Sprouts Farmers Markets, Inc. Aktie

All right. We're going to go ahead and get started. My name is Kelly Bania. I'm the food retail analyst here at BMO. Really happy to have Sprouts Farmers Market join us this year. We have CEO, Jack Sinclair, and CFO, Curtis Valentine, up here. We also have Susannah Livingston and Nick Konat. Susannah runs the IR team, and Nick is the President and COO, over here. But we're just going to do a fireside chat for the next 40 minutes.

For those of you that don't know, Sprouts operates over 480 stores across the country. They generate almost $9 billion in sales, $1.4 billion of which is digital. The company is on pace to open 40 stores per year and has really become a trusted partner for innovative product launches in the natural and organic space.

So where I wanted to start was just on the loyalty program. That's been a big initiative over the last year, kind of rolled out, I think, really in earnest in late Q4. Just wondering if you can just start with what are some of the key insights that you've learned so far? It's maybe early days, but are there any surprises or key learnings that you're getting from this as you get to know your customer better?

Sure. Yes. I think since launch in November, I think 3 things. On the first side, really good response from the customer. And credit to our store teams, a really incredible job they did talking up the program, engaging customers in the program. And so we saw a better-than-expected response from a sign-ups perspective. It was a really good start and really encouraging.

I think what we've seen -- on the positive front, we've also seen as members -- as folks have jumped into the membership, we can see that they were customers with us through credit card data once we get their first-party data, and we've seen a really nice response from that cohort, spending more, coming in more often. We're seeing them step change their annual spend at Sprouts.

We're seeing the existing kind of customers, the core customer of Sprouts has been really solid as well, right, spending about the same, coming in about the same amount of time. And then we're also able to more clearly see now a little bit of this challenge with the less engaged customer. That has been a piece that we haven't been able to move quite as well and has been a bit more of a challenge, and we've kind of talked about that on our last couple of calls of the challenge of getting somebody new into the program or somebody that's been a low-frequency customer before, trying to get them to spend a little bit more with us has been a challenge. Some of that may be affordability.

And then some of that, I just think we have an opportunity to continue to get better in this space as far as how we stimulate demand. And we're doing a lot of test and learn right now around the ways we can do that, and we've seen some really encouraging pieces in that as well. Things like, hey, at 10:00 a.m. in the morning, send the right customer a notification talking about our $5 sandwiches, our $5 sushi, our $10 wellness bowls, and we see an immediate response at lunchtime that day of folks coming in and transacting with us. So some encouraging signs early, and now we've just got to keep that flywheel moving, and we've got to get those programs to scale, and we've just got to go a little bit faster in that test and learn cycle to find more and more winning programs.

I'd also just add, Kelly, if this is a fireside chat, crank up that fire, because...

It's very cold in here.

Yes. Looking around, like, we could get the fire going any minute now. That would be outstanding.

I agree.

On the loyalty thing, I think, surprise on the upside to the number of sign-ups that we got. The store did a really good job of getting sign-ups to. So we've got more and more data than we ever thought we were going to get. I think this is the opportunity now for us, and we've got more opportunity ahead on loyalty than we're sitting on at the moment. We're excited by some of the tests that we've been doing and those tests and scaling those tests, maybe the surprise on the downside has been the challenge of scaling, how to get yourself to the point where you can automate the scale of the responses, so you can get to more customers quickly. And that's going to be one of the upsides for us going forward.

We do believe that the long term, there's going to be some fairly significant opportunities for us to engage with our target customers better than we've ever done before and understanding when we launch new products, how we can introduce them to the right customer in a personalized way. This personalization journey, we're only just getting started. And that's something that's going to drive, I think, a lot of upside for us in the future.

Okay. A couple of follow-ups there. I guess on that low-frequency customer, have you developed, kind of, a profile about who that is and what they're looking for more? I think it was a couple of quarters ago, you talked about there were maybe a little bit of a younger cohort. What else have you kind of identified as you kind of drill down on that cohort?

Yes. I think the early learnings were a little bit younger, a little bit lower income and a little bit Hispanic was the other piece that, kind of, demographically, we saw. A little bit over-indexed with the group that we were kind of struggling to move around a bit. I think now the benefit of the first-party data is being able to get a little bit more into the basket, what are they buying. What are others that are maybe moving up the ladder buying versus the ones that are just coming in a couple of times a year, a couple of times a quarter? I think those are the pieces we're still kind of sifting through and trying to learn from now that we can connect the old credit card data we had with the individual first-party person and have a little bit more clarity on frequency and engagement.

So continuing to learn really in real time about what they buy, what stimulates demand, running a battery of those tests around trying to get them to engage a little bit more deeply and winners, losers and trying to find different options to kind of move that customer.

Okay. Another big focus area for investors, I know, has been just the vendor participation in this program. So maybe you can help us understand where you are on that journey? And is -- a lot of your suppliers are kind of small innovative brands. Are they used to this kind of program where they might need to kind of participate in funding some of these promotions? Is Sprouts kind of bringing this and educating them? Or how familiar are they with this and the uptake? I guess there's a lot of questions on that.

Well, as you identify these vendors that we work with tend to be much smaller, and it's not the traditional retail media network dialogue that's going on from the big players, switching marketing spend from one space to the other and working. We've got this opportunity of this personalized health enthusiast customer who we can bring to whether it be gluten-free or grass-fed or the vegan vegetarian, we can take the information about the customer and join the dots with the individual vendor with a smaller vendor. And it actually gives them an access to be able to spend some money in marketing at a level that allows them to really target the customer they've got the best opportunity of engaging with. And we're at very early stages in this technology, we put the technology in place to get this done now.

And I'm excited actually the reaction to it. Increasingly, the vendors that we are working with and the smaller vendors that we're working with are looking for ways to get to the target customers. And this is the first time we've been able to really put in front of them, not just have a promotion across the board. Let's have a promotion that really works directly, introducing new products to people that's appropriate to them. Because we're doing 7,500 new products every year, pretty remarkable number of products. Majority of these are new products from small suppliers and increasingly, the personalization journey from loyalty. I'll be able to join the dots from 7,500 vendors, 7,500 products to the individual customers.

And from a financial point of view, we think it will actually help us not spend as much money on big across-the-board promotions and start to spend much more targeted. So it's better for the vendor, better for the loyalty customer and probably better for us in terms of how the economics work.

Okay. I wanted to just talk about kind of trends. I mean you guys are typically at the forefront of the trends that are happening in food. I think protein and fiber is a big one. What are you seeing there? But also you mentioned some new trends in vitamins and supplements. So can you educate us on what you're seeing across the board may be and what will be coming down the pipeline?

Well, you alluded to it. Proteins, if someone had said to me 5 years ago, we'd be excited about launching a protein soda people would have said you must be crazy. The world has changed fast in terms of protein. GLP-1s had a big influence on that. The MAHA agenda is having a big influence on how people think about what's in their food and how they eat and what's in the ingredients. And I think we're pretty well placed in terms of being clean product that's not got additives and colorings in the middle of the product. That's something that we've always been strong at and other people are chasing after it, but we've kind of got the reputation with our customer of being clean. And then as you get into all individuals, certainly, gut health has become a huge thing.

The whole, the whole -- and you alluded to how important vitamins and supplements are to our customer. Wellness -- health and wellness, the wellness agenda is straying into sleep and how brain health and the health of well-being and a lot of our supplement people, the people we've got working in our supplement department, Kelly, really inspire me in terms of if you go and talk to them and ask them for advice about sleep and if you ask them for advice about how to get your mental well-being where they're really, really strong in terms of new ingredients coming through, new vendors coming through.

And increasingly, it's a world where it's very difficult to be good online at this. It's a world that we've got that differentiation by having talent inside the store who can guide customers to different solutions in terms of how they're thinking about what they eat and how they eat and thinking about how their well-being goes forward. So lots of trends going on behind the scenes in this. Seed oil is a big thing that we're getting ahead of. Lots of trends on ingredients that are making a big difference for our customers.

I think aging and longevity is another one. So just up and down the age spectrum across income spectrums. There's a lot of people focusing on all those different topics in a variety of ways.

Is there -- I remember last year, there was -- I had to look it up, the Sea Moss, there's these trends that go viral. Is comping any of those? Were some of those just bigger last year that drove some outsized comp...

Do you want to do the baseball -- do you want to do the...

Sea Moss...

Yes. So we were having fun over the last couple of days because we've been out. We were in Boston yesterday and having some of these similar conversations. And so actually, one of the gentlemen had a good analogy, he was talking about baseball, and I hope this -- we have some baseball fans that will land for that crowd, but...

It's over my head.

We had our Scottish CEO who's trying to catch up with all this, but they're talking about batting average versus slugging percentage. The difference being a hit is a hit and that counts to your batting average, but a home run is worth more to the slugging percentage, what we had.

I hope you're listening to Curtis, when he's explaining that, because...

Jack turned that into the next meeting. He said, I like that. I like that analogy and he said, well, last year, we had more sluggers. And everybody kind of looked around and I'm not sure I know what that means. So -- but yes, to your point, to your question, we had a few home runs last year. Sea Moss took off, it went viral. And we had it on the shelf already. And so people come flooding in and we're out of Sea Moss for a week or 2, but we've got the relationship in place, and we're quickly back in stock.

Same thing with Coconut Cult on our shelves takes off on TikTok, and we're well suited to kind of capture those trends. Haven't had as many of those this year as we had going in that window of time. There's some other one-timers in there. Eggs was another big factor at the time. Conventional eggs were $12 a dozen. Because of our relationships, because of our sourcing, we had cage-free eggs at $5.99 a dozen. Chose not to gouge from a consumer perspective, and we saw a lot of traffic come our way and extra trips and extra items in the basket as the customer was just trying to figure out how to get eggs.

There was a strike at a competitor, at a regional competitor. There was a cyber incident with one of the bigger distributors that we have less exposure to. And so we had a few things going on all in that kind of 9-month window, Q4 of '24 to Q2 of '25 that gave us even outsized gains above and beyond the things that we were doing well from a strategy and from a from a health and wellness tailwind perspective.

And specifically to the Sea Moss, the kind of the viral -- when Kim Kardashian says something, it's kind of amazing how the viral impact, just dramatic changes in sales very, very quickly. And the fact that we had it in stock and available and everyone else didn't, that gives us confidence. If something like that happens, I think, it's hard for us to manipulate those things, they happen. But if you're launching 7,500 new products every year, you've probably got a good chance of catching whatever comes virally going forward, however it comes to the market. We think we're well placed to take advantage of when these opportunities come along. We've got a lot of new different products in front of the customer.

And that should be the kind of plus opportunity above and beyond a 2 to 4 algorithm that we're thinking about on a kind of a quarter-to-quarter basis. And those are the items that hopefully will add to what we can deliver on a regular basis.

I never thought Kim Kardashian would come up in a fireside chat, but...

There you go. Here we are. Well, here we are.

So in terms of kind of customer traffic, so that kind of less engaged customer, what do you think is happening to them right now? Are they just cutting their basket size? Are they replacing that at a conventional and finding maybe -- I think it's often a produce item. Do you have a sense or are you getting a sense more with the data of like what's really happening?

Yes. I think -- well, one is I think we really look back at last year, there was an extra trip, right? There was an extra item in the basket. And so just repeating that, certainly, the eggs example is the easiest one. If they have eggs at a regular price everywhere, then there's going to be -- it's easier access to those eggs and maybe a couple of less trips to Sprouts as a result. And what we are seeing pretty clearly even up and down into the core and existing customers is that last item in the basket. As the macro changes, as fuel prices go up, as the consumer is challenged.

So what we saw pretty clearly in '22 and '23 when inflation was a big storyline and what we've started to see a little bit again late last year, early this year, is a little bit of pressure on units per basket. For us, that tends to be a produce item because that's a big part of our basket and a lot of units in our 10-unit basket. And the customer starts thinking about whether they can really get through 3 or 4 units worth of fresh produce or whether they're going to have to throw it away, they start thinking about their household Shrink and whether they should buy that last unit.

And so we typically see our customer manage around the end of the basket. We don't see a lot of trade down or trade out around the attributes. They continue to buy the attributes, continue to come to the store to look for their dietary needs. It's really that last item in the basket that you can tell they're managing a little bit.

Okay. That's helpful. I remember last summer, you explained to me that you guys have a differentiation score that you track, which I thought was very interesting and something maybe we could just touch on. What is the methodology that goes into kind of tracking that and creating that? What are you seeing? Are you seeing conventional kind of react any differently as they're kind of searching for growth in this backdrop? Or is that pretty steady and there's no change? I feel like that's a big investor question, just kind of what's happening.

And the scale of what's -- clearly, people are getting more interested in the space that we are in this health and wellness space. And there's clearly a lot of really interesting entrepreneurs. America is a great place for having entrepreneurial spirit, bringing products and new products to the fore. And that's clearly having a lot of dialogue, not just with us across-the-board.

We use SPINS, we've got a percentage on SPINS that shows if something is being sold somewhere else. And what we do is we pick products. Our foraging team pick products for the innovation center that haven't been sold anywhere else in the country. So if you go into our store now, there's something called a Forager Finds table, which has got 20 or 30 items, which rotates every month or so. And those products are not being sold anywhere else. So they're totally unique to our business. And we've been finding that, that has become more and more productive as every quarter goes by, as our customers get more excited about. Our customers are very discerning. When you look at customers in our stores, they pick products up and read the labels and read the ingredients, more so than you would see in a traditional grocery store where people are kind of pretty mechanical about how they buy and what they buy.

So we've got certainly those customers who are interested in it. We're putting in front -- certainly, we had 65,000 applications for products to sell in our store. So picking 7,500 from those 65,000 has been one of the challenges for us. Our challenge isn't can we get enough? Our challenge is how do we pick the right ones? And how do we do that? The methodology, Kelly, to your question is how do we ascertain that these products haven't been sold anywhere else. And we've been pretty consistent about working that one through. And the fact that we're doing so many products, 7,500 gives us the right and I think the credibility with the small vendors to say, this is where I should start my product journey.

If I'm going to move from DTC or my idea and I want to get into a store, we're certainly feeling that Sprouts has been seen as a place where it would be a good place to start. And we've seen products, when you think of what happened to OLIPOP, which started with us and ends up everywhere. A lot of our products migrate through the channels, they go into the conventional and they go into mass. And it's something that we're positioning ourselves as the place to launch innovative different products. So we'll be as good as we are at that, and it will be a very big determinant in our success going forward, being really good.

The one thing I do know is that whatever else, whoever else is doing, they're not going to launch 7,500, because it's really difficult to launch. It creates a load of challenges. Operationally, we've got people that have worked in other places like myself. The idea of launching 7,500 and exiting 7,500 creates so many problems for your planograms, your replenishment, your backroom replenishment from the back to the front of the store. Those challenges make us a little inefficient, but they give us that differentiation. And that inefficiency is something that people are reluctant despite the point that you're making that other people are looking at the opportunity there. So we've got the way of understanding that nobody else is selling it.

We're trying to position ourselves as a place to come if you've got -- and anyone in the room that's got innovative different products come and talk to us, because we'll be the best place to launch it. And as we evolve, develop this -- that muscle that's going to be an important part of our business. The grocery industry is changing fast, and the big old monolithic CPG companies, if I can say that politely, got themselves in a place where they are having to move fast and they're finding it difficult to do that, and we certainly see ourselves as a pioneer in that movement.

So a couple of questions on that. So 65,000 new products are trying to get in your stores. You're getting about 7,500. So what are those other brands doing? Are they going to third-party marketplaces and launching on that? And has that become a different area where your customer can find, kind of, even those super niche brands? Or is that not really a competitive? Do you see that as a competitive dynamic?

Well, I think they will. They'll clearly try and find a way into the marketplace and marketplaces. The challenge when you've got products that people don't know about, they don't know about it, it's hard to go -- if you don't know what you don't know. So the opportunity we've got is that when we launch it in our products, people can get access and try it. If you just go on a marketplace, you've got to do pretty hard work to get people to understand it.

And that's -- again, when you look at marketplaces, they're a distribution solution rather than an assortment or a curation solution. And that's kind of where we're at in the journey. We'd like to be that curator of it. And we'll learn a little bit from DTC. If some of those 65,000 products that were not -- or 58,000 products that we don't take, if some of them end up on DTC and start selling, we'll probably be thinking maybe we should have that in our business, so we can watch that. And increasingly, tools to understand that. AI tools to help us understand the pace at which things are changing online, linking to the trends. The foraging team are working pretty hard at that, thinking how best to navigate our way through those challenges.

And I guess on the other side, so you mentioned -- so if you're going to add 7,500 new items, you've got to take 7,500 out. How challenging is that? Because you have presumably customers that like those products, maybe they're not the most popular, but you've got to pull them out and then you have a customer that comes back and says, I have this brand that I was just getting accustomed to, it's not here anymore. So how do you -- how hard is that to manage?

It's kind of a great question to ask someone that's been a grocer for as long as I am because it's the big kind of dilemma that you have in changing your assortment. For any grocer, you take it out, somebody is going to be upset. The reality for our customer and why our customers are so different, they kind of accept, whereas they wouldn't accept it at many places. They kind of accept that if they've taken something out, they've brought something in. And that's something in that will replace what I would have -- and they're comfortable in navigating their way through, they brought new things in. And that's something very unique about our customers.

We always talk one of our values is loving being different. Our customer base is different. And it's in that limited space. And increasingly, as we've done this, as I said earlier, these foraging tables that we've got just continue to do better and better. And the migration, it's interesting, the migration from the foraging table, only 30% of them make it on to the main, 70% fail, but that opportunity of customers seeing things, trying things and then something new comes in seems to be accepted by our customers.

Yes. On the financial side of it, Kelly, it's embedded in our business, right? It's been the way we've always operated. So we can just make it better by getting more efficient in the way we manage the in and out of SKUs, the way we manage inventory. And some of the conversation we've had over the last couple of years around Shrink reductions, markdown improvements, that inventory management conversation we've been having has been -- that's been one of the pieces. And it's one of the reasons we still feel like we have room to go and room to get better as we continue to improve the end-to-end supply chain, the relationship with the suppliers, the tools and the analytics and the process that we go about moving those 7,000 products through. That's where our upside is because it's inherently embedded, and it creates a challenge for someone else trying to figure out how to get into it because it's an investment for them. For us, it's an opportunity from a financial perspective.

Does this cycle of products in and out, does that happen any -- to a greater degree at any time in the year? Or is it just kind of always happening?

Probably just seasonally, like some of that is the in and out natural seasonal programming we run. So maybe the holiday time frame would be certainly a heavier time of year. Around that, though, it's a pretty consistent. We've got mechanisms, be it the innovation center, which turns over on a regular cadence, our category release program, which is on an annual cadence. And then the teams have also done a nice job developing speed-to-shelf processes where something really great is out there, you don't have to wait for your next category release, you just cut it in and bring in a smaller piece of the set. And so they've got -- the category managers have multiple options for how to bring that innovation in, and we try to be pretty nimble in how we think about it for obvious reasons when there's so many options and so many SKUs that we're moving through.

And the private brand team have done a really nice job around seasonal events to try and get ahead of the seasonal event, holiday events. We've done a summer sweet and heat event across all other categories that are under the Sprouts brand. We've done lemon events, which try to straddle across different categories linked to seasons, and that's been quite in and out process around some private brand work as well.

I'm glad you mentioned the private brands because -- so your private brand penetration has continued to go up, but you started talking about this affordability kind of dynamic in the past couple of quarters. And you would kind of think the private label really is a solution to that. So how do we think about private label's role in kind of addressing the affordability dynamics that you want to address versus anything else that you're doing on that front in terms of tests? Is it mostly a private label thing? Or is it a broader...

It's much broader than the private label thing. Just specifically to the private label, Kelly, or the way we think about private brand is very different to how you would traditionally take a branded product, replace it, sell it much cheaper and try and match the quality. We're trying to differentiate ourselves. So all of our private brand growth, which has gone from 16% to 26%. Without any -- we don't start off by saying let's get a higher percentage of private brand. And our margins on private brands are in line with the category. So it's not a margin enhancing. What we're trying to do is reinforce those opportunities in the marketplace around attributes. So a lot of strength in gluten-free and organic and those kind of initiatives.

So -- and that's part of bringing people value in terms of giving them attribute-based products at the right price. The broader affordability initiatives are around our customers. Our customers tend to say they really like us. The feedback we've had from a lot of customers is, look, can you just help us a little bit in the current scenario where we're at with gas pricing and the pressure on health care costs and the pressure on rent costs. So that broader affordability challenge that everybody is facing.

Our customers are saying, we want to continue to eat healthy. We want to continue to access your products. Can you help us make it a little bit more affordable? So we've looked at some of those items that are prevalent in our basket. And our basket is different to our traditional grocery basket and looked at those items, whether it be organic sourdough bread or whether it be organic coffee, whether it be frozen organic fruit. Those items are prevalent in our basket. We've looked at doing some specific tests on those kind of products to see what kind of elasticity we can get from that. We're not looking at other people's prices. We're looking at our own prices and saying how can we help our customers a little bit more in this affordability journey and how that's going to play out over the next few months, who knows. But the reality for us is we've got to take care of trying to be as effective as we are at passing affordability. So initiatives going on.

That broader initiative has been important. And then going back to what Curtis was talking about on loyalty and personalization, it does give us an opportunity to pick out how we can support particular issues for particular customers, and we're doing some tests on that as well.

And that will reshape how we think about promotions, obviously, with the loyalty personalization. One place private label can play a role. The other piece that we're thinking about from an affordability perspective is the assortment itself. So we talk about wellness bowls, which we've touched on in the last couple of calls, phenomenal ingredients, NAE chicken, grass-fed beef, really good flavors, unique flavors. We have a chef in-house that's part of our foraging team that develops these recipes and we've got that bowl priced under $10.

So meal-time solution, it's good, healthy portion, and it's been great. We've seen it when we get it right, healthy attributes, great price point, like our targeted customer and what they're looking for, it flies off the shelves. And so that we would consider kind of Sprouts brand too and some of the organic offerings we have. I mean, those are places where it can absolutely play a role in developing the type of products that our customer responds to and also show great value. And we've already got the $5 sushi, the $5 sandwiches. We just launched some yogurt parfaits, which are right on trend, again, with some really good ingredients that are doing well. So those are the places that when we get it right, the customer responds, and we're looking to do more of that as we look ahead and we think about how we build out that private label road map where we can find more of those types of solutions.

And the deli team have done a really nice job within the context of a marketplace where potentially with gas pricing people are more likely to eat at home than eat out of home. Is that a positive opportunity for us? Certainly, the alignment of our -- that Nick has been working on around the marketing, the operations and the merchandising team to bring to the market, the kind of things that Curtis was talking about, and we'll do more of that as we double down on our deli. And that requires some investment as well in product, but also investment in people and having the right hours in place to produce the right products at the right time.

Of course. You've had a lot of success in deli. You have seen the family meals, too. I just saw an ad for that looks really interesting. But in light of all that, you've had a lot of progress on Shrink. And you touched on that a little bit, Curtis, but you've kind of suggested there's still more upside on the Shrink front. So help me understand kind of where are you? Do you have a -- can you share a benchmark or anything? Because it's kind of amazing that there is still more opportunity on Shrink, I guess.

Well, I think, yes, the lion's share, we've gotten big gains over the last 4 or 5 years, and I don't know that we've got another kind of step change that way left to go. I see my CEO nodding his disapproval there, and he'll have a higher aspiration. But I do think there is -- again, the inventory complexity, the supply chain complexity, the in and out of the SKU base, I mean, those are still opportunities for us. There's an inherent cost of the business, Shrink in the business from those things, and we still have room to get better there. And so that's where our kind of belief comes from. Is it going to be 50s and 100 from a basis point perspective? No. But I think is there's another 10 every year that we could go get in that space.

Certainly, that's something we think we can do. And our Head of Operations believes it as well. And we're putting technology and process and data investments into place this year to kind of continue to take that next step in the journey and continue to figure that out. So I think the way we order -- I mean, right up and down the line, we've made step changes, but we're by no means at Walmart levels of productivity as it relates to how we move product through the ecosystem. So there's just still room to grow and mature as a company, and that's kind of where we -- that's where that kind of statement comes from about continued opportunity.

Okay. I should have mentioned, too, there is an app. If you want to submit questions, I can try to loop it in. I have like 1 million. So we'll just keep going. But if you want to submit, go ahead. I guess let's switch maybe to real estate. You've really been ramping up the square footage growth over the years. We should be at 40 stores this year. That's a lot of stores. How is the organization handling this ramp? And can you just talk about the quality of the locations that you feel like you're getting, which is obviously going to be important as we move through the next couple of years?

Yes. Well, tons of white space, right? So as we think about where we're going, the last 5 years, Florida, the Mid-Atlantic, kind of East Coast has been our newer markets that we've gone into. And now as we look ahead, those markets are performing well. We kind of consider them graduated at this point into a more established market. And now we look ahead to the Midwest, Chicago is the center point, the Greater New York area where we've just opened in Long Island recently and then ultimately up into Boston and New England to kind of complete the Northeast. And so quality of locations, I mean, it's a complete blank slate, right?

We get to go in and choose the absolute best of the best. We use our real estate process where it's analytically driven at the start where we have pins in the map, it's at cross street level, not just 3-mile ring level, and that's been a change that's been really helpful for dialing in. The further our teams get away from that cross street, the lower the sales projection they get, which makes it hard for our directors of real estate to pencil a pro forma. So they're incentivized to get tight to that optimal location that we've kind of determined through the math of it. And then we've got our operators engaged in that process, too.

So if we say we were going to do 300 a week at a certain location, the operators there are going, well, the site is down in a hole, it's behind a tree. You can't turn right into the site, like I don't -- you can't do 300 in this location and on they go to the next one, right? And so there's a real healthy tension in the process that kind of eliminates the quality concern around it. And you've seen where we've tried to get -- we've been chasing 10% unit growth since the beginning of the strategy. And as we have, as we always will, we'll choose quality over quantity. So we've definitely yet to sign off a lousy site in real estate committee, one that we said this isn't going to go well, and we've signed it up anyways. We continue to reject those.

So I think the quality is going to continue to be good. And what we've seen in the last few years is really good results, better than we anticipated. and that's continued here into '26 with the early openings so far. The '24 and '25 vintages continue to comp well. They are positive comps even though the broader business is struggling. And it's a piece that gives us confidence as we look about -- as we look ahead and talk about the return to the algorithm from a comp perspective, that's a proof point for sure that we look at and go, while there's still -- the proposition is still resonating. When we open a new community, we get a great response. And so we're building a lot of confidence around the new store program and excited to get to -- hopefully get to 10% next year as we start thinking about '27.

And the thing that gives us a lot of confidence that the format seems to be in really well. The format was very intentional. One of the strengths of what the guys that created Sprouts was having low-profile stores that you could see produce at the back of the store. A very unique grocery store in terms of how it comes together, low profile, you can see the whole store when you walk into the store, and you can see produce as the main feature at the back of the store.

And that at 23,000 square feet, we were drifting to bigger stores at 32,000 square feet with a lot of investment. The cost of building a store at 23,000 square feet is a lot less than 32,000 square feet. The cost of running the store is a lot less than 32,000 square feet. The cost of rent and also the economics that we envisaged here was let's sell the same as we would in a 32,000 square foot store in a 23,000 square foot store. And that's giving us a lot of confidence as this plays out in terms of the returns that Curtis would talk about, but also in terms of the way the customer is reacting to it.

They like the format. And that's -- as we take it to new markets, we were in New York at central reach at the store we opened in Long Island. And it surprises -- they think they're going into a grocery store. And when they go in, they go, well, this is different. And you can feel the kind of energy when people see something different and something new, because grocery stores are pretty homogeneous across the country. And that differentiation is something that gives us a lot of excitement in terms of what it can do for us going forward. And we think there's 1,200 places we could have one within the context of what Curtis was talking about. But the idea of bringing a new format to a new market, it's actually fires us all up. It's quite exciting to be part of seeing all these stores getting built all over the place and going into new markets and seeing people kind of excited by the idea of something new.

Well, same for our team members, too, the opportunity ahead. You know you can come into Sprouts and really grow a career and grow it rapidly. We're promoting north of 20% of our team members in the last several years just on the back of all the store growth. And it's not -- yes, you've got to staff the store, but you've also got to go backwards and staff the replacements because we're trying to move Sprouties from stores that have existed into especially these new markets, it's going to be really important that we open with folks that have been in Sprouts and other locations that understand our customer, understand our assortment, understand how we operate differently so that they can provide that experience to the target customer in those new markets.

And Dustin and Timmy, our Head of Stores and our Head of HR, have been working, again, years out, thinking about Chicago and how are we going to staff there, how are we preparing the next level of leaders. We've invested in training and development, and our talent engine, as we call it, to make sure that we're ready when we get there. And we're already talking about who's willing to move to Chicago and help us open those stores when we get there. And the teams are fired up because they see the opportunity, and they're excited about all the things that Jack just mentioned and the customer response and being a part of what we're doing. So it's a fun place to be. Lots to do, lots to work on, lots to get better at, but it's certainly a lot of fun.

