Sprouts Farmers Markets, Inc. Stock

Good day, and thank you for standing by. Welcome to Sprouts Farmers Market Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker for today, Susannah Livingston. Please go ahead.

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our third quarter 2026 earnings call. Nick Konat, President, Chief Operating Officer and incoming Chief Executive Officer; Curtis Valentine, Chief Financial Officer; and Jack Sinclair, outgoing Chief Executive Officer, are with me today.

The earnings release announcing our third quarter 2026 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website at investors.sprouts.com.

During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2026 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings and the commentary on forward-looking statements at the end of our earnings release.

Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures.

With that, let me hand it over to Jack.

Thanks, Susannah, and good afternoon, everyone. Before we get into the quarter and an update on our business. I am looking forward to working with Sprouts in a different capacity as Executive Chairman. It has been the opportunity of a lifetime to be the CEO of Sprouts. We have grown the business, strengthened our competitive position and built a more resilient organization. I'm especially proud of the culture behind that progress and the thousands of team members who bring our purpose to life every day.

I feel very good about entrusting Sprouts next chapter to Nick. He knows our company, our customers and our opportunities well. The Board and I have great confidence in him, the broader leadership team and the long-term potential of Sprouts.

We recognize that our recent performance needs to improve. While the consumer environment and the Cyclospora disruption affected the quarter, we also have work to do to strengthen our execution and customer proposition. In a few moments, Nick will outline the actions we are taking and the investments needed to support stronger performance. For now, I will turn it over to Curtis, who will discuss results and our updated outlook. Curtis?

Thanks, Jack, and good afternoon, everyone. Before I review the quarter, I want to thank Jack for his leadership of Sprouts and for the partnership over the years. I'm looking forward to working with him in his new role.

For the third quarter, after seeing progress in our sales trajectory through July, comparable sales softened in August and September and did not improve as comparisons eased. Total sales were $2.3 billion, up $104 million or 5% compared to the same period last year. This growth was driven by strong new store performance, partially offset by a 0.9% decline in comparable store sales.

The comp results reflect the Cyclospora for disruption, which reduced comparable store sales by approximately 60 basis points during the quarter. The decline was driven by a 3.3% decrease in comp transactions, partially offset by a 2.5% increase in comp basket. These factors inform both our revised outlook and the investments we will discuss.

New stores remain a key proof point around the overall potential of our model. Our 2026 vintage is outperforming our expectations and our recent vintages are comping positively, reinforcing our confidence in the long-term unit growth opportunity.

E-commerce was another bright spot in the quarter, with sales growing 12% and representing more than 16% of total sales. This month, we also expanded our e-commerce reach with the launch of Shipt, our fourth platform. Sprouts brand also continued to outpace national brands in our stores and represented approximately 26% of sales. Both of these growth drivers benefit from our differentiated assortment and products customers often cannot find elsewhere.

Gross margin for the third quarter was 38.2%, a decrease of 50 basis points compared to the same period last year. This primarily reflected higher shrink due to lower sales in the Cyclospora disruption, as well as higher fuel costs. These pressures were partially offset by the benefits from self-distribution.

SG&A for the quarter totaled $683 million, an increase of $30 million and a decrease of 10 basis points as a percentage of sales compared to the same period last year. This was primarily driven by fixed cost deleverage from lower comparable store sales, partially offset by lower incentive compensation compared to the last year. We continue to pursue opportunities across the short, medium and long term to manage costs effectively while supporting our strategic priorities.

Depreciation and amortization, excluding depreciation included in the cost of sales, was $45 million. For the third quarter, our earnings before interest and taxes were $153 million. Interest expense was approximately $1 million, and our effective tax rate was 25%.

Net income was $113 million and diluted earnings per share were $1.21, down 1% compared to the same period last year.

Turning to unit growth, we opened 15 new stores, representing our largest quarterly opening cadence. We also closed 1 underperforming store at lease expiration, resulting in 504 stores across 25 states at the end of the quarter. Year-to-date, Sprouts has opened 27 net new stores. Our pipeline remains strong with more than 105 executed leases and over 160 approved new stores. We continue to expect 42 net new stores in 2026.

Our balance sheet and cash generation continue to provide flexibility. Year-to-date we have generated $555 million in operating cash flow and invested $275 million in capital expenditures net of landlord reimbursement. We returned $299 million to our shareholders through the third quarter by repurchasing 3.9 million shares and have $537 million remaining on our $1 billion share repurchase authorization. Based on current activity, we now expect full year share repurchases to exceed $300 million.

We ended the quarter with $229 million in cash and cash equivalents and $22 million of outstanding letters of credit.

Turning to our outlook, recent trends support a more measured view for the remainder of the year. Traffic units and frequency are not recovering, even against easier compares that began late in the third quarter. This was an important signal that the pressure on the business was not cyclical and that a more meaningful response is required. Our revised outlook reflects those recent trends and the actions we are taking to increase and accelerate investments to improve affordability and to strengthen the long-term health of the business. We are listening to our customer, and we need to respond now to help them live and eat better in a challenging backdrop.

As a reminder, 2026 is a 53-week year, with the extra week falling at the end of the fourth quarter. For the full year, on a 52-week basis, we now expect total sales growth of approximately 4.3% and comparable store sales of approximately negative 1.7%. We continue to expect to open 42 net new stores.

Earnings before interest and taxes are expected to be approximately $605 million. We expect our corporate tax rate to be approximately 25% and capital expenditures net of landlord reimbursements to be approximately $310 million. Diluted earnings per share are expected to be approximately $4.80, assuming more than $300 million in share repurchases.

For the fourth quarter, we expect comparable store sales to be between negative 2% to negative 4%, and diluted earnings per share to be between $0.47 and $0.51. This includes gross margin deleverage of approximately 90 basis points driven by deeper investments in affordability and SG&A deleverage of approximately 170 basis points driven by fixed cost deleverage due to lower-than-expected comps and higher store labor and benefits costs.

Our full year outlook is presented on a 52-week basis. We now expect the additional 53rd week to contribute approximately $190 million of sales, $20 million in EBIT and $0.16 of diluted earnings per share.

As Nick will discuss more in a moment, we know our challenges and are taking significant actions to address our performance for the long term. These actions include investments in affordability, technology and supply chain. While we plan for near-term margin pressure as we reset the business for long-term growth, we expect EBIT margins to remain above 5%. From there, we remain committed to using the self-help opportunities we've previously discussed to rebuild our margin profile over time. Over the next several months, we will assess customer response and refine the scale and pace of our investments accordingly.

And with that, let me hand it over to Nick.

Thank you, Curtis. And Jack, thank you for your leadership, your partnership and your commitment to Sprouts. I look forward to continuing working together in our new capacities.

For the past 4 years, I have had the opportunity to help shape and execute our strategy. That experience has given me a deep understanding of what makes Sprouts distinctive, where we need to improve and how much potential remains ahead of us. We operate in the health and wellness market with a target customer who is focused on healthy, fresh and innovative ways to meet their nutrition needs. These customers remain an attractive and growing segment of the U.S. food-at-home market with an estimated market opportunity of more than $290 billion.

