Sprouts Farmers Market, Inc. (SFM) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Sprouts Farmers Markets First Quarter 2021 Earnings Conference Call. At this time, all 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 for today, Susannah Livingston. You may begin.

Thank you, and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our first quarter 2021 earnings call. Jack Sinclair, Chief Executive Officer; and Denise Paulonis, Chief Financial Officer, are with me today. The earnings release announcing our first quarter 2021 results, the webcast of this call and quarterly slides can be accessed through the Investor Relations section of our website at investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2021 and beyond. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings, along with the commentary on forward-looking statements at the end of our release - earnings release issued today. Our remarks today include references to non-GAAP measures. For a reconciliation of our non-GAAP measures to the GAAP figures, please see the tables in our earnings release. With that, let me hand it over to Jack.

Thank you, Susanna, and good afternoon, everyone. Thank you for joining our call today. I'm very pleased with how we have navigated the current environment, as we begin to cycle some of the positive impacts from the onset of the COVID pandemic last year, combining our strong financial performance with the strategic opportunities ahead of us, makes me very optimistic about the future of Sprouts. For the first quarter, we generated diluted EPS of $0.70, up 52% from the first quarter of 2019, as our strategic initiatives and promotions unshrink continue to deliver strong, sustainable financial results. As I've stated before, I believe 2020 was a turning point for Sprouts, and we're continuing to build on that success and momentum this year. For 2021, our focus remains winning with our target customers by building our brand through meaningful marketing in and out of the store, curated merchandise, building an efficient supply chain and unit growth supported by a new format to further expand our reach. 2020 was a pivotal year, not just for Sprouts, but for Americans in general, as we all tried to stay healthy. As we kick off a new year, the same focus on health is top of mind. For Sprouts this plays well into who we are, a fresh natural and organic specialty retailer. Fresh produce has always been the mainstay of Sprouts, and it continues to be at the heart of our proposition, representing 22% of our business condition what sets us apart from other grocers is the breadth of attribute based products that we carry. Attribute based trends like keto, paleo, organic plant-based, gluten free and functional are all themes focused on wellness and play directly to our target customers. In 2020, our organic sales across the store increased 21% to $1.4 billion, and in produce organic sales were up 23% driven by the desire to eat healthier. We're becoming the leader in the attribute space joined by our pioneering vendor community. Becoming the destination for up and coming vendors in the food industry is a fundamental part of our merchandising strategy, and something our target customer desires. We like to lean in and take risks on these young companies. No one else is collaborating with the teams like we are. We help drive their innovation and improve their ingredient panels, which results in exclusive market entries with leading edge products for Sprouts. Nut Pods Creamer is one such example. We started partnering with them back in 2018 as a small women-owned company. Over the years, we've partnered to create cost-to-market flavors and value sized offerings. And this week, a new zero sugar sweetened option will be in our stores. The growth we have seen in Nut Pods and many others have been extraordinary. And we look forward to how much more we can do. In the long run these relationships are creating a product innovation pipeline to keep our shelves full of unique trending merchandise. As I've said before, and we'll continue to see, we're not a traditional grocer. And as we grow and scale we're evolving as the go-to-food retailer for natural organic and attribute-based partnerships and product releases. In the first quarter, adding quarter past attribute-led product offering drove revenue. The plant based trend is one such offering that we continue to expand on our shelves. For example, take two milk alternative made from rejuvenated barley and Brave Robot dairy free ice cream are two products that help drive sales in dairy and frozen. Pork belly and bakery continued to grow on top of last year's COVID run out, fueled in part by innovation as well like Sweet Earth plant-based chicken alternative meals and dairy and strength from seasonal offerings and keto-based products in bakery. In grocery, the team continued to drive forward our innovation pipeline, resulting in more than 400 new items in the first quarter with still more to come this year. Many of these new products were the result of strategy work performed in 2020 to better serve our target customers. Throughout this year we will bring even more new products to create that treasure hunt shopping experience. And we'll be highlighting these new items in our innovation centers in our new stores, under our find a new favorite matching guiding displays throughout all stores. Moving on to our brand. Though we have 362 stores across the country, we are behind from a brand recognition perspective. Our awareness is very little. In 2021 this will change. Our Where Goodness Grows campaign was kicked off late last year with our first party entity, and many other digital mediums. This year the brand changes will start to come alive in the physical assets, starting with our five new format stores. Eventually they will be reflected in our product offerings through a common design principle, completing the entire umbrella of the Sprouts brand. On the marketing front our digital cost initiatives designed to connect with more target customers continue to progress. We're building our base of customers with emails up over 140% in the first quarter and website traffic growth of 39%. Importantly, email subscribers tends have baskets and other customers, which is one reason why we remain focused