Earnings Call: Q1 2021

May 6, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Sprouts Farmers Market First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I I would now like to hand the conference over to your speaker for today, Susanna Knudsen. You may begin. Thank you and good afternoon everyone. Call. We are pleased you have taken the time to join Sprouts on our Q1 2021 earnings call. Jack Sinclair, Chief Executive Officer and Denise Palonis, Chief Financial Officer, are with me today. The earnings release announcing our Q1 2021 results, quarter. 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 2021 and beyond. Quarter. These statements involve a number of risks and uncertainties that could cause actual 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, along with the commentary on forward looking statements at the end of our release earnings release issued today. Our remarks today include references to non GAAP measures. For a reconciliation of our non GAAP measures to the GAAP figures, Please see the tables in our earnings release. With that, let me hand it over to Jack. Thank you, Susanna, and good afternoon, everyone. Thank you for joining our call today. 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 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 Q1, we generated diluted EPS of $0.70 up 52% from the Q1 of 2019, As our strategic initiatives in promotions and shrink continue to deliver strong sustainable financial results. As I've stated before, 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. 2020 was a pivotal year, not just for Sprouts, but for Americans in general, as we all try to stay healthy. Retailer. Fresh produce has always been the mainstay of Sprouts, and it continues to be at the heart of our proposition, representing 22% of business. 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. In 2020, our organic sales across quarter. The store increased 21 percent to $1,400,000,000 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 a 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. We like to lean in and take risks on these young companies. No one else is collaborating with our teams like we are. To help drive their innovation and improve their ingredient panels, which results in exclusive market entries with leading edge products for sprouts. Nut Pods Creamer is one such example. We started partnering with them back in 2018 as a small women owned company. Over the years, we've partnered to create first to market flavors and value sized offerings. Week, a new 0 sugar sweetened option will be in our stores. The growth we have seen in nut pods and many others have been extraordinary, and we look forward to how much more we can do. In the long run, these relationships are creating a product innovation pipeline to keep our shelves full of unique trending merchandise. As I've said before and will continue to say, we are not a traditional grocer. And as we grow and scale, we are evolving as the go to food retailer for natural, organic and attribute based partnerships and product releases. In the Q1, as in quarters past, attribute led product offering drove revenue. The plant based trend is one such offering that we continue to brand on our shelves. For example, take 2 milk alternative made from rejuvenated barley and BRAVE Robot Dairy Free Ice Cream are 2 products that help drive sales in dairy and frozen. Both chicken alternative meals in deli and strength from seasonal offerings and keto based products in bakery. In grocery, the team continued to drive forward our innovation pipeline, resulting in more than 400 new items in the Q1, with still more to come this year. 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 and our Find A New Favorite merchandising displays throughout all stores. Moving on to our brands. Though we have 3 62 stores across the country, we are behind from a brand recognition perspective. Our awareness is very low. In 2021, this will change. Our Where Goodness Growth campaign was kicked off late last year with our first foray into TV and many other digital regions. This year, the brand changes will start to come alive in the physical assets, starting with our 5 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. On the marketing front, our digital first initiatives designed to connect with more target customers continue to progress well. We're building our base of customers With emails up over 140% in the Q1 and website traffic growth of 39%. Importantly, e mail subscribers tend to have larger baskets than other customers, which is one reason why we remain focused in growing this number over time. Through our marketing journey, we have identified who our core customer is, have begun to increase our digital communication and are starting to see this resume with target customers. Through our data sources, we continue to see positive trends and data points suggestion that we are winning disproportionately with our target customers. As well, we continue to see customer counts improving, ending the quarter with the highest we have seen since last April when the pandemic sets in. In addition, we noted in one of our customer surveys The majority of our customers who reduced or eliminated trips to Sprouts during the pandemic expect to return post pandemic. These are all steps in the right direction for our marketing strategy, and we look forward to increased sales from these initiatives as the year progresses. When I first joined Sprouts, I noted that our supply chain was disjointed with stores too far from our distribution centers. So I'm very excited about the opening of our fresh distribution center in Aurora, Colorado, serving 45 stores and bringing us to 6 DCs across the country. 