Thank you for standing by. And welcome to the Sprouts Farmers Market Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Susannah Livingston, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you and good afternoon, everyone. We are pleased you are taking the time to join Sprouts on our second quarter 2023 earnings call. Jack Sinclair, Chief Executive Officer and Chip Molloy, Chief Financial Officer are with me today. The earnings release announcing our second quarter 2023 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 2023 and beyond. These statements involve several risks and uncertainties that could cause 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 and the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP measures. Please see the tables in our earnings release to reconcile our non-GAAP measures to the comparable GAAP figures. With that, let me hand it over to Jack.

Thanks, Susannah. And good afternoon, everyone. I'm pleased to announce another solid quarter for Sprouts Farmers Market. Our 31,000 team members delivered comparable store sales growth of 3.2%, total sales growth of 6%, and adjusted earnings per share growth of 25% in the second quarter. Their efforts to provide a unique in-store and online experience, differentiated products and superior customer service while continue to establish Sprouts as a go to healthy speciality food retailer. During the quarter, we opened six new stores and are on a path to open at least 30 for the full year, allowing us to profitably expand our reach to new health enthusiasts and innovation seeking customers. During the quarter we also relocated our Southern California distribution center to a new, larger facility. And we simultaneously expanded our Tex DC. These distribution centers will allow us to bring fresher products to our customer base, while providing capacity for growth in those markets for years to come. In a moment, I'd like to turn it over to Chip, who will provide a closer look at our second quarter financial performance and our outlook for the remainder of the year. Before doing so, I want to take a few moments to thank Chip for his 10-plus years of service to Sprouts. As you may have seen in our release this afternoon, Chip has decided to retire at the end of this year. Chip has been a tremendous asset as a member of our board and executive leadership team. And on a personal basis. I valued and enjoyed our partnership. With that, I'll turn it over to Chip.

Thanks, Jack. And good afternoon, everyone. For the second quarter, total sales were $1.7 billion up $97 million or 6% from the same period in 2022. This increase was driven by adding new stores combined with comparable store sales growth of 3.2%. We experienced positive comp transactions or proxy for traffic throughout the quarter, combined with a net increase in basket. The basket increase was similar to this last several quarters, where the increase in retail inflation was partially offset by a slight decrease in the number of items in the basket from a year-over-year perspective. As expected, moving into the third quarter, we are beginning to see a slight tapering of both the year-over-year price inflation and the unit declines. Our e-commerce sales grew 16% during the quarter, representing 12.1% of our total sales. Our new markets continue to show encouraging trends driven by density of stores and increased brand awareness. On the product front, our strongest performing categories remain the ones with the most differentiation, such as grocery bakery, dairy and proteins, further supporting our strategic decision to focus on these key departments important to the Sprouts customer. Our private label or Sprouts brand sales grew 12% and represented 20% of total sales, as innovation seekers value uniqueness and quality only to be found at Sprouts. Turning to gross margin. Second quarter gross margin was 37%. Excluding the impact of special items, adjusted gross margin was 37.1%, an increase of approximately 70 basis points compared to last year. Category mix shifts and continued promotional optimization contributed to this accretion. SG&A for the quarter total $498 million. Excluding the impact of special items, adjusted SG&A totaled $494 million, an increase of $32 million from the same period in 2022. This increase was primarily driven by the addition of new…

Thanks, Chip. We continue to be encouraged by our performance to date driven by the strategic changes we've made over the past few years. Our differentiated products are resonating with our core customer segments, supply chain continues to get stronger and more efficient, we are accelerating our store growth with our new prototype, we are improving customer experience both in-store and online, and slowly but surely connecting more effectively with current and potential customers. As I've mentioned many times, we are a speciality food retailer. We curate products that contain attributes appealing to the health enthusiast customer. For example, in proteins, more than 50% of our beef sales are grass-fed, more than 50% of our chicken sales are organic, and 90% of our grocery sales have specific diet attributes such as vegan and non-GMO. Even in produce, which many consider a commodity, over 40% of our sales are organic. This is a significant difference from other grocers. Our innovation seekers are also finding a treasure trove of products from locally sourced produce to our private label Sprouts brand. In the second quarter, we focused on our seasonal produce assortments in each region, and shared the local grower stories in store. For the second quarter approximately 90% of our produce sales are from local farms. As Chip mentioned, Sprouts brand continues to be a growth driver for us with penetration over 20% this year. We have driven the brand through active sampling, e-commerce and store merchandising improvements and redesigned packaging. Our team has released over 200 new Sprouts brand items this year, focusing on relevant test profiles and health attributes. We were honored this year to receive many vertex awards, including Retailer of the Year and several gold, silver and bronze awards for our curated products. With eliminating the guesswork of…

[Operator Instructions] And our first question comes from the line of Ken Goldman from JPMorgan. Your question, please.

