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

Well, good morning, everyone. Thanks for joining us today. I'm Mark Carden, the food retail and food distribution analyst from UBS. We are super excited to have Sprouts with us today. Sprouts is one of the largest natural organic groceries in the United States, operating more than 380 stores across 23 states. We are fortunate to have 2 of the most knowledgeable people in the industry with us today. First is Jack Sinclair, the company's Executive Officer. Jack joined the company in June of 2019. We also have Chip Molloy, who took over as CFO in September of 2011 after serving on the company's Board of Directors since 2013. We're going to run through a number of topics this morning. If you have any questions during the presentation, please feel free to enter them into the app and we can try to leave them into the conversation. Before we start, I'm required to read a legal disclaimer as research analysts, we are required to provide certain disclosures relating to the nature of their own relationship and that of UBS with any company on which we express a view at this meeting today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out, and we can provide them to you after the meeting.

With that, let's start on some topics. So to start, we're now a few years to your guys' new strategy, obviously, the pandemic and inflation have thrown a few curveballs your way. As you look back and evaluate your progress to date, what are you most satisfied with and what's been most challenging?

Well, as you say, Mark, it's been a pretty volatile couple of years. The one thing that we've tried to -- I was able to do was get the new strategy in place immediately before the pandemic. So we've kind of managed anchor into that strategy and the things that we talked about just before the early 2020 was how can we get much more confidence in our algorithm in our underlying model and how can we get much more confidence in the target customers that we had. Chip and I kind of got together and talked a lot about how we're not going to be at Walmart on pricing, we're not going to win against Amazon on convenience, but what we've got is a unique opportunity to be very targeted to health enthusiastic customers, innovation seeking customers, customers who are -- there's more of them than those 5 years ago, and there will be more of them in 5 years than there is today. So it's a platform from which to work from. And what we were trying to be was trying to be all things to all men, try to chase every customer down, and it was putting a lot of pressure on the margins and a lot of pressure on the promotional intensity in the business. So unraveling that and one of the things that I think we've now got to as we emerge out of the pandemic as a much stronger underlying proposition, a much stronger underlying margin, a lot of differentiation in the assortment that we have. Very pleased with the evolution of the assortment, very pleased with where we are with regard to our underlying margin, which has given us all our strength as a -- from a financial point of view, which Chip will talk about in a little while. On top of that, we've been very focused on how we improve our fresh foods. We've built 2 new distribution centers. I'm delighted until we get new distribution centers in Colorado, a new distribution center in Orlando, which is the basis upon which we can build more stores and give more access to our proposition going forward. So that's creating an underpinning for the business. I'm delighted the fact that we've got a new store format in place, smaller there 23,000 square feet stores as opposed to 30,000-plus stores. That's going to -- that's all the stores that we're building in this year, in 2023, will be in that new format, and 2024 and beyond, we're going to have something like another between '22 and '24. We're going to have someone of the 70 stores on the market between now and then which we're very excited about. So new stores, new distribution centers, underlying proposition that I think has got a very strong financial strength in the business. And a set of -- we've developed a team pretty strongly over the last couple of years. And I'm very pleased we've got a team in place that I think gives us a platform for really strong growth going forward.

In terms of -- can you speak about your overall value proposition, really Sprouts has historically differentiated on produce. That said, in the environment today, do you think there is still any misconceptions out there just on Sprouts competitive position within the category that might not be true? Do you think that people look at the natural organic offering, perceived to be expensive than the current environment or has it been pretty status quo on that front?