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 to be opened this quarter will create a faster supply chain and build on our goal to have our DCs within a 250 mile radius of our stores. In addition, they will allow us to serve more stores and customers with pressure produce, aided with the benefit of ripening rooms and allowing us to support local The Colorado DC House produce from family owned Strohar Farms, who have been growing potatoes in Colorado since 1910, family owned petrochemical farms, only 30 minutes from our DC, who grow everything from leafy greens to sweet corn and peppers, as well as hazel Dell exotic organic mushrooms grown year round in temperature controlled sheds among others. These farming relationships will expand with our new local sourcing team housed out of the DC with a wealth of experience in local sourcing. This sourcing model is being replicated across all our distribution centers to ensure we are supplied with seasonal and locally relevant produce in every store. With this initiative, we will also decrease the miles our crops drive, therefore reducing our greenhouse gas emissions and creating operational efficiencies like less shrink and a reduction in food waste. I can unequivocally This piece of our strategy is good for our customers, our business and our planet. Our investments in 2021 go beyond the DCs. Considering we're a young company, we were only 54 stores a decade year. We have opportunities to invest and upgrade our systems that support and drive our future growth. A few of the investments this year are focused on perpetual inventory, replenishment, computer assisted ordering, labor management and our new human capital management system. These projects are intended to improve in stocks, improve our labor productivity and overall store conditions and provide team members with an efficient modern HR access point. As for unit growth, our pipeline remains strong with deals reaching out to 2024. As planned, we didn't open any stores in the first quarter as we were developing our new format. Continuing with our plan, we have one store scheduled to open in Q2. And as stated before, COVID pushed most of all most all of our opening for the back half of the year and remain on track to open 20 new stores this year. By the end of July, we'll have 2 new format stores open, a new store and one remodel of an existing store. Walking a virtual three d rendition of the new store, consumers overwhelmingly gave positive marks on the low profile and overall feel, while also rating the store better than the current store experience. As a reminder, this new format will have a smaller footprint, But more selling space per square foot costs 20% less to build, and we expect to have similar sales to our boxes today, quarter, resulting in expected higher returns. One last topic. Last week, we issued our 2020 environmental, social and governance report that highlights the tremendous work our team has accomplished during the year, bringing positive change to our nation's health, which goes well beyond the food we sell. From our response to the COVID-nineteen pandemic, to our efforts to reduce our environmental footprint and improve the well-being of our many stakeholders. We've made great progress on our journey to improving our sustainability program. We've done great work reducing our climate impact by decreasing our normalized carbon emission on a square foot basis, aided by our strategy to switch to digital marketing from print. Our team's focus on waste production has reached a new milestone at almost 60% landfill diversion rate rooted in our drive to increase food security for our communities, Food and Aging the Equivalence of 23,000,000 meals to local food banks. Developing the next generation of leaders To grow with Sprouts is of great importance to me and the future of Sprouts. In 2020, we promoted 7,200 team members, half of whom were ethnically diverse team members, and we filled 72% of store manager positions with internal candidates. Ensuring at Sprouts you can create a career, not just a job. I encourage you to review all the details in the ESG report, which will give you good insight to the work we are doing. I'm very convinced we can do good by doing good for our customers and for all our stakeholders. Before I hand it off to Denise, I want to acknowledge the incredible work the teams at the stores, DCs and in the support continue to do week after week. They're driving customer engagement and sales, supported by their depth of knowledge in the natural and organic space. As you've heard me say before, we're only in the early innings of our strategic changes with many improvements still to come. And yet one constant remains through the changes we have all gone through. People want healthy foods now more than ever, which is at Sprouts at Sprouts is all we do. Quarter. Now let me hand off to Denise to discuss our financials in more detail as well as our 2021 outlook. Denise? Thanks, Jack, and good afternoon, everyone. For the Q1, net sales decreased 4% to $1,600,000,000 and comparable store sales were down 9.4% compared to the same period last year. Our year over year comparison is not a straightforward indication of growth. We believe it's important to focus our performance on a 2 year basis. To that end, our net sales were up 11% compared to the Q1 of 2019, and our 2 year comp stack was up 2.2%. After posting positive comps to start the quarter, as expected, Same store sales turned negative as we began to cycle the 2020 COVID impact and reopening progressed. Importantly, towards the end of Q1 and into the current quarter, we have seen a return to positive traffic. Due to our ongoing strategic changes, Even with some sales deleverage and record high e commerce sales penetration, profitability remained strong with an adjusted EBIT margin of 7.2%, Trending well ahead of our 5.7% margin in the Q1 of 2019. As Jack mentioned, Innovation continued to help drive sales across many categories with deli and bakery notable winners. Offsetting this, we saw some sales pressure in vitamins due to a non existent cold and flu season. E commerce sales continued to remain strong with sales up 2 21% compared to last year. For the quarter, e commerce was 12.5 percent of sales, reflecting a notable increase in January as the country experienced a spike in COVID cases, settling back down to our Q4 2020 levels by March. Clearly, the work done last year to create a full omnichannel experience by expanding pickup at every store and the addition of shop. Sprouts.com continues to resonate with our customers. For the Q1, gross profit was $586,000,000 and our gross margin was 37.2%, from our ongoing shrink initiatives drove improvement. As a reminder, the Q1 included the annualization of the promotional changes we implemented in late Q1 early Q2 last year. SG and A costs increased $3,000,000 to $440,000,000 or 27.9 percent of sales, deleveraging 141 basis points compared to the same period last year. The majority of this deleverage was attributed to sales deleverage from cycling the onset of COVID last year and increased e commerce fees due to higher omni channel sales as more customers have continued to rely on home delivery and curbside pickup. As well, SG and A was impacted by additional COVID costs related to sick time and hero pay, more than offset by lower bonus payouts versus last year. For the quarter, our adjusted earnings before interest and taxes were $113,000,000 an increase of 41% when compared to the Q1 of 2019, a significant positive step change in performance that we will continue to build upon. Our interest expense was $3,000,000 and our effective tax rate was tax rate was 25%. 