in growing this number over time. Through our marketing journey, we have identified through our core customers have begun to increase our digital communication, and are starting to see this resonate with target customers. Through our data sources we continue to see positive trends and data points suggested that we are winning disproportionately with our target customers. As well, we continue to see customer counts improving ending the quarter with the highest we have seen since last April, when the pandemic sets in. In addition, we noted in one of our customer surveys, but the majority of our customers who reduced or eliminated trips to Sprouts during the pandemic, expect to return post-pandemic. These are all steps in the right direction for our marketing strategy, and we look forward to increase sales from these initiatives as the year progresses. When I first joined Sprouts, I noticed that our supply chain was disjointed restores too far from our distribution centers. So I'm very excited about the opening of our fresh distribution center in Aurora, Colorado serving 45 stores and bringing us to six DCs across the country. The opening went well, and we are now supplying all stores in Colorado, Utah and New Mexico region, a testament to the strength of the team. This new DC along with the new Florida DC to the open this quarter, we'll create a faster supply chain and build in our goals of our DCs within a 250 mile radius of our stores. In addition, they will allow us to serve more stores and customers with pressure projects needed with the benefit of ripening rooms, and allowing us to support local farmers. End season our local produce offering in Colorado will increase by more than four times our past assortment, the Colorado DC proposed produce from family-owned Strohauer farms that have been growing potatoes in Colorado since 1910, family-owned Petrocco farms only 30 minutes from our DC. We grow everything from leafy greens to sweet corn and peppers, as well as hazel dell exotic organic mushrooms growing year round in temperature control check among others. These farming relationships will expand with our new local sourcing team hosts out of the DC with a wealth of experience in local sourcing. That sourcing model is being replicated across all our distribution centers to ensure we are supplied with seasonal and locally relevant produce in every store. With this initiative, we will also decrease the miles our cups drive, therefore reducing our greenhouse gas emissions, and creating operational efficiencies, like less shrink and a reduction in food waste. I can unequivocally see this piece of our strategy is good for our customers, our business and our planet. Our investments in 2021 go beyond the DCs. Considering we're a young company, we were only 34 stores a decade ago, with opportunities to invest and upgrade our systems that support and drive our future growth. Appeal the investments this year our focused on perpetual inventory, replenishment, computer assisted ordering, labor management and a new human capital management system. These projects are intended to improve in stocks, improve labor productivity and oversee overall store conditions, and provide team members with an efficient modern HR access point. As for unit growth, our pipeline remains strong with deals reaching out to 2024. As planned, we didn't open any stores in the first quarter as we were developing a new format. Continuing with our plan, we have one store scheduled to open in Q2. And as stated before, COVID pushed most all of our opening for the back half of the year, and remain on track to open approximately 20 new stores this year. By the end of July, two new format stores open, a new store and one remodel of an existing store. Walking our virtual 3D rendition of the new store consumers overwhelmingly get positive marks on the low profile and overall feel, while also rating the store better than the current store experience. As a reminder, this new format will have a smaller footprint, but more selling space per square foot cost 20% less to build, and we expect to have similar sales to our boxes today, resulting in expected higher returns. One last topic. Last week we issued our 2020 environmental, social and governance report that highlights the tremendous work our team has accomplished during the year. Bringing positive change to our nation's health, which goes well beyond the food we sell. From our response to the COVID 19 pandemic, for our efforts to reduce our environmental footprint and improve the well being of our many stakeholders, we've made great progress on our journey to improving our sustainability program. We've done great work, reducing our climate impact by decreasing our normalized carbon emission on a square foot basis, aided by our strategy to switch to digital marketing from print. Our team's focused on waste reduction has reached a new milestone at almost 60% landfills diversion rate, rooted in our drive to increase food security for our communities who donating the equivalent of 23 million meals to local food banks. Developing the next generation of leaders to grow with Sprouts is of great importance to me, and the future sparrows. In 2020, we promoted 7,200 team members, half of whom were ethnically diverse team members, and we filled 72% of store manager positions within channel candidates and curing us pros you can create a career, not just a job. I encourage you to review all the details, and ESG report, which will give you good insight to the work we're doing. I'm very convinced we can do good by doing good for our customers and for all our stakeholders. Before I hand it off to Denise, I want to acknowledge the incredible work the teams at the stores theses and in the Support Office continue to do week-after-week driving customer engagement and sales, supported by the depth of knowledge in the natural and organic space. If you've heard me say before, we're only in the early innings of our strategic changes with many improvements still to come, and yet one constant remains through the changes we've all gone through. People want healthy foods now more than ever, which is at Sprouts, as Sprouts is all we do. Now, let me hand off to Denise to discuss our financials in more detail, as well as our 2021 outlook. Denise.

