Sprouts Farmers Market Q3 2026 Earnings Call Transcript

Sprouts Farmers Market (NASDAQ:SFM) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Sprouts Farmers Market reported Q2 2026 total sales of $2.3 billion, a 5% increase year-over-year, driven by strong new store performance despite a 1% decline in comparable store sales.

The company opened 7 new stores in Q2, bringing the total to 490 stores, with a robust pipeline of over 110 executed leases and 155 approved new stores.

E-commerce sales grew over 12%, representing 16% of total sales, and Sprouts Brand accounted for 26% of total sales.

The company’s gross margin was 38.7%, slightly down due to loyalty investments and elevated fuel costs, partially offset by self-distribution benefits.

Net income was $129 million, with diluted EPS at $1.37, up 1% year-over-year.

Sprouts plans to open 42 net new stores in 2026 and expects total sales growth of 5.5% to 6.5% on a 52-week basis, despite challenging consumer environments.

The company is focusing on affordability, loyalty, personalization, marketing, and supply chain improvements to drive future engagement and growth.

Operationally, Sprouts is enhancing its supply chain with new distribution centers and self-distribution efforts, particularly for its brand SKUs.

Management highlighted challenges with lower-engaged, lower-income customers but noted resilience among core customers.

The company remains committed to expanding in new markets, with plans to establish more stores in areas like Chicago and Long Island.

Full Transcript

OPERATOR

Hello and welcome to Sprouts Farmers Market second quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. After the speakers’ presentations, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to Susanna Livingston.

You may begin.

Susanna Livingston (Investor Relations)

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our second quarter 2026 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 second quarter 2026 results, the webcast of this call, and financial slides can be accessed through the Investor Relations section of our website at investorsprouts.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.

Jack Sinclair (Chief Executive Officer)

Thanks, Susanna, and good afternoon, everyone. Our second quarter results were in line with our expectations, and the core elements of our strategy remain strong. New stores continue to perform well. Our differentiated and attribute-based assortment continues to resonate, and our teams are moving with urgency to sharpen value, improve communication, and support customers in the areas that matter most. The consumer environment remains challenging, with customers continuing to make thoughtful choices around their healthy grocery spend, and we continued to face difficult year-on-year comparisons. With that said, our most difficult prior-year comparisons are behind us and become more manageable as the year progresses. We continue to see opportunities to improve our business in the short, medium, and long term. In the short term, we are taking a balanced approach, investing to strengthen support for customers today while building capabilities to support our proposition for the long term, ensuring sustainable growth into the future.

In a moment, Curtis will review our second quarter results and our updated outlook. After that, I’ll come back to discuss the key business priorities we’re advancing across affordability, loyalty and personalization, and innovation, real estate, supply chain, and our teams.

Curtis Valentine (Chief Financial Officer)

Thanks, Jack, and good afternoon, everyone. In the second quarter, our results played out in line with our outlook as we continue to lap outsized growth from the prior year and help our customers navigate the affordability challenge that they face in the current environment. Total sales were $2.3 billion, up $105 million, or 5%, compared to the same period last year. This growth was driven by strong new store performance, partially offset by a 1% decline in comparable store sales. We saw sequential comp improvement through May. June, as expected, we had our lowest comp of the quarter as we lapped strong last-year produce performance and the disruption in the natural and organic supply chain that sent more customers to our stores.

Starting in July, the business has improved in line with expectations. The sequential improvement has been driven by modest improvements in both traffic and units in the basket. E-commerce sales grew more than 12% and represented approximately 16% of total quarterly sales. Sprouts Brand also continued to perform better than the rest of the business, representing 26% of total sales. Our second quarter gross margin was 38.7%, a decrease of 12 basis points compared to the same period last year. This primarily reflects our loyalty investments and elevated fuel costs. These headwinds were partially offset by benefits from self-distribution and vendor participation to help support customer value. SG&A for the quarter totaled $683 million, an increase of $38 million and 30 basis points deleverage compared to the same period last year.

This was primarily driven by fixed-cost deleverage from lower comparable store sales and investments in the business, partially offset by disciplined cost management and lower incentive compensation. Depreciation and amortization, excluding depreciation included in cost of sales, was $43 million. For the second quarter, our earnings before interest and taxes were $174 million. Interest income was approximately $68,000, and our effective tax rate was 26%.

Net income was $129 million, and diluted earnings per share were $1.37, an increase of 1% compared to the same period last year. Turning to unit growth, we opened 7 new stores, ending the quarter with 490 stores across 25 states. Our pipeline remains robust, with more than 110 executed leases and 155 approved new stores, giving us confidence in our ability to continue expanding access to Sprouts over the long term. Our balance sheet and cash generation remain strong and provide flexibility. Year to date, we have generated $369 million in operating cash flow, which enabled self-funding of our investments in capital expenditures of $186 million, net of landlord reimbursements, through the second quarter.

We also returned $210 million to our shareholders by repurchasing 2.8 million shares and have $626 million remaining under our $1 billion share repurchase authorization. We ended the second quarter with $224 million in cash and cash equivalents and $22 million of outstanding letters of credit. As we look to the balance of 2026, we are beginning to move past the most difficult compares and seeing early progress. Though the operating environment remains uneven, we believe our initiatives in affordability, innovation, personalization, marketing, and supply chain will strengthen engagement over time. Customer behavior is evolving gradually, and we recognize it will take time for our actions to fully gain traction. In this macro environment, the lower-engaged customer remains an opportunity, and all customers are managing units in the basket.

Given that context, we continue to take a disciplined view of the back half while investing in the actions we believe will support engagement and long-term growth. 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, our outlook for total sales growth is between 5.5% to 6.5%, with comp sales between negative 0.5% to positive 0.5%. We now plan to open 42 net new stores in 2026. This accounts for 43 new openings, as well as one closure of an underperforming store with an expiring lease. Earnings before interest and taxes is expected to be between $675 and $685 million.

