Sprouts Farmers Market, Inc. (SFM) Earnings Call Transcript & Summary

Hi, everyone. I'm Brandon Fletcher. I cover broadlines and hardlines retail for A.B. Bernstein, and we're excited today to host Sprouts Farmers Market. I had the privilege of working with Jack Sinclair a long time ago when I was too small and young for him to remember me at Walmart, but I have the utmost respect with [ what he has done to ] grocery.

I remember.

And we also have the blessing of having Denise with us today to help us go through some of the financial components to get all of these things right as we know this story is very interesting, very powerful. But anytime you got growth, there's always these questions about how fast you grow and how fast you harvest. And so we're glad to have both of them on with us today. Sprouts has actually prepared for us a little bit of presentation. And we're going to do that part first, and then we'll move to a set of questions. My last callout is to know that we do have a set of pigeonhole questions, which I hope you guys are familiar with now, that is being monitored. You're going to let me see the ranking of votes. And then when we get to the question-and-answer session at the end from the audience, I'll be able to see what you guys are most interested in. With that, I'll hand it back over to the Sprouts team.

Yes. Thanks, Brandon. And I should show you my Razorback to show that I remember Arkansas, so I appreciate the chance to reacquaint. And good afternoon, everyone. Thanks so much for virtually joining us in these strange times. We're calling this a fireside chat, but it's 106 here down in Phoenix. So I think I may be about to call it a poolside chat, to be honest with you guys. But there you go. We're going to talk and highlight a few topics from our recently announced long-term strategy. But first, I want to say it takes a community of dedicated people to keep our stores open in these unprecedented times. Our store team members are truly everyday heroes, keeping our shelves stocked with fresh, healthy food within an ever-changing store environment. And I've been really impressed with the decisiveness and the agility of our leadership team as we've met every morning and trying to ensure that team member and customer safety is paramount while supporting our stores and making sure we're in stock and open and ready for customers. The proposition of healthy, affordable food supported by a compelling vitamin department and enhanced assortment in a smaller box will be exciting for our target customer in the future. Our strategy consists of 5 main pillars: our target customer, brand recognition, store size and format, supply chain and financial targets for the updated stores. We really have been spending a lot of time since I've been here employing deep research to understand our target customer, what occasions drive those purchases, what they buy and where they buy it. We found we overindexed with 2 specific groups within the overall target customer base. Those specific groups are health enthusiasts and experience and innovation seekers, and that's where our future path will be focused. Those customers are looking for healthy, innovative options at a good value. We have a tremendous opportunity to gain share in this segment, and we can double our business by capturing just an additional 3% share with our target customers. We should be the destination for healthier food. In the past, we focused on many different customers, trying to be everything to everyone, which diluted our efforts to grow sales. Something else we've learned through the COVID-19 is that customers want at-home delivery and curbside pickup, and we don't think this is going to go away anytime soon. And because of that need, we've rolled out curbside picking across all our stores in the last few weeks. And the focus on e-commerce will continue within our strategy implementation. Ultimately, we're agnostic as to where our customer transacts but instead focused on strong engagement and building brand equity with those customers. So we've already begun to work elevating our brand recognition. And rather than focus on promotions, we're building our brand story, focused on effective and relevant brand recognition marketing initiatives like sharing why our products are different and innovative and highlighting special elements like great local options. We know we can grow our share of wallet by more effective and relevant brand recognition and marketing initiatives while spending less money on promotions. Eventually, this will flip a much larger portion of our marketing spend to various paid campaigns in social search, streaming media and more, which can build top-of-mind awareness of Sprouts. Our target customers are drawn to our product differentiation. Marketing inside or outside the store, we will highlight our differentiation in each category, like our attribute-driven paleo, keto and plant-based campaigns, emphasizing digital shopping lists and customer engagement around our buzzworthy smaller brands. Our ultimate goal is to make our marketing dollars more efficient and effectively -- effective and most importantly, help drive traffic. To be clear, we are still promoting and providing good value every day to our customers, but we are doing so differently by being much more targeted. In January of this year, we ran a promotion on locally grown strawberries for the Southeast region. In the past, this would have meant trying to be the lowest price in town, on a broad -- on -- in town on a broad promotion across all berries. And we would have sold a lot of them but with very little profit. Fast forward to 2020, we focused on a single item, strawberries, and the differential of the product being local. Strawberry sales in this region comped north of 20% with a margin that was up tremendously from last year. This displays not only our ability to highlight fresh product, but how our scale is allowing us to partner with more local growers. Going forward, our new stores will be smaller, 21,000 to 25,000 square feet. And I want that farmers' market feel with smaller square footage but no less categories, just refined to really meet our target customers' needs. We're very excited to grow our target customers to grow in areas where our target customers prefer in produce, frozen and further expansion of our center-of-plate protein, all focusing on a differentiated product offering. Categories like deli will remain and will become more simplified. If anything, COVID-19 gave us a glimpse of what this may look like. On the flip side, the new format will contain an innovation center where our vendors can demo new products, our incubator brands can display what is new and trending. We can reduce our nonselling space and, therefore, maintain a large number of SKUs. We believe these smaller stores can deliver sales on a par with the larger store, as proven with many historic locations we have today, resulting in strong returns of a simple model that we had in the past, setting us up well to expand across the country. As for our expansion plans, based on an intersection of where our target customers live, the revenue potential and where our current and future DCs are and will be allocated, we narrowed our near-term expansion markets, which alone could provide 300 to 400 more stores. We will continue to focus where we're strong, like California and Texas, while building out Florida and the Mid-Atlantic to achieve a larger concentration of stores. Our plan is to grow at a minimum 10% annual unit growth rate, but most importantly, support our growth with an appropriate supply chain network. From day 1, I realized our supply chain was disjointed from our unit growth plans. That will change with this strategy. We have a commitment to our customers to provide fresh produce. However, with 5 DCs supporting 344 stores, with a number of those stores beyond 500 miles, freshness is hard to guarantee. Going forward, we aspire to have our DCs within 250 miles of the stores. Colorado and Florida are our first priority, with the Mid-Atlantic on their heels. And this will not only provide fresher product, it will optimize our supply chain costs. We plan to create a fast and fresh DC that aligns with our fresh partners in a more synergistic way. While the current environment affects the precise timing of when these strategies will impact upon our results, I'm confident all these initiatives will improve our store performance, drive efficiency, establish a tremendous unit growth trajectory and accelerate our future earnings. Now let me hand it over to Denise to discuss our financial targets.

