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Sprouts turns in double-digit sales gain for Q1

President, COO and interim co-CEO Jim Nielsen takes medical leave

Sprouts Farmers Market raised its fiscal 2019 guidance in reporting a double-digit sales increase for the first quarter.

Also on Thursday, Sprouts disclosed that President and Chief Operating Officer Jim Nielsen has taken a medical leave of absence.

Jim_Nielsen_Sprouts.pngNielsen (left) and Chief Financial Officer Brad Lukow have served as interim co-CEOs since the Dec. 30 departure of CEO Amin Maredia, who left to pursue other interests. The company has retained an executive search firm to help in the appointment of a full-time chief executive.

Lukow reported Nielsen’s medical leave at the start of Sprouts’ first-quarter earnings call with analysts this morning but provided no further details. “Jim is taking a temporary medical leave of absence,” he said. “We wish Jim a speedy recovery, and we look forward to his return.”

Later, during the question-and-answer portion of the call, an analyst asked Lukow for an update on the CEO search effort, noting that the process has entered its fifth month and Lukow is “now doing the job three people used to: CFO, CEO, COO.”

Lukow responded that such executive searches can take six to nine months. “The board is highly engaged. The search committee is moving through to the conclusion of the search. They're deep into it, and we'll hopefully have something in the not-too-distant future,” he said.

Brad_Lukow_Sprouts_CFO.png“We've got a deep management team who are executing on our strategic initiatives. And yes, in this interim short period while Jim's away, his direct reports are now reporting into me,” Lukow (left) explained. “It's not about one person; it never is. The company has been focused over the last 24 plus months of building the bench and bringing in great talent,” he added. “And the fact is that we're now approaching a $6 billion company. That has been pretty important in enabling us to attract top talent to the company. So we're feeling very solid as a management team that we're continuing to execute.”

Sprouts’ first-quarter results bear that out. For the 13 weeks ended March 31, the Phoenix-based fresh, natural and organic grocer had net sales of $1.41 billion, up 10% from $1.29 billion a year earlier. The company attributed the gain to a 1.4% gain in same-store sales and strong performance by new stores.

Sprouts opened about 30 new stores in 2018, eight in the 2019 first quarter and one so far of eight planned for the second quarter, with a target of 28 new locations overall for the year. The retailer currently operates 322 stores in 19 states.

“We continue to look forward to bringing our unique model of healthy living for less to two new states, New Jersey and Louisiana, this June. Our recent store vintages continue to open very strongly in both new and existing markets, resulting in a new-store productivity in the low 80s, a reflection of our growing brand strength that is resonating across the country,” Lukow told analysts.

An enhanced customer experience in the deli, meat and seafood departments is helping to drive results in the new stores, according to Lukow.

“During the second quarter, three new stores will be opened in this new prototype format. We continued to expand our selection of Sprouts brand private-label products that taste great, made with quality ingredients and at a great price. Private label now accounts for nearly 14% of our revenue today and continues to significantly outpace our overall company net sales and comp growth,” he said. “We will continue to introduce new staple trending and unique products this year, along with increased in-store, digital and social media messaging to drive further trial, engagement and loyalty among our customers.”

Online grocery delivery sales surged 60% year over year in the first quarter, Lukow noted, and Sprouts aims to broaden the availability of store pickup.

“We have is expanded our testing of click-and-collect and are now offering service in number of stores in six markets. We will continue to test and learn to ensure we are seamlessly engaging with our customers, regardless of how they choose to shop,” he said. “On the technology side, we have continued with the rollout of fresh item management and are on track to complete the implementation of production planning by the end of the third quarter this year. The system is allowing us to optimize production of the right items at the right time, resulting in better in-stock position and driving incremental sales.”

Sprouts_delivery_Instacart_shopper.pngSprouts said home delivery sales climbed 60% in the first quarter.

On the earnings side, Sprouts posted first-quarter net income of $56 million, or 46 cents per diluted share, compared with $67 million, or 50 cents per diluted share, a year ago. Adjusted net earnings were $56.8 million, or 46 cents per diluted share, versus $66.6 million, or 50 cents per diluted share, in the prior-year period. Sprouts said the earnings decrease reflects the cycling a lower effective tax rate and the impact of the adoption of the new lease accounting standard this year.

The earnings-per-share result topped the high end of Wall Street’s forecast. Analysts, on average, had projected adjusted EPS of 41 cents, with estimates ranging from 38 cents to 43 cents, according to Refinitiv/Thomson Reuters.

Sprouts issued revised fiscal 2019 guidance of $1.18 to $1.24 per diluted share. “We are increasing the bottom end of our earnings per share range to $1.18 from $1.16 to reflect the stronger first-quarter results,” Lukow said in the call.

For the full year, Sprouts forecasts net sales growth of 9% to 10.5% and comparable-store sales growth of 1.5% to 3%, reiterating earlier guidance.

“Our focus on fresh and healthy products at great prices has positioned us well to meet the needs of today’s customers,” Nielsen said in a statement. “And our ongoing investments in technology for efficiency, digital channels for brand and product awareness, and innovation for differentiation are paving the way to success for years to come.”

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