We expect our corporate tax rate to be approximately 25.5%, and we expect capital expenditures, net of landlord reimbursements, to be approximately $310 million. Our diluted earnings per share outlook is expected to be between $5.32 and $5.40, assuming at least $300 million in share repurchases. This updated outlook also reflects the current consumer backdrop, our continued efforts around affordability, ongoing fuel surcharges, and disciplined cost management.

It also incorporates the expected one-time year-over-year gross margin benefit in the fourth quarter as we cycle an easier shrink comparison and the loyalty program changes we made earlier this year. We believe this outlook gives us the flexibility to continue investing in customer value while managing the business with discipline. For the third quarter, we expect comp sales to be in the range of negative 0.5% to positive 1.5% and diluted earnings per share to be between $1.20 and $1.24.

EBIT margin pressure is expected to be approximately 50 basis points due to fixed-cost deleverage from lower comp sales and the impact of more new store openings when compared to the third quarter last year. And with that, I’ll turn it back to Jack.

Jack Sinclair (Chief Executive Officer)

Thanks, Curtis. Against an uneven near-term backdrop, we remain focused on the areas we can control: sharpening value, strengthening foraging, improving how we engage with customers and providing them a great in-store experience, advancing supply chain capabilities, and executing against a strong new store pipeline. We’re using data to better support our customers on their health journey. Our customers care about what they eat, and we are committed to making healthy, clean food more affordable and accessible, which is particularly important during these challenging times.

Our teams are proud to rise to this challenge. That commitment is directly connected to our top priority, serving our target customer. They continue to value the Sprouts experience, the quality of our assortment, and the discovery we bring to health and wellness, while also looking for practical ways to make healthy living fit their budgets. We are responding in a way that is consistent with who we are by bringing together innovation, quality, and targeted value in the areas that matter most.

In the second quarter, our fresh deli meals, vitamins, vitamin sale, and $9.99 wellness bowls, for example, are how this approach resonated with customers. Our first-half affordability tests produced mixed results. Most actions drove better unit movement, while broader traffic response developed more gradually than expected. We’re using those learnings to refine our second-half approach, focusing on the items that matter most to customers and where targeted price and affordability actions can have the greatest impact on engagement.

Foraging and innovation remain key strengths, and they continue to outperform overall company growth. They help differentiate the assortment and focus our space, promotions, and new item activity around the products customers value most. During the second quarter, we launched approximately 1,300 new items, with an emphasis on attributes that we believe matter to our customers, including organic, seed oil-free, fiber, gut health, and protein solutions.

These products help reinforce why customers choose Sprouts. With our exclusive partnership, Pasture Bird Chicken is now available nationwide at Sprouts, and products like Better Pop and Bitty Soup Shots are resonating with customers. Our organic offerings continue to gain traction across departments, now representing more than 30% of total sales, including more than half of sales in dairy and produce. Loyalty and personalization remain important long-term enablers for the business as consumer behavior evolves. Against this uneven macroeconomic backdrop, we continue to see progress. Our acceleration efforts have identified new tactics to drive sales that should benefit us in the second half, and the data we are building is increasingly useful across the business with more in-depth customer behavior and preferences. Building our first-party data capability will continue to support our long-term strategy by unlocking value for our customers and Sprouts across the enterprise.

Marketing is one area where our new data can help us more effectively engage customers in the second half of the year and beyond. We’re using these insights to better target media across both existing and new customers while also refreshing our creative to more clearly communicate Sprouts’ unique position and bring the brand to life. We’ll continue to tailor our messaging to distinguish Sprouts Farmers Market and compelling value on the healthy essentials our customers need. Our supply chain work is also advancing. Our Northern California distribution center is open and operating smoothly and nearly 85% of our stores are now supported with fresh meat through Sprouts Farmers Market distribution centers. This gives us greater control over freshness, service levels and shrink and the financial benefits from this transition will continue to support our efforts on affordability.

We also are continuing to advance our self-distribution journey with targeted investments in our existing space beginning with select Sprouts Farmers Market brand SKUs. As we look beyond produce and meat to the next phase of this work, new stores remain one of the clearest proof points of the strength of our model. Performance continues to be strong and our teams are selecting great sites, opening stores efficiently and bringing Sprouts Farmers Market to more communities. We are pleased with the progress across both high volume existing markets and newer markets that are continuing to build awareness and momentum.

Our construction team have done a great job improving our processes and shortening our time to build stores. Given these improvements along with our strong pipeline, we will be opening 42 net new stores this year, slightly ahead of our original guidance. We will open at least 15 stores in the third quarter, which represents our largest quarterly opening cadence to date. Lastly, the Sprouts Farmers Market team remains the heart of the organization. Our team members bring the Sprouts Farmers Market experience to life every day from the quality and freshness in our stores to the service and education they provide our customers. Their commitment to our purpose, our team and our customers remains a key advantage for our business.

In summary, we are operating with discipline against a dynamic near-term backdrop while staying focused on the actions that strengthen engagement, reinforce the Sprouts Farmers Market value proposition and position the business for sustainable growth. We appreciate your continued interest in Sprouts Farmers Market and look forward to keeping you updated on our progress in the quarters to come and with that I’d like to turn over for questions.

OPERATOR

Thank you, ladies and gentlemen. As a reminder, to ask a question, please press star one one on your telephone, then wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ed Kelly with Wells Fargo. Your line is open.

Ed Kelly (Analyst at Wells Fargo)

Hi, good morning. Good afternoon, everyone. Could we maybe just start with comp cadence? And I’m specifically interested in July. You talked about July being in line. Could you provide a little bit more color around the month versus the Q3 guide? You know, the Q3 guide leaves the possibility of a negative component. I’m not sure if you saw that in July. And was there any impact from Cyclospora? And then just remind us of the compares by month moving forward now.

Curtis Valentine (Chief Financial Officer)

Sure, yeah. Hey, Ed, this is Curtis. So comp cadence sequentially, you know, improved through May. As we said in the script, June was a tough month. That was really the end of kind of the challenging compares last year in June, you know, really strong produce season, disruption of the natural and organic supply chain that sent customers our way. And so those are behind us now. As far as the second half of the year, there were no major disruptions or benefits last year that we’re up against.