Hi, thank you. And Chip, congrats on your pending retirement. I was curious, it typically, when a retirement is announced, the company will either announced successor or at least will say that a search is underway. In this case, the freezing was that a search will take place. I just didn't know if that's indicative of any element of suddenness or anything we should think about in terms of the timing. I assume there's nothing there. I just wanted to ask and make sure.

No, absolutely, Ken. The search is underway. We should have been clear. And if we didn't express it like that, because it is a step two underway. And it's not at all, is not a suddenness at all. On the -- we've been thinking about this for some time, Chip's been thinking about at some time, but only you're going to say something Chip on that?

Yeah, and this is a -- it's been playing for a while in my head and timing's right. And it's been a great run here. I've been here 10-plus years. And I'm just I'm ready to go out to pasture. Finally, I've tried to retire a couple other times I failed miserably this time. I think I'm good to go.

You've been there during an interesting 10 years. So congrats to you. I just wanted to also ask the competitive environment certainly still seems from what we can tell to be rational. Clearly, there's been more promoting going on seems to be paid for mostly by the vendors, the manufacturers. Just wanted to get a little bit of a broader sense for how you see that for the rest of the year? What you're factoring into your guidance? And if you would agree that it's still, within the boundaries of what you might consider rational if that's the case.

Yeah, I think that's you're describing exactly right. Ken, the context of a competitive dynamic doesn't seem to be changing dramatically. And certainly we're in a slightly different place. And a lot of the things that we sell are very different to what how you would describe that competitive dynamic. So we're watching it. We watch our produce pricing very, very carefully. And we're in good shape on that. And we're not seeing things that causes that gives us cause for kind of any concern in that space.

Great, thank you so much.

Thanks, Ken.

Thank you. One moment for our next question. And our next question comes from the line of Leah Jordan from Goldman Sachs. Your question, please.

Good afternoon. Thank you for taking my question. I just want to touch in on volumes. You said that they were improving sequentially, but still in declines. Just any color on the magnitude of how that's improving there. And then should we think that it's coming back from the produce side, is that's where the challenge was last year, or just can you talk about how the trends and fresh and produce overall are to the total store decline?

Yeah. Leah, this is Chip. So overall, we're seeing as we expected, and all honestly last year, we expected it to within the Ukraine incident happened. But we expected at the beginning of the year that as the year would progress, there will be less top-line benefit associated with AUR and that the units per basket would start to stabilize to get less negative effect earlier. We're beginning -- starting to see it late in the quarter and beginning to see into the third quarter where it's happening just as we thought you're seeing less benefit from AUR, and you're starting to see it stabilized sequentially. And the same thing for units, you're beginning to see less negative per units, and it's beginning to stabilize, and it's just starting to get to that number slightly under 10. And that's where we're hanging out units per basket.

And regarding the fresh side of the question, Leah. Areas like meat, we have seen a slowdown in the rate of inflation. And we've also seen an encouraging change in terms of the unit volume that's been going through on that. So the way Chip described it, almost 18 months ago, how that's playing through, it's how we're expecting it to play through going forward. Again you're seeing a little bit reduction in terms of eight of inflation, not going into a negative but the pace of inflation slowing down. And the illusion [ph] in units is changing. But in volatile categories like avocados, you're seeing some pretty dramatic changes in that where the pricing changes, and you see a pretty immediate change in unit volume. So we will watch it closely. We are in a very --produce is a big part of our business as you know. So we watch that and there's always been volatility in produce not remains a case.

Okay, great. Thank you. And just on my follow up, I wanted to check in on the 3Q comp guide. The low-single digit, is just a bit more vague than you guys typically give. So curious if you're seeing anything different behavior wise from the consumer, or is that more just a function of maybe uncertainty on the disinflation outlook? So any color there and maybe some quarter-to-date color as well? Thank you.