Well, I think one of the things that's happened is that the conventionals as the industry calls them have certainly developed a little bit more in terms of organic, a little bit more in terms of attribute-based products. But we're still very differentiated. You know when I was looking at some data, we've only -- a lot of our assortment, only 12% of our assortment overlaps with Walmart, which is a pretty strong grocer in the country. So that differentiation, I think, is something that merits a lot of attention. When it comes to the value point, Mark, produce is very important to us, and we think we've got strong differentiated pricing on produce, which was the basis that built the whole business in the first place. But as you go around the rest of the offer within the stores, our vitamin business is very important to us, but it's service based, and it's based on differentiation. When you go into our grocery aisles and our dairy aisles, it's about differentiated product. Good value on those products, but not something you can directly compare with. So I think one of the challenges we have is how do we position ourselves in the marketplace both with the investment community and with our customers that were different. When we open a new store, customers come into the store, a lot of customers go in to the store. And a big chunk of them, which is not a surprise to me go, this isn't for me because it's -- where is my Coca-Cola? Where is my cereal? Where is my tight, where is my things that I expect in a grocery store? If you expect that from Sprouts is not what you get. What the customers that do love us love us for our differentiation for the things that we sell that other people don't sell. We sell more plant-based dairy products than we do dairy-based dairy products because I don't know any other grocery in the world that does that. It's just the nature of who we are is the different -- is the value growth, is the differentiation that allows us to position in the marketplace. But it's hard to have that dialogue when there's a lot of conversa -- you're asking one of the challenges in the last couple of years. One of the challenges in dialoguing this in the marketplace is everybody wants to lump us in with the grocers and if grocery goes in this direction how will Sprouts evolve and develop? And we feel we've got a little bit of a moat in place almost irrespective of what happened on a competitive sense, promotional sense -- what we've got a moat in place that gives us some defensiveness in almost whatever comes back to us going forward.

Great. And building on that a little bit more from the customer standpoint, historically, you guys put together some really strong net promoter scores among your most frequent shoppers, getting new ones in a door, I know over the past few years, has been a bit more of a challenge, particularly in some of the newer markets. How acceptive have customers been to your efforts to enhance your marketing message in these markets? What do you think is the most impactful here? And what do you guys tell someone to grow?

Yes, sure. I think we were slow than we act. So as we changed the model back in 2019 in 2020 and we got away from the extreme low prices on produce. We had great product, we had great differentiated product. We had a great store experience but we weren't telling that message well. So then the pandemic hit. In the back end, we're beginning to tell that message. We're beginning to enhance the products. We're talking about Sprouts brand or we're highlighting it with signage in the stores, we're highlighting with packaging in the stores, but there's still opportunity. So in the newer markets like Florida or the Mid-Atlantic where we don't have brand awareness, getting that message out is really critical for us. So we're -- our messaging is becoming more regional so that in those markets, it's about who we are, and what we do, and in markets like California and Arizona, it might be a little bit more promotional based, but just to enhance sort of stimulate demand but not like deep discounts, but where we are in telling our brand messages what we're trying to do. And we're starting to see some traction. Our new markets like the Mid-Atlantic and Florida they started slower but we're now starting to see comps in those regions that are better than we would have expected as you think about the new store.

That makes sense. And you've seen that even more so from some of the markets that have intensified more recently as opposed to the ones that you're a little bit more than in-store.

Absolutely.

Yes. We're encouraging places like Tampa, where when I first got here, we had 2 or 3 stores, it's very hard to get a message so that people know. We're now very well known for owning, I think, 12, 13 stores we've got there now is that critical masses allowing yourselves some strength. And that your reference promoter scores they're really high relative to the -- relative to our competitors which is something that gives us a lot of confidence. We ask the question, why do people that love sprouts, love sprouts so much? And it's kind of this is back to what -- how we need to communicate going forward. There are other projects fresh great pricing. They have the attribute-based differentiated assortment. I can buy things at Sprouts that I can't get anywhere else, and that's a big plus we're getting. They either love the smaller store formats so they can get in and evolve and the low profile that allows you to see all the way around the store. So there's a uniqueness and a differentiation that drives the net promoter scores. The challenge we have is you've got a set of customers who love us and don't come as often as we would like them to do. And a set of customers who should love us they just don't know about us. And that then leads to how do we develop our customer engagement going forward. And customer engagement part of it is to entice a little bit more spend from our existing customer is we've got -- we will reengage a DNA of the company, which is sampling and servicing say the stores. And we had to turn it off a little bit because of the pandemic, a lot of the things that makes a farmers market special is the engagement you have with customers in store. So we think we're doing some very specific things on that, that I think we'll start to reignite what was great in the company. We're doing a lot of work on are we picking the right media to talk to the right people and then what going on that space which I'm quite excited about. And then personalization. In our world where customers are much more in tune with what's on the labels and why you're buying things and the new products we're bringing in, there's a new opportunity for us to get much more personal in our marketing communication and that starts with getting the information. We've only got 13% of our customers who actually give us the data at the moment. We can expand that a little bit and use that to develop it. We've done some little tactical things on that. And as we get into 2024, I'm pretty excited about where asking because in terms of driving a little bit more traffic and a little bit more spend from the customer that exist with us at the moment.