We have 1 minute left. Two questions that I wanted to fit in. I'm running out of time. I wanted to touch on e-commerce because the growth has been huge there. And I guess, what do you -- are you able to kind of loop in your data with that and really learn more about what's driving that? Is that a new customer? Is that penetration? Are you getting smarter with kind of your data to integrate that and go, here's what -- here's where we're really growing in e-commerce and what the potential is from here?

Again much better linking with [indiscernible], with Instacart, DoorDash and Uber Eats solution, which is what we use. Our e-com business is now 16% of our sales. It went up to that level in COVID. It's kind of stayed the same, which is unusual. A lot of grocers, it went back down again. We believe -- and we know that our customers are omnichannel customers. Most of the customers that are operating in that e-com space are also in our stores, so they kind of understand both of it. We like e-com because the basket is bigger. So the cash profit, the margin is down -- rate is a little bit lower, but the cash profit is much higher, and we've got very close relationships with the -- with our partners to make sure that we're getting better at that data question that you're asking.

And it's an access point for our customer. They don't -- if they can't get to the store because maybe they're 25, 30 minutes away and a 50-, 60-minute round trip is too much for a handful of their items, they've got an option now. So when we open up a trade area, 10 to 15 minutes brick-and-mortar, but 30 minutes from an e-com perspective, and we know that, that helps with frequency and engagement and access for the target customer.

There was one more question, we were having a good time and we've run out of time.

We're out of time, but I was going to ask just how you -- how -- based on what you're seeing in the data, comparisons changed dramatically in the back half. How confident are you in the back half outlook as it stands today?

Yes. I'll let you build on that. The numbers are pretty clear in terms of math thing. It's a relative -- we're not sitting here waiting for the lapping to come through. The lapping will come through just with the math, if you're looking at unless something macro happens, which is clearly an opportunity for us. We're doubling down on what we can do. Curtis is creating the space for us in terms of not be compromising our margin and do the right things on affordability, the right things on deli, the right things in terms of loyalty and personalization, the right things on data, the right things on our marketing investment around space, around media work.

So there's a lot of really good things happening that would be on top of just the math number. So I think what we talked about, we're really confident in our business, partly because the new stores have been so successful. In the midst of all these ups and downs, we've had real success in our new stores, that gives us a lot of confidence.

Okay. Perfect. We have to wrap it up there, but thank you so much.

Good day, and thank you for standing by. Welcome to the Sprouts Farmers Market First Quarter 2026 Earnings Conference Call. [Operator Instructions]

Please be advised that today's call is being recorded.

I would now like to hand it over to our first speaker, Susannah Livingston. Please go ahead.

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our first quarter 2026 earnings call.

Jack Sinclair, Chief Executive Officer; Curtis Valentine, Chief Financial Officer; Nick Konat, President and Chief Operating Officer, are with me today.

The earnings release announcing our first quarter 2026 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website @investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2026 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 information, please refer to the risk factors discussed in our SEC filings, in the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures.

With that, let me hand it over to Jack.

Thanks, Susannah, and good afternoon, everyone. Before I dive in, I want to start by thanking our team for their disciplined execution and continued focus throughout the quarter. The first quarter played out largely as we expected. We continue to work through tough comparisons and a cautious consumer backdrop. Our recent new store openings are performing well and we continue to be trusted partners for innovative product launches. Progress in our self-distribution of meat has been encouraging and is nearly complete.

In addition, we continue to strengthen our talent across the organization. Our purpose is clear. We help people live and eat better. Our immediate 2026 priorities are to strengthen differentiation through forging and innovation to reinforce our great in-store experience, to accelerate customer engagement through loyalty and personalization, to build an advantaged supply chain, to expand access to healthy food through new store growth, and to take targeted actions to strengthen value, all supported by our investment in our talent and technology.

This quarter, we executed with discipline, balancing early loyalty investment and targeted value actions with cost control, while continuing to advance the capabilities we need to support our long-term growth. I want to thank our team for their focus across the organization. With strong execution and easing comparisons, we're expecting sequential improvement in our business as we move through 2026.

For now, I'll hand it to Curtis to review our first quarter financial results as well as our updated 2026 outlook. Curtis?

Thanks, Jack, and good afternoon, everyone. In the first quarter, total sales were $2.3 billion, up $93 million or 4% compared to the same period last year. This growth was driven by strong new store performance, partially offset by a 1.7% decline in comparable store sales. Innovation is a differentiator for Sprouts and continues to drive our sales. E-commerce sales grew 10% and represented approximately 16% of total quarterly sales. Sprouts brand also continued to perform well, growing faster than the rest of the business and representing more than 26% of total sales.

During the quarter, we maintained discipline around margins and returns. Our first quarter gross margin was 39.4%, a decrease of 20 basis points compared to the same period last year. This primarily reflects loyalty investment consistent with our plan and unfavorable shrink performance. These headwinds were partially offset by benefits from self-distribution, which is performing as expected. We've taken initial steps to improve affordability for our target customers. We have made selective price adjustments on the most relevant items to our customers' baskets alongside a more focused promotional plan.

We believe our P&L and guidance provides flexibility to support these actions and our customers' needs. SG&A for the quarter totaled $659 million, an increase of $36 million and 42 basis points of deleverage compared to the same period last year. This was primarily driven by fixed cost deleverage from lower comparable store sales. We remain focused on cost discipline while funding key growth and customer initiatives for the near and longer term. Depreciation and amortization, excluding depreciation included in the cost of sales was $42 million. For the first quarter, our earnings before interest and taxes were $215 million. Interest income was approximately $129,000 and our effective tax rate was 24%. Net income was $164 million, and diluted earnings per share were $1.71, a decrease of 6% compared to the same period last year.

On unit growth, we opened 6 new stores, ending the quarter with 483 stores across 25 states, including our entry into New York. Our strong and healthy balance sheet continues to provide flexibility. For the first quarter, we generated $235 million in operating cash flow, which enabled self-funding of our investments in capital expenditures of $98 million, net of landlord reimbursement. We also returned $140 million to our shareholders by repurchasing 1.9 million shares and have $696 million remaining under our $1 billion share repurchase authorization.

We ended the first quarter with $252 million in cash and cash equivalents and $22 million of outstanding letters of credit.

Turning to our outlook. We continue to lap some exceptional numbers from last year. We expect year-on-year comparisons to improve in the back half as trends ease. We also believe our initiatives will build as the year progresses. As a reminder, 2026 will be a 53-week year with the extra week falling at the end of the fourth quarter. For the full year, on a 52-week basis, we are maintaining our outlook for total sales growth between $4.5 million to 6.5% and comp sales between negative 1% to positive 1%. We still plan to open at least 40 new stores in 2026.

Earnings before interest and taxes are expected to be between $675 million and $695 million. We expect our corporate tax rate to be approximately 25.5% and we expect capital expenditures net of landlord reimbursements to be between $280 million and $310 million. We are increasing our earnings per share outlook to be between $5.32 and $5.48, assuming at least $300 million in share repurchases.

For the second quarter, we expect comp sales to be in the range of negative 2% to 0% and earnings per share to be between $1.32 and $1.36. EBIT margin pressure is expected to be approximately 75 basis points due to fixed cost deleverage from lower comp sales, annualizing our loyalty points investment and the impact of higher fuel costs. We will continue to manage the business with a balanced approach, investing for the future where we see the best returns while remaining disciplined on execution and cost control for 2026 delivery.

And with that, I'll turn it back to Jack.

Thanks, Curtis. As always, we are confident in our strategy and the long-term potential of Sprouts. Our focus is to stay true to our strategy and sharpen execution across our priorities forging and innovation, customer experience, supply chain and new store growth, supported by targeted investments in talent and technology. We strive to make healthy eating accessible and affordable. As health and wellness evolves delivering differentiated attribute-driven products remains central to how we stand out and meet our customers' expectations. We're leaning into foraging, innovation and discovery to introduce new and distinctive items with clean ingredients.

We've seen particular success with organics as they remain an important quality standard for our target customer and a meaningful growth driver for Sprouts. In the first quarter, more than 55% of produce sales were organic and over 34% of total sales came from organic products. We've already launched 1,500 new items this year, including brands like press, coffee, cold brew, protein drink, pendulum probiotics for gut and product protein soda. Innovation remains our strength, and we continue to attract a strong and healthy pipeline of emerging health and wellness brands that view Sprouts as the preferred launch partner.

Sprouts brand continues to grow, expanding our differentiation across both fresh and nonperishable categories. Several of these innovations are resonating with customers, most notably our regenerative organic certified coffee, SED oil-free humors and beef tallow kettle chips. As we innovate, we remain focused on maintaining the right balance of everyday wellness essentials to curated premium wellness items, ensuring relevance value, and quality for our customers.

As we go to market, you'll see us leaning more into our leadership in the health and wellness space. This is why customers seek us and continue to shop with us. As a result, we're sharpening our marketing to more clearly express what makes Sprouts unique, highlighting differentiated brands, founder stories and product innovation. The store experience remains another core differentiator, and our customers consistently cite it as a key driver for the love of spreads. That advantage starts with what we believe is the best store team in the industry. Our team members are essential to delivering our unique assortment and supporting customers with attribute-driven needs, combining expertise with authentic personal service. This year, stores are focused on simple genuine customer connections that make shopping easy and enjoyable while elevating daily execution, improving installed freshness and production efficiency.

I want to thank our team for the work they do every day to make our customers feel welcome.

Another theme core to the DNA of Sprouts is making healthy eating accessible and affordable. It always starts with our assortment. And we're working to bring healthy delicious meal solutions, such as wellness bowls under $10, $5 Sushi Wednesday and our $4.99 sandwiches. We will continue to innovate in areas that highlight Sprouts healthy attributes in everyday essentials, such as our recently launched 2 new yogurt phase with restaurant quality at a great value.

We're also taking a targeted approach to price and promotion with a clear focus on returns. In the first quarter, we took initial price reductions on a small number of SKUs, such as coffee, and a handful of other essential items. As well, we continue to test additional pricing opportunities. We're reshaping our promotional plans to be more streamlined and targeted on driving greater value on the categories and items that matter most to our customers.

We continue to invest in talent and technology to strengthen our operating model and build the capabilities needed to scale. This year, we're bringing new training and tools to our team to help them see opportunities in their business, to improve how we drive in-stocks and better manage strength. We believe these investments support consistent execution in stores, enhance customer experience and position Sprouts for sustainable long-term growth.

Our loyalty program continues to scale. And is a strategic lever to deepen customer engagement. We're seeing positive customer response to both broad-based and targeted offers, including loyalty multipliers. As participation grows, we're gaining richer insights into customer behavior and using these learnings to accelerate personalization.

Building on first quarter insights, we're adding resources to increase the pace of testing and learning and investing in capabilities and tools needed to turn what works into scalable programs. Vendor participation and demand have been strong, reinforcing our ability to expand these programs over time.

From a supply chain standpoint, our focus is on building an advantaged distribution channel that allows us to take more control of our fresh inventory. Our plan to open our new Northern California distribution center in the second quarter is on track and will complete our initial meat self-distribution journey.

In addition to our structural changes we're making targeted enhancements to improve service levels, inventory management and allow the organization to respond more quickly to shifts in demand. As I noted, New stores are off to a strong start, reinforcing our confidence in our long-term strategy. Already in 2026, we've opened stores in New York, Texas, Florida and Virginia to resounding success. We're seeing great reaction as we enter new communities, and we're sharpening site selection as we scale, expanding access to healthy puts from sea to shining sea.

Looking ahead, we have nearly 150 new stores approved and more than 105 executed leases in our pipeline.

To wrap up, while the near-term backdrop remains challenging, we believe we are well positioned to navigate through it. We're encouraged by what we can already see in new stores, execution, supply chain and the team with easing comparisons, discipline around cost management and the initiatives we have underway, we're confident in our strategy and our ability to drive long-term value.

Thank you for joining us today. We look forward to sharing more of this journey with you in the quarters to come.

And with that, I'd like to turn it over for questions.

Operator?

[Operator Instructions] Our first question will come from the line of Rupesh Parikh from Oppenheimer.

Just given some of the macro concerns out there, just curious just overall what you're seeing in terms of the healthier consumer. And then as you look at different segments, low, middle, high, just curious if you're seeing any changes there?

So yes, clearly, there's a lot going on in the macro environment, and we're watching it pretty closely. We're focusing in on what we can do in terms of making life as good as we can for all of our customers. Certainly, the macro environment suggests that our loyal customers have stopped very much to us going forward. The less engaged customers are feeling a little bit more pressure and it could well be to do with the income levels.

But I think it's a kind of general pattern across our customer base. As we look at the marketplace, it's a little bit uncertain what's going to happen going forward, and we are focusing on doubling down and being good at what we do and kind of encouraged by certain categories in terms of when we've done some price investments or some response to that. And I'm encouraging some of the work that we're doing in our deli departments and increasing the options for people to access healthy, cheaper food direct from Sprouts..

Great. Then maybe just going deeper into just your -- some of the price reductions. Just as you look at all your value efforts, how do you say they're progressing versus your expectations and just confidence in gaining further traction from here?

Well, we're doing a number of different tests in different places, and some are working better than others, and some work very directly, and that's what we're learning. The testing process is both a geographic test, which we're doing in certain places. And specific categories. Tariffs put quite a number of -- we referenced coffee in the script. Tariffs put some pressure on the top line prices of a number of categories. And that's kind of eased off a little bit, and we've certainly been investing a little bit in that coming back the other way. So we're being very selective by category, and we're doing some specific tests across different geographies.

Our next question will come from the line of Thomas Palmer from JPMorgan.

Maybe I could start off A little bit of a follow-up to Rupesh's question on affordability. What behavior change are you seeing, I guess, as you run these tests in terms of are you driving more new customers into the store? Is it more about seeing existing customers buying more items? And how do you communicate the improved price points to customers? What have you found effective?

Go ahead, Nick, I'll let you see that.

Tom, it's Nick here. So a couple of things.

Jack mentioned it. It starts with the assortment work we've done. The 2 areas I'd call out I think that have been most successful at driving basket. And I think we're also seeing track it on these categories is the work we've done in the deli with wellness bowls, our new part phase, our $5 sandwich $5 sushi. Those have been really good for us, and we're seeing both basket and traffic to those areas increase.

Sprouts brand, the other I'd call on the assortment side. If you look at -- we've got tremendous organic offerings, and that's driving organic growth. And as we push and market those, we're seeing increased sales and basket in those Sproutsprend items.

On the pricing side, for us, our focus is twofold to try to put a few more ends in the basket and also to get our core customer to come back more often because those everyday essentials are more within reach for them. So that's how we're looking at the pricing activity and how we measure it.

Okay. And then just a follow-up on the commentary about the expected EBIT margin pressure in the second quarter. Any help just on kind of the split between gross margin and SG&A that you foresee? And maybe any framing of kind of how much of this 75 basis points might be related to fuel?

Yes, this is Curtis. Yes, a little bit of extra pressure from fuel in the second quarter. That's kind of what we've embedded for now, and we'll see how that evolves through the quarter here. The shape of it will look pretty similar, I think, to Q1. So if you look at our Q1 results, some pressure in gross margin, maybe a touch higher, we've got our new NorCal DC rolling out. So there's some overlap cost there as well as the fuel you highlighted. And then maybe just a touch better on the SG&A than what we saw in the first quarter, but generally pretty similar shape to what we've experienced here in Q1.

Our next question will come from the line of Seth Sigman from Barclays.

I wanted to follow up on the point around affordability and you're making some price changes. I know that's not all you're doing. There's other efforts to improve affordability. But can you just remind us how you can manage that all from a margin perspective? Like what are the offsets we should be thinking about? And then a related question, on the loyalty program, specifically the vendor support. Where are we from that perspective? I know it's still early, but I know that's a part of the equation through the year to start to see some stabilization in the margins. So help us think about sort of that opportunity.

Yes, this is Curtis. I think, yes, the opportunities we've talked about are inventory management continuing to improve in that space, specifically within Shrink a little challenging in the first half that challenge eases and we get some easier comparisons in the second half just because of the sales volatility we've had year-over-year. We should continue to get better at shrink. We should continue to get better at markdowns and how we move product through the ecosystem. Those are the things that we've been working on that we can continue to get a little bit better at as we move forward.

Certainly, the vendor funding is another piece, then that's really, as you noted, early days, but we'd expect that to ramp as the year evolves and build as we continue to build programs around now we've got the loyalty data and how we go to personalize off of that. So that will be a piece that kicks in helps as well. But those are the primary drivers.

Over the longer term, we'll think about self-distribution and other further opportunities there, and that should also be a helper down the line.

Okay. Great. That's super helpful. And then just thinking about sales, you're guiding to sequential improvements through the year, comparisons are obviously a factor. But can you talk more specifically about the signals that you're seeing in the business now that gives you confidence that perhaps trends have stabilized after the slowdown that you've seen over the last couple of quarters? And I guess, in that context, how are you thinking about the Q2 sales guidance?

Yes. It's played out pretty much as expected. As you know, it's only been 60 days since last we chatted here. So it's not a lot has changed, but we're seeing some slight improvement in traffic, some slight improvement in units as we get into the second quarter here. And it's kind of playing out as we thought. Similarly, we talked -- we have talked visibility into the customer and a perspective on what that would look like as it relates to the improvement quarter-to-quarter, and that's played out as expected.

And so -- it's early, it's 60 days later, but so far, so good. We've seen things play out kind of how we were thinking they would. Beyond that, if I go back to why do we have confidence from a broader perspective, it's the 4-year run we had prior to the last couple of quarters where we built sequentially over time to that 3% to 4% comp in the algorithm. And then a really strong obviously experience with some tailwinds in '24 and '25. So obviously, it lapping is a challenge, but we believe we get the other side of that, that we'll get back into our algorithm later this year.

Yes. And I was the lapping is clearly a part of this dynamic going forward in terms of why we're feeling better what's going to happen in the second half. But there is still continued tailwinds in terms of this health and wellness and clean ingredients. The marketplace is trending towards that. And there's clearly some macroeconomic dynamics that play into it. But that underlying trend that's been with us for a number of years, we think we're really well placed to be in taking advantage of that.

And to next point on assortment in terms of making sure the assortment we're bringing forward in both the Sprouts brand products and the new products we're bringing in, playing to that health and wellness and differentiate the agenda. We're feeling really confident about the way that assortment is evolving and the team and with the response we're getting from the entrepreneurial spirit that's so prevalent in this space. They're bringing a lot of products to us. That's something that gives a lot of confidence going forward.

Our next question come from the line of Leah Jordan from Goldman Sachs.

I just wanted to ask a little bit more on the comp trends in the quarter. Just color there cadence by month, differences by geography. Also, more specifically, how is Q2 to date tracking? And maybe just remind us of the onetime laps that we still need to be thinking about going forward? I know on the whole, the comps get easier, but just the onetime kind of ones we should be mindful of.

Leah, it's Curtis. So yes, Q1, we talked a lot about the strike at a competitor in P2 that -- or February that drove some business our way last year. And that kind of played out as we expected. So Fed was our worst month of the quarter. January and March looked pretty similar. As we've evolved into April here, we are just slightly ahead of the midpoint of the guidance for the comp for the quarter. And then from a year-over-year perspective within Q2, we just talked about May and June last year being a little bit favorable in the produce season which does look good again for us here in 2026 and then the cyber incident that impacted the natural organic space last year being a little bit of a tailwind for us in June.

And so those are the moving parts. But again, things have really played out through February, March, April, as we had initially anticipated.

Okay. That's really helpful. And then just for my follow-up, I wanted to go back to the broader affordability discussion. You made some targeted price adjustments around Essentials. It sounds like you're doing some more tests. But maybe in areas like coffee or other things that you've done, maybe help give us some detail around where price gaps kind of were and maybe where they are today? Like what -- and are you seeing any response from peers in the marketplace after doing that? And then also, I guess, because some of this momentum is still on the come, I guess, what kind of volume response are you in these categories after you make those price adjustments? I mean, I guess, how are you able to measure like, okay, yes, we've made enough of a price investment at this point given it's still being tested in progress.

Well, the context of that conversation is the same today as it's been all the way through this dialogue in terms of the products that we're trying to invest in or put better prices in. They're based on what's important in our customers' basket and they're not relevant to what's not necessarily relevant in what other people's basket is. So we're not really looking at direct pricing comparisons. We do in produce as we've talked about.

But in other categories, we're looking at specifically our attribute-based products and looking at elasticity. And we have on some of these investments that we've talked about, when we grow prices, we've seen volumes go up. And that I suppose that's intuitive.

And the question is how far do we go? At the moment, we're doing tests in broader-based categories in certain locations, and we're doing specific category work but it's all about elasticity. It's all of it comparing ourselves to our customer and what they do as opposed to comparing our prices to other people. So we don't think about it like a gap you might do in a traditional way of thinking about this. PAUSE we think about how can we drive volume to price. Nick, maybe you want to add to that?

The only thing I add Leah is, I think it's a combination. I don't want to lose touch of it before the affordability focuses on assortment. And then it's our everyday pricing and then it's also on some of our promotion activity and customers told us as we look at broader category level and subcategory level promotions, and being really targeted there. We've seen really good uptake in lift, unit lift and sales dollar lift that we've seen good response to. So it's -- as Jack said, it's hard to do our unique customer what's important to them.

And then we're seeing unit lifts and those things, we're moving and we'll measure that over time and make sure that translates into bigger baskets and more traffic.

Our next question will come from the line of Edward Kelly from Wells Fargo.

I wanted to ask maybe first Curtis, could we start with the back half gross margin outlook and sort of how you're thinking about things? And part of that, I'm kind of curious as to what you're assuming for fuel. Obviously, it's a little bit of a moving target. Our math has maybe fuel as a 20 basis point headwind quarterly, if it were to continue at this rate for the rest of the year. I'm just kind of curious, is that ballpark? And what's in the guidance for that? And then how are you thinking about gross margin in the back half?

Yes, it's probably just a touch high, but pretty close, I would say, on the estimate there. Although, again, it's been pretty balance, so it expands a lot about what the price is. Right now, we just factored it into Q2, knowing that it's right in front of us, and that's where the price point is. And we'll see how that evolves in the second half of the year. And so don't have a lot of that factored in the second half. As we think about the second half, we expect margins to stabilize.

Really think about that from an EBIT perspective. There'll be a little bit of pressure as the comp continues to improve and get back into the algorithm. But once we're there, we'd expect that stable margin kind of posture that we talk about.

And then on the growth side, specifically, we do get some of those things that are challenging in the first half to do ease in the second half. So the loyalty piece will be fully anniversaried as we get to end of Q3. We do have an easier shrink comparison, particularly in the fourth quarter. And so some of those things go away, and then we've got our benefit from self-distribution in meat that will be a little bit more clear once we get past the opening of the of the NORCAL DC. So expecting margins to improve and be kind of flat to maybe slightly positive in the second half.

And I'd also add that we do have for what we're testing right now, assuming that, that were to go as we're testing, we've got a little bit built in for some of the pricing adjustments from an affordability perspective.

Okay. And just a follow-up. Taking a step back on comp to leverage and sort of where this is evolving for you guys. If you get back to sort of 3, 4 comp here, can you leverage on that moving forward? I'm just curious as to how that leverage point has sort of changed in your thinking, if at all.

Yes. We talked about feeling good from a Ford perspective, and I think that's coming down as we continue to -- we're working hard on the cost side of the business, leveraging our scale as we get bigger as a business to improve our cost base. working hard on how we can leverage technology to improve our cost base as well. These are the things that we've been talking about and investing in the past couple of years that are starting to help on that front.

And that's just work that we'll continue to do over and over again as we continue to get bigger. So it should be less than 4. And then it comes down a little bit to just how much we plan to invest in the business and where we need to make investments in the business. And so there'll be a bit of an ebb and flow on the investment front.

We've been at that for a couple of years now at a pretty steady clip. If we find a reason and a high return opportunity, we'll invest a little more. So that will be the other factor in that, but certainly should be less than the 4 we've talked about historically, and we feel pretty good late this year if we get back to that algorithm range to bring SG&A pressure in line and kind of have that moderate as well.

Our next question will come from the line of Mark Carden from UBS.

So to start on loyalty, how have loyalty program sign-ups trended relative to your expectations? Have you guys seen any shifts in sign of trajectories or consumer behavior as you've settled on the new ER model? And has it had any more or less of an impact on margin than you originally expected?

Mark, it's Nick. We -- when we made the updates and improvements to the program in early '26 we did a lot of work studying the customer in their response. And the customer surveys and sentiment we had actually showed really well. We didn't see any decline, in fact, a slight uptick in support for the program as we were adjusting it to provide more tangible value to the point multipliers and other efforts as well as more personalization. So we feel pretty good about the customer sentiment with the program changes we made in early '26.

From a behavior standpoint, I think as Jack mentioned, our core customer, our core loyalty customer, we're seeing be really steady, good spend and increased spend happy as we're seeing there. And then much like we noted last quarter, new members in the program are joining the program and continuing to spend and spend more.

So we feel good about that. But we have a lot of work to do in the first half to continue to invest to demonstrate and show how we can drive behavior in this environment and continue to test, learn and scale. We're making smart investments in accelerating that capability to help propel us in the back half and beyond.

That's great. And then just given some of the pressures on cost of living, including rising fuel prices, are you guys seeing much of a shift in purchasing behavior in categories like meat or seafood. And are you still seeing similar reductions in items per basket? Just any color there would be helpful.

Yes. In reverse order there, Mark, on the items for basket not a material still just pressure, like we talked about on the last call, that last item in the basket is always when there's a little bit of inflation or maybe fuel prices are up and the customers thinking about just basket size and how much they can spend, we always see it in that last item in the basket, and that's been pretty consistent in the last couple of months since last...

And I mean, Mark, on the mix of the categories, what I'm pleased with is our health attributes where we really lean in, as we talked about organic [indiscernible] Protein and so on. We're seeing really good growth in those attributes. We kind of look at the business through that lens first, and we're seeing solid growth there. Where things a little bit more commoditized.

As we mentioned, that's where you might see the item out of the basket, a little bit of pressure in the value channels, but we feel strong about where we lean in and where we want to win, which is that health customer. We feel good about the categories that are winning in that space.

And we take the responsibility for affordability really seriously. There's a real opportunity for us to help people live and eat better. If we focus in on those areas where we can make things just a little bit better for our customers.

Our next question will come from the line of Michael Montani from Evercore ISI.

I just wanted to ask on the top line side, if you could talk about the traffic and ticket that you experienced in the quarter. Should we think about food home inflation kind of low 2s is like a rough proxy. And then like really, what's your outlook there? Because we were looking at like 150 to 200 bps step-up potentially through the course of the year due to oil and fertilizers kind of filtering through. So any color you have on that as well as on the traffic side, could you just talk about the loyalty program, personalization, potentially some of the work in media and marketing you're doing what gives you conviction that you can basically turn the traffic side to be positive again?

Mike, I'll start, this is Curtis on the kind of shape of the comp. And so yes, from an inflation perspective, similar to where we've been the last couple of times, we're typically on a like-for-like SKU-based sat or maybe a touch higher than CPI based on our mix. We've leaned a little premium in the assortment and the things we've brought in and that adds a little bit, and we're just mixing to organics and things like that. So from a mix perspective, we see a little bit higher kind of AUR and inflation.

So those things are still the same as they were, and we're seeing a pretty steady basket when you put all things together. So it's a positive basket, negative traffic kind of gets us to the Q1 comp the sequential improvement should really come from the traffic side. We're not counting on a lot of additional inflation at this point. We'll see how we manage that and handle that if and when it comes. But for now, we're expecting the inflation piece to be fairly steady from what we've seen, and we're expecting a sequential improvement to come in the traffic as the compares ease year-over-year.

I'll let Nick talk a little bit about the marketing side of things. In terms of the cost and inflation and how it's playing out, appears a little bit uncertain, as Curtis said a minute ago, it's up and down, what exactly is going to happen with that. We'll have to wait and see fertilizer. We haven't really seen that come flowing through into our cost base yet. What has -- and the good thing is when you sell a lot of organics, you don't need as much fertilizer. So there's a lot of opportunity for us to maybe double down on organics in the world where the fertilizer costs are flowing through into food prices.

But I'll let Nick talk about the marketing side of things.

Yes. Mike, real quickly, I think a couple of thoughts on the marketing. One, really happy with what's going on with new stores and how the marketing is working to bring new customers in those stores. It's a proof point one of the power of the brand of our positioning and health and wellness and part of the marketing and the work the team is doing there. So that's been really strong.

In addition, I think we continue to do a great job of launching new products and new items with a lot of our vendor partners and the marketing work there has been very solid. I think the good -- as I look at traffic in the back half, we've got a lot more data than we've ever had and how to drive customer behavior, what to learn from our customer and our customer marketing team is using that to help us think about how do we adjust our brand message and media to be more relevant to the customer right now where they're at in the space.

