term. What we'll watch closely as the customer responds to that and that'll help us pace you know the timing and the depth from a gross margin perspective as you highlighted we have lots of self-help opportunities we've talked about uh over several quarters now and the things that will be landing here in 2027 and and beyond and so self-distribution um the retail media the opportunity with the data from the loyalty program and vendor partnership there uh all all opportunities all still in front of us to go unlock value in the P&L and create some offset to the affordability investment. Again, what we need to understand now is how is the customer going to respond to this next wave, and that'll give us a lot of clarity into February and into 2027 guidance. Okay. All right. Thank you both. Thank you. One moment for the next question. Please keep in mind that we ask that you limit yourself to one question and one follow-up. Our next question is coming from the line of Rupesh Parkic of Oppenheimer. Please go ahead. Good afternoon, and thanks for taking my question. So first, I guess on unit growth, as we look to FY27 and beyond, just given some of the challenges in the core business, how does your team think about potentially slowing unit growth to maybe improve or stabilize profitability even faster? Hey, Rupesha, it's Curtis. Yeah, I mean, clearly we're going to have to think about that as we look ahead. It's going to be a strong part of our story going forward. You know, we continue to be pleased with the new stores as they've opened well. They're comping, you know, in their year two, three, four, the last few vintages. So, you Know, it's a high return vehicle for us, but we've got to balance that with the other needs of the business. We need to balance our investment portfolio to address traffic and the core store challenges. But we do believe new stores is going to continue to be a strong opportunity for us. Great. And my follow-up question, just on traffic. So as you look at some of the new efforts that you're doing, are you seeing any green shoots or just your overall confidence you have in actually being able to improve traffic with the new experts underway? Yeah, thanks for your patience, Nick. We are. What we've seen is some of our efforts that we've made across either pricing affordability investments or affordability investments in the product side have seen some fruit. As I mentioned in the previous question, it just hasn't been enough to move enough traffic to our stores. We've seen really good category response and item response, but it hasn't Been broad enough or deep enough to do so. And that's what gives me confidence that the investment we're making in some of the things that are most important to our customers that builds trust, that provides access to key health categories, and that's the items they care about most is going to continue to drive traffic. You know, I also go back to what I said in the call, you know, we've seen good results with e-commerce. We've seen strong results with our new stores. And so we know the model and the proposition is very strong. Our customers tell us that. CLC has continued to lean into that. And then we still have a lot of areas where we can continue to focus on how we win. You know, our innovation is growing in our stores. The areas we've innovated continues to show strong growth. As I mentioned, we've got really good marks on our store experience, and that will continue to be a key area. E-commerce, Sprouts brand, and then the continued development of loyalty and personalization all give me a lot of confidence in our ability to continue to grow. Great. Thank you for all the color. Thank you. One moment, please. And the next question will be coming from the line of John Heimbachel of Guggenheim. Please go ahead. Hey, Nick, to start off, can you, when you think about breadth and depth of, you know, you didn't go deep enough or broad enough, which I'm not sure both are equally an opportunity, but, you now, where do you see, which one is more important? And then I know the unengaged member or the un engaged customer was not responding. Have you seen weakness spread to the more engaged customer? Yeah, thanks, John. I think as we look at what we've learned and also, you know, what we're looking at as we rebuild our pricing strategy, I think I kind of put into three buckets on when I think about breadth. Number one is there's an opportunity for us to provide more affordable entry points in the categories. So think about that as a really a place where Sprouts brand can play. Things like cage-free eggs or raw almonds in areas where we haven't been as affordable entering into some key categories for us. The second part of the breadth and the strategy is around trust builders. Those kind of higher frequency, more competitive items, think in our case like conventional produce. I think we've got room to be much sharper there. We've done a great job on organic, but that's an area where I see a lot of opportunity for us. And then the third bucket around breadth is what we're calling the target customer KVIs. These are the items that drive customer choice in their healthy options and selections. Think of these as things like organic grass-fed beef. And that's where I look at the breadth and where we're pointing our pricing strategy. The depth will just depend more, John, on market. And we're going to make sure that we're right by market and be more focused there. Some we're in a good place and some we have more work to do. The second question on the customer, you're right. The less engaged customer has been the biggest driver of our traffic decline and footsteps into the store. But to your point, we have started to see it a little bit more with our core customer. They're still stronger, but we've seen a little bit of softening in their behavior, which was one of the key indicators for me and for us that we need to take action now. And