Ladies and gentlemen, thank you for standing by, and welcome to the Sprouts Farmers Market's Third Quarter 2022 Earnings Call. At this time, all participants are on a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. I would now like to turn the call over to Susannah Livingston. You may begin.
Thank you, and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our third quarter 2022 earnings call. Jack Sinclair, Chief Executive Officer, and Chip Molloy, Chief Financial Officer, are with me today. The earnings release announcing our third quarter 2022 results, the webcast of this call, and quarterly 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 2022 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 filings and the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP measures.
Please see the tables in our earnings release to reconcile our non-GAAP measures to the comparable GAAP figures. With that, let me hand it over to Jack.
Thanks, Susannah, and thanks to everyone for joining us today. Despite many of the current challenges in the consumer landscape, we're encouraged by our performance in the third quarter, which included total sales growth of 5%, comparable store sales of 2.4%, and earnings per share growth of 9%. I want to thank our 31,000 team members for their continued dedication and commitment to making Sprouts the ultimate destination for discovering healthy eating and wellness options. Our customers count on us to be a leader in innovative, high-quality, and healthy products in a unique and inviting shopping experience. I would also like to highlight the efforts of our operations, supply chain, and human resource teams in supporting our Florida stores and the communities they serve during and after Hurricane Ian.
Fortunately, 100% of our team members were safe, and all our stores and the Orlando distribution center were up and running within four days of the storm's passing. I would also like to thank all our supply partners who played a vital role in successfully navigating the storm. We believe we are making progress in delivering expectations for our customers, team members, and shareholders. We had a solid third quarter and expect continued progress in the quarters ahead. In a few moments, I'll follow up with more details about our recent activities and the remainder of 2022. For now, let me hand it to Chip to review our financial performance in the third quarter and our current outlook. Chip?
Thanks, Jack, and good afternoon, everyone. For the third quarter, total sales were $1.6 billion, up $81 million or 5% from the same period in 2021, driven by new stores and comparable store sales growth of 2.4%. Comp sales were supported by an increase in basket due to retail inflation, partially offset by a slight reduction of items in the basket. Our e-commerce sales grew 19%, representing 11.1% of our total sales for the quarter. Deli continued to be a top performer as customers sought Sprouts as a destination to fulfill their appetite for healthy prepared meals and grab-and-go options, such as sandwiches, salads, and snack boxes. The other categories of strength were where we have the most innovation and differentiation, including bakery, grocery, dairy, and frozen.
Our third quarter gross margin was 36.7%, an increase of approximately 90 basis points compared to last year's third quarter. The majority of the impact was driven by the fact that we were less promotional this year than last year when we were testing a variety of promotional and pricing tactics. SG&A for the quarter totaled $461 million or $37 million higher when compared to the same period last year. The increase was driven by new stores, higher wages, and additional marketing spend. Last year, we shifted marketing dollars into more promotional activity. E-commerce fees were also higher due to the associated increase in sales, while credit card fees are rising as more customers shift from debit to credit. For the quarter, our earnings before interest and taxes were $90 million.
Interest expense was $2 million, and our effective tax rate was 26%. Third quarter net income was $66 million and diluted earnings per share were $0.61, an increase of 9% compared to the same period in the prior year. During the third quarter, we opened one new store in Moreno Valley, California, bringing our total to nine for the year so far. Turning to the balance sheet and cash flow highlights. We ended the quarter with $316 million in cash and cash equivalents, $250 million outstanding on our $700 million revolver, and $25 million of outstanding letters of credit. 100% of our $250 million in outstanding debt remains fixed with our interest rate swap through the end of this year. Cash flow generation in the third quarter remained strong.
We generated $98 million in operating cash flow and spent $25 million in capital expenditures net of landlord reimbursement in the third quarter. This robust cash flow generation allows us to invest in the growth of our business while also returning cash to our owners through our ongoing share repurchase program. For the quarter, we repurchased 1.6 million shares for an investment of $44 million. For the third quarter, diluted weighted average shares outstanding were down 6% from last year. Turning to our expectations for the year and the fourth quarter. For the full year, we expect total sales growth to be in the range of 4.5%-5% and comp sales of approximately 2%. Earnings per share is expected to be between $2.32 and $2.36.