1st quarter diluted and adjusted diluted earnings per share were 0 point 7 $0 up 52% from the Q1 of 2019. We continue to generate strong cash flow from operations, dollars 105,000,000 in the 1st quarter to fund future expansion and sales initiatives. For the quarter, cash was impacted by higher bonus payout for the strong 2020 performance and an increase of inventory in preparation of opening the Colorado DC. In the quarter, we invested $9,000,000 in capital expenditures, net of landlord reimbursement, primarily for new stores. Additionally, following the Board's approval of a share repurchase authorization in mid March, we restarted our share buyback program, purchasing approximately $3,000,000 in stock by the end of the Q1. We continued share buybacks in the 2nd quarter and year to date through May 3, 2021, we've repurchased $5,000,000 in stock under the current authorization. We ended the quarter with $250,000,000 outstanding on a revolver, dollars 39,000,000 of outstanding letters of credit, $256,000,000 in cash and cash equivalents and $297,000,000 available under our current $300,000,000 share repurchase authorization. Reflecting the strong balance sheet, we continue to maintain a low debt position, ending the quarter with a net debt to EBITDA ratio of nearly 0 at 0.01x. Now let me provide an update on our 2021 outlook. Quarter. The impact that the pandemic will have on the U. S. Economy, food at home demand and consumer habits is still in flux. And in turn, we continue to manage the business under a number of quarter. As a reminder, I'm giving these comparisons on a 52 week to 52 week basis as fiscal 2020 was a 53 week year. We continue to expect net sales to be flat to up slightly versus 2020, driven by unit growth of approximately 20 new stores, which will open in the back half of the year and Comparable Store Sales Down Low TO MID Single Digits. As stated before, underpinning our assumptions are negative comps in the first and second quarter as we lap the height of COVID with an improving 2 year comp sales stack each quarter. Capital expenditures, net of landlord reimbursement, are expected to be in the range of $140,000,000 to $160,000,000 We now expect our corporate tax rate to be approximately 25%. Due to slightly better performance in SG and A than expected in the Q1, We are increasing our adjusted EBIT expectation by $10,000,000 to be in the range of $305,000,000 to $325,000,000 and increasing to maintain a majority of the gross margin rate improvement we realized in 2020, with the Q1 experiencing outsized benefit and the remaining 3 quarters being pressured as we cycle some COVID benefits from shrink and buying opportunities we don't expect to repeat. We see several puts and takes for SG and A margin for the year, which reduced expenses from bonus normalizing, mostly offset by annualized COVID related costs as well as increased health care costs and sales deleverage. We have started 2021 on a good footing with a strong balance sheet, and I'm confident that strategic changes we began last year structurally changed our financial algorithm for the long term. At this time, we're happy to take your questions. Our first question comes from the line of Mark Carden with UBS. Your line is open. Great. Good afternoon. Thanks a lot for taking the questions. So on the comp, you were up 2.2% on a tier stack in a period where there were still some COVID restrictions in place. Now I know you guys don't sell as much as some of your competitors in the way of popular CPG products, but are there any other factors that we should be aware of on the top line that may have held you back? Was it mainly vitamin driven? Are customers still consolidating trips to larger stores? Are they still adjusting to your new strategy? Any color here would be great. Thanks. Well, you kind of answered the question there, Mark, and the things that you mentioned specifically to the Q1. As we look, clearly, there's an overlap. Jan, Feb was a different overlap to March's overlap. But one of the things that would probably have been a factor that we didn't quite take into account was the vitamin growth that we would have expected from a cold and flu season in January and that's something that probably didn't happen to the extent because everyone I'm asking when nobody had the flu. So that certainly made some impact on that in the early stages of the quarter. And the reopening program and what's happened With regard to restaurants opening and not opening had some impact on us in the meat space and probably in the alcohol space as well a little bit, and that's something that certainly had an impact. And as we've said all along in this dialogue around What's been happening over the through the pandemic is probably as people have reduced the number of places they go to do their food shopping That we didn't benefit from some of the growth that happened previously and that's certainly something that continues. And it's beginning we think to kind of mitigate itself as we play through the year. We're certainly seeing some encouraging signs on Our target customers with the intention that they're telling us that they're going to be more comfortable about Going out and shopping in more places. And that's something that gives us a little bit of encouragement going forward. I think that's Pretty clear our healthy enthusiast target customers were probably more concerned about the pandemic and the implications for their health than maybe the average customer. And I think in some ways, I think that's why our e commerce business is quite strong. And I think People that are more comfortable at going out, we're thinking there's some encouragement going forward in the data that we're seeing. Great. That's helpful. And then we're hearing more about rising inflation in food. And I know Sprouts has historically had a bit of a different profile on this front. But how are you thinking about inflation over the course of the next few months? And does your new promotional strategy really change your thought process with respect to passing through Any higher costs? Thanks. Certainly, what we're seeing as you know, our mix of business is different. And the and looking at the Q1, our produce It was actually deflationary, not inflationary in the Q1 a little bit, but not hugely, but a little bit. And that's something that means that our mix going forward, we're actually anticipating the produce going forward because there's going to be pretty good yields and pretty strong opportunities for us to take advantage of price in the marketplace. So we're not as worried about inflation in our fresh produce business, probably a little bit more worried about inflation, if worried