then my follow-up real quick. When you think about this spread, right, between new store productivity has remained very, very good. The comps have softened. How do you assess that, you know, that increasing spread between the two? usually they kind of track together at least a little bit. Yeah, John, it's Curtis. It's unique. I think it's not what you would expect to see. And that's, again, the new stores have continued to perform well, and we're seeing good response when we open new stores. And so on the one side, that's positive for us that the new stories are performing the way that they are. And we haven't seen as much of a challenge in the new store portfolio. It's the core stores that we've got to do a better job with. And the things that Nick has spoke about there and we're getting after here in the very short term are really addressing that core store challenge to improve the costs. Thank you. Thank you, one moment for the next question. Our next question will be coming from the line of Thomas Palmer of JP Morgan. Please go ahead. Hey, guys. Thanks for the question. Curtis, if I heard you right, you noted that you expect EBIT margin to remain above 5%. The 4Q outlook obviously implies something quite a bit lower. I'm just trying to think about maybe the progression of EBIT margins. Should we be thinking about 4Q as kind of the low point for margins and then you return to this, you know, 5% plus? Just any color there given that 5% comment. Yeah, Q4 is always our kind of lowest quarter from that perspective. We're typically, you Know, we've got the full weight of the new store vintage out there. It's a lower sales quarter for us. You know, January is our Super Bowl, as we say, and that's our fresh start to the new year. And so we see our strongest sales in January and we're a little bit softer, usually in the holidays where we're less top of mind, maybe for customers. And so that's that's a typical kind of historical phenomenon. And then within that, you've got some of those unique challenges. Last year, we saw the business slowing in the fourth quarter and took some action, pulled forward some some changes from a from a labor perspective, accelerated some of the investments in that space to try and manage it. As we've talked about throughout the quarter, we can kind of work our way through a few quarters at those lower comps. But the longer you go, the more challenging that gets. And so we've got our new stores opening up. We've got over investments landing and the comp just simply isn't where we need it to be. So I don't expect that to be indicative of the shape of Q1 or where we're headed. It's a little bit more of a 2026, you know, Q4 phenomenon. And as I just mentioned a couple of questions ago, you don't shrink is not where we want it to Bea either. that is higher than it should be. Some of that is the sales and some of that is we've got to continue to do a better job, you know, managing our inventory and our SKUs and in and out and all those things. So a few different, you know, kind of Q4, 26 specific type phenomenon, not particularly indicative of where Q1 or Q2 or Q3 will be. Okay. Thank you for that. One more follow-up, I guess, on kind of this 4Q versus 2027 dynamic, there was the reference to some planned actions really coming in January, but also mention of some deeper investments as we think about the holidays. So presumably kind of November, December. Is that like the experiment time where you kind of overinvest in price and see what sticks? And that's where January you start to institute more permanent changes. I mean, So what's really, I guess, in mind for this nearer term versus what comes in January? Yeah, Tom, a couple of things. So first off, as we mentioned, we're rebuilding the pricing strategy, and we're putting some of those elements into market now to help us kind of learn to be prepared for January overall. So we're building now with the input or the belief or the plan, excuse me, to launch in Jan. So we are doing things in market right now to test and learn. And the other thing I mentioned is we are making action now on items that we know right now drive transactions for our customer on the healthy holiday essentials that matter most. These are areas we can go deeper right now where our customer needs it for the holidays and to help drive more traffic into the store. As Curtis noted, January is our, you know, it's kind of our win time. that's when we're most top of mind for our customers. And so that's why I wanted to go national with the strategy with all the noise and the holidays in November, December. We're using this to get ourselves ready to take care of the customer in Jan, but at the same time making moves right now to serve them within the things they need most over the holidays. Understood. Thank you. Thank you one moment for the next question, please. Our next question will be coming from the line of Mark Kendrick of UBS. please go ahead afternoon thanks so much for taking our questions so wanted to start with a follow-up on shopper behavior by customer type sounds like it's starting to impact your core customer a bit as well when you think about it from an income cohort perspective are you seeing pressure across the board or has it been more isolated to call it the lower third in other words are headwinds starting to creep up even income chain yeah hey mark um so what we're seeing you know we what hasn't changed at all is that the less engaged customer is still where we're seeing the biggest leakage so that that's been the case and within that customer set uh there is a it's a larger impact with with slightly lower incomes we are seeing that um what's changed recently is we've seen a little bit more of an impact on our core customer uh slightly fewer units in the basket a little bit of softening on the on the trip side uh and we see it generally across the board it's not strictly based on income level um but we're seeing