We've got some early tests and efforts in place that have shown an ability for us to move the customer to drive awareness and to move traffic. So I'm very happy with the early work the team is doing, and I think you'll see that impact us in the back half.

Our next question come from the line of Scott Marks from Jefferies.

First thing I wanted to ask about, maybe you already touched on this, but can you help us understand how comps, how performance is trending just across geographies, maybe across more recent vintage stores versus more mature stores expansion versus existing markets? Just any color you can provide on that would be great.

Sure. Scott, it's Curtis. On the -- it's been pretty consistent from a geography perspective. As we've talked about before, we're not seeing materials has gone up and and moderated here. It's across all geographies. Maybe just a little bit of additional pressure in the Southwest and in the Southeast than the other category -- or geographies, but but not material in that respect.

On the vintages, I'll say we're pleased with the new stores, as we've highlighted in the script, and that's another good proof point there as there's still positive comps in the new vintages or the more recent 3 or 4 vintages. And so that's just another encouraging piece that even though there's an underlying lapping pressure, we're seeing some good results in those most recent vintages.

And again, just gives us some confidence in the overall strategy and where we're headed and things bouncing back as the compares ease I think that's really -- those are the kind of little bits that are a bit different as you break it down across either geography or store type.

Appreciate the thoughts there. And then maybe a second one for me. It sounds like you guys had another strong quarter for e-commerce. Wondering if you can share any updates on e-commerce, how you may be adapting your e-commerce strategy, given some of the other changes you're making on affordability and everything else. So any comments you can share on that would be helpful.

Scott, it's Nick. As we mentioned, we saw double-digit sales growth in e-com, and we're now roughly about 16% penetrated. I think it starts with -- it speaks to the power of our assortment that people want the unique innovative items that we have, and it lends itself well as a secondary shop to e-commerce. And so it starts with, I think, the proof point of people are looking for the unique things that we have and make them part of their daily life.

But two, I've been really happy with our -- the way our partners have worked with us, Instacart and DoorDash, in particular on helping us break into new markets, find new customers on their platforms and drive growth, and that's growth through targeted marketing opportunities through targeted sponsored price investment and continue to grow the business and basket there.

And the last thing I'd say is the good news about e-comm for us is an omnichannel customer. And so when we grow that business and grow that customer base, most of those customers are shopping in store, and those are most valuable customers. And so it's really healthy for us to see that growth on the e-com side.

And the next question will come from the line of Krisztina Katai Equity Research Analyst.

Jack or Nick, you talked about leaning into foraging and the launch of 100 new items so far this year. Just curious, what is the team targeting as a percentage of newness for the balance of the year? And just how that breaks down across opening price points versus more premium price points. And are you seeing competitors move faster on similar attribute-based products just thinking around trending areas like protein forward offerings?

Well, I think everyone's seeing the trends, Kristina. I think one of the advantages, and I think we talked about in the script a little bit is that I think we're being seen as the place to launch these products going forward. We've got when you walk around the Expo West, and there's -- the whole place is buzzing around can we get into Sprouts or not. And we get -- I think we got 65,000 applications to bring SKUs to bring products to our business last year.

We're only able to manage 7,500 of them into the space. So -- but we don't have a specific target in terms of our percentage. What we've got to do is use these innovative and entrepreneurial new brands to continue to excite our customers.

The innovation center that we have is working really well and continues to get better. And that's been one of the features that we brought into the stores over the last couple of few years, and it's getting better in terms of how we manage that. So I think we've got a great reputation with the vendor base. We don't have specific targets. And we've got to continue to reinvent ourselves. And that's kind of the role that we have in terms of this space.

And I think a lot of people we view Sprouts as the right place to launch these products.

Yes. No, the only thing I would add to Jack's comments, Kristina, on yours, this is Nick. We don't necessary targets, but I think we are going to expect to be able to launch as many new items this year as we have in the past, we've developed a really great capability and capacity between our forging teams and our category management teams to take that massive influx of interest work with partners and identify the best items to launch.

So we are going to continue to do that as we be the -- hopefully, serve the customers the most innovative and health for retail in the market. And then you asked about balance. The good news, I think that's a fun of focus for us as part of affordability is how do we innovate across all categories and all price points that everybody can experience the right healthy options for them and based on their preference. And because of the depth of innovation available to us, I think we've got a lot of great options that are good for our customer and also remain distinctive from what else is out in the market that buffers us from competition and price.

That's great color. And if I can just follow up, you're sharpening your marketing to highlight what makes Sprouts unique. Are you at all planning to change the percentage that you're allocating to marketing spend in 2026? Or any of the key channels, just thinking digital social that has worked really well for you. And just you're tying that in with the messaging around affordability. Just sort of how should we think about what has been achieved on that front versus what is still to do for the balance of the year?

Kristina, I appreciate you noticing -- we're working hard at bringing what makes Sprouts Sprouts to market. And talk about the unique differentiated items and our store experience that sets us apart. So you'll see us continue to lean into that positioning. And I would tell you, I think you'll expect to see that even stronger in how we go to market. And position ourselves against who we are, which is the best place to help you live and eat better. From an investment standpoint, no, we're not planning on making any incremental investments in marketing. I don't think we need to because we have a lot of opportunity to be more efficient in how we market.

And I think we've got the tools in place as we build on the brand capabilities to do that. And to your point, certainly, we'll continue to look at where in the media funnel we invest and in which geographies that drive new customers that drive the right customer into the store and that balance that awareness and traffic. So we'll continue to do that. I think there's more opportunity in the back half of the year for us to get even smarter with our media.

And our next question comes from the line of Robbie Ohmes from Bank of America Securities.

The first one, just -- I think I might have missed it, but did you guys give the exact traffic and ticket comps for the quarter?

Robbie, not specifically, but yes, traffic or basket was positive, low single digits, and traffic was negative in the offset there.

And then the Long Island store, any color you can give us on how that has come out of the box relative to expectations?

Well, I was lucky enough to be in there a couple of weeks ago. We've got a great team in there, and we're definitely going into new markets we're establishing ourselves in a place where people don't know us. So the marketing team, as Nick alluded to earlier, new stores have been doing a terrific job on it. It started well for us.

I'm really pleased with the team. It will take a little bit -- we're ahead of where we thought we would be. This thing could -- we've got a lot more stores coming. One of the things about stores on islands on their own, not just Long Island, on their own is how do you bring critical mass by having a few more stores. And over the course of the next 18 months, we've got a number of stores coming in Long Island, which will strengthen our marketing and strengthen our communication on our brand. But it's kind of -- it's been really exciting to go to a new market.

And we've got more coming as look through the next 18 months. It will be a similar challenge for us when we go to Chicago, similar challenge when we go to Boston. And we're learning a lot from what's happening in center reach, which is a store in Long Island.

That's really helpful. And maybe my last question, just, Jack, the foraging team, we obviously don't expect you to give specifics, but are they seeing anything on the horizon that could reignite some momentum for Sprouts?

Well, I think the trends that are applying, I'll let Nick comment as well, the trends are that we're chasing after, just like everyone else's, the protein trends are big on the fiber trends are big things. And there are some other things coming down the track at in terms of health and wellness, particularly in the supplements business and in the vitamins business in terms of brain health and those kind of things.

So there's a lot of trends happening. And our team -- what we think we've invested in a really strong team over the last couple of years, and we'll continue to invest more that we're ahead of the trends, and it will link a little bit certain when celebrities launch products and make a big deal of it, that's something that can stimulate demand pretty quickly. So we're kind of working pretty closely with a number of kind of interesting people that come to see us. And so there's personalities and there's a lot of trends with the area.

I think that's well said. I think, Rob, the only color I just would add is I think the part of this is how do we work with a lot of these new brands to help bring their brand to life and make them even stronger than they are on their own. And the piece of it, as I say, we will also miss we really push hard in finding brands that nobody else has seen. And there'll be times where they don't hit, but that's part of our DNA.

And I think we've got -- because we're the best place to launch brands, our odds of getting those that really go big and viral are as best as anybody in the industry because of the way we launch brands and how early we are to do so.

Our next question comes from the line of Kelly Bania from BMO Capital Markets.

Wanted to go back and ask just another one on the price adjustments and the more focused promotions are you able to quantify the growth impact of what the planned investment for 2026? And I'm just trying to understand if there's a shift of any dollars? Or how much is incremental? And then can you also help us understand the parameters for these tests, meaning is the goal to just get back to a specific level of traffic and then you would back off of these investments? Or is this more of something that we should think about evolving in years to come? Because without a specific price gap or level of pricing that you're targeting, where do you find completion with this initiative?

Kelly, it's Curtis. A lot in that. So I think -- no, I probably won't quantify too specifically other than to say kind of what we said earlier, which is we do we've been investing in the business and a lot of those things have shown up in gross margin favorability, and we still have tailwinds from those investments. And so we're thinking about it much more as a shift, so to speak, is that term that you used from those things that would have provided a little bit of favorability to now funding some of the affordability actions and helping out the customer.

So that's definitely how we see it. As we think about the different things we're testing. Again, it's a test, so I don't want to get too specific about what that impact may or may not be. But assuming that the majority of that rolls out, that's kind of how we're thinking about the back half of the year, and we want to see the response from the customer at item and category and all the different things we're trying. And we'll put some things into action in the second half, but we feel like we've got the funding to do that within the guidance based on some of the things that are coming in. And we talked earlier about things ramping up like participation in the loyalty program and and some of the offsets that come from that data and from working with the vendors in that space to drive the business together.

So we've got a few levers there to help support that effort, and that's kind of what's baked into the plan for the last part of the year. I think -- and then to your longer-term question, that's how we think about it in the longer term, too. I continue to make the business better to continue to mature our processes and how we go to market. And watch elasticities, follow our pricing strategy in order to deliver great value and affordability for the customer. So that's how we'll continue to think about it beyond 2026.

Okay. And can I just follow up on the SG&A growth just the 5.6% there. Can you help us understand what is kind of happening at a same-store operating expense level? And if you kind of lap this next year, would you need to reinvest any more back into SG&A this year or next year, sorry.

Yes. I think the trends have been good to see some real progress in the cost work that we do impact all the stores. And so we talked a little bit earlier about bringing down that leverage point from the 4 we talked about historically. And then it just comes down to investment. And if we see great things to invest in the business. Typically, there's an upfront there in resource or technology to build the capability, but we would only do it if we were going to see benefit on the back end. And so it's a little bit TBD as the year evolves for 2027 and what we might be thinking about from an investment perspective.

But Certainly, we feel like we can get SG&A kind of back to close to stable as we get to the latter part of the year and we start to get back into our algorithm. And then we'll start to think about next year and where we need to make investments to continue to drive the business for the long term.

And on a store-by-store basis, we're getting much more efficient in running on each individual store, if that was the question you were asking. We made a lot of progress in being more efficient in operating the stores, and that's something that will flow through both in the new stores and the existing stores going forward.

Our next question comes from the line of Jacob Aiken-Phillips from Melius Research.

I wanted to ask an inflation questions because there's growing concern that increased fuel costs will flow through the petroleum and fertilizer markets has disrupted some drought conditions. I know you're not seeing that yet, but -- can you talk us through like how the business would perform under different inflation scenario, like grow inflation normal and an elevated level?

Yes. Jacob, this is Curtis. I mean again, every PAUSE I think every version of that is a little bit different. I can point back to when the last round of significant inflation in '22, '23, where we saw our business continue to accelerate and we had a lot of things going on that we're moving the business. We reshaped our strategy. I think it's a lot of -- nobody quite knows exactly how that's going to play out. And we'll manage it when it comes, if and when it comes. And talk to Nick a little bit about how we would manage it if it came through, but it's -- we've seen different versions of that over the years, and the business has been solid throughout.

I think the important thing in our inflationary environment is that we do what we do well. We've got to be serving our customers really well in terms of the health and wellness agenda. I do think it's relevant irrespective of inflation, deflation people want that want to healthy, want to eat healthy. And one of the dynamics, I think, is a little bit able for us or not prone to being affected by big inflation or not inflation, whether that's going to happen or not, who knows. I think the fuel things and the fertilizer things are a little bit uncertain how it's going to play out.

But we'll certainly be very conscious of taking care of our customers and making sure we're giving people access to affordable health and wellness products within the assortment that next been talking about in the call today. And it's something that we'll pay a lot of attention to. We take our responsibility of helping people live and eat better seriously, and that applies. to the inflation or deflation.

Great. And then my second one is, you have added strong growth in absolute driven categories and some pressure more commoditized ones.

Can you walk us through how we should think about the mix implications of that for cost and margins over time? And then just as a follow-up, are vitamins supplement committed or more commoditized?

You've asked a lot of questions there, a lot of good ones as well. Let me just start off with vitamins and supplements is such an important category for us because we've got great people who can give you great advice. And I invite any of you to go and ask our people in the stores of how they can advise you on that. And it's less commoditized because of that. Can you maybe talk a bit of the stuff.

Yes. I mean I think overall, the core of what we do is state differentiated and focused on core attributes and that's what we'll always do and focus on. And if things do start to become more commoditized, that's when we then pivot and find different brands, different offerings to stay differentiated. From a margin profile standpoint, the margin mix of our business is pretty consistent. There's not a massive gap between category or attributes that would have a real meaningful impact, Jacob on our mix with those shifts, again, small things here and there, but nothing consequential that you would see significantly flow through.

And we're unusual for a grocery store, if that's what were described as we're unusual in the sense that our margins are pretty consistent across the different categories. We don't have really low margin, high-volume branded goods. So the mix is more consistent. And that makes one of the uniquenesses of our business is that margin mix profile.

Our next question comes from the line of John Heinbockel from Guggenheim.

Sort of an all-encompassing question here, but I think last quarter, we talked about emerging health enthusiasts as a cohort. How important are they, right, to the business, to the growth? How are they behaving right? And then what are they reacting best to in terms of your desire to help them out affordability wise?

John, it's Nick. I think -- let me start with -- we still feel really strongly about the overall market, right? We've talked about our $200 billion health enthusiast market, whether you're new in the space or been there, I think that provides a lot of opportunity for growth for us overall. From an emerging standpoint, I think we've been pretty happy in the past. We've seen good acquisition from younger or, call it, newer cohorts that you speak to and we're seeing things like protein. One of the things we're seeing is not health is a big driver in that space. And our -- we leaned into non-alc early about 3 years ago, and that continues to drive and grow our business a lot of the supplement space. And so the good news is because of the emerging brands we have and how we work with them on social, I think we're well positioned to capture that customer and between that customer and the existing health enthusiasts, I think the market is in a really good place for us.

And just building on what Nick said earlier on the marketing, how we can get more sharp at communicating with these people as they come into that space. There are more -- if the market today is 280, whatever we think it's going to be bigger in the future. Our challenge is how we can really hone our message around that particular group of customers as they come into this space.

And with that, this concludes the question-and-answer session. I would now like to turn it back over to Jack Sinclair, CEO, for closing remarks.

Thanks, everyone, for anticipating your attention and your interest in our company. We're excited about the future going forward and look forward to updating you over the next few quarters. Thanks ever so much and take care.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

All right, everybody. Good morning. I am Bill Kirk, ROTH's Food Retail Distribution and beverages analyst. You're here in the consumer track. This is the blue room, where we're about to hear from Sprouts Farmers Market and CEO, Jack Sinclair and CFO, Curtis Valentine. Thank you both for being here with us. Sprouts is obviously a leading specialty food retailer. And for the last few years, have not only posted best margins in the industry, but years of the best comparable store sales and unit expansion growth. So thank you guys for being here.

I want to start right there with a sort of philosophical question about food retail. Does the competitive landscape in food retail allow for someone to sustainably have the best margins and the best growth at the same time?

Yes. We're feeling -- we've carved a niche in the marketplace, and that niche is what's protected us from some of the broader context of the grocery market. The fact that we're focusing in on health enthusiast customers. And there's a trend towards that and maybe talk about that later a little bit about how the MAHA world is accelerating the whole health trends. So we think there's a lot of positive trends behind what we do. And the question you asked, Bill, around how sustainable is our margins.

Our margin structures are very -- is sustainable because of the assortment differentiation that we have and that we're not comparing like-for-like. A lot of grocery stores are selling exactly the same things as everyone else, which puts inevitable gross margin pressure on that. So we've got an opportunity to forge our own path in the middle of that space by having differentiation. We also -- so the margin profile that we've had is sustainable going forward. We're feeling very comfortable about that. And our long-term algorithms to hold our net margins flat.

And we've got plenty of opportunity to drive efficiency within our margin. Relatively young company, Sprouts, in terms of where we are in the marketplace. So that gives us opportunities in terms of Shrink, in terms of self-distribution, in terms of other aspects of how we can become more efficient going forward. So that gives us a kind of opportunity to keep confidence that our margin profile is sustainable going forward.

And within that context, the traffic dynamic, we're building a lot of stores all over the place at the moment, having a lot -- making a lot of success in new stores. That's bringing a lot of traffic to our business. So a lot more people are getting engaged in Sprouts in the last couple of years than they ever have before as we accelerate the store program.

On top of that, we've got some work to do to move. We're a little disappointed in terms of we talked about in our last call about exactly where we are regarding traffic. But we're doing some specific work. The world changed. There were some tough comparisons, and that's not an excuse so some tough overlaps we had to deal with. But we also looked at a tougher consumer environment.

And as you look at going forward, the challenges of gas pricing and some of the dynamics that are going on at the moment, we've got to work hard at making sure our affordability of the products that we're selling our value. And value, meaning at any price point as opposed to trying to change the profile of our price points in the business. So we're focused very much on value. We think that will help us with traffic going forward. We're very confident in our margin profile. And the algorithm that Curtis and I have talked about in our calls, we're pretty confident we're in the right place to be able to deliver on that.

That was wonderful. You talked a couple of weeks ago about having the P&L capacity to fund some maybe price investment. I don't know if that's the phrase you would use. But you talked about having the P&L flexibility to address any affordability issues that may be out there with products. Can you elaborate on that a little bit more? Is that a margin versus traffic conversation? And if the elasticities don't show up as you would expect with any investment you're going to make, then what do you do?

Yes. Well, as I've said in the outset, we've got differentiated products. So that makes the price comparisons in what you invest in are a little bit different for the world. I've lived in through my career in a grocery world where everyone's got the same thing, you're always looking at everyone else's prices. We do so in produce. So we're looking hard in a very volatile marketplace, making sure our value in organic produce is significantly better than anyone else in the industry.

So we watch that, and that's working pretty well for us. As we look at pricing across the rest of the box, it's a little bit about making sure the products we're bringing in are at the value we want them to be bringing in. So whether it be beef tallow chips, which is on fire, would you believe, which the market is changing protein trend. How do we make sure that when that protein trend comes alive, that we're at the right prices within that. And that's a little bit about what we mean by our P&L sustains what we need to do.

There's efficiencies we can build into our business to allow us to get exactly where we need to be in terms of these trends that are accelerating so quickly, whether it be fiber or protein. And we want to be the leading edge of those, and we need to make sure we're giving value within that context of a fast-changing marketplace, a changing marketplace in terms of health, in terms of the agenda behind health or a changing marketplace in terms of the products and innovation that's coming to the marketplace. We will win by being better innovation than everyone else.

As part of that, we've got to make sure that innovation is priced at such a level that's affordable and that affordability challenge. We want to give more access to more people. That's why we're building a lot of stores. That's why we're working on our loyalty program to try and bring more people into an agenda so that we can fulfill what our purpose is, which is helping people live and eat better.

And the only way we can do that is by having a value within the products that we sell. So it's not so much about price investments, it's about bringing real clarity to the products that we're launching and that the price points we launch them at makes sense to our customers. And elasticity will tell us that if a product is too expensive, it won't sell as well.

If a product is the right price, it will sell well. So we watch that pretty carefully. And that's -- it's the world that we can operate within our world as opposed to worrying too much about what everyone else is doing.

And just on the investment side. I mean we've been investing in the business, a lot of inventory management. You've heard us talk about that. You've heard us talk about self-distribution. Those are pieces that in the short term are providing that capacity, the returns from those investments are providing the capacity to do the things we need to do on the affordability front.

And as we look ahead, the other primary investment we're making right now is in loyalty and that's impacting the first half of this year from a margin perspective, but it unlocks opportunities in the medium and long term. And so that's kind of that virtuous cycle. We'll invest. We'll get some returns, we'll create capacity, and then we'll reinvest in the business, whether that's back into the infrastructure of the business or whether that's to the customer and affordability will make our choices year-to-year based on the conditions.

And the products we're launching. So we're really excited about something we call Wellness Bowls, which are really, really high-quality products, $7.99 and $9.99 and we're really seeing some success on that and we're really doubling down on sandwiches. The world that's happening out there in terms of the pressure that the consumer is going to feel on gas pricing.

We do feel that creates an opportunity for us to take some business from the restaurant space as people eat in home rather than out of home. And if we, again, focus in on value on products that play to the health agenda, play to the organic agenda, clean ingredients, we feel as if we've got an opportunity to take some business in the context of a tougher environment.

In areas where you've seen some traffic pressure, how important is it to identify where that traffic is going as you develop your plans for resparking your traffic profile?

Yes, I think we've been spending a lot of time trying to understand the traffic dynamic. I think for us, what we've seen is the geographic story, the category story was pretty similar on the nice uptick we had and then it's followed suit on the downtick. What's been different is the consumer piece of it. So having a better visibility into the customer and a little bit of benefit of hindsight, we can look back and see that there was a surge in new customers, a surge in reactivated customers that drove our business. And then our challenges are really just in growing off of that kind of new higher base of customers, not really losing customers in a meaningful way, it's just that we're having some challenges growing off that base.

And then specifically, we're seeing the unit pressure across our high engaged and our low engaged that choicefulness at the end of the basket, which again alludes to the consumer pressure that folks are under right now.

I imagine that choicefulness at the end of the basket, is that more -- it's got to be more discretionary type items that might be in your store. Would you expect with some of the fuel pressures that might be arriving for consumers that, that end of the basket remains pressured?

Yes. I think it's very similar to what we saw in '22 and '23 in the first wave of inflation and actually, I would say, for us, it ends up being a little bit more in the produce space. We have quite a few units in the basket from a produce perspective and so you'll see consumers. We talk about it managing household Shrink, right, instead of buying 2 punnets of strawberries, they'll buy one because they're not sure they're going to be able to get...

Uses punnet because he keeps hearing the -- talking about European.

What I learned from Jack and then he makes faces. So yes. So -- but that's a little bit what we saw back then, and that's a little bit what we're starting to see now is, again, there's just that last item in the basket is where they're making some choice and produce tends to be one where am I really going to get through it? Or am I going to throw it away and they get a little bit more choiceful.

A question I get a lot, and I think I know what your answer is going to be, but we get a lot of question about Amazon announcing they're doing new markets or lowering minimum order size or reducing delivery times or the things that make a lot of headlines, they coincide with comp sales decelerating so do prior years, but they coincide with your comp sales deceleration. Are the two related?

No. I think -- I know there's a lot -- the timing is tough to ignore, right? But it is -- it's more about that lapping piece. It's when we started to see kind of the peak of new customers on a weekly basis is in that same window of time. Our competitive set is pretty broad. We're a complementary retailer. So there is no one dominant competitor in our share of wallet, if you will, and so we watch it very closely. We watch all competitors very closely, and it's going to be a competitive landscape in a dynamic market. We're doing well. The products we sell are doing well, and that will continue to draw attention.

But for us, it's -- we believe it's in our hands to do the things that we do well, which is differentiate, innovate, great store experience, build new stores and new communities. Those are the things that are going to drive our traffic and drive our business.

We feel like we're completely in control of those, and we just have to do that really well. And then as we get through kind of this surge of customers that we went through, we start to normalize September Q4, we think we'll get back to kind of normalized comps at that point.

You talked about the loyalty program. You both did as a way to respark traffic growth. Can you maybe just set the stage for the crowd of how that loyalty program came about? What -- where you were deficient before you had the loyalty program in terms of insights you could develop and how you can apply those today to help drive basket, drive traffic?

Yes. The important thing is the data that's coming from the raft of customers that operate in this health enthusiastic space. And we were quite honest, we're flying a little bit blind without the detail. What you find is there's so many very specific cohorts within the data that we're getting from the loyalty program whether it be vegan, vegetarian, grass-fed beef, keto, paleo, the whole dynamic -- the difference between customers who are interested in gluten-free and organic and what it's teaching us is how do we get these cohorts together and do the right thing for those individual customers.

We spent a lot of time and a little bit longer than I would have liked us to get to the point where we've got the data from the customer base. And that -- the technical challenges of doing that took us a little bit longer than we would like. But we're in a place now where we're doing a number of really interesting tests breaking down customer dynamics in terms of taking individual customers, individual groups of customers and stimulating the demand through different types of techniques.

So we're trying to work at the process of learning exactly what needs to happen in relatively low volume customer base that we'll be able to scale going forward as the year goes on. So the key to the loyalty program for us has been -- is giving us access to -- our customers love it. Customers tend to -- they'll shop with us and enjoy Sprouts, are very positive about the loyalty program and what it's doing for them. We're giving them some value. We're thinking about different techniques to promote with them appropriately.

It allows us to be much more targeted with promotions. And that's kind of the biggest opportunity we have in front of us, which back to the margin, helps protect the margin as well as give the right investment at the right time for the right customers. So we're excited about the data. We're at really early stages on it, and we're expecting some progress on that as the year goes on.

Years ago, you went through a period where you refined your customer base a little bit, and I'm going to mess up the phrasing, but you kind of didn't want the coupon clipper only types in the stores. How do you prevent the loyalty program from becoming dependent on coupon clipping or promotion type activity?

Well, I think that's really getting into those sub-segmentations and cohorts and truly understanding what drives behavior. So we'll know them a little better. And even in the testing we're doing, not everything we do from a test perspective is about promo. It's about sometimes highlighting the unique products we have or simple things like time of day and when we send an e-mail and how that impacts open rates and click-through and things like that. So I think we're just -- again, Jack said earlier, kind of flying blind in the past. That's the piece that we have now that we understand what's going to incentivize behavior instead of having to give a promo to a big wide swath of customers. We can get pretty targeted and pretty narrow with the group that we know need that promo in order to incent behavior and then use non-promo type efforts to stimulate demand where possible, too. So I think that bifurcation, that sub-segmentation in the cohorts will help us do that.

And those customers that were those coupon clippers that we kind of intentionally wound down with not doing such aggressive promotions. They're not really in that loyalty base to the same extent. So our expectation, although we've still got to confirm this, is that it's not going to be so much about promotion, it's going to be much more about stimulating. Here's a product you haven't heard before. Here is something new. It's 10:00 in the morning, why don't you come and have lunch.

Those kind of stimulants trying to get people enthused about what our assortment is and what the opportunities are and reminding people. That's the thing that we think is going to work best for us and the promotion side of it is more kind of about tuning it to the individual cohorts.

And what I think is exciting about the data is you've always been on the cutting edge of some of the health and wellness movement without all the data necessarily to tell you how the consumer may be shifting on the street. So how big of a part of the data is informing your assortment decisions, like forming the product in the store.

The MAHA agenda that's happened across the country is pretty remarkable to be honest, someone that came to the -- from the U.K. where over to the U.S. where all the products are being -- we're selling are full of additives and colors and things that were kind of accepted across the grocery space in the United States. The fact that, that's been kind of moved so far against that it's playing into our hands a little bit. There's some legislation in Texas that were requiring some labeling that was going to -- that's about to say these products contain ingredients that are banned in the United Kingdom, Australia and Canada. It's pretty remarkable that Texas would vote for that.

But anyway, that was 100% all the Democrats, all the Republicans voted for, which I don't think happens often in Texas. He tells me to keep away from politics, he's probably right. So the remarkable thing for me is how that has been accepted across the political spectrum. And our opportunity and the great thing about that legislation from Texas is not one product would we have to label. Not one product would we have to put that label on it. So we're giving access to this kind of MAHA agenda product much more visibly than anyone else in the marketplace.

And we're going to double down on that in terms of -- and then we'll double down on it with our loyalty customers and the customers that understand it. There's a growing understanding of what's in our food and people understanding that food is medicine. And the fact that we don't have pharmacy, we're pretty unique in a grocery store, not to have a pharmacy. And that whole vitamin supplements and ingredients is something that we're really well placed on to double down on going forward, and we'll talk to our customers in the loyalty program about it.

Let's spend a little time on the self-distribution of meat and seafood. In 2025, your kind of original vendor, if you will, had some disruptions. You put a temporary kind of replacement in there who also had disruptions before ultimately bringing it in-house. So I guess as you go through the transitions of meat and seafood to ultimately get into your own systems, did that impact 2025 for the category, meat and seafood at all in your stores?

Yes, certainly. I think it did have a small impact on us. I mean we were able to effectively get the product we needed, but we didn't have enough product to promote and to go to market the way we normally would. And so we'll see a little bit of that as we -- really it's right now and into the next couple of months where we were having those disruptions. So we should see some benefit in the very near term on the meat side from being back in business in control of it with our own self-distribution.