So the comp will sequentially get easier from a comparison perspective month to month as we go forward. Within July, we’re within our guidance range, just slightly negative for July is where we landed. And then on Cyclospora, you know, it’s really live right now. It’s been really the last two weeks where we’ve seen a bit of impact on the business. And so we’re really just kind of dealing with that real time. I mean, first and foremost, food safety is our number one priority. The team really does a great job with that. They’re watching all the news and the regulatory updates closely. And we haven’t had any product recall impact in our stores to date.

But it is, you know, it’s impacting the customers and how they shop. It’s really isolated to kind of lettuces, salads and salad-related items is where we’re seeing a bit of an impact. So it’s shifting from fresh to frozen. So we’re watching this pretty closely just to see where it’s going, how the customer reaction to this. It’s difficult to know exactly how this is going to play out, but we’re focused on food safety.

Ed Kelly (Analyst at Wells Fargo)

Okay, maybe just a quick follow up. Jack, you mentioned affordability. Results of the effort kind of being mixed and maybe some adjustments that you’re making. Could you talk a bit more about that? And are those adjustments meaning like intensifying pricing effort? Is it just sort of like how you’re spending the dollars?

Jack Sinclair (Chief Executive Officer)

We’re being very focused on trying to look after our customers on those items that matter most. And the tests that we’ve done, as we said, have been mixed and different departments have done different, different items have performed differently. And the challenge for us is making sure that everything we’re doing fits the model that we’re working on. So I’ll maybe let Nick. Nick and his team have been doing a lot of work analyzing the specific detail of what we’re investing in and I think we’ve got a pretty good handle on what it’s going to cost and what we’re going to do going forward.

Nick Konat (President and Chief Operating Officer)

Yeah. Hey Ed, kind of three pillar approach to the affordability work we outlined. The one that I think is showing the most growth and really happy with what the team’s doing is in our assortment efforts. So we see really strong momentum in our healthy meal solutions and we’re continuing to increase that offering with the health-driven, attribute-driven meals. We’ve talked about our new $29.99 family meals. We now have all of our fresh-made salads in store under $9.

So that’s been really strong for us. The second lever of that assortment has been in Sprouts Farmers Market brand with innovation in the healthy essentials. So I’ll give you a couple examples. You know, we’re launching seed oil-free frozen potatoes that are now top sellers in the category and we’re just about to launch a $4—actually we did just launch a $4—fresh-baked organic sourdough bread. So you see us investing in the areas that’s important for our customer and the assortment.

On the price and promotion piece, as Jack mentioned, it’s been a little tougher to move the customer in this environment. We are seeing good basket and unit velocities from some of the price and promotion efforts we’re doing. But we’re continuing to test and learn both how we price and also how we message. And we’re going to continue to be prudent about how we do that as we learn how to move the customer. And then the third pillar of that work is on personal loyalty and our personalization efforts and the acceleration of the learnings we’ve had in the first half of the year in the third quarter to help continue to move our existing customer.

Ed Kelly (Analyst at Wells Fargo)

Great. Thanks, guys.

OPERATOR

Thanks, Ed. Our next question comes from the line of Leah Jordan with Goldman Sachs. Your line is open.

Leah Jordan (Analyst at Goldman Sachs)

Good afternoon. Thank you for taking my question. I just wanted to follow up on Ed’s first question around the comp. So, you know, in the prepared remarks, you talked about July improved in line with your expectation, but you still narrowed the comp guidance for the year. So I’m just trying to get a sense of what’s making you maybe less optimistic in terms of getting to that top end now. Is it really around the macro, increasing competition, or is it simply just, hey, we’ve had a softer start to July and maybe some of this is tied to the lettuce concern that you talked about.

Any color there? And then just ultimately maybe frame your confidence on getting back on to Algo by the fourth quarter. Thank you.

Jack Sinclair (Chief Executive Officer)

Yeah, I think the questions are with regard to getting back to outlook, we’re feeling free to go forward in terms of what we’re projecting. In terms of the specifics, there’s a macro environment that’s kind of difficult to really put your handle on. Clearly, grocery pricings are going up, gas prices have gone up and down, and they’re clearly putting pressure and we can see it in the units, and it’s not across. Grocery units are not as strong as they were because of the inflation.

So we’re trying to second guess exactly where this is going to play out. But our guidance is something that we feel pretty confident about. And certainly if the comparisons that we’ve got going forward play out the way we expect them to do, we should be back on our algorithm in due course.

Leah Jordan (Analyst at Goldman Sachs)

Okay, that’s helpful. Maybe just a quick follow up on that. We’ll stick with the comp. I mean, just maybe more color on the drivers. How you’re thinking about traffic versus units versus AUR. Kind of as we move through the back half, it sounded like traffic and units were getting better in July. Just trying to think about the underlying drivers for your comp outlook as we go through the fourth quarter.

Curtis Valentine (Chief Financial Officer)

Yeah, I think we expect sequential improvement in traffic for sure. Yeah, units and traffic should get better. It’s not going to come from AUR. You know, traffic was the thing that went up really well when we were doing well and has been moderated and been the driver as we’ve softened here. So I think we’d expect that to continue to get better as the compares get easier, and then units should get a little bit better as we continue to work on the affordability piece.

Leah Jordan (Analyst at Goldman Sachs)

Okay, thank you.

OPERATOR

Thanks, Leah. Please stand by for our next question. Our next question comes from the line of Tom Palmer with JP Morgan. The line is open.

Tom Palmer (Analyst at JP Morgan)

Hey, good afternoon and thanks for the question. Maybe I could just first clarify on the guidance revision. So comps were narrowed around the midpoint. The second quarter earnings came in a little bit ahead of, I think, what you guided for. So I just wanted to understand maybe some of the narrowing to kind of the bottom half when we look at that EBIT outlook, if there are maybe incremental investments that are contemplated. I know there was the reference to some deleverage and so maybe the extra couple stores is the difference.

But anything else on top of that. Thanks.

