Sprouts Farmers Market recently reported results for the 13-week first quarter ended March 29, an update on second quarter results and outlined its strategy for profitable long-term growth.
First Quarter Highlights:
Net sales of $1.6 billion; a 16 percent increase from the same period in 2019
Comparable store sales growth of 10.6 percent and 2-year comparable store sales growth of 12 percent
Net income of $92 million; compared to net income of $56 million from the same period in 2019
Adjusted net income of $93 million; compared to $57 million from the same period in 2019
Diluted earnings per share of $0.78 and adjusted diluted earnings per share of $0.79; compared to $0.46 diluted and adjusted diluted earnings per share from the same period in 2019
Positive impact from COVID-19 pandemic was estimated to be $0.22 of diluted earnings per share
“I am inspired by our hard-working and profoundly dedicated 32,000 team members who have served under the most difficult of circumstances to ensure our customers have healthy food to feed their families,” said Jack Sinclair, CEO of Sprouts Farmers Market. “During the first quarter, the COVID-19 crisis led to a significant increase in sales as consumers bought more food to consume at home. As we navigate these ever-changing circumstances, we remain steadfast and decisive, prioritizing team member and customer safety and remaining in-stock on fresh, healthy food for our communities, all the while not losing sight of our transformational strategy that will set us up for long-term success.”
First Quarter 2020 Financial Results
Net sales for the first quarter of 2020 were $1.6 billion, a 16 percent increase compared to the same period in 2019. Net sales growth was driven by a 10.6 percent increase in comparable store sales and solid performance in new stores opened. Due to the impact of the COVID-19 pandemic, demand increased dramatically during the latter part of the quarter. As a result, net sales were positively impacted by an estimated $146 million and comparable store sales by an estimated 9.6 percent.
Gross profit for the quarter increased 23 percent to $594 million, resulting in a gross profit margin of 36.1 percent, an increase of 180 basis points compared to the same period in 2019. The positive leverage was driven by more balanced promotions during the first two months of the quarter, in addition to sales mix and shrink benefits during March due to customer stockpiling.
Selling, general and administrative expenses for the quarter increased 16 percent to $436 million, or 26.5 percent of sales, flat compared to the same period in 2019. SG&A included a pre-tax special item charge of $1.2 million for professional fees related to our ongoing strategic initiatives. Leverage from increased sales related to the COVID-19 pandemic was largely offset by increased bonuses paid to team members as they serve the communities during this crisis, incremental ecommerce fees as more customers adopt digital solutions, as well as continued pressure from higher health care, labor and occupancy costs.
Depreciation and amortization for the quarter increased 5 percent to $31 million, or 1.9 percent of sales, a decrease of 20 basis points compared to the same period in 2019.
Store closure costs and other credits for the quarter were a credit of $1 million compared to a cost of $0.5 million in the same period of 2019 related to a true-up of a previous store closure charge.
Net income for the quarter was $92 million and diluted earnings per share was $0.78, compared with $56 million and $0.46, respectively, in 2019. Excluding the impact of special items, adjusted net income was $93 million and adjusted diluted EPS was $0.79; an increase of 72 percent, including an estimated $0.22 benefit from the COVID-19 impact.
Unit Growth and Development
During the first quarter of 2020, Sprouts opened four new stores, resulting in a total of 344 stores in 23 states.
Leverage and Liquidity
Sprouts generated cash from operations of $277 million in the first quarter of 2020 and invested $17 million in capital expenditures net of landlord reimbursement, primarily for new stores. Sprouts ended the quarter with a $451 million balance on its revolving credit facility, $34 million of letters of credit outstanding under the facility and $247 million in cash and cash equivalents.
Update on Current Performance and 2020 Outlook
“We have been closely monitoring our results and certain trends we saw in the later part of the first quarter have continued into April. Elevated levels of grocery spend have continued as many consumers have increased their food at home spend. Social distancing has changed consumer behavior from customers consolidating trips and increasing use of ecommerce services. For the month of April, our comparable store sales increased 7.2 percent, compared to the same period last year notwithstanding the closure of all our stores on Easter Sunday and ecommerce sales represented 13 percent of our net sales. While these increased sales, as well as our strategic initiatives around smarter promotions remain a benefit to operating margin, the timing of significant investments to enhance team members pay and benefits and to implement additional safety and cleansing measures will weigh heavier in the second quarter compared to the first quarter. Because of this, we do not believe we will sustain the same level of operating margin expansion experienced in the first quarter,” the company said in a statement.
“The COVID-19 crisis has created a lack of visibility for the remainder of 2020 with many unknowns,” said Denise Paulonis, chief financial officer of Sprouts Farmers Market. “While April sales trended higher than average, we are making significant investments in pay, benefits and safety measures, as the health of our team members and customers is our number one priority. We remain uncertain as to when consumer behavior will return to normal or what may emerge as the ‘new normal’. This environment is making it difficult to predict specific outcomes, and accordingly we are not reaffirming or stating a new outlook range, however, we currently expect that we will be able to meet or exceed our previous annual outlook.”
Sprouts has identified initial steps of a long-term growth strategy, which focuses on the following areas that we believe will transform the company and drive profitable growth:
Win with target customers
Sprouts plans to refocus attention on its target customers, where there is ample opportunity to gain share within these customer segments. The business can grow by leveraging existing strengths in a unique assortment of better-for-you, quality products and by expanding ecommerce capabilities to allow customers easy access to differentiated products through delivery or pickup.
Update format and expand in select markets
Future plans will deliver unique smaller stores with expectations of stronger returns, while maintaining the approachable, fresh-focused farmer’s market heritage Sprouts is known for. Sprouts’ geographic store expansion and new store placement will intersect where target customers live, in markets with growth potential and supply chain support, providing a long runway of at least 10 percent annual unit growth.
For more information the company’s growth and strategy, visit the official statement.