Thanks, Jack. Financially, we've built a strategy that's grounded in strong unit returns and 10% plus unit growth opportunity with low single-digit comparable sales growth. Through smarter promotions and other cost-saving activities, we expect to stabilize and potentially expand our EBIT margins. Putting all this together, we believe our strategy will ultimately deliver attractive low double-digit earnings growth and expand ROIC, thereby driving meaningful shareholder value creation. Let me share a couple of details on each of these points. As we evaluate our strategy, we realized our box was just becoming too big and too expensive to build to maintain the economics we had historically. Jack already hit on the benefits of smaller stores earlier and the result of the smaller stores, a box that's around 20% smaller in square footage and with a similar reduction in fixture costs, leading to a blended cost to build of about $3.2 million, including inventory and preopening costs. It's important to note that the cost of our enhanced layout store had reached upwards to $4 million in 2019, so this is a substantial reduction in costs. The target economics of the new box include year 1 sales of approximately $14 million, with sales growing 20% to 25% in 4 years to annual sales of $16 million to $18 million. We expect this will result in a blended 8% 4-wall EBITDA margin in year 4. Considering our cash investment of $3.2 million, the box can yield an approximately 40% cash-on-cash return by year 4, which should continue to grow into year 5. We expect comparable store sales to grow low single digits. Key drivers of our comp performance include enhanced marketing capabilities, a focus on innovative and differentiated products and e-commerce growth. Regarding marketing, utilizing more digital channels will elevate the awareness of Sprouts by focusing more on our brand while spending less marketing on promotions. We'll also attract our target customer through marketing that highlights quality center-of-plate proteins and differentiated products. Additionally, new stores will aid in comp growth. One significant change for our new store strategy is our promotional schedule. In the past, our new store opening promotions were very deep and for weeks on end, thereby reducing comps in future years. Going forward, we'll still bring value to new customers but with a smarter targeted promotional approach. Our expectation is that we can stabilize to expand our EBIT margins going forward. From a margin tailwind perspective, we restructured our produce buying team, which improved our vendor relationships and has allowed for better sourcing of products. We expect that our in-store labor productivity initiatives, multiple-year shrink improvement plan as well as our investments to improve the supply chain, especially leveraging new DCs in Colorado and Florida, will together improve our operational and infrastructure costs. Lastly, the new store box economics will continue to lower rents and a reduction in cost to build, lowering depreciation and amortization, both of which will be beneficial to the P&L. From a margin headwind perspective, we expect labor and benefit costs to continue to increase each year. And while e-commerce will likely be an overall benefit to comp and profit, it will pressure margins, which we have factored into our targets. We continue to explore the optimal omnichannel setup for Sprouts, delivering on customer expectations while improving the economics of this channel. One aspect that's been a constant for Sprouts is our strong cash generation. Our focus remains on utilizing our cash flows to invest in our business to deliver strong returns. Unit growth is the first priority, complemented by other sales supporting initiatives such as DC expansion plans. In the immediate term, through the COVID-19 pandemic, beyond investing in the business, we'll continue to build cash on our balance sheet and maintain a strong level of financial discipline. Once this crisis has passed, we'll reevaluate our capital structure needs and determine the best alternatives for the excess cash the company continues to produce. As we look to the future, we'll continue to serve our communities with healthy, differentiated foods and provide meaningful job opportunities for our amazing team members, all while delivering on these commitments to our shareholders. And with that, Brandon, I'd love to kick it back over to you to start the Q&A.

Yes. No, that's great. Thank you so much. Yes, I'm more bullish every time you guys talk. The dynamics, I think, are very powerful there. One of the things that I wanted to see if you guys had an opportunity to do is, can we get a sense of where we are going, an early read on May or anything else that we can kind of get a feel on? Because there's just so much from what some other people are [ hungry very ].

Sure. The business continues to be strong in May relative to what we talked in April. Our underlying comp for May was 13.1% and in line -- we're trying to keep everyone up to date with what's happening on a regular basis at the moment. It's fractionally better than what were our underlying comp in April, where we closed -- the close on April Sunday. So the underlying comp, a couple of hundred basis points than -- the comp in May was a couple of hundred basis points better. Trends, very similar, low traffic, transactions down, baskets significantly higher. And so that -- yes, the business continues to operate in circumstances that haven't changed significantly from April.