We expect capital expenditures for the year, net of landlord reimbursements to be between $120 million and $135 million. For the fourth quarter, we expect comp sales of approximately 2% and earnings per share between $0.35 and $0.39. We also expect to open seven new stores during the quarter, bringing our total for the year to 16. Given the current uncertainty in the marketplace, it's a bit early to guide for next year other than the opening of at least 30 new stores. That said, we are committed to controlling what we can control to drive meaningful results. Before turning it over to Jack, I'd like to share an update on the Sprouts Healthy Communities Foundation.
I've had the good fortune of serving on the foundation board over the last year and have been unbelievably impressed by the Sprouts passion for the mission of helping children learn to grow healthy. Through the foundation, Sprouts actively supports 130 nonprofit organizations that operate thousands of vibrant school gardens that provide students with hands-on gardening, cooking, and nutrition education while reinforcing academically what students are learning in the classroom. This year, the foundation has supported programs that benefit an estimated 3 million students. Our team members also help bring this work to life through their hands-on support, volunteering to help build and maintain many of these garden spaces. This fall, we hosted our annual Sprouts Day of Service, where 700 team members donated 3,000 volunteer hours to support the foundation's mission. We wanna thank all that took time to participate in these events.
With that, I'll turn it over to Jack.
Thanks, Chip. Today, I'd like to highlight progress in those key focus areas that enable our ongoing profitable growth and deepen our relevance with the consumer. After that, I'd like to touch on the here and now, what's happening with our customers during these unprecedented inflationary times and how we respond. First, on the real estate front. A few years ago, we set out to open 10% new stores every year. We've not delivered on that goal, given the permitting and supply chain challenges created by the pandemic. This year, we will open 16 new stores, and the trend is improving. We expect to open at least 30 new stores next year on a path to 40+ by 2024. Recently, we completed the implementation of a new real estate tool. This tool does three things for us.
One, it provides details of the Sprouts' white space for every MSA in the country. Based on the tool, we believe that our brand can support 1,350 total stores in the continental U.S., an incremental 970 from where we stand today. Second, it identifies the absolute best location for a Sprouts store within a trade area, essentially main and main. This enables our real estate team to be more proactive in sourcing the very best sites. Third, it provides a more accurate sales forecast for each location, helping us avoid potential underperforming stores. As we've mentioned many times this year, another area of focus is in-stocks. We expect to complete the implementation of PICAO or Perpetual Inventory Computer-Assisted Ordering by the second quarter of next year.
Recently, we also invested in an on-shelf availability solution that provides a single source of the truth for product availability as seen from the customer's eyes. The combination of these two tools should support incremental sales, improve margins via the reduction of markdowns and shrink, and free up task-related labor hours in the store so that our team members can spend more time better serving our customers. Moving on. Product innovation and differentiation are critical for Sprouts. It creates an environment of ongoing discovery and helps reinforce customer loyalty. We partner with over 250 local farmers on the produce front to help build strategies around unique varieties. Today, we have over 300 local produce items in our stores, almost double that of last year. By the end of 2024, we expect 20% of our produce sales to be local.
Outside of produce, we're doubling down with our brands. Far this year, we've launched an additional 400 private label products and repackaged more than 450 with an updated design that highlights vital product attributes and is also considered more appealing based on customer surveys. Our brand's non-perishable sales growth during the third quarter was more than double that of branded products. Our merchants also continually seek new and innovative products from the vendor community. In grocery alone this year, we've launched more than 300 first-to-market products, many of which are exclusive to Sprouts for a period of time. Lastly, deli has no shortage of innovation as we curate our unique meals and offerings that taste great and are good for you. Deli has been our highest growth category this year.
The last key area of focus that I want to highlight is in the customer analytics and loyalty arena. In the previous two years, we've built a true customer analytics team and are working diligently to understand our customers' behaviors and desires better. We have a long way to go, but it's a journey that starts with connecting. During the third quarter, we increased our active email accounts by 19%, our SMS accounts by 42%, and our mobile app downloads increased by 15%. Today, we can link approximately 16% of our total transactions to individual customers, compared to just 12% a year ago. Approximately 7.5% of transactions are tied to loyalty customers, up about 50% compared to last year, and their baskets are almost 70% higher than non-loyalty baskets.