Curtis Valentine (Chief Financial Officer)

Hey Tom, it’s Curtis. Yeah, I mean really, the EBIT midpoint to midpoint $5 million change is really fuel. We’re just looking as we, as we spoke about last time, we covered it off in Q2, but we said we didn’t have it covered in the second half and we weren’t, you know, we’re going to wait and see how that played out. Obviously it remains elevated and it’s been pretty volatile and so we’re embedding two and a half million a quarter in the second half for fuel.

Tom Palmer (Analyst at JP Morgan)

Oh, great. Thanks for that. And I also wanted to ask on some of the, I guess, vendor participation that was noted and then one of the earlier answers you noted, focus on accelerating personalization with loyalty rollout, are you starting to drive increased support? I think that’s one of the goals and the belief was it might take a little bit of time working with vendors. But I am curious if we’re hitting a point where that’s becoming more of a factor just given the call outs earlier.

Nick Konat (President and Chief Operating Officer)

Hey Tom, it’s Nick. I would say we’re still early stages in that we just started opening up vendor participation in the program at the beginning of this year. And so we’re nascent in that and the idea is always, hey, you have these really unique vendors with unique customers with unique needs and how do you tie them all together to help them find their audience and their market? Because we have the health enthusiast that a lot of these new brands want.

And so I think I feel really good about that strategy. Starting to see more and more vendors participate and see benefit from participating in the program. So we’re certainly ramping, but it’s early stages and I think we’ve got certainly as we build out the capability, as we continue to invest in technology, that’ll be something we continue to push over the next number of years.

OPERATOR

Thank you. Thank you. Our next question comes from the line of Kelly Benia with BMO Capital Markets. Your line is open.

Kelly Benia (Analyst at BMO Capital Markets)

Hi, thanks for taking our question. Wanted to just double click on the comment about kind of all customers are managing units per basket. As we look at your sales across the two categories between perishables and non perishables, it looks relatively stable. So just wondering what is really happening underneath the hood there with units per basket. I thought that was a little bit more isolated to produce, but maybe you can just help us understand if anything has changed on the units per basket and what the plan is there to address that.

It sounded like the focus is on traffic for now, but just as you look out further on the units per basket, what is the remedy for that?

Curtis Valentine (Chief Financial Officer)

Hey, Kelly, it’s Curtis. Yeah, I think units in the basket produce is always a lead because it’s one of the larger. It’s the largest unit count in our average basket. But in these times, we saw it back in 22 and 23, and again here, when the prices are up or there’s an inflationary environment or the customer’s under pressure for us, they tend to manage that last item in the basket. And so it’s a little bit of an impact across the entire business.

And then produce usually has a little bit larger impact just simply because there’s more produce units in our basket, say, than the average conventional. So as far as what we’re doing, I mean, I think the things that we are doing, you know, from a loyalty and personalization perspective, certainly that should help on the unit front. And from an affordability perspective, that’ll help on the unit front. And we’re seeing, you know, some good progress on units in the tests that we’re doing, as we alluded to earlier.

And we’d like to see a little bit of a broader impact from a traffic perspective, but the unit piece has been positive so far.

Kelly Benia (Analyst at BMO Capital Markets)

Okay. And Curtis, when you talk about kind of thinking about the items that matter most to your customers, some of the examples, I think sounded like they were in fresh, maybe. Correct me if I’m wrong, but are you. How do you think about kind of balancing the fresh kind of price investments or affordability versus kind of the new innovation and the new items which, you know, seems so critical to the Sprouts Farmers Market merchandising strategy? How do you balance that?

Or are you trying to figure out, you know, where to put more or less investment between those categories?

Nick Konat (President and Chief Operating Officer)

Hey, Kelly, I’ll take that. It’s Nick. We start with our customer and think about it less around fresh and non perishables and more around what’s in the customer’s basket and what’s most important for them and for us. You know, I think you’ve heard me talk about the healthy essentials. It’s, you know, it’s organic cheese, it’s organic bread, it’s organic meat, and it’s obviously organic produce. So it’s across the board on things non perishable and perishable that we’re focused on and then looking at what’s most important to them and where can we help make some of these things more accessible to them.

That’s where you see us both innovating with assortment, especially in Sprouts brand, and then making the selective investments to ensure that they’re more accessible. So we look at it from a total customer standpoint. And you know, we’ve seen good success in fresh right now because I think that’s a good driver for the customer around meals and meal solutions. But look at it holistically across the store.

OPERATOR

Thank you. For our next question. Our next question comes from the line of John Heimbockel with Guggenheim. Your line is open.

John Heimbockel (Analyst at Guggenheim)

Hey, can you guys address cohort performance demographically? Right. I’m thinking you’ve talked in the past about the emerging health enthusiast, right, perhaps having more affordability issues. How is that group performing? And then when you distinguish between, right, so you had some waves of shelf price reductions and then you’ve also done some stuff with the loyalty program in 3x/5x points. When you think about what’s working, what’s not working from a pricing standpoint, how would you assess that?

Nick Konat (President and Chief Operating Officer)

Hey, John, it’s Nick. I think the two headlines for me on the question of working not, I think one is the macro’s tough and it’s tough. The customer is proving tougher to move overall. So efforts are not quite the same as they may have been in a more stable market. We don’t have the level of inflation that we’re seeing in the market. So that has an impact overall. And I think the second thing is we’re seeing, as we mentioned before, our less engaged lower income customer is the one that’s been harder for us to move.

Some of that’s a lapping story, John. We’re obviously still lapping some of that. But if you look at our cohorts and our loyalty customers, it’s those that are a little less engaged, lower income, where it’s been tougher to drive that trip and that extra item in the basket.

John Heimbockel (Analyst at Guggenheim)

Maybe as a follow up to that. I know the other opportunity, right, because of the sheer amount of product introductions, is to reach out to folks, right, that are attributed, oriented to let them know the 1,300 items came in and maybe the opportunity is bigger with higher income customers. But to what degree are you doing that now or is that still to come, right, where there’s, you know, there’s these prompts, calls to action about these items.