That's great. The other thing that's interesting with these baskets down is we obviously know that people are doing kind of the basket consolidation for their own concerns about being out there. But are those basket compositions, are they just more of the same products? Or are you seeing a little bit of expansion of the, I'll call it, the SKU range that's being shopped?

Yes. It's interesting. It really has maybe changed in the last day or 2, to be honest with you, where you had the -- what I would call COVID-related categories driving the basket, whether it be rice and beans and the core items for spices and paper for baking and those kind of core items were driving hard for us. We don't get the same consumable mix as a lot of the other people in marketplace. So we don't have the biggest -- we don't have huge basket driving from paper goods and cleaning utensil -- cleaning goods and things like that. But our business has seen -- saw that trend into core commodities, if you like, going backwards. Last couple of days, we've seen a little bit more health-related business moving forward. We've seen our keto business significantly grow. So diet-related products, which are very much in our wheelhouse, we've seen a bit of a growth in that over the last -- if anything, that would be a kind of trend that we're watching that we wouldn't say solid yet, but we're watching it with a lot of interest in terms of how that trend changes. And I've also been really pleased by our fresh produce business over the last few weeks. That's strengthened a little bit as the season and the availability has changed. And as restaurant suppliers are finding us as a good source of outcome from it, we're seeing very significant growth in our organic produce business and things like grass-fed beef and antibiotic-free chicken, bits of trends towards those kind of things over the last maybe a week or so, even more so than what we were seeing in April.

Got it. That's powerful. One of the things, as kind of a follow-on to that, is when we talk to investors who don't know the story terribly well, they start with a very simple notion of grocers. Grocers don't make any money on food. They make money on a bunch of other stuff. You guys actually make some money on food. And granted, part of that is differentiation of product and supply. I love the local buy on the strawberries and things like that. But what is the "general merchandise equivalent?" Is it just those higher quality elements of product in terms of core food? Or is there another way that investors should kind of park it in their mind as to how the margin mix looks out?

Yes. We don't have that kind of mix for general merchandise because it's just not in our -- we don't have the way of making it. The ones we do -- the things we do sell in that space are differentiated, but they're not the kind of drivers of our traffic that it would be in many other places. The driver for our business, and we did all the research that we've talked about, very much is around our produce business, which operates at a pretty good margin for us. It operates really strongly in our -- our frozen business is very strong because it's very different, plant-based, keto, vegetarian, vegan, those kind of categories, where if you walk up and down our frozen fixture, it's totally different to what you would see in all of the other grocers. And we don't really -- we don't quite know how to define ourselves, Brandon, whether we're a -- I don't really like defining ourselves as a grocer. We kind of like want to be defined as Sprout Farmers Market, where what we've got is differentiated. Our vitamin and supplement business is a differentiator. Our frozen business is a differentiator, and our produce business is a differentiator in terms of categories. And going forward, we want to be much stronger at what we would call center of plate. We're seeing real strength when we get difference in areas like plant-based proteins. We're doing really well with that. And we're seeing where we're specialists in, as I said, at the grass-fed beef and very specialist organic chicken, we're doing very well in. And so when we're different, we can do very well.

Yes. And it's one of the things -- I saw you guys have a shop near my house in Nashville. I've been stuck in Arkansas for a while. But essentially, it's farmers' market with Coke. Like I'm so glad you still have some piece of -- some proper soda. I don't want have to eat the Blue Jones, whatever thing. Not that, that's wrong, but yes, it's a farmers' market with some Coke. The...

We've got some soda, but we don't have Coke.

Yes. But I mean, it's -- you have real soda, right? You can get something that isn't...

Yes. There you go.

The dynamic that's fascinating is, as you guys have this rapid adjustment you had to do for COVID, which you guys did really quickly, how much of that's going to stick as the new normal in terms of operational? I mean it almost looks like you're saying, look, we were headed there anyway, fine if we got there faster. Is there -- should we think about a pullback from that? Or it's just like, yes, you just ran your plants faster.

Yes. I think it's a really interesting question. I think we're observing right now 3 things that are probably going on kind of from macro to micro, right? On a macro level, I think what really happened through this is communication became really important in the organization, clear communication, really streamlined decision-making, creative problem-solving. When you think about our expansion from 55 stores to the full chain for pickup in a matter of weeks, it would be a real indicator of that idea of being able to move fast, make decisions, get that operational part getting executed. We certainly hope that all of that's going to stick in the way that we operate the business. Two more pragmatic pieces about it, right? E-commerce is different, right? We had 4% e-commerce penetration in Q1. We had 13% penetration in April, and we had 12% penetration in May, right? Clearly, while we don't know where this is going to settle out and where the new norm is, I think we see ourselves as very much needing to be sure that our new boxes going forward and how we think about that business is really optimized to serve e-commerce. And then the third one I'd point out that I think we all believe is all of the cleaning and safety protocols that we've put into stores. We think that's going to be a long-lasting piece of what we care about and what we focus on. Not that we would never have not focused on being clean and taking care of our employees and our customers, but I think more than ever, that's just going to be a regular course of business go forward.

Yes. I think that makes a lot of sense. I had a range question, but I think you answered it well. I like this idea of moving to center of plate as another opportunity. There's this temptation for everybody to go -- because so many businesses do this, they make money on something that isn't the core business, it's like, no, no, no, we are really good at our core business, that's why we do it. On format changes, investors have been excited to see the store growth. I like the idea of how much more tightly wound around the DCs and potential DCs it is. There was a pause, which we think made a lot of sense. What were some of the things that got to where you go, all right, we're ready, let's grow again, we're set? What were some of those elements where the team got confidence that it's ready to go right back to a gangbuster growth?

