Strong holiday sales help Sprouts overcome price pressure

Q4 comps positive despite deep produce deflation

Sprouts Farmers Market eked out a slight gain in comparable-store sales during the fiscal fourth quarter despite produce deflation that was greater than anticipated.

The Phoenix-based retailer posted 0.7% comps — a figure that exceeded analyst expectations of a slight comp decline — on a 0.4% increase in store traffic and a 0.3% improvement in ticket. This came as Sprouts cycled 7.6% comps in last year’s fourth quarter and retail deflation of 2.5% led by deep reductions in produce costs including berries, apples and tomatoes.

In a conference call discussing results, Sprouts CEO Amin Maredia termed the results “truly remarkable,” and credited a strong holiday sales program and growing private label sales increasing baskets in part for the positive results. Officials however maintained a cautious outlook for the fiscal year, citing expectations of continued deflation in fresh categories and associated competitive promotional activity at least for the first half of the year.

For the 13-week period, which ended Jan. 1, sales of $986 million increased 6% from the 14-week 2015 fourth quarter, and by 14% on a 13-week basis. Net income totaled $17 million. Adjusted earnings per share of 13 cents were down from last year’s fourth quarter but beat analyst estimates by a penny.

“Clearly, this has been the most challenging deflationary environment we have experienced since 2009 and the longest period of sustained food deflation in decades,” Maredia said. “The competitive promotional environment continues throughout the fourth quarter. We expect this environment to remain for the near term until deflation subsides. During this time, we will continue to maintain our competitive position by being price right and focus on customer initiatives to drive traffic to our stores.

“Our marketing campaign both in-store and across all digital channels during the holidays were exceptional and resulted in a significant sales lift and many customers trading up for their holiday meal,” Maredia added. “Having personally spent significant time in many of our markets during the holiday, I was extremely happy with the customer traffic, tonnage growth and customer compliments during the Thanksgiving and Christmas weeks and see that the quality offering in our value proposition is increasingly resonating with customers.”

The company called for flat to 1% comp growth for the fiscal year and flat margins. It expects to open 32 new stores this year, with capital expenditures of $155 million to $165 million. While capex would be slightly lower than the $167 million Sprouts spent in 2016, new store growth would slow to 13% from 17%.

Maredia said his strategic priorities for the year include growing product offerings including private label and fresh; improving customer engagement; and investing in infrastructure, including technologies around deal management and ad planning, labor scheduling, and automated ordering and inventory management.

Sprouts plans about 50 store deli resets during the year, after completing 76 last year. He said the company recently hired a new culinary director — a former Kroger and Whole Foods chef, Matthew Pratta — to “help further drive innovation in this area and ensure product development is on trend and on high quality.”

For the fiscal year, net sales of $4 billion increased 13%, or 15% when adjusted for the 53rd week last year and comps for the year were up by 2.7%. Net income of $124 million was down from $129 million last year.

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