is the right word, but a little bit more conscious of inflation in the meat space and 1 or 2 of the other parts of the grocery business And we're watching that closely. Transportation is clearly putting some pressure on the supply chain of our vendor base, and we're watching that closely. By and large, we're feeling pretty confident given that we sell a pretty differentiated range of products that as Inflation plays and cost inflation plays into our business. We're feeling pretty confident that we can pass it on appropriately. If it gets too big then we'll to watch and have dialogue with our vendor base on it. But from what we're hearing so far and what's in front of us, we're feeling that we can pass it on and not have the kind of huge worry about what may happen going forward. Got it. Thanks so much. Thanks. Our next question comes from the line of Scott Mushkin with R5 Capital. Hey, guys. Thanks for taking my question. So first one is a little bit along the same lines as the last one, but I want to broaden out a little bit comps. The big thing that we hear from clients is like, hey, Sprouts is a good business, but let's face it, they just can't comp like They should and the gross margin gains that they're seeing are not sustainable that they're going to have to come in and lower pricing and and some of these earnings really is a little bit of a mirage, that's why trade so cheaply the equity. What do you guys say to that? What's your rebuttal to that line of thinking. Well, I think we Scott, we've been pretty so far, we've had Very consistent record of delivering on that. So the sustainability so far quarter after quarter after quarter, We're feeling confident about that. We're certainly aware of why where the margins have come from and partly it's about the promotional unraveling of our very aggressive high low promotional and actually negative profitability promotional. We're not going to bring those back, so I can kind of guarantee that, that mix that was driving a lot of the margin issues in the business has gone away and sustainably gone away. We know we can improve continue to improve our shrink. We're seeing that in our business week after week after week. So we're feeling very confident about the sustainability of that. And the fact that we're selling such differentiated product allows us to manage our EDLP pricing as long as those products that we're selling are different. We're able to price it based on elasticity. And as long as that plays through and works out, and I'm pleased with some of the work we've been doing The pricing team and the pricing systems we've been bringing in is allowing us to give us a lot of confidence that there's sustainability in the gross margin and the sustainability in our operating margin. And think about the other things that we're doing, the distribution costs should be coming down as we drive less miles to the stores. The operating ratios in our business should be kept on down. Those are some labor pressures. The operating ratios were a fairly immature young business. So the things that we're working on in terms of inventory management, operating the stores, self checkout at the registers. So there's some sustainable operating improvements that we That will drive help us drive bottom line. We've got sustainable logistics improvements that can help to drive bottom line And we're pretty confident that when we know the promotions aren't coming back in any aggressive way on high low promotions or aggressive below cost promotions. So you put that together, I'm certainly very if I'm confident about anything, I'm confident about the fact that our margin growth is sustainable. And I think one piece I'd add on the customer front is we have been making a pivot with our strategy and we knew that there would be some folks It might be more of a coupon clipper profile that wouldn't be the ones that would stick with us and the intent was to gain a lot more of our target customer going forward. And I think it's interesting that we've given a couple of pieces of research that we've done that are pointing things in the right direction with some green shoots and that, that is all starting to And I'd say, first, we actually did research directly and people have told us that where they had reduced their shopping trips to Sprouts before because of the pandemic, that the majority of them have intent to return as the pandemic subsides. And we said that's great, but what's even better is that as we come into April, we're starting to see this prove out a bit. So we ended the quarter with the highest customer counts we've seen since the start of the pandemic. So a nice positive direction and more customers starting to come into the store. We're also seeing that customer count in particular with the reactivated and re acquired customers. So the same ones who told us they had stopped shopping with us because of the pandemic, we're starting to see those numbers trend up a bit. And then with the positive return to traffic, I think everybody was wondering, well, what will happen to basket? And we've been very pleased to see that while traffic has turned positive at the end of the quarter and into Q2. We're actually holding our basket pretty much in line with where we were coming through last year rather than there being a trade off between that basket and traffic number. So some positive indications there that the pivot and the strategy that we're making it's starting to resonate and hopefully we'll be able to see that with a bit more clarity as some of the COVID haze subsides. So that's really good color guys. And I just had one follow-up question. I mean, obviously, your balance sheet is really good. Not really any debt on it. You're producing good free cash flow, and the store crank up doesn't really come to next year. Why not get more aggressive and just buy back a chunk of stock and say, hey, it's cheap, it's our best investment right now. I know you have a buyback, but it seems like you could do a lot more if you wanted. Yes. I think we're really pleased that we have the authorization out there and we do intend to utilize that authorization. I think we would all agree that We think that the stock has a lot of positives that it can run-in the future years and we'd like to get in on that I think what really happened in the Q1 for us is that authorization got put in place fairly late in the quarter and we were trading under 10b5-1 plan. So you didn't see quite as much come through as we could have done, but we have all intent to be utilizing the authorization as the weeks months here evolve. Perfect. Thanks guys. Thanks. Thank you. Our next question comes from the line of Ruvish Parikh with Oppenheimer. Your