That's great. In terms of -- In your earnings calls recently, you've called out some of the trade-down behaviors even seeing such as reducing the number of produce items, sometimes shifting spend in certain categories like proteins. Have they seen much trade out amount among your target customers that might be a little bit more sensitive to some of the economic shifts? Do you see this becoming any more of a risk if economic challenges persist? And then what kind of actions can you take to really keep those customers in the fold?

I'll let you talk about the numbers a little bit around the basket talking a little more broadly about when the economy is under pressure and people's finances are under pressure, will they trade out at Sprouts and go somewhere? I think the reality of our proposition is, if you're a vegetarian and you can get everything you need veg, you're not going to change your dietary requirements because the economy is under pressure. You might buy a little bit less, you might buy differently, but you're going to go where you can get differentiated assortment. If that's what we're focused on, and we're communicating with those customers who are differentiated. And when you look at what's happened in our e-commerce business, it gives me a lot of confidence but there's a set of customers out there that will not do what we indicated trade out. We're the fastest-growing e-commerce business in the United States in grocery. We then try to be, the customer took us there through the pandemic not wanting to be -- we didn't say let's go from 2% to 11% of our sales in e-com. Why did it happen? It happened because the customer can only access what we sell from us and that creates that differential. That gives me confidence that our assortment is strong enough to withstand the kind of changes that go on in the economy and people finances, and that's given us a lot of confidence going forward. Maybe you could talk a little bit about the basket and what's in the basket.

Sure. So the basket we talk a lot about losing that extra units. We don't have a 30 or 40 unit basket. We're sort of in the low double digits from our units per basket perspective because we're a complementary shop. The #1 item that we have the most units is produce. So when you think about the customers first, when we got out of the highly, highly promotional game of 2019, with lost -- we started to lose that unit. But we then went been into COVID so you had the up and the down of the pandemic. It's hard to get there. But as we were coming into 2022, you could see that extra unit of produce was gone. And now as you've seen inflation take over since early 2020 what we believe the consumer is doing is they're looking at the basket, they're saying it's less of a trade down, it's more of a how do I pinch or how do I save. And in our basket, the way to do that is take one last item out that happens to be your lowest price point item and the items that you have the most of in your basket in a way, we believe that the consumer is sort of what we describe as they're managing their household trunk by not buying as much produce. And you can see that across the industry. But for us, because more than 20% of our sales are in produce it has been a disproportionate amount. So what does that mean going forward? We're very focused on that. We've got new leadership in produce, we've got some new strategies in produce. We're really -- we've doubled down on local produce. We're really getting good there. We're beginning to get the messaging out on produce as well. We're still very, very price very well, especially in certain regions like the Southeast where very high differentiation keeps getting between our pricing and the pricing of the biggest competitors. So we feel really good about that. But mathematically, you've got that -- when you went from 12 units to 11 units to now 10 units as long as those units start to stabilize, which we're beginning to see, that's where in the back half of this year. It's not about gaining extra unit, it's just less leakage. And we believe just mathematically that's happening for us as you start to see the AUR or the inflation not be as prominent in the back half of this year. We do have a lot of efforts to get that extra unit in the basket of contest in the stores. We've got the sampling that Jack is describing, the testing the produce, how we're presenting the produce. So it's an all-out effort to get that actual unit in the basket.

Interesting. Do you see a risk of that -- of customers just being accustomed to maybe being a little over controlling of their own household trunk as you said earlier in terms of getting that item back? Or would you expect as inflation starts to fade?

I would say that from a financial perspective, we're not betting on getting that unit back. What we're betting on is working on and we can see the leakage stopping. From a strategic perspective we're doing a lot of things to get that unit back and we think that there are opportunities to do that we just are not spending against it in a way -- getting ahead of it from spend perspective.

A big driver for us household fresh veggies -- frozen vegies has taken on -- it's very important to us and it's become much more important to the consumer in this environment and I think that has been a little bit of a switch from very fresh to frozen as people try and protect that household trunk thing. We've doubled down on space for frozen and it's working well for us.

Interesting. That's a higher-margin category, if you get guess as well. So percentage by that. That helps out too. In terms of just disinflation in general, how would you expect the competitive landscape to change if you experience some disinflation in the back half of the year? Would you expect price competition to step up both in conventional and also in natural organic? And then --- I'll ask a follow-up actually.