We've also completed some early testing on targeting and personalization efforts with encouraging results. This will take time to scale, but will provide opportunities for Sprouts in the coming years. Turning to the here and now, we all know we live in an inflationary environment not seen for most of our lives. This environment is impacting the consumer and virtually all industries, including retail. Here at Sprouts, we're encouraged by the fact that our traffic has been relatively stable for several quarters. We've experienced some months where it's up slightly and some where it's down a bit. We're not really experiencing a classic trade down. In fact, many of our higher priced categories are experiencing the most significant growth. We continue to experience that our customers put approximately one less item in the basket.
That one less item, on average, is essentially produce, our lowest price point category, the one with the most items in an average basket and one of our lower margin categories. Even though we are competitively priced every day in produce, we believe our customer is managing their overall basket spend by eliminating that extra produce item. How are we managing in this environment? Well, we're laser focused on in-stocks, and our merchants and store operations teams are creating key item promotions that produce a buzz in the stores for our team members to support the drive for that extra item. Our merchants also work diligently with our marketing team to develop and test promotions to drive incremental profit dollars. Our teams have done a phenomenal job managing margin dollars during this volatile period of cost increases. We've also recently announced a partnership with DoorDash.
We expect this service to be available in all locations by the end of the year. By partnering with DoorDash, we enter a new marketplace where more customers can access our unique and healthy assortment. DoorDash, along with our long-standing Instacart partnership, should enable ongoing e-commerce growth. We're working now to get ahead of 2023. We believe the average retail increases this year will produce a tailwind for at least a portion of next year. However, we know it is critical to manage all costs, including cost of goods, supply chain, and SG&A, while progressing in those vital focus areas that I outlined today. With that, I'd like to turn it over for questions. Operator?
Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your touchtone telephone. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Mark Carden with UBS. Your line is open.
Good evening. This is Michael Lasser for Mark Carden. Thanks a lot for taking our question. If the model is evolving from one that was driven heavily by consumers buying produce and other fresh items, and now it's gonna be more deli and prepared oriented, how do you think that's gonna change the economics over the long term? Do you think that the fact that customers are adding one less produce item into the basket is more of a function of some of the model changes that have occurred, or is it more of a function of the economic environment right now?
Yeah, I think Mark, sorry,
It's Michael.
Sorry, Michael.
Thank you .
As I think this one through, our produce business is being affected more by the economic environment than by a change in our model. Produce remains at the heart and the center of our proposition to the customer. A significant proportion of our sales come in produce. I think what's happening is it's just a little bit easier for the customer to take one item out of the basket in produce. They'll buy one punnet of strawberries as opposed to two punnets of strawberries. That's certainly a trend that we've seen over the last two or three quarters.
With regard to the model, I think it's the customer that's taking us where we need to go in terms of meals and prepared meals, and we're seeing a strength in that business, and the team have done a nice job at developing some great products that fits in with our healthy kind of health and attribute-based assortment. I think it's more about the evolution of the customer and the evolution of how effective we've becoming in our meals space, and we'll become much more effective going forward rather than a significant change in the model. If that kind of answers your question.
Yeah. My follow-up question is, you've outlined some parameters around store growth for next year. How should we think about the economic sensitivity overall of Sprouts same store sales growth in the event there is a recession? You do over-index to more affluent consumers who would presumably be a little less impacted by some of the challenges than other consumers. Still, you know, your prices are a little bit higher than other retailers. How do we think about those puts and takes?
I think the important thing about our business is our proposition is different to other retailers. If you're very focused on a vegetarian diet or a vegan diet or a keto diet or a paleo diet, you're likely to stay that way irrespective of the economic conditions that you're surrounded by. I think we feel we've got some stickiness in our proposition in terms of what we offer, so that irrespective of the context of what's happening in the marketplace, our proposition is differentiated enough and appeals to a group of people who very much are, I think, aligned to what we are putting in front of them. I think we've seen that from the stickiness in our traffic over the last couple of years.
I've been encouraged by the fact that almost irrespective of the ups and downs around inflation and pricing, we've got a sticky customer, and I think that'll continue irrespective of what happens. Who knows what's gonna happen over the next year or so going forward. We've got that sticky consumer who's bought into who we are. As we evolve and develop our loyalty and our communication direct engagement with those customers, I think we're well-placed to compete almost in whatever circumstances come our way.
Thank you. One moment for our next question. Our next question comes from Ken Goldman with JP Morgan. Your line is open.
Hi. Thank you. Jack, you know, you said last quarter, I believe, that e-com perhaps will settle in at maybe 8%-10% of sales post-pandemic and then grow off that. You know, we're pretty far past, hopefully the bulk of the pandemic now, but your e-com's still growing nearly 20%. It's over 10% of your total, as you mentioned. Why would it, at this point, go back toward a high single digit number if it's growing so fast in this kind of environment today?