line is open. Good afternoon. Thanks for taking my question. So I guess Denise, just following up with your commentary on the, I guess, improving traffic lately. Is there a way to give more color on maybe the quarter to date contents or just any way to so we can better understand the types of trends you guys are seeing in April? Yes, I don't think we're going to call out any numbers because as we know week by week, there's a lot of volatility in what we're seeing. Yes, but I think there's some positives specifically related to the target customer that we'd reiterate. So I think with our target customer in specific, They have a larger basket and their basket has continued to increase more kind of post pandemic than that non target customer, suggesting innovation and other things in time as well. So reasons to believe, particularly with those target customers, that the positive traffic turn and holding the basket is something that we will continue to see. Okay, great. Maybe just one follow-up question on the SG and A line. I think last call you mentioned that you expected SG and A dollars, I believe to be roughly flat for the year. What's the right way to think about it now? Yes. We generally actually We expect SG and A rate to be directionally flat for the year. And so that might be a little bit different and what you were hearing. But what we believe is we're going to continue to see benefit as we have bonus that's going to roll off and and be a tailwind for us with in turn some additional expense as we continue to manage hero pay, healthcare expenses and then just some general sales deleverage. But the 2 of those every quarter won't necessarily be flat, but we'd expect year will be approximately flat. Great. Thank you. I'll pass it along. Thank you. Our next question comes from the line of Ken Goldman with JPMorgan. Your line is open. Hi, it's Tom Palmer on for Ken. Thanks for the question. First, just wanted to ask on the e commerce side. Looks like penetration rates for you were still climbing. Do you expect this to continue as the year progresses just because more stores offering services and the improved app. Or do you think we've reached a peak and as we kind of reach reopening, That starts to ease a bit. And then alongside that, how has fulfillment been? Have you been figuring out ways to make it more kind of reduce the SG and A burden that it has put on your stores? Yes. I'll let Denise talk a little bit about The cost side of this in terms of the demand side of it, Tom, we're feeling that we probably have reached a peak on this. As I said a little bit earlier, I think a lot of We've probably one of the fastest growing e commerce businesses in grocery over the course of the last year or so, And that has probably been driven by the sensitivity of our customers to going out. And they want access to this product, but they've had to use it. They've had to use it through our e commerce vehicles. And we expanded our pickup, which made a big difference to We were only in 55 stores for pickup, and we expanded that to all 360 stores, as we've talked about in previous calls. So that's been a driver to our mix and a driver to the fact that we're growing faster than most in this space. As this settles down, as people are more comfortable getting out, as the mask mandates change, as vaccination rolls out. We're expecting it to settle down. It wouldn't settle all the way back down to 3.5% where we were when I came in. I think it will settle back down, if I was guessing, somewhere around 8%, 10% of our business rather than significantly anywhere near where we're at, at the moment. And in terms of how we're specifically figuring out ways to try and minimize. Remember, it's all profitable for us. We're pretty pleased by the fact that it makes us all money. We lose the margin mix isn't quite as strong, As you know, so and we're doing some specific things to try and minimize the cost of that. We're handling all of the pickup at our store through our own labor, which She's making a difference to that in terms of both the speed and efficiency of that and the cost of it. And we'll continue to look at that. I don't know if you want to expand on that a little bit, Denise? Yes. And Jack, I think you covered a lot of the points. I think the point we reemphasize is even with that penetration at 12.5% in the Q1, we delivered A strong operating margin up substantially from where we were 2 years ago where penetration was next to nothing. And I think the other part that I'd mentioned as well is we continue to invest behind our owned channel, our shop. Sprouts.com channel. And then the white label penetration for lack of a better way to put it is now up to about 17% of our total e commerce sales. So as we're bringing those customers in a little closer to us, we have an opportunity to have more customer data, have a more direct relationship with those customers And to monetize that a little bit more than what we can simply do when we'd be selling through a marketplace. So we just reinforce the fact that For us, it is a profitable business and we have absorbed the costs in our P and L to date at a relatively high level of penetration. So everything here and working forward, as Jack said, is efficiencies of picking ourselves in our stores. We'll only be able to build on that as we go forward and improve that profitability more. Thanks for all the color there. I wanted to ask just on the promotional environment. Obviously, the large pullback in promotional activity has really driven stronger margins over the past year and a half now. Is there a point where it makes sense to get more promotional as a way to drive traffic trends higher, Not back to prior levels, but just higher than we've seen over the past few quarters. And at what point does that make sense, I guess? Yes, I think it's a good question, Tom, as we continue to experiment with different ways to attract our target customers. Our marketing activity and our promotion activity is very much geared to how do we communicate directly with our target customer. And we've been learning that. Remember, traffic and transactions have been distorted pretty dramatically over the course of the last year or so. And as we work our way through different techniques that we can use, certainly, product and price won't be the driver that's going to attract the customers that we are trying to attract. It's more likely to be techniques that build loyalty amongst our target customer base. And we're getting increasingly we've done a lot of what we call and test and learn through Q1, Which we've learned some different techniques, some of which have worked and some of which haven't worked. And we're working our way