Nick Konat (President and Chief Operating Officer)

Yeah, we’re definitely doing that. We’re seeing it in the numbers, our innovation, the products that we are, you know, the new products we’ve launched in the last year are significantly outperforming the overall box. We’re seeing the innovation continue to be strong and the customer continue to be willing to buy the new items, the unique items they see with us. So I think that’s a combination of the foraging work that we continue to do, the strong pipeline innovation that our merchants and foraging team has built and then we are continuing to introduce it to our customers not just through loyalty, which has been personalization, but also through social media and our marketing. And so I’m actually very happy with how our newness continues to perform. We certainly have aspirations that can drive it even further, but that’s been good for us.

OPERATOR

Thank you. For our next question. Our next question comes from the line of Christina Katai with Detroit Bank. Your line is open.

Christina Katai (Analyst at Detroit Bank)

Hi, good afternoon and thanks for taking the question. So I wanted to follow up on the affordability test. You’ve noted that you’re seeing improving unit movement, but it’s generating a slower than expected traffic response. So can you help us quantify the gap there? And you call these tests having mixed results? What have you learned about elasticity and just overall customer response that is shaping your second half investments?

Curtis Valentine (Chief Financial Officer)

Hey Christina, it’s Curtis. I won’t. And Nick or Jack may jump in as well. But I don’t think I’ll get too specific on quantifying the exact expectations there or what’s where we’ve been. I’ll just say I think the one thing we again it’s going to go back to, it’s challenging to move the customer in this environment. And the longer we’ve gone with the elevated fuel and the challenging macro, you know, it’s just a little bit harder. Things that worked last year aren’t working as well this year.

Things that we think should work, that we try don’t work quite as well. And so, you know, it’s been a lot of learning and kind of readjusting to the current environment for how we go to market and that’s really kind of how it’s playing out as we think about the tests, whether it’s in personalization or whether it’s in price and promotion.

Jack Sinclair (Chief Executive Officer)

Yeah. And I think one of the macro challenges is one of the biggest things that I think is affecting the chat. The ability for us to move traffic. And the comparison to last year is pretty significant. On some of the things that happened last year and those lower engaged customers that came to us last year in some unique circumstances, that’s the group that we’re seeing the biggest challenge on growing the traffic. But when that lapping grows out, we’re feeling pretty confident about that.

Linking to all the work that Nick’s team are doing in terms of how do you give value to the customer and how do you give value on those items that matter most to the customer? We’re seeing some progress on that. I think the traffic will take a little bit longer.

Christina Katai (Analyst at Detroit Bank)

That’s helpful. And if I could just follow up on that, obviously you called out the lower engaged customer remains the largest opportunity. So if you could just sort of give us any framework around how to think about that. Just how much of the comp pressure today is coming from these shoppers? What percentage of your customer base would you characterize as low or engaged today? And if you could just maybe tie that in terms of what behavioral changes are you seeing as the loyalty and personalization efforts gain traction?

Thank you.

Nick Konat (President and Chief Operating Officer)

Hey, Christina, it’s Nick. I probably won’t quantify, but I would tell you that where we’re seeing the biggest challenges I mentioned on John’s question was with the. The lower engaged customer. It’s certainly a smaller portion of our spend and a smaller portion of our customer base. So it’s not our core customer, but we certainly see that. And the behavior your question was about is we’re just seeing them spread the trips out a bit more. We’re not seeing them take the same low frequency maybe that they have in the past.

I think that’s what’s driven by in the macro. And that people are managing their wallet right now, what they can spend. So that’s. That’s kind of what we’re seeing from the less engaged cohort. And the good news is our core customer has remained pretty resilient. I think part of what we’re seeing, some of the price activity, it’s been good for units in the basket, a little bit tougher on traffic. But we’re seeing the customer respond to is great assortment that’s at a great value. And some of the newness and things that we’ve launched, I think that kind of highlights, the type of customer we have and who we really stay focused on as we continue the work in the second half.

Christina Katai (Analyst at Detroit Bank)

Okay, that’s great color. Thanks. Best of luck.

Nick Konat (President and Chief Operating Officer)

Thank you. Thanks, Christina.

OPERATOR

Our next question comes from Milana Rupesh Farique with Oppenheimer and company. Your line is open.

Milana Rupesh Farique (Analyst at Oppenheimer & Co.)

Good afternoon. Thanks for taking my questions. Just given a number of players, you know, highlighting price investments out there, just curious, you know, how you guys feel about your price caps and just overall what you’re seeing on the competitive promotional front. Thank you.

Jack Sinclair (Chief Executive Officer)

Specifics in terms of price cuts, we talk fairly consistently, Rupesh, about that. In terms of the important pricing, the way we’ve got direct comparisons with other guys is in our produce. So we continue to pay a lot of attention on our produce. We’re very pleased with where we are on our organic produce. And it’s a fairly volatile market, as we alluded to earlier. So produce pricing, we feel we’re in a pretty good place relative to the competition in that space and with regard to other activities that have gone on in the marketplace.

And clearly a lot of people are talking about things that are going on in the marketplace. We’re pretty confident that the assortment and products we’re putting together are differentiated enough that we have to focus on the value of those items that matter most to our customers, and our customers being that health enthusiast customer. And as Nick alluded to earlier, just picking the right items at the right price is something we can do because our products are differentiated.

And we do that in the context of making sure we’ve got the right value for the customer going forward. And that’s been our pricing model for a long time now.

Milana Rupesh Farique (Analyst at Oppenheimer & Co.)

Great. And then my follow-up question, just on new stores: commentary suggests that they’re still performing really well. But just curious, given the more difficult backdrop, have you guys seen any challenges in how these stores ramp or anything else to highlight, just given the weaker backdrop?

Curtis Valentine (Chief Financial Officer)

Hey, Rupesh, it’s Curtis. No, actually, I mean, that’s one of the things we’re really pleased about and kind of continues to give us confidence in the go-forward and in the strategy overall, is the new stores continue to open well. And it’s really across the country. We’ve opened them in New York and in Florida and across to California. And so new stores opening everywhere. They’re all generally performing the way we’d like them to. We see the typical nuances of new markets versus more established markets, but all of them kind of performing ahead of our expectations and in line with the last couple of years of performance.

