Sprouts Farmers Market, Inc. (SFM) Earnings

Management highlights

Thanked our team for disciplined execution and continued focus. The first quarter played out largely as expected, working through tough comparisons and a cautious consumer backdrop. Recent new store openings are performing well, and progress in self-distribution of meat is encouraging. Strengthened talent across the organization. 2026 priorities include strengthening differentiation through foraging and innovation, reinforcing in-store experience, accelerating customer engagement through loyalty and personalization, building an advantage supply chain, expanding access to healthy food through new store growth, and taking targeted actions to strengthen value. Focused on foraging innovation and discovery, launching new unique items, with organics as an important growth driver. Sprouts brand continued to grow. Store experience is a core differentiator, with team members being key. Stores focused on simple customer connections, elevating daily execution. Took targeted price and promotion actions, invested in talent and technology, expanded loyalty program, with positive customer response. Supply chain progress with Northern California distribution center on track. Opened stores in new markets with good prospects.

Guidance

Continue to lapse in exceptional numbers from last year. Expect year-on-year comparisons to improve in the back half. For the full year, total sales growth outlook 4.5%-6.5%, comp sales outlook -1%-1%. EBIT outlook $6.75 billion - $6.95 billion. EPS outlook $5.32 - $5.48, assuming at least $300 million share repurchases. Second quarter comp sales outlook -2% to 0%, EPS outlook $1.32 - $1.36. Event margin pressure about 75 basis points. Expect sequential improvement in business as comparisons ease.

Segment performance

In the first quarter, total sales were $2.3 billion, up $93 million, or 4%, compared to the same period last year. This growth was driven by strong new store performance, partially offset by a 1.7% decline in comparable store sales. E-commerce sales grew 10% and represented approximately 16% of total quarterly sales. Sprouts brand continued to perform well, growing faster than the rest of the business and representing more than 26% of total sales. The first quarter gross margin was 39.4%, a decrease of 20 basis points compared to the same period last year. SG&A for the quarter totaled $659 million, an increase of $36 million and 42 basis points of deleverage compared to the same period last year. Earnings before interest and taxes were $215 million. Net income was $164 million and diluted earnings per share were $1.71, a decrease of 6% compared to the same period last year. On unit growth, six new stores were opened, ending the quarter with 483 stores across 25 states. We generated $235 million in operating cash flow, which enabled self-funding of our investments and capital expenditures of $98 million net of landlord reimbursement. We also returned $140 million to our shareholders by repurchasing 1.9 million shares and have $696 million remaining under our $1 billion share repurchase authorization. We ended the first quarter with $252 million in cash and cash equivalents and $22 million of outstanding letters of credit. For the full year, on a 52-week basis, we are maintaining our outlook for total sales growth between 4.5% to 6.5% and comp sales between negative 1% to positive 1%. We still plan to open at least 40 new stores in 2026. Earnings before interest and taxes are expected to be between $675 and $695 million. We expect our corporate tax rate to be approximately 25.5%, and we expect capital expenditures net of landlord reimbursements to be between $280 and $310 million. We are increasing our earnings per share outlook to be between $5.32 and $5.48, assuming at least $300 million in share repurchases. For the second quarter, we expect comp sales to be in the range of negative 2 to 0% and earnings per share to be between $1.32 and $1.36. Event margin pressure is expected to be approximately 75 basis points. More than 55% of produce sales were organic and over 34% of total sales came from organic products.

Risks & headwinds

Macro environment uncertainty, consumer behavior changes, competitor reactions, price adjustment effectiveness uncertainty, supply chain risks, new store expansion risks, inflation and fuel cost fluctuations risks

Analyst Q&A

• Q: Given some of the macro concerns out there, just curious just overall what you're seeing in terms of the healthier consumer. And then as you look at different segments, low, middle, high, just curious if you're seeing any changes there.