through different techniques as to how we can drive that business, but very focused on target customers as opposed to doing broad brush product and price promotions, because what we want to have is a really good value in our produce business, communicate that really strongly, communicate the benefits So we talked about in terms of our attribute based products and drive people into the stores on the back of that. And remember, our awareness is low And the fact that awareness is low gives us a lot of comfort that if we really communicate the proposition effectively using the techniques that we're using. And we might have to spend a little bit more on marketing as opposed to on promotions going forward. But as I say, we're going through a test and learn phase, and we'll figure out the right way to handle it over the course of the next few quarters. Great. Thank you. Thank you. Our next question comes from the line of Karen Short with Barclays. Your line is open. Hi, good evening. This is actually Renato Bussanza on for Karen. Thanks for taking our questions. So my first question is sort of bigger picture and maybe a follow-up to Scott's question earlier. But right now, obviously, you have a lot of initiatives that are helping drive profitability and those are certainly showing up in the numbers and are commendable. But one could argue that at some point those start to dry up. So my question is, how do you think about prioritizing Profitability Initiatives versus Sales Growth because I think at some point you're going to have to get that top line really going again to reach your longer term objectives. Well, the longer term objectives in our business are fundamentally the growth plan that we've got in terms of new stores is going to give so much more access for our health enthusiast and innovation seeker customers to get access to the Sprouts proposition, which will is already pretty unique, and we're going to make it even more unique so that the specificity day of why you come to Sprouts and who you are as a target customer is the focus of all our work, whether it be merchandising work, real day work, marketing work. We're focusing all on our target customers. We know from all the data that we've done that there's plenty of people there Who aren't spending the dollars that we'd like them to spend with us, partly because of awareness and partly as we work better to communicate effectively with those target customers. And it's very true in markets where we're not known. If you go to Florida or Texas or Baltimore, where I was last week. You've got very different dynamics going on there as opposed to San Diego or Denver, where we've already got a pretty strong presence. So the focus of what the premise of the question is that we have to invest margin to get top line. We're not in that space. We're in the space of our proposition and the algorithm that Denise outlined in the remarks earlier. We've got an algorithm that Gives us a strong underlying profitability. We've got customers out there that look like the customers that we want to attract And it's up to us to do that effectively through communication, not through investing tons of money and margin. That's The reality of it and we've got some immaturity in our operating base that gives us even more comfort that going forward, we can sustain the margins while attracting more of our target customers. Okay. That's helpful. And then just a question on the comp guidance. So a bit of a slowdown from a 2 year stat perspective in terms of comp for 1Q. And I presume some of that's due to California dining restrictions being lifted and maybe some of the I think you called out, but just wondering if you can provide some color on how you're thinking about that reacceleration in stat trends for the rest of the year. Certainly, you should benefit from less trip consolidation as you talked about as things start to normalize. But that also means there's likely more of a shift to food away from home from food at home. So just any help reconciling those two things would be appreciated. Thank you. Yes. And they're all things that we're looking at. I'll let Denise expand on this. So it's all things that we look at going forward. But we've said fairly consistently that Q1, Q2 Was always going to be a lead not just for us, but for the whole industry in terms of how that plays through. And on a 2 year stack basis, We're expecting a lot of our initiatives to gradually and just see an improvement in Q3, Q4 on a 2 year stack basis as we start to kind of normalize the comparisons. And as you said, we didn't get as big an upside last year, so we shouldn't get as big a We should be able to see our Q3, Q4 2 year stack just improve naturally as part of the underlying business that we have. And as I said, we're very excited about the marketing activity that we've put in place, the test and learn that we've done. That work will start to play paid dividends for us in Q3, Q4. And I think the only other point that I would add is don't forget the fact that We will continue to have new innovation coming into our stores, building off of all the category management work that we worked on through the Q4 last year and Takes a little time to then get that into our stores and we will also have we already have one of our new GCs open as of the end of the Q1 and we'll have a second GC opening now here in the Q2, both of which are going to bring fresher, more local products into Florida, into Colorado, important core markets for us where we really believe that that's going to resonate with customers as well. And so all these strategy points coming together or where we see the momentum coming from as we turn from the first half of the year, which certainly has its unusual overlaps into the second half of the year where we can really have These things shine for our customers. Great. Thanks for the color. Thank you. Our next question comes from the line of Chuck Cerankosky with Northcoast Research. Your line is open. Good afternoon, everyone. Could you talk to us, Jack, about the sort of regional trends in sales without being overly specific as Different states and even different counties have reopened in varying ways in which you're seeing in the stores and especially things we might not expect. Well, let me California is clearly important to us. And we saw in December a little bit of a boost in our California business as it closed down went down and then in January it went the other way. So California has clearly seen them. That's beginning to settle down. As we look We're seeing more consistency across the country in the last few weeks than we had seen previously. I think as you just Gradually people feeling more confident