Thanks, Jack, and good afternoon, everyone. For the first quarter net sales decreased 4% to $1.6 billion and comparable store sales were down 9.4% compared to the same period last year. Our year-over-year comparison is not a straightforward indication of growth. We believe it's important to focus our performance on a two-year basis. To that end, our net sales were up 11% compared to the first quarter of 2019 and our two-year comps stack was up 2.2%. After posting positive comps to start the quarter, as expected, same-store sales turns negative as we began to cycle the 2020 COVID impact and reopening progressed. Importantly, towards the end of the first quarter and into the current quarter, we have seen a return to positive traffic. Due to our ongoing strategic changes, even with some sales deleverage and record high e-commerce sales penetration, profitability remained strong with an adjusted EBIT margin of 7.2%, trending well ahead of our 5.7% margin in the first quarter of 2019. As Jack mentioned, innovation continued to help our sales, across many categories, with dairy and bakery notable winners. Offsetting this, we saw some self-pressure environments, due to a non-existent cold inclusive. E-commerce sales continued to remain strong with sales of 221%, compared to last year. For the quarter, e-commerce was 12.5% of sales, reflecting a notable increase in January, as the country experienced a spike in COVID cases, settling back down to our fourth quarter 2020 levels by March. Clearly the work done last year to create a full omni-channel experience by expanding pickup to every store, and the addition of Shop.Sprouts.com continues to resonate with our customers. For the first quarter, gross profit was $586 million. And our gross margin was 37.2%, an increase of 114 basis points, versus the first quarter of 2020. Efficient promotions and good everyday pricing, as well as continued benefits from our ongoing shrink initiatives drove improvement. As a reminder, the first quarter included the internalization of the promotional changes we implemented in late Q1 and early Q2 last year. SG&A cost increased $3 million to $440 million, or 27.9% of sales, deleveraging 141 basis points, compared to the same period last year. The majority of the deleverage was attributed to sales deleverage from cycling the on-set of COVID last year, and increased e-commerce fees due to the higher omni-channel sales, as more customers have continued to rely on home delivery and curbside pickup. As well as SG&A was impacted by additional COVID costs related to sick time and hero pay, more than offset by lower bonus payouts versus last year. For the quarter, our adjusted earnings before interest in taxes or $113 million, an increase of 41%, when compared to the first quarter of 2019, a significant positive step change in performance that we will continue to build-upon. Our interest expense was $3 million and our effective tax-rate was 25%. First quarter diluted and adjusted diluted earnings per share were $0.70 up 52% from the first quarter of 2019. We continue to generate strong cash flow from operations $105 million in the first quarter to fund a future expansion and sales initiatives. For the quarter, cash was impacted by higher bonus payout for the strong 2020 performance, and an increase in inventory in preparation of opening the Colorado DC. In the quarter, we invested $9 million in capital expenditures, net of landlord reimbursement, primarily for new stores. Additionally, following the board's approval of a share repurchase authorization in mid-March we restarted our share buyback program, purchasing approximately $3 million in stock by the end of the first quarter. We continued share buybacks in the second quarter, and year-to-date through May 2021 we've repurchased $5 million in stock, under the current authorization. We ended the quarter with $250 million outstanding on revolver, $39 million of outstanding letters of credit, $256 million in cash and cash equivalents and $297 million available under our current $300 million share repurchase authorization. Reflect as a strong balance sheet, we continue to maintain a low debt position ending the quarter with a net debt to EBITDA ratio of nearly zero at 0.01 times. Now let me provide an update on our 2021 outlook. The impact that the pandemic will have on the US economy, food at home demand and consumer habits is still in flux. And in turn, we continue to manage the business under a number of scenarios, creating a bit wider than typical range for outlook. As a reminder, I'm giving these comparisons on a 52 to 52 week basis as fiscal 2020 was a 53 week year. We continue to expect net sales to be flat to up slightly versus 2020, driven by unit growth of approximately 20 new stores, which will open in the back half of the year, and comparable store sales down at low to mid single-digits. As stated before, underpinning our assumptions or negative comps in the first and second quarter, is we lacked the height of COVID with an improving two year comp sales check each quarter. Capital expenditures, net of landlord reimbursements are expected to be in the range of $140 million to $16 million. We now expect our corporate tax rate to be approximately 25%. Due to slightly better performance in SG&A than expected in the first quarter, we're increasing our adjusted EBIT expectation by $10 million to be in the range of $305 million to $325 million, and increasing our adjusted diluted earnings per share to be in the range of $1.87 to $2. We continue to expect to maintain a majority of the gross margins rate improvement, we realized in 2020 with the first quarter experiencing outsize benefit, and the remaining three quarters, being pressured as we cycled from COVID benefits from shrink and buying opportunities we don't expect to repeat. We see several puts and takes for SG&A and a margin for the year with reduced expenses from bonus normalizing, mostly offset by annualized COVID related costs, as well as increased healthcare costs and sales to leverage. We have started 2021 on a good footing with a strong balance sheet, and I'm confident that the strategic changes we began last year, structurally changed our financial algorithm for the long-term. At this time, we're happy to take your questions.

