Sprouts Farmers Market, Inc. (SFM) CEO Jack Sinclair on Q1 2022 Results - Earnings Call Transcript
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EPS of $0.79beats by $0.07| Revenue of$1.64B(4.17% Y/Y)misses by $8.55M
Sprouts Farmers Market, Inc. (NASDAQ:
SFM) Q1 2022 Results Earnings Conference Call May 4, 2022 5:00 PM ET
Company Participants
Susannah Livingston - Vice President of Investor Relations & Treasury
Jack Sinclair - Chief Executive Officer
Chip Molloy - Chief Financial Officer
Conference Call Participants
Mark Carden - UBS
Scott Mushkin - R5 Capital
Charles Grom - Gordon Haskett
Stonedinvestor- gummybear advisors
Karen Short - Barclays
Edward Kelly - Wells Fargo
Krisztina Katai - Deutsche Bank
Rupesh Parikh - Oppenheimer
Thomas Palmer - JPMorgan
Robert Ohmes - BofA Securities
John Heinbockel - Guggenheim
Charles Cerankosky - Northcoast Research Partners
Operator
Hello. Thank you for standing by, and welcome to Sprouts First Quarter 2022 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Susannah Livingston, Vice President, Investor Relations and Treasury. Please go ahead.
Susannah Livingston
Thank you, and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our first quarter 2022 earnings call. Jack Sinclair, Chief Executive Officer; and Chip Molloy, Chief Financial Officer, are with me today.
Jack Sinclair
Thank you, Susannah, and good afternoon, everyone. We are pleased with solid first quarter results and believe it is a sign that many of the strategic changes we've made over the past couple of years are beginning to materialize.
While we are pleased with our strategic changes and the positive impact they've had on the business,
the near-term landscape has changed a bit since our last conversation with you, which
is slightly impacting our outlook for the remainder of the year. Chip will provide details relating to our financial performance and our current outlook. And then I will follow up with more details relating to our focus for the remainder of 2022 and how we're navigating the current environment.
With that, I would like to turn it over to Chip.
Chip Molloy
Thanks, Jack, and good afternoon, everyone. For the first quarter, total sales were $1.64 billion, up $66 million from the same period in 2021 driven by comparable store sales of 1.6%, supported by positive comp transactions and new stores.
We did benefit early in the quarter from the King Super strike in Colorado and the height of the Omicron variant. That said, we experienced both positive comp transactions and positive comp sales each month during the quarter. We are encouraged by our top line growth while simultaneously maintaining our gross margins.
E-commerce sales were 11.5% of total sales, which was also slightly elevated during the early part of the quarter due to the Omicron surge. We continue to experience strength in our deli business as consumers search for both healthy and easy meal options. We also experienced strength in those areas with our greatest breadth of differentiated product such as grocery, dairy and vitamins.
We are particularly proud of our merchandising, supply chain and operations teams as they managed to keep our shelves stocked with both perishable and nonperishables in a challenging sourcing environment. We continue to see our customer engagement grow from a digital standpoint with increases in account sign ups, active e-mail users and tech subscriptions. We also saw positive trends in customer retention rates, while our customer satisfaction scores remain very high.
Our first quarter gross margin was 37.3%, essentially flat when compared to the first quarter of last year and better than we originally expected. We passed through inflationary cost and are closely monitoring price elasticity. We continue to test promotional strategies to drive both positive traffic without sacrificing overall gross margin. That said, we are continuing to experience slightly fewer units in the basket when compared to the same period last year.
SG&A for the quarter totaled $460 million or $20 million higher when compared to the same period last year. Increases were predominantly driven by new stores and higher in-store labor and supply cost. We also spent approximately $2 million relating to California's 2022 Supplemental Sick Leave law that provides paid time off for COVID issues. We now expect the total cost to be approximately $3 million by the time the law expires in September 2022, unless there is another variant outbreak.
During the quarter, we opened 6 new stores & spent $22 million in capital expenditures net of landlord reimbursements and repurchased 1.5 million shares for an investment of $46 million.
Our strong cash flow from operations of $153 million continues to fully support our ongoing capital needs.
Turning to the balance sheet highlights. We ended the quarter
with $324 million in cash and cash equivalents, $250 million outstanding on our revolver, $25 million of outstanding letters of credit and a net debt-to-EBITDA ratio less than 0. As you probably saw on March 25, we closed a $700 million revolving credit facility, which replaced our previously existing $700 million revolver. The terms and conditions are substantially similar to our previous agreement with a new expiration date of March 2027. As well as the addition of ESG-linked pricing terms.