about getting out and moving around. I think the vaccination program and again I think our customers are more likely to get than the average and more likely to be comfortable at coming out. We're seeing that kind of consistency As we kind of talked about, our basket is holding quite well and that would be true across the country just to make We're not seeing the differences that we probably saw last year and certainly in Q4 that we started to see now. So I don't know if that helps really, but I think we're seeing more consistency than differentiation over the course of the last few weeks. Anything in the product mix that you would point out as Yes. I think as I said a little bit earlier, as restaurants reopen, When you open, you see a change in the meat business a little bit. That slows down a bit. The alcohol, which went absolutely crazy for reasons last year, That's beginning to slow down a little bit relative to where we would have expected, maybe would have expected it to have been. But by and large, it's generally to do with restaurants. Funnily enough, we're seeing some pretty interesting things happening in vitamins, although the cold and flu season went down in January. As we start to navigate through April May, you're starting to see people, I think, migrating back to things that are very health focused. And so there's a little bit of an interesting trends happening in that space to the positive for us that we're intrigued by. And so is that kind of maybe vitamins would be the big I don't know if there's anything else, Denise, that we keep commenting on? No. I think you All right. Thank you very much. Thanks. Thank you. Our next question comes from the line of Kelly Buneal with BMO Capital. Your line is open. Hi, thanks for taking our questions. First, I just wanted to follow-up on The comment about traffic in March April and great to hear that it turned positive. Just was curious if you could help us understand a little more context about what that looked like last year and what you were maybe comparing up against? And is that comment just about in store traffic or is that total transactions? And then I have another follow-up. Yes. And so let me put in first in context Last year. So last year, if we all remember, really all of March and particularly early in March, but continuing March into April, What we saw was a dramatic reduction in the number of times people were coming into the stores and very large baskets. So people coming in and buying whatever they could get, wherever they could get it. As we all knew, there were silly things like shortages of yeast or pepperoni or cheese that people would go and look for it wherever they could find it. So, last year, we definitely saw a notable downtick in traffic, but a correspondingly big growth in basket. As we work through the year, our traffic trends got a little bit better, but they stayed negative through the year. And basket fell off a little as we would expect after that big stock up, but also going to stabilize Q3 into Q4. When we turned into Q1, those same trends really existed in January February, which were all pre COVID last year. So that made a great deal of sense. I think we saw the same volatility that others would see in the early part of March where this was lapping the height of things from last year and that would be where we just fundamentally all were readjusting to our businesses. What we saw as we got to the very end of March and into April was the recovery of traffic. So on a 2 year stack, It is it's not a net positive yet, but it is headed in the right direction. But I think the most encouraging part to us is not only is that number headed in the right direction, But the basket really helped and that tells us that things are resonating about what people are putting into their carts and what they've come to adopt in shopping at Sprouts. So hopefully that's just a bit of color that helps. Yes. Thank you. Thank you, Denise. That's really helpful. And just also kind of along the same lines, you talked about some customers, I guess, relaying to you that they have plans to come back to Sprouts post pandemic and maybe you're starting to see that a little bit. But can you quantify what percent of your customer base you think that is and what maybe is embedded in your guidance with regards to that customer coming back? Do you expect that to be a certain percent of them coming back, is that expected to just improve as we move through the quarters? And do you know who you lost them to, in the meantime? Yes. I think in general, we do know who we lost them to. We lost them to the folks that were just consolidating SHOP, which could have been whatever they chose to consolidate to. So they could have consolidated, to Kroger, to an Albertsons, to a regional conventional, some even a bit into a target or that type of environment. And they told us loud and clear, they just reduced the number of places that they were going. So anywhere they could get a full shop is where we would have seen them consolidate a bit. In terms of the way we're planning, we haven't built the plan at the level of detail of this customer we lost, what percent of them do we think that we'll get back. I think what we're term are we lost? What percent of them do we think that we'll get back? I think what we're more reacting to is we do expect through the year that our customer accounts will continue to improve. We believe a good portion of that from what the customer has told us, but The majority of the folks who told us they had slowed down or stopped coming to us through the pandemic, who told us that they would return, We think that will be a good proportion of where we see those gains. And but we also have expectation that with the marketing campaigns and programs that we out there that we'll be able to continue to bring new customers in as that kind of fear of COVID, fear of shopping starts to subside and The resonance of the messaging of where goodness grows and what we stand for, we might be able to get a bit more reach out there to some folks who might not know about us as much today. Turning to those new customers, I think we built a lot of stores through that year, and it wasn't the time for people to experiment with new stores Trying new things out. So that's a big part of the marketing going forward. We think the stores that we did open over the course of the last year I've got a great opportunity to build once the pandemic kind of dies down a little bit. Thank you. Our next question comes from the line of Chris Jordan with Goldman Sachs. Hi, great quarter. I have something. A debt free grocery store with a history of strong profitability in a world with 0% interest rates Is