Ken, I think that's a really good point. I think as we've evolved and seen what's happened, our customers have bought into that space. I think the fact that they're able to access our brand and the branded products that we have that fit in with the health attributes and the kind of diet-focused process piece. Our customers have clearly voted with their feet around e-commerce, and as I said, you're right. I expected it to maybe settle down a little bit more, but it continues to grow. That's one of the reasons we've put the DoorDash process in place, which has given more access for people to choose in an omni-channel way how to access our products and our brands. I think you've appropriately challenged what I said the last time.
This thing is continuing to grow, and we expect it possibly to continue to grow further.
Thank you for that. Just for a follow-up, I wanted to ask about CapEx. You reduced your CapEx guidance for this year. I know you're not talking about 2023, but you have previously provided a range. I think you said 2.5% to 3.5% For next year. Was the CapEx number reduced because it's being pushed into next year, or were there other factors that went into that for this year?
No, it's being reduced just as you get closer and closer to the end of the year, Ken. It's just we're just finding we're spending a little bit less on some of the projects that we thought we would spend on. As it relates to next year, we're still looking at probably somewhere between 3% and 3.5% of sales. The store growth will be bigger next year. Just a couple of projects that we'd like to do next year. We have a new DC coming online, so it's gonna be closer to 3.5% next year.
Thank you. One moment for our next question. Our next question comes from Rupesh Parikh with Oppenheimer. Your line is open.
Hey, Rupesh. Rupesh, you're not coming through.
Can you hear me now?
No, you sound like you're underwater. I apologize.
Okay. You can move on. I'll just call you on my phone now.
Sorry, Rupesh. We can't hear you.
All right, one moment for our next question. Our next question comes from Chuck Cerankosky with Northcoast Research. Your line is open.
Good evening, everyone. Quick question on inflation. What kind of inflation did you see in cost of goods in the third quarter?
Yeah, Chuck, we don't give out the actual numbers, but you know, you can see it throughout the industry. It's pretty still steady, pretty high inflation that's been flowing through for the last several quarters now.
Okay. Looking at the inventory level for going into this fourth quarter, how do you feel about that? How are they out of stocks? How much of a seasonal effect are we looking at for the holiday selling program, realizing that Sprouts isn't as strong in those categories typically as conventional supermarkets?
Well, as you say, Chuck, we don't sell anything like as much in the seasonal, but January is our big month as people get focused on their diets, specifically going into the holiday period. Generally, we're trying to focus on out-of-stocks, which we talked about, and there's a lot of work going on in the stores in terms of working that. We very important to us is things like organic turkeys and some of the attribute-based products we've got around vegan and vegetarian for the holidays. We're well-placed for that. We feel we're in good shape. Clearly, it's a volatile world that we're living in, but we feel we're in good shape. We've put a pretty good holiday program together. I'm pleased by the marketing we're putting behind the holidays. We're doubling down a little bit on it.
We feel we're pretty well-placed going into the holiday, given the context for our business, which you appropriately identified.
Thank you. One moment for our next question. Our next question comes from Spencer Hanus with Wolfe Research. Your line is open.
Great. Thanks for the question. Could you guys just provide a little bit more context on what's driving the acceleration in three-year comps in four Q? And then relative to three Q, are you expecting a more balanced contribution from units and price next quarter?
Hey, Spencer. We're not thinking about three-year comps anymore, so messy. We're really starting to settle in more on a two-year. I could go back and do the math or one of us could, but we're really focused on where we are now. As it relates to the acceleration, we're still, you know, we're still in this place where we see inflation. We see traffic pretty steady. We see some inflation on cost of goods and subsequently on price and with a little bit less on the units. You know, when we came into the beginning of the year, we were seeing that. We thought that would dissipate in both directions as the year transpired.
It didn't happen because inflation was continuing, and it's gonna continue now at least through the first half of next year, and then we'll wait and see at that point. You know, we're hopeful that as we get through, not only will we comp the less units in the basket as we get later into the year, but at the same time, we'll probably lose a little AUR and pick up a little bit on the units.
Got it. That's helpful. With the pending consolidation in the industry, how do you think that that'll impact the competitive dynamics in some of your core markets like California and Arizona? I understand you don't compete directly in a lot of the categories, but just curious how you think that impacts price in the industry.
