Sprouts Farmers Market, Inc. 2026 Q3 Earnings Call

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, Susanna, 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 am 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 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 and 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 EBIT 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 one 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. EBIT 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.