So the starting point of that is, will there be some kind of price dramatic price investment going on across the industry? I think not. I mean the challenge is on Albertsons and Walmart and it's all going to create this kind of downward spiral in terms of margins in the grocery sector. They've been pretty public at saying that's not what's going to happen. I think it unlikely, the way we look at it is even if it did, it wouldn't affect us too much because what they would be fighting on would be things that we don't sell. It would be a battle for who can sell Tide cheapest and who can sell Coca-Cola cheapest, which isn't going to affect us too much because you can't buy those things from us. So the challenge for us is how do we make sure that what we're selling is relevant to our target customers going forward in a deflationary world, a disinflationary world, an inflationary world. So we look at that context of who we are. And we think it creates a moat for us in the environment that we're working in. There's clearly going to be some volatility. The volatility of inflation and how to manage inflation from a food retail point of view is unprecedented in the last year, a number of price changes that people have been able to go through it here now the going at scale of the change. It has been unprecedented, unless you're very old like me and you remember it in the 1980s in the United Kingdom. It's not really happened to the level that it happened going forward. So if it switches the other way, there's going to be a lot of decisions that everyone is going to have to take, and we'll have to watch it. With regards to natural organic competition as opposed to conventional pricing, what would happen in that space? We think we've got a pretty strong -- the only competitor, there's one obvious competitor that we would kind of look at carefully. Our produce pricing is something we'd be very sensitive to in that. If we started to see a dramatic investment in produce, that's something that we would pay a lot of attention to, and that's probably the only dynamic competitive thing that might happen that we will be over in good shape. At the moment we haven't seen anything that worries us so far, but we'll be watching that closely as this evolves and develop. The rest of the proposition is about reacting appropriately to value in the marketplace as price changes. But we're very -- I think Chip and I and the team have got a track record now of being pretty consistent on our margins. It's not something we're going to compromise because that's been the key to creating our business score. It's got the momentum that has at the moment has the capability and the underlying algorithm to be able to build the kind of stores that we want to build, get the access so we can get -- we couldn't have done that without the math. So we're not going to compromise that whatever happens going forward. And I would say we've been pretty confident about that through all the ups and downs over the last few years. That's the one thing that we can say with a lot of confidence that margins have been strong and that's something that we can maintain going forward.

So that's an interesting point. That is a question that as you can imagine comes up with investors a lot is it expresses a very sustainable gross margin and realtor to some of its peers. What are some of the levers of asset price that you guys think are almost impactful and allowing you to sustain up margin when a lot of maybe not direct competitors, both are field retailers have seen us trending down over time?

Well, a couple of things. One is obviously shrink is one. But it's not -- I mean we've been managing that and doing a really nice job with that. So that's helped. It's not going to move it 100 or 200 basis points but it's certainly going to do something and always help manage it. And then we continue to look at cost of goods like constantly looking at who we're dealing with, who our vendors are or talking them, supply chain efficiencies. A lot of our stock comes through distributors so we're going through distributors, the relationship with our distributors, what are the cost of goods that they're getting and how are we negotiating with the vendors. So that's a critical element of it to make sure that we're continuing to maintain that margin.

And Sprouts brand it's going to be important to us when we load of progress as you really encouraged by the Sprouts brand performance, which again creates more of a more differentiation, and it's differentiated to Sprouts brand. It's not commoditized brand in that space. So we've been really encouraged by how that's gone up. Our mix of private label or Sprouts brand has gone significantly higher in the last few months even as we've invested in new packaging, new designs and new products. So that's going to help us create that moat, keep in having differentiated assortment. The dynamic mix of -- Sprouts was built, and this is long before my time. Sprouts was built on rate-produce pricing and driving margin from vitamins, bulk, which other people really haven't gotten any scale driving margin by having differentiated grocery assortment. That whole context doesn't change the vagaries of how things are changing in other places. You've got an underlying business that was the reason the margins we're slipping a bit was because it became very promotional and people would chase the promotions. And as long as we take away from that, we've got an underlying mix that is strong enough to sustain if anything I think the margins got more upside than downside going forward. I'm not supposed to say that, apparently.