We have a unique position in the market. Our curated assortment and product innovation continue to differentiate Sprouts. Strong recent store openings across established and newer markets reinforce the appeal of our proposition, while our strong store pipeline and smaller format model provide a long runway for disciplined growth. These strengths give us confidence in our model.

At the same time, our recent performance is not where it needs to be. We understand why. We are taking actions to improve it. Competition is intensifying. Affordability is a bigger driver of choice. And the target customers' needs are constantly evolving.

Sprouts must evolve faster as well. Our level of innovation, investment and execution must rise to meet the customer and market opportunity in front of us. Our customers continue to tell us they love Sprouts, particularly our shopping experience and the differentiated products that help meet their individual needs. At the same time, they're looking for us to make healthy eating more affordable to help them meet their evolving nutrition and health goals.

That is the larger opportunity for Sprouts to become an even more relevant and trusted partner, leveraging our strengths with innovative products, practical meal and health solutions and greater value, giving them more reasons to shop with us.

As I step into the CEO role, we have more work to do, but our immediate priorities are clear: improving comparable sales and customer traffic. We are already taking actions that will affect the fourth quarter and shape our plan for 2027. Today we need to do more to support our customers and strengthen the Sprouts proposition to be more accessible and affordable. Our efforts to date have not been enough, and our current pricing strategy has not delivered against that goal. This means making more meaningful price investments across a broader range of products.

To that end, we are rebuilding our pricing strategy, and we'll roll it out nationally in January when Sprouts is most top of mind for healthy solutions. This is not a shift to broad-based discounting or an effort to compete on price alone. Our objective is to offer more compelling value within our differentiated proposition by offering a greater role for Sprouts brand, innovative products across price points, value on healthy essentials, convenient meal solutions, and a personalized experience to help customers discover and save.

We have seen encouraging customer response to assortment innovations such as wellness goals, price below $10, $29.99 family meals for 4, and fresh baked organic sourdough for $4. These are examples of how Sprouts can combine differentiation, quality, convenience and value in ways meaningful to our customers.

We need to build that response and go further. For the holidays, we are going to be reducing prices on healthy and holiday staples across the country, a deeper investment on the key items most important to our customer and what drives them into stores.

Supply chain will remain a significant self-help lever to drive profitability. Greater control over freshness, service levels, inventory and shrink will help us respond faster to changes in demand and improve execution over time. We are now planning the next phase of self-distribution with a selection of Sprouts brand products representing a logical next step as we look to expand the benefits of our network.

Technology will also be another critical enabler. Modernizing our systems and selectively applying AI will help us connect data across the business, move faster and scale more efficiently. The growing amount of first-party data captured through loyalty will deepen our understanding of customers while giving our marketing teams better insights into reaching prospective customers who most resemble our loyal shoppers.

We recognize these investments will affect our near-term margins. Our immediate priority is to strengthen the customer proposition and support healthier traffic and sales. Over time, we believe stronger sales performance, together with expanded self-distribution, improved retail media, vendor partnership, sourcing initiatives and continued cost savings can help us rebuild profitability and create long-term shareholder value.

As we look ahead to 2027 and beyond, we have 3 jobs to do, all grounded in serving our customers better and giving them more reasons to choose Sprouts. First is to grow our reach. We will continue opening high-quality new stores and expanding e-commerce, bringing Sprouts to more customers and making it easier for them to find the unique items they need.

Second is strengthening our model. We need to accelerate the differentiation that brings customers to Sprouts and make healthy eating more affordable. That means increasing the pace and impact of innovation, investing where value matters most, and improving freshness and availability, all while preserving the distinctive experience our customers value. We are also evaluating opportunities to refresh the experience in our stores and make our products and solutions easier to discover.

And third, build what's next. We have the potential to become a stronger partner in our customers' health journeys. Our forging team will keep Sprouts at the forefront for their health and wellness needs, partnering with emerging brands early in their journey in developing practical solutions, their evolving priorities through our Sprouts brand. Connecting that differentiated assortment with deeper customer insights and more personalized engagement will help us deliver practical solutions that are relevant and easy to discover.

In addition, our culture will remain a fundamental differentiator in how we win. Our approachable, knowledgeable team members and their personal connections with customers are central to what makes Sprouts distinctive. As we grow, we will continue to strengthen that culture, both in the experience we deliver to customers and in the opportunities we create for team members to learn, grow and build careers. That commitment underpins the freshness, service and consistent executions customers experience in every store.

In summary, we are clear on our direction: put the customer at the center, extend our differentiation, improve affordability and build the capabilities to unlock value for our customer and our business. We are clear on our priorities and are moving with urgency, while continuing to refine our longer-term plans. Sprouts has a differentiated model, a large and growing customer segment, compelling unit growth, and a great team and culture that's hard to replicate. This gives me confidence in our next chapter and our ability to create long-term value for our customers, team members and shareholders.

Now I will turn the call back to Jack.

Thanks, Nick. Before we close, I want to thank our team members across the company. The progress we have made in helping people live and eat better is a tribute to the thousands of team members who show up every day committed to our purpose, our customers and each other. My greatest privilege has been working alongside this team and watching what can be accomplished when we work together.

As Executive Chairman, I'm aligned with Nick and the leadership team on the challenges we need to solve and the actions we are taking. These changes are required to meet the needs of our customer. We will be working closely over the next few months on our short and long-term actions that will reposition Sprouts for future growth.

And with that, we would like to turn it over for questions to the operator.

[Operator Instructions] Our first question will be coming from the line of Seth Sigman of Barclays.

A few key questions here. So when we look at the fourth quarter guidance and the implications beyond, it's a really big change in margins versus what was implied before. It looks like a 100 basis point swing at least on the gross margin. I understand the urgency. But what gives you confidence to make such an aggressive change now? Maybe if you could speak to the testing, the case studies that you've seen that give you confidence to make the big changes in the investments that you're speaking to here in the fourth quarter.

Yes, Seth. It's Nick. We've been paying very close attention to what's going with our customer. And as we look at what's happening in business right now, as I mentioned in the call, we are focused right now on getting our customer back in our stores and driving sales and transactions. And as we look at what we've seen from the customer, both in what they tell us and how they respond through their wallet, affordability is the key current issue we need to address and solve.

We -- they made it clear to us that what we are doing isn't far enough. We have confidence in what we're doing, because a lot of the things we did early in the year have shown promise. Like I mentioned, we've been invested in innovation with health and value together. We've seen the customer respond. But it wasn't deep enough or broad enough to move the customer and move transactions as we need.

And so rather than wait over a longer period of time, we're acting with conviction now because we believe in the long-term health of the model. We're not going to let the customer fade away from us. We're going to make moves to get them here and to get the business back on track and recognize the potential of the long-term model with a healthy customer, strong market, great performance in new stores and additional growth.