Sure. Well, we very specifically went to a go-slow to a go-fast position not long after I got here. I spent a lot of time visiting a lot of stores with a lot of the team. And when you go down to our stores in San Diego and some of our stores in Los Angeles and some of the stores in some other -- in Colorado, you actually have much smaller boxes. And they're more like farmers' markets, and they're not quite so elaborate in terms of what I would call a bit too -- a bit modern when you start having a lot of steel and a lot of fixtures around our deli and a lot of fixtures around our meat and our seafood. They're quite nice, but they cost a lot of money to do. And operationally, it creates some complexity over and above from where we were. So the more I spent time in those stores, looking at numbers and talking to our team members working in those stores, they were easier to operate. The customers like them. The sales per square foot was significantly higher. I know part of that has been there around a long time, but it was significantly higher. And the returns are better. So the opportunity for us is how do we recapture that magic of an authentic farmers' market and put it into a context where we're providing all the products that are available in bigger stores. And part of that was how to make the backrooms a bit smaller. We create a model that's kind of gone back to where we were. So authentic farmers' markets, the way I would describe it, we draw our inspiration from where this company started. And I think maybe just a -- and in terms of returns, the stores we were building over the last couple of years, and we've still got a few of them to build as part of the gestation period, customers do like them. They just cost a little bit too much, and the returns aren't where we need them to be. And if we're going to fulfill our aspiration of getting as many stores and giving access to as many people as we can that are relevant to our customer, we know the customers are there. So we want to get more stores in front of them. We can do a lot more of them if we spend a lot less building them, and we'll get better returns as well. So we're not reinventing the wheel here. We're kind of going back to where we were.

That's powerful.

And I think we're complementing that with the supply chain as well, right?

Yes, exactly.

So Jack's realization early on that we just got our stores too far away from our DCs, the fact that we're going to invest against that supply chain to be both more efficient but also get fresher products to the customer, I think, enables some of that faster expansion in markets where we can get some density.

Yes. No, I think that's exactly right. And one of the things that we just -- I just love that you used the strawberries example because when we first started working with Sprouts, we -- those were some of those opportunities where we said, man, what a great format, but these strawberries are coming from California. And by the time they get there, you don't have the promise. But when you get to local source from Florida, which is what Publix and others do, man, what a promise you can keep. And then everybody looks at everybody else's garbage produce, which is literally not edible, in most cases, anyway. And it's just [ in the trip ]. I think that's a very powerful pivot. The other one that...

On the distribution -- just the distribution center in Colorado, there's very specific seasons where Colorado corn and -- where you can really double down in the right seasons, and that applies all over the country. So having local buyers in each of our distribution centers close to the market will allow us to maximize that and then tell stories about the people that are growing the product for us, which just connects our customer to our stores.

Yes. I think it's an enormous opportunity. A lot of times what I think people miss when they talk about retail generally is that the role of the buyer has been, in some ways, I'll call it, AI-ed away or analytic-ed away, and you miss the opportunity that's still very real. And so when people go, well, Amazon can be awesome. I'm like, Amazon is a 26-year-old very smart kid that's A/B testing on 5,000 products. They have no idea what season it is. They have no idea what half of the products are. And so there's this incredible opportunity that exists for that. One of the ones we've heard about is that some of the changes in prepared foods caused people to maybe not fully understand is that moving away from the promise, is that enhancing the promise. I just wanted to give you kind of air time on how do we think about the prepared food shuffle to see -- that we think that's consistent with the core promise and why that those changes were positive net-net for the consumer.

Well, again, just to emphasize the point you were making around curation of assortment, retailers that are like us have to be different by curating our assortment effectively, which is back to the role of the buyers. And we've got a good team of people here who have got a good DNA and understand the real crux of what our customers are interested in. We'll expand and develop that team over the next little while. But basically, that curation allows us to be different. We're not going to compete with Amazon on convenience or Walmart on price, but we can compete with anyone on bringing the products that we want narrow -- focused on that narrow customer base. And that relies on very strong buying going forward. And sorry, I got off track there. What...

The changes...

Prepared foods, yes. Big, big issue. And the reality of it is, COVID has changed our thinking a little bit on this one. As the restaurants are closing -- are finding, obviously not being open in many places, and when they reopen in a very different guise, there are significant opportunities for us to create prepacked solutions that allow people to get meal solutions of prepared foods. We've had to close obviously our salad bars. We've had to close our olive bars. We've had to unwind our soup -- the soup facilities. And the idea of the people making things in front of you was somewhere we were drifting away from anyway. But again, I think the customers' expectations in that space is changing. And we will have to raise our game a little bit in terms of how we create prepacked solutions, which can bring some complication, but we're going to invest in the right people and the right supply chain to enable us to provide a solution within the context of social distancing and people being comfortable with hygiene that we -- in the post-COVID world that we're better at. And that -- again, center of plate plays a big role in that. I think there's going to be more cooking at home as well going forward. I think there's definitely going to be more baking at home. Who knows what the post-COVID world has been, but there's been some really extremes in customer behavior linked to better prepared foods, but it also links a lot to preparation of food at home. And I think we're well placed in that space. I'd like us to be better placed in the prepared food space. We're okay, but we can do better in that, around those dietary needs that our customers have. I think we can do a lot around keto and vegetarian and vegan and paleo in that space. And -- but the team are doing some work on that at the moment.