And then the other encouraging proof point is the recent vintages are comping positive. So as the core is a bit challenged, those last four vintages are all positive. And again, just continues to point to that this is an offer, this is a format, this is a model that the customer is looking for. So been really pleased with the new stores.

Milana Rupesh Farique (Analyst at Oppenheimer & Co.)

Great, thank you.

Curtis Valentine (Chief Financial Officer)

Thank you.

OPERATOR

Our next question comes from the line of Mark Cardin with UBS. Your line is open.

Mark Cardin (Analyst at UBS)

Good afternoon. Thanks so much for taking the questions. So this one, this builds on the last one a bit. It sounds like you’re seeing good momentum on your new stores. As you look to your stores in newer markets, are your customer mixes mirroring what you see across the broader footprint? Is it any tougher to bring in customers that are closer to the lower end of income spectrum in markets where you’re still building up your name recognition? Does the excitement of the new concept offset this?

Just what are you seeing on that front? Thanks.

Curtis Valentine (Chief Financial Officer)

Yeah, Mark, it’s Curtis. I think in newer markets, it’s just challenging generally because the awareness isn’t there. And that’s really the big difference. I don’t think it’s any materially different from a cohort perspective. You know, we watch mix and what they shop from a department perspective; there’s no dramatic differences there. I just think it takes a minute for people to figure out who we are, figure out that we’re different, and how they can incorporate us into their share of wallet from a grocery perspective.

And so those stores, as we’ve talked about over the years, tend to build a little bit faster; they start a little bit lower and then they build a little bit faster as customers figure us out. And it’s definitely clear when you go to Long Island, you’re not as well known as when we open stores in Los Angeles. So we see that very specifically in our numbers. But the mix of our customer base, I don’t think is significantly different from where we are everywhere.

Mark Cardin (Analyst at UBS)

Great, that makes sense. And then you guys alluded to some other opportunities from a self-distribution perspective. How would you think about timing as to when it’s right to insource additional categories? Does your experience with meat and seafood pull up the timeline at all there?

Nick Konat (President and Chief Operating Officer)

Hey, Mark, it’s Nick. You know, we’re really happy with the work the supply chain teams have done and the merchants have done in completing the meat rollout that we wrapped up with our NorCal DC in Q2. They’ve done a phenomenal job across the board, and I think what it’s proven to us is, hey, there’s potential for us to continue to learn and look for more ways to control the key products that are really important to us and our customer. And as Jack mentioned, we’re starting to dip our toe in the water a little bit there with a couple of Sprouts brand items that we’re bringing in, using the capacity we have in our existing distribution centers to again take ownership and try to improve service levels and profitability in the business.

We’re going to continue to take it one step at a time, learn, see how that’s working, and assess. But we’re going to continue to look for ways we can take more control where it makes sense for us. But we’re taking a measured approach over the next couple of years, and we’ll look at that as we look at our long-term plan on our network as well.

Jack Sinclair (Chief Executive Officer)

And we’re investing appropriately in supply chain. We’ve built, I think, four distribution centers in the last few years, and we’ve got more to come going forward in terms of building capacity to support our store base as we grow into different marketplaces. So it’s been a strong evolution of our supply chain over the last few years, and this idea of getting more control over things like Sprouts brand and some of the core categories is going to be really important to us, and we’re investing in it appropriately.

Mark Cardin (Analyst at UBS)

Great. Thanks so much, and good luck, guys.

Jack Sinclair (Chief Executive Officer)

Thanks, Mark.

OPERATOR

Please stand by for our next question. Our next question comes from the line of Scott Marks with Jefferies. Your line is open.

Scott Marks (Analyst at Jefferies)

Hey, good afternoon, guys. Thanks very much for taking our questions. Wanted to just hit on a comment you made in the prepared remarks about EBIT margin pressure being about 50 bps in Q3. I think you called out a few different components of that with more new store openings, fixed cost deleverage, lower comp sales; you called out some of the fuel headwinds. So just wondering if you can kind of help us bucket each of those components in terms of, you know, contribution from each as it relates to that expected pressure.

Curtis Valentine (Chief Financial Officer)

Thanks. Yeah, hey Scott, it’s Curtis. I think probably the easiest way to say it is it’ll be pretty similar to what we experienced in Q2. So if you go up and down the P&L in Q2, the shape of it’s going to look pretty similar. So slightly negative gross margins, slightly negative SG&A, a little bit of pressure in D&A, and then the new stores piece really kind of folds into that SG&A pressure.

Scott Marks (Analyst at Jefferies)

Okay, clear on that. Thank you. And then previously you had also called out a cannibalization factor in existing markets where you’re rolling out new stores. Wondering if you can just give us an update on that and what you’re seeing now relative to what you had been seeing previously. And that’s all. Thank you.

Curtis Valentine (Chief Financial Officer)

Yes, Scott, Curtis again. Yeah, I think we talked about about 100 to 150 is kind of the range we typically expect to see, and that will depend on mix of new versus existing markets and et cetera, et cetera. Right now we’re towards the lower end of the range. One piece is we’ve fewer store openings in the first half, and we’ll ramp that up here in the second half. But through Q2, it’s kind of towards the low end of that range, and that’s slightly better than what it was last year.

But we’ve been pretty consistently in that range.

Jack Sinclair (Chief Executive Officer)

I think one of the things that’s encouraging for us is that the calculations on cannibalization, the model, the guys are doing a really good job of predicting exactly what that cannibalizes. So we can really understand it. We’ve got much better at that over the last few years.

OPERATOR

Thank you. Please stand by for our next question. Our next question comes from the line of Scott Mushkin with R5 Capital. Your line is open.

Scott Mushkin (Analyst at R5 Capital)

Hey guys, thanks for taking my questions. So I wanted to go back to the pricing thing for a second because we’ve seen some interesting pricing with you guys. And the example I would give is where we see Fage yogurt priced very well, but then we see Rao’s tomato sauce priced way above the market. And I guess I was just curious: how deep do you guys get in understanding where the market is on different items to make sure you’re priced right, or maybe there are times you can actually come up a little bit?