Yeah, we it's a little less it's a little wider, obviously those singles can be one to three-ish. We feel solid about that. And how that unit versus AUR and how it transpires through the quarter is, I would say it's fragile how it fundamentally comes out. But right now, I feel really comfortable that we're going to be in that range.

Okay, thank you.

Thank you.

One moment for our next question. And our next question comes from the line of John Heinbockel from Guggenheim. Your question, please.

Hey, Jack. Can you dive into the two target customer segments? In terms of growth in new households, of that group? And any insight you have on wallet share? I'm just curious how they're performing relative to the overall base in terms of the acquisition. And how much of their wallet do you think you have today?

Well, we've got a little percentage of the wallet, which you've always had, in terms of health enthusiasts and the innovation seekers. The encouraging thing that when I look at data are both natural and organic, which is the kind of -- which we can get very good data on in terms of our market. Share market shares encouragingly, growing within that space, and significantly different to the kind of the more traditional products that we have. So our business is continuing to focus on differentiation, so that we can attract and appeal to a small share growth that we need from those target customers. And we're seeing some encouraging market share data in the last little while. I'm very encouraged by the traffic that's coming in. And the traffic's coming in both digitally, both e-commerce and in bricks and mortar. So we're seeing a nice balance of both, and so we're creating this omnichannel customer who's going with the curated assortment that we've got. And the data that have gotten we'll get more data going forward. But the data that we've got so far suggests that we're growing share with those target customers, which has always been the intent, since we really pivoted the strategy around this target customer base.

So when you say low-single digit, right, that's your share of the market as opposed to your share of individual customers' wallets? I know you don't have a loyalty program, but I'm just curious, right with your best customers, what percent of your wallet of -- their wallet do you think you're getting in food? Is it 15% or 20% or not that high?

No, I say it's relatively low. I don't have the exact number. And that's why the opportunity is so big in front of us. We don't need much of a growth to make the number has really added up over the next few years. And that's why we're so confident of where the strategies are. We've got a low share of our customers' wallet, which is the nature of our assortment. We've said all along that we're not going to try and win on conventional products with conventional grocers. We're going to [indiscernible] on that, differentiate to the assortment that we have, and that on the basis of what we're looking at, at the moment that's moving in the right direction. And we continue to have confidence that the growth and share of wallet that we will get with those target customers are more than fulfill our long-term plans.

All right, and then just lastly, you think you'll have a loyalty program, and it'll probably be more affinity than loyalty. But, when do you think you'll have something out there in the next 12 months or longer, you think?

We're working very hard on that. And it will evolve and develop. And I don't think you're going to wake up one day and have it exactly the way we want to have it. We will then we're getting more data from our customers will increasingly get more data from our customers. And what we then do with that, we're in the process of figuring that one out. And exactly how it manifests itself and how it plays into the marketplace, we will certainly have been about position to know exactly where we are, next year on this one.

Thank you.

Thanks, John.

Thank you. One moment for our next question. And our next question comes from the line of Mark Carden from UBS. Your question, please.

Good afternoon, and thanks so much for taking the question. And Chip, congratulations on the retirement. So another strong comp. And it seems like you're seeing some nice market share gains. When you think about your store base, are you seeing much of a deviation in results between your newer markets and your legacy markets? You guys talked about improving brand awareness. Are you near where you want to be from a recognition perspective in some of your newer markets, or is there still a lot more runway in that front?

Well, the certainly runway on newer markets. We have a very clear kind of position. It takes a little bit longer in Florida and in the mid-Atlantic and set and focus the country to get the stores up and running and moving the way we want to do it. I've been very encouraged by Florida, though, in terms of where we've been, because those stores are no bigger, we're now getting some critical mass in terms like Tampa. And we're seeing some encouraging two-year numbers out of our Florida business, which suggests it kind of how we thought about this, that it takes a little bit longer. And you need critical mass from a marketing point of view, we've got a bit of work to do to build on that in the mid-Atlantic market. But we've got that plans in terms of the stores that we talked about are very much about consolidating the store base around tighter market so that we can get the effects of marketing in place. It takes a lot longer, we're not known. And it goes a bit faster in places where we are known. And we're flexing our marketing communication, a little bit on that as well as we go forward.

Great. And then you said you remain on track to reach your 30 store target for this year. I know it's still a little bit early. But any update on how you're thinking about unit growth next year, would you still expect to return to your algorithm or some of the headwinds that have been impacted?