The stores have some confidence now in the service that they're getting from our DCs helps with the ordering kind of smoothing that out. They're getting more deliveries, fresher product, all those things that we anticipated from going to self-distribution are playing out in real time. It's part of those investments we're making that are that are driving capacity in the P&L for the affordability piece. So pleased with that.

And then when we get to the middle in the summer, that was a piece that drove the business as we had the cyber disruption. We were limited in that. It's not our primary distributor. And so we certainly saw some extra business really in the June, July time frame, and that will be a bit of a challenge when we get to lapping that. But in the very short term, we're seeing a little bit of benefit from kind of being in business and being a normal state from a meat perspective.

Can you remind the group to maybe set the stage a little bit, like how big is that category in your stores? I think the last update was -- it's up to 75% of the stores are being serviced by our DCs now? And how do the savings and benefits that you've seen in the transition compared to what you would have expected?

Yes, I think we're right on track from an ROI or business case perspective, right? We're not paying the distributor fees. That's really the primary benefit from it, pay a little bit more to distribute and then a better gross margin or better cost for the merchandising team. So that's played out effectively as anticipated. And the team has done a really good job navigating through a really challenging year, as you highlighted.

We're excited to be on the other side of it and kind of in full control, and that's really the benefits of self-distribution for us in those key strategic categories, particularly in fresh, it's really important for us to be in control of it, and that's kind of played itself out the way we thought it would.

And the important thing about the whole program is it's given -- one, we're delivering it alongside our produce, so there's efficiency in that. But the store managers -- the people running our meat departments have got much more confidence that the product they're ordering is going to come in. That gives an opportunity in terms of both in-stock, better management of Shrink and that whole, that's beginning to flow through for us. We're excited about. And when you talk to our meat managers, they are the guys that are really excited because they had a tough year trying to deal with some of the challenges we've put in front of them. So that's giving us a lot of confidence that the meat business can be strong going forward.

How does bringing in that category and what you're learning from it? Inform how you think about other categories and whether you should do it yourself or rely on a third party?

Well, we've got good third-party supporting us, and we've got to be thankful for a lot of the work that they do. But having said that, gradually over the course of the next few years, we'll take more responsibility for our own distribution needs. We're very focused on looking at our Sprouts brand product and taking accountability for ourselves. As we get bigger and stronger and a bigger business going forward, we need to take more responsibility for more of our own offers. Certainly Sprouts brands, one that we're looking pretty hard at in terms of what can we do as the next step on this and there's a number of other categories that might make some sense as well. We're learning the replenishment side about how to organize, how to work with the vendor base, how to work the replenishment to the stores. We're learning a lot from the meat exercise, which will help us thinking about some other categories.

Another thing that's changed a lot over the years is the digital mix of the business, right? It was probably low single digits before COVID. It's now almost up to 16% of your sales is digital mix at year-end. So as digital mix has become so much more prevalent, how do you think about opening stores, store density that's required in the market just given that channel has become so large.

I'll let you talk a little bit, but just in terms of the omnichannel customer, we've always been of the view that we'll let the customer decide how they want to navigate to purchasing the products that we sell. We've seen some interesting trends of more pickup, which I think does link to the affordability. Our pickup business is relatively small as a percentage relative to the bigger players. So what we -- what we've seen in the last few months is a fairly significant change in pickup relative to delivery, which is probably linked, as I said, to affordability in terms of how that evolves and where we're at in the middle of that, I'll maybe let you.

Yes. I think from a store perspective, I don't think it changes dramatically our perspective on getting to over 1,000 stores, 1,200 stores is kind of what we're aiming for in the long term for the U.S. I think it changes how we approach markets. So as we go into, say, Chicago here in 2027 and beyond, just thinking about spacing and thinking about where we put that first wave of stores in a new market, that reach that e-com has for us, allows us to get to -- it's kind of a 30 minute-ish trade area, drive time-wise versus our brick-and-mortar would be more in that 10 to 15 range. And so it just changes a little bit the dynamics around how we think about getting into a market to start, but ultimately, it doesn't really change. The brick-and-mortar is still 85% of the business.

So when we see strong brick-and-mortar sales in a store, it still highlights an opportunity that you could put another store pretty close by. So that won't really change that part of it. It will just be more about how we enter markets in Chicago and the Midwest and then ultimately in the Northeast as we get to New York.

I think you just opened your first New York store. I think there's a Massachusetts one on the way. Can you talk about the balance between going into what are new markets versus maybe building a little density South where you had opened some stores in New Jersey and Philadelphia and the Mid-Atlantic?

I think balance is the right word. I think that's how we're thinking about it. It's got to be both. If you look back over the last several years, the East Coast, a lot of Florida stores, some Mid-Atlantic stores. That was kind of our new market set. And we've had about a 50-50 split between kind of newer emerging markets versus our more established markets where we're infilling with density. And I think as we mature in Florida now, they kind of graduate, so to speak, into a more mature market for us, where we're going to densify.

And then we're opening up the Midwest. We're opening up the Northeast and so we'll kind of maintain that 50-50 split, just with a little bit of different geography. I think the piece we're taking with us from a learning perspective is really around density within a new market, right?

So it's not, hey, get 1 or 2 stores, let's see how it goes. We want to get to kind of 10 stores. That's our operating district kind of model is a 10-store to 1 DD, district director, model and trying to get those stores clustered. So you get that operational efficiency, you get the marketing efficiency, you get the supply chain efficiencies. And so we're really focused in the newer markets going forward on kind of getting to 10 as quickly as we can to kind of build out from an awareness perspective and from an efficiency perspective.

Awesome. And before we get kicked out of the room here. Jack, maybe if you could finish just real quick. What about 2026 has you most excited?

I'm really excited about the company. I'm really excited about the team that we're building around us. We've got Nick Konat, the Chief Operating Officer brought a new Chief Customer Officer in, brought a new Chief Merchandising Officer in. We're working -- we're really investing in the team members out of the store. We're making a load of progress in terms of when you're building as many stores as we're building, building a team, a talent pool, store managers, we're going to -- we promoted 30% of our people last year. We're really excited about the opportunities that we're creating for people right across the country, and we're building a really strong team. And that's probably what excites me the most because we've got a great purpose as a company. We've got a great opportunity in front of us and working with people that share that purpose is a real thrill.

Awesome. That's perfect. Thank you, Jack. Thank you, Curtis, for joining us.

Thanks.

Thank you very much.

Good day, everyone, and welcome to Sprouts' Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

Now it's my pleasure to turn the call over to the Vice President of Investor Relations, Susannah Livingston. Please proceed.

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our fourth quarter and full year 2025 earnings call. Jack Sinclair, Chief Executive Officer; Curtis Valentine, Chief Financial Officer; and Nick Konat, President and Chief Operating Officer, are with me today. The earnings release announcing our fourth quarter and full year 2025 results, the webcast of this call and financial 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 2026 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 financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures.

With that, let me hand it over to Jack.

Thanks, Susannah. Good afternoon, everyone. In 2025, Sprouts delivered over 7% comp sales growth and achieved more than 40% earnings per share growth, reflecting the strength of our strategy. These strong results are a testament to the team's focus on our target customers and Sprouts' positioning to capitalize on the ongoing trends in healthy living. These are outstanding full year results. However, we are not happy with how the year finished as our comp momentum slowed.

In 2025, we made progress on a number of key initiatives. New stores exceeded expectation. We launched our loyalty program and our expanded self-distribution supported both service levels and freshness. We introduced more than 7,000 new items, including more than 600 new products under the Sprouts brand. In addition, disciplined cost management and a continued system enhancement helped us build a margin profile that has seen significant expansion. This performance builds on what has been a remarkable multiyear journey for the business. Over that time, we've driven strong new customer growth, reinforced our business foundation and made meaningful progress towards our purpose of helping people live and eat better.

At the same time, the macro environment remains uneven and consumers are increasingly value focused. Against this backdrop, the health and wellness landscape continues to evolve. What began as a focus on natural and fresh has expanded into more targeted outcome-driven solutions with customers becoming more discerning, seeking innovation, quality and transparency while also being highly value conscious. We believe our purpose and strategy position us well to address affordability and access, two of the most important challenges in healthy living today.

While our conviction in the long-term algorithm remains strong, 2026 will be a challenging year as we lap some big numbers. We are very pleased with our new stores, our investments in self-distribution, our growing depth of customer data and the continued advancement of our differentiated assortment. At the same time, we are disappointed with transactions and still learning how we can shape customer behavior through loyalty and personalization. In 2026, we are investing in the capabilities needed to fully exploit our loyalty data. We know we can do more. We also have the capacity in our P&L to help address the affordability challenges that many of our customers are facing. The team remains excited and confident in our ability to support our health enthusiast customers and drive growth in the years ahead.

In a moment, I'll talk more about our plans for 2026. But for now, I'll hand it to Curtis to review our fourth quarter and full year financial results as well as our 2026 outlook. Curtis?

Thanks, Jack, and good afternoon, everyone. In the fourth quarter, total sales were $2.1 billion, up $152 million or 8% compared to the same period last year. This growth was driven by a 1.6% increase in comparable store sales and the strong results from new stores. Our key points of differentiation continued to drive our sales with attribute-forward products growing faster than our core business. E-commerce sales grew 15%, representing approximately 15.5% of our total sales for the quarter. Additionally, Sprouts brand continues to resonate, now making up nearly 26% of our total sales for the quarter.

Basket drove our comp with traffic ending slightly negative after a disappointing holiday season and finish to the quarter. We effectively managed costs and margins against this backdrop. Gross margin for the fourth quarter was 38.0%, a decrease of 10 basis points compared to the same period last year, primarily due to shrink, partially offset by the benefits from our move to self-distribution in meat. In addition, the rapid adoption of our loyalty program did put some pressure on gross margins. We look forward to utilizing this data to further engage our target customers and drive sales behavior.

SG&A for the quarter totaled $653 million, an increase of $38 million and 41 basis points of leverage compared to the same period last year. This improvement was largely driven by lower incentive compensation expense and effective cost management. Depreciation and amortization, excluding depreciation included in the cost of sales was $39 million. For the fourth quarter, our earnings before interest and taxes were $123 million. Interest income was approximately $581,000 and our effective tax rate was 27%.

Net income was $90 million and diluted earnings per share were $0.92, an increase of 16% compared to the same period last year. For fiscal year 2025, total sales increased nearly 14% to $8.8 billion, driven by comparable store sales growth of 7.3% and strong new store performance. Our focus on innovation and differentiation resonated well with our target customers, driving overall sales. Additionally, we were happy to see that our new stores exceeded our expectations for the second consecutive year.

Gross margin was 38.8%, an increase of 70 basis points compared to gross margin in the prior year. This was predominantly driven by improvements in shrink from our investments in inventory management over the last couple of years as well as leverage from increased sales early in the year.

SG&A expenses for the year totaled $2.6 billion, an increase of $283 million or 45 basis points of leverage compared to SG&A last year. This leverage is mainly attributable to sales leverage from strong comp performance early in the year. Store closures and other costs totaled $5.6 million due to ongoing occupancy costs from our 2023 store closures and disaster recovery costs. Depreciation and amortization, excluding depreciation included in the cost of sales, was $150 million.

For 2025, our earnings before interest and taxes were $686 million. Interest income was $2.6 million, and our effective tax rate was approximately 24%. Net income was $524 million and diluted earnings per share were $5.31, an increase of 42% compared to the prior year's diluted earnings per share.

Sprouts ended the year with 477 stores across 24 states. Looking ahead, there are over 140 approved new stores and more than 95 executed leases in our pipeline. A strong and healthy balance sheet has underpinned our financial performance. For the year, we generated $716 million in operating cash flow, which enabled self-funding of investments in capital expenditures of $224 million, net of landlord reimbursement. We also returned $472 million to our shareholders by repurchasing 4 million shares and have $836 million remaining under our new $1 billion share repurchase authorization. The year ended with $257 million in cash and cash equivalents and $23 million of outstanding letters of credit.

We have been encouraged by our strong sales and customer growth in recent years. However, the challenge of lapping this growth has been more difficult than we anticipated, particularly with our lower engaged customers who are visiting less often and purchasing fewer items as they navigate economic challenges. We are encouraged to see our loyalty members increasing their frequency and spend, but know that there is still significant opportunity ahead. Our customer engagement and personalization capabilities are still maturing, and our customer is telling us they need greater support in making healthy living more affordable. We are well positioned to do more for our customers as we look ahead to 2026.

As for our outlook, it's important to note that fiscal year 2026 will be a 53-week year with the extra week falling at the end of the fourth quarter. We estimate the impact from the 53rd week to be approximately $200 million in sales, $28 million in income before interest and taxes and $0.21 in diluted earnings per share. For the full year, on a 52-week basis, we expect total sales growth to be between 4.5% and 6.5% and comp sales to be between negative 1% and positive 1%.

We plan to open at least 40 stores in 2026. Earnings before interest and taxes are expected to be between $675 million and $695 million, and earnings per share are expected to be between $5.28 and $5.44, which includes some share repurchases. With our strong cash generation, we plan to utilize our free cash flow to repurchase our shares and would expect to spend at least $300 million on this program in 2026, which is included in our EPS outlook. Year-to-date, we have already deployed $100 million towards share repurchase, and we'll continue to take a disciplined opportunistic approach when we see a disconnect between our share price and our long-term fundamentals. We also expect our corporate tax rate to be approximately 25.5%.

During the year, we expect capital expenditures net of landlord reimbursements to be between $280 million and $310 million. For the first quarter, we expect comp sales to be in the range of negative 3% to negative 1% and earnings per share to be between $1.66 and $1.70, which includes the impact of a higher tax rate due to year-over-year share price changes and the related stock-based compensation tax impacts. In the first quarter, we expect EBIT margin pressure of approximately 85 basis points due to fixed cost deleverage and the impact of our loyalty program.

To add some additional color to the full year guide, we expect the first half of the year to be challenging as we lap double-digit comp comparisons. We anticipate sequential comp improvement thereafter as we rebuild towards our long-term financial algorithm late in the year. EBIT margins are expected to face some early year headwinds due to fixed cost deleverage and higher-than-expected sign-ups for our loyalty program. We expect that this will stabilize later in the year as we leverage our investments in self-distribution and anniversary the loyalty rollout while still experiencing modest new store growth pressure in the second half as our pipeline is weighted more heavily to Q3 and Q4.

While we expect to experience short-term growth headwinds as we stabilize our business after two years of significant growth, we remain confident in our strategy and our ability to return to our long-term growth algorithm.

And with that, I'll turn it back to Jack.

Thanks, Curtis. While we're not happy with our current business performance and our 2026 outlook, we believe strongly in the long-term potential of Sprouts and our ability to take the necessary steps to reaccelerate growth.

Over the years, Sprouts has built a strong foundation for sustainable long-term value creation. As always, we recognize the future is more important than the past. The exceptional growth we've seen over the last two years was supported in part by the broad expansion of the U.S. health and wellness movement, where Sprouts is uniquely positioned with the right products and customer experience to serve as a top destination for healthy discovery. Growing from this elevated base of new customers now requires sharper execution, deeper customer engagement and better affordability for our customers.

In 2026, we are focused on preparing for our next phase of growth by leveraging our operational strengths and advancing our forging customer engagement real estate and supply chain initiatives, along with targeted investments in talent, technology and affordability that reinforce our unique value proposition. We are positioning Sprouts for long-term success.

Our top priority is serving the needs of our target customer. Launched last year, our loyalty program exceeded sign-up expectation and significantly broadened our customer insights. We expect the program to deliver a behavioral shift over time. We are pleased to see our most engaged customers increasing their frequency and to see some customers join our rewards program and significantly increase both frequency and spend at Sprouts. Yet we see opportunities to deepen engagement further, while by driving additional frequency, expanding participation across more categories or encouraging trial of innovative new items.

Beginning in 2026, we've enhanced our loyalty program to provide more value and are investing in our personalization capabilities to increase program effectiveness. As we have spoken about many times, our customers come to us for a variety of solutions to support their healthy living journey. Better understanding these customer cohorts and personalizing how we engage with the needs remains a critical growth lever. In 2026, we're adding new talent with deep expertise in data analytics and customer engagement to fully unlock this potential.

Health and wellness continues to provide tailwinds in the marketplace, and we will stay ahead by offering more unique products. The forging team continues to source products from around the world and is leading in evolving trends. We've established ourselves as the retailer of choice for launching new health and wellness products, supported by our commitment to nurturing and growing emerging brands as they scale. We'd like to thank all our vendors for their partnership, especially those who have trusted us to launch their trending products. Their innovation, combined with our customers' growing appetite for discovery in health and wellness continues to be a key driver of our success.

By the end of 2025, our organic sales mix grew to more than 30% of our total sales, and this trend remains a key focus for us. On the docket for 2026 are more products with on-trend attributes such as no seed oils, gut health and longevity. Also, you will see organic grass-fed whey protein, functional hydration beverages such as tractors, modern take on the hay market and products like Elevate Organics formulated to heal the body and the planet through regenerative farming practices. These are just a few examples of what this team is delivering to our customers.

Sprouts brands have now surpassed $2 billion, continuing to outperform overall company performance. Rather than replicating national brands, our goal is to offer customers products that complement their favorites while delivering something distinctly Sprouts, high-quality innovation at a great value. The team has developed a robust three-year innovation pipeline designed to meet the evolving needs of our health-orientated customers, focusing on products they trust and actively seek out. The launch of our new hemp wellness bowls is a terrific example of the intersection of health and affordability. The success of this new offering shows that customers respond when we deliver both in a compelling way. Next week, customers will see our new sweet heat seasonal event come to life across our stores with an exciting set of limited time products only found at Sprouts.

We continue to drive market-leading healthy innovation and our stores help bring it to life for our customers. Our teams remain focused on delivering our unique customer experience, educating shoppers and showcasing our differentiated assortment. I continue to be so proud of how our teams execute in stores for our customers.

New stores continue to perform well. This strong performance reinforces our confidence in our growth path. Our robust new store pipeline now includes over 140 approved locations and plans to open 40-plus new stores in 2026. We are also excited to have entered a new state earlier this year with the addition of our first New York store, expanding our presence in the Northeast. While nearly all of our 2026 openings will be in our existing footprint, the team is also looking forward to 2027 and beyond. and we are approving sites in both the Midwest and the Northeast to lay the foundation for further future growth.

On the supply chain front, the transition to self-distribution for fresh meat is progressing very well, strengthening our control over our fresh categories. Today, 75% of our stores are serviced with fresh meat from our distribution centers. Our Northern California facility is on track to be fully operational by early in the second quarter, completing our self-distribution rollout. Stores are already benefiting from increased delivery frequency with fresh meat products now arriving alongside daily produce shipments. We're also continuing to invest in our forecasting and replenishment capability that we expect will enable Sprouts to scale and grow. We believe the cost efficiencies from these initiatives and other investments will allow us to support our customers with a more affordable, healthy living journey while also maintaining our strong margin profile in the long term.

Lastly, the Sprouts team remains the heart of the organization with ongoing investments in the development to drive the business and key initiatives forward. We continue to invest in our talent engine pipeline to support our future growth. Our ongoing investments in our team have helped maintain a low turnover, and that stability is reflected in the consistently exceptional customer experience scores we received, many of whom tell us time and again, I love Sprouts. We extend our gratitude to our more than 36,000 team members for their commitment to serving customers every day.

I also want to thank Scott Neal and wish him the very best in his retirement. As our Chief Merchant, Scott has driven outstanding growth in our business while furthering our strategy of differentiation. As well, we welcome both Don Clark, our new Chief Merchandising Officer; and Mandy Rassi, our new Chief Customer Officer. We look forward to their contributions as we scale our business for continued growth.

In summary, while the near-term backdrop is challenging, the steps we are taking today are strengthening the business and reinforcing our ability to grow our $290 billion total addressable health and wellness market. It's amazing to reflect on our growth from a single store in Chandler, Arizona in 2002 to more than 500 stores by the year-end, serving over 14 million customers walking through our doors every quarter. The health and wellness movement remains strong, and Sprouts' unique positioning continues to set us apart. By managing costs with discipline and investing behind the capabilities that differentiate us, we are confident in our ability to create long-term growth and value for our shareholders. We appreciate your continued interest in Sprouts and look forward to keeping you updated on our progress throughout the year.

And with that, I'd like to turn it over for questions. Operator?

[Operator Instructions] Our first question comes from the line of Ed Kelly with Wells Fargo.

I guess I wanted to start with current comp momentum. You talked about some slowdown into holiday disappointing into the year, and it seems like that's continued into Q1. I was hoping maybe you could unpack what you think is driving that additional step down where you are running currently versus the comp guidance that you've given for the quarter?

And then as part of this, Jack, you have mentioned the idea of maybe investing in some value for your customers. And I think that's an idea that maybe price and promo, you've kind of resisted that idea historically. Just curious as to how deep of an investment you think you will be making there.

I'll let Curtis talk specifically on the numbers, Ed. First and foremost, what's happening, there's an uncertain macro environment. There's clearly some tough lapping that we're going and the toughest lapping does actually come in Q1 in terms of the numbers that we got last year for a variety of kind of -- a variety of reasons that are not going to be repeated this quarter. So that's one of the reasons for it.

On the other context of it in this affordability the affordability issue, our customers are saying to us, look, we really love your business. We really love what you do. But can you help us a little bit on this affordability? Can you help us just a little bit on what you're doing? And it's caused us to take a really good look at what are the options in terms of pricing, what are the options in terms of promotions. And the great thing about the business today from where it's been over the years is we've got the capacity to invest going forward if we need to invest to support the customer in the particular circumstances that are existing at the moment.

So that -- I think we just got more capacity to do -- we've got more options in terms of how we think about it. And Nick and the team are thinking really hard about how we can pick the right actions to support the customer in this affordability issue. And some of it will be promotions. Some will be personalization. Some of it will be about pricing. So we're looking at it in a bit of detail across the board, and we'll be taking some action, and we can -- we've got the capacity to do that.

Do you want to talk numbers, Curtis?

Yes. On the step down, Ed, really, the primary thing is that customer lapping issue as we kind of look back, it's a low engaged customer that we really brought in with new customers, with reactivated customers. at the new year last year in the fourth quarter last year, and there were some of those viral moments and eggs and things like that, that were driving customers our way.

So as we get up against it, it's just been challenging. And I don't think the macro helps in that respect. It makes it more challenging. And the combination of factors has made it difficult. Year-to-date, we are right at the midpoint of the guide. We're about a little over halfway through the quarter, and we are past the King Soopers' strike lapping that we had last year. That's behind us, but we're right at the midpoint of the guide here year-to-date.

Our next question comes from the line of Seth Sigman with Barclays. Going to move to the next question comes from the line of Leah Jordan with Goldman Sachs.

I just wanted to ask about the comp guide. See if you can just walk through how you're thinking about traffic versus ticket as we go through the year. What have you assumed of any contribution from loyalty?

And then I understand you have the difficult lap in the front half. But at the end of the day, natural and organic category is still growing pretty nicely across grocery. So, I guess, why do you think you've been more challenged in this current backdrop? And has anything changed in the competitive landscape? Or just more detail on what gives you the confidence that you can get back to that positive growth in the back half?

Yes. Leah, it's Curtis. On the guide front, from a traffic basket perspective, we'll see in the full year guide, slight pressure on traffic. It should get sequentially better as the year progresses. The first half will be challenged, and then we'll see sequential improvement as the compares soften a bit. And then the basket will be just the flip of that, slightly up and offsetting to the flat midpoint in the guidance.

As far as the confidence to get back to where we've been before, it's really just we have good strength in pieces of our strategy right now. New stores are performing really well. Attribute-based SKUs are performing really well. We continue to be pleased with the innovation and forging piece and the partnership with emerging brands and vendors. Those are all still going strong for us. We've had two great years of growth. We had two really strong years of sequential improvement prior to that, too. And so we feel like those are the building blocks for how we'll get back to where we need to go.

As we mentioned earlier, we need to do a little bit more for the customer in this moment. We're going to be working on our personalization and customer engagement capabilities throughout the year and accelerating some resource there. Those are the pieces that should help us get back.

And yes, we're expecting to be a part of that sequential improvement. The things that we're doing, we're assuming will help us get back to where we want to be and embedded in the guide. And then there's obviously just a lot of uncertainty and a long year ahead of us as it relates to the consumer pressure and our customer lapping conversations. So a balance of those things embedded in the guidance.

So, with regard to the competitive scenario, clear, that you are referring to, I think the great thing about our company is it's all in our own hands. We've got the capacity to do what it needs to do in the marketplace. We're not seeing anything really dramatic coming at us from different. We think this is a kind of lapping challenge and an affordability challenge that everybody is having to look at carefully. And the consumer uncertainty that's come from the affordability, it's not really reflected itself in a huge competitive space.

We are watching really closely whether the products that we have, the differentiated products that we have are priced appropriately within the market. But it's not about what other people are pricing because they don't sell these things, and it's about how do we give the right balance of the assortment, the right balance of price points, the right balance. And that's what we think we've got to do in the context of this affordability.

Inflation has clearly driven some significant increases on pricing on coffee, on meat, and it's affected some of the less -- the customer who doesn't come as often is clearly affected in some of those categories, and we're watching that closely, and we'll take the action that we need to take. But the great thing is it's all in our own hands.

Okay. That's very helpful. So I mean, it sounds like the lap is a big issue here. So that kind of leads to my next question around the right margin profile for this business. So you've had some really nice expansion over the last couple of years. And I think when we've talked before, it's, hey, we wouldn't really be giving that back. But today's guide is implying a notable margin decline. We're hearing more about investing in value in the last question and in the prepared remarks.

So, I guess, assuming you look back on algo in the back half, what is the right margin profile for this business? How do you think about the ongoing level of investment that's needed here? And just kind of the pressure that you're seeing today, what is temporary investment versus deleverage? Just kind of how do we think about the long-term margin profile?

Leah, it's Curtis. Yes. So I think, yes, the midpoint of the guide, there's a pressure on EBIT margins. That's primarily if we look at the full year fixed cost deleverage, occupancy depreciation deleverage as we think about the full year, around that, still fairly stable. And obviously, there'll be a shape of it from first half and second half. But we've made investments in the business over the last few years to create some space, inventory management, self-distribution. We've talked a lot about those. And then as we look ahead, we also feel like there's plenty of things left for us to go after and levers to pull in the longer term. And so continued improvement, inventory management, category management, additional self-distribution down the line.

There's lots of opportunity for us to go. And in fact, the challenge is we've seen the business go up and then the business come back down. And that just highlights that there's still room and maturity for us to go get in the business and inefficiencies for us to capture. So in the medium and long term, we still think there's investments to be made that can drive profitability that we can use to address affordability and take care of our customer. And that's how we're thinking about it.

Our next question comes from the line of Rupesh Parikh with Oppenheimer.

Just going to store openings and new store productivity, just curious how they continue to perform as you got into Q4. And then new store productivity does look a little lighter in Q4. Just curious if the timing or if there's anything else to discuss there.

Rupesh, it's Curtis. Yes, really pleased with the new stores. The performance continues to be strong there. The '25 vintage outperformed our box economics expectations, not quite as strong as the '24 vintage, but still really strong. The performance has been consistent with our expectations as it relates to established markets, nonestablished markets, kind of East Coast, West Coast. It's been pretty consistent, and we're really pleased to see the response we're getting when we bring this to new communities. And it really reinforces for us the confidence in the long term and our ability to return to our algorithm.

And then the new store productivity, that does get a little bit bouncy from quarter-to-quarter, mix of stores and where we're opening them and year-over-year comparisons. But overall, really pleased with the new store performance.

And the fact that we're consistently now building all in the new and the new V6 that we started a little while ago, we've now got more than 100 of those. We can start to make them even more efficient going forward as the team are working on learning how to do -- how to build them a little bit cheaper, how to execute them a little bit faster and how we can operate them a little bit more effective. So there's a lot of really good work going on behind. And when you've got the customers responding well to the new stores, it gives us a lot of scope to play to improve the efficiencies.

Our next question is from Michael Montani with Evercore ISI.

I had a two-parter. One was, can you share the new store opening cadence by quarter for the year? And then the other question was, if you look at 4Q, can you just parse out what you saw in terms of inflation versus transaction counts? And is the 300 bps softening you've had sequentially so far? Is that basically all transaction counts?

Yes. Mike, it's Curtis. I'll take them in reverse order there. On the softening, it's primarily traffic in the fourth quarter, a little bit of units. We are starting to see some unit pressure again, back to that affordability concept and some of the challenges from inflation that we're seeing.

Inflation kind of continues to play out the way we've expected. It's low single digits in line with CPI. And then you have -- we've got our mix towards premium products that's driving up our AUR and organic and things like that, that drive it up a bit and some of the value pack stuff that we've done over time. And then you have -- you do have some categories like coffee and meat that are inflationary that also drive that up a bit. And then, yes, so we're seeing the unit pressure a little bit across the board for all customers. And then the traffic challenge is primarily that lower engaged customer that we've seen.