[Operator Instructions] Our first question comes from the line of Mark Carden with UBS. Your line is open.

Thanks a lot for taking the questions. So on the comp you were up 2.2% of your stack in a period where there were still some COVID restrictions in place. Now I you guys don't sell as much as some of your competitors in the way of popular CPG products, but are there any other factors that we should be aware of on the top line that may have held you back with a mainly vitamin driven, are customers still consolidating trips to larger stores, they sell adjusting to new strategy, any color here would be great? Thanks.

Well, you kind of answered the question there Mark and the things that you mentioned it's specifically to the first quarter. As we look clearly there's an overlap Jan, Feb was a different overlap two March's overlap. But one of the things that would probably have been a factor that we didn't quite take into account was the vitamin growth that we would have expected from a cold and flu season in January, and that's something that probably didn't happen to the extent because everyone's wearing a mask and nobody had the flu. So that certainly made some impact on that in the early stages of the quarter. And the reopening program, what's happened with regard to restaurants opening and not opening had some impact on us in the meat space and probably in the alcohol space as well a little bit. And that's something that certainly had an impact. And as we've said all along in this dialogue around what's been happening over the - through the pandemic as probably as people have reduced the number of places they go to do their food shopping, that we didn't benefit from some of the growth that happened previously. And that's certainly something that continues, and is beginning we think to kind of mitigate itself as we play through the year. We're certainly seeing some encouraging signs on our target customers with the intention that are telling us that they're going to be more comfortable about going out and shopping in more places. And that's something that gives us a little bit of encouragement going forward. I think that's pretty clear our health enthusiasts target customers were probably more concerned about the pandemic and the implications for their health, run maybe the average customer. And I think in some ways, I think that's why our e-commerce business is quite strong and I think people that are more comfortable at going out, we're thinking there's some encouragement going forward in the data that we're seeing.

And then we're hearing more about rising inflation in food. And I know Sprouts has historically had a bit of a different profile on this front. But how are you thinking about inflation over the course of the next few months, and as your new promotional strategy really change your thought process with respect to passing-through any higher costs. Thanks.

Certainly. What we're seeing - as you know our mix of business is different and looking at the first quarter, our produce was actually deflationary, not inflationary in the first quarter a little bit, not hugely but a little bit. And that's something that means that our mix going forward. What I see anticipating the produce going forward, because there's going to be pretty good yields and pretty strong opportunities for us to take advantage of price in the marketplace. So we're not as worried about inflation in our fresh produce business, probably a little bit more worried about inflation. If worried to the right word but a little bit more conscious of inflation and the meat space and one or two of the other parts of the grocery business, and we're watching that closely. Transportations clearly putting some pressure on the supply chain of our vendor base, and we're watching that closely. By and large we're feeling pretty confident, given that we sell a pretty differentiated range of products that as inflation plays and cost inflation plays into our business, we're feeling pretty confident that we can pass on appropriately. If we get too big then we'll have to watch and have dialogue with our vendor base on it. But what we're hearing so far and what's in front of us, we're feeling that we can pass it on and not have the kind of huge worry about what might happen going forward.

Our next question comes from the line of Scott Mushkin with R5 Capital. Your line is open.

So, your first one is a little bit along the same lines as the last one, but I wanted to broaden it out a little bit about comps. The big thing that we hear from clients is like, hey, Sprouts is a good business but let's face it, they just can't comp like they should. And the gross margin gains that they're seeing are not sustainable that they're going to have to come in and lower pricing, and some of these earnings is really is a little bit of mirage, that's why I trade so cheaply the equity. What do you guys say to that? What's your rebuttal to that that line of thinking?

Well, I think we sculpt - we've been pretty. So far we've had very consistent record of delivering on that, so the sustainability so far, quarter after quarter after quarter, we're feeling confident about that. We're certainly aware of why will the margins have come from and partly it's about the promotion or unraveling of our very aggressive high-low promotional and actually negative profitability promotional. We're not going to bring those back. So I can kind of guarantee that mix that was driving a lot of margin issues in the business has gone away and sustainably gone away. We know we can improve continue to improve our strength. We're seeing that in our business week after week after week, so we're feeling very confident about the sustainability of that. And the fact that we're selling such differentiated product allows us to manage our EDLP pricing. As long as those products that we're selling are different, we're able to price it based on elasticity. And as long as that pleased through and work so and I'm pleased with some of the work we've been doing and the price of the pricing team and the pricing systems we've been bringing in is allowing us to give us a lot of confidence that their sustainability and gross margin and the sustainability in our operating margin. And think about the other things that we're doing the distribution costs should be coming down as we drive less miles to the stores. The operating ratios and our business should be kept on - those are some labor pressures, the operating ratios were a fairly mature young business. So the things that we're working on in terms of inventory management and operating the stores, self checkout to the registers. There's some sustainable operating improvements that we can all drive help us drive bottom line. We've got sustainable logistics improvements that can help to drive bottom line and we're pretty confident that we know that promotions aren't coming back in any aggressive way and on and on, high, low promotions or aggressive below cost promotions, so you put that together. I am certainly very quiet, although I'm confident about anything I'm confident about the fact that our margin growth is sustainable.

And I think one piece I'd add on the customer front is, we have been making a pivot with our strategy and we knew that there would be some folks who might be more of a coupon clipper profile that wouldn't be the ones that would stick with us. And the intent was to gain a lot more of our target customer going forward. And I think it's interesting that we can have a couple of pieces of research that we've done that are pointing things in the right direction with some green shoots and that that is all starting to resonate. And I say, first we she did research directly and people have told us that where they had reduced their shopping trips to sprouts before because of the pandemic that the majority of them have intent to return as the pandemic subsides. And we said that's great, but what's even better is that we as we've come into April or starting to see this prove out of it. So we ended the quarter with the highest customer hands we've seen since the start of the pandemic, so a nice positive direction and more customers starting to come into the stores. We're also seeing that customer count, in particular with the reactivated and re acquired customers, so the same ones who told us they had stopped shopping with us because of the pandemic, we're starting to see those numbers trend up a bit. And then with the positive returns to traffic, I think everybody was wondering well what will happen to basket, and we've been very pleased to see that while traffic has turned positive at the end of the quarter and into Q2, we're actually holding our basket pretty much in line with where we were coming through last year, rather than there being a tradeoff between that basket and traffic number. So some positive indications there that the pivot in the strategy that we're making is starting to resonate and hopefully we'll be able to see that with a bit more clarity as some of the COVID haze subsides.

