Sprouts Farmers Market - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered an EPS beat and slight top-line miss versus consensus: diluted EPS $1.22 vs $1.17*, revenue $2.20B vs $2.22B*, with EBITDA also ahead ($198.1M vs $193.0M*).
• Comparable store sales decelerated to 5.9% amid tough laps and a softening consumer, while gross margin expanded 60 bps YoY to 38.7% on improved shrink.
• Guidance was tempered: FY 2025 comps lowered to ~7% (from 7.5–9.0%) and net sales growth to ~14% (from 14.5–16.0%); Q4 comps guided to 0–2% and EPS $0.86–$0.90.
• Strategic catalysts: full launch of Sprouts Rewards loyalty (early signs of higher frequency/sales per customer) and continued self-distribution transition in meat/seafood to improve in-stocks; board authorized a new $1.0B repurchase (Q3 buybacks $50M).

What Went Well and What Went Wrong

• What Went Well

  • Margin execution: gross margin rose to 38.7% (+60 bps YoY) primarily from improved shrink, supporting EBIT margin of 7.2%.
  • Private label and attributes: Sprouts Brand exceeded 25% of sales, and e-commerce grew 21% to ~15.5% of total sales (baskets strong across partners).
  • Strategic progress: loyalty fully launched with early indicators of increased shopping frequency and sales per customer; self-distribution in meat/seafood completed at four DCs to improve fill rates.
  • Quote: “We delivered strong earnings growth, up 34% year-on-year, with a 5.9% comp…inventory management improvements contributed to expansion of our EBIT margin.”.

• What Went Wrong

  • Top-line moderation: as the quarter progressed, comps moderated faster than expected due to challenging YoY comparisons and signs of consumer softness (traffic still positive but slowed; pressure at basket tail).
  • Q3 revenue undershot consensus and prior cadence; Q4 guide embeds flat-to-low single-digit comps reflecting 10%+ laps in Nov/Dec and macro caution.
  • Competitive dynamics: Texas produce pricing more aggressive (HEB expansion) requiring vigilance; cannibalization running ~125–150 bps as density grows.
  • Analyst concern: risk that outsized tailwinds last year (strike, supply disruptions) are now tougher laps; management flagged pockets of prior gains (Oct 2024, Feb, May/June).

Transcript

Speaker 6

Ladies and gentlemen, thank you for standing by. Welcome to Sprouts Farmers Market's third quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you would 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. 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.

Speaker 1

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts Farmers Market 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 comparable GAAP figures. With that, let me hand it over to Jack.

Speaker 4

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 continued to expand our store presence from Sea to Shining Sea. 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 Farmers Market 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?

Speaker 3

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 $0.69 million, 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 nine 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 timeline delays, we now plan to open 37 new stores in 2025. Earnings before interest and taxes are expected to be between $675 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 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 the 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 earning stability while we continue to invest in our future growth. I'll turn it back to Jack.

Speaker 4

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 U.S. 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 one-third 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 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 three 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 foraging, 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 Farmers Market 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 foraging 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're 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're 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 four 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 Sprouts team members 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. With that, I'd like to turn it over for questions. Operator?

Speaker 6

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. The first question comes from Michael Montani with Evercore. Your line is now open.

Yes, hi. Good evening. 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 how you would respond to that, if there were other cyclical temporal headwinds that we should be thinking about in the quarter, you know, and how that could play out in the fourth quarter. Also, do you see this as a function of competition, or is it something else?

Speaker 4

I think what we talked about in the script there, Mike, was very much there were lapping some tough numbers from last year. 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. I put that putting that into context. We always look at what our competitors are doing and what the competitors are playing in there. 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. We're very excited about the loyalty and personalization work.

The context of all of that, I think, shields us from what we've seen happening from our competitors. As I say, we're pretty confident about the future, Mike.

Speaker 6

The next question comes from Seth Sigman with Barclays. Your line is open.