Jack Sinclair (Chief Executive Officer)

We will dig into the specifics of those points, Scott, and we’ll dig into understanding exactly where they are. We are looking, on brands like that, where other people are pricing at. And it’s a combination of what’s happening in the category: are we evolving the category or not, how important is that category for us? And I think we’ll get better at that approach going forward. Maybe you want to say something?

Nick Konat (President and Chief Operating Officer)

No, I think Jack said it. The only thing I would add, Scott: you know us. I think as we look at it, our intent is to try to continue to bring in brands that don’t have the level of competition in a couple of those categories. We have a lot of new innovation coming in there too that we’re trying to introduce people to and get into that space. But, you know, for the most part, again, the goal is to continue to try to not carry the same things, and when we do, be everyday competitive.

And, you know, there’s certainly opportunities for us to tighten execution, but that’s the way we’re looking at the business and that’s the way we’re executing.

Scott Mushkin (Analyst at R5 Capital)

And that goes right in—execution goes right into my second question. As you guys are opening a lot of stores now, how are you thinking about— I remember Whole Foods back in the day when they were opening so many stores. One of the bigger challenges was just getting the right store manager in there, making sure the execution was consistent across the fleet. Again, one of the things they ran into is when they poached people out of stores, the execution at the older stores could fall down a little bit.

So how are you guys thinking about this as growth has really accelerated?

Jack Sinclair (Chief Executive Officer)

I’ll let Nick go through a bit of detail on that. It’s a really good question, and we’re thinking very hard as we grow our store base: how do we develop this? And the whole process of promoting internally has been an important part of our exercise. And we’re really pleased with the assistant manager programs that we’re making progress on, going forward as we get to 40, 50 stores going forward in the years ahead. This is an important—and a really important—part of our proposition to the customer. We call ourselves Sprouties, and making sure we create and grow Sprouties is a key part. And our HR team are doing a terrific job working with the ops team. Nick, I don’t know if you want to build on it. It’s such an important point.

Nick Konat (President and Chief Operating Officer)

Yes. I’ll just give a little more color to Jack’s comments. Scott, I think this has been something we’ve been talking about for a while: super important to build our pipeline. It starts with making sure our culture and values are really well ingrained across the business. That’s what drives the experience that’s unique for us in the stores, and we’ve done a lot of great work there. We put a lot of time into actually recruiting and bringing people internally before we place them in stores and letting them work side by side with assistant managers and managers to increase the pipeline of people who are ready. And then we’re continuing to invest in putting more ASMs and store managers into stores early to help us get people ready to take on a new store and, to your point, make sure that the existing stores maintain. I think we’re really happy with what we’re seeing in the new stores.

The teams have been great and overall I’ve been impressed with what I’ve seen in the existing. But it’s certainly something we’ll continue to invest in—that pipeline—as we continue to grow the number of stores.

OPERATOR

Thank you. Please stand by for our next question. Our next question comes from the line of Robert Owens at Bank of America. Your line is open.

Robert Owens (Analyst at Bank of America)

Oh, hey guys, a couple of quick follow-ups for you. The first is just I’d love to get your sense of like-for-like inflation and maybe, you know, the trends that you saw in the first half and as we go into the back half, you know, what does inflation look like? Is it accelerating into the back half, you know, and is it coming through from suppliers and things like that?

Curtis Valentine (Chief Financial Officer)

Hey Robbie, it’s Curtis. The first half is, you know, second quarter was pretty consistent with the first quarter. We’re seeing, you know, on like-for-like SKUs, you know, inflation in line with CPI. And then for us we always have a little bit of a, you know, a mix uptick and some of our newer products and maybe more premium innovation, you know, driving the AUR up a bit. But on a like-for-like basis we’re still fairly in line with CPI. And then you’ve got just a handful of categories like coffee and beef that are elevated.

That’s helpful.

Robert Owens (Analyst at Bank of America)

And then there’s been some commentary out there, and maybe some data—I don’t have it—but about, I guess, the West Coast being much weaker at least for the traditional grocers than, say, the middle of the country and the East Coast. Can you remind us your exposure to the West Coast and have you seen significant differences West Coast versus other regions?

Nick Konat (President and Chief Operating Officer)

We’ve got a lot of stores on the West Coast and, quite honestly, Robbie, we’re not seeing any difference in our performance in the West as we see in the rest of the country. But we’ve clearly heard that from others.

Robert Owens (Analyst at Bank of America)

That’s great. And just I’m going to slip in one last one. When you go to Long Island and when you think about opening a park and Boston and places like that, are these higher average store volume markets in general for you or you would not expect that.

Curtis Valentine (Chief Financial Officer)

Hey Robbie, it’s Curtis. I think we have high hopes and aspirations for those markets. I think they’re going to be strong markets for us. I would think, though, that early days, what we typically see when we open a new market is the volume is a little bit lower. Again, it takes a minute for people to figure us out. We don’t have great density. You know, that’s challenging for marketing, you know, just scale of the business. And so early days, we expect them to be a little bit lighter than our average opening, and then we expect them to ramp pretty quickly over time.

And certainly one of the big changes we’ve made as we think ahead to Chicago and even greater New York is getting to that density even quicker. And so I think in Chicago you’ll see us start in 2027 and then our expectation is 12 to 18 months later we’ll have 10 stores in Chicago and there’ll be a good presence of Sprouts Farmers Market in Chicago. And then we’re putting our foundation teams and our marketing teams on the ground early in those markets to really build community and let folks know we’re coming.

So we’re trying to get ahead of that in those newer markets. But that said, I think we’ll still expect them to start a little bit slower and they are denser markets. So ultimately they’ll be a great story once you get the awareness where it needs to be.

Robert Owens (Analyst at Bank of America)

Sounds great. Thank you.

Curtis Valentine (Chief Financial Officer)

Thanks, Rob.

OPERATOR

Thank you. Please stand by for our next question. Our next question comes from the line of Michael Montani with Evercore ISI. Your line is open.