So that’s really good color, guys. And I have one follow-up question. I mean obviously your balance sheet is really good and there is not - really any debt on it. You're producing good - free cash flow and the store crank up doesn't really come to next year. Why not get more aggressive and just buyback a chunk of stock and say, hey, it's cheap, it's our best investment right now. I know you have a buyback, but it seems like you could do a lot more if you want it?

Yes, I think, we're really pleased that we have the authorization out there and we do intend to utilize that authorization. I think we would all agree that we think that the stock has a lot of positives that it can run in the future years and we'd like to get in on that too. You know, I think what really happened in the first quarter for us is that authorization got put in place fairly late in the quarter and we were trading under a 10b5-1 plan. So you didn't see quite as much come through as we could have done. But we have all intent to be using - utilizing the authorization as the weeks and months here evolve.

Our next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open.

So, I guess, just following up with your commentary on, I guess, improving traffic lately. Is there a way to get more color on maybe the quarter day competence or just anyway to sort of, better understand the types of trends you guys are seeing in April?

Yes, I don't think we're going to call it any numbers because we know, week by week there's a lot of volatility in what we're seeing here. But I think there's some positive specifically related to the target customer that we'd reiterate. So I think with our target customer and specific, they have a larger basket and their basket has continued to increase more, kind of, post-pandemics in non-target customer, suggesting innovation and other things in the store are resonating with them. And - we have seen target customer retention turning higher and increasing over this period of time as well. So, you know reasons to believe, particularly with those target customers that the positive traffic turn and holding the basket is something that we will continue to see.

Maybe just one follow-up question. On the SG&A line, I think, this call you mentioned that - you expected SG&A dollars I believe to be flat - roughly flat for the year. What's the right way to think about it now?

Yes. We generally, actually, of course we expect to SG&A rate to be directionally flat for the year. And so that might be a little bit different in the - in what you are hearing. But what we believe is we're going to continue to see benefit as we have bonus that point to roll-off, NBA tailwind for us - with intern some additional expense as we continue to manage and hero pay, healthcare expenses and then just some general sales deleverage, but the two of those, every quarter won't necessarily be flat. But we'd expect the year will be approximately flat.

Our next question comes from the line of Ken Goldman with JPMorgan. Your line is open.

It's Tom Palmer on for Ken. Thanks for the question. First, just wanted to ask on the e-commerce side looks like penetration rates for you were still climbing. Do you expect this to continue as the year progresses, just because more stores offering services and the improved out? Or do you think we've reached a peak and as we kind of reach reopening, that starts to ease a bit and then alongside that. How has fulfillment been? Have you been figuring out ways to make it more efficient, kind of, reduce the SG&A burden that it has put on your stores?

Yes. I'll let Denise talk a little bit about the cost side of this in terms of the demand side of it. Tom we're feeling that we probably have reached a peak on this, as I said a little bit earlier, I think a lot of - we've probably one of the fastest growing ecommerce businesses in grocery over the course of the last year or so, and that has probably been driven by the sensitivity of our customers to going out and they want access to this product, but if I had to use it to - through all ecommerce vehicles, and we expanded our pickup which made a big difference too. We were only in 55 stores for pickup and we expanded that to all 360 stores, as we've talked about in previous calls. So that's been a driver to our space and a driver to the fact that we're growing by more than most in this space. And as it settles down as people are more comfortable getting out as a mask mandates change those vaccination rules out, we're expecting it to settle down. It wouldn’t settle all the way back down to 3.5% where we were when I came in, I think it'll settle back down, if I was guessing somewhere around 8%, 10% of our business rather than significantly anywhere near where we're at the moment. And in terms of how we're - we're specifically figuring out where to try and minimize. Remember its all profitable for us we're pretty pleased by the fact that it makes us all money, we lose all the margin, Max isn't quite as strong as you know, so and we're doing some specific things to try and minimize the cost of that. We're handling all of the all of the pickup at our store through our own labor which is making a difference in terms of both the speed and efficiency of the that and cost of it. And we'll continue to look at that as well definitely we might want to expand on that a little bit. Denise?

And Jack I think we covered, you covered a lot of the points. I think the point we'd re emphasize is, even with that penetration at 12.5% in the first quarter, we delivered a strong operating margin up substantially from where we were two years ago where penetration was next to nothing. And I think the other part that I'd mentioned as well is, we continue to invest behind our own channel, our Shop.Sprouts.com channel and its on the white label penetration for lack of a better way to put it is now up to about 17% of our total ecommerce sales. So as we're bringing those customers in a little closer to us and we have an opportunity to have more customer data, have a more direct relationship with those customers and to monetize that a little bit more than what we can simply do when we be selling through a marketplace. So we just reinforced the fact that for us it is a profitable business and we have absorbed the costs in our P&L to date at a relatively high level of penetration. So everything here and working forward as Jack said in efficiencies of picking ourselves in our stores will only be able to build on that as we go forward and improve that profitability more.