So last year, I remember we were in a stage in Boston and Chip, I remember you threw out a term when you're thinking about wide space in terms of the smile of the U.S. and how you'd start off in the Pacific Northwest go down to the Southwest across the South of the Eastern Seaboard. You guys have tweaked that a little bit and now you're talking about 1,350 stores across the full country. And so big opportunity there. You guys are targeting adding 10% growth. What role would M&A also play within that? And then I guess related to that question, you really found a box prototype that works well for you guys. Presumably, some of the potential targets might have the same size box, how would that impact your thinking of approaching M&A?

Well, from that M&A perspective I think, one, we do have a lot of wide space to just grow on our own, whether that's through the smile or even as we make our way into the Midwest. We've still got some years within this smile to grow before we have to start thinking about that Midwest. M&A, there's just -- we could sit back and say, what would be the least of folks that we would potentially want to be involved with and the list is pretty small. Unless you're really going to go to a multi-brand or a multi-concept. And we just don't believe. Where we sit today we love the brand proposition that we bring to the table. We want to bring health to more consumers and be able to extend that brand and so it gets very complicated when you try to do that on your multi-banners with multi-customer propositions. So there's no need to do that for now. When you look to the Midwest sure, there's players, some players in the Midwest that might fit, privately owned, whatever of course, we'd always look at those, but can you get it done? I don't know.

Makes sense. Maybe they're related just when you guys are thinking about this 10% unit growth and you're looking for an ideal location for a Sprouts store, what jumps up?

Really, the customers, right? So how many customers are there that fit our segmentation? So we're looking for the health enthusiasts, the innovation seekers, what's the density of those? That's got to be number one. And that from there, what's the landscape like from a competitive perspective even though we don't think about -- sometimes we might want to be right next to a conventional, but look at just how's the pie gets chopped up within that area. And then we use the tool today, which is pretty new that we've just implemented last year but it took us almost a year to really do it well. We now have the tool that helps us identify not just the trade area but helps us identify main and main. So it literally helps say, this is where you want to be if you can get there so that's ground zero. So you start at ground zero and go from there. And it's a pretty exciting tool for us.

And just in terms of as you think about also with new stores over the long haul, you talked about what you look for in a store as you're placing that store. We've also talked about expansion into new markets you've also done a lot of infill. How do you think about the balance between opening stores in infill markets versus opening stores in new markets?

When you start to accelerate your growth to 10%, beggers can't always be choosers. So let's just start with that. But we would like to -- we would like a nice balance. So we find that in our established markets where we have brand awareness of stores typically come out of the gate at a higher level and then they get the maturity quicker. And then unestablished markets or nonestablished markets they come out on average slower. And so it's a balance of how many we can do. We've done the last 2 years. We've sort of been a 60-40 mix of nonestablished versus established. This year will be more of a flip of that 60-40 the other way. Ideally, if we could do 10% square footage and do it 50-50, the perfect world, that's what we would do because we've been getting brand awareness at the appropriate clip without the diluting P&L with the stores that are in the nonestablished markets.

But to achieve our goals and we've talked about 1,300 potential sites around the country. It starts with where our distribution centers as long as it's within 250. So a lot of those 1350 we don't have a distribution center within 250 miles. So that's a big chunk of it. One of the reasons we talked earlier, having distribution centers in Orlando and then in Colorado and the new one in California or just filming is going to even more opportunities and confidence. As you drive a little bit the economics get a bit better. We're taking millions of miles off the road, which is saving us a lot of putting in additional profitability in each of the stores for opening. The next challenge for us is when do we go -- we will need a distribution center in the Midwest and the Mid-Atlantic to get after. And if we want to get beyond that, we'll be putting some distribution centers in other parts of the country to target that. But we don't have to get there totally 26 27 to keep this 10% unit growth going forward. And I think we've got much more confidence in our model and we've got much more less risk put into the model by making them smaller and more easy to operate.

And that brings up an interesting point, Jack. I know one of your main areas of focus or initially was a focus when you joined the company was the distribution center footprint and how it wasn't satisfactory for Sprout growth plants. You guys have obviously done a lot on that front, opening the new California distribution center, you talked about expansion plans. How close are you today to being caught up to where you would like to be just your existing footprint before even thinking about...