it overall with the customer which is as i mentioned earlier why i decided we need to make a change and make a move now to take care of the customer and get the margins set up to allow us to do that great thanks and then on competition you talked about at accelerating in the space. Are you seeing it both at natural organic focused retailers as well as at conventional players? Do you think more customers are shifting their natural organic spend over to mass and conventional just because of where prices are at, even if it's not necessarily something they prefer to do? And how do you think about best approach for advertising your new strategy and making sure they're aware of what you guys are able to do on that front? yeah i i think there's there's three factors in this that that i think all play together we're we are seeing uh competition across different across a number of channels continue to chase the health and wellness customer which we think you know validates the opportunity in the space that we believe in the long term so we we we're not surprised by that we are seeing it happen as we as we've talked about affordability um is a challenge for the customers in this space. And then the third piece is the macro is not helping, right? I think that's only exacerbating, making it tougher for us, making tougher the customer. So those three things together, I think are what's impacting the customer from a competitive standpoint. You know, I'm not surprised that they're continuing to play more in this phase. I think it's overall, we're seeing customers migrate to value channels, which is another indicator that affordability is a key opportunity for us. But I feel really good about our ability to win and compete in this environment because our whole model is built to serve the needs of this unique customer, not just about the items that some of the other people will carry. And so as I look at our core competencies of innovating, a really fantastic store experience, those are our strongest muscles. We need to flex them faster and stronger to serve The Customer where they are now. And I know we can do that to help offset any competitive challenges. And as I mentioned right now, invest in affordability to help the customer remove that as a barrier to come to stores. Appreciate all the color. Thanks so much for the book, guys. Thanks, Mark. Thank you. One moment. Kelly Baya of BMO Capital Markets, your line is open. Hi, thanks for taking our question. Also just wanted to go back to gross margin here. And two questions. I guess as you look at the fourth quarter, I think you said 90 basis points of deleverage. How much price is in that? Because you mentioned shrink, fuel, I'm guessing some sales deleverage impact. So just trying to understand how much price is in the fourth quarter. And this comment that you are committed to maintaining EBIT margins above 5%, I mean, how can you commit to that? Where do you think gross margins can settle out here? Hey, Kelly, it's Curtis. Yeah, the gross margin, I'll go maybe in reverse order. I mean certainly that that five percent creates a lot of space between where we are today and uh you know and that that mark so it gives us a lot room to assess the things that we're going to go do uh we're gonna make some investments in the gross margin i think the lion's share of the the p l impact will come through gross margin and that affordability investment the technology and the supply chain activity get a little bit of sgna but a lot of capital in that space so um and that's some of that's already kind of built into the model and the way we think about capital going forward. So those are things that we're going to go after and see what the customer response is. Obviously, we're talking about traffic being a priority and traffic first and repairing that with the customer. And then we go from there. So the investments we'll make here between the holiday activity and the January pricing, and then we'll see how the customer responds. And then all those self-help levers we have over time become optionality for us to continue to go further if we need to. So we feel like we've got, you know, some space now to do what we need to do. We'll see how the customer responds and we'll, again, we'll adjust the pace, you know, and the scale accordingly. And when you, you Know, see how the customer response, are you targeting any specific price gap to competition or do you just kind of monitored it and say, you know, once traffic kind of stabilizes, that's how we'll see how the customer responds if things start to stabilize, or do you have a specific price gap in mind? Yeah, hey Kelly, it's Nick. We do have a more competitive position how we're looking at the strategy and by market and by category, but most importantly by the things that are most valued by our customer on the gaps we want to have. I think if you look at it, we were at more of an item elasticity model in the past, and we're shifting to a customer and solution model across the products. As I mentioned, I think in John's question around the areas of focus for investment around entry points, trust builders, and our key items for target customer that you'll see us invest in. And then we'll measure it based on units, transactions in the store, and the customers coming back to our site and store, and that's how we'll measured, and they'll tell us when we're in the right spot. Thank you. One moment for the next question. Our next question will be coming from the line of Christina Keite of Deutsche Bank. Please go ahead. Hi. Good afternoon, and thanks for taking the question. So I wanted to follow up on the test, right? You've cited strong item and category responses, but did the stores where you tested these actions generate better total store transactions and frequency versus the control stores, just how much of the unit list was incremental versus customers simply shifting purchases to the lower-priced