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Sprouts fights off pricing woes, beats estimates in Q1

Eyes Amazon Prime expansion; brighter outlook on easing deflation

Sprouts Farmers Market fought off 3% deflation and posted strong volume increases leading to better-than-expected sales, comps and earnings in the fiscal first quarter, the company said Thursday.

Sprouts officials cited growth in private label sales and deli, as comps improved by 1.1% led by a 0.6% increase in store traffic in the quarter, which ended April 2. Total sales improved by 14% to $1.1 billion. Net income of $46 million was flat from last year, aided in part by lower taxes.

Earnings per share of 33 cents increased by 10%, and beat consensus analyst estimates of 31 cents.

The results prompted the Phoenix-based natural food retailer to forecast slight increases in its financial forecast for the fiscal year. Sprouts is now anticipating net sales growth of 12.5% to 13.5%, comps in the range of 0.5% to 1.5% and earnings per share of 87 cents to 91 cents vs. previous guidance of 12%-13% sales growth, flat to 1% comps and 86 cents to 90 cents EPS issued in February.

Gross profit margins were down by 110 basis points from last year’s first quarter, when falling input costs had not yet filtered to the shelf level.

Officials said deflation of 3% in the quarter was the highest it had ever experienced, but that it moderated throughout the quarter, led by rebounding produce prices. That was an encouraging signal that the spate of deflation would be ending shortly, but officials were cautious about how quickly prices would rebound as competition remained intense.

“We expect 2017 to be in the 1% to 2% deflationary range, a slight improvement from what we believed at year-end mainly attributed to produce,” CEO Amin Maredia said in a conference call. “We anticipate that deflation will progressively improve throughout the year with the expectations that we cycle deflation in most all categories as we enter the third quarter.”

He added, however, that Sprouts would continue to make strategic price investments as necessary to maintain traffic, and said gross margins for the year would likely continue to be down vs. 2016.

“I think the competition for the competitive landscape continues to be heavy on some items,” he said, mentioning, for example, aggressive meat prices heading into the grilling season last summer that triggered the onset of deflation at retail.

In other remarks, Maredia said Sprouts intended to expand a 10-store test of providing home delivery through Amazon Prime Now with a goal of 20 stores this year and a “robust” rollout anticipated for 2018.

“We're pretty excited about the uplifts we're seeing in the stores where we are rolling this program out,” Maredia said. “We want to roll it out to make sure that the stores are able to execute it well … we're [also] trying to gain some more efficiency out of the process and really manage the cost for the collective Sprouts and Amazon partnerships.

Maredia said Sprouts remained on track with plans to launch an enhanced deli program at 50 new and existing stores this year, including a full-service case of freshly prepared meals and sides, a salad bar, fresh juices and soup stations.

“We're starting to see good volumes [in stores that have added enhanced delis] and those volumes are continuing to ramp up in the first quarter. We continue to see meaningful increases sequentially quarter-over-quarter in that area. So what we've learned is, it's a business that builds over time because customers are getting used to it, now that you have expanded that product into your stores.”

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