Well, Spencer, it's certainly created a lot of dialogue in the industry, that's for sure. I think we're in a position where we do see ourselves and are very differentiated. We've got a very clear strategy in terms of where we're going forward in terms of our assortment and differentiation. If consolidation leads to a lot of price investment, it won't be on things that we sell. We kinda see that we're kinda shielded from almost anything that might happen. Whether it's really successful, these mergers, or whether they're not successful, we think our destiny's in our own hands. It's not in the destiny of what might happen in the marketplace. We're gonna carry on plowing our own canoe, if that's the right expression.
We're gonna keep doing what we're doing, developing innovative and differentiated product that fits in with the healthy lifestyle of the customers that we have. We think that wouldn't be affected by the kind of merger conversations that have been happening in the industry over the last little while. That would apply anywhere in the country where this operates.
Thank you. One moment for our next question. Our next question comes from Robert Moskow with Credit Suisse. Your line is open.
Hi, thank you for the question. I understand that Californians are receiving government stimulus checks in October. I wanna know if you thought that would be a positive for your business. Maybe you could remind us what % of your business is in California. Then secondly, I wanted to know how much visibility do you have into the 30 new store openings. I mean, there are delays in all kinds of projects for all kinds of reasons. I know you've already pushed back that target once. How solid is the 30?
We're feeling pretty solid about the 30 stores. You know, as we've said in the last few calls, we've got a solid pipeline of stores well beyond the number that we need for this year. 30 is a number that we're feeling comfortable with. I know this year we only got to 16, but the context of that we understand much better as we go into 2023 and 2024 than we did in going into 2022 with all the volatility that was going on in supply chain. All other things being equal, we're feeling good about that number of 30 stores. California is a big part of our business. I don't know, Chip, if you've got some thoughts on that.
It's about 40%, Rob.
We don't get as much out when government checks get paid out as other people get, but it certainly won't do us any harm.
Thank you.
One thing interesting on that, we don't do as much on EBT in our brick-and-mortar, but we've noticed as we've introduced it on our e-com platform, we're actually over index more than we do in our stores. It's giving access via e-com to those customers that we didn't think that would happen, but it's happened.
Thank you. One moment for our next question. Our next question comes from Edward Kelly with Wells Fargo. Your line is open.
Hi, guys. Good afternoon.
Hi.
It seems like the gross margin this year is maybe coming in a little bit better, you know, than that sort of like slight full year talked about. Can you maybe just provide a little bit of color on that? Then as we think about 2023, and I know it's, you know, it's early, but, you know, can you just kinda talk about what your expectation is there, impact of new DC, that type of stuff?
Sure. Sure, Ed. For this year, so the quarter, you know, we picked up about 90 basis points. More than half of that was, if you remember last year in the third quarter, we went out and did a bunch of promotional tests, full box. We had promotions on top of promotions, and we didn't do that this year, as we learned some things out of that. That's about half of the pickup year-over-year. If you remember early in this year, we also as the merchants have had to deal with the cost increases that have been coming with them, we got a little bit behind. We had a little bit behind. I think that was either Q4 or Q1 that we were a little behind. It was Q4.
This quarter, we got a teeny bit ahead. As they manage through it net-net, we picked up the 90 basis points. As we think about next year, you know, our aim is to manage our margins essentially flat. We've got a little bit of DC, a teeny bit of headwind there as we relocate our Southern California DC. There are some opportunities both in mix and some opportunities to drive a teeny bit of margin. Generally, we're looking at flat for next year.
Okay. Just a quick follow-up. You know, on SG&A, obviously, you know, with an acceleration in store growth, you know, you'll see, you know, an accompanied acceleration in SG&A. You know, you did sort of mention, you know, looking to be sort of like, you know, tight on expenses. I'm just kinda curious, you know, what some of the things are, you know, that potentially could, you know, could help you, on that line item.
Yeah. We have some things still in the stores. We're looking at supplies. I mean, we're looking at every rock to try to make sure that we can manage through that. You know, we have wage increases that are coming at us. If I looked at the list, supplies is a probably a bigger opportunity. We have some things on our tags. As we push tags into the store, we're doing less of that. When price changes, we started that this year. We'll get some more of that next year. We're just gonna have to be tight on incremental headcount or any incremental costs associated with that. Of course, we'll look at marketing, but we wanna over-index there if we can. It's, that's the part we just gotta manage through.