So yes, Mark. Well, we're comfortable on the 30 number, and maybe a couple more than that this year. But in 2024, will be on track for 10%.

Thanks so much and good luck.

We've got the sights approved on that as well, Mark. So we've got a lot of confidence in that.

Fantastic. Thanks again.

Thanks.

Thank you. One moment for our next question. And our next question comes from a line of Karen Short from Credit Suisse. Your question, please.

Hey, thanks very much. And I echo my congratulations, Chip for retirement. So I did want to just ask two things. Looking at the second half sales growth versus EBIT growth, compared to what you just did in 2Q, there's significant divergence, I guess, in those numbers. So I know there's a lot of moving parts, but wondering if you could just parse out what those two -- what the components would be for that delta. And then, so specifically, put some tape on gross margin and SG&A. And then what specific inflation number are you thinking about for the second half?

Karen this is Chip. First, thanks for the congratulations. I appreciate it. As it relates to the second half, really, nothing's changed since our guidance in the year and even last quarter. I think we gave enough details to suggest that in the back half, we wouldn't see the same kind of profitability gains predominantly because, number one, I think our margins are going to be -- our gross margins are generally going to be flat in the back half of the year. And on the SG&A front, we're going to have some deleverage, specifically in the third quarter. And that the pieces of that are a couple. One, there's a little bit of timing in the third quarter that we talked about last quarter. The second is, as we get through this -- as we start to accelerate the store growth that will put a strain on the P&L. And thirdly, as labor costs have been going up for everyone for a long time, as he said on the call, we take the labor cost and the store growth piece. We've really done a great, our teams have done a great job of mitigating that transition through that. But at the moment, as we get, we start to lap some things we did last year, it gets a little bit more difficult to mitigate those costs increases. That said, the good news is at least on the labor front, the labor rates are beginning to stabilize. So it won't be as difficult next year, but for the back half of the year, it's a little bit of a strain. And as we accelerate the store growth, you know that how that math works. But again, next year midway next year, we'll start to be in that stable place we'll see number of stores are going in the ground every year.

Okay, and inflation?

Inflation. So on the inflation front, our thought at the beginning of the year was always going to be in double digits in the beginning of the year, from a year-over-year perspective. And then as sequentially as you migrated through the year that you'd be then call it by the third-fourth quarter in mid-single digits, year-over-year. And that seems to be starting to play out.

Okay, thanks so much.

Thank you. One moment for our next question. And our next question comes from the line of Krisztina Katai from Deutsche Bank. Your question, please.

Hi, good afternoon, I want to add my congratulations to Chip on the retirement as well. I have a follow up question on gross margin, which obviously was quite strong in the second quarter. And I think, despite some rising promotions throughout the period. So maybe can you talk about the drivers behind the gross margin? I know you mentioned better promotional leverage, but what are some of the other offsets that you're finding to really drive that performance there, for example, some of the Sprout-funded promotions to see like last week sale and private label items. And then within that, as well, just like question on this, how you view your current price gaps, and just how willing is Sprouts to retain traffic and market share in exchange for managing margins at these levels? Thank you.

Thanks, Krisztina. I'll talk about the margin and then Jack will talk about the gap. So from a margin perspective, we didn't come into the quarter, we were expecting some margin accretion. We did overperform on that line. It is a partially driven by mix, both within the categories. And then overall for the company, category-to-category as we see some of our higher margin, businesses are growing faster than some of our lower and within the categories. Some of the items are subcategories, if you will, and organics are growing faster than then more commoditized. So that's helping. Also, as we talked about promo effectiveness, we're continuing to see ourselves more on the ELP and less than the promotional front. And then thirdly, a little bit we've probably overperformed a little bit on dislike, probably five or six quarters ago, as we saw costs rising, we got behind it a little bit. We got a teeny bit ahead this time, that's sort of a transitory. So I wouldn't count on that going forward. And as we look for the rest of the year, we'll really get into that place where we think the margins are going to become more and more stable, year-over-year.