And Seth, this is Curtis. I'd just add, I mean, the other part of Q4 is shrink is not where we want it to be right now either. So we expected that to be a tailwind, and it's continuing to be a challenge. So from a year-over-year perspective, again, shrink isn't where we want it to be. And then obviously, we've got the fuel challenge that continues to be elevated.

So a couple of other pieces within the fourth quarter. But again, we feel to take bold action now to take care of the customer and keep moving forward with that.

Okay. That's helpful. Look, I guess the message is that this is not a 1-quarter dynamic. So some of these investments are going to wrap into next year. Can you give us some perspective today on what the total level of investment should look like from a gross margin perspective? I guess the concern would be that your gross margins are still significantly above where a lot of other folks in the industry are today. And so where does that need to get reset to?

And then -- and just the last piece related to that, maybe you could speak to the ways that you can fund that, whether it's through media or vendor funding or supply chain. How should we be thinking about those as potential offsets to these investments?

Yes. Seth, it's Curtis again. Yes, so when we put the kind of the 5% in there to help understand what the level could be, obviously, we're going to take dramatic action here with the gross margin bit and get the affordability investments and the next wave of those going in the very near term and short term. What we'll watch closely is the customer responds to that. And that will help us pace the timing and the depth from a gross margin perspective.

As you highlighted, we have lots of self-help opportunities, we talked about over several quarters now and the things that we'll be landing here in 2027 and beyond. And so self-distribution, the retail media, the opportunity with the data from the loyalty program and vendor partnership there, all opportunities all still in front of us to go unlock value in the P&L and create some offset to the affordability investment. Again, what we need to understand now is how is the customer is going to respond to this next wave, and that will give us a lot of clarity into February and into 2027 guidance.

[Operator Instructions] Our next question is coming from the line of Rupesh Parikh of Oppenheimer.

So first, I guess, on unit growth as we look to FY '27 and beyond, just given some of the challenges in the core business, how does your team think about potentially slowing unit growth to maybe improve or stabilize profitability even faster?

Rupesh, it's Curtis. Yes, I mean, clearly, we're going to have to think about that as we look ahead. It's going to be a strong part of our story going forward. We continue to be pleased with the new stores as they've opened well, they're comping in their year 2, 3 for the last few vintages. So it's a high-return vehicle for us. But we've got to balance that with the other needs of the business. And we need to balance our investment portfolio to address traffic in the core store challenges. But we do believe new stores is going to continue to be a strong opportunity for us.

Great. And then my follow-up question, just on traffic. So as you look at some of the new efforts that you're doing, are you seeing any green shoots or just your overall confidence you have in actually being able to improve traffic with the new efforts underway?

Yes, Nick. We are. What we've seen is some of our efforts that we've made across either pricing affordability investments or affordability investments in the product side have seen some fruit. As I mentioned in the previous question, it just hasn't been enough to move enough traffic to our stores. We've seen really good category response and item response, but it hasn't been broad enough or deep enough to do so. And that's what gives me confidence that the investment we're making in some of the things that are most important to our customers that builds trust, that provides access to key health categories and the items that hear about most is going to continue to drive traffic.

I also go back to what I said in the call, we've seen good results with e-commerce. We've seen strong results with our new stores. And so we know the model and the proposition is very strong. Our customers tell us that. So you'll see us continue to lean into that.

And then we still have a lot of areas where we can continue to focus on how we win. Our innovation is growing in our stores. The areas where we've innovated continues to show strong growth. As I mentioned, we've got really good marks on our store experience, and that will continue to be a key area. E-commerce, Sprouts brand and then the continued development of loyalty and personalization all give me a lot of confidence in our ability to continue to grow.

And the next question will be coming from the line of John Heinbockel of Guggenheim.

Nick, to start off, can you -- when you think about breadth and depth of -- you didn't go deep enough or broad enough, which I'm not sure both are equally an opportunity, but where do you see, which one is more important?

And then I know the unengaged member or the unengaged customer was not responding. Have you seen weakness spread to the more engaged customer?

Yes, John. I think as we look at the -- what we've learned and also what we're looking at as we rebuild our pricing strategy, I think I'd kind of put it into 3 buckets when I think about breadth. Number one is there's an opportunity for us to provide more affordable entry points in the categories. So think about that as really a place where Sprouts brand can play, things like cage-free eggs or [ roam ] and in areas where we haven't been as affordable entering in new -- some key categories for us.

The second part of the breadth on the strategy is around trust builders, those kind of higher frequency, more competitive items. Think, in our case, like conventional produce. I think we've got room to be much sharper there. We've done a great job on organic, but that's an area where I see a lot of opportunity for us.

And then the third bucket around breadth is the -- as I -- we're calling the target customer KPIs. These are the items that drive customer choice in their healthy options and selections, Think of these as things like organic grass-fed beef. And that's where I look at the breadth and where we're pointing our pricing strategy. The depth will just depend more, John, on market, and we're going to make sure that we're right by market and be more focused there. Some we're in a good place and some we have more work to do.

The second question on the customer. You're right, the less engaged customer has been the biggest driver of our traffic decline and footsteps into the store. But to your point, we have started to see it a little bit more with our core customer. They're still stronger, but we've seen a little bit of softening in behavior, which was one of the key indicators for me and for us that we need to take action now.

And then my follow-up real quick, when you think about the spread, right, between new to our productivity, has remained very, very good, the comps have softened, how do you assess that, that increasing spread between the 2. Usually, they kind of track together at least a little bit.

Yes, John, it's Curtis. It's unique. I think it's not what you would expect to see. And that's -- again, the new stores have continued to perform well, and we're seeing good response when we open new stores. And so on the one side, that's positive for us, that the new stores are performing the way that they are, and we haven't seen as much of a challenge in the new store portfolio. It's the core stores that we've got to do a better job with, and the things that Nick spoke about there and what we're getting after here in the very short term we're really addressing that core store challenge to improve the comps.

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

Curtis, if I heard you right, you noted that you expect EBIT margin to remain above 5%. The 4Q outlook, obviously, implies something quite a bit lower. I'm just trying to think about maybe the progression of EBIT margin. Should we be thinking about 4Q is kind of the low point for margins and then you return to this 5% plus? Just any color there given that 5% comment?

Yes. Q4 is always our kind of lowest quarter from that perspective. We're typically -- we've got the full weight of the new store vintage out there. It's a lower sales quarter for us. January is our Super Bowl, as we say, and that's our fresh start to the new year. And so we see our strongest sales in January. And we're a little bit softer usually in the holidays where we're less top of mind maybe for customers. And so that's a typical kind of historical phenomenon.

And then within that, you've got some of those unique challenges. Last year, we saw the business slowing in the fourth quarter and we took some action, pulled forward some changes from a labor perspective, accelerated some of the investments in that space to try and manage it. As we talked about throughout the quarter, we can kind of work our way through a few quarters at those lower comps, but the longer you go, the more challenging that gets.