Speaker 9

Thanks, Seth. Good afternoon, everyone. 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? You talked about keeping your customers. You grew your customers quite a bit last year. How are you seeing that play out? Are we seeing perhaps a change in spending behavior, lower spend per customer? Thank you so much.

Speaker 3

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. In February, we had some help from a strike at a competitor that was upside. In 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. We don't see anything structural outside of those types of things that we're up against. We do have those moments that we'll be up against over the course of the next 10 months. Just, yeah, a little bit of softness in our business.

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. Those are the things that we're kind of pointing to as it relates to the customer pressure.

Speaker 6

Our next question will come from Leah Jordan with Goldman Sachs. Your line is open.

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

Speaker 4

I think the first thing you'd say is we're lapping some tough numbers from last year. We may have underestimated the challenge of lapping those numbers. It happened through the quarter as opposed to in the quarter. As we look forward, we're anticipating a challenging environment. We know what we've got to lap going forward. We're anticipating a little bit of pressure on the consumer going forward. The health and wellness macro trends are still strong for us. We see a real opportunity in doubling down on the loyalty program behind that going forward. There are some macro pressures that I think you'll see coming through in the marketplace that we're certainly experiencing. With regard to thinking about what should we do, 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.

We'll do what we need to do. We're very strong in terms of managing our margins, managing our costs. 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. 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. We'll have to react to that in some ways. We are reacting to that in the appropriate way.

Speaker 3

To the miss in Q3, Leah, yeah, 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. It was really the end of Q3, as Jack mentioned, where it really started to drop off a bit. That's when we get up against the 10% plus comps here in September and then the 13% plus in October. 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.

OK, that's super helpful. I was going to ask about the comparison November-December. That's really helpful. I guess, my related follow-up would be then for as we look into 2026, right, you're going to have some difficult laps in the front half of the year. You just talked about how you sailed through it in March of last year. How should, you know, 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?

Speaker 4

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's coming through 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. 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.

Speaker 3

Yeah, 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. We'll have a bit of a challenging first half up against the double-digit comps. As we get to the second half, we've got those building blocks that Jack just referenced. 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. We'll get specific when we get to February. We've been investing in the business to create levers to kind of manage through any environment. We'll be working through that, and we'll manage our margins effectively here in the first half of 2026.

Very helpful. Thank you.

Speaker 4

Thanks.

Speaker 6

The next question will come from Mark Carden with UBS. Your line is open.

Good afternoon. Thanks for taking the questions. To start, you guys called out strength in your best 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?

Speaker 9

Yeah, thanks, Mark. It's Nick. On the differentiation front, we measure that really closely since it's so strategically important to us. 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. We feel really good about where we are from a differentiation standpoint in the market. Yes, our most differentiated and innovative products continue to be the places we see the strongest growth in comps. 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 slightly up.

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. 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. That's how we're seeing it come across in our dynamic.

Got it. That's helpful. Thanks. 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? Thanks.

Sure. We've been at a pretty aggressive pace over the last couple of years, adding hundreds of SKUs each year. Our team has done an amazing job of doing that. I think what's important to keep in mind is when we build our Sprouts Brand program, 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. To your point, what's happening around us, that's really winning. We continue to see our penetration grow, our sales growth in Sprouts Brand has been really, really good. We will continue to fuel that pipeline and overinvest in that space to capture the momentum we have in the brand.

Speaker 4

We have some pretty exciting plans, Nick, going forward in terms of what's happening next year and some holiday products that are pretty exciting as well. The investment in Sprouts Brand will continue aggressively going forward, Mark.

Thanks so much. Good luck, guys.

Thanks.

Speaker 9

Thanks, Mark.

Speaker 6

The next question will come from Edward Kelly with Wells Fargo. Your line is open.

Yeah, hi. Good morning, everyone. 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. Have you seen any stabilization yet in the two-year as it pertains to October? What's the assumption that's based into the comp guidance as you think about the quarter itself?

