Dive Brief:

• Sprouts Farmers Market plans to open at least 30 new locations next year and expand its store count at an even faster pace in 2024, executives said Wednesday during the specialty grocery chain’s second-quarter earnings call.
• The retailer generated same-store sales growth of 2% during the quarter compared with the same period last year, reversing a 10% year-over-year decline during Q2 of 2021. Net sales rose 5% in Sprouts’ latest quarter, to $1.6 billion, due to new store openings and the improvement in comparable sales.
• Sprouts also indicated in a Wednesday filing with the Securities and Exchange Commission that it has parted ways with Gil Phipps, who had served as the grocer’s chief marketing officer (CMO) until he was reassigned in February to the post of senior marketing advisor.

Dive Insight:

Sprouts officials sought during the earnings call to convince investors that the produce-focused grocery chain has stabilized its operations and is positioned to reignite its store growth trajectory despite headwinds posed by inflation and the pandemic.

The company has been “amping up the selling culture” and using technology to improve in-stock levels and reduce shrink, efforts that are helping to drive sales, CEO Jack Sinclair said. In addition, Sprouts has seen traffic in its stores increase even though it has raised prices, and the company has been installing additional cases to support its increasing focus on prepared meals, according to Sinclair.

Sprouts’ deli business was “a shining star” for the grocer during Q2, with sales of dairy and frozen items also coming in strong, Chief Financial Officer Chip Malloy said. Online sales were up 15% and represented 11.1% of Sprouts’ total sales for the quarter, Malloy added.

The retailer has opened eight new stores so far in 2022 and expects to debut a total of between 15 and 17 locations by the end of the year, Malloy said. The company opened two locations and closed three due to expiring leases in Q2, and operated 378 stores in 23 states as of July 3.

Sinclair said Sprouts has been held back in its efforts to open new locations by difficulties in obtaining equipment and licensing hurdles, but aims to return to its pre-pandemic pace of expanding its store count by around 10% annually. The company has about 85 signed leases and is primed to accelerate its growth next year after facing constraints in 2022.

“I think we’re being naturally cautious given where we’re at in the context of what’s happening [in the] supply chain,” said Sinclair. “It’s not getting hugely better, but it’s definitely not getting any worse.”

Sinclair said Sprouts sees Florida as an especially promising market because the state is seeing “an influx of people who are in our target customer base, people who are interested in health and health, healthy products, more interested in nutrition, more interested in fresh foods.”

Even as Sprouts sought to present its financial results for Q2 in a positive light and focus attention on plans for growth, analysts pointed out that the chain has lagged behind its competitors.

In a research note, GlobalData Managing Director Neil Saunders said that while Sprouts’ latest numbers are up, the fact that they follow declines a year ago is an ominous sign.

“Given these things, Sprouts numbers are far from being great. Indeed, they indicate that the chain is losing market share and is seeing some attrition in volume – which is not a good position to be in at a time when economies of scale matter more than ever,” Saunders said in an email, adding that he thinks the company needs to step up its effort to persuade more shoppers to turn to Sprouts as their primary grocer.

Sprouts’ stock price surged after the company released its results, but CFRA Research analyst Arun Sundaram said he was wary about the company’s prospects going forward.

“We remain cautious on SFM shares given the deteriorating macro environment and the high likelihood that the competitive environment intensifies over the next year,” Sundaram wrote in a note to investors, using the grocer’s stock ticker symbol.

Phipps’ employment with Sprouts ended May 31, according to the company’s latest Form 10-K. A former Kroger vice president, Phipps joined Sprouts as CMO in April 2020, reporting directly to Sinclair and responsible for overseeing the chain’s brand strategy and awareness efforts. When it removed Phipps from that role in February, Sprouts said it would review his employment status by the end of May.