I always think about we need to bring those 2 things together, high-quality specification but social distance, I always think of Japan and the incredible freshness that's provided in every convenience store. And when -- back in the Seiyu days when Walmart was there, it was just eye-opening to see what really good shops could do in that and that the U.S. just hadn't got there. And I know others had tried. Tesco had come in and tried it before. But to me, that promise is still there and unmet. And I think it's a really great opportunity to figure out how this...

It's a great point, Brandon. Having had the opportunity to visit those Wakana commissary operations that supplied the Seiyu business, the speed of freshness that they deliver through a combination of very effective production and really good planning and the distribution through makes it -- mix in small stores, as you know, in Tokyo, to create that kind of fresh food experience is pretty remarkable.

It's something else. But that sounds great. The other thing we noted is Board advisers have added a little bit of Trader Joe's like knowledge. What, if anything, should we impute of that experience in the format? Or are we reading too much into it? And it's just a talented partner in the Board. That's just a question we get a lot is, is it -- does private label go through the roof to 60%? Or how do we interpret that?

Yes. I think it's a good question. Doug will bring a lot of experience to us, and I would read that as a very experienced Board member who will add a lot of value to our business. I don't want to be Trader Joe's, and that's not what Doug would want us to be either, to be quite honest with you. Having said that, differentiation, you can expect a lot of pace to differentiation. The uniqueness of back to curation of assortment, how you can make things different across your business, Trader Joe's have done it well. But it's not Doug that's going to bring that to us. I think we will do it in our own way. Less -- private brand will play an important role in it, and we've brought some expertise in. Gil, who's come in and joins as the CMO, who will be heading up all of the private brand initiatives as well, will bring a focus to how we brand private brand and make it fit into the overall. In terms of product, we'll also be looking very hard at smaller brands and innovative brands and new brands, which may emerge into private brand for us at some point. But driving these smaller companies that bring innovation, and there's a lot of them around and we want to play -- we want to be the destination for those guys to bring them to market, we've got a few interesting things happening and about to happen with that differentiation. If we're seen as the place to go and we're able to operate in relatively small volumes through our local-sourcing initiatives, we can test things and make things come alive maybe before they come to private brand. So the difference, I would say, would be -- will be different. Private brand will be important to it, but innovative new brands will be important to that as well, things that people haven't seen before. And we're seeing a lot of success in that at the moment.

And the cost of those new brands is so cheap, right? So Alexia covers food for us. We'll talk about it. You can start a food brand for $500,000 in some line time, right? And if you can find the right social messaging or whatever to get a hit, then you can start rolling. But at the same time, they have a problem of distribution, and you guys are the right size to hit that component to go bam, we've got a differentiation. It's interesting. Kroger is doing something that we kind of like in terms of the VC side of this, but I think their goal is like to buy Pacific soups before Campbell's does. And you guys are in a different niche to really get that innovation piece as opposed to participating in the disruption of supply chain. So I think it's a very exciting opportunity. A couple of quick ones. So just because there's opportunities that may come up for stores, people are asking like is the real estate pressure that you may have for mom-and-pops and others that have that, is that going to -- is that -- would that cause you guys to say, no, we're not doing 10% this year, we're doing 15% because everything got super cheap in terms of buying into boxes?

Clearly, with COVID, everything has kind of changed the world that -- when we think about real estate today. I think we are certainly willing to be opportunistic and try to find -- maybe it's not going to be the same exact amount of growth every year, and it could be a little lumpy. As things come up, there's opportunities that just project themselves. But there's going to be an interesting balance because I think on one end, where we say there's going to be opportunity that could come up, we also look at it and say, new construction and things like that could be more challenged, right? When you think about all the folks who participate in that broader real estate space, getting loans and getting the ability to build ground-up new sites where it could be more difficult for some developers out there than it was, so I think what we're really looking to do is say, how to get the right mix? How do we play it as you watch the market move? So maybe we'll be able to get a nice chunk of stores in a hurry because of some opportunistic piece. In other cases, maybe some ground-up builds might be a little bit slower than what we might have foreseen if we looked at this back in February.

Makes sense. And I'll ask the obligatory...

And just to -- sorry, just to be clear on that, Brandon, as we will focus in on the locations where we've identified the customers that we've narrowly focused on and any opportunistic -- any opportunity that arises, we'll anchor it into are the customers in that location enough of them to make it worthwhile for us.

Yes. Some of those Winn-Dixie boxes may come up for you in Florida that are just sitting in the dark, so we'll see how it goes. I'll ask the obligatory M&A questions. Okay. So would you buy somebody at some point? And are you scared about massive consolidation like Kroger-Ahold or whatever making it harder to do what you guys do?

Well, second question first. I'm really clear that we can operate at whatever the market looks like in terms of consolidation amongst -- the thing about Kroger or Ahold, they're trying to chase the $1.2 trillion market. They're not trying to chase the $250 billion, $300 billion that we are chasing, and they will have to do that. So however much that consolidation worked, and they wouldn't go down to let's narrowly focus on what those guys are focusing in on, so I think we can be complementary. We're just -- as I said earlier, we're just trying to take a little bit from the food -- the total food purchases of our customer. We're not trying to win traffic or -- from those guys. And if we keep ourselves different, then we'll be able to -- I'm very comfortable we can be a complementary retailer and grow nicely without really affecting anybody who's much, much bigger than us. So that gives me some comfort that those kind of dynamics would be -- would work for us in terms of how that goes forward. And in terms of opportunities for us, we'll -- we're focusing very much on what are -- the whole customer strategy will fundamentally change our real estate approach, our merchandising approach and our supply chain approach so that we're focusing everything on short channels of distribution, local sourcing. I don't think anyone else is going to do that, and I'm not sure anyone else can help us do that either. And as we're very single-mindedly focused on that, I don't know anyone else that can help me do that. If I thought there was, I would love to hear about it. But just at the moment, I think we've got to paddle our own canoe, or whatever the expression is, lower our own canoe and get us really clear about this is what we are doing. And if we can see something that helps us along the way, then yes, we'll take a look at it.