items? And then as you're thinking about the broader price investment, just how should we think about how broad that is in terms of what percentage of the assortment do you realistically need to touch for the consumer to really respond through increased trip frequency. Thank you. Yeah. Hey, Christina, it's Nick. I think if you think about your second question on where we're going to look at it, I think as I've said that what we learned from the tests that we've run in the past is that we weren't broad enough in the number of items that we needed to focus on and it wasn't broad genug to make an impact on the overall customer traffic to store. We saw movement within, again, item and category, but we didn't see enough the customer um and the ability to to tell the story make sure they understood what we were doing to invest in them and so that some of those learnings that we've captured is what's informed as I mentioned a broader investment um across the business um you know as I mentioned earlier there's there's a number of key areas uh around entry trust and the key the key items for our target customer that we're investing in it's a much more substantial part of our our sermon than we've done in the past which is why we reflected and in the margin and the and the guidance we've had for you today got it and then just as a follow-up should we interpret the above 5% EBIT margin common as a conservative for so likely the trough or is that a reasonable planning range for 2027? And what level of comp rate would that also assume? Thank you, guys. I'm still outside. I think, okay. Yeah, I think right now, Christina, I think, you know, again, 5%. Yeah, we would hope that that that would be the floor. And that's the idea. We've got the room now, but we've got to really assess this next wave of activities. And is it enough? And could it be better than that. If the customer really responds, that's what we'd hope to see. But we've got to go put those things in market. We've got work our way through the holidays and into the January timeframe and see how the customer responds to that. And so we're not ready to guide for 2027 or speak to the comp as it relates. But that's the idea now is we're investing now. We're going to see the customer response and then we'll have obviously a much more specific answer in February for guidance for 2027 and beyond. That's great. Best of luck. Thank you. Next question is coming from the line of Robert Ohms of Bank of America. Please go ahead. Oh, hey, guys. Two quick follow-ups. I think my first question is just on what, can you give any more color on marketing changes you might be making to, you know, drive traffic or, you Know, maybe educate people about some of the pricing changes you're making? And then the follow-up question I'll give you ahead of time, which is just cyclospora from here, what kind of a headwind is it to comps? Thanks. Hey, Robbie, it's Nick. I'll take the first question and pass it to Curtis. On the marketing changes side, as I mentioned, January is a key month for us, both for acquiring new customers and then traffic with existing customers. And so as we look at how do we go to market in January, The affordability investment and the pricing work will be part of our go-to-market story and the marketing story we tell as we do so in Q1. I think the other thing I would tell you on the marketing side is, you know, one thing that is really clear to me, and you're going to hear a lot from me in the future, is we have got to continue to understand our customer better, serve them better, and run our business through them more. And so we are at a place where we can start to unlock more insight from the customer data we've been capturing and use that to drive not just the market, but even the merchandising and product development work we have. And so that's an area that you'll see us use that will unlock media, unlock more retail media for us, unlock acquisition, and then certainly serve our innovation and forging work overall. And that'll be something that we take advantage of here as we begin 2027. And then, Robby, on the cyclospora, you know, we called out the 60 bps in the quarter. It kind of peaked for us in that August, early September timeframe. It was a little bit higher than that, and it's gotten progressively a little better since. It's still a slight headwind as we sit here today, quarter to date, for the fourth quarter, but we are seeing it start to improve. Thank you. Thanks, Roby. Thank you. One moment for the next question. And our next question is coming from the line of Scott Marks of Jeffries. Please go ahead. Hey, good afternoon, everyone. Thanks for taking our questions. First thing I wanted to ask about, Nick, on the previous question, you started to touch on data a little bit. And I don't think we've heard as much recently about the loyalty program. So wondering if you can just update us with where you are on that, what kind of engagement you're seeing from the customer, and maybe how you've been leveraging that to this point, if you have. Yeah, thanks, Scott. So, as I mentioned overall, I mean, the data is going to be a key unlock for us. We are about a year into the launch of the program. As I look at it, I think we've made progress, but it's not as far as we need to be. We've been talking about the work we've invested in, that program to drive customer value and customer behavior. Now we're at a place we've got a good set of data and talent capabilities to then start to bring that into the organization in a bigger way. And we just barely cracked the surface of it, to be honest with you. That's why I'm excited about starting to do more of that moving forward and understanding customer needs, understanding the key solutions and need states customers have, they look at the business, you know, the importance of item and attribute is significant, but where the customer is moving is into how they use those to