Third Quarter 2026 Earnings Conference Call - SPROUTS FARMERS MARKET INC

Financial Performance:

• Q3 2026 total sales reached $2.3 billion, a 5% year-over-year increase driven by new store growth, offset by a 0.9% decline in comparable store sales (comp).
• Comp sales were negatively impacted by a 3.3% drop in transactions and a 0.6% reduction from the cyclospora disruption; basket size increased 2.5%.
• E-commerce sales grew 12% year-over-year, now representing over 16% of total sales.
• Gross margin decreased 50 basis points to 38.2% due to higher shrink, the cyclospora disruption, and elevated fuel costs, partially offset by self-distribution benefits.
• Net income was $113 million ($1.21 diluted EPS), down 1% year-over-year.
• Operating cash flow year-to-date was $555 million; capital expenditures were $275 million.
• Share repurchases totaled $299 million through Q3, with $537 million remaining on a $1 billion authorization; full-year repurchases now expected to exceed $300 million.
• The company operates 504 stores across 25 states, having opened 15 net new stores in Q3 and 27 year-to-date.

Guidance and Future Outlook:

• Full-year 2026 sales growth is revised to approximately 4.3% (52-week basis), with comparable store sales expected to decline approximately 1.7%.
• Net new store openings for 2026 remain projected at 42, supported by a pipeline of over 105 executed leases and 160 approved stores.
• Full-year EBIT is expected at $605 million, with diluted EPS guidance of $4.80.
• Q4 2026 comparable sales guidance is narrowed to a negative 2% to 4% range, driven by traffic weakness and deeper pricing investments.
• Q4 2026 diluted EPS is forecast between $0.47 and $0.51, reflecting 90 basis points of gross margin deleverage and 170 basis points of SG&A deleverage.
• Management reaffirms a target EBIT margin floor above 5% for the long term, acknowledging near-term pressure from strategic investments.
• The 2027 outlook and specific 2027 guidance will be refined in February following assessment of customer response to current pricing and affordability initiatives.

Business Segments and Product Lines:

• The "Sprouts" private label brand accounts for approximately 26% of sales, outpacing national brands.
• New store vintages are outperforming expectations and comping positively, highlighting the strength of the unit growth model.
• E-commerce platform Shipt was added in Q3 as the fourth delivery channel, supporting the 12% e-commerce growth rate.
• Management is prioritizing investments in affordable entry points (e.g., Sprouts brand eggs, nuts), "trust builders" (conventional produce), and target customer KVIs (e.g., organic grass-fed beef).
• Specific price points are being tested, including wellness goals under $10, family meals for $4, and fresh-baked sourdough for $5.

Market and Competitive Landscape:

• The health and wellness "food at home" market opportunity is estimated at over $290 billion.
• Competition is intensifying across natural/organic retailers and conventional mass merchants (e.g., Walmart), with customers migrating to value channels due to affordability concerns.
• The target customer segment is evolving, with affordability becoming a primary driver of choice alongside health needs.
• Management notes that while innovation and differentiation remain strong, the current pricing strategy has not been sufficient to retain transaction volume against competitors.

Risks and Challenges:

• The cyclospora disruption reduced comp sales by approximately 60 basis points, though the impact is expected to progressively improve in Q4.
• Core store traffic and transaction frequency are softening, with the decline initially driven by less engaged customers but now affecting the core customer base as well.
• Shrink levels are higher than target due to lower sales velocity and inventory management challenges, creating margin pressure.
• Fixed cost deleverage is impacting SG&A due to the decline in comparable store sales.
• The broader macroeconomic environment is exacerbating affordability pressures for consumers.

Management Commentary and Tone:

• A leadership transition occurred with Jack Sinclair moving to Executive Chairman and Nick Conant becoming the incoming CEO.
• Management tone is candid and urgent, acknowledging that recent performance "needs to improve" and current actions "have not been enough."
• There is a clear commitment to "bold action" and significant near-term margin investment to rebuild customer trust and affordability.
• Management expresses confidence in the underlying business model, new store potential, and long-term market opportunity despite current headwinds.

Analyst Questions and Answers:

• Margin Outlook: Analysts questioned the 100 bps gross margin swing in Q4; Management clarified this reflects immediate affordability investments and is not indicative of the 2027 baseline, with EBIT margins expected to recover above 5%.
• Unit Growth: Discussions confirmed new stores remain a high-return vehicle, though the pace of investment will be balanced against core store stabilization needs.
• Customer Behavior: Data shows the "less engaged" customer is the primary driver of traffic decline, but core customers are showing early signs of softening in basket size and frequency.
• Pricing Strategy: The new pricing strategy will roll out nationally in January, with immediate holiday price reductions on key items to test elasticity and drive traffic.
• E-commerce: E-commerce is viewed as a differentiator and growth engine, with opportunities to expand reach and leverage first-party data for personalization.
• Loyalty Program: Management stated the loyalty program is a year into launch with good data foundations, aiming to leverage AI and first-party data to better understand customer "need states" rather than just item attributes.

Other Key Points:

• Management plans to refresh the in-store experience in legacy stores to match the performance of new locations, utilizing data to identify specific recovery opportunities.
• Self-distribution of Sprouts brand products and retail media partnerships are identified as key long-term levers to offset affordability investments and rebuild margins.
• Technology modernization and AI integration are critical priorities to enhance data connectivity and operational efficiency.
• The 2026 fiscal year includes a 53rd week, which is expected to add approximately $190 million in sales and 16 cents to diluted EPS.