With a combined revenue of $21 trillion and $2.1 trillion in profits, the 2026 Fortune 500 is the definitive list of America's largest companies.

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F500-2021-437-Sprouts Farmers Market

The supermarket chain offers a wide selection of natural and organic foods, and operates more than 340 stores in 23 states. It makes its <em>Fortune</em> 500 debut this year.

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This year's Fortune 500 marks the 65th running of the list.

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This year's Fortune 500 marks the 64th running of the list.

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Wal-Mart stayed on top as its sales crept closer to half-a-trillion dollars. Apple moved into the top five. And UnitedHealth Group continued its steady climb. 

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Founded in 1943, Sprouts Farmers Market is a retailer of natural and organic food products sold under the Sprouts brand. Perishable products include produce, dairy, meat, and bakery goods. The company also offers nonperishables such as frozen foods, beer and wine, vitamins, body care products, and more.

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Sprouts Farmers Market (SFM): Company Profile, Stock Price, News, Rankings

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Sprouts Farmers Market

sprouts farmers market

Today, and thank you for standing by. Welcome to Sprouts Farmers Market third 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 answer session. If you would like to ask a question, you can press star one one on your telephone. You will then hear an automated message advising your hand is raised. To restore your question, please press star one one again. 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 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.

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. With that, let me hand it over to Nick.

Thank you, Curtis. Jack, thank you for your leadership, your partnership, and your commitment to Sprouts. Look forward to continuing working together in our new capacities. For the past four 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, and we are taking actions to improve it. Competition is intensifying, affordability is a bigger driver of choice, and the target customer's 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 and 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 will 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 Bowls priced below $10, $29.99 family meals for four, 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 on 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 three 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. Third, build what is next. We have the potential to become a stronger partner in our customers' health journeys.

Our foraging team will keep Sprouts at the forefront for their health and wellness needs, partnering with emerging brands early in their journey and developing practical solutions to 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 is 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 am 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.

Thank you. As a reminder, if you would like to ask a question, please press star one one on your telephone. If you would like to remove yourself from the queue, press star one one again. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. Our first question will be coming from the line of Seth Sigman of Barclays. Your line is open.

Hey, everyone. Thanks for taking the question. A few key questions here. 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 you could speak to the testing, the case studies that you've seen that give you confidence to make the big changes and the investments that you're speaking to here in the fourth quarter. Thank you.

Yeah. Thanks, Seth. It's Nick. We've been paying very close attention to what's going with our customer. 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. As we look at what we've seen from the customer, both in what they tell us and how they respond with their wallet, affordability is the key current issue we need to address and solve. They've 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. 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.

Seth, this is Curtis. I'd just add, the other part of Q4 is shrink's not where we want it to be right now either. We expected that to be a tailwind, and it's continuing to be a challenge. From a year-over-year perspective, again, shrink isn't where we want it to be. Then obviously, we've got the fuel challenge that continues to be elevated. There's a couple other pieces within the fourth quarter. Again, we feel like we need 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 one-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, so where does that need to get reset to? Then, 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? Thank you.

Yeah. Thanks, Seth. It's Curtis again. So we put 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 response to that, and that'll help us pace the timing and the depth from a gross margin perspective. As you highlighted, we have lots of self-help opportunities we've talked about over several quarters now and the things that will be landing here in 2027 and beyond. 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 going to respond to this next wave, and that'll give us a lot of clarity into February and into 2027 guidance.

Thank you. One moment for the next question. Please keep in mind that we ask that you limit yourself to one question and one follow-up. Our next question is coming from the line of Rupesh Parikh of Oppenheimer. Please go ahead.

Good afternoon, and thanks for taking my question. First, I guess on unit growth as we look to FY 2027 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?

Hey, Rupesh, it's Curtis. Yeah, 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 two, three, four of 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. We need to balance our investment portfolio to address traffic and the core store challenges. But we do believe new stores continue to be a strong opportunity for us.

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

Yeah, thanks, Rupesh. It's 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. 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 that's the items they care 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, so we know the model and the proposition is very strong. Our customers tell us that. CLC has continually leaned into that. 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 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.

Thank you. One moment, please. The next question will be coming from the line of John Heinbockel of Guggenheim. Please go ahead.

Hey, Nick, to start out, when you think about breadth and depth of, you said you didn't go deep enough or broad enough, which I'm not sure both are equally an opportunity, but which one is more important? I know the unengaged member or the unengaged customer was not responding. Have you seen weakness spread to the more engaged customer?