So yeah, Krisztina, the margins are in good shape, and we're comfortable the way it's being managed. And price gaps play a key role, particularly in our produce business, where we spend a lot of time looking at where we are. We're very aggressive on organic produce. And we've talked a little bit about how successful that has been for us. The whole context of our produce price gaps is in good shape. And we're comfortable on that and where we continue to look at it and continue to be where we've always been there. The other things that will look on pricing, I'm very pleased to win a bulk pricing, given that not a lot of other people sell bulk foods. The fact that we are able to sell loose bulk on commodity items for customers, where they can control the volume that they're purchasing portion control. We're all praying about 20% cheaper than our packaged goods on the equivalent items. So that's been an important part of our pricing mechanism going forward. And on our base business our grocery business, our daily business our frozen business, sell such a different assortment that we look alike elasticity on pricing as opposed to gaps, and spend a lot of time working out what the right price is to maximize the volume. So it's very much in line with how we've been working our pricing all the way through. And as Chip said, we made some progress on the margin, and we continue to watch our price down [ph].

Thank you for that. And just as a follow up on e-commerce, which was strong yet again, I think he said he grew 16% in the quarter. Can you talk about what impact the extended partnership has with DoorDash on your same store sales? And then just generally, how are you thinking about the sustainability of that e-com momentum once you really start to lap the DoorDash expansion?

Well, as I said, we're very focused on being an omnichannel retailer. The customer will take us where they want to take us with regard to we want customers who are focused on our assortment based on our differentiated curated assortment. And they seem to be navigating. I think it's encouraging Kriztina for us is that we're seeing traffic growth in both e-com and in our bricks and mortars business. And it's kind of equal between the two -- between the two of them. DoorDash has enhanced our growth a little bit and traffic a little bit in terms of working through. And we're pleased with the partnership with both Instacart and DoorDash. Again, it's allowing the customer to choose how they want to engage with us. And as the DoorDash business is a little bit more immediate people are looking for faster delivery relative to the Instacart business. But both of them are performing well for us. And we're encouraged by the progress that we're making on both of them.

I would add DoorDash is helping, but it's still less than 1% of the contribution of cart [ph].

Okay, that's great. Thank you so much, and best of luck.

Thanks.

Thank you. One moment for our next question. And our next question comes from the line of Michael Montani from Evercore ISI. Your question, please.

Hey, good evening. Thanks for taking the question. Also extend congratulations to, Chip as well. I want to ask first off, if I could, if you could provide some additional color on, what drove the comps this quarter? Was it more transaction size or transaction counts? And then also, intra-quarter trends and geographic trends, if there's anything additional, you could share on the color front there.

This is Chip. Thanks again. So as it relates to the quarter, it was a really from period-of-period, it was a pretty stable quarter. So we had positive comp transactions throughout the quarter every single period slightly up. And again, we saw AUR benefit from inflation and we saw a little bit of unit decline similar to what we've seen. As you got late in the quarter, we started to see that tapering of both the AUR and the unit decline. So that's kind of a mix of the transactions but a mix of the comp. As it relates to geography wise, again, we see we -- it's been pretty stable across the geographies. I will say that some of our -- we're getting comps, like Florida and the mid-Atlantic where we have a mix of -- higher mix of newer stores, you get a little bit extra there from a comp. But generally we feel really good. Those markets, those onesie-twosie markets have been a little bit of a challenge for us, those places where we have just very little density. And they're pretty far away. Examples that we have one store in Louisiana, we have a couple in Oklahoma. We have -- they're just sort of onesies-twosies. Those are just not performing as well, because we just don't have enough brand density. So that plays out as to the story of why we want to densify our markets.

Got you. And then if I could just follow up on the SG&A front. Wanted to see basically, what you would need to see in terms of a leverage point from the comps in order to get natural leverage given the accelerated store growth and the wage inflation you're seeing. And then, has there been any deceleration I guess to start the quarter, or was the low-single digit guide potentially looking at what could come but you haven't seen it yet.

I'll address the first part. So when we're growing -- when we're at this place where we're going to be growing 10% a year. You really do need if your gross margins are stable, to keep your operating margin generally flat. So that leverage point you need a three comp to be able to do that on the long -- over the long haul annual-to-annual. Any given quarter, you could have some puts and takes. We have a little bit of call to take in the third quarter, which we talked about. But outside of that you need about a three comp to be able to do that. And what was the second question again?

I just wanted to see, kind of low-single digit guide, to the midpoint call [multiple speakers]

Yeah. We're a little are a little earlier in the quarter than we were last quarter. So we feel -- I mean, we feel solid about the quarter feel good about the guide. But first, as it relates to what's in front of us, it's no different than what we said last call. We said we were going to be a essentially a three comp for the year. We were tracking two or three comp, or we said a two to three for the year, we were tracking two or three. So that's quite a one to three for the back half. And here we are in the back half. And we're just -- we're tracking for that. So that's where we think we'll be.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Rupesh Parikh from Oppenheimer. Your question, please.