And so we got our new stores opening up, we've got our investments landing, and the comp just simply isn't where we need it to be. So I don't expect that to be indicative of the shape of Q1 or where we're headed. It's a little bit more of a 2026 Q4 phenomenon.

And as I just mentioned a couple of questions ago, shrink is not where we want it to be either. That is higher than it should be. Some of that is the sales and some of that is we got to continue to a better job managing our inventory and our SKUs and in and out and all those things. So a few different kind of Q4 '26 specific type phenomenon, not particularly indicative of where Q1 or Q2 or Q3 [ were ].

Okay. One more follow-up, I guess, on kind of this 4Q versus 2027 dynamic. There was the reference to some planned actions really coming in January, but also mention of some deeper investments as we think about the holidays. So presumably kind of November, December. Is that like the experiment time where you kind of over-invest in price and see what sticks, and that's where January you start to institute more permanent changes? I mean, what's really, I guess, in mind for this nearer term versus what comes in January?

Yes, Tom, a couple of things. So first off, as we have mentioned, we're rebuilding a pricing strategy, and we're putting some of those elements into market now, to help us kind of learn to be prepared for January overall. So we're rebuilding now with the input or the belief or the plan, excuse me, to launch in Jan. So we are doing things in market right now to test and learn.

And the other thing I mentioned is we are making action now on items that we know right now drive transactions for our customer on the healthy holiday essentials that matter most. These are areas that we can go deeper right now where a customer needs it for the holidays and to help drive more traffic into the store. As Curtis noted, January is our -- is kind of our win time. That's when we're most top of mind for our customers. And so that's why we wanted to go national with the strategy with all the noise in the holidays in November, December. We're using this to get ourselves ready to take care of the customer in Jan, but at the same time making moves right now to serve them within the things they need most over the holidays.

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

So I wanted to start with a follow-up on shopper behavior by customer type. It sounds like it's starting to impact your core customer a bit as well. When you think about it from an income cohort perspective, are you seeing pressure across the board? Or has it been more isolated to call it the lower third? In other words, are headwinds starting to creep up even the income chain?

Mark, so what we're seeing -- what hasn't changed at all is that the less engaged customers is still where we're seeing the biggest leakage. So that's been the case. And within that customer set, there is a -- it's a larger impact with slightly lower income. So we are seeing that.

What's changed recently is we've seen a little bit more of an impact on our core customer, slightly fewer units in the basket, a little bit of softening on the trip side. And we see it generally across the board. It's not strictly based on income level, but we're seeing it overall with that customer, which is, as I mentioned earlier, why I just said that we need to make a change and make a move now to take care of the customer and get the margin set up to allow us to do that.

Great. And then on competition, you talked about it accelerating in the space. Are you seeing it both at natural organic focused retailers as well as the conventional players? Do you think more customers are shifting their natural organic spend over to mass and conventional just because of where prices are at, even if it's not necessarily something they prefer to do? And how do you think about best approach for advertising your new strategy and making sure they're aware of what you guys are able to do on that front?

Yes. I think there's 3 factors in this that I think all play together. We are seeing competition across a number of channels, continue to chase the health of the customer, which we think validates the opportunity in the space that we believe in the long term. So we're not surprised by that. We are seeing it happen.

As we've talked about, affordability is a challenge for the customers in this space. And then the third piece is the macro is not helping, right? I think that's only exacerbating, making it tougher for us, making it tougher for the customers. So those 3 things together, I think, are what's impacting the customer.

From a competitive standpoint, I'm not surprised that they're continuing to play more in the space. I think it's, overall, we're seeing customers migrate to value channels, which is another indicator that affordability is a key opportunity for us. But I feel really good about our ability to win and compete in this environment because our whole model is built to serve the needs of this unique customer, not just about the items that some of the other people will carry.

So as I look at our core competencies of innovating, a really fantastic store experience, those are our strongest muscles, and we need to flex them faster and stronger to serve the customer where they are now. And I know we can do that to help offset any competitive challenges. And as I mentioned right now, invest in affordability to help the customer mood that is a barrier to come to stores.

Kelly Bania of BMO Capital Markets.

Also I just wanted to go back to gross margin here, and 2 questions. I guess as you look at the fourth quarter, I think you said 90 basis points of deleverage. How much price is in that because you mentioned shrink, fuel, I'm guessing some sales deleverage impact, so just trying to understand how much price is in the fourth quarter?

And this comment that you are committed to maintaining EBIT margins above 5%, I mean, how can you commit to that? Where do we -- where do gross margins -- where do you think gross margins can settle out here?

Kelly, it's Curtis. Yes, the gross margin will go maybe in reverse order. I mean certainly, that 5% creates a lot of space between where we are today and that mark. So it gives us a lot of room to assess the things that we're going to go do. We're going to make some investments in the gross margin. I think the lion's share of the P&L impact will come through gross margin and that affordability investment, the technology and the supply chain activity, a little bit of SG&A, but a lot of capital in that space. And that's -- some of that's already kind of built into the model and the way we think about capital going forward.

So those are things that we're going to go after and we'll see what the customer response is. Obviously, we're talking about traffic being a priority and traffic first and repairing that with the customer, and then we go from there. So the investments we'll make here between the holiday activity and the January pricing, and then we'll see how the customer responds. And then all those self-help levers we have over time become optionality for us to continue to go further if we need to. So we feel like we've got some space now to do what we need to do. We'll see how the customer responds and we'll again adjust the pace and the scale accordingly.

And when you see how the customer responds, are you targeting any specific price gap to competition? Or do you just kind of monitor it and say, once traffic kind of stabilizes, that's how we'll see how the customer responds, if things start to stabilize? Or do you have a specific price gap in mind?

Kelly, it's Nick. We do have a more competitive position how we're looking at the strategy and by market and by category, but most importantly, by the things that are most valued by our customer on the gaps we want to have. I think if you look at it, we were at more of an item elasticity model in the past, and we're shifting to a customer and solution model across the products. As I mentioned, I think, in John's question around the areas of focus for investment around entry points, trust builders and our key items for target customers, that you'll see us invest in.

And then we'll measure it based on units, transactions in the store and the customers coming back to our site in store, and that's how we'll measure and they'll tell us when we're in the right spot.

Our next question will be coming from the line of Krisztina Katai of Deutsche Bank.

So I wanted to follow up on the test, right? You've said a strong item and category responses, but did the stores where you tested these actions generate better total store transactions and frequency versus the control stores, just how much of the unit lift is incremental versus customers simply shifting purchases to the lower-priced items?

And then as you're thinking about the broader price investment, just how should we think about how broad that is in terms of what percentage of the assortment do you realistically need to touch for the consumer to really respond through increased trip frequency?

Yes, Krisztina, it's Nick. If you think about your second question on where we'll look at it, I think as I've said, what we learned from the tests that we've run in the past is that we weren't brought enough in the number of items that we needed to focus on, and it wasn't broad enough to make an impact on the overall customer traffic to store. We saw a movement within, again, item and category, but we didn't see enough to the customer, and the ability to tell the story and make sure they understood what we were doing to invest in them. And so that -- some of those learnings that we've captured is what's informed, as I've mentioned, a broader investment across the business.