Thanks for all the color there. I wanted to ask just on the promotional environment. Obviously the large pullback in promotional activity has really driven stronger margins over the past year and a half now. Is there a point where it makes sense to get more promotional as a way to drive traffic trends higher not back to prior levels, but just higher than we've seen over the past few quarters? And at what point does that make sense, I guess?

Yes, I think it's a good question, Tom as we continue to experiment with different ways to attract our target customers, our marketing activity and our promotional activity is very much geared to, how do we communicate directly with our target customer, and we've been learning that. Remember traffic and transactions have been distorted pretty dramatically over the course of the last year or so. And as we work our way through different techniques that we can use, certainly product and price won't be the driver that's going to attract the customers that we're trying to attract, it's more likely to be techniques that build loyalty amongst our target customer base. And we're getting increasingly - we've done a lot of what we call them test and learn through Q1, which we've learned some different techniques, some of which have worked and some of which haven't worked, and we're working our way through different techniques, as to how we can drive our business, but very focused on target customers, as opposed to doing broad brush product and price promotions, because what we want to have is a really good value in our produced business, communicate really strongly, communicate the benefits that we talked about in terms of our attribute-based products and drive people into the stores on the back of that. And then remember, our awareness is low, and the fact that awareness is low, gives us a lot of comfort that, if we really communicate the proposition effectively using the techniques that we're using. And we may have to spend a little bit more on marketing as opposed on promotions going forward. But as I say, we’re going to have test and learn phase, and we'll figure out the right way to handle it over the course of the next few quarters.

Our next question comes from the line of Karen Short with Barclays. Your line is open.

This is actually Renato Basanta on for Karen. Thanks for taking our questions. So - so my first question is sort of bigger picture. And maybe, maybe a follow up to Scott's question earlier, but you know right now obviously you had a lot of initiatives that are helping drive profitability and those are certainly showing up in the numbers and are commendable, but one could argue that at some point those start to dry up. So my question is, how do you think about prioritizing profitability initiatives versus sales growth, because I think at some point you're going to have to get that top line. You don't really going again to reach your longer term objective?

But longer term objectives in our business, fundamentally the growth plan that we've got in terms of new stores is going to give so much more access for our health enthusiast and innovation seeker customers to get access to this growth proposition, which will - is already pretty unique, and we're going to make it even more unique, so the specificity of why you come to Sprouts, and who you are at the target customer is the focus of all our work, whether it’d be merchandising work, real estate work, marketing work, we're focusing all on our target customers. We know from all the data that we've done that there's plenty of people there, who aren't spending the dollars, so we'd like them to spend with us, partly because of awareness, and partly as we work better to communicate effectively with those target customers. And it's very true in markets, where we're not - now when if you go to Florida or Texas or Baltimore, where I was last week, you got very different dynamics going on there, as opposed to San Diego or Denver, where we've already got a pretty strong presence. So the focus of - the premise of the question is that we have to invest margin to get top line. We're not in that space. We're in the space of our proposition, and the algorithm that Denise outlined in the in the remarks earlier, we've got an algorithm that basically gives us a strong underlying profitability. We've got customers out there that look like the customers that we want to attract, and it's up to us to do that effectively through communication, not through investing tons of money in margin, that's the reality of it, and we've got some immaturity in our operating base. That gives us even more comfort going forward. We can sustain the margins, while attracting more of our target customers.

And then just a question on the comp guidance, so you know a bit of a slowdown from a two year staff perspective in terms of comp for 1Q, and I presume some of that due to California dining restrictions being lifted. And maybe some of the other things you called out. But just wondering if you can provide some color on how you're thinking about that reacceleration and stat trends for the rest of the year, certainly, you should benefit from less trip consolidation as you talk about as things start to normalize. But that also means there's likely more of a shift to food away from home, - from food at home so just any help reconciling, those - those two things would be appreciated. Thank you.

And they're all things that we're looking at I'll let Denise expand on that. Let us all things that we looked at going forward, but we've said fairly consistently that Q1, Q2 was always going to be. I - not just for us but for the whole industry in terms of how that plays through, and on the two year stack basis we're expecting a lot of our initiatives to gradually and just see an improvement in Q3, Q4 on a two year stack basis, as we start to kind of normalize the comparisons. And as you said, we didn't get as big an upside last year, so we shouldn't get bigger, we should be able to see our Q3, Q4 two years stack just improve naturally as part of the underlying business that we have. And as I said, we're very excited about the marketing activity that we put in place the test and learn that we've done that that work will start to play pay dividends for us in Q3, Q4.

And I think the only other point that I would add is don't forget the fact that we will continue to have new innovation coming into our stores building off of all the category management work that we worked on through the fourth quarter last year, and it takes a little time to - to get that into our stores. And we will also have, we already have one of our new DC open as of the end of the first quarter and we'll have a second DC opening now here in the second quarter, both of which are going to bring fresher, more local products into Florida, into Colorado, important core markets for us where we really believe that that's going to resonate with customers as well and so all these strategy points coming together are where we see the momentum coming from as we turn from the first half of the year, which certainly has its unusual overlaps into the second half of the year, where we can really have these things shine for our customers.