Good afternoon. Thanks for taking my question. And also Chip, congrats on your pending retirement. So I just want to go back to the traffic, and that traffic is as in positive year-to-date. So just curious, as you look at your initiatives in-stores, what do you think has been key in driving that positive traffic that you continue to say?

Yeah. I think, Rupesh, what we've been trying to do is increase the customer engagement, both in-store and our store. So the in-store space of what we've been doing, as COVID got in the way of being engaging with customers, but being able to talk to customers and guide customers. And a lot of our customers come into our store, and they're looking for advice, whether it'd be in the vitamins and supplements department, whether it'd be on certain dietary things, so we're trying to engage much more. The team to be able to engage. Sampling programs been warmed up pretty substantially. And I think the fact that we've got so many new innovative items. We've got this innovation table in our stores, which features 30 to 40 items every quarter that are completely unique to Sprouts. And we're doing a lot of sampling on that and seeing a lot of success in the drinks category and the snacks category and those type of initiatives. So sampling has been a big thing, engaging with the customer in the store, and making sure that we're providing a faster cleaner checkout service as well. So we're very pleased by the customer service scores that we get which we measure significantly. We know bonus the store, but as part of the bonus program, there's a customer service measure that we get, the numbers are not very encouraging and ahead of where we expected them to be. So there's a lot going on inside the store. Outside the store where we're finding ways to make it easier for people to navigate through the e-commerce experience with us, whether it be when we put pictures on the website, people can immediately access directly into the product, unable to purchase the product. We've made a lot of progress, we've got a lot more to go, but we've made some progress on our app, we've made some progress on our website. So that's just this whole principle and that comes under the umbrella of customer engagement. The operating team have been doing a lot of work to try and make the experience when you come into a Sprout store superior to the experience you would get in other grocery stores.

And then maybe just one follow up question. So just on the consumer, are you guys seeing any shifts in consumer behavior, whether trade down or anything different versus what you saw last quarter?

I think that trend continues a little bit. There's a little bit of trade down across the marketplace. And there's a little bit of trade down in our business. People buying slightly cheaper types of things. People buying slightly less items as they go through the store. So yeah, there's a little bit of trade down. But as we've said, often our customer base who are in our stores to buy our unique assortment, whether it be dietary-based or keto or paleo or [indiscernible] based, tend to stick to that's what their diet is and that's what they buy. They may trade around a little bit. So the behavior hasn't changed dramatically Q2 to Q1. And we're not seeing a lot of changes in that dynamic.

Great, thank you. I'll pass it along.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Kelly Bania from BMO Capital Markets. Your question please.

Hi, good evening and congrats as well to you Chip, on your retirement. I was hoping we could go back a little bit to the gross margin. I think Chip, if I heard you correctly, you said you're expecting flat in the second half. I think that means flat on a year-over-year basis, for the second half. Maybe correct me if I'm wrong there, but can you talk about the factors that are supporting that. And I guess just given other grocers, and obviously a lot of other retailers talking about Shrink, maybe you can just update us on where you are on the various buckets Shrink. And especially as you mentioned, you are, I think rolling out to more self-checkout.

Kelly, so as it relates to mortgages, I did mean flat from a year-over-year perspective. So we're expecting to be pretty darn stable both in Q3 and Q4, from a year-over-year perspective. And as it relates to Shrink, Jack is going to address.

Yeah, and I think the dynamic in retail, there's a lot of challenges across the retail industry on the amount of stuff that's going on organized crime being that we're not seeing that dynamic to the same extent, as you're hearing from the other retailers, principally, because a lot of the products that we sell are so niche, and so differentiated, but not quite as easy to sell on when people take things from us. We do have a couple of stores that we're watching on vitamins and supplements and things like that. So we're definitely not seeing the dynamic that you're hearing about from other people. We continue to work hard at making sure strength in our parlance, which is all about fresh foods, and are we putting the right amount to the store? And we can make some progress on that. And we're feeling that we've got a lot of progress to make there. But we've made some progress as well as we work on our systems and our replenishment to make sure we're hitting the stores with the right time. We've talked often in our in these calls about PICAO, Perpetual Inventory Computer-Assisted Ordering, that programs rolling out now across the chain, and we've made some progress on trying to get the right amount of product into the store at the right time. And these new distribution centers are helping us do that as well. But our work to do on systems, the Shrink. I think we've got Shrink under control. And it's a different dynamic to other retailers, Kelly.