As I mentioned earlier, there's a number of key areas around entry, trust and the key items for our core customer that we're investing in. It's a much more substantial part of our assortment than we've done in the past, which is why we reflected in the margin and the guidance we've had for you today.

Got it. And then just as a follow-up, should we interpret the above 5% EBIT margin comment as a conservative 4%, so likely the trough? Or is that a reasonable planning range for 2027? And what level of comp rate would that also assume?

Yes. I think right now, Krisztina, I think, again, 5%, yes, we would hope that that would be the floor, and that's the idea. We've got the room now, but we've got to really assess this next wave of activities? And is it enough? And could it be better than that if the customer really responds? That's what we'd hope to see.

But we've got to put those things in market. We've got to work our way through the holidays and into the January time frame and see how the customer responds to that. And so we're not ready to guide for 2027 or speak to the comp as it relates. But that's the idea now, is we're investing now, we're going to see the customer response and then we'll have, obviously, a much more specific answer in February for guidance for '27 and beyond.

Your next question is coming from the line of Robert Ohmes of Bank of America.

Two quick follow-ups. I think my first question is just on -- what -- can you give any more color on marketing changes you might be making to drive traffic or maybe educate people out some of the pricing changes you're making?

And then the follow-up question would be ahead of time, which is just Cyclospora from here, what kind of a headwind is it to comps?

Robbie, it's Nick. I'll take the first question and pass to Curtis. On the marketing changes side, as I mentioned, January is a key month for us, both for acquiring new customers and then traffic with existing customers. And so as we look at how do we go to market in January, the affordability investment and the pricing will be part of our go-to-market story and the marketing story we tell as we do so in Q1.

I think the other thing I would tell you on the marketing side is one thing that is really clear to me and you're going to hear a lot from me in the future is we have got to continue to understand our customer better, serve them better and run our business through them more. And so we are at a place where we can start to unlock more insight in the customer data we've been capturing and use that to drive not just the market, but even the merchandising and product development work we have.

And so that's an area that you'll see us use that will unlock media, unlock more retail media for us, unlock acquisition, and then certainly serve our innovation and forging work overall. That will be something that we take advantage of here as we begin 202y.

And then, Robbie, on the Cyclospora, we called out the 60 bps in the quarter. It kind of peaked for us in that August, early September time frame. It was a little bit higher than that, and it's gotten progressively a little bit better since. It's still a slight headwind as we sit here today quarter-to-date for the fourth quarter. But we are seeing it start to improve.

And our next question is coming from the line of Scott Marks of Jefferies.

First thing I wanted to ask about, Nick, on the previous question. You started to touch on data a little bit. And I don't think we've heard as much recently about the loyalty program. So wondering if you can just update us with where you are on that, what kind of engagement you're seeing from the customer and maybe how you've been leveraging that to this point if you have?

Scott, so as I mentioned, overall, I mean the data is going to be a key unlock for us. We are about a year into the launch of the program. As I look at it, I think we've made progress, but it's not as far as we need to be. We've been talking about our -- the work we've invested in that program to drive customer value and customer behavior. We've gotten -- we are now at a place we've got a good set of data and talent capabilities to then start to bring that into the organization in a bigger way. And we just barely cracked the surface of it, to be honest with you. That's why I'm excited about starting to do more of that moving forward, and understanding customer needs, understanding the key solutions and need states customers have.

Look at the business, the importance of item and attribute is significant, but where the customer is moving is into how to use those to solve key need states. So I talked about we're going to continue winning gluten-free, but we also need to own gut health because that's the solutions where people are going, and we can start to use our data to unlock that.

And so you'll see us do that. And I think it's important to remember that for us, our value proposition starts with a target customer with healthy, innovative, fresh, convenient solutions for our customer. And then the affordability piece is going to be the layer on that removes a barrier to enjoy and come back to Sprouts and the stores they love. And we'll continue to go to market in that same way.

Appreciate the thoughts there. And then maybe just secondly, you've highlighted a number of areas where you think you need to invest in affordability. Wondering if you can just help us understand, maybe as we look across departments within the store, maybe what departments have you seen that have been more challenged versus ones that have been maybe a bit less impacted by some of these affordability challenges?

Yes. So a couple of things. I think let me start with what's relatively consistent across all categories, and that's where we are distinctive and innovative with where the customers' needs are, that's winning. And we're driving newness in those spaces, whether that be in frozen or in bakery and deli, innovation, newness around health, convenience, freshness and value is working across all categories.

I think where we've seen opportunities is in areas where we have maybe a little bit more overlap or similar overlap. We think about our produce business, to me is a key area of opportunity and focus. Our meat business is one where another area where we can continue to differentiate and win in that space, but I think we also -- that's where I look at meeting the customer where they are from an access and affordability standpoint is where we have a good amount of opportunity.

The next question is coming from the line of Greg Melich of Evercore.

I wanted to follow up on the e-commerce growth of 12%, now 16% of sales and adding Shipt under the platform. Can you maybe describe how that growth is accelerating and just what you're seeing in the baskets there? And when you think about the reset of margins, how you want to lean into e-commerce?

Yes, Greg, I'll start, this is Nick, on e-com. We've mentioned this in the past, but I do believe that's a really strong indicator of the strength of our proposition where we have these items that are harder to find in other places. And for customers who can't make the trip to the store, e-com is a really great opportunity for them. And it continues to be a growth driver, and I think a proof point of the strength of our model.

On the behavior itself, that basket is a bigger basket. That customer is an omnichannel customer. And as I mentioned in the call about the focus on grow, this is an area of a lot of opportunity for us. While it's 16% of our sales, it's still relatively low penetration on the number of our customers. And as people become more aware of what we can do in the e-commerce space, we provide more access with both our own channel and our partners, I think this is an area of continued growth because the customer tells us this is how they want to shop Sprouts when they can't make it to our store.

Got it. And then a follow-up on -- you said the newer stores are just doing better. I guess when you look at those, is there something in the store that you're seeing in those that you can -- you're thinking about rolling out to the existing chain, maybe a few things that stand out?

Yes. I think part of the credit to the new stores, we've -- I think we've done a really great job with putting those very close to our target customers, and the teams in the stores have done an amazing job. As I mentioned in the call, I think there's an opportunity for us, and we're actually moving now on looking at some of our more legacy stores and core stores and looking at ways to refresh some of the experience there and bringing together, whether it's more merchandise in the categories that are working, improved ways to find and discover our innovation and our forging work improved ways to highlight freshness in the stores, I think that's an opportunity for us. And we're starting to work there and putting some tests in the market soon, to look at the fleet and the existing fleet and ensure we keep up with what we're seeing in the new stores.