As for our outlook, our view today is slightly different than it was at the beginning of the year. We believe we could drive slightly positive comp transactions, our proxy for traffic throughout the year. More importantly, we believe year-over-year inflation would begin to dissipate as the year progressed and the decline in units per basket would slowly stabilize.
However, inflation is not slowing and customers continue to put 1 to 2 fewer items in their basket this year than last. We can speculate a variety of reasons as to why the fewer units.
Rising gas and utility prices, of late of precious discretionary dollars to more experiential offerings such as travel or restaurants, et cetera.
With all that said, we now believe it is prudent to expect total sales growth, comparable store sales growth and earnings per share to
be at the low end of the outlook we provided during our last earnings call in February. As a reminder, that outlook included 4% to 6% total sales growth 0% to 2% comparable store sales growth and $2.14 to $2.24 earnings per share. We are still on track to open 15 to 20 new stores and invest $150 million to $170 million in capital expenditures net of landlord reimbursements. For the second quarter, comparable sales should be close to flat and earnings per share is expected to be between $0.49 and $0.53.
With that, I'll turn it over to Jack.
In April to strengthen and expand school garden-based education, the foundation hosted an inaugural growing Schools Garden Summit in Denver, Colorado. As the first ever national gathering focused entirely on school gardens, the Summit united over 400 educators and leaders from across the country working to sustain school garden programs. These educators and the nonprofit organizations they represent, operate learning gardens at over 6,000 school campuses throughout the United States, providing hands-on nutrition science and academic instruction to an estimated 2.5 million students every year.
Our community involvement doesn't stop at the foundation. Sprouts is committed to focusing on women's athletics by partnering with the Los Angeles Angel City Football Club as the team's founding back up Jersey sponsor, making our first commitment to women's professional soccer and enhancing our support of the broader Los Angeles community. We were thrilled to support Angel City's inaugural soccer match last month as well as we look to expand our women's sports platforms in the coming months.
One of the ESG topics we're always proud of is
our food waste recovery, which increased to 78% in 2021, mainly driven by the donation on an equivalent 26 million meals to over 400 food rescue organizations across the country. These and many other stats can be seen in our 2021 ESG report that we just published this week.
So as you can see, we're feeling good about the progress we're making against the strategic objectives we outlined over 2 years ago.
A few of our focus areas include in-stocks, bringing back a selling culture to our stores, key merchandising solutions and basket-level promotions. Starting with in stocks. Sprouts has historically been somewhat challenged in this area due to unsophisticated systems and processes that make it extremely difficult for our stores and our merchants, resulting in less than optimum in-stock positions.
To improve this, last year, we embarked on implementing a new system that supports Perpetual Inventory and Computer-Assisted Ordering or PICAO.
Turning to selling culture. We want to bring more buzz to our stores the pandemic restricted the opportunities to drive excitement in our stores.
At this time, we're happy to take your questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Mark Carden with UBS.
Mark Carden
So I wanted to start by digging into the comp a bit more. We've seen some pretty strong top line results at grocers like public in recent days with inflation, presumably, I think it's a bit of a tailwind there. What do you think is driving the pressure in the other direction for Sprouts in your view, really, when you're thinking about your forward guidance? Are competitors investing more in price, is trip consolidation at larger grocers, maybe capping your transaction growth from being even higher than it is today. You also mentioned, of course, the fewer items per basket, or is there something else that's really kind of driving differential there?
Jack Sinclair
Yes. Thanks, Mark. First of all, we're pretty encouraged by the transaction growth. So the fact that transactions are going up to something that's encouraging as over the last couple of quarters, and we think that is likely to continue. The issue is, as you say, is units per basket. What we're not seeing is any real intense promotional activity from other people that's influencing that. And we think it's some of the macroeconomic environment that's existing out there. Inflation is clearly affecting people's ability to spend as much or to buy as many items as they come into our stores.
Operator
Our question comes from stonedinvestor from gummybear advisors
Stonedinvestor
What the F is the matter with you! You suck! Big Time-- Bozos-- People are filling their carts miles high at Costco... get some bigger carts you idiots and gets some half dressed milk maids in the store actually milking cows.. Get fresher eggs /chickens laying eggs in the store on the floor! And get some of that new Tractor-Ice Tea... You want buzz in the store? Release some freakin bees! Bee hives / fresh honey on the comb.
Jack Sinclair
I'll let Chip talk about all that....
Chip Molloy
Yes, Stoney It's just a couple of million dollars, and it's associated, as Jack said, there's the creative side of that was we thought would be finished in Q1. That's tracking its way into Q2 and some in Q3.
