The deli expansion is part of a comprehensive five prong plan to boost consumer visits, including increased specialty items and private label, enhanced digital advertising and employee training to improve customer service, according to executives. Unfortunately for Sprouts, these efforts come too late to cushion the blow to its bottom line of limited produced and deflation in the category in the first quarter.
During the quarter, net sales increased 19% to $858 million, but it wasn’t enough to help the retailer meet expectations. It reported earnings per share of 25 cents – 2 to 4 cents shy of expectations – and same store sales also fell 1.2% below expectation, growing only 4.8%. Gross margins also came in low, falling 90 basis points versus an expected increase of at least 10 basis points.
The retailer attributed its failure to meet expectations to supply shortages of quality produce early in the quarter, which was cast in an even worse light by being compared to a strong quarter for produce last year.
The retailer’s inability to run sufficient promotions in produce, which accounts for 25% of its business, negatively impacts the entire store because the category drives the overall business, CEO J. Douglas Sanders told investment analysts May 7.
“Produce quality and availability is improving,” and “we are seeing strong traffic trends into the store as the produce availability has normalized,” he added.
However, at the same time, the retailer has suffered devaluation in produce to the tune of 9-10% in the quarter, said CFO Amin Maredia, who added that deflation should normalize in the second and third quarters so that it is closer to 2% for the full year.
While produce always will be a key driver for Sprouts, the retailer is taking steps to ease the potential for the category to negatively impact the full store when trouble hits. Among these efforts is opening delis, including salad bars with prepared protein and side dishes, to help drive traffic, executives said.
Excited about early positive reaction to the delis, juice bars, protein cases and front-facing sandwich stations launched earlier this year, the retailer will accelerate adding these components to more stores, including new and old locations in different geographies, said Chief Operating Officer James Nielsen.
Specialty items draw consumers
The retailer also is playing up and expanding its selection of specialty items to help make it a destination for consumers.
“Our attribute-driven specialty categories continue to provide sales momentum throughout the store, experience comp growth above the company average and sales growth as well that is outpacing the overall industry,” said Sanders.
He noted the retailer plans to introduce this year another 150 items focused on “key attributes our consumers are looking for, including non-GMO, organic, raw, gluten-free and vegan.”
Private label expansion
Beyond the launches in specialty categories, Sprouts also will introduce additional private label products in 2015. Already last quarter, it launched 60 private label products, including its new raw food line, bringing its total to more than 1,600 items throughout the store.
“Private label continues to be a key differentiation, driving customer loyalty and brand awareness by offering great quality and value on natural, organic and specialty products,” Sander said.
The fourth prong in Sprouts plan to drive traffic and sales is expanding its digital presence to attract younger consumers.
“Because we have always targeted the everyday grocery shopper, our print distribution of more than 14 million weekly circulars is still our most impactful advertising vehicle,” Sanders said. “But, we also know that growing our customer engagement outside of print is an extremely important part of connecting with the next generation of shoppers.”
He noted the retailer now engages with more than two million consumers across social media and mobile. It also saw a 250% increase in transactions through Apple Pay and Google Wallet since January.
The training programs are focused on improving product knowledge, operational execution and leadership development, which should position the firm well to help consumers avoid growing pains as it expands, Sanders said.
Despite the retailer’s plan of attack to rebound from a difficult quarter, investors were not satisfied and the price of Sprouts’ shares plummeted following the announcement it missed its targets in the first quarter.