And Greg, I would just add, this is Curtis. Again, the same way that we've reshaped how we pick sites leveraging customer data and understanding the uniqueness across 72 Mosaic is an opportunity now as we look back into the core stores and identify the ones that aren't doing as well as others. And you use that same data to really understand the pockets of the customer that are struggling a little bit and where we need to do a little bit more. And so that's work that's ongoing as we continuously learn opening new stores and looking back at our fleet. I think that -- leveraging that data set the way we have to pick better sites will also be something that will help us to reinvigorate growth in the core.

Our next question is coming from the line of Samuel Barton of Melius Research.

I just wanted to follow up on the data in the retail media. Wondering if you guys had a view on agentic shopping and how it might relate to less human traffic through the site if more shopping is done through an agent and just the quality of data as a result?

Yes, you bet. We've certainly taken a look at it both on what's happening around us and in our space. We haven't seen anything to indicate that agentic shopping is having a negative impact on us. And rather, we're looking at how do we lean on that as a way to continue to help customers find the unique needs. I think that's where you'll see people, in our space, use that shopping is to help continue to solve the need states and solutions that we're uniquely positioned to deliver. And we're certainly looking at some things in the commerce experience right now that can help us stand out and do so. We're not ready to speak about at this point. But I don't believe there's any negative consequence that we've seen so far from the world of agentic shopping.

And I'd just add as far as data goes, I mean that -- it's critical to have your data in the right place as we look ahead to leveraging AI across the business. And so that's -- as we talk about technology investments and modernizing what we're trying to do in the technology space, certainly, data is going to play a big role in making sure that we have that in the right place, and that will be a place of investment for us here going forward.

Our next question is coming from the line of Scott Mushkin of R5 Capital.

I actually have 2. I wanted to drill down on pricing just a little bit. It seems like when we look at our data that the pricing in produce, and I think, Nick, you alluded to this already, there's some challenges competitively in traditional or conventional produce. And I was just wondering as you think about margins going forward, I'm not sure that's going to go away. And so as you reset, do you think you've kind of accounted for that?

And then the second thing about pricing is just as we go through the rest of the store, the affordability with a lot of your stores in more middle-income areas how do we think about those items and the affordability there and what you can do? And then I have a follow-up.

Yes, Scott. Let me start with on the produce side. As I mentioned, it goes back to, I think, what we're seeing in the market. There is intensifying competition. That's one of the spaces in produce where we are seeing it. And then coupled with the affordability challenges in the market and the macro, I think the customer is making choices on what they buy there.

I look at producers again as a business of strength for us. We sell a lot of produce. It's core to who our customer is. It's core to our value proposition. We have a strong capability to source it and find good costs and deals to pass on to the customer. I think the opportunity for us is how do we be more balanced and how we do that across conventional organic, as I mentioned, for us, and the right commodities at the right time to do that. And the teams are working that and putting that in place as we speak.

On the affordability side, on kind of -- I think you were saying kind of mid markets. This goes back to, I think, what we're seeing from our customer is breadth of offering to help these customers who are health enthusiasts that may not have the highest income, giving them affordable entry points, as I mentioned. Like if you want to have a healthy specialty egg, we have an amazing Sprouts brand cage-free egg, we need to make sure it's affordable every day to get into.

I talked about the conventional produce space. And then as I've talked about these target customer items that are most -- that are drivers of choice for healthy options, that's the third area where whether you're higher middle or low income and you're looking for the healthy options for our unique customer, we just need to be right every day on that, and that's where -- one of the areas we're making an investment.

That's great. And then my second question is around execution and the consistency of that execution, particularly in the produce area. So we've seen obviously some of these -- I mean, it's not obvious, but we see it, some of the mass merchants, particularly Walmart, have really improved their execution in produce in particular. So how do you think you guys fit into that? We've seen in our store business some inconsistency there. So how do we -- how do you compete and make sure your execution is where it needs to be in the marketplace?

Yes, Scott. I think a couple of things. One, our customers tell us produce is still a really key reason why they choose us and why they love us. And I think there's always opportunities to improve execution, but our customer still tells us that they like our produce and they like the experience of it.

I think as we mentioned, when we're not moving the units as fast as we need to, that challenges that model [ and so on ], on freshness and on shrink and the customer experience, and that's part of why, I think, being better on pricing across the board in produce will increase unit velocities, will increase freshness. Volume will drive freshness, as you know. And I think that's going to help both sales, but also the customer experience.

And there's some work we continue to do in assortment to make it easier for our stores to execute. I think we ask a lot of them in the differentiation we have. We'll continue to differentiate. I think we can get tighter and simpler in how we execute produce in stores to continue to be the leader that we are in the produce space.

And this does conclude today's Q&A session. I would now like to turn the call back over to Nick Konat for closing remarks. Please go ahead.

I just want to thank everybody for joining us today, their interest in our business, and I look forward to connecting with many of you on our business in the future. Thank you.

Thank you so much for participating in today's programming. You may now disconnect.

Hello, and welcome to Sprouts Farmers Market Second Quarter 2026 Earnings Conference Call. At this time, all participants on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]

Again. I would now like to hand the conference over to Susannah Livingston. You may begin. .

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 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 investors.sprouts.com.

During this call, management may make certain forward-looking statements including statements regarding our expectations for 2026 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings and the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures.

With that, let me hand it over to Jack.

Thanks, Suzanne, and good afternoon, everyone. Our second quarter results were in line with our expectations, and the core elements of our strategy remains 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 remained challenging.

With customers continuing to make thoughtful choices around a healthy go-through spend, and we continue 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. 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, loyal team personalization, innovation, real estate, supply chain and our teams. Curtis?

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 a 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 spent 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 investment 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 the 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%. The 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 and capital expenditures of $186 million, net of landlord reimbursement. 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 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% and 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 on closure of an underperforming store with an expiring lease. Earnings before interest and taxes is expected to be between $675 million 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 onetime 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 million 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.

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 we eat, and we are committed to making healthy, clean fruit, 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 vitamin sale and 999 wellness polls for example of 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 were targeted price and affordability actions can have the greatest impact on engagement. Forging and innovation remain key strengths and they continue to outperform overall company growth.

To 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 matters to our customers, including organic seed oil-free fiber, gut health and protein solutions. These products help reinforce why customers choose spreads. With our exclusive partnership, [ Pasture BurgChicken ] is now available nationwide at Sprouts and products like better pop and bets 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 darn purchase loyalty and personalization remain important to 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 1 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 Sprout's unique position and bring the brand to it. We'll continue to tailor our messaging to highlight health discovery, the unique products that distinguish Sprouts 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 who Sprouts distribution centers. This gives us greater control over freshness, service levels on 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 brand SKUs as we look beyond produce and meat to the next page of this work. New stores remain 1 of the clearest proof points of the strength of our model. Performance continues to be strong, and our teams are selecting great sights opening stores efficiently and bringing Sprouts 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 team remains the heart of the organization. our team members bring the trough experience to life every day from the quality and presence 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 value proposition and position the business for sustainable growth. We appreciate your continued interest in Sprouts and look forward to keeping you updated on our progress in the quarters to come.