We'll find ways to make sure that it works.
Thank you. One moment for our next question. Our next question comes from Kelly Bania with BMO. Your line is open.
Hi. Thanks for taking our questions. I was wondering if we could just talk a little bit about the new store economic model. I think last quarter you made some tweaks to that. Was just curious if you could provide an update, how you estimate your year one new store productivity is coming in, and how many stores do you have that are really tracking towards that year one $13 million sales target?
Well, right now we're looking at year one is $13 million. You know, we don't know. We don't have that many. We just opened one more store this year. We've only got nine that we've opened this year. What we're looking at is we still believe we'll be at 16 by year five, and we'll be at, you know, a relatively breakeven in year one, and we'll be at 8% EBITDA by year five. We're really working hard to manage the cost. We just haven't put a ton of stores in the ground, and they haven't matured enough for us to reinforce all of those assumptions, but we feel pretty good about it.
The one thing we are finding is that more established markets, they come out of the gate stronger where we have brand density. Where we don't have brand density takes a little longer. They come in a little bit lighter, and they, but they build a little faster.
Kelly, I think we've been quite encouraged by some of the stores in year two, year three in some of the less established marketplaces. We're seeing some strength in some of those stores now, which is very encouraging. I think the economics of what we're building in terms of smaller stores, we've only got a few on the ground there, but all of them next year will be that. I think we're feeling pretty good about the ramp up.
Okay. Thank you. And also just wanted to ask about, I guess the categories. You talked about deli and prepared as some of the leading categories. I thought that those were some categories that were maybe a little bit de-emphasized in the new store model. Are you rethinking that at all? Are those categories still performing well in the smaller stores? Or maybe you could just help us understand really the deli and prepared strategy from here.
Yeah.
Well. Oh, go ahead.
Yeah. Kelly, when we started on that track, yes, we were the last prototype that we did, yes, was focused on a lot of the deli area, but it did it in a very grand way. We made the store bigger. We added a very expensive area for deli where you could see it being prepared, and those were areas, it was, I would call it just excess. We don't need to have that type of elaborate fixturing and that elaborate of labor. That much square footage in a given box to be able to be really good at deli. We're continuing to evaluate that, but we feel good. We've got good fixtures today, we've got self-serve fixtures today.
It was just too expensive and too much, and yet we can still chase that puck with what we've got in our new prototype.
Yeah. The deli space in our V5, which is the version before the one we're working on now, it was very grand, but didn't really add a lot of assortment. The thing that we've kind of got to and the pandemic kind of took us there, is what an opportunity there is for us of prepared meals within that deli environment. We've added cabinets behind that and invested in products, and we'll continue to do that. I think that's come along from the pandemic as much as anything else, what an opportunity there is for us. We're probably a little bit late to the party, but it's certainly working for us at the moment.
Thank you. One moment for our next question. Our next question comes from Robbie Ohmes with Bank of America. Your line is open.
Hi, this is Kendall Toscano on for Robbie. Thanks for taking my question. So to start if I could get a little bit more detail on the traffic trends. And you said this quarter was more of a steady trend versus the last two quarters, you called out hogging traffic. And I think in Q2, you said that there was like a quarter-over-quarter improvement and talk some about the marketing initiatives you're doing and some progress on that. I guess just what's obviously hard in a very inflationary environment. But what are you kind of looking at to measure the progress of marketing and things like that? Would you hope to kind of have like a reacceleration in traffic?
Yes. It's Kendall, right? I couldn't quite hear. Kendall, we're seeing, we've seen last three quarters, we had net positive traffic up until Q3, in Q3. In every one of those quarters, we had some months that were maybe slightly down and slightly up. Net net, we were up. This past quarter, we had the same phenomenon, but net net, we were down just a hair for the quarter in Q3. As we rolled into October was flat. It's just a it's a really steady number. It just moves a teeny bit up and down as from a comp perspective. As it relates to marketing, you know, our teams are from a promotions perspective, our teams, they're playing with promotions every day, so every week.
They measure them, and they measure from a traffic perspective, from a sales perspective, and from a profitability perspective. We're finding, as we've said in the past, some things work a little bit, but we're not. There's no panacea out there that says, this is the perfect thing that we need to do to go drive traffic. It's just a continuing and an overall marketing message.