On the new store opening cadence, backloaded again, as I mentioned in the script, six here in the first quarter should be nine in the second quarter and then pretty balanced in Q2 and Q3 to get us to our 40 for the year. And 2027 is shaping up pretty strong, and that should be a more balanced kind of quarterly spread of new store openings, but one more back-weighted vintage here in 2026.

And we try and avoid -- I think we're going to avoid really having anything in November and December after the -- certainly after Thanksgiving, trying to avoid those. And that's something that we're pretty confident we'll do this year.

Our next question comes from the line of Mark Carden with UBS.

So just building on the topic of affordability, you guys have mentioned in the past that you tend to be more of a secondary or a tertiary shop for customers. I know your assortment is largely unique, but do you believe you've seen much in the way of wallet share shift on some of the categories where you might overlap with a Costco or another grocer where they tend to shop? I know you called out eggs perhaps in the lap, but does anything else jump out? Or do you think it's more just a function of consumers controlling their own shrink, so to speak, as conditions remain challenging?

I'll let Nick have a go at that one, Mike.

Mark, it's Nick. So what we're seeing on the customer side, our -- from a share of wallet standpoint, our share of wallet is holding pretty flat. We saw just a little tiny bit of a loss in Q4 in share of wallet, but overall holding strong, which means if you think about our innovation and differentiation continues to win, and we're not seeing significant -- any kind of real share of wallet declines to some of the more conventional channels that you would expect or maybe allude to in your question. So we're holding our own there.

We are certainly seeing the consumer navigate towards value, which is part of what you hear from us on how do we meet our customer where they are and provide the value that we can do to help them. I think it's important to note, it's not just about price. I know -- I think that's a place people go. But for us, it starts with what we're great at, which is our innovation and differentiation.

And what we're seeing in our business is when we can provide health forward products at a really strong value like our Bowl program under $10 and our Sprouts brand organic program, our $5 sandwiches, we're seeing a really, really strong purchase from customers. And we just need to innovate more in that space at this given point in time in addition to leaning on things like personalization and loyalty, our always sharp produce pricing and offering. And as Jack mentioned, being smart about how we price and promote to continue to maintain and grow share in this time.

Our next question comes from the line of Tom Palmer with JPMorgan.

I wanted to ask on shrink. It was not mentioned as one of the potential margin headwinds for this year. I know last year, it was called out as a pretty substantial tailwind, especially in the first couple of quarters of the year. And I think there was a little bit of a question of how much of that was double-digit comps driving shrink lower versus all your work with inventory management. So, now as you lap that, I guess, any update on what you're seeing with shrink and maybe how much of it you're holding on to versus your expectation?

Tom, it's Curtis. Yes, it was a little bit of pressure on shrink or a favorability last year as we had the strong comps. We are up against that. Certainly in the fourth quarter, that's part of the story. And then in the first and second quarter, we'll be up against that a little bit. But we do feel like we've made sequential improvement there over the years. and that the team is prepared for that.

I think where it really gets challenging is when you get those whipsaws in sales, right? The big acceleration that we saw and now a bit of the deceleration that we've seen as the business has settled and moderated, that's where it's really challenging. I think we've got a good handle on where we are here as we're sitting here in the first quarter, and the teams are continuing to put work and investment into that to prepare us for later in the year. And so on the balance for the year, we do expect shrink to be fairly stable, and it will just be a little bit choppy quarter-to-quarter.

Our next question comes from the line of Robbie Ohmes with Bank of America.

Curtis, I was hoping you could give a little more color on the gross margin assumptions you guys have in the guidance for 2026. Would love to see if you could give us a little more on -- should we just think about it as occupancy deleverage in the weaker comp quarters and so more pressure on gross margin? Or can you give us some help on how much merchandise margin might change or go down in 2026?

Yes, sure, Robbie. The first half will be a bit pressured. I'll talk about it in terms of EBIT margins and the drivers there, and you'll get a little bit of the color on both sides underneath that. But yes, the fixed cost deleverage certainly pressured with a negative comp here in the first half, that will be challenging. primarily occupancy and depreciation. There's lots of moving parts. We've got cost work that we've done that will help and other new store growth pressure and things like that. But net-net, it's really a fixed cost story. On top of that, we've got the loyalty program that we saw good adoption and uptake in people opting into the program that puts a little bit of pressure on the rewards and the points that we're absorbing there.

So there'll be a little bit of pressure there that falls into the gross margin in the first half. And then as we get later in the year, we'll be leveraging those investments in self-distribution. We'll be anniversarying the loyalty program, and that compare will get a little easier, and we'll get back to kind of a more stable EBIT margin as we think about the second half.

Robbie, as I said in the script, I think there's real capacity in our organization to make sure we can deliver the algorithm long term in terms of the net margin going forward. So we're feeling pretty confident about that in the future.

Our next question comes from the line of Kelly Bania with BMO Capital Markets.

I guess, just to be frank, the outlook for '26 kind of earnings or at least EPS flattish, maybe up low single digit. I guess it doesn't really signal to me a major or even small investment in affordability for your customers. So I was just wondering if you can talk about what's really planned there, whether it be pricing promos. I know loyalty continues to roll out and you made some tweaks there. But is that something that could evolve? Are you still kind of analyzing what kind of investment in affordability you want to make for your customers? And I guess, do you think that removing -- do you think that some more affordable prices could remove the volatility that we're seeing in your comps and maybe insulate you more from the macro pressures that you are seeing?

We certainly think that from a customer point of view that they're asking us to do a little bit more to help them, as I said in one of the other questions, the customers are very positive about our assortment and the service they get in stores and the type of stores that they're going into. So there's confidence in that. The customer is seeing in this challenging environment, can you do a little bit more for them. And we're going through a number of tests to try and figure this out.

So we -- to that point, I'll pass you on to Nick to just talk a little bit more about what we're thinking about doing, but it's not fixed yet, and we're doing some tests to see where it goes.

Kelly, it's Nick. I think to answer your question on affordability, there's multiple prongs there to get there. I think the biggest one is leaning into our strength and looking at our assortment and the offering we provide to the customer and making some changes. Candidly, we -- I think you could argue we might have gotten a little bit further on the premium spectrum over the last couple of years on our offering. And there's a lot of innovation and access to our healthy products that are a little bit more on the value side of the equation. And that's just some good assortment work to make sure we have good balance across our categories, and the teams are already working on that as we speak, just to give access at every price point to every one of our customers. So that's a big piece of it. And as I mentioned, we're seeing that work in things like what we do with our deli meals and bowls program and so on. You're going to continue to see us stand tall with produce pricing.

I think we're in a really good place there, and that strategy will continue. And then as Jack mentioned, I think there's some of the things that we carry that have a little bit of overlap. And the important thing for us is that we're competitive. We're never going to win on price. We're always going to win with assortment and innovation and differentiation. But there's probably a handful of products that we want to be sure that we're right every day to just continue to maintain our trust. But we've got a lot of levers to pull to help support that. So we don't think we need to make any kind of massive investment to do that, which is what I think you're seeing reflected in our financials.

And obviously, the last piece of this is as we continue to improve our personalization lytics capabilities, it's a great way to drive value for the customer and then the access to the things you're looking for.

Our next question comes from the line of Chuck Cerankosky with Northcoast Research.

When you're looking at the loyalty program, how has the vendor participation been? And I'm looking at it as an offset to the strong sign-ups from customers. And is that something that is less than expected? And perhaps, is there any conflict with the vendors as they look to Sprouts own brands product introductions as part of the loyalty program?

Chuck, it's Nick. We -- to be honest with you, we are just starting to unlock vendor participation in the loyalty and personalization program in the beginning of this year. We -- '26 or '25 was focused on launching the capability, building it out, starting to get some -- the data, the testing, the learnings -- and this year really is a great opportunity for us to start to unlock more value for it. And so we're just starting into the fiscal year with getting vendor participation.

The good news is this is a win-win for our vendors and for us. Our vendors, especially the emerging players are looking to find their target audience, customers who might fit the key attributes, whether they're in the organic space or the gluten-free space. And so we can provide great access to those customers at a really strong ROI that helps them get trial for their products. And for us, obviously, certainly introducing these products to our customers who tell us they want newness from us and driving value and long-term value.

So we're in the early innings, so to speak, Chuck, on that effort, and I think we'll continue to see ways to unlock value for our vendors and us through the course of this year.

And Nick, I would probably say the idea that we're much -- there's no real conflict going on with the vendors about Sprouts brand. It's the opposite of that, Chuck. I think we've got ourselves in a place where we're kind of the place that people want to come to bring innovation and differentiation. And we're working really hard at that. The forging team are doing really well. We're launching a lot of products. And we're giving people opportunity and a starting point for their brands. And so as I say, we're not having a lot of -- not having any cut, it's the exact opposite.

Our next question comes from the line of Scott Marks with Jefferies.

I wanted to just follow up on this. notion of some pressure on units, some of those comments earlier. Are you seeing maybe more impact on certain categories or departments or even attribute-based items than others? And wondering how that impacts margin mix. And then obviously, as you work through kind of the ways to create value, how does that inform your thinking about changes across different parts of the store, let's say?

We are seeing some differences across different categories. We referenced coffee and meat where you're seeing significant inflation. You're seeing unit effects in that space. Produce business, I think people are being careful with their shrink, buying a little bit less units in our produce business than in what has been a volatile pricing environment in produce.

So, yes, we're seeing it and watching it pretty closely in terms of how that works. And part of our job is to make sure that we minimize the impact of categories that are seeing a lot of inflation. And we certainly see that as something that that's our job to try and take care of our customers when they're saying to us, look, this is costing a lot of money. So, yes, we're seeing different things by different categories. And the unit -- when you -- we've got an elasticity model. And if things don't sell as well, we can take a really good look at the pricing. And that's kind of the way we're thinking about it.

Scott, the only thing I'll just add to your question, I think there's not really any mix pressure based on how the sales are moving. So there's not any pressure on the mix driven by our sales. I think the only other thing I'd add to Jack's comment is, for us, the biggest unit challenges, there's some category piece, but just in that less engaged customer. The customer we gained last year that are putting less units in the basket for that group is where we're seeing it more so than, say, our core customer.

Our next question comes from the line of John Heinbockel with Guggenheim Securities.

Jack, so to follow up on that last one, how are your target or core cohorts performing behaviorally, right, and their view on affordability? And then is affordability more an issue in reality or perception and how you think about maybe altering marketing, the marketing message beyond personalization to address affordability?

Well, we're certainly taking a good look at our marketing messaging and being the kind of focusing on that. We think there's some real affordability issues rather than being for the customers. And what we found is our loyalty data has given this really clearly, those loyal customers to us are spending a little bit more money with us. It's the less engaged customers that Curtis outlined, I think, in the script, which is specifically those are the customers that are drifting are coming less often and spending a little bit less from us. And the feedback we're getting from them is that's an affordability crisis in terms of the affordability crisis that exists in the marketplace is affecting them more so than our loyal customers.

Our next question comes from the line of Krisztina Katai with Deutsche Bank.

So I wanted to follow up on the attribute, on attribute-based products that continue to perform well for you guys. Can you talk about planned SKU launches for 2026? And then within that, how are you thinking about the price points where you want to add more products or where you maybe double down a little bit to further deliver on the value that the customer is looking for? Or just maybe just talk about how you see the current assortment within the stores? And just to what degree do you think that some of these assortment changes need to happen? I would love to get your thoughts there.

Yes, it's a great question. Nick just touched on it. So I'll let Nick expand on how to explain what we're doing there.

Krisztina, I think as a starting point, I actually feel really good about our assortment mix across the key health attributes. Think about protein, fiber, grass-fed, gluten-free, organic. I mean that is who we are is offering breadth and depth across those attributes and not just one part of the assortment in store but all over. So I actually feel we're really well positioned.

To my earlier comment, I think where we can improve is how do we make sure access to some of those attributes and some of those offerings are available at more price points. And so making sure that you have that at more entry-level price points in our category, the right opportunities for organic and gluten-free. I think there's some opportunities for us to get just better balance for where the customer is right now and what they're asking for from us. So you'll see us spend more time on innovation and launches that continue to have balance and -- but continue to be focused on attributes. We're not going to make any changes and change what we carry. We're going to continue to lean into the health and wellness attributes that help us stand out.

And then to those launches, I mean, you're going to see us continue to launch close to 6,000, 7,000 new items this year. You're going to see us continue to grow Sprouts brand. And as a reminder, Sprouts brand is focused in areas where our customers telling us they want innovation. We're not looking to do a national brand compared to program. That's not our strategy. So we'll continue to see hundreds of new items in Sprouts brand, both across our fresh businesses and our nonperishable.

And I think you're going to see us also launch even stronger. We're really happy with what's happened with our partnership with the Haymaker product from Tractor and Elevate. And when we really line up behind some of these key brands, we're seeing really outstanding uptake with the customer. And I think you'll see our marketing and merchandising teams double down on some even bigger launches through the year as well.

Thank you. Ladies and gentlemen, this will conclude our Q&A session, and I will pass it back to Jack Sinclair for closing comments.

Yes. Thanks, everybody, for your attention and your interest in working with Sprouts and talking to us today. So I wish you all the very best. Take care.

And this concludes our conference. Thank you for participating. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to Sprout's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Susannah Livingston, Vice President, Investor Relations and Treasury. Please go ahead.

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our third quarter 2025 earnings call. Jack Sinclair, Chief Executive Officer; Curtis Valentine, Chief Financial Officer; and Nick Konat, President and Chief Operating Officer, are with me today. The earnings release announcing our third quarter 2025 results, the webcast of this call and financial 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 2025 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 financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures. With that, let me hand it over to Jack.

Thanks, Susannah, and good afternoon, everyone. In the third quarter, we delivered strong earnings growth, up 34% year-on-year with a 5.9% comp and strong new store performance. Our results continue to be driven by our execution on the key pillars of our strategy. We saw an increase in customer traffic as we effectively engaged with our target customers, while our most differentiated and attribute-based products continued to drive sales as we continue to expand our store presence from C to shining C.

In addition, our ongoing inventory management improvements in supply chain contributed to the expansion of our EBIT margin. Together, these achievements demonstrate the strength of our teams and the durability of our strategy.

While it was a solid third quarter, it fell short of our top line expectations. As the quarter progressed, our comp sales moderated faster than expected as we came up against challenging year-on-year comparisons as well as signs of a softening consumer. As we look ahead, the investments we have made provide us with levers to manage our business and deliver earnings growth.

Today, we'll walk you through our performance highlights, update you on our strategic initiatives and share how we're positioning Sprouts for the rest of 2025 and beyond. I want to thank the team for their ongoing commitment to supporting our customers on their health journey. For now, I'll hand it over to Curtis to review our third quarter financial results as well as our updated 2025 outlook. Curtis?

Thanks, Jack, and good afternoon, everyone. In the third quarter, total sales were $2.2 billion, up $255 million or 13% compared to the same period last year. This growth was driven by a 5.9% increase in comparable store sales and the strong results from new stores. Traffic remained positive and accounted for approximately 40% of our third quarter comp.

Our key points of differentiation continued to drive our sales with attribute-forward products growing faster than our core business. E-commerce sales grew 21%, representing approximately 15.5% of our total sales for the quarter, with good performance from all partners. Additionally, Sprouts brand continues to resonate with our target customers and now represents more than 25% of our total sales for the quarter.

While our third quarter yielded solid results, we expected more from our top line as we underestimated the impact of lapping strong numbers from last year in the context of a softening consumer backdrop. We believe our strategy always has us well-positioned to capitalize on the surging interest in health and wellness.

Last year, we saw outsized gains in new customers, substantially growing our customer base. And by and large, we've kept those customers. Against that backdrop, we have managed our costs and margins effectively. Our third quarter gross margin was 38.7%, an increase of 60 basis points compared to the same period last year. This improvement was mainly attributable to improved shrink.

SG&A for the quarter totaled $653 million, an increase of $73 million and 13 basis points of leverage compared to the same period last year. This improvement was largely driven by lower compensation expense, which was partially offset by increased benefit costs and pressure from our new store growth.

Depreciation and amortization, excluding depreciation included in the cost of sales, was $39 million. For the third quarter, our earnings before interest and taxes were $157 million. Interest income was approximately $690,000, and our effective tax rate was 24%, including a benefit of $0.03 predominantly from a purchase discount for transferable tax credits. Net income was $120 million and diluted earnings per share were $1.22, an increase of 34% compared to the same period last year.

During Q3, we opened 9 new stores, ending the quarter with 464 stores across 24 states. We are encouraged by our new store performance and the positive response we are getting from customers as we enter new communities across the country. The team continues to improve our processes and partnerships to accelerate our development cycle and our planned expansion into the Midwest and the Northeast is providing fertile ground for site approvals.

We plan to open more stores in 2026 than in 2025 and believe we are on track to get to our 10% unit growth in 2027. A strong and healthy balance sheet has underpinned our financial performance. Year-to-date, we generated $577 million in operating cash flow, which allowed us to self-fund our investments of $194 million in capital expenditures, net of landlord reimbursement to grow our business. We have also returned $342 million to our shareholders by repurchasing 2.4 million shares. We have $966 million remaining under our new $1 billion share repurchase authorization that was approved by the Board of Directors in August. We ended the third quarter with $322 million in cash and cash equivalents and $23 million of outstanding letters of credit.

On July 25, we closed a $600 million revolving credit facility, which replaced our previously existing $700 million revolver. The terms and conditions are substantially similar to our previous agreement with a new expiration date of July 2030. While we plan to fund operations and unit growth through our robust cash flow generation, this facility provides Sprouts with financial flexibility as we grow.

As we look ahead for the remainder of this year, we are balancing the strength of our business strategy against the consumer uncertainty and challenging year-over-year comp compares. For the full year, we expect total sales growth to be approximately 14% and comp sales to be approximately 7%. Given the strong execution of our real estate pipeline and fewer time line delays, we now plan to open 37 new stores in 2025.

Earnings before interest and taxes are expected to be between $675 million and $680 million, and earnings per share are expected to be between $5.24 and $5.28, assuming no additional share repurchases. That said, we expect to continue repurchasing shares opportunistically. We also expect our corporate tax rate to be approximately 24% -- during the year, we expect capital expenditures, net of landlord reimbursements, to be between $230 million and $250 million.

For the fourth quarter, we expect comp sales to be in the range of 0% to 2% and earnings per share to be between $0.86 and $0.90. In the fourth quarter, year-over-year margin rate in both gross margin and SG&A are normalizing. Despite pressure to our top line, we expect to be able to grow EBIT dollars in line with our sales growth to deliver stable year-over-year margins in the fourth quarter.

Despite facing challenging revenue comparisons, we remain confident that we have a resilient business capable of delivering solid earnings growth. This reflects our ongoing commitment to operational efficiency and disciplined cost management. These factors provide us with earnings stability while we continue to invest in our future growth. And with that, I'll turn it back to Jack.

Thanks, Curtis. Over the years, we have built a strong foundation for sustainable long-term value creation. We focus on driving growth through differentiated innovation, strengthening our operations, enhancing our digital capabilities to deepen customer engagement and expanding our store footprint, all while investing in our talent and technology.

Together, these elements form the cornerstone of our strategy, positioning us to compete effectively. The broader health and wellness movement in the United States continues to gain popularity. With this in mind, we remain committed to expanding and strengthening our unique product offering. We continue to see strong customer demand for our attribute-driven products, which remain a key driver of our sales growth.

Currently, more than 1/3 of our sales come from organic products, and we'll continue investing in this important attribute for our customers, ensuring they have access to the best in organic offerings at a great value. The supplement sector is also evolving within our stores, focused on areas such as longevity, women's health and gut health, trends that resonate with our health enthusiast customers.

The Sprouts brand now accounts for more than 25% of our sales and with a robust product pipeline planned for the next 3 years, we are committed to continuing our growth. What makes our Sprouts brand unique are our innovative products and flavors, such as herb-stuffing potato chips and maple-flavored coconut pillows, new for this year's fall season.

In the third quarter, we launched new wellness bowls, each priced under $10. These bowls feature attributes like grass-fed beef, organic tofu and responsibly-sourced salmon. They're packed with protein, bold flavors such as sesame garlic ponzu and high-quality fresh ingredients at a fantastic price. Our customers are responding, and we're pleased with the early results.

As we look to the future of forging, we're investing to ensure that we continue to lead in this space, supported by a robust pipeline of innovation and deep partnerships with entrepreneurial brands that view Sprouts as the ideal launch platform. These partnerships energize us. And together, we're excited to introduce approximately 7,000 new products for 2025 that align with our customers' values and lifestyles.

To stay ahead in a rapidly evolving market, we're expanding the capabilities of our forging team to better anticipate emerging trends and customer needs. Over the past year and into early 2025, we expanded our customer base, attracting a meaningful number of new shoppers. We are pleased to see that the vast majority have remained engaged. On the marketing front, we continue to partner with our influencers, extend our reach in new markets and have started utilizing our Sprouts Rewards to engage with our customers.

Speaking of the Sprouts Rewards loyalty program, it's fully launched this week, marking an essential step in our Sprouts customer engagement and personalization journey. We have seen good growth in our identifiable customers and the stores are taking ownership of this important initiative. Although it's still early in the program, we are observing encouraging indications of increased shopping frequency and sales per customer in our early rollout geographies and are excited to see our progress in the coming months.

On the supply chain front, we're excited about our ongoing transition to self-distribution in fresh meat and seafood. It has been a difficult year for us in the meat category as multiple third-party supply disruptions led to availability challenges and customer disruption, further underscoring the importance of controlling our destiny through self-distribution.

Through October, we have successfully completed the transition at 4 of our existing distribution centers, leading to increased delivery frequency to our stores and improved fill rates. Looking ahead, we anticipate completing this transition by the second quarter of 2026 with the opening of our new Northern California distribution center, further solidifying our commitment to operational excellence.

The new stores we've opened this year are performing well, both in terms of top line revenue and bottom line profitability. Additionally, last year's vintage is entering the comp base well, further validating the effectiveness of our model. We're particularly pleased about our robust new store pipeline, which currently includes 140 approved locations. This highlights the strength of our brand and also demonstrates the scalability of our format.

We are confident that we will be able to meet the evolving needs of our customers while also achieving our ambitious growth targets. To that end, we are pleased that we plan to open 37 stores in 2025, exceeding our original target of 35. We're excited to welcome 3,700 new Sproutees to our team and to expand access for our target customers, allowing us to bring the Sprouts experience to more communities nationwide.

The effective execution of our strategic initiative is made possible by the dedication and talent of our team members throughout the organization. Central to our culture is a shared belief in our purpose and values, which form the foundation of our long-term success. I want to express my gratitude to our 35,000 team members for their unwavering commitment to serving our customers every day.

We acknowledge the challenges of sustaining the momentum built from last year's exceptional results alongside an evolving consumer backdrop. We have an amazing business that has significant potential. We are confident in the resilience of our business model and are dedicated to investing in our foundations for sustainable long-term earnings growth. Thank you for joining us today. We look forward to sharing more of this journey with you in the quarters to come. And with that, I'd like to turn it over for questions. Operator?

[Operator Instructions] And the first question comes from Michael Montani with Evercore.

I just wanted to ask, we've had some questions about concerns around competition that might be potentially encroaching on your core consumer. I just wanted to see kind of how you would respond to that, if there was other cyclical temporal headwinds that we should be thinking about in the quarter and then how that could play out in the fourth quarter? And also, do you see this as a function of competition? Or is it something else?

Well, I think what we talked about in the script there, Mike, was very much there's -- we're lapping some tough numbers from last year. And at the same time, there's a kind of consumer context that feels like things are getting a little bit more difficult for the consumer. So putting that into context, we always look at what our competitors are also doing and what the competitors are playing in there. But our strategy is pretty clear. We've got 7,500 new innovative products launched. I don't think -- I haven't seen anyone else launching that kind of number of innovation and differentiation.

We're building a lot of stores up to 37 stores, which we're very confident about, and we've got a great pipeline of stores coming through going forward. And we're very excited about the loyalty and personalization work. So the context of all of that, I think, shields us from what we've seen happening from our competitors. And as I say, we're pretty confident about the future, Mike.

And the next question comes from Seth Sigman with Barclays.

There's a concern in the market that there have been some unique drivers helping your business over the last 12 months. You've had great performance and the concern is that those drivers are going away. As you reflect on that and the current slowdown that you're seeing, is there anything you would call out that's proving more difficult to lap?

And then you talked about keeping your customers. You grew your customers quite a bit last year. I mean, how are you seeing that play out? Are we seeing perhaps a change in spending behavior, lower spend per customer?

Hi Seth, this is Curtis. We've just seen some pockets and windows where we've had some outsized growth and gains. We've talked about those on the call. Certainly, last October was our strongest month that we've compared against. It was a 13-and-change comp. February, we had some help from a strike at a competitor that was upside. And then May and June, we had strong months with a good customer season from produce and some challenges in the industry from a supply and a cyber issue. We saw customers come our way in those moments. We're always well positioned to kind of capitalize in those moments.

But we don't see anything structural in -- outside of those types of things that we're up against. But we do have those moments that we'll be up against over the course of the next 10 months. And then just, yes, a little bit of softness in our business. I mean we see things in more of our middle-income trade areas, some of our younger trade areas where we see those demographics, we've seen the business soften just a little bit more than the rest of the business. And those are the things that we're kind of pointing to as it relates to the customer pressure.

And our next question will come from Leah Jordan with Goldman Sachs.

I'll kind of stick with the same theme around the comp slowdown. Just seeing if you could provide some more detail on the key surprises versus your expectations because this was a notable miss, right, below even your guide. Has there been any major difference across the regions or product categories?

And I think ultimately, you've historically talked about your offering being resilient to macro pressures as people are committed to their diets. But now you're talking about a softer consumer. So I think ultimately, has something shifted around your value proposition today? How do you view it? And I guess, why don't you see the need to invest a bit more to reengage your core consumer as you're really implying market share losses in the fourth quarter?

Well, I think the first thing we'd say is we're lapping some tough numbers from last year, and we may have underestimated the challenge of lapping those numbers. And it happened through the quarter as opposed to in the quarter. And as we look forward, we're anticipating a challenging environment. We know what we've got to lap going forward, and we're anticipating a little bit of pressure on the consumer going forward.

The health and wellness macro trends are still strong for us, and we see a real opportunity in doubling down on the loyalty program behind that going forward. And there are some macro pressures that I think you'll see coming through in the marketplace that we are certainly experiencing.

With regard to thinking about what should we do with -- we're not seeing a competitive dynamic changing dramatically in the marketplace in terms of pricing or activity. We've always promoted and we're very comfortable with promoting going forward. And we'll do what we need to do, but we're very strong in terms of managing our margins, managing our costs, and we'll consistently do that. You can see that from the numbers that we've just produced and the numbers that we will produce going forward. So no, we're not seeing anything dramatic in terms of the competitive dynamic in this space. We are seeing consumers under a bit of pressure, and we'll have to react to that in some ways, and we are reacting to that in the appropriate way.

And then to the miss in Q3, Leah, yes, I think we sailed through that first step change in the comp in May and June and didn't really see the underlying pressure again, probably masked a little bit of what was starting to go on there. But it was really the end of Q3, as Jack mentioned, where it really started to drop off a bit, and that's when we get up against the 10-plus comps here in September and then 13-plus in October. And so being a little bit cautious with where we are and looking ahead as we go up against the 10.5% and 10.5% roughly in November and December.

Okay. That's super helpful. And I was going to ask about the compares in November, December. So that's really helpful. I guess -- so my related follow-up would be then for -- as we look into '26, right, you're going to have some difficult lapse in the front half of the year. You just talked about how you sailed through it in March of last year. So -- how should -- I know you haven't -- it's a little bit early for the guide, but how should we think about the building blocks for the comp next year, driving engagement and lapping that as well?

Well, from the building blocks point of view, I'll let Curtis talk a little about how the numbers play through. From the building blocks point of view, Leah, we've got real confidence in the innovation pipeline that we've got coming through. We're really confident about the store pipeline that we've got coming through in terms of new stores. We're really confident about the work we've been doing that hasn't come through yet in loyalty and personalization, which we're excited about. So there's a lot of real positives in terms of the consumer side of this equation going forward. I'll let Curtis talk a little bit about the numbers.

Yes. And you called it out. We are early. Obviously, we'll be going through our budget process here in the fourth quarter, and we'll talk in more specifics in February. So yes, we'll have a bit of a challenging first half up against the double-digit comps. And then as we get to the second half, again, we've got those building blocks that Jack just referenced. And so we're pretty excited about those things coming online and getting us back into kind of that algorithm range and getting back to driving towards the high end of that algorithm comp as we hit the second half of next year.

Again, we'll get specific when we get to February, but we've been investing in the business to create levers to kind of manage through any environment, and we'll be working through that, and we'll manage our margins effectively here in the first half of 2026.

And the next question will come from Mark Carden with UBS.