Otherwise said, grow organically.

Grow organically.

I'm there. This is just kind of a throwaway question just because we all eat. How crazy is the food supply chain now? I mean we see the new stuff, we see random outs. There's a local grocer in Arkansas who advertises, "We have any kind of meat you want, don't go anywhere else." I mean how nuts is the food supply chain really?

Well, it's seen some pace -- some changes. In the initial phase of March, it was absolutely crazy for everybody chasing everything. And it very much related to, well, not in our case, but across the marketplace on nonfood groceries, but they also affected dramatically the core commodities of rice, beans, flour, yeast, all those kind of things. Those challenges have remained, but nothing like the way they were at the initial phase of this as the supply chains have caught up. We've had -- our produce business has been pretty strong because of availability, because the restaurant business has been so -- obviously, they're not carrying volume. So we found access to really good quality, and that space worked. Meat went crazy for a little while. When the President announced that the meat plants had to open, I think the world thought they were not going to be able to ground -- buy ground beef for the rest of their lives. So what we got was these crazy demands. Sometimes demand was actually so outpacing -- it wasn't supply that was the problem, it was demand that was a problem, and you're getting that out of kilter. So trying to keep pace with that. We are relatively well placed in that meat dynamic because we're kind of a bit specialist in the things that we buy. And we've got our own butcher, so we can operate within the store to take larger chunks of beef and chop -- cut them up to the customer requirements. So we had some sort of structural advantages in the short term on that. But it has been -- and it's been quite challenging for all of our suppliers after some of our smaller suppliers as they've tried to chase packaging, as they've tried to chase ingredients. That's been some of the challenges that we've faced in some of our smaller suppliers. So they were able to cope because we weren't chasing against Walmart or Kroger for those products because they weren't buying them. But those vendors are now struggling a little bit to get what we need. And we've got a distribution model that's very much predicated on a lot of SKUs at low volume, which worked okay for a little while. And then it's starting to -- but we're chasing it pretty hard. And it's been a crazy few months, but the team has done a really nice job keeping on top of it. I've been very pleased with that. I think relatively because we've been -- we're a bit more bespoke in what we have, I think relatively, we've been in better place than most.

Got it. There's -- there are the 3 quick things that I'm going to bundle together in terms of things that COVID may continue to pressure. One is wages. The second is tech on both cleaning as well as picking your packing, so kind of has there been acceleration of that element? And the third is, if there has been, I would call it this way, a change or a worry about maybe you need to go to private label to solve those supply shocks, you go -- get richer in the supply chain to deal with that. So those are the types of flavors we have. Pick any of those or none of them if you want to follow. But people just go, what's changing that's different? Then what they talk about is wages. They talk about supply chain, and there's some sense of private label.

Yes.

Yes. Look, let me start, and I'm sure Jack will jump in. I'll just kind of go in order as I was scribbling them down. So on the technology front, I think we're all really concerned about cleaning, sanitary protocols. In terms of it being a new technology that's going to change the game, we're a little less focused on that and a lot more focused on operationally do the right thing and have that right supply of cleaning coming into the stores. The technology piece has been a bit more interesting, though, as you watch the consumer want more contactless transactions, right? So we -- you saw that with the e-commerce ramp-up, so that was one form of delivering that. But even in the stores themselves, right, customers who are using credit cards more than they might have used before, that might be an economic situation. It might be the situation if they don't want to handle cash, and they don't want to have that coming back and forth because of what they perceive. It could also mean a lot around self-checkout. We're in the process of testing self-checkout in some of our stores. We don't have it in all of them. But for us, it's one that we're watching pretty close about just what contactless really means on that front. And on the wages front, I'll start off and Jack can jump in as well. Yes, I think we're excited to have paid our team members. We are excited that they're being viewed as heroes. They've done a great job for us and have earned every dollar that we've paid them. We fundamentally believe wages are going to continue to increase, right? That was the path we were on before. This might have done an early step-change of what that path is going to be. But in the way we thought about it, our long-term plan builds that in, and I think we view that we'll do the right thing for our team members.

That's great. That's very helpful.

And then on the third, more supply shocks, things like that, I think we're working -- we're focusing on working with our partners and finding what that right supply chain flow is. I don't think that we're thinking structurally about a shift to private label, a shift to a different branded product. We're unique in the products we provide, and I think we're going to continue to do that. The best job we can do is partner with our distributors and others to say how could we be sure that, that flow remains as seamless as it can be.

Okay.