Yeah, thanks, John. I think as we look at what we've learned and also what we're looking at as we rebuild our pricing strategy, I kind of put it into three 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 raw almonds, and areas where we haven't been as affordable entering into some key categories for us. The second part of the breadth and the strategy is around trust builders. Now, 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.

The third bucket around breadth is what we're calling the target customer KVIs. These are the items that drive customer choice in their healthy options and selections. Think of these as things like organic grass-fed beef. 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 their behavior, which was one of the key indicators for me and for us that we need to take action now.

When you think about this spread, right, between new store productivity has remained very, very good. The comps have softened. How do you assess that increasing spread between the two? Usually they kind of track together at least a little bit.

Yeah, 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. 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 has spoke about there and that we're getting after here, in the very short term, are really addressing that core store challenge, to improve the comps. Thank you.

Thank you. One moment for the next question. Our next question will be coming from the line of Thomas Palmer of JPMorgan. Please go ahead.

Hey, guys. Thanks for the question. 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 as kind of the low point for margins, and then you return to this 5% plus? Just any color there given that 5% comment.

Yeah. Q4 is always our kind of lowest quarter from that perspective, where typically, we have got the full weight of the new store vintage out there. It is a lower sales quarter for us. January is our Super Bowl, as we say, and that is our fresh start to the new year. We see our strongest sales in January, and we are a little bit softer usually in the holidays where we are less top of mind maybe for customers. That is a typical kind of historical phenomenon. Then within that, you have got some of those unique challenges. Last year, we saw the business slowing in the fourth quarter and 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. We have got our new stores opening up, we have got our investments landing, and the comp just simply is not where we need it to be. So I do not expect that to be indicative of the shape of Q1 or where we are headed. It is a little bit more of a 2026 Q4 phenomenon. 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 do a better job managing our inventory and our SKUs and in and out and all those things.

So a few different kind of Q4, 2026 specific type phenomenon, not particularly indicative of where Q1 or Q2 or Q3 are.

Okay. Thank you for that. One more follow-up, I guess, on kind of this Q4 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 is where January, you start to institute more permanent changes? I mean, what is really I guess in mind for this nearer term versus what comes in January?

Yeah, Tom, a couple of things. First off, as we had mentioned, we are rebuilding a pricing strategy, and we are putting some of those elements into market now, to help us kind of learn to be prepared for January overall. We are 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. 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 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 kind of our win time.

That is when we are most top of mind for our customers.

I wanted to go national with the strategy. With all the noise in the holidays in November, December, we are 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 in the things they need most over the holidays.

Thank you. One moment for the next question, please. Our next question will be coming from the line of Mark Carden of UBS. Please go ahead.

Afternoon. Thanks so much for taking our question. Wanted to start with a follow-up on shopper behavior by customer type. Sounds like it is 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?

Yeah. Hey, Mark. What we are seeing, what has not changed at all is that the less engaged customer is still where we are seeing the biggest leakage. That has been the case. And within that customer set, it is a larger impact with slightly lower income. So we are seeing that. What has changed recently is we have 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 is not strictly based on income level, but we are seeing it overall with the customer, which is, as I mentioned earlier, why I decided we need to make a change and make a move now to take care of the customer and get the margins set up to allow us to do that.

Great. Thanks. 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 at 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 is not necessarily something they prefer to do? And how do you think about best approach for advertising your new strategy and making sure they are aware of what you guys are able to do on that front?

Yeah, I think there are three factors in this that I think all play together. We are seeing competition across a number of channels continue to chase the health and wellness customer, which we think validates the opportunity in this space that we believe in the long term. So we are not surprised by that. We are seeing it happen. As we have 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 is only exacerbating, making it tougher for us, making it tougher for the customer. So those three things together, I think, are what is impacting the customer. From a competitive standpoint, I am not surprised that they are continuing to play more in this 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. 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. 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 remove that as a barrier to come to stores.

Appreciate all the color. Thanks so much for the book, guys.

Thank you. One moment. Kelly Bania of BMO Capital Markets, your line is open.

Hi, thanks for taking our question. Also, just wanted to go back to gross margin here. I have two 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 am guessing some sales deleverage impact. 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%. How can you commit to that? Where do you think gross margins can settle out here?

Yeah. Hey, Kelly, it is Curtis. Yeah, the gross margin, I will go maybe in reverse order. 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 are going to go do. We are 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, get a little bit of SG&A, but a lot of capital in that space. Some of that is already kind of built into the model and the way we think about capital, going forward. So those are things that we are going to go after and see what the customer response is.

Obviously, we are talking about traffic being a priority and traffic first and repairing that with the customer. Then we go from there. So the investments we will make here between the holiday activity and the January pricing, then we will see how the customer responds. 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 have got some space now to do what we need to do. We will see how the customer responds, and we will adjust the pace and the scale accordingly.