So to start, you guys called out strength in your most differentiated products even with the slowdown. Do you think customers are spreading out their shopping more and becoming any more price sensitive on some of the less differentiated items like, say, produce? Have you seen shifts in what you think your overall wallet share is for customers today? And just how you're thinking about really the broader promotional environment over the next few periods?

Yes. Thanks, Mark. It's Nick. On the differentiation front, we measure that really closely since it's so strategically important to us, and we haven't seen our levels of differentiation wane at all in the last year, even through, as we mentioned, some of the business dynamics here. So we feel really good about where we are from a differentiation standpoint in the market. And yes, our most differentiated and innovative products continue to be the place that we see the strongest growth in comps. And so as we continue to fill that pipeline and bring all the new products we do to market, we feel bullish about what that's going to do for us moving forward, as Jack mentioned.

I do want to touch on share of wallet to your question. We're actually seeing our share of wallet hold to slightly up. So to the competitive questions and dynamics, we're not seeing our customer take their share of spend other places. We're holding our own on the share of wallet side, which I think portends to some of the macro we're seeing. And at the last part of your question, I think for us, we're not seeing a major exodus of customers. We're just seeing our customer at times spend maybe a little bit less on the tail end of their basket as they manage some of those pressures, and that's how we're seeing it come across in our dynamic.

Got it. That's helpful. And then you're seeing a lot of strength in private label with penetration climbing again this quarter. Just given the softening of the consumer that you talked about, any changes to how you're thinking about the pace of adding additional SKUs to your assortment?

Sure. We've been on a pretty aggressive pace over the last couple of years, adding hundreds of SKUs each year. And our team has done an amazing job of doing that. And I think what's important to keep in mind is when we build our Sprouts brand program, we're not -- we don't play sort of that national brand compare strategy. We look to find unique items that our health enthusiasts can't find other places. And to your point, what's happening around, that's really winning. We continue to see our penetration grow. Our sales growth in Sprouts brands have been really, really good. So we will continue to fill that pipeline and overinvest in that space to capture the momentum we have in the brand.

And we've got some pretty exciting plans, Nick, going forward in terms of what's happening next year and some holiday products are pretty exciting as well. So the investment in Sprouts brand will continue aggressively going forward, Mark.

And the next question will come from Ed Kelly with Wells Fargo.

I was curious if you could talk a bit more about the fourth quarter comp expectation and what you've seen so far quarter-to-date. Obviously, the October compare is tougher. But have you seen any stabilization yet in the 2-year as it pertains to October? And then what's the assumption that's based into the comp guidance as you think about the quarter itself?

Hi Ed, this is Curtis. Yes. So quarter-to-date, we are just north of 1 up against that 13-and-change last year for October. So the 2-year has started to stabilize a little bit here in the last, call it, 6 or 8 weeks, but we've definitely seen some ups and some downs week-to-week in the 1-year and the 2-year, and that's what's got us a little bit cautious. So we're up against, again, as I said earlier, about 10.5% in both November and December. And so we're really watching closely the 1-year versus the 2-year and there -- and how that plays out, particularly as we go through holidays with some of the consumer pressure that we've noted already. So watching closely, and we'll see how we go. We've had 2 months now up against 10-plus comps. We ran about 4% in September against the 10%, and we've run about 1% here against the 13%. And so we just want to see a few more of those months against the double digits to shore that up.

Okay. And then just a follow-up, Jack, you mentioned on the loyalty side that you were encouraged by some of the things that you have seen so far. I was wondering if you could elaborate on that. And as we think about 2026, how are you thinking about utilizing the loyalty card? What you can do to sort of push on that and the contribution that you think that it might begin to deliver?

Well, we won't commit specifically to what it might deliver, Ed, but it's a great question and it's very much at the heart of. What we're encouraged by is the execution literally this week, I think where all stores have now got access. It's taken us a full 9 months or so to get this rolled out across the country. We've been really encouraged by the number of customers that are signing up, and we're encouraged by the number of customers that are scanning. So we're in a better place with identifiable customers going forward to understand exactly what they're doing.

And as we go on our personalized journey and the customers go on their personalized journey, we're going to be able to take, I think, a real opportunity to sell the story of how we can tell or sell the story to our customers of new products that are relevant to them and be very targeted and efficient in that. The team are working hard on that. We made a little bit of progress on it, but I can anticipate -- I'll let Nick build on this. But I think there's real opportunity in 2026 to build even further growth from our loyalty program.

Yes. Hi Ed, it's Nick. Just a little more context there. We are seeing an ability to move customer behavior through loyalty right now with increased frequency and stronger sales per customer. The team has done a great job of getting us rolled out completely nationally.

And so now we can turn the team's attention fully to how do we make that work even harder for us in '26. I think Jack gave good color on how we can do so. But we've got the rollout behind us, and we know what we've been able to move behavior. And I think we've got a lot of levers to pull next year to do even more to again, bottom line, serve our unique customers on things that's most important to them and distinctive to us to drive long-term value.

And the next question will come from Tom Palmer with JPMorgan.

Look, I know you don't always give too much detail here, but I thought I'd ask on just some of the changes in customer behavior. So first, I think you made a reference smaller baskets, not fewer customer visits driving the comp slowdown. I just want to make sure I heard that right.

And then second, are you seeing any notable shifts when we think regionally or in certain departments of the store? I'm just kind of wondering because it does seem to be a little bit influx in terms of customer behavior, if anything stands out on that side.

Hi Thomas, it's Curtis. Yes, I think similar to how we talked about it on the way up last year, it was traffic and it was brick-and-mortar traffic that really accelerated, and we saw it be pretty balanced across categories and geographies, and we're seeing it really play out similarly as we lap those numbers this year. So it's been a traffic slowdown. Traffic is still positive, as we noted in the script, but that's a piece that slowed down.

And then, yes, we're seeing a little bit of pressure at the end of the basket, as we called out earlier now as the consumer pressure builds a bit, similar to what we saw during the inflationary period in '22 and '23, they're really managing the end of the basket, and it's creating kind of a units-per-basket-type pressure that we've seen before. So that's been the dynamic.

Okay. And then just on the fourth quarter, you noted the expectation, Curtis, for margin to be flat year-over-year. I just want to clarify, is that both gross margin and SG&A would be relatively flat? Or is one kind of moving in one direction and the other the other?

Yes. I think it's flat for EBIT margins is how we think about it, stable EBIT margins. It will be a little bit positive on the growth side and then a little bit of pressure at a 0% to 2% comp, it will be a little bit of pressure on SG&A.

And the next question will come from Rupesh Parikh with Oppenheimer.

So given the moderation that you've seen in your business recently, does this at all impact how aggressively you invest next year? And then are there levers to pull if you do see further softening from here?

Yes. I think we're going to continue to invest in the business. I think we will always make smart choices about how we allocate resources against the highest kind of priority and highest value type projects. And so we've had a good level of investment for the last 2 years. And I think that's created some levers for us.

Certainly, we've talked about inventory management, category management and the things that we've been working on helping drive some of those gross margin gains. We think there's still some room to go there. And we're working hard on our cost capability on our indirect cost side, and we spent a lot of time on that this year. So we're preparing ourselves to be able to manage through, and we feel like we're in a good position as we head towards 2026.

And we're full steam ahead on building stores. We're excited about that. As we talked about, the new stores are opening well. We're really encouraged by that within the context of the macro environment that we're in the middle of. We're full steam ahead in terms of self-distribution. So we'll continue to invest in that, which will bring forward some benefits in terms of in-stocks and benefits in terms of margins.

We're full steam ahead in terms of investing in innovation pipeline and making new products come through in our business. And as Nick said a minute ago, we're full steam ahead on our loyalty and personalization journey. So we're very confident in the investments that we're making going forward. And once we get past some of these lapping challenges, I think we're in really good shape.

And then maybe just one quick follow-up. On the capital allocation front, it sounds like you're going to continue buy back shares. But has your approach at all changes given a more certain environment, but at the same time, your stock is much lower. So just curious if there's any differences in how you approach share buybacks at these levels?

Yes. I think we'll be more aggressive depending on where the shares settle out here when we're done. Certainly, we've talked about buying opportunistically over the course of the year, and we bought pretty aggressively early in the year when the stock price was a little lower through the year. And I think we'll be thinking about it the same way as we exit our quiet period here, our close period here in the third quarter. So we're excited about the $1 billion authorization, and we'll see where things land come Friday, but we'll go get after it.

And the next question comes from John Heinbockel with Guggenheim.

So guys, 2 operational things. What's your -- has your thought changed now that you've rolled out loyalty, how much data you're going to need, how much history, right, to really market very effectively to your base? And then secondly, how do you guys size the opportunity in in-stock, right? Because what we keep hearing, right, is that natural and organic fill rates are not anywhere near where they need to be. How can you fix that? How long will that take to address? And how big is that opportunity in in-stock?

Yes. Hi John, it's Nick. Let me tackle first the loyalty question around data and history. So listen, part of your point, the more data we get, the better we can be at personalizing and driving behavior. There's no doubt about it, right? And this is -- we mentioned loyalty is a long-term play for us to drive long-term comp, and we're going to continue to be able to create much better depth of how we personalize and more insights, the more data we get. So you're right on there, and I'm looking forward to that over the next number of years.

But I will also say we're -- as we mentioned, we're able to use the data we have to drive customer behavior and plan on doing so in '26. I think as you know, our customers are not quite as frequent as your typical maybe grocery -- conventional grocer shopper.

So there's a little bit of time and just hey, getting that frequency in that basket doesn't happen as quickly when you have a super high frequency customer. But we've got enough data and tools, and we're going to continue to build it now that we're rolled out nationally to increase the level of engagement with the customer and I think continue to drive a lot of value for them. So that's on the loyalty side. Do you want to talk about?

And with regard to the supply chain and the in-stock, we've talked a lot about what we've done in meat this year. That's going to make a significant difference in terms of in-stocks in meat, and we believe that will help drive some sales in that space. Natural and organic is a very long tail, John, as you know. And that does create a challenge in terms of being as in-stock as people with less SKU count in the middle of their kind of assortment.

We will be looking at expanding some other areas potentially on self-distribution, which we've talked about in the past. We would like to be better as Sprouts brand in terms of how we can get more in-stock on that. We think there are certain categories that we need to double down on. Having said that, we are working very hard with our partners to get better forecasting and better anticipation of how demand could be -- we could anticipate demand even better.

But there's certainly an upside in sales, in in-stock numbers. We haven't put a clear number to that. We have in the meat category. But in other categories, we haven't put a really clear number to it. But instinctively, there's some upside for us in that if we can get better over the years -- months and years ahead.

All right. And maybe a follow-up, for Curtis. I know historically, right, or at least recently, right, the breakeven comp has been closer to 4%. How much do you think you can reduce that? Because you don't want to do damage to the business, right? Say, okay, we'll live with some deleverage for a while. How do you think about that trade-off?

Yes. I think it's a good call out. I think we do think about it, in the shorter term, we feel like we can manage around it with some of the levers that we've created with the investments we've made. Certainly, longer term, it's hard at 0 to 2 for a long period of time. We don't expect to be there for a long period of time. And so we believe it will be a bit of a short-term phenomenon as we go up against the numbers from last year.

Again, we're working on our cost capability and how we get -- as we scale and we get more efficient and we get a little bit more automated through process and things like that. There should be some opportunities for us to better manage costs. And so that's how we'll be thinking about it, and we'll be exercising those levers here in the very near term while we get the comp momentum going again with the building blocks for '26.

And the next question comes from Robbie Ohmes with Bank of America.

You guys gave thoughts on fourth quarter gross margin being up a little. When you guys come up against the tough comparisons in the first half of '26, any thoughts you can give us on gross margin puts and takes as you go through that?

I think, Robbie, it's a little bit early to be talking about '26, and I want to go through our planning process and work through that. I'll just say that we talk about stable margins. And when I think about the full year for '26, I don't see a reason why we won't be talking about that when we get there. We've got a -- we've invested in levers to help manage around some of the pressures we're facing right now. And then we'll continue to invest in some things. And so there'll always be a bit of a put and take as it relates to the EBIT margin.

we like the idea of stable, but we're not going to get too specific yet on first half, second half, those types of things.

Got you. That's helpful. And then just another follow-up on the kind of pressure on the consumer you're seeing. How narrow is it? Is it a -- is it just the, say, 25- to 35-year-old demographic that you guys are seeing some of the pressures? And maybe related to that, separate from the loyalty program, is there anything on the marketing side that you might need to change to get momentum going again?

Yes, I mean I think the pressure on the consumer, I'll speak to that, and then I'll turn it over to Nick on the second question. But from a consumer pressure perspective, I mean, I think that's building everywhere is what you see in the macro, a little bit more in the kind of lower and middle income is what you read about and what you hear. I think those are the things where we just see that be a little bit outsized in those spaces.

So again, I talked about middle-income trade areas, younger demographics. It's just a little more pronounced in those, but I think the pressure is there for everybody and everyone is trying to figure out how they manage through that in a dynamic environment.

Yes. Robbie, it's Nick. And then to the second part of your question there on the marketing side. I think we have a great story to tell, but we're always testing, learning how well we're telling it. I think to your point, I think we can always tighten up our value proposition. Right now, it's a good chance to continue to just refine what makes us unique. It's about innovation, freshness, quality and health. And I think if we hit those at the great prices and fair prices that we have, I think we'll be in a good place.

So we're always testing, but I don't think there's any significant changes or pivots other than what we always do, which is look at how well we're telling our story and then where we're spending the money by channel and location to maximize it.

And the next question comes from Scott Mushkin with R5 Capital.

So I guess I wanted to get back to the competitive environment a little bit. Our research, both research and consulting work, we've done a lot of work down in Texas, in particular, market for you guys that says the produce area has become hypercompetitive. And I guess I was wondering, where do you think you guys are priced if we're going to look specifically at the fresh basket? And who do you think you're actually competing with? In other words, if the traditional market goes hypercompetitive, is that something you actually need to react to?

We watch our -- we talk regularly, Scott, we watch produce pricing more attentively than anything else. And Texas has become a more aggressive market with H-E-B's expansion into Dallas. We're having a great time opening new store. I'm delighted with our Dallas performance alongside H-E-B. We're doing really well in terms of how those new stores are opening, and we're having success in San Antonio and Austin as well.

We watch the Texas market closely. It is more competitive on produce than other parts of the country. We've got a fairly significant price gap on most grocery competitors around the country. Texas is more competitive, and we're watching that closely.

When you look at the rest of the country, produce remains a competitive advantage for us going forward, and we focus on that a lot as it's such a direct comparison. But we're feeling pretty good about our produce pricing going forward. there's a lot of volatility in it, as you know, and people are -- I don't see it getting any more aggressive from a margin point of view outside of Texas going forward.

Okay. And then, Jack, when you think about your competitive set, again, some of our research suggests that Amazon proper has gotten very aggressive again on pricing of everyday essentials. If you think about Whole Foods, do you think of them as a direct competitor? I guess you would, but I mean, how sensitive are you to things that they are doing, competitive?

We watch it very close. Yes, sorry, I'll let you finish the question, Scott.

No, that was it.

Okay. Well, we do watch those guys very closely and very intently because they do sell a lot of things that we sell. But we've got very clear data over what they overlap with those guys, and we're not seeing any significant change in the stores that are facing those guys than in the stores across the rest of the country.

And you kind of touched on what I think Amazon [indiscernible] Whole Foods are doing, which is chasing after maybe the 365, maybe the more entry point prices. So it's drifting away into trying to get the full basket from people. We're very much a complementary retailer and are in the space that if we keep differentiating ourselves, we're feeling pretty confident that that's the right place for us to be. And we keep watching it very closely. And we're not getting overexcited about what's happening in any of our competitors at the moment.

And the next question comes from Scott Marks with Jefferies.

First thing I wanted to ask about is last quarter, you had called out a cannibalization factor with new stores impacting existing markets. Given that new stores are performing well for your commentary, wondering if you can just update that and update us on how you're thinking about that dynamic.

Scott, this is Curtis. Yes, I think it's still in the same general range. I think we talked about 125-ish basis points, 125 to 150, and that's kind of what we've seen. Certainly, as we ramp up the number of new stores, that will continue to grow a bit, but that's about the range we've seen. And we've had some strong openings, particularly in some dense areas that have had some larger cannibalizations, but it's in line with our expectations and not a huge change from quarter-to-quarter.

Okay. Appreciate that. And then next question from me. Maybe you're a little bit less exposed to that, but just wondering SNAP spend, how exposed is your business to that? And have you seen any impacts given some of the policy changes and obviously, the government shutdown having a potential to impact that?

Yes. So certainly, again, not going to be helpful from a consumer perspective. Our SNAP is about -- it's somewhere between 2% and 3% is historically where it's been. So it's a limited impact to us. I think we're just starting to see the effects of that, both from either a shutdown perspective or SNAP. I think that's happening kind of in real time in the last several weeks. So I don't think it's a huge impact to our business, but it's certainly not helping.

And the next question comes from Benjamin Wood with BMO Capital.

I think this might be for Kelly Bania from BMO. I'm not sure how that happened. I wanted to talk about the promotional strategy. It seems like to us that the messaging is more aggressive with respect to price and promotion lately as opposed to the shift over the last few years, which has been to lean more on product attributes and seasonal highlights.

Is that accurate? Is there any change in response to the comp trajectory from a promotional strategy? And is there any -- can you talk about how your consumers are responding to promotions today? Is there any difference in how that has been progressing through the quarter or into the quarter-to-date period in October?

Hi Kelly, thanks for the question. It's Nick. Overall, we're not changing our pricing or promotional philosophy in any consequential way. As I mentioned, for us, the customers continue to tell us they define value through quality, innovation, freshness and health, and that's what we continue to lean in on.

We have a handful of key events that we do every quarter or so, things like our organic sale or vitamin sale. We do a BOGO event. And within those, we certainly try to promote the things that we know are most important to the customer, and we will play around at times with price points or messaging to try to learn what's happening with the customer. But overall, we're not having any significant changes in our strategy.

And I think I want to also make clear we're not changing how we manage to our margins or our overall value proposition to the customer. So I think you're going to see us be pretty consistent. And as the onset of our personalization capability. I think that gives us another lever to target our price promotional spend to drive better return and take care of our best customers.

And I guess maybe just a follow-up on that. If this consumer softness were to continue, would you reconsider your level of promotional activity at all, particularly for this customer that seems to be most sensitive to whatever is going on right now?

Yes. With what we're seeing right now, no, we wouldn't. I mean, like I said, we are always looking at -- Jack mentioned earlier, we're always monitoring our pricing on produce and our key items and the competition and making adjustments as we think we need to based on the dynamics of the local market items. But from a broad strategic standpoint, no, we don't see that. And we just don't see the same impact doing that, that maybe others do because of who our customer is. And again, what we want to win in the marketplace is winning with the areas I just mentioned.

And the next question will come from Chuck Cerankosky with Northcoast Research.

To what degree, if any, would Sprouts slow down new store openings to deal with an increased level of shopper caution?

Yes. I think, Chuck, I think we're really positive with the way the new stores are responding as we've called out a couple of times throughout. We're seeing really strong openings. We're seeing really good comps out of the second, third, fourth year vintages, and that's continued. We're continuing to get markers here on '24 vintages as they get into the comp base here in Q4 and into next year.

But the results have been positive there. The customer is telling us they're looking for Sprouts and a Sprouts-like solution, and we're excited to get into as many communities as we can. Over the long term, we'll see how the pipeline plays out and those types of things. But right now, we're pretty bullish on the white space and pretty bullish on the performance we've seen.

We've got a clear purpose to help people live -- we've got a very clear purpose to help people live and eat better. And the opportunity that we've got to do that by taking our brand across the country into places where they don't exist is a key part of what we want to achieve going forward.

And we're absolutely delighted by the way new stores are opening and the teams that are making this happen are doing a terrific job, and we're continuing to grow on it. And we have absolutely no intention of backing off from that. At the moment, really excited about our new stores, and it really fulfills the purpose of what everyone here is working to try and do, and we're excited about it going forward.

Do you sense any need to maybe promote a little differently or more aggressively with some of the new stores as they debut?

Well, I think -- I think the new stores are opening really well because I think we're getting better and better understanding where to build new stores, the models that we're building about where exactly the health enthusiast customers are, are working well. And the marketing team have done a really nice job in different locations, communicating the values and what we have and grow the business within each market.

We're a pretty unique business, 24 states, relatively small business, and we're going to get to a lot more states over the next year or 2 as we -- as Curtis talked about in the Midwest and the Northeast corridor. So we're going to have to think about having a different marketing approach by market, but not in terms of promotional approach. We're not going to be doing big aggressive things to drive people into the store.

Chuck, I'd just add one of the things that's been really positive in the way that we've marketed those new stores is more about getting -- it's getting into the local community and getting more local earlier in the process to really build some excitement around the store and some enthusiasm in the local community.

And so again, it's just about telling our story. It's about engaging with the community, and we've seen a lot of positive traction when we've showed up in some new places.

I see no further questions in the queue at this time. I would now like to turn the call back over to Jack for closing remarks.

Well, thanks, everybody, for taking the time and showing so much -- asking such great questions and showing so much attention to our company, and we look forward to continuing the dialogue with you going forward. Thanks again. Take care.

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Good day, and thank you for standing by. Welcome to the Sprouts Farmers Market Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Susannah Livingston, Vice President of Investor Relations and Treasury.

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our second quarter 2025 earnings call. Jack Sinclair, Chief Executive Officer; and Curtis Valentine, Chief Financial Officer, are with me today. Nick Konat, our President and Chief Operating Officer, had a family commitment and not be joining us for this quarter.

The earnings release announcing our second quarter 2025 results, the webcast of this call and financial 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 2025 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 financial measures. Please see the tables in our earnings release to reconcile our non-GAAP financial measures to the comparable GAAP figures.

With that, let me hand it over to Jack.

Thanks, Susannah, and good afternoon, everyone. At Sprouts, we remain committed to our purpose to help people live and eat better. In an environment where consumers are becoming more mindful about what they eat and where it comes from, Sprouts stands apart. Our focus on fresh, local and innovative natural and organic products, along with our knowledgeable team members and approachable stores, continues to resonate with our target customer.

In the second quarter, we delivered strong results driven by our strategy to market to our target customers with a differentiated assortment, disciplined operations and advantaged supply chain and ongoing store growth. Our sales increased 17%, supported by comparable store sales of 10.2% and robust new store performance. Our diluted earnings per share reached $1.35, reflecting a 44% increase compared to the same period last year. We are proud of how our team continues to execute, focusing on our customers, which in turn continues to deliver strong results.

Today, we'll walk you through our performance highlights, update you on our strategic initiatives and share how we're positioning Sprouts for continued success in the second half of the year and beyond. We're excited about our progress and remain focused on delivering innovative, fresh and healthy foods that meets the evolving needs of our health-conscious consumers.

I want to thank the team for their ongoing commitment to supporting our customers on their health journey.

For now, I'll hand it to Curtis to review our second quarter financial results as well as our updated 2025 outlook. Curtis?

Thanks, Jack, and good afternoon, everyone. In the second quarter, total sales were $2.2 billion, up $327 million or 17% compared to the same period last year. This growth was driven by a 10.2% increase in comparable store sales and the strong results from our new stores. The performance of our comps across categories, channels and geography remains balanced, supported by new stores entering the comp base.

Traffic was strong and accounted for the majority of our comp. As anticipated, it slightly moderated from the first quarter, which is not surprising given traffic was the main driver of last year's acceleration. Our e-commerce sales grew 27%, representing approximately 15% of our total sales for the quarter with good performance from all partners. Additionally, Sprouts brand contributed 24% to our total sales for the quarter.

Our second quarter gross margin was 38.8%, an increase of 91 basis points compared to the same period last year. This increase was primarily due to leveraging our inventory and category management improvements as well as leverage from our sales performance. SG&A for the quarter totaled $645 million, an increase of $89 million and 33 basis points of leverage compared to the same period last year. Our strong comp performance led to leverage mainly in labor and occupancy. Store closure and other costs totaled approximately $2 million for the quarter. These are primarily due to costs associated with exiting leases related to our 2023 store closures. Depreciation and amortization, excluding depreciation included in the cost of sales, was $37 million.

For the second quarter, our earnings before interest and taxes were $179 million. Interest income was approximately $431,000, and our effective tax rate was 26%. Net income was $134 million and diluted earnings per share were $1.35, an increase of 44% compared to the same period last year. During the second quarter, we opened 12 new stores, ending the quarter with 455 stores across 24 states.

A strong and healthy balance sheet has underpinned our financial performance. Year-to-date, we generated $410 million in operating cash flow, which allowed us to self-fund our investments of $138 million in capital expenditures, net of landlord reimbursement to grow our business. We have also returned $292 million to our shareholders by repurchasing 2 million shares. We have $158 million remaining under our current share repurchase authorization. We ended the second quarter with $261 million in cash and cash equivalents and $23 million of outstanding letters of credit.

As you probably saw on July 25, we closed a $600 million revolving credit facility, which replaced our previously existing $700 million revolver. The terms and conditions are substantially similar to our previous agreement with the new expiration date of July 2030. While we plan to fund our operations and unit growth through our robust cash flow generation, this facility provides Sprouts with financial flexibility as we grow. An increasing number of customers are emphasizing the importance of quality, healthy food options and this positive trend, along with continued new store performance is inspiring our plans to expand into new markets. Looking ahead to the remainder of 2025, we are dedicated to achieving significant earnings growth while capitalizing on these emerging opportunities.

For 2025, we expect total sales growth to be 14.5% to 16% and comp sales in the range of 7.5% to 9%. We still anticipate comp sales to moderate as we cycle the higher comps from late 2024. We plan to open at least 35 new stores. Earnings before interest and taxes are expected to be between $675 million and $690 million, and earnings per share are expected to be between $5.20 and $5.32, assuming no additional share repurchases. That said, we do expect to continue to repurchase shares opportunistically. We also expect our corporate tax rate to be approximately 24%. During the year, we expect capital expenditures net of landlord reimbursements to be between $230 million and $250 million. For the third quarter, we expect comp sales to be in the range of 6% to 8% and earnings per share to be between $1.12 and $1.16.

As we have begun to lap last year's comp step changes, we continue to see consistent 2-year stack performance of approximately 15%. In the second quarter, we also benefited from some external tailwinds that pushed the 2-year stack above our run rate in May and June. While those tailwinds come and go, the approximately 15% 2-year stack remains consistent and gives us confidence in our increased comp guidance.

Year-over-year margin rate in both gross margin and SG&A are expected to start normalizing in the third quarter as we compare to last year's improved shrink performance, and we work to derisk our supply chain, providing more flexibility and capacity. We anticipate continued EBIT margin expansion of approximately 40 to 50 basis points year-over-year. For the rest of 2025, we are confident in our strong financial foundation and successful execution of our strategic initiatives, which position us to deliver strong earnings growth in the second half.

And with that, I'll turn it back to Jack.

Thanks, Curtis. We leveraged our strategic initiatives in the second quarter, which delivered excellent results and set us up for an exciting future. We keep reinvesting in our business by developing innovative products and enhancing our operations, both in stores and across the supply chain. Additionally, we're driving engagement with our customers through targeted service strategies and carefully chosen store locations. We also continue to prioritize investing in our team members who play a vital role in driving these results. Customers are increasingly drawn to Sprouts due to our strengths in identifying trendy offerings, providing fresh and quality food and launching innovative products rich in health-driven attributes.

Innovation is a cornerstone of our strategy, and our consistent launch of new products keeps our selection fresh and exciting. Our innovation center continues to grow in sales with baskets that contain innovation items being more than double the size of our overall company basket.

We remain focused on the categories that matter to our target customers. The Sprouts brand continues to excel with plans to release over 350 new products this year alone. Our success is driven by our strong emphasis on attributes, high-quality items and the discovery of products through seasonally themed events. Growth in organic products is on the rise, now accounting for nearly 1/3 of our total sales and over 50% of our produce sales, thanks to our organic first merchandising initiatives.

Additionally, we continue to expand our SKU count in trending categories such as no seed oils and high-protein items. We now offer more than 3,700 high-protein products with 450 new items set to be released this year. Our focus on attribute-driven products is resulting in increased sales that surpass the rest of the business and outpace overall grocery industry growth. These efforts reinforce and strengthen Sprouts leadership in the better-for-you segment, allowing us to capitalize quickly on key market trends.

As you know, we've been building an advantaged supply chain that is a strategic priority, enabling scalable growth for the future. Fresh is the most important category for us. We've been building capacity over the years to take on more self-distribution. This includes expanding capacity in existing markets, such as our Northern California DC in early 2026 and building new capacity in our expansion markets. By taking control of key product categories such as meat and seafood, we are taking critical steps towards self-sufficiency. This approach allows us more control over our supply chain while minimizing operational and supply chain risk. Although there's significant work to do, we will begin in-sourcing fresh meat and seafood this quarter in Orlando and continue the work through the second quarter of 2026. We will continue to focus on new DC expansion in the next 3 to 5 years to support our continued growth.