a crime against capital structure theory in Modigliani and Miller. I'd like your perspective on your balance sheet. That's my only question. Good job. Good quarter. Thank you. It's a good question. I'm sorry, Denise. So in general, we are incredibly pleased you have a very strong balance sheet at this point in time. And clearly compared to prior history of the company, we currently have more cash on our balance sheet than we would planned than we would have had before or we would plan to have go forward. And we're going to be putting quite a bit of that cash on the balance sheet to use in when we think about building out new stores, The technology we've talked about, our second DC coming online, so we feel good about that. And then I think as we announced last quarter with our share repurchase authorization. You're going to see us investing in ourselves and buying back more of our stock go forward. But overall, I will take a flush with cash balance sheet for a period of time here and we will work our way back into all of that being great investment for the and what I would say a little bit about what we might do with that. As we look at our new format stores, of which we've got a couple happening in July, There'll be elements of that, that we want to try and put into our existing store base and we'll have to think through exactly the things that Particularly, I'm excited about the innovation centers and how we can make that really relevant and really effective in losses. So there's some things we can do with this going forward And Denise and I often talk about such issues. Thank you. Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Your line is open. Yes. Hi, good afternoon. Jack, I wanted to ask you, you've obviously made the argument that the company is running sort of like Lower profit or lower return promotions in the past. My question around this though is that the company wasn't really comping all that well for a number of years though and that doesn't really suggest that Sprouts was buying sales. It's probably more complicated than that, but what are we missing here if we're just sort of About it more simplistically like that. Well, you're kind of taking me back a little bit today kind of where we were 1.5 years ago. I think my own view as to what was happening was as the company was chasing top line, it was actually deflating top line at the same time. So buying an awful lot of empty volume and an awful lot of empty customers that not only where you where they attracting these what we call the coupon clippers and we've identified those people. When the coupon clippers were coming in, they were getting a deal. But everybody else was getting deal and not responding in terms of any volume. So yes, the combination of the kind of target customers that we've got at the moment Getting access to very low below profit net negative profitability items, whether it be in commodity chicken or sweet corn or the things that they were chasing after. So not only was it kind of it was giving people something for nothing and not generating volume and attracting customers who weren't spending anything and just losing money. So I think that's why the top line started to dissipate from that. You started to see it getting into very low numbers. So I think it was that downwards filer that grocers often get into where they chase it and actually you deflate it. I think that's what was happening. And we're trying to well, we have done. We've changed the kind of momentum of that, so that we're chasing after customers who kind of value what we've got. And we will promote with those customers, and there will be promotions that are accretive to us rather than negative to us. And then we'll take it kind of going forward. I think that's the reason that, that happened. And What you find is the business was becoming a convinced trying to become a conventional grocer by doing conventional grocery kind of things. And what we've tried to do is be really clear that we're a specialty grocer that we sell things that other people don't sell. We've got a very big proportion of business in fresh produce. We've got a big proportion of business in bulk. We've got a big proportion of business in vitamins. And in many ways, the commercial strategy of the business was missing the differentiation and chasing after conventional. And that's what we're in the middle of changing. And as we said earlier, we're in the early innings of this. But we're very clear that where we were going was probably deflating our business I'm not attracting customers who are going to give you long term profitability, if that makes sense, Dave. Yes, yes. And just I guess a follow-up to that. So as it's you've heard a lot on this call, I guess, right? Like, look, It's hard to imagine Sprouts getting the multiple that you probably think it deserves without this comp improving from from here. How are you thinking about the timeframe around when you would expect comps to reflect what you believe like the underlying fundamentals of this business are? And are we waiting for store growth to ramp up and any stores beginning to mature and then that building into the comp. I'm just kind of curious as to what the timeframe is that you think it's acceptable for comps to get to a more reasonable level. Well, we're focused on growth, not comp. That's the real kind of focus on our business. I think it's interesting, a lot of the grocery guys are hitting higher comps. If you look at the actual underlying growth of the business, it's significantly less than the comp number. We're exactly the opposite to that. So you're right. There'll be some maturity in the new stores that will drive some comp sales going forward. But our focus is very much on how do we grow our business, We've been pretty clear that we can grow our EBIT substantially into the I'm quoting certain numbers, but we've been pretty clear that our sales growth can be north of 10% and our EBITDA growth will be north of that. If we can consistently deliver that month after month, quarter after quarter. That's the direction we're moving in, in. And this business will move from a $6,500,000,000 business to north of $8,000,000,000 business over the course of the next few years and very substantial margin growth. So they're generating very significant EBITDA growth. That's the program we're on, Ed, and that's what we're driving. Okay. Thank you. Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Jack for closing remarks. Yes. Thanks very much, everybody. I appreciate the time. And I really appreciate your interest in our business, and I look forward to continuing the dialogue over the next few quarters. Take care, everyone. Thanks ever so much.