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Sprouts sinks on cautious outlook

Sprouts Farmers Markets on Thursday said it met quarterly comps sales guidance and beat earnings estimates on higher margins only to see its stock fall by nearly 7% on a cautious outlook including lower expectations for margins in the current quarter and sales for the fiscal year.

The Phoenix-based natural foods retailer said new store construction delays and expectations of continued slow inflation prompted the sales adjustment, from previous calls of 18% to 21% growth to a range of 17% to 19%. An environment of "near zero inflation" sparked by falling prices in proteins and dairy kept comp-sales growth of 4.8% near the low end of Sprouts expected range, and below analyst expectations of 5.8%. While gross margins as a percent of sales improved by 80 basis points to 30.9% in the quarter, officials acknowledged that that performance was unlikely to continue, attributing it primarily to having dialed down promotions as compared to the same period last year, and better profits as protein prices fell.

While the market was decidedly cool to the report, officials were upbeat.

"We feel really good about how we're situated," Amin Maredia, Sprouts' CEO, said in a conference call with analysts. "In a quarter where we had near zero inflation, pulling out a 4.8% comp is a testament to our ability to continue to drive traffic and our ticket, and engage with our customers in our stores."

Maredia said delays in new store construction, due mainly to inclement weather in California and the Midwest, triggered the sales guidance adjustment. "It just pushes some of our second quarter openings into the third quarter and third quarter openings shifting slightly from early in the third quarter to the middle of the third quarter. So, some sales weeks [are] lost there," he explained. "It's not ideal, but it's Mother Nature-driven for the most part."

In response to a question from an analyst, Maredia said Sprouts has experienced little impact as a result of Aldi's expansion into California.

"We've had a number of stores opened within a two-mile radius of Sprouts. And it appears to be a pretty different concept, and a very different customer," Maredia said. "We've tracked it very closely and we've not seen any impact from those openings to-date. And we'll continue to monitor that just like we do for all competitors."

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