The Sprouts Reward loyalty program launched in Arizona this month, marking an important step in our Sprouts customer engagement and personalization journey. The results of our test and pilot programs have boosted our confidence in the program's potential, showing that loyalty members are shopping more frequently, growing at a faster rate and spending more. Our teams are excited and prepared to support the full rollout, which remains on track for the end of this year. This initiative presents a significant opportunity for us to better understand and serve our target customers, ultimately, using these insights across our business to enhance the customer experience and create long-term value.

Currently, we are seeing strong customer acquisition and an increase in share of wallet. Our customer experience is improving across all channels. In-store performance has strengthened due to better in-stocks, fresher products and superior service. Additionally, our e-commerce platform continues to grow with shop.sprouts.com experiencing the fastest increase in penetration.

It has been exciting to witness the evolution of our marketing approach, which has transitioned from paper to digital to targeted marketing and now to genuinely personalized outreach, leveraging customer data to foster more meaningful and engaging customer experiences. Building great stores remains the foundation of our growth strategy, and we're on track to open 35 locations this year. New stores this year are opening with solid top and bottom line results and last year's vintage is entering the comp base strong, reinforcing the effectiveness of our model. We continue to expand our footprint to enhance accessibility for more customers across the country. With a robust pipeline of over 130 approved locations, including recent approvals in the Midwest and the Northeast, we are poised for continued momentum. From sea to shining sea, new stores are delivering strong performance, underscoring the strength of our brand and the scalability of our format.

The great results and strong execution of our initiatives are possible because of our team members across the business. At the heart of our culture, our team believes in our purpose and values, which serves as the basis for long-term success. To support our future growth, we have developed a robust talent engine that focuses on our team members' recruitment, development and engagement. Key initiatives include the Fast Track program to develop future store managers, the Assistant Store Manager University and our robust onboarding process. We have also implemented monthly talent planning reviews for our field to ensure we remain ahead of our needs and opportunities. As a result of these intentional culture building and training efforts, we have significantly reduced turnover, creating a more stable, engaged and high-performing team. I want to express my gratitude to our 35,000 team members for their hard work, which continues to deliver outstanding results.

As we look ahead, we remain confident in our strategic direction and Sprouts unique position within the specialty food retail landscape. Our journey is not just about growing stores or improving margins, it's about deepening our connection with customers who seek real food, fresh quality ingredients and innovative products that meet their unique needs. We've been making progress, but we know there's much more to do, whether it's expanding our footprint, strengthening our supply chain or continuing to innovate. We're committed to building a resilient, purpose-driven company that delivers long-term value to our shareholders and positively impact the communities we serve.

Thank you for joining us today. We look forward to sharing more of this journey in the quarters to come.

With that, I'd like to turn it over to the operator for questions.

[Operator Instructions] Our first question comes from Leah Jordan with Goldman Sachs.

Jack, Curtis, great job to you and the team on the quarter. Just wanted to see if you could provide some more detail on the loyalty program. I know it's been rolling out across the country, still more to go. But I guess what has surprised you so far as you rolled it out to more regions? And then maybe what have you adapted now in your approach and any learnings over the past few months as it's been in some of your initial locations for longer?

Yes. Well, Leah, the first iteration of this is it was in 35 stores. Last week, we rolled out all of our stores in Arizona. So we're now up to close to 70 stores or 75 stores in terms of across -- so we're still on the rollout across the nation. We've been learning. The encouraging thing is the number of people who are signing up and the way the consumers are standing is ahead of what our expectations were. So we're encouraged by that. We're encouraged by the way it's working for -- we spent a lot of time and money making sure the execution and the experience for the customer was good and worked well, and we're comfortable that, that's -- we've learned a lot about how to make sure there isn't any clunkiness in the signing off and making it work. We're very confident in where we're at. We're going to roll this -- it will all be rolled out by the end of October. So we're feeling like the program is ready to roll out. And we think it will bring us some big benefits next year.

So I think the learning has been about execution and making it work effectively. And with the data that we're getting and the information, we're going to be in a very good position to evolve all aspects of our communication, aspects of our merchandising, aspects of where we should put stores. So we're going to learn a lot from it going forward. I'm excited by the journey we're in the middle of Leah.

That's very helpful. And we'll look forward to hear more on that. I guess for a follow-up, I just wanted to switch over to digital. It continues to be very strong for you guys. Just more color on the trends there. And also curious how engagement maybe is different for each of your partners? And is there any divergence as they mature at different rates? And then on your comments in the prepared remarks, you talked about sprouts.com being the fastest increase in penetration. So curious what you're doing differently there that's driving that.

Sure. I think it's been pretty -- Leah, this is Curtis. It's been pretty kind of consistent and balanced. The same story continues to play out as we go from quarter-to-quarter. Three really good partners, all growing well. I think our team on the shop.sprouts.com front just continues to learn about how to engage the customer there and work with our partners to do that well. And so they continue to make good solid progress. And that was probably the channel that was coming from the lowest base, and so they continue to see really strong growth.

And I think the only real difference is, I think we've talked about it before, but the Instacart basket tends to be about 2x the brick-and-mortar basket a little bit bigger. And the Uber Eats and DoorDash baskets are a little bit more convenience-based kind of what's for dinner tonight, milk, eggs, bread, staples. But outside of that, the mix is pretty consistent up and down the different categories. And again, they're all growing really well and providing good service to the customer and good partners for us.

And we're encouraged by the shop.sprouts.com evolution and development because it gives us some confidence that the customers are navigating directly to the Sprouts brand as part of that context. And that's something that the team have been working on for a number of years now, and it's really beginning to come together. And we think that will build more loyalty going forward.

Our next question comes from Edward Kelly with Wells Fargo.

Nice quarter. I wanted to ask you about the comp and the cadence and momentum. So you talked about a stable sort of 15%-ish 2-year before May and June acceleration. So I was hoping you could speak to that acceleration. Curious if it was related to the disruption across the industry with UNFI. And then I'm curious what you've seen so far in July. And that kind of dovetails into guidance because the guidance for 6% to 8% in Q3, 6% is 15%, right? So you've guided the midpoint a little bit better than that. I'm just kind of curious about sustainability of current trend and how you were thinking about it all with guidance.

Sure. Thanks, Edward. This is Curtis. Yes, 2 things really in May and June. Really, the biggest driver was we had a really strong produce season. So we've seen some really good organic crops and availability. And so the team, again, has done a great job. We're well positioned. They work really closely with the growers. We're focused on local. They're focused on organic first. And so when we have a good season, particularly in organic, they're able to capitalize on it. And that's what we really saw through May and June. As the seasons evolve, that's kind of normalized a bit. But in May and June, we saw a nice pop in the produce business.

And then the second piece, sure, there was quite a significant disruption in the natural organic space. And we had a limited impact there just because we have a smaller portion of our business. there. And so that was a helper, too. We had some people come our way when they couldn't find things elsewhere, and that also boosted them. That's a little bit more of the June. But the May, June story in total was a little bit better than that 15%.

And then as far as how that's evolved quarter-to-date, both of those things have kind of settled and normalized a bit. And so we're kind of back into that 15% 2-year stack run rate. And really, quarter-to-date through July, it's right at the midpoint from a 2-year stack perspective. And so that's what gives us the confidence in the guide. It's been -- since we jumped up last September, 7 of the 11 periods have been in that 15% range with just a few periods where we've seen some external factors that we've capitalized and seen stronger numbers. And so just the consistency of what we've seen, I think, gives us the confidence to guide where we guided.

Great. That's good color. And then just a quick follow-up on the gross margin, another strong quarter. You talked about trends normalizing kind of from here into the back half. But self-distribution and meat and seafood is rolling in. And I'm curious as to how that impacts gross margin. And then loyalty is also ramping. And I'm not sure if there is some investment that takes place as that rolls out, too. So if you could just maybe speak to the outlook for the gross margin and how those things might impact it.

With regard to self-distribution, Ed, we're going through a transition period. So we will get long-term benefit on the margin, but that's not going to come through this year to the extent that it will in the future. So that's something that as we manage the transition, we've got some issues that we're trying to deal with and dealing with effectively in terms of how we're managing the margin. And loyalty will take -- we've given points in the loyalty. So there will be some element of cost around the loyalty that we've taken into account in all the margin forecast for going forward. But ultimately, loyalty will be about driving the top line. And we think the margin in due course as we get support for the initiatives will enable us to neutralize any margin impact from loyalty going forward.

Curtis, you maybe talk about the...

Yes. And it's just kind of cadence. I mean, it's kind of playing out as we expected, Ed. I mean the first half was a little bit better. Certainly, the supply disruptions that we've seen in both quarters helps on the shrink line a little bit, as we talked about last quarter. We're expecting that to stabilize and normalize here in the second half. And then the comps for us normalize, so a little less supply chain leverage. We've got the distribution investments, and then we're up against the tougher compares and shrink. And so those are the kind of key factors, but really, it's playing out as we'd expected.

Our next question comes from Mike Montani with Evercore ISI.

Just wanted to ask if I could, on the margin front first. Could you discuss if there was any kind of impact either on the COGS front or even in SG&A due to some of the UNFI issues that they had in the supply chain? And then similarly, from the loyalty program?

Yes. So no, loyalty is just rolling out here in the third quarter. So no impact there. We had the same 30 -- low 30 stores that were on the pilot that they were on as of Q1. So no change in the loyalty story for Q2. On the disruption front, first off, it was great partnership with UNFI, it was really great. It was a difficult challenging period, but they worked really closely with the teams. We were able to flow product through the entirety of it, albeit manually. And so it was helpful to be able to do that. And so it was pretty minimally disruptive to us. It's a small portion of our business. Again, just the product flow, a little bit challenging. We didn't promote as much in the second quarter as a result. So some of those types of issues arose. But largely, we were able to mitigate through it, and we're kind of on the other side of it.

There was no margin impact from the disruption.

Okay. And then just a follow-up was on the new stores. If you could talk about what you're seeing in terms of new store performance and obviously, how to think about the opening cadence for the rest of the year?

Well, we're committed to the 35 stores for the rest of the year, and we opened 12 very successful stores. We're absolutely delighted with the way the new store format is working. I think we're up to 100 of our V6 format now in terms of we've opened -- all the stores have been opened in the new format, and that's given us some consistency in terms of execution and rollout. We're feeling confident in the number of stores for the rest of the year. I think the encouraging thing, Mike, for us is we're seeing a strong performance in what has traditionally been markets that were not that well known. We've been very encouraged by the progress we're making in the Mid-Atlantic. The Florida store is really coming alive now in terms of the new stores that are opening. And by and large, we're hitting -- what's the baseball expression, we're hitting close to 100 on our new stores at the moment.

And cadence-wise, Mike, we had 12 in the second quarter, 9 in the third quarter, 11 in the fourth quarter is kind of where we are. And then as always, this time of year, just the weather and any kind of impacts from that will be the only thing that would change that.

Our next question comes from Rupesh Parikh with Oppenheimer.

Also congrats on a nice quarter. I guess I'll start with maybe just -- I'll just kick it off with 2 macro questions. So just on inflation, just curious what you guys are seeing in the business and expectations going forward. And then on the consumer front, your business continues to perform quite well. Just curious if you're seeing any changes in dynamics around the consumer.

On the inflation front, it's been pretty consistent from quarter-to-quarter. So we're seeing a similar -- we're tracking CPI in line with the way we typically do. Obviously, our fresh business is a little more volatile, but, it's tracking in line with that. And then we've got some kind of mix helpers as we move to organic and we work some of the value pack type things. So similar story to Q1 on the inflation and AUR front.

And in terms of the customer side of things, what we're seeing, our customer seems to be being pretty resilient. There's still a lot of uncertainty going forward that we're not quite sure about. But if we look at the numbers and we look at how our customers are reacting, I think we've always said that our customer base is pretty focused on what they eat and how they eat and how they -- so I think we've got some resilience almost irrespective of what happens in the macro economy. I think there's some uncertainty going forward. We're not seeing a lot of dynamics in the other grocery retailers in terms of changing things too much. And our business has proven pretty resilient, as you can see from the numbers.

Our next question comes from John Heinbockel with Guggenheim.

Our next question comes from Robbie Ohmes with Bank of America.

Jack, I was hoping you could talk about the new product flow outlook. It sounds like it continues to go great. But I mean, how do you keep that same percent of newness? And I was curious if -- are you seeing any competitors kind of moving faster to get in stock in some of the newer items you bring in? And also related to that, on organic pricing, have you seen any increased competition or anybody trying to do anything there like Whole Foods to make it tougher to keep the spread on the organic produce pricing?

Well, Robbie, as you can imagine, we watch our competitors all the time in terms of what they're doing in terms of product launches and pricing and things like that. The context -- our energy is all about how do we bring new innovative, entrepreneur-driven products into the marketplace. And the foraging team that we've talked a lot about are doing a fantastic job attending conferences, traveling around the world. As I think I've said in the past, they've got the best job in the world as far as I can see. It's the one I would like sometimes. And the opportunity, they're getting out there and really understanding where the opportunities are. And I think we're creating a reputation with the young entrepreneurial people that are bringing new products to the marketplace. And we're hoping that they're coming to us first.

We certainly see from -- we have a portal where people put new ideas into it. We get tens of thousands of applications into the portal every year. And we're looking -- almost our challenge is how do we bring more of them in, but there's plenty of opportunity for us to do it. And I think we're seen as a place that committed to it because we've got an innovation center and we create space and give young entrepreneurs the opportunity to get started. So we're pushing very hard on that agenda. At the same time, we're pushing very hard on our Sprouts brand. And Sprouts brand that's innovative and different and based on attributes, no seed oils and vegetarian and vegan. And the process that we're going through in terms of bringing differentiation from our Sprouts brand, we think, gives us a little bit even more of a moat in terms of linking to what the competition might or might not do. We watch them and they clearly -- our sector health-focused, innovative attribute-based products are going to be more important in the future than they are less important. But we think we're at the leading edge of that, and we're watching it pretty hard.

Organic pricing, we've been pretty assertive, as you know, about our organic pricing and forcing differentiation. We're working very hard at long-term contracts with our produce suppliers to give us the opportunity to create this tripartite pricing position where the customer gets a good deal, we get a good deal and the farmer gets a good deal. And those long-term plans are something that I think give us a point of difference in terms of the context of the marketplace. And we haven't seen too much from our competitors, either ups or downs in terms of what's happening on organic produce or anything else for that matter. But a good question, Robbie. Thanks.

And just a quick follow-up. I apologize if I missed this, but the KeHE agreement and delays there and everything, can you talk about the status of that and what issues might or might not be there?

Yes. KeHE has been a good partner for us. We will continue to be a good partner for us. We're just working through the details, as you can imagine, with the long-term deal. There's a lot to cover. So we're working through the details, and we're planning for a long-term extension here soon.

Our next question comes from Mark Carden with UBS.

So to start, we've seen a few strikes at 2 of your largest conventional competitors over the past few months. Obviously, some differences in structure. But have you seen these events lead to any pressure just in a broader underlying wage environment? Or has it been pretty steady in your view?

We work very hard to look after our team members. I think we're the only retailer that gives the opportunity for every team member in the store to earn a bonus. We play pretty good. We look very hard about our wages and benefits relative to the other people, and we pay above the average in every market in which we're operating in. So we're feeling -- and the HR team do a terrific job managing this regionally and locally to make sure we're in the right place, and we're taking care of our people. We haven't seen any major change in terms of how people are thinking about that kind of initiative around our space. And I think it's incumbent on us to look after our people appropriately, and we're working very hard at that.

That's great. And then we've seen restaurant traffic continue to decline over the past 3 months, a bit more moderate pace versus earlier in the year. I know in the past, you guys have talked about some potential trade-in from food away from home. Do you believe you're seeing any more of a tailwind there? And are you seeing any lifts in your prepared food sales?

We're working very hard in prepared foods. We've got a new salad program out there, a new meals program out there. So we're working hard at it. And the team are putting some really -- the deli team are doing some really good work in that space. I'm encouraged by that, and it might be helping us a little bit as you go through that going forward. It's something that we'll continue to invest in.

Our next question comes from Kelly Bania with BMO Capital Markets.

This is Kelly Bania from BMO. I wanted to go back to the topic of the loyalty program and just more color on kind of the timing of when you would expect the benefits to accrue from that program. Is that something that is pretty immediate? Or does that take more time to build as you build out the capabilities and the communication with your loyalty members? Just trying to get a sense if we should expect that this is a comp driver for 2026 as that gets rolled out by the end of the year? Or if you can shed any light on how those kind of initial 30 or maybe 30 or 40 stores are comping relative to the existing store base?

Kelly, this is Curtis. Yes, I think we would certainly expect it to impact comps in 2026. We've been working hard at it for quite a while, and we're really excited to get rolled out here. The team members are fired up, especially here in Arizona, where we just launched and so far, so good on that front. And so I think it will be a little bit different for us, and that's what we're interested to see as we do get rolled out. Certainly, as a secondary shop, our frequency isn't the same as a traditional conventional grocer. And so it should take us a little bit longer to build our database and build our customer data just from that perspective.

And then again, how it plays out from frequency to basket to retention, the key markers that we're going to be watching will be a little bit different for us than a traditional program. And so we'll know a lot more. Obviously, we will be rolled out here in the middle of Q4, and we'll be learning every day as we continue to roll out. So we'll have better insight into that in the next call. But I think for now, we're excited about it. It's certainly going to drive comp in '26. And then the question is just kind of pace and timing on when that comes in. It should start to help a little bit in Q4, but really, we're thinking about it as a 2026 and forward type impact.

And it takes a little while for that all to work through given the frequency of shop to our stores. So it's going to take a little bit of time for us to really understand the exact numbers. But we're really -- as Curtis said, the team members are really pumped up about this. And the customer -- the feedback I've had for some customers is it's about time why have you not done it before now. So we're kind of excited about it. And as we say, the numbers will all come through in 2026.

And just a follow-up is, should we expect the opportunity as bigger on the units per basket or the traffic or maybe a little bit of both?

Well, I think that's the other part that we're interested to see. We certainly expect it to help on frequency and traffic, and we'd expect it to help basket, and we'd expect it to help retention. The mix of how that plays out and the pace at which it impacts those 3 buckets, I think, will be the piece that we'll learn as we go a little bit just given the different nature of our shop.

Our next question comes from Scott Marks with Jefferies.

First one I wanted to ask about is we've heard a lot, I would say, from more traditional branded food suppliers and food retailers about increasing attribute-based options, notably protein. So wondering, one, how your team has been kind of approaching that and how you think it may be impacting your business, if at all?

Yes, protein is going to be a really important part. If you go around some of the shows and the exhibitions, protein is one of the biggest and most clear driver of attributes and change in diets as people push that. We're very well placed in the number of protein products that we've got in our business, and we continue to expand it, and we're excited about it, and we'll be talking a lot more about it going forward. I think what they're saying is the right trend. That's an important trend, and we want to be at the leading edge of these kind of trends. And I think our assortment and the number of SKUs we've got in our stores reflects that. And we'll start talking a little bit more assertively about it, both in signage in store and externally about how people should come to us for protein. But it's going to be a competitive dynamic going forward.

Got it. And then second question for me, maybe a bit more of a longer-term question. I guess as we think about the store expansion into areas like the Mid-Atlantic and the Northeast, how are you thinking about maintaining maybe produce, especially freshness in some of those regions, especially as we get through winter months or times of year where maybe it's a little more difficult to kind of get things as quickly from farm to store. Just wondering how you're thinking about freshness of those products.

Yes. It's a good question, Scott. Our distribution philosophy has always been to try and get our stores within 250 miles of the distribution center. And then in each of the distribution centers, we will have a local sourcing team who will try their best to get everything local that they possibly can. If they can't get it local, they'll get it regionally. And if they can't get it regionally, they'll get it nationally. And so in a place like Colorado, where we've got a distribution center, we've got a team of people there that have done a terrific job the last few months in terms of when it's appropriate in Colorado, have Colorado peaches and have Colorado melons and have the Colorado products that are relevant to that local community.

And that will apply when we go to the Mid-Atlantic. When you look at Jersey tomatoes, when you look at those kind of dynamics, there are certain times of the year, and New York apples, we've got to have the right products in store, and we want to be right in pace with that. And our distribution center program, when we get to the Midwest, we'll be thinking about what are the appropriate things to buy locally at the right time of year. Clearly, as you go north, things are a little bit different. And the process of getting product from the growing regions to the distribution center, we'll also be doubling down on how we can do that faster and as fast as we possibly can.

But inevitably, you have to bring things from California at certain times of the year that travel a long way, and we'd hope to be managing our inventory so well that the freshness and the rotation allows us to maintain the freshness on those kinds of products. But as you can imagine, it's a really important part of our business. We think a lot about it region by region, market by market, distribution center by distribution center. And we have got really good plans in place as we expand into the Midwest and the Northeast. But it's a great question.

Our next question comes from Chuck Cerankosky with Northcoast Research.

Great quarter again. Curtis, I have a question for you. It doesn't involve merchandising, but I noticed the 26% tax rate and you're talking about 24% later in the year or for the full year. Anything that Sprouts could do to get that tax rate down to maybe even a long-term number that's below 24%?

Yes. Good question, Chuck. I wasn't counting on that one. I think our tax team does a really good job, small but mighty team, and they're always looking at opportunities and how we leverage tax credits, specifically around our food waste and how we can divert that and do good things with that and take advantage of that. So they're looking at those things always. And I think we'll continue to work on that. But I think that 25% to 26% kind of has been pretty consistent for us other than maybe the first quarter when we see some of the stock price impact.

Our next question comes from Scott Mushkin with R5 Capital.

So my first one, and it's just about the fourth quarter. Thinking about, Curtis, what you said about kind of a 15% to 16%, I guess, stacked comp, that implies a pretty low comp for the fourth quarter. And I was just -- stacks are good until they're not good. And I was just wondering how you guys are thinking about the fourth quarter. I mean it seems like as the business is running right now, a 4% comp, even though it would get you stack in the same place, just doesn't seem realistic.

Yes. I think, Scott, I think what we'll be watching, we've talked kind of for the year, the 3 big things, right, as we comp the comp, 2 big step changes last year, and we've cycled through the first one in May. The next big one is in September. And so we'll get a read on kind of your question, could it be a little better in the fourth quarter from a 2-year stack perspective. We'll have that answer when we get through September here later this quarter.

The second piece was the new stores and particularly the comp impact from the [ 24 ] vintage. I think about 1/4 of the [ 24 ] vintage stores are now in the comp base. So that's still largely ahead of us. And then loyalty, loyalty will be some upside. If it takes off a little bit quicker than we think or has a bigger impact early than we think it might. That's a piece that we've been watching as well, but is largely in front of us. And so I think we still have some questions to answer there. And certainly, we're going to go try to drive it higher and hope that it will be better. But for now, I think it's prudent to kind of stick to the 15% that we've been seeing pretty consistently for several months now.

Yes, it makes sense. But it's going to be interesting to see, especially with all your initiatives. So my second question is actually also on comp, but more long term. So if you think about the industry growth rate, most things that we look at would say 5% to 6% through the end of the decade. You look at your guys' initiatives, new store growth, maybe some cannibalization, but that would suggest at least a 7% comp over the next 3 years if growth rates in the industry hold up. Am I wrong on that?

Yes. I don't know that you're wrong, Scott. I think we continue to look at things. And again, the key markers that we've been looking at, the ones I just mentioned, we'll have a really good clarity on that. Obviously, seeing the third quarter guide, we're building our confidence in that storyline. Certainly, as we sit here today, 1st of August, we'd be looking for a stronger comp than our algorithm 2% to 4% as we think about 2026. And so we're excited to kind of see those key markers play out and maybe answer that question a little bit more directly when we get to kind of February and 2026 guidance and beyond.

And without changing guidance or talking about numbers, I think it's -- we certainly recognize there's a tailwind to this category, this healthy eating, people caring about where their food is grown and how their food is produced, people caring about what's in their food. So I think that's a tailwind trend that I think we'll begin to see. And we've got a low share of wallet of our customer base. So there should -- we're certainly ambitious to grow going forward. But what we're not going to do is put numbers down that put pressure on our SG&A, to be honest, going forward, and we're very conscious of that.

Our next question comes from John Heinbockel with Guggenheim.

I wanted to sort of follow up on that one. Jack, can you talk to wallet share, right? Where do you think you are today? And is 20% an ambitious number to get to? It wouldn't seem to be -- and if you were to do that, where do you think the biggest opportunities are? Is it in prepared foods?

Well, I think prepared foods is certainly one of them. But I think as people switch their diets is the biggest thing switch into what we sell, products that are more attribute best products that have got more health benefits to them and cleaner. That whole -- as people switch, which I think people will switch, you'll start to see us growing from the 13% that we talk about. Whether it will get to 20%, I'm not so sure, but we certainly think we can make a significant dent in the gap between 13% and 20%, partly because that people will trend towards it.

And yes, we will develop better meals opportunities in terms of what we are going to get in that space. And vitamins and supplements is another category that we talk a lot about that's going to, I think, lead to -- I think more people are going to get into that going forward. So I think that will help us in terms of category growth. So there's a number of initiatives that I think will encourage us to believe that we can get a share of wallet growth from 13% to somewhere north of that.

All right. And then sort of as a follow-up, right? So AUV is probably going to end up for a lot of reasons, right, market growth and then your initiatives higher than perhaps you had thought. At the same time, you've reduced the size of the box. How do you think about capacity right within a typical box? And is the -- the answer is not bigger stores. The answer is more density and then what -- which is fine. And does that inevitably raise the cannibalization number within the comp?

Yes. I certainly think that we're not going to change the size of the box. We're going to work harder at making the box more efficient. And the team are doing a really nice job on that. The team working in the operations space in terms of how we're utilizing the space behind the scenes in our stores in terms of how we manage inventory, how we manage receiving, how we manage the flow of goods through the backroom into the store. So there's a lot of work there that gives us some opportunities to expand capacity even within the boxes that we have.

And we continue to look at what are the right -- certainly, we're not going to build bigger stores. So shall we build stores closer and closer? And as our volumes grow, it gets more and more attractive for us to cannibalize a little bit in terms of take some pressure off the stores that are doing well. So your observation is appropriate. We've not quite got there yet in terms of the worry on it. I'm looking forward to worrying that the stores are so busy that we have to build other ones next door to them.

Thank you. I would now like to turn the call back over to Jack Sinclair for any closing remarks.

Yes. Thanks, everyone, for your attention. We really appreciate your interest in our business, and we look forward to updating you in the future months to come. Thank you very much for your attention.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Okay. There we go. So yes, good morning, and I think we can kick off. So welcome to Sprouts' fireside chat presentation today. Thank you for joining us. My name is Krisztina Katai. I'm Deutsche Banks' U.S. retail analyst. It is my pleasure to have with us Sprout Farmers' Market management team, so we have Jack Sinclair, who's our Chief Executive Officer; and Curtis Valentine, Chief Financial Officer. So for those that might not know, Sprouts is one of the largest natural organic grocers in the United States. They're getting close to operating 500 stores, growing close to a 10% clip. So with that, I think we can kick it off.

And Jack, I wanted to start with you. Obviously, Sprouts has had an impressive run of same-store sales. You've expanded your profitability. You had really strong performance, including in your most recent first quarter period. So for those that are not as familiar with Sprouts story, maybe if you could describe what differentiates Sprouts from the competition and what you think clearly has been a critical element to your overall success?

Yes, Krisztina, thanks for that. And a very key part of our business and why we've been really, I think, creating some success over the last few years is being very focused on our target customer. We've been very intentional that we would focus on 5 years ago when we put the strategy together, there was a $200 billion dollar market and what we described as health enthusiast and innovation seeker. And that is $200 billion of $1.2 trillion marketplace.

So focusing in on $200 billion meant we had to not focus on $1 trillion of business. And one of the things that's been successful for us is shaping the individual, shaping the business behind that target customer, increasingly trying to understand that target customer better and better. Our merchandising team has been focused on attribute-based products that really do resonate with that target customer.

So what products we're putting in front of customers, whether it be keto, paleo or vegan, vegetarian that whole dynamic organic -- the whole dynamic has been about how do we create the right products for that customer base, supply chain, we've spent a lot of time -- we focused a lot on building supply chain capability in terms of distribution centers within 250 miles of our stores.

That allows us to get fresher products. Fresher product resonates very well with 20% of our sales are fresh produce because we've really doubled down on that freshness. And that resonates very well with that target customer as well. Real estate, putting stores in the right place because we understand that target customer and not putting stores in the wrong place. Not trying to be all things to all men by building stores in every single corner of the country, but being very specific and we're getting better at that in terms of putting stores in the right place, which is, I think, one of the reasons the new store program has been pretty successful as well.

And marketing, being very intentional about who you're speaking to and how you're speaking to them, moving from 21 million paper flyers to 100% digital and multimedia approach to it. And that's been a very significant change in terms of trying to attract. Taking promotion this high low promotional context, which is such a predominance in the grocery sector in the United States and unraveling that and being very careful to target those target customers being specific to marketing, merchandising, supply chain.