Well, where we are today, we're probably at about 80%, 85% of where we'd want to be. There's still a few outlines our stores making us a lot of money, about 400 miles from the old distribution center. So when you trying to change that footprint it takes a lot of will to do that. But we've certainly made a lot of progress on that. We're in a much better place than we were. It took me a while to realize it, but it's a long way from Atlanta to Naples, and we kind of figured out if we're going to build the store base that we need, we need more capacity in distribution in different places. So we're closer than we were but particularly as I said, in Mid-Atlantic, we need to get ourselves in a better place there and we'll get there.

And another recent development with Q4 results you guys announced 11 store closures. These were all identified pre-COVID understandably during the midst of the pandemic you don't want to shut them down. But what led you decide that now is the right time? And then just from a geographic perspective, how spread out are they? Are they concentrated in any particular markets? Do most of them overlap with another store so shoppers have another option? How would you think about that?

I'll let you get into more detail, Chip, behind the rationale over it from a timing point of view. Principally, I didn't want -- we had a long conversation when I first joined about stores that weren't delivering what we want them to deliver financially. And it was significantly more than what we ended up doing today, and this is a one-and-done thing to catch up. And the reason it now is the pandemic's kind of done. I fundamentally believe that this year, certainly February, it feels like it's done and it's kind of it would have been wrong to compromise grocery stores, people having access to those health options in those stores over the last couple of years when we certainly would, from a financial point of view had thought of doing this sooner rather than later. So maybe I let you explain the stores, Chip.

Yes. Sure. In 2018, when Jack joined, I was on the Board at the time I stepped in as interim when Jack first joined. And we looked at the entire portfolio then, and we would have closed more stores than we did now. But because we fundamentally have improved the profitability of the store that we're on average, we have fewer stores that are what I would call less than optimal or producing negative results. And so it was just as Jack said, we got past the pandemic or at a time at the end of the year, we took -- we did a lot of work. We looked at every store in our portfolio, and we came down and we had some that leases would becoming about at some time in the near future. A lot of them were just too big or they were just bad sites that we had picked in the past and we just thought this was the time, let's get it behind us. So let's move on. It will make us a healthier portfolio going forward and a stronger portfolio. The benefits we'll get a little -- they're all negative, so that will take a little drain off of P&L as well as in many cases, there will be some reverse catalyzation that will sort of make us a better healthier company going forward. We have -- just to add to that, one person as a day, so what we learned. We did change our real estate model. So we have a -- we think that we're in a much better position to derisk opening a bad store in the future that we may have been in the past.

Okay. You talked about the decannibalization aspects. When you think about your store growth overall, how impactful is cannibalization just as you expand your...

Well, it depends on where they're built. It comes back to the density of it's established or not established, but it's a pretty small drain. I mean we burden any new store with cannibalization to see if the economics work assuming that that's -- we're not just going to build it. And it's immaterial at this moment.

So maybe jumping back to private label. Jack, you touched on it a bit earlier. Sprouts obviously takes a very different approach. It sees more to supplement our assortment versus creating an entry-tier level. So I guess really sizable penetration just this past year going from 16% to 19%. How do you weigh when it's ultimate for a product to use the press versus a more national brand? And how do you see private label penetration expansion kind of unfolding over time? Is there targeting as to grow?

Well, we've done a lot of work in Sprouts brand. We've brought a new team together with a lot of expertise, and I'm very excited over the work they've done. The redesign of the Sprouts brand is something that is coming alive and will be completed by the end of this year, but we're kind of halfway through that now. We think that's made a big impression on it. The key there are some real opportunities in the categories on the Sprouts brand that differ. What I don't want is a commoditized private brand that's just going to look like I can buy in Kroger or I can buy Walmart. What we're looking for is different. So if we've got even if it's canned pinto beans, they will be organic canned pinto beans. So you're covering some of the base requirements of a customer in the grocery shop, but it will be differentiated in some way whatever it is. Seasonal is a huge opportunity for us when we've done a lot of work on trying to develop private label that fits into the seasonal portfolio. That's exciting. And then taking the big trend in the marketplace around attribute-based products we think plant-based ready meals is something that we can own. Other people haven't really created. If you can get products that taste good and this is -- the technology is changing quickly and we've got some real expertise in the team that I think is going to create some products that will really work for our target customers and try and take the plant-based vegetarian meal space and --where everybody wants to eat, not just people who are focused on that particular dietary needs. So a lot of work going on in private -- on meals and meal solutions and a lot of work going on, on seasonal. On top of that, we have this in all our stores and our innovation centers where small brands come to us. And when we see that working, we're working with brands to say, is that something we would want to put into a Sprouts brand as part of an evolution with our buying partners? So I don't want us to be a 100% private brand. I don't want it be a Trader Joe's. But I do want us to have that differentiation in Sprouts brand that creates that loyalty and it leads to the loyalty and it's something we can do well with our personalization and loyalty work, talk to people about the products that we're bringing to the market. So we're making a lot of progress on that space. We're not setting a target for our work at Tesco back in the '80s, we had like 50% private label or something like that. That's not -- we're not trying to chase it down that route. But what we are going to do is continue to make Sprouts brand so relevant for our target customer that continues to grow. It's growing about twice the rate our Comp Private brands 2x at the moment in terms of comp, which is something that's a testament to the work that the teams have done.