  A: Clearly there's a lot going on in the macro environment and we're watching it pretty closely. We're focusing in on what we can do in terms of making life as good as we can for all of our customers. Certainly the macro environment suggests that our loyal customers have stuck very much to us going forward. The less engaged customers are feeling a little bit more pressure, and it could well be to do with the income levels, but I think it's a kind of general pattern across our customer base. As we look at the marketplace, it's a little bit uncertain what's going to happen going forward, and we are focusing on doubling down and being good at what we do, and kind of encouraged by certain categories in terms of when we've done some price investments at some some response to that. And I'm encouraging some of the work that we're doing in our deli departments and increasing the options for people to access healthy, cheaper food direct from Sprout.

• Q: Maybe just going deeper into some of the price reductions, just as you look at all your value efforts, how do you say they're progressing versus your expectations and just confidence in gaining further traction from here?

  A: We're doing a number of different tests in different places and some are working better than others and some work fairly directly. And that's what we're learning. The testing process is both a geographic test, which we're doing in certain places and specific categories. Tariffs put quite a number of, we referenced coffee in the script. Tariffs put some pressure on the top line prices of a number of categories. And that's kind of eased off a little bit, and we've certainly been investing a little bit in that coming back the other way. So we're being very selective by category, and we're doing some specific tests across different geographies.

• Q: A little bit of a follow-up to Rupesh's question on affordability. What behavior change are you seeing, I guess, as you run these tests in terms of are you driving more new customers into the store? Is it more about seeing existing customers buying more items? And how do you communicate the improved price points to customers? What have you found effective?

  A: As Jack mentioned, it starts with the assortment work we've done. The two areas I'd call it, I think that have been most successful at driving basket. And I think we're also seeing traffic in these categories is the work we've done in the deli with our wellness bowls, our new parfaits, our $5 sandwich, $5 sushi. Those have been really good for us. And we're seeing both basket and traffic to those areas increase. Um, sprouts brand of the other I'd call on the assortment side. If you look at, uh, we've got tremendous organic offerings and that's driving organic growth. Um, and as we, uh, push and market, those we're seeing increased sales and basket in those sprouts brand items on the pricing side. For us, our focus is twofold. It's to try to put a few more ends in the basket and also to get our core customer to come back more often because those everyday essentials are more within reach for them. So that's how we're looking at the pricing activity and how we measure it.

• Q: I wanted to follow up on the point around affordability and, you know, you're making some price changes. I know that's not all you're doing. There's other efforts to improve affordability. But can you just remind us how you can manage that all from a margin perspective? Like, what are the offsets we should be thinking about? And then a related question on the loyalty program, specifically the vendor support. Where are we from that perspective? You know, I know it's still early, but I know that's a part of the equation through the year to start to see some stabilization in the margins. So help us think about sort of that opportunity.

  A: The opportunities we've talked about are, you know, inventory management and continuing to improve in that space, you know, specifically within shrink, a little challenging in the first half. That challenge eases and we get some easier comparisons in the second half just because of the sales volatility we've had year over year. We should continue to get better at shrink. We should continue to get better at markdowns and how we move product through the ecosystem. Those are the things that we've been working on that we can continue to get a little bit better at as we move forward. Certainly, the vendor funding is another piece. Then that's really, as you noted, early days, but we'd expect that to ramp as the year evolves and build as we continue to build programs around now that we've got the loyalty data and how we go to personalize off of that. So that'll be a piece that kicks in and helps as well. But those are the primary drivers. Over the longer term, we'll think about self-distribution and other further opportunities there. And that should also be a helper down the line.

• Q: You highlighted strong growth in attribute-driven categories and some pressure in the more commoditized ones. Can you walk us through how we should think about the mixing implications of that for constant margins over time? And then just as a follow-up, are vitamins and supplements committed attribute-driven or more commoditized?

  A: Vitamins and supplements is an important category for us with less commoditized due to advice. Overall, the core of what we do is stay differentiated and focused on core attributes. Margin mix of our business is pretty consistent. There's not a massive gap between category or attribute that would have a real meaningful impact on our mix with those shifts. Again, small things here and there, but nothing's consequential that you would see significantly flow through. And we're unusual for a grocery store, if that's what we're described as. We're unusual in the sense that our margins are pretty consistent across the different categories. We don't have really low margin, high volume branded goods. So the mix is more consistent. And that makes one of the uniquenesses of our business Is that margin mix profile?