And I think that's been a big part of why we've had some -- made some progress in the last few years. But I will say, we've got 1 million miles to go on top of this. We're not far down the road where we need to get to.

Okay. And I just wanted to dig into on your target customer base that you've really narrow them to help enthusiast and innovation seekers. If you could just touch on what exactly are they looking for? How do you ensure that the assortment and the store experience will resonates with this demographic and then secondly is just how do you see the right balance between small brands that are not widely distributed, the Sprouts branded products that you are increasingly having success with and also more well recognized national brands?

Yes. Our customers are increasingly -- they're a little bit better educated and very discerning about the food that they buy. If you watch our customers in the stores, they walk around and they turn product over and read the label at a level that I haven't seen before in terms of the intentionality of what's in the product and a real discernment about what they want to buy and what they want to see.

And a lot of it is about product attributes that play to their particular dietary needs, whether it be gluten-free, whether it be lactose intolerant, whether it be dynamics within the specific organic requirements. We've seen a big step up in our organic business.

What did we do to try and make sure we're getting the right balance? We put together what is a foraging team, and that foraging team are balancing out, Krisztina, the difference between the private brand requirements that we have and the small brands that you identify, which are very important to our lifeblood.

Private brand has been -- we've changed the whole private brand approach rather than it being, let's bring a branded product equivalent and at a lower price and make a better margin, we kind of didn't want any of that commodity thing in our business, and we created a private brand team who we recruited from some other places, some from the U.K., and we've made some real progress on creating differentiated private brand product whether -- and every time you look at, we've redesigned all of our private brands and when you look at what's on the labeling, it will call out the attribute that makes it different and we've made some progress there.

The small brands, the lifeblood, we launched 7,500 items last year, which is extraordinary really in a business that's got 20,000 in total. So 7,500 of them in, 7,500 out, but we've become the destination for small entrepreneurial. And the U.S. is pretty strong in terms of bringing entrepreneurial differentiated products into the marketplace. We want to be the destination for that. We had 65,000 applications for products into our portal.

For products that could potentially come into our business. We only manage 7,500 of them. So we're -- and execution that makes it more difficult than it would be for many other retailers, but it's something that we think is really important to that target customer to have a very long tailored product with a lot of interesting, innovative, different attribute-based products in the middle of it.

So I think we've got a lot to do in this space, but I think we're creating this destination for the small entrepreneurial guys to come to us first and we've got a much bigger presence than we ever had at Expo West and all the shows around the country as we try and balance this out going forward. But we want both. We want private brand, and we want the innovative entrepreneurial products.

Great. And then just touching further on this foraging team that you have created. Maybe if you could talk a little bit more about their specific approaches, how do they source products and then maybe we could drill into how an average shopper comes to Sprouts? How have they been discovering you? Maybe talk about basket dynamics? And then where do you see more opportunities to drive growth with this existing customer?

Well, the foraging teams are very -- is something we kind of -- we wanted to be this destination for new innovative differentiated products. So the team came together under someone who -- Kim Coffin, who is on our ELT, She's a senior leader in the business, She's put the team together. And what do they do to try and find it? They go to, as I mentioned, Expo West, they go to all the big shows around the country and internationally.

So they spend a lot of time out there. They have things called pitch slams. And in fact, I think there's one going on today where 30 or 40 individual vendors will come into the office and pitch, either virtually or in the office pitch products to us. And there's constantly -- we're constantly evaluating those products.

So -- and being very close to what's happening in social media, what are the trends. We've seen something like sea moss, which has been an extraordinary success for us. Started with us seeing it on social media. So that whole context of being close to what's happening nutrition wise, being close to what's happening in terms of diet on the social media space. The team have worked very hard on that.

So this combination of social media visiting, going around a lot of very specific shows and being very in tune with the ecosystem that exists around these products. And we have to end up holding hands a little bit with some of these vendors who to exaggerate to make the point, they started in the garage and how do we work them so that they can come to the marketplace and be first with us. We're kind of -- we feel as if we can be the starting point for a lot of very exciting young brands in the country and we're making progress with that. And then, maybe you could talk a little bit, Curtis, about how the customer kind of in basket works and dynamic in terms of where things are.

I think you asked kind of where they're coming from, and they're coming from everywhere. I think there's a real health and wellness tailwind that's sending customers our way, Krisztina. And so we see them coming through. Certainly, we believe they're omnichannel. And so our digital efforts, our in-store efforts, really, it's about providing more and more access to what we do.

And so the 2 ways we'll do that going forward. New store growth, just get to more communities where these target customers live and introduce them to Sprouts. And then the loyalty program, I think, as we get on that path and better understand who they are and what they care about and which part of this attribute ecosystem they're engaging in that will allow us to kind of deepen our engagement with them and then get them to come in just a little bit more often or maybe add one more item to the basket will be how we'll continue to create growth.

Great. And I just wanted to ask a more near-term oriented question. It looks like Sprout doesn't experience or experiences very little just from the volatile consumer confidence and the overall backdrop that we're experiencing in the U.S. Well, for example, yesterday, we heard about higher income household trade and accelerating from a dollar store? Could you speak to what you're seeing regarding your current consumer behavior? Have you seen any shifts over the last couple of weeks or even months as well?

Well, we're clearly watching this very closely because there's so much dialogue about consumer confidence and what's happening. And so you would have expected some things to have changed in our environment. The reality is we aren't seeing any change whatsoever, which is quite surprising even in the last few weeks.

Now whether that will stay, we're kind of second guessing whether it will stay like that. And we're very clear that by region, by category, trading up, trading down, we're not really seeing a significant change in the pattern of what's happening in our business. And you would probably have expected it by now, Krisztina to have seen something in that. I think our customer base is a little bit more resilient to what's going on in the macro environment, I think you've got customers who are very health focused.

And if you're interested in your diet and you're a vegan, you've got to eat. You're probably going to stay eating the things that you're going to -- you're focused on in terms of our target customer. So I think that resilience comes and that gives us a lot of confidence going forward that irrespective of what happens in this pretty significantly uncertain time that we're going to be able to cope and deal with the changes as they come to us.

And then just maybe add a couple of things. I think from a trade perspective, trade-in or trade down in that higher income consumer, I mean, one of those trades would be out of food away from home and into food at home, right, which actually creates maybe a little bit of a tailwind as that first wave of activity happens.

The second thing is to Jack's point on following the diet and being more interested in health, that is sending people our way up and down the demographic scale. So you've got boomers who are really focused on longevity and just live in a little bit longer. You've got the younger generation and I'm wearing an Oura Ring here, and they've got wearables and they're keen on their heart rate and how well did they sleep?

And I know when I eat something lousy late at night as I did last night for dessert, I don't sleep quite as good, and my ring tells me that. And so I think people are just very aware of what they put in their bodies, this food as medicine concept, and it's sending more and more people our way every day. And as Jack said 5 years ago, we experience health enthusiasts, 5 years from now than there are today, and that's played out. And we said the same thing today. We'd expect more of our target customers tomorrow than we have today. And I think those are the things that are driving people to us.

No, that makes sense, and I would be one of those types of customers that is always actively tracking their sleep and making sure that is a high quality. Just in terms of categories or type of products, can you talk about what has been resonating the most with your customer, especially as we think about the potential for trade down or trade in activity to happen and then have you seen any underlying shifts in buying patterns? And how do you think about rebuilding the basket going forward?

Well, the reality is that the important attribute-based products that we sell are the things that are working well for us. we're seeing a real growth in organic. That's been pretty dramatic for us. More than 50% of our produce sales are now organic, which is leading us to some really good long-term relationships in the agriculture space. The whole diet trend around gluten-free has been pretty significant for us.

We've seen a pretty significant growth in keto for us. Protein, if you go around Expo West, all -- everyone was talking about protein and protein is getting added to the most weird and wonderful products in our categories. So as you look, that's probably a very significant trend that how that's evolving. And what it's translating into is we're seeing strong performances in our dairy, frozen grocery for all the same reasons, it's all attribute-based products across different categories.

You're also seeing some interesting things happening in non-alcohol. Alcohol that's non-alcohol, which I know is a bit of a misnomer really. But we're seeing some real success in that space. Nondairy, dairy, we've seen some real success in. But a lot of it is driven by attributes. And that's the progress that we're seeing significantly across the different categories.

Right. So you have obviously embarked on the strategy shift, you've eliminated what you referred to as the coupon clippers that has resulted in a significant upgrade in household income. So do you think that your model post the strategy change just makes you may be less vulnerable to the overall macro and overall price intensity of food retail. Then I wanted to touch on, if you think about your pricing perception of Sprouts in particular, key departments across the store?

Well, very specifically, as -- we're not -- I'll talk about pricing specifically. Produce pricing is very important to us. We spend a lot of time, it's the origins of the company, it's the DNA of the company, it's a bigger proportion of our business than anything else. So we spend a lot of time looking at produce pricing. We will have a very strong gap in organic product pricing, and we spend a lot of time analyzing where we need to be against conventional grocers and against Whole Foods as we look at our produce pricing.

Other categories, we don't have the direct comparison. Increasingly, we've been getting ourselves in a place where the assortment that we're carrying is not -- does not appear in other places with the possible exception of Whole Foods across the rest of the marketplace, we're not really carrying the same things as the other people.

And the way we look at pricing is about elasticity if we put a product out there that's got a fair value for the customer, and no one else to sell and that the customer will buy it. If they don't buy it, then maybe we've got the pricing wrong. So there's a lot of micro pricing work being done in our organization to try and understand exactly where that needs to play out.

And by and large, that the focus of our value proposition is we're giving customers healthy products, differentiated products, innovative products and they will respond to that. And they've responded pretty well. And we don't see our price perception in the context of what is it against other grocers. We see it in the context of how does it work with our individual customers, and that's the context of our pricing decisions.

It's taken me a little while to get my mind around that as having been a grocer for 100 years in every other place. The context of thinking about this in a different way, reflects that we really love being different as a company and thinking that through is how we navigate our way to thinking about our price perception.

And just one more on competition. We've talked about consumers increasingly shifting to health and wellness. We've also been seeing some of your conventional competitors promote Sprouts like events or really launching differentiated own brand products. Can you talk about your confidence that Sprouts can maintain its differentiated position in the face of growing competition. Certainly, when you're performing so well ahead of the market that is going to be drawing some attention to you. So how are you thinking about sustaining the market?

It gets back to your original question about what we're trying to do and that focus on a narrow customer segment allows us to be very focused on it. And remember, what we said, there's $1.4 trillion that we don't go after that the other guys, the main conventional guys certainly have to go after. And you can't chase and they're doing quite well on some of those products. but it's not going to do enough for them.

They have to spend their energies chasing after the $1.4 trillion that we're not chasing after. So we can be very -- we feel very confident that the way we think about a long tail of assortment is something that other people won't want to do. Not that they couldn't do it, but they wouldn't want to do it because they would lose a lot of their capabilities of selling high-volume products in the $1.4 trillion marketplace.

We only said -- you'd have to take Coca-Cola your business to really focus. We sell probiotic sodas, we don't sell Coca-Cola to bring all those probiotics sodas into the business and take Coca-Cola out would be, frankly, pretty silly for those guys to do that. So we think we've got an inherent strength in that, and they are doing fairly well with it because the customer are evolving to it. But the reality is we're in a position I think, to be so narrow in our focus. And we're relatively small still in the great scheme of things. Our $8 billion doesn't compare really with some of the other people you're identifying in that conversation, Krisztina.

Right. And I wanted to bring in Curtis a little bit more. Switching gears to gross margin. Obviously, this has been another aspect of the Sprouts story over the last few years as you've really eliminated just broad-based promotions. Will you continue to find gross margin upside even this year. You have many initiatives, including category management and supply chain enhancement. So Curtis, can you walk us through maybe where you see incremental opportunities that you still see ahead? And then just overall philosophy of how much you want to flow through versus how much you want to reinvest in the business?

Yes, sure. Yes. So we're still a fairly immature business. It's only been 10, 12 years since we went public, and we're growing really fast. And so we continue to find opportunities to just do things more effectively and efficiently. And we're not reinventing the wheel here. These are tried and true kind of grocery and retail techniques. But inventory management has been in the space in the last 12 to 18 months that we've really seen gains in so much lower shrink, more efficient in the 7,500 products that we're taking in and out of our business every year.

So from a markdown perspective, just getting sharper and using tools and data and process to make better decisions in that space. And so these are kind of behind the scenes cost items that we've taken out. It's not an impact to the consumer at all. We haven't been raising prices to get that margin.

It's been cost takeout and process efficiency and how we work through the entire supply chain. And so those are things that we've taken advantage of recently, but we'll also have opportunities still to go because we're not done yet as we continue to invest in replenishment in those types of capabilities.

I think the other thing we think about and it kind of goes to the last part of your question is we're going to continue to reinvest in the business for the long-term sustainable earnings growth and the health of the business in 2027 and beyond. And that's a little bit of how we've gotten some of those gains as well. A couple of years ago, we invested in capacity in the supply chain, right? And that allowed us to then come back and as we add new stores, create leverage or as we look ahead to meat and seafood self-distribution, right, it gives us the capacity in the room to go do those types of things that continue to drive gross margin leverage.

And then lastly, we'll have loyalty, which at the early stages as we're in right now, will be a bit of an investment for the points that we'll give on the loyalty program. But as we take in that first-party data and we get to know our customers at a deeper level, should create opportunities not only in growth but throughout our business to go ahead and reshape our merchandising, our operations and service, our marketing and how we serve those customers.

We'll get to go do that again with the benefit of first-party data and the insights and the learnings that we've had in the last 5 years. And so we're pretty excited about the opportunity in the upside. But again, we really -- we talk about stable more than bottom line, stable EBIT margin is the commitment we've made, and then that becomes kind of the floor.

So as we go execute these programs, one, if the comp momentum continues, then you'll see a little bit of leverage drop to the bottom line from strong comps but as we go execute these programs and we do it well, we outperform our business case, then you'll see a little bit of a flow-through to the bottom line as well. And because these are foundational elements we're just making better. These are not one-time things that we're doing. That just creates a new floor for next year's stable guidance. And so as we get gains, as we have the last few years, we'll keep them and we'll just keep moving forward, looking to stamp out more inefficiency in our business.

Great. And you touched on self-distribution. Fresh meat and seafood is something that you're undertaking this year. Can you talk about the expected benefits in terms of freshness, control, and then overall profitability to the gross margin. And maybe later down the road, what are some potential other areas for soft distribution that you see in the business?

I'm going to cover the benefits side, and I'll turn it over to you for the future. Yes. So on the benefit side, I think you've got it, right? So I think a little bit closer relationship with our suppliers. We just like that direct connection to them to be able to work better together. Right out of the gates, we've got the fee that we're paying for the distribution historically is the pool of funds, and then we've got to pay for it ourselves in our own ecosystem.

And so there's just a little bit of arbitrage that will flow through the gross margin there assuming that we execute really well, which is where we're heads down and focused on this year is getting it right so that we do capture that little bit of gross margin benefit.

Beyond that, then we should see in the partnership with the vendors better in stocks, right? So better allocations, better fill rates, getting the right product to the right stores with just one less complication in that dynamic. We can go direct to suppliers and do that a little bit better, and that should result in some better sales for us down the line as we have better in-stocks and then I'll kind of let Jack talk about what this might lead to in the longer term.

Yes. And specifically on the meat thing I'm anticipating when you become a specialist meat retailer, which we have become grass-fed, no antibiotics, very conscious of the husbandry of the animals. We can work longer-term programs with the vendor base, and that's going to be something that's I think going to help us instead, good stead as we grow scale.

As we grow scale, how do we think this through. As Curtis said, we've invested in distribution capacity, which gives us optionality going forward. And we've got a number of areas as we grow geographically, we're going to have to build some more DCs as well. And we'll build them with enough capacity, which will have some effect in the short term, but it will get enough capacity going forward.

So what are the areas that are going to matter to us in private brand is going to be important to us. Sprouts brand is going to be important to us as we grow in scale. Should we find some way of becoming more -- having more control of our destiny in that space, probably our vitamins and supplements departments, which are really important to the differentiation of the company, grocers of pharmacies, we have vitamins and supplements departments where you can get people advice as to how they can navigate their health journey and navigate the way they can look after themselves. And we've got people that are really important.

We probably haven't got the supply chain behind it that I would like going forward. So areas like that as we think about it, might not be self-distribution. It might be, but those are the kind of categories as we grow that we're going to have to take a little bit more control of our own destiny so that we can free up our business to look after customers more effectively. And that's very much a big part of the kind of supply chain investment. How do we create resource to make the world a better place for our customers when they come and interface with our team members.

Great. And one other exciting aspect is you're launching a loyalty program that's going to be rolled out starting in the third quarter. If you can talk about the overall road map to provide that tailored unique need for your customer, what kind of uplift do you expect to gain from the program in order to keep it margin neutral? And any insights that you can share from your initial pilot program?

Well, I'll let you build on it, Curtis. The starting point of this is we're really excited about our loyalty program. The reality of our customer base is such -- we have to understand the nuances of what -- when we say health enthusiast innovation seeker, there's a lot of nuance within it that we need to kind of understand even better than we have been, whether it be you're a grass-fed meat customer, you're a vegan customer, you're a keto customer. You're an organic customer. How do we understand that nuance more effectively so that we can communicate more effectively. Where we are at the moment, we're in 35 stores. Those 35 stores, we've been working very hard on the user experience around the loyalty program to make it much more customer -- to take the friction out of the customer journey on that, and we've worked our way through that.

It's been expensive. It's been a long journey. And we're feeling we've got to the end of that journey now, and we're ready now to roll it out. That journey now starts to roll out in July. And by the end of the year, we'll be in all stores. What do we want customers to do as this rolls to all stores, we want them to sign up. They're signing up on the basis that they get points. They get $2 for every 100, basically the way it will work. And how did -- then from that, how do we get them to scan. We need them to sign up and scan, and that's the basis of getting this thing kicked off.

From that data, what are we going to do with it is a kind of exciting thing for our business right at the moment. And we draw inspiration from people like Sephora and Ulta, who I think are in the conference here today and other people like REI, more so than we draw inspiration from the grocery schemes that we see around the world, all of which tend to be a little bit transactional, a little bit about here's $0.10 off your gas or here's some price for you that the other guy can't get.

We don't want to get into that space. What we do want to do is understand the customer. And the vision would be that when you open the app, it's individual to you. It makes really clear that the personalization dynamics so that you feel special and feel something special. And we'll build on that by creating ways to spend your points to go beyond just getting money of your -- of the register and how do you access different things.

And the team are in the middle of that. It's a really exciting phase of our evolution back to how we -- who we want to serve and how do we look after that customer. And that will help our purpose to help people live and eat better. We think this loyalty program is going to help us do that in a very individual way. You want to?

Yes. I think from a -- I think we expect it to be a little bit of a longer journey, too, Krisztina. I mean we have a lower frequency customer that comes through our doors, and so it will take us a little bit longer to gather all the data we'll need to really create and stimulate the demand in the ways that Jack is talking about.

And so we expect it to be incremental and multiyear incremental to our comp. It should be a tailwind for the next several years that will help us deliver, sustain the momentum we're on and deliver the comps that we promise. And then I think it will evolve as well. It will iterate from an experiential perspective, right? We do want to create that community feel to it. And so we'll be working on different ways to do that beyond just the points -- starting point that we're using.

But certainly, you could get to our innovation, is a big part of what we do, and so access to new products and unique products first. I think you could think about demonstrations around cooking and recipes and influencer-led events and things like that and giving access to some of those things for the folks that are in our loyalty program. I don't know that specifically will be it. I'll leave that up to the marketers to deal with, but they'll be coming up with great ideas like that and better ideas than that in all likelihood, and that will create that kind of community feel that we're after for our target customer.

Well, I'm already signed up. I'm excited for these. You just have to open store near Manhattan for me to attend.

We're on our way. I suspect we'll get to that question here shortly. So we're on our way.

So that's a good segue for us to get to new store growth. Another big part of your story. Maybe just given your differentiated sourcing approach. If you could talk to us about how you see the long-term store growth potential, where do you see the greatest white space opportunity ahead? And when do you expect the new store openings to start tilting more towards newer market as opposed to filling in existing markets. So that 50-50 balance that you're currently achieving?

Yes. So 1,200 to 1,400. So 1,200-plus sites. I mean we've got them kind of plotted out as you know, we've talked about our journey on the site selection process and the analytics that underpin that. And so we've got pins in the map across the U.S. and about 1,400 different places, and we'll be able to get there in due course. More specifically, we'll get into the Midwest with kind of Chicago as the center point, and then we'll get into the Northeast, kind of Greater New York and into Boston. We've opened up those geographies after doing a little bit of consumer research to confirm that we're ready to go with the right go-to-market in that space.

But that will allow us to go a little bit faster and continue to accelerate our unit growth as we head towards 10%. That will probably start in 2027 practically as we start signing them off now, it will take a couple of years to get those out of the ground.

And the shift of the business, it's been interesting in the last 5 years that really the 50-50 has been kind of the East Coast, right? The 50% nonestablished a lot of Florida, a little bit in the Southeast, up into the Mid-Atlantic. That's been our nonestablished 50. The performance we've seen has been really encouraging, and it gives us a lot of confidence to continue to go fast and that they're doing really well.

They're starting to open at higher levels. They're comping really strongly. It's starting to resonate, really resonate with the target customer. And so those markets are almost graduating into a more established market. And so I view the 50-50, it will kind of just stay the same. It will just be a little bit -- it will be the different markets.

It will be the Northeast and the Midwest that will become our nonestablished markets where we'll start with a little lower density and awareness. But those other markets will fold into a more established state and probably look a little bit more like your Texas, Colorado, Arizona, California type markets as we evolve going forward.

So it should continue to have that split, which gives us a nice kind of cannibalization balance where we don't see much in those new markets, and we see a little bit in the existing markets as we infill. And so it will kind of play out similarly we expect over the next 5 years. As the last 5 years just with different markets.

I think one of the things that's quite interesting about the new stores is what's happened to places like Florida for awareness and as we -- what we've done and awareness going from 30% to 75% in some of our markets down in Florida as we build the store. So getting critical mass and getting enough stores quickly to make their awareness move fast is going to be one of the big challenges for us in places like Chicago and Boston and the New York Metro area.

Those opportunities, and we're thinking very hard about how we can market and move a little bit faster so that this dynamic of new markets and old markets, fuses into one, and we're just able to open stores everywhere and a little bit of that is building awareness in advance and we're thinking very hard about that.

We're having some real thoughts of what our marketing teams of how we can get ahead of some of the markets that we're not in and maybe move a little bit faster with awareness, which will allow us to maybe get the stores opening and you won't have this difference between old stores -- new markets and old markets that we've traditionally talked about, and we're working pretty hard about that.

The other thing I would say is the smaller stores is now much easier for us to execute than we've ever -- we've now got the cadence of building 23,000 square foot stores, as I don't think we've talked about. We've gone from 32 to 23. We can launch these much more effectively, and we're finding that. I think we can -- I think we'll be able to do better in new markets than we traditionally have done.

Right. And what interesting aspect of your business is your overall sourcing and then your increased focus on local sourcing as well. But as we think about where the majority of your footprint sits and where you've been growing in areas like Florida and Texas, it really has been more or less concentrated in areas with stronger growing seasons or just overall closer to areas where more food generally is grown. So as you think about the expansion more into the Northeast, then followed by the Midwest, just how did you manage that expansion while maintaining the farmers market appeal of the overall Sprouts experience?

Yes, I think it's a great question, and we're thinking pretty hard about it. I think about markets like Colorado. Each of our distribution center, we have a local sourcing expertise, building long-term relationships. And a lot of it primarily links to our fresh produce business, which as we keep saying is so important to us. Colorado has got a very short window because it snows a lot there. So you've got a short window, but you have to work really hard at when it really matters to source it appropriately.

We'll have to think about that a little bit in Chicago when we get to Chicago and building relationship with growers in Michigan and building relationship which, again, Colorado is a good parallel to think about how you would do that. We'll be building relationships so that you can source product locally.

And we'll work -- we'll bring some partners on board who can help us with this in markets where we're not known. But each distribution center will be sourcing locally, and we'll be sensitive. At the moment, we've got a partner helping us in the Mid-Atlantic. So Jersey tomatoes being ahead of that kind of program, you wouldn't have said that, that would be a Sprouts expertise a few years ago. And we think we're working very hard. When the markets are there, we'll be there to support the growers and give longer-term commitments 2, 3-year commitments so that people will grow for us, encouraging them to grow organic regenerative agriculture.

We're working very hard locally and each market is going to have its own dynamic. But we'll do this -- people are eating a lot of fresh produce in Chicago. And when they get it, it says local, it will be as local as we can get it, and hopefully, we'll be better than most. And we've certainly had a lot of -- made a lot of progress in Florida. I was with the Florida agriculture people last week, and we've really doubled down on how we can work closely in the season when it matters. And so we're confident about it. It's something that's in our DNA, and it's something that we're working hard at.

Right. And just wanted to switch to digital where you have seen really strong growth over the last several years, not only with your original partner, Instacart, but even with newer partners, DoorDash, Uber Eats and then when you started to anniversary those ambitions as well. What has been such -- what has been contributing to this such strong growth -- how do you think about digital growth from here? And maybe talk about what are some of the key differences in digital orders versus in-store shopping habits?

Yes. Sure. Well, I think for us, it starts with the assortment always. So it's that differentiated attribute-based assortment. If you're going online to get groceries, if you're going for Coca-Cola, you've got 1,000 options. If you're looking for something in the long tail of keto, you don't have that many options. And so I think that's what our customer is seeking our assortment out online.

That's why you've seen the growth you've seen in our business, which gives us a lot of confidence that it is different and it is unique because of the way that the customer responds digitally. I think secondarily, we have growing up as a fresh foods retailer and particularly with fresh produce. We've got an inherent kind of brand trust in what we do that you'll find the best and the freshest produce at Sprouts.

And so our online mix for produce is the same as it is for a brick-and-mortar transaction in store, which just again reinforces that they trust that. If you're going to have somebody pick your apple for you, it better be somebody that you trust that you know will do it well, and will have the freshest product.

And so that's what we see is the assortment and the mix of departments is roughly the same online as it is in store. The basket size is a little bit different. It's about 2x on the Instacart delivery order, what it is brick-and-mortar. And then Uber Eats and DoorDash is a little bit more of the convenience shop and a little bit more milk, eggs, bread kind of what's for dinner tonight. So a slightly different mix for them, but still really strong baskets. They are in the same range as our brick-and-mortar in-store basket kind of in that low to mid-40s range.

And so yes, all 3 partners have been excellent partners. They get on great with the stores. They take great care of the customers. They pick great fresh produce for the customer. And we'd expect that to continue to grow for us. It's a convenience play and an access play for our target customer. Our brick-and-mortar trade area will be about 10 minutes drive time for most of the customers. The e-comm trade area allows us to expand to about 30 minutes drive time. So if you live 25 minutes away from a Sprouts, and have a 50-minute round trip maybe you have a new baby at home, and you're not willing to make that 50-minute round trip, but you love what Sprouts does. Well, now you've got another option.

So that was the idea around Instacart, Uber, DoorDash, it's a different pool of customers that just provides access and a bit of convenience that we can't provide with our brick-and-mortar footprint. They now have that online. And so I think the assortment continues to be different. We continue to have that opportunity to access the customer in different ways. We'll allow them to choose, the penetration will be what it will be, based on how the customer chooses to interact with us but we expect it to continue to grow in the next 5 years.

Great. And maybe 30-second rapid fire to round this out, Curtis. Just capital allocation priority balance between store growth, share repurchases, any potential for M&A opportunities.

Yes, we always invest in the business first. And so the things that are driving EBIT in our business today are the things that we're going to continue to invest in, so store growth, supply chain, loyalty personalization, innovation, team and technology. That's our first priority, our 3% to 3.5% of sales guidance kind of allows us to do all the things that we've got the bandwidth to do in that space and feel good about driving returns on.

Outside of that, we paid down on the debt. We're really toggling between interest income and share repurchase. So when the price is a little bit lower, we buy a few more shares when the price is a little bit higher, we'll learn a little bit on the interest and there's just a math equation there.

And so we'll always take the excess free cash flow and return it to the shareholder in the most efficient way possible. On the M&A side, we look and things come along and we'll always look. But practically, it's important for us that it's got to fit our target customer. It's got to accelerate our strategy.

It has to make sense financially and then we've got to be able to execute it and have the bandwidth to do it in such a way that it doesn't impact the core business, which is really going right now. And so when you think about a short list of potential players there. There might not even be a list to think about. And so we're pretty...

We've got plenty to do what we're doing.

We're pretty heads down and pretty focused on the organic.

It's not a big part of our thinking at the moment.

Correct.

Great. Well, I think that rounds us out for time. So thank you so much, Jack, and Curtis for a great presentation. This has been a very enjoyable conversation. So thank you again, everyone, for attending. This will conclude our fireside chat.

Thank you and Good luck.

Good luck, Krisztina. Good to see you. We'll see you again soon.

Thank you.