Yeah, the marketing spend, I think what we continue to spend a little bit more money on it. We want to spend more, we wanna invest in personalization and loyalty. We're seeing we're gonna be much more precise with our new media model so that what we spend gets us more returns against that specific kind of dollars. It continues to be a level of experimentation. We seem to be able to get awareness with our customer. The next challenge for us is getting more engagement, and that's something that we're working on. I think this having more, as we talked in the script, having more emails and having more direct ways of communicating with our customer will help us to build that loyalty, build more transactions, sometimes from the same customer and sometimes from new customers.
That's very much what we're working on across the space. As Chip says, there's no panacea here. We've made a lot of progress, and I think we're putting some very good building blocks in place to build that loyalty and personalization going forward.
Thanks. That's really helpful. Just as a quick follow-up, if you could just talk a little bit more about the trends you're seeing with new and existing customers.
Well, as we've got some very sticky customers which is why we get a consistent level of pattern of traffic that Chip was talking about a little while ago. In our new markets, the new customers take a little bit of time. What we find in our new stores in less established markets on the East Coast and in parts of Florida, is that a lot of customers come in to have a look. Then the real target customers are the ones that stick around, and they're the ones that we grow from. You get an interesting kind of mix when you open a new store where a lot of people come in, and then it takes a little while for that customer to really get who we are.
Because sometimes they come in and think we're a grocery store, and given that we're a specialty grocery store, that changes that dynamic a little bit. As I say, we're getting better awareness across the customer base. Our existing customers, how to get them to spend a little bit more, we've been doing a lot of activity on that space and new customers. We're seeing a balance of both coming into our business.
Thank you. One moment for our next question. Our next question comes from Scott Mushkin with R5 Capital. Your line is open.
Hey, guys. Thanks for taking my question. I guess I'm going to slide seven. I think you guys put in the presentation where you showed the EBIT margin kind of coming up to about, you know, just over 6%. I know we've talked about this in the past, but just kind of taking a step back and looking at the business model and the same-store sales you guys are putting up. Number one, if they were to stay in this kind of low single digit range, can you maintain this type of EBIT? So that's kind of the first part of the question. Once you answer that, I have a follow-up.
Scott, yeah, I think we can maintain it. Obviously, with a 10% square footage growth, we're gonna need to comp in a place that's probably north of 2% to be able to keep that stable. We do have some costs that we have to manage through. Net-net, we think that we're in a place where we're certainly not gonna see gross margins deteriorate. We've shifted the business, we've changed the business. It's different mix in the business today, and we don't see gross margins declining at this point. It's really a matter of keeping that EBIT margin flat while we're investing in new stores and managing our costs accordingly to be able to ensure that our EBIT margin stays relatively flat.
The second follow-up question to that, there was obviously the negative side. The positive side, I get this from clients, you know, quite a bit, is, you know, what can they do, you know, more aggressively to get that comp moving higher? I know you guys are working on some stuff because clearly it's almost like a coiled spring, you know, the equity itself, if you can get that comp moving higher. I know, again, we've talked about that before, but it just, you know, it comes up with a lot of clients, as, you know, the stock is, you know, pretty cheap if you can get that comp moving.
Yeah. Well, I certainly agree, Scott, that the stock is cheap. The opportunity going forward for us is how do we sustainably build a comp and a customer loyalty base going forward? The one thing that we can't do is do these pulses of comp by investing margin and thinking that that's gonna build long-term sustainable, profitable customers. That's what the strategy entails. Slow, confident driving of a customer base who loves what we do and continue to get more of them. The broader trend in the industry is there's a trend towards health and wellness. We're really well-placed to take advantage of that. We're really well-placed by putting the infrastructure into our business so that we can run it and run it better going forward and efficiently.
A specialty retailer like us should be operating at a significantly increased underlying margin relative to the conventional industry, and that's where we've got this thing too. We now continue to have the opportunity in front of us to build long-term customer loyalty, which builds long-term customer profitability without it being these pulses of in and out and in and out, which certainly aren't what the direction in which we are going.
Thank you. One moment for our next question. Our next question comes from Krisztina Katai with Deutsche Bank. Your line is open.
Hi. Good afternoon, and congrats on a nice quarter. I wanted to follow up on the personalized offers. You currently know about 16% of transactions, so it seems like it's a pretty good opportunity. Maybe if you could talk a bit more about some of the metrics you mentioned. I think you said the basket of a loyal shopper is 70% larger. How are you approaching the analytics side of things to make sure that this customer continues to increase their spend with you and then also get them to come into the store more frequently?