Our next question comes from the line of Chuck Cerankosky with Northcoast Research. Your line is open.

Could you talk to us, Jack about the sort of regional trends in sales without being overly specific and different states and even different counties have reopened in varying ways and what you're seeing in the stores and especially things we might not expect?

Well, let me - California is clearly important to us and we saw in December, a little bit of a boost in our California businesses closed down, went down and then in January it went the other way. So with California has clearly seen them that's beginning to settle down. As we look across, we're seeing more consistency across the country in the last few weeks, than we had seen previously. I think as you're just gradually people feel more confident about getting out and moving around. I think the vaccination program, and again, I think our customers are more likely to get vaccinated than the average and more likely to be comfortable at coming out. We're seeing that kind of consistency as we kind of talked about our baskets holding quite well and that would be through across the country just to make. We're not seeing the differences that we probably saw last year and certainly in Q4 that we’re starting to see now. So I don't know if that helps really, but I think we're seeing more consistency than differentiation over the course of the last few weeks.

Anything in the product mix that you would point out?

Yes. I think, as I said a little bit earlier as restaurants reopen you see a change in the meat business a little bit. It starts slows down a bit. Alcohol went absolutely crazy for reasons last year. Last year beginning to slow down a little bit relative to where we would have expected maybe would have expected to jump in. But by and large, generally to do with restaurants, finally now we're seeing some pretty interesting things happening in vitamins, although the cold and flu season went down in January. As we start to navigate through April in May, you're starting to see people. I think, migrating back to things that are very health focused. And so there's a little bit of an interesting - interesting trends happening in that space to the positive for us. They were intrigued by. And so, if that kind of maybe vitamins would be big, I don’t know there's anything else Denise we should be commenting on.

No, I think you hit the big one.

Our next question comes from the line of Kelly Bania with BMO Capital. Your line is open.

First, I just wanted to just follow up on the comment about traffic in March and April and great to hear that it turns positive. Just was curious if you could help us understand a little more context about what that looked like last year and what you were maybe comparing up against and is that comment just about in-store traffic or is that total transactions? And then I have another follow up.

So let me put in first in context last year. So last year if we all remember, really all of March and particularly early in March, but continuing March into April, what we saw was a dramatic reduction in the number of times people are coming into the stores and very large baskets. So people coming in and buying whatever they could get, wherever they could get it. As we all knew there was silly things like you know shortages of yeast or pepperoni or cheese that people would go and look for it wherever they could find it. So last year, we definitely saw a notable downtick in traffic, but a correspondingly big growth in basket. And as we worked through the year, our traffic trends got a little bit better, but they stayed negative through the year and basket fell off a little as we would expect after that big stock up. But also going to stabilize Q3 into Q4, when we turned into Q1, those same trends really existed in January and February, which were all pre-COVID last year, so that made a great deal of sense. I think we saw the same volatility that others would see in the early part of March, where this was lapping the height of things from last year, and that would be it where we just fundamentally all we are readjusting to our businesses. What we saw as we got to the very end of March and into April was the recovery of traffic. So, on a two year stock, it is it's not a net positive yet, but it is headed in the right direction. But I think the most encouraging part to us is not only is that number headed in the right direction. But the basket really held. And that tells us that things are resonating about what people are putting into their carts and what they've come to adopt and shopping at Sprouts. So hopefully that's just a bit of color that helps.

Yes. Thank you. Thank you Denise, that's really helpful. And just also kind of along the same lines, you talk about some customers, I guess relaying to you that they have plans to come back to Sprouts post-pandemic and maybe you're starting to see that a little bit. But can you quantify, what percent of your customer base, you think that is? And what maybe is embedded in your guidance with regards to that customer coming back. Do you expect that to be a certain percent of them coming back is that expected to improve as we move through the quarters. And you know who you lost them to in the meantime?

Yes. I think in general, you know as we lost them too. We lost the folks that were just consolidating shop, which could have been whatever they chose to consolidate to, so they could have consolidated to Kroger or to an Albertsons to a regional or conventional. And some even a bid into a target or that type of environment. And they told us loud and clear, they just reduced the number of places that they were going. So anywhere they could get a full shop is where we would have seen them, consolidate a bi. In terms of the way we're planning, we haven't built the plan at the level of detail of this customer we lost? What percent of them do we think that we'll get back? I think what we're more reacting to is, we do expect through the year, that our customer health will continue to improve. And we believe a good portion of that from what the customer has told us. There is a majority of the folks, who told us they had slowed down or stopped coming to us through the pandemic, who told us that they would return. We think that will be a good proportion of where we see those gains. And but we also have an expectation that with the marketing campaigns and programs that we have out there, that we'll be able to continue to bring new customers in, as that kind of fear of COVID fear of shopping starts to subside, in the in the resonance of the messaging as of where goodness grows and what we stand for. We might be able to get a bit more reach out there is some folks who might not know about us as much today.