Michael Montani (Analyst at Evercore ISI)

Great, thanks. Good afternoon. Thanks for taking the question. Just wanted to ask first off, on the lettuce impact, we were thinking about an 80 to 120 bp range impact. You know, currently that might moderate to like 30 to 50 bps for the quarter. I’m wondering if you could give any commentary around if that’s consistent with what you’re seeing in your expectation set. And then the follow-up I had was around initiatives that you’ve got in place that give you confidence that you can, you know, drive comp units and stabilize traffic.

Curtis Valentine (Chief Financial Officer)

Yeah, hey, Mike, it’s Curtis on the first one. You know, again that’s really live, right? It’s been the last two weeks where we’ve seen the impact there. And so we’re really watching it closely as far as what’s going to happen. I mean, I don’t think we’ve got a great handle on that. We’ll have to just watch it, monitor it closely, and see how it plays out. So it’s been a small impact thus far over the last two weeks and we’ll be watching it closely.

Nick Konat (President and Chief Operating Officer)

Hey Mike, it’s Nick. I’ll answer the second part of your question. I think some of that I’ve talked about. If you think about how do we continue to drive the comps in the second half with the assortment work around meals and healthy essentials and the innovation there, I think it’s still a lot of testing and learning in price and promo and then obviously personal and loyalty. I think we’ve got some good green shoots in that space. That leads to momentum in the second half.

And the other thing I hadn’t mentioned, I’ve been really happy with what I’m seeing from Mandy, our new Chief Customer Officer, and her team on the marketing front as we look at new ways to harness her capabilities and insights on media, on using our first-party data that we’re now acquiring in even a stronger way outside of our ecosystem. And also you’re going to see us, I think, get even better about our messaging and communication, how we balance health, innovation, quality, and value.

So I like the work I’m seeing from the team that the customers will start to see in the back half of the year.

Curtis Valentine (Chief Financial Officer)

Hey Mike, it’s Curtis again. I’ll just clarify that, as far as the quarter-to-date piece of it or what’s behind us, the number you quoted was just a little bit high versus what we’re seeing. I won’t speculate about what will be going forward, but it’s not quite as high as you had it for the last couple of weeks that we’ve seen.

OPERATOR

Please stand by for our next question. Our next question comes from the line of Seth Sigman with Barclays. Your line is open.

Seth Sigman (Analyst at Barclays)

Hey everyone, thanks for taking the question. I wanted to focus on e-commerce growth—accelerated this quarter. It was actually a big driver, I think, of the overall comp improvement despite that channel seemingly becoming more competitive. So just with the new data that you have on customer, is there anything more you can share about what you’re learning about that customer? Where are they coming from? How do they shop cross-channel? How valuable are they?

Thank you.

Nick Konat (President and Chief Operating Officer)

Hey Seth, it’s Nick. Yeah, I’ll share a couple things, and it’s pretty similar to what we’ve seen. But you’re right, we saw very good e-commerce growth and it’s been a really good partnership with our partners Instacart, DoorDash, and Uber Eats. I think the reason we continue to see it even in a bit of a challenged macro is we have a lot of things that customers really want and need that they can’t find anywhere else. And even now, right, when maybe they might not be making that get-in-the-car to make that trip, they can get something ordered online or just have it picked up in front of our store.

And we’re seeing both our delivery and pickup businesses perform well. The e-commerce customer for us is an omni customer for the most part. The vast majority of those customers shop both channels and they’re our highest-value customers. So the more we grow that customer and business, that’s a very good thing for us. And as mentioned in the past, I think what we’re seeing is the basket for e-commerce and the mix look pretty similar to what you see in brick and mortar. High amount of produce, a lot of fresh. I think the customer trusts our fresh business and that’s why you see it coming through in e-commerce.

So pretty consistent dynamic to what you’d see from a mix standpoint in brick and mortar.

Curtis Valentine (Chief Financial Officer)

Seth, I’d just add—this is Curtis. You know, it’s another really good proof point for the model at large. I mean, we’ve talked about new stores and innovation and those continuing to perform. This is another area that’s continued to perform in a macro environment where you’d expect there to be some pressure on it. And so again, it just highlights that the assortment is something the customer is looking for. And when we can, you know, we want to be wherever they need us to be to service them.

And e-comm is a great channel for us and we expect it to continue to grow going forward.

Seth Sigman (Analyst at Barclays)

Okay, thank you for that. Super helpful. And then I just want to follow up on the margins. So the expectation that gross margin will be down slightly in Q3, I think the hope was that second half would see gross margins flat to up slightly. I think that was the original expectation. So is the delta there just higher fuel? And if you could just clarify if there’s any assumption that price would help offset that. Like, how are you thinking about that?

Curtis Valentine (Chief Financial Officer)

Yeah, I think. Really? Yeah. The slight difference from the prior commentary is the fuel piece, which does land in gross, and that’s a challenge. And I think the answer to the second part of the question is, like, that’s not the right time for us to be pushing through price—where the customer is, where the macro is, and with the work we’re doing on affordability. And so the fuel piece is an incremental pressure we didn’t have contemplated when the year began, and we’re dealing with it accordingly.

I think within Q3 specifically, there’ll be just a little bit of an impact from the cyclospora piece as well. And that’s probably the Q3 story: a little bit of fuel, a little bit of cyclospora. And then in the fourth quarter we’ve got fuel embedded in where we’re going. And then we do expect the fourth quarter margin to be up slightly. You know, again, the one-time changes in the loyalty program—so we’ll be $2 going to a dollar, started in January.

So the fourth quarter will be a full run rate last year at the $2 level versus $1 this year. So there’ll be a little bit of a one-time benefit there.

Seth Sigman (Analyst at Barclays)

Okay, thanks so much.

OPERATOR

Thank you. Ladies and gentlemen, I’m showing no further questions in the queue. I would now like to turn the call back over to Jack Sinclair for closing remarks.

Jack Sinclair (Chief Executive Officer)

Well, thanks again for your attention. We appreciate you taking the time to listen to our quarter call. We look forward to updating you in the future. Take care, everyone. Thank you.

OPERATOR

That concludes today’s conference call. Thank you for your participation. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.