Well, first of all, we've invested in a customer analytics team, which we've talked about. Very specifically putting resource into this so that we can mine that data and mine that information about that customer and try and understand very specifically at a personal level what motivates that customer to spend some more money with us. We've done some very specific tests in areas like vitamins, specific tests in areas like bulk, specific tests where we can see who is that customer and how do we get a bigger share of their wallet going forward. We get a pretty small share. Even the customers that love us, we get a pretty small share of the dollar simply because of the nature of our proposition.
Just mining that data, understanding that data, putting offers in front of them, that allows us to grow it. We're very early, as I said in the script. We're at the infancy of this whole process, but we've certainly got the infrastructure in place. We're putting the people in place. We're getting some partners on board to help us with this because we're not reinventing the wheel here either. This has been done by a lot of people in a lot of different industries to us. We see a lot of opportunity in front of us about personalizing offers, driving that loyalty from customers who inherently want to be with us and give us their information. I think that's gonna continue to grow going forward, Krisztina.
Great. As a follow-up, I was wondering if you could maybe talk about some of the tailwinds that you're seeing from the clustering of stores around DCs. Like, how has that helped with sales as you are now putting fresher items on the shelves, but also if you can quantify maybe just what the tailwind has been on gross margin on distribution efficiency and also cost reduction, especially, you know, with the elevated transportation costs that we have in this environment.
I'll let Chip maybe go into more detail, but specifically, if you're driving less distance, and we're so pleased, especially when gas prices or diesel prices were so high. The fact that we're traveling significantly less. I can't remember the exact number. 3 million?
Yeah.
I'm getting signals here. 3 million miles less on the road to get to the same number of deliveries to the same number of stores is a very significant saving, part of the offsetting what costs would have come through on there. That's encouraging. Going forward, there's gonna be some doubling up costs for a little while we get our Southern California place where we need to get to. Long term, that'll drive us some efficiency as well going forward. I don't know if Chip can add anything.
Krisztina, just the first half of the year, we got some benefits from the less miles and the fact that we had the new DCs open. Once we got into the back half of the year, we were now at a place where we were comping those benefits. The back half of the year, it really hasn't been a margin, or it wasn't in the third quarter, and nor do we expect it to be a margin enhancement in the fourth quarter. Really trying to manage that line at this point as a push.
Thank you. One moment for our next question. Our next question comes from Rupesh Parikh with Oppenheimer. Your line is open.
Good afternoon, and thanks for taking my question. Hopefully, you can hear me now.
We can hear you, Rupesh. Yeah.
Okay, great. Just on the new store prototype, I believe the one outside of or in Phoenix, now you're in year two. Just curious how that store is performing. Just overall, as you continue to roll out the new store prototype, any surprises, positive or negative?
It's very close to being a year. I'm trying to look at Chip's whether it's actually overlapped a year yet. It has just overlapped.
We're encouraged by the underlying numbers in that store. It's coming through well relative to where we would have expected it to be, and we're very confident on the returns on that. The other stores that we've opened, and it's only a handful, are coming through pretty well across the board. We're encouraged by that at this stage. The economics are better than they would have been significantly because we're paying less rent, the operating costs are lower. In the context of going forward, I'm glad that we're building smaller stores because there's a lot of potential costs going the other way in terms of construction that we're having to manage. We're very encouraged by the fact that we're building smaller stores in terms of making that economics work.
The mix in the business is coming through kind of the way we expected it to. A little bit of strength in the deli business, which has maybe surprised us a bit. That's come through well. Frozen foods has been very encouraging in terms of what's happened in those new stores, which I think we can double down on going forward.
Great. Then maybe one quick follow-up question for Chip. Just as we look at Q4, is there any more color you can provide in the interplay of growth in SG&A margins for the quarter?
Yeah, I mean, in Q4, we're sort of expecting margins to be in the 36-ish range, and I suspect costs will probably rise year-over-year on the SG&A line, call it 7-ish%. That's, you know, we said we'd comp around 2%.
I'm not showing any further questions at this time. I'd like to turn the call back over to Jack Sinclair, CEO, for any closing remarks.
Well, thank you, everybody, for your attention today. We appreciate your interest in our business, and wish you all a very good holiday season. Thanks a lot.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.