Speaker 3

Hi, Ed. This is Curtis. Yeah, so quarter to date, we are just north of a 1, up against that 13 and change last year for October. The two-year has started to stabilize a little bit here in the last, call it, six or eight weeks. We've definitely seen some ups and some downs week to week in the one-year and the two-year. That's what's got us a little bit cautious. We're up against, again, I said earlier, about 10.5 in both November and December. We're really watching closely the one-year versus the two-year and how that plays out, particularly as we go through holidays with some of the consumer pressure that we've noted already. Watching closely, and we'll see how we go. We've had two months now up against 10-plus comps. We ran about a 4 in September against the 10.

We've run about a 1 here against the 13. We just want to see a few more of those months against the double digits to shore that up.

OK. Just to 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. 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?

Speaker 4

We won't commit specifically to what it may deliver, Ed, but it's a great question. It's very much the heart of what we're encouraged by is that the execution literally this week, I think, where all stores have now got access to it. It's taken us a full nine months or so to get this rolled 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. We're in a better place with identifiable customers going forward to understand exactly what they're doing.

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've made a little bit of progress on it. 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.

Speaker 9

Yeah. Hey, Ed. It's Nick. I think 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's done a great job of getting us rolled out completely nationally. Now we can turn the team's attention fully to how do we make that work even harder for us in 2026. I think Jack gave good color on how we can do so. We've got the rollout behind us. We know we've been able to move behavior. 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 at things that's most important to them and distinctive to us to drive long-term value.

Great, thank you.

Speaker 6

The next question will come from Tom Palmer with J.P. Morgan. Your line is open.

Speaker 9

Hi. Thanks for the question. 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. First, I think you made a reference to smaller baskets, not fewer customer visits driving the comp slowdown. I just want to make sure I heard that right. 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 in flux in terms of customer behavior, if anything stands out on that side. Thank you.

Speaker 3

Yeah, I think you know similar to how we talked about it on the way up last year, it was traffic. It was brick-and-mortar traffic that really accelerated, and we saw it be pretty balanced across categories and geographies. We're seeing it really play out similarly as we lap those numbers this year. It's been a traffic slowdown. Traffic's still positive, as we noted in the script, but that's the piece that's slowed down. 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 2022 and 2023, they're really managing the end of the basket. It's creating kind of a units per basket type pressure that we've seen before. That's been the dynamic.

Speaker 9

OK. Thanks for that. 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 one direction and the other the other?

Speaker 3

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

Speaker 9

OK, thank you.

Speaker 3

Thanks, Tom.

Speaker 6

The next question will come from Rupesh Parikh with Oppenheimer. Your line is open.

Good afternoon. Thanks for taking my question. Given the moderation you've seen in your business recently, does this at all impact how aggressively you invest next year? Are there levers to pull if you do see further softening from here?

Speaker 3

Yeah, 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. We've had a good level of investment for the last two 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. We're working hard on our cost capability on our indirect cost side, and we spent a lot of time on that this year. We're preparing ourselves to be able to manage through, and we feel like we're in good position as we head towards 2026.

Speaker 4

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. 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. As Nick said a minute ago, we're full steam ahead in our loyalty and personalization journey. We're very confident in the investments that we're making going forward. Once we get past some of these lapping challenges, I think we're in really good shape.

Maybe just one quick follow-up. On the capital allocation front, it sounds like you're going to continue buying back shares. Does your approach at all change given a more certain environment? At the same time, your stock is much lower. I'm just curious if there's any differences in how you approach share buybacks at these levels.

Speaker 3

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. We bought pretty aggressively early in the year when the stock price was a little lower through the year. I think we'll be thinking about it the same way as we exit our quiet period here, our closed period here in the third quarter. We're excited about the $1 billion authorization. We'll see where things land come Friday. We'll go get after it.

Great. Thank you. Best of luck.

Thanks, Rupesh.