That's helpful. And I think you talked about a favorable product mix shift. But I haven't -- don't think I heard just about vitamins and supplements in particular, how is that category doing? And any color you can share on just the trends in that category?

Yeah, well, we've been encouraged to that. There's a lot of post-COVID upsides and people buying products for immunity. And we're certainly seeing that. Cold and flu season clearly makes a difference one way or the other, and how that works from one quarter to the next. But underlying it, we're very pleased with that. The teams that are working in our vitamins and supplements department. We're providing a lot of guidance and advice to our customers when they come in, and underlying [indiscernible] as we're encouraged by.

It overindexed related to the company comp, so this comp was better than a company comp.

Thank you. One moment for our next question. And our next question comes from the line of Robbie Ohmes from Bank of America.

Hey, thanks for taking my question. And Chip, congrats on the retirement. My question is just when I -- when we listen to the thoughts on gross margin and labor and then the new stores hitting the P&L, can you give us any sort of ways to think about whether you can keep the gross margin and the EBIT margin in similar ranges for 2024 versus what you've achieved in 2023?

Yeah, Robbie. First, thank you for the congrats. As we think about -- it's still early to think about next year. Obviously, we have a multiyear plan. We try to work from and just beginning to think about next year. But our goal is to keep the gross margins flat. And we'll continue to work to have our operating margins close to being flat, which means on the SG&A front, we're going to constantly have to do work. There may be quarters just like this year, I mentioned, there's -- the third quarter is a little bit dilutive on the SG&A line. But I do think the teams are rallied around those opportunities to find ways to leverage or at least to ensure that we're not de-levering on the SG&A line. So there's still opportunities to go after. It's just -- it gets a little harder over time, but I think the teams are ready to go do that.

Terrific. That's really helpful. Thanks.

Thank you. One moment for our next question. And our next question comes from the line of Chuck Cerankosky from North Research. Your question please.

Good evening, everyone. Can you guys -- either one of you comment on the inflation you're seeing in the cost of private label merchandise? And then could you please give me your outlook on where you think that growth rate is headed as the economy normalizes. It's been obviously very strong growth and do your customers stay with it and keep buying or do they migrate back to branded product?

Well, let me start, Chuck, with the second part of your context, which was where are we in terms of -- our Sprouts brand product is not operating in the way that our private brand would operate across the traditional grocery space. We're trying to make sure that everything we're putting in behind that is differentiated and has a very -- it doesn't have a commodity space to it. So we believe the growth in our Sprouts brand, which is over 20% now will continue as the team that's at food and put in place in that space continue to find differentiated products that fit our target customers, and we've made a ton of progress on that. I'm very encouraged not just for the health enthusiast but this innovation seeker that we have. We're doing a really nice job of bringing products to the market that you can't find anywhere else under the Sprouts brand. So I'm encouraged for that, and I think it will continue to grow almost irrespective of how the economy grows. I think as a mix, as a mix of our business, our Sprouts brand will be strong going forward. In terms of cost base, again, for the same reason, we're having -- the impact on the cost side of Sprouts brand is very much about how the commodities are playing through, and there has been some volatility in commodity prices. How that plays into our Sprouts brand? I think it's difficult to say exactly. I think Chip talked earlier about what's going to happen with the -- rain sign, and how does that knock on effect have in terms of cost prices for raw materials going into processed products across the country. I think that's a little bit uncertain. But we are pretty confident we can -- we'll certainly be able to manage the product side of this and the team are very focused on making sure that we're buying these products at the most effective price we can.

Thank you for that. And Chip, good luck to you.

Thanks, Chuck.

Thank you. One moment for our next question. And our next question comes from the line of Edward Kelly from Wells Fargo. Your question please.

Hi, guys. Good afternoon. Congrats again, Chip. I want to ask about inflation, a follow-up one on Karen's question. I thought I heard you say that you expect inflation to be in the mid-single digits in the back half of the year. I just wanted to clarify that. And if so, can you talk about the drivers of that level?