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

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

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?

The Q3 guide leaves the possibility of it negative confident. I'm not sure if you saw that in July. And was there any impact from [ Cyclespora? ] And then just remind us of the compares by month moving forward now? .

Sure. Yes, this is Curtis, lots in that. So comp cadence sequentially improved through May, as we said in the script, June was a tough month. That was really the end of kind of the challenging LY compares last year in June, 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 are -- we're within our guidance range, just slightly negative for July is where we landed. And then on cyclo it's really live. Right now, it's been really the last 2 weeks where we've seen a bit of impact on the business. And so we're really just kind of deal with that real time. I mean, first and foremost, Food safety is our #1 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'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 to -- 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. .

Okay. And 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. .

We're being very focused on trying to look at for our customers on those items that matter most. And the tests that we've done, as we said, have been mixed in different departments have done different different items have performed differently. And the challenge for us is making sure that everything we're doing fits in within the model that we're working on.

So I'll maybe let 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.

Yes. Ed, kind of 3-pillar approach to the affordability work we outlined. The 1 that I think is showing the most growth and really happy with what the team is 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 brand with innovation in the healthy essentials. So I'll give you a couple of examples. We're launching [indiscernible] l free frozen potatoes that are now top in the category. We're just about to launch a $4.

Actually, we did just launch a $4 fresh baked organic solar overhead. 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 and loyalty and our personalization efforts, and the acceleration of the learnings you've had in the first half of the year and the third quarter to help continue to move our existing customers.

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

I just wanted to follow up on Ed's first question around the comp. So 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.

Yes. I think the questions are with regarding back, we're feeling free to and about that going 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 -- our guidance is something that we feel very 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.

Okay. That's helpful. Maybe just a quick follow-up on that we'll stick with the comp here. I mean just maybe more color on the drivers, how you're thinking about traffic versus units versus AR kind of as we move to 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.

Yes. I think we expect sequential improvement in traffic for sure. Yes, units and traffic should get better. It's not going to come from 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. .

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

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'd 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 of stores is the difference, but anything else on top of that?

Tom, it's Curtis. Yes. I mean really the EBIT midpoint to midpoint $5 million change is really fuel. We're just looking -- as we spoke about last time, we covered it off -- and -- but we said we didn't have it covered in the second half, and we weren't -- we're going to wait and see how that played out.

Obviously, it remains elevated, and has been pretty volatile. And so we're embedding $2.5 million a quarter in the second half for fuel. .

Great. And I also wanted to ask on some of the, I guess, vendor participation that was noted and then 1 of the earlier answers, you noted focus on accelerating personalization. With loyalty rollout, are you starting to drive increased support. I think that's 1 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. .

Tom, it's Nick. I would say we're still early stages and that I mean we just started opening an 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. And we're 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 will be something we continue to push over the next number of years.

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

I 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 2 categories between perishables and nonperishables, 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?

Kelly, it's Curtis. Yes, I think units in the basket produce is always a lead because it's 1 of the larger -- it's the largest unit count in our average basket -- but we -- 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 customers 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.

And so as far as what we're doing, I mean, I think the things that we are doing from a loyalty and personalization perspective, certainly, that should help on the unit front and from an affordability perspective, that will help on the unit front and we're seeing some good progress on units in the tests that we're doing, as we alluded to earlier, 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.

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 seems so critical to the Sprouts merchandising strategy. How do you balance that? Or are you trying to figure out where to put more or less investment between those categories? .

Kelly, I'll take that. It's Nick. We start with our customer and less -- think about it less around fresh and nonperishables and more around what's in the customer's basket and what's most important for them. And for us, I think you've heard me talk about the healthy essentials. It's organic cheese. It's organic bread, it's organic meat, and it's obviously organic produce. So it's across the board nonperson pairs flow 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 brine and then making the selective investments to ensure that they're more accessible. So we look at it from a total customer standpoint, and we've seen good success in fresh right now because I think that's a good driver for the customer on meals and meal solutions, but look at it holistically across the store.

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

And can you guys address cohort performance demographically, right? I'm thinking -- you've talked in the past about the emerging health enthusiasts right, perhaps having more affordability issues. So 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? .

John, it's Nick. I think the broader headline -- the 2 headlines for me on the question of working that. I think 1 is the macro is tough and it's tough, the customer is proving a 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, are less engaged, lower income customer is the 1 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 in the basket.

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 attribute oriented, to let them know the 1,300 items came in and maybe that's 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 these prompts calls to action about these items. .

Yes. We're definitely doing that. We're seeing it in the numbers. Our innovation, the products that we are -- the new pass 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 be willing to buy the new items, the coms they see with us. So I think that's a combination of the forging work that we continue to do. the strong pipeline innovation that our merchants and forging 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 to continue to drive it even further, but that's been good for us.

Our next question comes from the line of Christina Kata with Dutcheank. .

I wanted to follow up on the affordability test. You've noted that you're seeing improving unit movement, but it's generating this lower-than-expected traffic response. So can you help us quantify the gap there? And you call these test having mixed results. What have you learned about elasticity and just overall customer response that is shaping your second half investments? .

Christine, it's Curtis. I don't -- 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 1 thing -- 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. 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 there'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 test, whether it's in personalization or whether it's in price and promotion.

Yes. And I think 1 of the macro challenges, 1 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 -- 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 -- next 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. .

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. how much of the comp pressure today is coming from these shoppers? What percentage of your customer base would you characterize as lower engage 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.

[indiscernible], it's Nick. I probably don't quantify, but I would tell you that where we're seeing the biggest challenges, as I mentioned in John's question was with the lower engaged customer. It's certainly a smaller portion of our spend in a smaller portion of our customer base. So it's not our core customer, but we'll 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 as they have in the past. I think that's what's driven by in the macro, right?

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

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

Just given a number of players highlighting price investments out there, just curious how you guys feel about your price gaps and just overall what you're seeing on the competitive promotional front? .

Specifics in terms of price cut, we talked fairly consistently with pleasure about that in terms of the important pricing the way we go direct comparisons with the with other guys in our product. So we continue to pay a lot of attention in our projects. We're very pleased with where we are on our organic produce, and it's a fairly volatile market as you as we alluded to earlier.

So produce pricing, we feel we're in a pretty good place in terms of relative to the competition in that space. And with regard to other activities that's gone in the marketplace, and clearly, a lot of people are talking about things that are going on in the marketplace. We are 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.

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

Rupesh, it's Curtis. No, actually, I mean that's 1 of the things we're really pleased about and kind of continues to give us confidence in the go forward and then the strategy overall is the new stores continue to open well -- and it's really across the country, and we'll open them in New York and in Florida and across to California. And so new stores open 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 4 vintages are all positive and again, just continues to point to this is an offer. This is a format. This is a model that the customer is looking for. So I've been really pleased with the new stores.

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

So this 1 -- this builds on the last 1 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 mix is nearing 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 the excitement of the new concept to offset this? Just what are you seeing on that front? .