Speaker 6

The next question comes from John Heinbockel with Guggenheim Securities. Your line is open.

Speaker 3

Two 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? Secondly, how do you guys size the opportunity 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? How big is that opportunity in stock?

Speaker 9

Yeah. Hey, John. It's Nick. Let me tackle first the loyalty question around data and history. Listen, to your point, the more data we get, the better we can be at personalizing and driving behavior. There's no doubt about it, right? This is a, we've mentioned loyalty is a long-term play for us to drive long-term comp. 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. You're right on there. I'm looking forward to that over the next number of years. I will also say, as we mentioned, we're able to use the data we have to drive customer behavior and plan on doing so in 2026. I think, as you know, our customers are not quite as frequent as your typical, you know, maybe conventional grocery shopper.

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

Speaker 4

Yeah, 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 has a very long tail, John, as you know. 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 at our Sprouts Brand in terms of how we can get more in stock on that. We think there's 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. There's certainly an upside in sale in-stock numbers. We haven't put a clear number to that. We have in the meat category. In other categories, we haven't put a really clear number to it. Instinctively, there's some upside for us in that if we can get better over the months and years ahead.

Speaker 3

All right. Maybe follow up for Curtis. I know historically, or at least recently, the break-even comp has been closer to 4%. How much do you think you can reduce that? You don't want to do damage to the business, right? You say, OK, we'll live with some deleverage for a while. How do you think about that trade-off? Yeah, I think it's a good call out. 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. We believe it'll 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. That's how we'll be thinking about it. 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 2026. Thank you.

Speaker 4

Thanks, John.

Speaker 6

The next question comes from Robbie Ohmes with Bank of America. Your line is open.

Hey, thanks for taking my question. 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 2026, any thoughts you can give us on gross margin puts and takes as you go through that?

Speaker 3

I think, Robbie, it's a little bit early to be talking about 2026. I want to go through our planning process and work through that. I'll just say that we talk about stable margins. I think about the full year for 2026. I don't see a reason why we won't be talking about that when we get there. We've invested in levers to help manage around some of the pressures we're facing right now. We'll continue to invest in some things. 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.

Gotcha. That's helpful. Just another follow-up on the kind of pressure on the consumer you're seeing. How narrow is it? Is it just the, say, 25 to 35-year-old demographic that you guys are seeing some of the pressures? 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?

Yeah, I mean, I think the pressure on the consumer, I'll speak to that. Then I'll turn it over to Nick on the second question. 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. Again, I talked about middle-income trade areas, younger demographics. It's just a little more pronounced in those. I think the pressure is there for everybody, and everyone's trying to figure out how they manage through that in a dynamic environment.

Speaker 9

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

Got it. Thanks so much.

Speaker 3

Thanks, Robbie.

Speaker 6

The next question comes from Scott Mushkin with R5 Capital. Your line is open.

Speaker 9

Hey, guys. Thanks for taking my questions. 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 a market for you guys that says the produce area has become hyper-competitive. I was wondering, you know, where do you think you guys are priced if we were going to look specifically at the fresh basket? Who do you think you're actually competing with? In other words, if the traditional market goes hyper-competitive, is that something you actually need to react to?

Speaker 4

We watch our price. We talk regularly, Scott. We watch produce pricing more attentively than anything else. Texas has become a more aggressive market with HEB's expansion into Dallas. We're having a great time opening new stores. I'm delighted with our Dallas performance alongside HEB. 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. We focus on that a lot as there's such a direct comparison. We're feeling pretty good about our produce pricing going forward.

There's a lot of volatility in it, as you know. I don't see it getting any more aggressive from a margin point of view outside of Texas going forward.

Speaker 9

OK. Jack, when you think about your competitive set, 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. How sensitive are you to things that they are doing competitively?

Speaker 4

We watch it very closely. Sorry to let you finish the question, Scott.

Speaker 9

No, that was it.

