Dive Brief:

• Sprouts Farmers Market reported a same-store sales increase of 2.7% for the first financial quarter ended April 1, according to a news release. This marks a slowdown for the company, which previously reported two straight quarters of 4.6% comps increases. Sprouts stated that slight deflation, produce supply challenges and a calendar shift that excluded the New Year’s holiday from results all contributed to the decline.
• Net sales were $1.3 billion, up 14% from the same period one year ago, while net income was $67 million, up 44% from last year’s Q1.
• Sprouts adjusted its full-year outlook, projecting comp sales growth of 1.5% to 2.5% compared to previous guidance of 2.5% to 3.5%. Net sales projections, meanwhile, fell to 10.5% to 11.5% compared to 11.5% to 12.5% previously.

Dive Insight:

Sprouts expected same-store sales to moderate this quarter, and the 2.7% increase falls within the parameters outlined during its previous earnings report. But the lower full-year guidance indicates pressure is mounting as the specialty retailer’s nationwide expansion rolls along.

The Phoenix-based chain continues to expand into new markets. In March, it moved into the very competitive Mid-Atlantic region with a Maryland store opening. The company recently announced plans to open stores in Pennsylvania and Washington this year, extending its footprint to 19 states, and continues to grow in cities across the Southwest, West Coast and Southeastern U.S.

Sprouts currently operates close to 300 stores and plans to build around 30 stores per year for the foreseeable future. Executives have said they see the company eventually having 1,200 locations.

Sprouts’ small size and focus on discount groceries and perishables are unique, but it will have an increasingly tough time standing out from the competition in crowded markets as e-commerce challenges mount from the likes of Amazon, Kroger and Walmart. In Florida, it’s squaring off against a very strong Publix chain, along with other specialty players like Lucky’s Market and Earth Fare.

Investors have been concerned about Sprouts’ prospects against Whole Foods and new owner Amazon, and that may only increase as the grocer continues to roll out same-day delivery through Amazon’s Prime Now service. Sprouts, which has utilized the same service for home delivery and reported strong sales and market expansion as a result, recently linked up with Instacart and is quickly expanding into new markets. The two companies recently announced delivery service in Denver, Sacramento and San Diego.

Sprouts is also targeting growth in prepared foods and private label, which nicely round out its offerings in produce and grocery. The chain is intent on disrupting traditional grocers, as proven by a recent report showing it’s pummeling Kroger on “fresh” pricing. But Amazon, discounters like Aldi and other specialty retailers remain its main competition. Sprouts will have to outmaneuver these companies — not just the Krogers and Albertsons of the industry — if it hopes to become the major retailer it aspires to be.