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 is how we will see how the customer responds if things start to stabilize? Or do you have a specific price gap in mind?

Yeah. Hey, Kelly, it's Nick. We do have a more competitive position in 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 customer that you'll see us invest in. Then we'll measure it based on units, transactions in the store, and the customers coming back to our site and store, and that's how we'll measure, and they'll tell us when we're in the right spot.

Thank you. One moment for the next question. Our next question will be coming from the line of Krisztina Katai of Deutsche Bank. Please go ahead.

Hi, good afternoon, and thanks for taking the question. So I wanted to follow up on the test, right? You've cited 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 was incremental versus customers simply shifting purchases to the lower priced items? 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? Thank you.

Yeah. Hey, Krisztina, it's Nick. I think if you think about your second question on where we're at to look at it. I think, as I've said, that what we learned from the tests that we've run in the past is that we weren't broad 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 movement within, again, item and category, but we didn't see enough customer and the ability to tell the story and make sure they understood what we were doing to invest in them. 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 is a number of key areas around entry, trust, and the key items for our target customer that we are investing in. It is a much more substantial part of our assortment than we have done in the past, which is why we reflected them in the margin and the guidance we have had for you today.

Got it. Then just as a follow-up, should we interpret the above 5% EBIT margin comment as a conservative floor, so likely the trough, or is that a reasonable planning range for 2027? What level of comp range would that also assume? Thank you, guys.

Comp. Okay. Yeah, I think right now, Krisztina, I think, again, 5%, yeah, we would hope 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 go put those things in market. We've got to work our way through the holidays and into the January timeframe and see how the customer responds to that. 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 2027 and beyond.

Thank you. Next question is coming from the line of Robert Ohmes of Bank of America. Please go ahead.

Oh, hey, guys. Two quick follow-ups. My first question is just on can you give any more color on marketing changes you might be making to drive traffic or maybe educate people about some of the pricing changes you're making? Then the follow-up question I'll give you ahead of time, which is just cyclospora from here, what kind of a headwind is it to comps? Thanks.

Hey, 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 traffic with existing customers. As we look at how we go to market in January, the affordability investment and the pricing work 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.

We are at a place we can start to unlock more insight from the customer data we've been capturing and use that to drive not just the market and even the merchandising and product development work we have. That's an area that you'll see us use that'll unlock media, unlock more retail media for us, unlock acquisition, and certainly serve our innovation and foraging work overall. That'll be something that we take advantage of here as we begin 2027.

Robbie, on the cyclospora, we called out the 60 bps in the quarter. It kind of peaked for us in that August, early September timeframe. 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.

One moment for the next question. Our next question is coming from the line of Scott Marks of Jefferies. Please go ahead.

Hey, good afternoon, everyone. Thanks for taking our questions. First thing I wanted to ask about, Nick, on the previous question, you started to touch on data a little bit. I do not think we have 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 are seeing from the customer, and maybe how you have been leveraging that to this point, if you have.

Yeah, thanks, Scott. As I mentioned overall, 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 the work we've invested in that program to drive customer value and customer behavior. 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.

As I look at the business, the importance of item and attribute is significant, but where the customer is moving is into how they use those to solve key need states. I talked about we're going to continue winning gluten-free, but we also need to own gut health because that's a solution is where people are going, and we can start to use our data to unlock that. You'll see us do that, and I think that 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. 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. We'll continue to go to market in that same way.

Appreciate the thoughts there. 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? Thanks.

Yeah. A couple of things. Let me start with what's relatively consistent across all categories, and that's where we are distinctive and innovative with where the customer's needs are, that's winning. We're driving newness in those spaces, whether that be in frozen or in bakery, in 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, as a key area of opportunity and focus. Our meat business is one where another area where we could continue to differentiate and win in that space. But I think 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.

Thank you. One moment, please, for the next question. The next question is coming from the line of Greg Melich of Evercore. Please go ahead.

Hi, thanks. I wanted to follow up on the e-commerce growth, up 12%, now 16% of sales and adding Shipt onto the platform. Could 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? Thanks.

Yeah, Greg, I'll start. This is Nick on e-com. We've mentioned this in the past, but I do believe it'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's 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 omni-channel customer. 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 a relatively low penetration on the number of our customers.

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. Thanks. 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're thinking about rolling out to the existing chain? Maybe a few things that stand out.

Yeah. I think part of the credit to the new stores, we've, I think, 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 foraging work, improved ways to highlight freshness in the stores.

Sprouts Farmers Market (SFM) Q3 2026 Earnings Call Transcript

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