But yes, on supply chain, I think the robustness of supply chains is something that we're all going to have to really wrestle our minds around. I think the vulnerabilities in supply chain further upstream, too much dependency of things that we aren't in control of is something that we're going to have to change not just in the food supply chain but in the overall supply chain. I never thought as a grocer all my life that I'd be chasing after masks and chasing after gloves and -- and the dynamics of finding those things have been pretty extraordinary. I wouldn't know -- I didn't know anything about it and quickly learned a lot about it. And there's some vulnerabilities in our supply chain, packaging vulnerabilities that are applicable to us but applicable to the whole industry that I think we need to get much, much better at. With regard to -- and I think it might lead to more upstreaming in certain -- I mean we've certainly got some opportunities to take control of some of the aspects upstream in terms of supply chain. So that's evolving, and I think it needs to evolve. And I'm sorry, just, Brandon, to reinforce Denise's point on the team members. The cultural effect of COVID on the society that we're operating in really manifests itself in people that just don't understand exactly what they're walking into when they go in every morning to -- and it applies very much to our people and the people working in stores and the people working across the grocery industry. I've got a lot of respect for them because it's really difficult. You might be getting paid a little bit more and you might be -- but it's hard when you're going back to your families and hard when you're going talking to your families about it. So it does -- it makes -- it really crystallizes to me how we've got to really think hard about what we do to look after our people appropriately. And that doesn't just mean money. It means how do we appropriately look after our people going forward, and it's something we're spending a lot of time thinking about.

Yes. No, I share offices when I'm in Arkansas with a broker who's been dealing with all that stuff of working on the supply for masks and sanitizer and all that stuff. And it's truly bizarre. It's like being in some strange postapocalyptic world where it's everything you expect from Mad Max, except for the guns, but everything else is exactly [ the same ]. I'm going to ask you a couple of questions from the audience that have popped up that have a fair number of votes. One is, can you talk about competitive pressures for the "healthy food", which is, I think, the way some people frame it, from the Walmarts and the Krogers or even the Whole Foods?

Yes. I -- surely, and I think what you find is as the tailwind of healthier eating has come around, everybody is looking at it in a kind of particular way. And having worked in some of these other places in that, the challenge for big people who want to get into small things, it doesn't actually fit their business model that well because the sales intensity don't lend itself to the kind of efficiencies that you need to drive SKU efficiency and shelf efficiency. If you -- if Greg Foran saw that -- where a case -- you couldn't have a case in a quarter on the shelf, the product wouldn't be in the business, which drives incredible efficiencies. But it takes a lot of product away. We are a little bit less efficient, but we've got to -- we've got that differentiation that's built from the curation and the differentiation. So no doubt the other guys are thinking about it. And specifically, the main guy in a marketplace that we would kind of maybe be aligned with would be Whole Foods. We've seen some changes in their environment under the Amazon guys. And they're very different businesses, Amazon and Whole Foods. And I think we watch with interest how that cultural thing will evolve and develop. But as I said earlier, and I don't mean this in any way kind of dismissively or arrogantly in any way, we're complementary to most in that we operate in a space that if we can bring accessibility, value to that customer base, we're -- the other guys are not going to chase after it in the same way because it leads to inefficiency for them. And that's what you find. The products that are coming into our stores early, 2 or 3 years down the line, they'll end up in Walmart and Kroger and everybody else once they reach a certain level. But as we create that differentiation, we'll have that 1-, 2-year advantage over the market. That's how we're thinking about it, and that's why we're putting innovation centers into our new stores. That's why we're encouraging this vendor base to come after it. So I think scale plays an advantage to us in that space, and it allows us to be flexible. And yes, people are looking at the tailwind of healthier eating, but I think we're well placed to compete with that.

It's cool. Another one that has, I think, the most votes now is, can you give us a little color on what you're changing on in-store processes? And again, I know you can probably talk about that for hours. But if you'd maybe highlight a couple of things where you're saying, listen, there was an in-store process that just wasn't what we needed be optimally for customer service or efficiency and just give us a little color on some of those changes.

Yes. Well, we've -- like you said, I could talk about it for hours. I'll just try and prioritize my thoughts and might get done in one. First of all, we have inefficiency in our shrink or throwaways, as I called it through my kind of early career. We have an inefficiency in terms of the way we handle our products and the way our systems support what we're trying to do. So investing in systems to allow -- make it easier for the stores to manage some of the excesses that come from production, that's one of the big drivers in the change. Second change is certain areas like deli and, to some extent, our meat counters and, to some extent, our bakery operations, the production areas, the salad bars, which are going away probably, I don't know if they're going -- coming back, the olive bars, the soup counters, those kind of things take up a lot of labor and a lot of process. I envisage those things changing fairly substantially going forward. And maybe -- so processes around fresh, the shrink and the investment in systems behind that and also the inventory management in the back of our stores. One of the things that we've been spending a lot of time on is how do we get the flow right, which will be helped by the distribution changes, the supply chain changes. And in a fresh business, we want it to be less than often, and you want to have less inventory sitting there going forward. And if you're closer to the DCs, you're able to do that more efficiently so that what comes in the back door can be handled more quickly. Our back door through shelf, there's quite a number of things going on to significantly change the labor hours needed to do that function. I'd rather have our labor hours devoted to serving the customers and looking after the front end of this as opposed to the back end. So a lot of changes there. And in our new stores, we're going to have smaller back rooms. The proportion of space in our more recent stores, unproductive as a back room space, to customer-facing space is too high, and we're bringing that down as well, which will make it easier for the guys in the back to handle that business. That kind of gives us a quick summary of where we're at.

I would agree. Those are -- that just -- there's always room in those projects. They're evergreen. Last one, and then we'll do an overarching question, from the audience is, can you give a little color on kind of the things that are being done to help construction costs and the store economics on the CapEx side? You guys had some color when we were doing kind of our follow-up call after the earnings, and I just thought some of those things are really powerful and would love to hear any color on.