Yes. Mark, this is Curtis. I think it's -- 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. 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 slower -- sorry, build a little 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 the room we open stores in Los Angeles, we see that very specifically in our numbers. But the mix of our customer base, I don't think it's significantly different from where we are everywhere. .

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 in-source additional categories? Does your experience with meat and see to pull up the time line at all there.

Mark, it's Nick. We're really happy with the work of the supply chain teams have done and the merchants have done and completing the meat rollout that we wrapped up with our NorCal 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 count 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 some 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 a 1 step at a time, learn and 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.

And we're investing appropriately in supply chain. We've built, I think it's 4 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 price brand and some of the core categories is going to be really important to us, and we're investing in it appropriately. .

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

Okay. Good afternoon, guys. Thank 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 the some of the fuel headwinds. So just wondering if you can kind of help us bucket each of those components in terms of contribution from each as it relates to that expected pressure

Yes. Scott, it's Curtis. I think probably the way to say it is it will be pretty similar to what we experienced in Q2. So if you go up and down the P&L the shape of it is 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 source piece really kind of folds into the SG&A pressure. .

Okay. Clear on that. 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 Scott Curtis again. Yes, I think we talked about about $100 million to $150 million 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 -- a 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.

I think 1 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 cannibalized so we can really understand it. We've got much better at that over the last few years. .

Our next question comes from the line of Scott Mushkin with R5 Capital. .

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 Page yogurt priced very well. But then when we see rails made sauce priced way above the market. And I guess I was just curious like 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's time you can actually come up a little bit. .

We will dig into the specifics of those points, Scott, which 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 are we -- what's happening in the category, are we evolving the category? -- or not, which is how important is that category for us. And I think we'll get better at that approach going forward. Maybe you want to see some .

No, I think, Jack, 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 a 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 for the most part, again, the goal is to continue to try to not carry the same thing. And what we do be every day competitive.

And there's certainly opportunities for us to tighten execution, but that's the way we're looking at the business, and that's where we're executing. And that goes right in execution goes right into my second question is that 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, 1 of the bigger challenges was just getting the right store manager in there, making sure the execution was consistent across the fleet. And again, 1 of the things they ran into is when they pushed 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

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 at 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, and we call ourselves routes and making sure we create and grow routes 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 such an important point .

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 and 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 done a lot of great work there to 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 we're continuing to invest in putting more ASMs and store manage in the stores early to help us get people ready to take on a new store 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.

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

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 the trends that you saw in the first half. And as we go into the back half, what does inflation look like? Is it accelerating into the back half? Is it coming through from suppliers and things like that? .

Robby, it's Curtis. The first half is -- second quarter was pretty consistent with the first quarter. We're seeing on like-for-like SKUs, inflation in line with with CPI. And then for us, we always have a little bit of a mix uptick in some of our newer products and maybe more premium innovation driving the AUR up a bit. But on a like-for-like basis, we're 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.

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 in the East Coast. Can you remind us your exposure to the West Coast? And have you seen significant differences in West Coast versus other regions?

We've got a lot of stores in the West Coast. And quite honestly, Rob, 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 had that from others. .

That's great. And just -- I'm going to slip in 1 last one. When you go to Long Island and when you think about opening up Hartsdale in Boston and places like that, do you -- are these higher average store volume markets in general for you? Or or you would not expect that?

Robby, 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 that's challenging for marketing, 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, 1 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 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 at Sprouts 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 there are denser markets. So ultimately, there will be great to once again the awareness where it needs to be..

Our next question comes from the line of Michael Montani with Evercore ISI.. .

Just wanted to ask, first off, on the lettuce impact. We were thinking about an 80 to 120 bps range impact 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 expectations set. And then the follow-up I had was around initiatives that you've got in place that give you confidence that you can drive comp units and stabilize traffic.

Yes. Mike, it's Curtis. On the first one. Again, that -- it's really live, right? It's been the last 2 weeks where we've seen the impacts 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 2 weeks. And we'll be watching it closely. .

It's Nick. I'll answer the second part of your question. I think some of that I 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 we're still -- it's still a lot of testing and learning and 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 then 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 an even stronger way outside of our ecosystem. And also, you're going to see us, I think, get even better about our messaging and communication on 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.

Mike, it's era 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 [Audio Gap]

Our next question comes from the line of Seth Sigman with Barclays.

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 customers, is there anything more you can share about what you're learning about that customer? Where are they coming from? How do they shop across channel, how valuable are they [indiscernible]

Seth, it's Nick. Yes, I'll share a couple of 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 what -- the reason we continue to see it even in a bit of a challenged macro is -- we'll 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 the getting 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 in business, that's a very good thing for us. And as I mentioned in the past, I think what we're seeing is the basket for e-comm and the mix look pretty similar to what you see in brick and mortar, a 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.

And Seth, I'll just add, this is Curtis. 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 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 we want to be wherever they need us to be to service them, and e-com is a great channel for us, and we expect it to continue to grow going forward. .

Okay. 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?

Yes. I think really, yes, the slight difference from the prior commentary is the fuel piece, which does land and gross, and that's a challenge. And I think the answer to the second part of the question is like at is not the right time for us to be pushing through price where the customers, 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. Think within Q3, specifically, there will be just a little bit of an impact from the cyclosporapiece as well, and that's probably the Q3 story, a little bit of fuel, a little bit of cycle pluraand then in the fourth quarter, we've got fuel embedded and where we're going.

And then we do expect the fourth quarter margin to be up slightly, again, the onetime changes in the loyalty program. So we'll be $2 going to $1, 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 onetime benefit there.

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.

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. .

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

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

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

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

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

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

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

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

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

It's very cold in here.

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

I agree.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sea Moss...

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

It's over my head.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The earnings release announcing our first quarter 2026 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website @investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2026 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements.

For information, please refer to the risk factors discussed in our SEC filings, in the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures.

With that, let me hand it over to Jack.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Operator?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thanks.

Thank you very much.

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

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

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our fourth quarter and full year 2025 earnings call. Jack Sinclair, Chief Executive Officer; Curtis Valentine, Chief Financial Officer; and Nick Konat, President and Chief Operating Officer, are with me today. The earnings release announcing our fourth quarter and full year 2025 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website at investors.sprouts.com.

During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2026 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings and the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures.

With that, let me hand it over to Jack.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Do you want to talk numbers, Curtis?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our next question is from Michael Montani with Evercore ISI.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our third quarter 2025 earnings call. Jack Sinclair, Chief Executive Officer; Curtis Valentine, Chief Financial Officer; and Nick Konat, President and Chief Operating Officer, are with me today. The earnings release announcing our third quarter 2025 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website at investors.sprouts.com.

During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2025 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings and the commentary on forward-looking statements at the end of our earnings release.

Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures. With that, let me hand it over to Jack.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And the next question comes from Seth Sigman with Barclays.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And the next question comes from John Heinbockel with Guggenheim.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

No, that was it.

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

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

And the next question comes from Scott Marks with Jefferies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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