Sprouts sticks to game plan in lapping Q1 pandemic impact

Cycling COVID-19-fueled gains from a year ago, Sprouts Farmers Market posted decreased sales and earnings for its fiscal 2021 first quarter but topped Wall Street’s per-share projections.

For the quarter ended April 4, net sales declined 4.3% to $1.58 billion from $1.65 billion a year earlier, Sprouts reported after yesterday’s market close. The Phoenix-based specialty grocer said a solid performance by new stores helped drive sales, offset by a 9.4% drop in comparable-store sales stemming from the onset of COVID-19 a year ago.

In the 2020 first quarter, Sprouts turned in double-digit gains in both net sales (+16%) and comp-store sales (+10.6%), driven by consumer stockpiling behavior as coronavirus began spreading around the country.

At the bottom line in the fiscal 2021 first quarter, net income came in at $83 million, or 70 cents per diluted share, compared with $91.8 million, or 78 cents per diluted share, in the prior-year period. Sprouts noted that diluted earnings per share in 2020 reflect an estimated 22-cent benefit from the impact of COVID-19.

Organic produce sales rose 23% in 2020 and are a linchpin of Sprouts' strategy to draw health-conscious shoppers.

Analysts, on average, had projected adjusted EPS of 62 cents for Sprouts’ 2021 first quarter, according to Zacks Investment Research.

“I’m very pleased with how we have navigated the current environment, as we begin to cycle some of the positive impacts from the onset of the COVID-19 pandemic last year. Combining our strong financial performance with the strategic opportunities ahead of us makes me very optimistic about the future of Sprouts. For the first quarter, we generated diluted EPS of 70 cents, up 52% from the first quarter of 2019, as our strategic initiatives and promotions un-shrink continue to deliver strong, sustainable financial results,” Sprouts CEO Jack Sinclair told analysts in a conference call late Thursday.

“I believe 2020 was a turning point for Sprouts, and we’re continuing to build on that success and momentum this year. For 2021, our focus remains winning with our target customers by building our brand through meaningful marketing in and out of the store, curated merchandise, building an efficient supply chain, and unit growth supported by a new format to further expand our reach.”

Going back to the 2019 first quarter provides a more accurate picture of Sprouts’ latest quarterly performance, according to Chief Financial Officer Denise Paulonis.

“Our year-over-year comparison is not a straightforward indication of growth. We believe it’s important to focus our performance on a two-year basis,” Paulonis said in the call. “To that end, our net sales were up 11% compared to the first quarter of 2019, and our two-year comp stack was up 2.2%. After posting positive comps to start the quarter, as expected, same-store sales turns negative as we began to cycle the 2020 COVID impact and reopening progressed. Importantly, towards the end of the first quarter and into the current quarter, we have seen a return to positive traffic.”

Sprouts plans to open 20 new stores this year after launching 22 new locations in 2020.

Bright spots in the quarter included deli, bakery and e-commerce sales, with the latter up 221% year over year, Paulonis reported.

“For the quarter, e-commerce was 12.5% of sales, reflecting a notable increase in January, as the country experienced a spike in COVID-19 cases, settling back down to our fourth-quarter 2020 levels by March,” she said. “Clearly, the work done last year to create a full omnichannel experience by expanding pickup to every store, and the addition of shop.sprouts.com, continues to resonate with our customers.”

Private label continues to expand as well, according to Sinclair. “In grocery, the team continued to drive forward our innovation pipeline, resulting in more than 400 new items in the first quarter, with still more to come this year,” he said. “Many of these new products were the result of strategy work performed in 2020 to better serve our target customers. Throughout this year, we will bring even more new products to create that ‘treasure hunt’ shopping experience, and we’ll be highlighting these new items in our innovation centers in our new stores, under our ‘Find a New Favorite’ merchandising displays.”

The pandemic led many Americans to refocus on their health and well-being, and Sprouts stands well-positioned to capitalize on that trend as it expands and refines its better-for-you offerings, noted Sinclair.

“2020 was a pivotal year, not just for Sprouts, but for Americans in general, as we all tried to stay healthy. As we kick off a new year, the same focus on health is top of mind. For Sprouts, this plays well into who we are—a fresh, natural and organic specialty retailer. Fresh produce has always been the mainstay at Sprouts, and it continues to be at the heart of our proposition, representing 22% of our business,” he explained.

“In addition, what sets us apart from other grocers is the breadth of attribute-based products that we carry. Attribute based trends like keto, paleo, organic, plant-based, gluten-free and functional are all themes focused on wellness and play directly to our target customers,” Sinclair said. “In 2020, our organic sales across the store increased 21% to $1.4 billion, and in produce, organic sales were up 23%, driven by the desire to eat healthier. We’re becoming the leader in the attribute space, joined by our pioneering vendor community. Becoming the destination for up-and-coming vendors in the food industry is a fundamental part of our merchandising strategy and something our target customer desires.”

The opening of the Aurora, Colorado, distribution center is part of Sprouts' efforts to shorten supply routes to its stores.

Helping to spread the message of Sprouts’ healthy eating proposition will be the ongoing expansion of its store base. While the chain didn’t open any new locations in the first quarter, it aims to open 20 new stores in 2021, including five new smaller-format locations. Ten of the new stores are slated to be in Florida. Sprouts added 22 new stores in 2020, finishing the year with 362 locations in 23 states.

“Though we have 362 stores across the country, we are behind from a brand recognition perspective. Our awareness is very low. In 2021, this will change,” Sinclair said. “Our Where Goodness Grows campaign was kicked off late last year with our first foray into TV and many other digital mediums. This year, the brand changes will start to come alive in the physical assets, starting with our five new-format stores. Eventually, they will be reflected in our product offering through a common design principle, completing the entire umbrella of the Sprouts brand.”

Sprouts also continues to improve proximity in its supply chain. In March, the company opened a 135,000 square-foot produce distribution center in Aurora, Colorado—marking its sixth DC—and another is planned for Florida.

“The opening went well, and we are now supplying all stores in our Colorado, Utah and New Mexico region, a testament to the strength of the team. This new DC along with the new Florida DC, to be open this quarter, will create a faster supply chain and build on our goals of our DCs within a 250-mile radius of our stores,” Sinclair said. “In addition, they will allow us to serve more stores and customers with fresher produce, aided with the benefit of ripening rooms and allowing us to support local farmers.”

This piece originally appeared on Supermarket News, a New Hope Network sister website. Visit the site for more grocery trends and insights.