Yeah. So the drivers of that would just be the prices that are already in place today. And as they play out year-over-year, that's how it's going to play out.

Okay. And then a follow-up is related to your promotional strategy. And this is a dynamic of promotional intensity versus engagement. We've heard some talk in the marketplace about increased promotional engagement through things like e-mail, for instance, with customers that may be attached to certain stores that makes it look like intensity is growing, but I don't know it might just be engagements growing, and I don't know how dialed in you want as to a level.

We can --

Yeah, just kind of curious that how your strategy is evolving? Because obviously, your margin does not suggest intensity is picking up. So clearly, it seems like it might be engagement.

We are getting better engagement certainly. We're getting better at sending the right e-mails to the right people so that we're not diluting the effect of -- we'll get much better at as we get more data from our customers and then become increasingly personalized. The nature of our -- the nature of our proposition to the customer does rely on us being very personalized in the offer. People who have got particular dietary needs. Let's communicate in some term, we don't want to be communicating metrasped me offers to the vegan customer and that we've got and we've got a lot of them. So getting more precise in how we do it is probably what you're seeing in the kind of dialogue about the promotion intensity. We as a business have no intention of investing a ton of margin being promotions, but we've got a lot of intention of making sure our promotions are more targeted, more accurate and more precise in terms of driving business for us.

Great. Thank you.

Thanks.

Thank you. One moment for our final question for today. And our final question for today comes from the line of Scott Mushkin from R5 Capital. Your question please.

Hey, guys. Thanks for taking my questions. And Chip, I think we're all going to miss you. So -- but not yet because you're going to be around for a little bit longer.

I will.

So my first question is more housekeeping. I know you guys said you were going to close. I think you said 11 stores this year. It looks like a bunch of those were in the second quarter. How do we -- how should we look at net new openings as we move forward? And what's your expectation for net openings this year? And how do we think about next?

Well, if you think about it, we will have close to 11 this year, and we will open at least 30. So just doing the math there, that's 30 -- I'm a finance guys. So I can get that that's a net of 19 plus -- I had some question answer. So a net 19-ish or a little bit more this year. And then as we think of next year, next year, we're targeting 10% unit growth, there shouldn't be any closures like we did this year. Is there one or two off that we might end up as the leases expire, there might be? But generally, we should be looking at 10% net growth from 2024 and beyond.

Okay. That's it. Thanks for clarification. So then my next question, and I think it's kind of been touched on a little bit, but I just wanted to get out of maybe a little more is around kind of the glide path in earnings as we progress forward. Thinking about the comp, I think it's going to come in this year is in the middle of your range of 2.5%. Without a big acceleration next year, it just seems like the earnings growth could be more muted? Or am I thinking about things wrong?

Well, I think if we -- if you think about it that we're trying to drive towards a 3-ish plus comp, and we're trying to keep our gross margins flat and our SG&A then would grow in line with top line, which would be, call it, high singles on top line. So to 10-ish. That gives you an operating margin that's flat and you get earnings growth in the high singles pre-share buyback. Can we do that? I think we have a lot of confidence probably more than some of your peers that we can really keep our gross margin stable. We have a ton of confidence there with our differentiated product, how we go to market, differentiated customer base, we feel like we can keep that. As it relates to the cost basis, yes, right now, we are accelerating store growth. So we have to manage through that. The good news, the other thing that's been hitting us has been labor cost. Labor cost growth is beginning to decelerate. So I think going into next year, we'll be in a better place that we can manage that. And I think, as I said earlier, and I know it sounds oversimplified, but we have an aligned team here and aligned building and align store set that knows that we really want to manage our costs and keep them under control. So we're always looking for opportunities. And there's we'll be able to -- I have confidence we'll be able to do that. We've made a lot of investments in our store support office over the last couple of years, and we're getting to a place where that does not need to grow nearly like it has. We had to put in new systems, we had to add more people. We had to invest across the board. We invested in merch planning, we invested in financial planning. We've been all over the board. We're getting to a place where we can begin to leverage the corporate part of it, it's just about managing labor at that point in the stores.

All right, great. Thank you for taking the question.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jack Sinclair for any further remarks.

Thanks very much, everyone, for all the questions and your attention. And thanks again to Chip, and congratulations on his retirement. But as Scott just said, he's got a bit more work to do because he's not going until the end of the year. And we look forward to working through the next few months together. Thanks again for your attention. Take care.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.