Dive Brief:

• Sprouts exceeded earnings expectations in Q1, reporting net sales of $1.4 billion, a 10% increase compared to the same period in 2018. The growth was driven by a 1.4% increase in comparable store sales and strong performance in new stores opened, the company said in a press release.
• During the company’s earnings presentation, interim co-CEO Brad Lukow said grocery delivery sales were up more than 60% year-over-year for the quarter ending March 31, with delivery now available in every market where Sprouts operates. With a continued shift of consumers purchasing both in-store and online, Sprouts is focused on engaging with shoppers where and how they want to connect, Lukow said.
• With results better than expected for the first quarter, Sprouts has revised its low-end earnings-per-share guidance for 2019 to 18 cents, up from 16 cents. The top end guidance of $1.24 per share will remain the same.

Dive Insight:

Sprouts’ stock rallied on news of earnings per share beating analyst estimates. With revenue in line with analyst expectations, the company is on track to achieve 2019 financial targets, according to the press release.

Delivery is a key growth driver for Sprouts. Lukow said Sprouts has seen a continued increase in average weekly sales on home delivery, and expects that by the end of the year, delivery sales will account for about 1.75 to 2% of total sales. Basket size for home delivery is significantly larger than in-store, and the margin mix is much stronger relative to the mix of products that are being ordered online, Lukow said.

“We’ve had tremendous success rolling out home delivery now across all of our markets. It was really only late in the last quarter that we rolled out into the southeast. We’re seeing pretty significant customer adoption,” Lukow said, noting that Sprouts’ brand and focus on fresh is resonating with customers.  

Sprouts opened eight new stores in Q1, bringing the total to 321 stores in 19 states. The company will enter two new states, Louisiana and New Jersey, in June, and is on target to open 28 new stores this year. Eight stores are planned in Q2 and a majority of the remaining stores will open in Q3, Lukow said.

New prototype stores are performing strongly in new and existing markets, driven by enhanced customer experience in deli, meat and seafood, Lukow said on the call. Sprouts currently has six of these new stores, and two more new stores will be built in the new format this year. Beginning next year, every new store that Sprouts opens will follow the new format.  

The emphasis on deli is paying off, with the category proving to be a top sales performer for Sprouts in Q1. Lukow said that incremental sales in meat and seafood, deli and bakery are exceeding expectations, and while produce is an important traffic driver, increasingly customers are seeing Sprouts as a full-shop, healthy grocery store.

“There are a number of factors that are giving us a lot of confidence ... we’re not just a specialty grocer, this is really about a natural, organic, fresh full grocery shop,” Lukow said.

With interim and co-CEO Jim Nielsen on temporary medical leave, Sprouts will continue to execute on its priorities without disruption, Lukow said. Although the company has not yet identified a new CEO following the departure of Amin Maredia at the end of last year, the board is highly engaged in the search, and Lukow said Sprouts will hopefully have an update soon.

Gross profit for the quarter increased 9% to $484 million, resulting in a gross profit margin of 34.3%, a decrease of 30 basis points compared to the same period in 2018, primarily driven by cost inflation that was not fully reflected in retail pricing due to the competitive landscape, as well as changes in product mix.

Net income for Q1 was $56 million and diluted earnings per share was $0.46, compared with $67 million and $0.50, respectively, in 2018.