solve key need states. So I talk about we're going to continue winning gluten-free, but we also need to own gut health because that's the solution is where people are going and we can start to use our data to unlock that. And so you'll see us do that. And I think that, you Know, it's important to remember that for us, our value proposition starts with, you know, a target customer with healthy, innovative, fresh, convenient solutions for a customer. And then the affordability piece is going to be the layer on that removes a barrier to enjoy and come back to Sprouts and the stores they love. And we'll continue to go to market in that same way. Appreciate the thoughts there. And then maybe just secondly, you've highlighted a number of areas where you think you need to invest in affordability. I'm wondering if you can just help us understand, maybe as we look across departments within the store, maybe what departments have you seen that have been more challenged versus ones that have maybe been less impacted by some of these affordability challenges? Thanks. Yeah, so a couple of things. I think, let me start with what's relatively consistent across all categories, and that's where we are distinctive and innovative with where the customers' needs are, that's winning. And we're driving newness in those spaces, whether that be in frozen or in bakery and deli, innovation, newness around health, convenience, freshness, and value is working across all categories. I think where we've seen opportunities is in areas where we have maybe a little bit more overlap or similar overlap. We think about our produce business to me as a key area of opportunity and focus. Our meat business is one where another area where we can continue to differentiate and win in that space. But I think we also, that's where I look at meeting the customer where they are from an access and affordability standpoint is where we have a good amount of opportunity. Thank you. One moment, please, for the next question. The next question is coming from the line of Greg Mellick of Evercore. Please go ahead. Hi, thanks. I wanted to follow up on the e-commerce growth up 12%, now 16% of sales and adding shift onto the platform. Do you maybe describe how, you know, that growth is accelerating and just what you're seeing in the baskets there? And when you think about the reset of margins, how you want to lean into e-commerce? Thanks. Yeah, Greg, I'll start. This is Nick on e-comm. You know, we've mentioned this in the past, but I do believe it's a really strong indicator of the strength of our proposition where we have these items that um are harder to find in other places and for customers who can't make the trip to the store ecom's a really great opportunity for them and it continues to be a growth driver and i think a proof point of the strength of our our model on the on the behavior itself that that basket is a bigger basket that customer is an omni-channel customer and as i mentioned the call about the focus on grow uh this is an area of a lot of opportunity for us we while 16 percent of our sales is still a relatively low penetration on the number of our customers and as people become more aware of what we can do in e-commerce space we provide more access with both our own channel and our partners i think this is an area of continued growth because the customer tells us this is how they want to shop sprouts when they can't make it to our store got it thanks and then a follow-up on you said the the newer stores are just doing better i guess when you look at those is there something in the store uh that you're seeing in those that you can you're thinking about rolling out to the existing chain maybe a few things that stand out yeah i think the you know i think part of the credit to the new stores we've done a really great job with um putting those very close to our target customers and and the teams in the those stores have done an amazing job. As I mentioned in the call, I think there's an opportunity for us, and we're actually moving now on looking at some of our more legacy stores and core stores and looking at ways to refresh some of the experience there and bringing together, whether it's more merchandise in the categories that are working, improved ways to find and discover our innovation and our foraging work, improved way to highlight freshness in the stores. I think that's an opportunity for us, and we're starting work there, putting some tests in the market soon, to look at the fleet and the existing fleet and ensure we keep up with what we're seeing in the new stores. and Greg I would just add this is Curtis you know again the same way that we've reshaped how we pick sites you know leveraging customer data and understanding the the uniqueness across you know 72 mosaics is an opportunity now as we look back into the core stores and and identify the ones that aren't doing as well as others and you use that same data to really understand you know the pockets of the customer that are that are struggling a little bit and where we need to do little bit more and so that's work that's ongoing as we continuously learn you know opening new stores and looking back at our fleet i think that you know leveraging that data set the way we have to to pick better sites will also be something that will help us go you know uh reinvigorate growth in core got it well thanks and good luck thanks for thank you thank you one moment please for the next question our next question is coming from the line of samuel barton of melius research please go ahead. Good afternoon. Thanks so much for taking our question. I just wanted to follow up on the data in the retail media. I'm wondering if you guys had a view on agentic shopping and how it might relate to, you know, less human traffic through the site if more shopping is done through an agent and just the quality of data as a result. Thanks so much. Yeah, you bet. We've certainly taken