Definitely those new customers, I think, we built a lot of stores through that year. And it wasn't the time for people to experiment with new stores and try new things. So that's a big part of the marketing going forward. We think the stores that we did open over the course of the last year I've got a great opportunity to build, once the pandemic and it died down a little bit.

Our next question comes from the line of Chris Jordan with Goldman Sachs. Your line is open.

I have something, a debt free grocery store with a history of strong profitability in a world with zero percent interest rates is a crime against capital structure theory and Modigliani–Miller I'd like your perspective on your balance sheet. That's my only question. Good job, good quarter.

Thank you, the good question.

So in general, we are, we incredibly pleased to have a very strong balance sheet at this point in time. And clearly compared to prior history of the company, we currently have more cash on our balance sheets than we would planned than we would have had before, or we would plan to have going forward? And we're going to be putting a quite a bit of that cash on the balance sheet to use. And when we think about building out new stores, the technology we talked about. Our second DC coming online, so we feel good about that. And then, I think as we announced last quarter, with our share repurchase authorization, you're going to see us investing in ourselves and buying back more of our stock to go forward. And, but overall, I will take a flush with cash balance sheet for a period of time here and we will work our way back into all of that being great investments for the company go forward.

And what I would say a little bit about what we may do with that. As we look on new format stores, of which we've got a couple happening in July, there'll be elements of that that we want to try and to enter existing store base, and we'll have to think through exact to the things, particularly I'm excited about the innovation centers and how we can make that really relevant, and really effective. So, there's some things we can do with us going forward. And Denise and I often talk about such issues.

Our next question comes from line of Edward Kelly with Wells Fargo. Your line is open.

Jack I want to ask you, you've obviously made the argument that the company is running sort of like lower profit or lower return, promotions in the past. My question around this though is that the company wasn't really copying all that well for a number of years though and that doesn't really suggest that Sprouts was buying sales. It's probably more complicated than that but, what are we missing here, if we're just sort of thinking about it more simplistically like that.

It kind of taken me back a little bit to the kind of where we were a year and a half ago. I think my own view as to what was happening was, as the company was chasing top line, it was actually deflating top line at the same time. So buying an awful lot of empty volume and an awful lot of empty customers that not only were they attracting these, what we call the coupon clippers and we've identified those people. When they are coupon clippers were coming in, they were getting a deal, but everybody else was getting that deal, and not responding in terms of any volume. So you had the combination of the kind of target customers that we've got at the moment, being getting access to very low profit, negative profitability items, whether it be in commodity chicken or sweet corn are the things that they were chasing after. So, not only was that kind of - it was giving people something for nothing, and not generating volume and attracting customers who weren't spending anything and just losing money. So I think that's why the top line started to disappear from that, you start to see if getting into very low numbers. I think it was that downward spiral the grocers often get into where they chase it and actually you deflate it. I think that's what was happening, and we're trying to - well, we have done. We've changed the kind of momentum of that, so that we're chasing after customers who kind of value what we've got and we will promote with those customers, and there'll be promotions that are creative to us or other negative to us. And then we'll take it kind of going forward. I think that's the reason that happened. And what you find as business was becoming convinced, trying to become a conventional grocer by doing conventional grocery kind of things. And what we've tried to do is be really clear that we're a specialty grocer that we sell things that other people don't sell. We've got very big proportion of business in fresh produce. We've got a big proportion of business in bulk. We've got a big proportion of business in vitamins. And in many ways, the commercial strategy of the business was messing the differentiation and chasing after conventional, and that's we're in the middle of changing. And as we said earlier, we're in the early innings of this, but we're very clear that, where we were going was probably deflating our business and not attracting customers who are going to give you long-term profitability.

Yes. And just I guess a follow-up to that. So is it's - you've heard a lot on this call, I guess right like - it's hard to imagine Sprouts getting the multiple that you probably think it deserves without this comp improving from here. How are you thinking about the timeframe around when you would expect comps to reflect, what you believe like the underlying fundamentals of this business are, and are we waiting for store growth to ramp up, and then the stores beginning to mature and then that building into the comp. I'm just kind of curious as to what the timeframe is that you think it's acceptable for comps to get to a more reasonable level?

Well we're focused on growth not comp, that's the real kind of focus on our business I think it's interesting. A lot of the grocery guys are in comps. If you look at the actual underlying growth of the business is significantly less than the comp number, we're exactly the opposite to that. So you're right, there will be some maturity in the new stores that will drive some comp sales going forward. But our focus is very much on how do we grow our business, which we've been pretty clear that we can grow our EBIT substantially into the quoting certain numbers, but we've been pretty clear that our sales growth can be north of 10% and our EBITDA growth will be north of that. If we think consistently deliver that month-after-month, quarter-after-quarter, that's the direction we're moving in and this business will move from a $6.5 billion to north of $8 billion business over the course of the next few years, and very substantial margin growth, so they're generating very significant EBITDA growth. That's the program we are on and that's what we're driving.

Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Jack for closing remarks.

Yes. Thanks very much. However, we appreciate the time and I really appreciate your interest in our business and I look forward to continuing the dialogue over the next few quarters. Take care everyone. Thanks ever so much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.