Speaker 4

OK. We do watch those guys very closely and very intently because they do sell a lot of things that we sell. We've got very clear data over what they overlap with those guys. 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. You kind of touched on what I think Amazon/Whole Foods are doing, which is chasing after maybe the 365, maybe the more entry point prices. It's drifting away into trying to get the full basket from people. We're very much a complementary retailer, and we're in this space that if we keep differentiating ourselves, we're feeling pretty confident that that's the right place for us to be. We keep watching it very closely, and we're not getting over-excited about what's happening in any of our competitors at the moment.

Speaker 9

All right. Perfect, Jack. Thanks very much for taking the questions.

Speaker 4

Thanks, Scott.

Speaker 6

The next question comes from Scott Mushkin with Jefferies. Your line is open.

Hey, good afternoon. Thanks, Scott, for taking my questions. First thing I wanted to ask about is last quarter, you had called out accountabilization factor with new stores impacting existing markets. Given that new stores are performing well per your commentary, I'm wondering if you can just update us on how you're thinking about that dynamic.

Speaker 3

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

OK. Appreciate that. Next question for me. Maybe you're a little bit less exposed to that, but just wondering SNAP spend. You know, how exposed is your business to that? Have you seen any impacts due to some of the policy changes and obviously the government shutdown having the potential to impact that? Thanks.

Yeah, certainly, again, not going to be helpful from a consumer perspective. Our SNAP is about somewhere between 2% and 3%, is historically where it's been. 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 the last several weeks. I don't think it's a huge impact to our business. It's certainly not helping.

Appreciate it. I'll pass it on. Thanks so much.

Thanks.

Thank you.

Speaker 6

The next question comes from Benjamin Wood with BMO Capital Markets. Your line is open.

Oh, hi. I think this might be for Kelly Bania from BMO Capital Markets. I'm not sure how that happened.

OK.

Thank you for taking our questions. 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? 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?

Speaker 9

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. 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 organic sale or vitamin sale. We do a BOGO event. Within those, we certainly try to promote the things that we know are most important to the customer. We will play around at times with price points or messaging to try to learn what's happening with the customer. Overall, we're not having any significant changes in our strategy. I want to also make clear we're not changing how we manage to our margins or our overall proposition to the customer.

I think you're going to see us be pretty consistent. With the onset of our personalization capability, I think that gives us another lever to target our price and promotional spend to drive better return and take care of our best customers.

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's going on right now?

Yeah, you know, 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 or items. From a broad strategic standpoint, no, we don't see that. We just don't see the same impact doing that that maybe others do because of who our customer is. Again, what we want to win in the marketplace is winning with the areas I just mentioned.

Speaker 6

The next question will come from Chuck Cerankosky with Northcoast Research. Your line is open.

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

Speaker 3

Yeah, I think, Chuck, 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. That's continued. We're continuing to get markers here on 2024 vintage as they get into the comp base here in Q4 and into next year. The results have been positive. The customer is telling us they're looking for Sprouts and a Sprouts-like solution. 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. Right now, we're pretty bullish on the white space and pretty bullish on the performance we've seen.

Speaker 4

We've got a very clear purpose to help people live and eat better. 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. We're absolutely delighted by the way new stores are opening. The teams that are making this happen are doing a terrific job. We're continuing to grow on it. We've absolutely no intention of backing off from that at the moment. Really excited about our new stores. It really fulfills the purpose of what everyone here is working to try and do. We're excited about it going forward.

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

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. The marketing team have done a really nice job in different locations communicating the values and what we have as a business within each market. We're a pretty unique business, 24 states, relatively small business. We're going to get to a lot more states over the next year or two, as Curtis talked about in the Midwest and the Northeast corridor. 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.

Speaker 3

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 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. It's about telling our story. It's about engaging with the community. We've seen a lot of positive traction when we've showed up in some new places.

Great, thank you.

Speaker 4

Thanks.

Speaker 3

Thanks, Chuck.

Speaker 6

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

Speaker 4

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

Speaker 6

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