Well, we've got some specifics on that. Denise, do you want to take that in terms of where we're going forward...

Sure. I mean first and foremost, when you think about the construction costs, the construction costs, in some ways, scale with the size of the facility that you're in. So I think, first and foremost, reducing square footage by about 20% is able to reduce construction costs by about 20%. But when you then get into the store, I think back to Jack's point of us being a farmers' market and that simplified experience, in the store today, in our most recent vintage of the store, we're very built out. It's a very [ C&C ] deli counter. The amount of signage and the expense around the way that we've chosen to speak to the customer in the store is probably just more than we need, right? I think there's a much more simple, much more artistic and enjoyable experience that can come with a little bit less excess of things coming into the store. So I think we're working on that as well. Also getting really efficient in thinking about what forms of refrigeration, what will we swap out that might be able to be more efficient in the stores and then continuing down the path of things that we've been doing, but I think in these new stores becomes that much more important, right? The expansion of LED lighting, natural lighting in the stores, things that can just make that box more efficient is what we really also want to be focused on. And then separate than that, as we embark upon this store growth and expansion, working in the back room of saying, well, what's the right way that we're actually going to go out and contract to get our construction done, which is a good traditional sourcing lever that I think that we're going to pull as well.

I wear people out on LED lights and energy efficiency and the coolers. I'm so glad. There's just -- there's so much value in those simple things. And the ones who just still won't do it, I don't know what it is. Last unifying question that we're asking everybody, and I know it restates a little bit what we got into but just so that I follow the program without getting in trouble. As you think through and beyond the pandemic, how do you expect your priorities to shift, especially as they relate to either cutting costs or managing some of those pressures that you may have faced or increasing levels of investment to deal with the opportunity?

So I -- if someone can tell me what's going to happen post-COVID, I'd love to hear it because I just don't know. The thing I'm pretty sure about is it wouldn't go back to where it was pre-COVID. So as you look through introspectively how it affects our business, as Denise said a little earlier, we are going to have to spend more on PPE. We're going to have to spend more on cleaning. We're going to have to spend more on the kind of things that we appropriately have done to make our customers and our team members feel safe. And that's something that will continue. And I actually don't think that's a bad thing for the food industry to be even better at that, and I think we've been pretty good at that in the country over the last little while but getting even better around. We've always been well placed in that relative to some others. So I think that's a thing that's going to give customers reassurance.

Yes.

So I think that will be an ongoing thing for us. The role of our team members in our industry and in our company, I think, will change. And I think that kind of how we really represent that appropriately is something that we're -- we'll have to do post-COVID, and that's not going to change. I think e-commerce will be at a higher level than it was before we started. So we'll have to be well placed in terms of doing -- and we have to think hard about the implications of that. I think the meal solutions that you touched on earlier, prepared foods, I think, will be different. I don't think restaurants are coming back anytime soon. So I think the world of how people buy into that fresh food, that kind of prepared foods, fresh food, will change a little bit. And having said all of that, the strategy that we had coming into COVID, we're very comfortable is the right strategy post-COVID. If anything, we think there's a few tailwinds around immunity, which will help our vitamins and supplements business around immunity and health, which I think will help our produce business. And I think differentiation on things that are healthier or perceived healthier in our meat assortment and -- will help -- will be reinforced by what we're doing. And smaller stores that aren't as frenetic, if that's the right word, where people can see around the whole store and they're not kind of bumping into people when they weren't expecting to, I think, is a strength. I think our format's a strength going forward. So building these smaller stores, low-profile stores that you can see all the way around, kind of plays into what our strategy was. The other thing that I think is important from the context that promotional activity in the U.S. grocery industry has been -- there's this obsession with sending out millions and millions of flyers with the price of chicken on it, and that drives -- or the price of Coke or the price of -- and we even saw it at Memorial Day. Again, it drives a lot of people into the store all at one time, and I'm not sure that is sustainable going forward. So I think the context of this intensity around high, low will change a little bit going forward as partly availability from the vendor base and partly from just customers not being as comfortable with that kind of frenetic Wednesday battle for the product. I think that plays to our strategy a little bit as well.

That's awesome.

So although there were a lot of changes, we're feeling good. Our strategy is in the right spot, Brandon.

Yes. No, I think that's great. I mean what's interesting, one of the other questions we had for -- a summary question for everybody was about ESG. And as you guys go through everything you've done, I'm like, you're doing all of that, and you're doing all of those elements because it's necessary in order to be successful for the customer mission. You have to serve the associates. You have to figure out the right level of sourcing. You have to reduce transportation miles, and you have to have clean governance for how you're allocating the capital in useful ways. And so it's one of those elements that when the strategy gets right, as you said, you don't have to change it much when COVID comes on. You don't have to change it much when the investing style becomes ESG, and you don't have to change it much when a competitor does something because your strategy is right. So we really appreciate the time. Thank you so much, guys. Thanks for all the questions, audience members. I know we didn't get to all of them. By the way, audience, there's a Procensus poll that you can look at on the -- I think left or the right of your screen, I can't remember, but you'll see it, that we'd love to have feedback on to get kind of the take on things are helpful and useful and impressions on the opportunity that we think Sprouts Farmers Market provides for investors. Thank you very much, guys. Appreciate it. Get to the pool.

Thanks, guys.

Thanks a lot. Appreciate it.