Dive Brief:
- Sprouts announced flat comp store sales growth at 0.1% for the second quarter of 2019, according to the company's earnings press release. Net sales were $1.4 billion, up 7% from the same period last year, driven by a strong performance in new stores opened. Sprouts opened six new stores in Q2, including its first locations in New Jersey and Louisiana.
- Net income for Q2 was $35 million, compared to $42 million in the second quarter of 2018 and diluted earnings per share were $0.30, compared to $0.32 last year. The drop is attributed to a new leasing accounting standard and a challenging sales environment.
- The natural grocer has adjusted its 2019 guidance based on Q2 results, with net sales expected to grow 7% to 8% for the full year with flat comps. Diluted earnings per share have been adjusted to $1.05 to $1.09.
Dive Insight:
Just weeks into his role, Sprouts' new CEO Jack Sinclair is facing his first challenge with disappointing second-quarter earnings, particularly due to comp store sales. During the grocer's earnings call, Sinclair and interim chief financial officer Chip Molloy expressed their commitment to moving forward and strengthening Sprouts' performance despite Q2 results.
"There is work to be done and we are not satisfied with recent results. We believe the hiring of Jack will reverse the trend and capture the opportunity in front of us," Molloy said on the call.
While Sinclair acknowledged he doesn't have all the answers today, he expressed confidence in the company's unique format and foundation and said that he sees tremendous opportunity to expand the brand across the U.S.
"We have a great foundation, but we have significant work to do. Leaning on my background on companies of scale, I know we have opportunities to evolve this business model to be even more efficient and effective," Sinclair said.
He noted Sprouts' bulk section, vitamin selection and competitive pricing as major strengths that the company can build on. Sinclair also looks to improve marketing and branding to better tell Sprouts' story to customers, especially since so many are showing interest in healthy eating.
E-commerce remains a growth point for Sprouts. While online sales remain relatively small overall, they grew by 170% during Q2, and the company also expanded its test of click-and-collect in the Phoenix market.
On the call, Molloy and Sinclair noted that they plan to reevaluate how Sprouts expands and opens new stores moving forward. While the company isn't likely to slow down its growth, Sinclair said it may take a more concentrated geographic approach and consider doing slightly smaller stores in the future.
Some of Sprouts' struggles, Molloy noted, are due to the company's attempt to expand and maintain store productivity simultaneously. Typically, companies focus either on growth and expansion or store productivity and driving operating margins. Sinclair also said that the way Sprouts opens stores stresses its supply chain, and the company will need to mature the process to make it more efficient while retaining customer excitement.