a look at it, both in what's happening around us and in our space. We haven't seen anything to indicate that agenda shopping is having a negative impact on us. And rather, we're looking at how do we lean on that as a way to continue to help customers find the unique needs. I think that's where you'll see people in our place use that shopping is to help continue to solve unique states and solutions that we're uniquely positioned to deliver. And we're certainly looking at some things in the commerce experience right now that can help us stand out and do so. We're not ready to speak about at this point, but I don't believe there's any negative consequence that we've seen so far from the world of eugenic shop. And I just add as far as data goes, I mean, that, you know, it's critical to have your data in the right place as we look ahead to leveraging ai you know across the business and so that's you know as we talk about technology investments and you know modernizing what we're trying to do in the technology space certainly data is going to play a big role in you know making sure that we have that in the right place and that'll be a place of investment for us here going forward one moment for the next question our next question is coming from the line of scott muskin of R5 Capital. Please go ahead. Hey, guys. Thanks for taking my questions. Actually, I had two. I wanted to drill down on pricing just a little bit. It seems like when we look at our data that the pricing in produce, and I think, Nick, you alluded to this already, there's some challenges competitively in traditional or conventional produce. And I was just wondering, as you think about margins going forward, I'm not sure that's going to go away. And so as you reset, do you think you've kind of accounted for that? And then the second thing about pricing is just, as we go through the rest of the store, you know, the affordability with a lot of your stores and more middle income areas, how do we think about those items and the affordability there and what you can do? And Then I have a follow-up. Yeah, thanks, Scott. Let me start with um on the on the produce side as i mentioned you know it goes back to i think what we're seeing in the market there is intensifying competition that's one of the spaces in produce where we are we are seeing it and then coupled with the affordability uh challenges in the market in the macro i think the customer is making choices on what they buy there i look at produces again as a business of strength for us we sell a lot of produce it's core to our who our customer is it's corridor value proposition we have a strong capability to source it and find good costs and deals to pass on to the customer i think the chance the opportunity for us is how do we be more balanced and how we do that across conventional organic as i mentioned um for us and and the right commodities the right times to do that and the teams are working that and putting that in place as we speak on the affordability side on kind of i think you were saying kind of mid markets this goes back to what we're seeing from our customer is that you know breadth of offering to help these customers who are health enthusiasts that may not have the highest incomes giving them affordable entry points as i mentioned like if you want to have a healthy specialty egg we have an amazing sprouts brand cage free egg we need to make sure it's affordable every day to get into um yeah i talked about you know the conventional produce space and then as i talked about these target customer items that are most that are drivers of choice for healthy options now that's the third area where whether you're higher middle or low income you're looking for the healthy options for our unique customer we just need to be right every day on that and that's one of the areas we're making an investment that's great and then my second question is around execution and the consistency of that execution particularly in the produce area so we've seen obviously some of these, maybe it's not obvious, but we see it, that some of the mass merchants, particularly Walmart, have really improved their execution in produce in particular. So how do you think you guys fit into that? We've seen in our store business some inconsistency there. So how don't you compete and make sure your execution is where it needs to be in the marketplace? Yeah, thanks, Scott. I think a couple of things. One, our customers tell us produce is still a really key reason why they choose us and why they love us. And I think there's always opportunities to improve execution, but our customer still tells us that they like our produce and they like the experience of it. I think, as we mentioned, when we're not moving the units as fast as we need to, that challenges the model in store on freshness and on shrink in the customer experience. And that's part of why I think being better on pricing across the board in produce, will increase unit velocities, will increase freshness, volume will drive freshness as you know, and I think that's going to help both sales but also the customer experience. And there's some work we continue to do in assortment to make it easier for our our stores to execute. I think we ask a lot of them and the differentiation we have will continue to differentiate. Ithink we can get tighter and simpler in how we execute produce in stores to continue to be the leader that we are in the produce space. Perfect, guys. Good luck. Appreciate it. Let me ask some questions. Thanks, Scott. Thank you. And this does conclude today's Q&A session. I would now like to turn the call back over to Nick Honick for closing remarks. Please go ahead. I just want to thank everybody for joining us today, their interest in our business, and I look forward to connecting with many of you on our business in the future. Thank you Thank you so much for participating in today's programming. You may now disconnect.