It's all about sticking us. Can we get this stick to in us? Can we ever come back? I formally part of that growth is we've redone a lot of the packaging and the packaging. I'm a finance gig and do I care about packaging, but it looks really, really good and it seems to be working so that's -- I'm happy with it.

Changed your mind, Chip.

That's great. Another area, so in stocks, you guys have done a lot of work here. How do you think about the longer-term benefits from two of your tools? The perpetual inventory computer-assisted ordering system and your on-shelf availability solution. And then for those newer to the Sprouts story, can you highlight what these 2 initiatives entail and how they could impact your P&L?

Sure. On-shelf availability, we launched that last year. It's a tool that allows in the moment the stores can see where are we out of stock. They can see it through the velocity of sales and then they -- it triggers them. So we've set up goals around I would say on shelf availability for the stores that bonused on it, they're going after it. So it's really open to in-stock. PICO, which is a perpetual inventory computer system ordering is really taking the work of our store associates having to determine how to create orders and there really is perpetual inventory and all they need to do at this point is just count. And when they count, then it knows, the system knows what to order. It takes the human element out of it. I mean, obviously, they have within reason, and we're launching that through all of our different categories. We'll be finished with that this year and that's helping the stock position to them.

So both of those platforms they're not reinventing the wheel. It's something that's been pretty common in the industry. I think the reality of the natural and organic space that dumbled into if you like in the last 3 or 4 years is this acceptance of mediocre during in-stock that would not be tolerated at a Walmart or a Target or -- and that kind of that change of mentality is part of this improve systems in place to make it work and encouraging our partners, there's such a price of assortment in a small space. It becomes a difficult challenge to get in-stock as good as you would get in the more conventional kind of good retailers. So that's something that we would aspire to as we change our systems, we change the partners we're working with. And we're boys in the store managers now in stock. And it's one of the things that has our e-com business growing within in stock, it's very crispier in stock when I got here. The in-stock guys would come and say as well, I can't give us, I can't do that. And the feedback that we were getting from that information really prompted us to say, we're going to change the mentality around in-stock in the sector that we're in. And that's something that -- there's an upside and that's a very significant basket upside if we can take our produce and store our -- convert our grocery and stock up to our produce and stock levels, very significant upside, and that's what we're hoping to get over the next year or so.

That's another initiative you guys have talked a lot about in recent years in self-checkout, how far along are you on this one? And do you still see much incremental in this front?

We're at 40%. So we're at 40%, will be at 50% by end of the year. All of our new stores have self-checkout. Then it becomes down at -- then the other 50% of the portfolio is really a math exercise of can you save away with hours to put the system in. And then in some cases, when it's on edge, we're going to go for it anyway because it's a better customer experience.

And we've had some dialogue about that is that given the nature of who we are. The farmers markets don't have self-checkouts in them. And if you want that interface with the customer that I talked about earlier, we don't want to lose that but there's clearly some customers who come in and want to go -- small basket want to go quickly. So we've -- and it's helped us. It certainly helped us in those stores that we have put to end with cost per labor are going up, a big chunk of cost in labor at retail is at the front end. So it's helped us in terms of navigate through some of the challenges on cost per labor hour. So the technology is getting a little bit quicker and better and cheaper. One of the challenges we had with self-checkout was when you have a big bulk department, which we have, where people have to write the code down, we've had to navigate our way to through things that maybe other people haven't had to. So it has taken a little bit longer than it should have, but there's opportunities going forward in that space as well.

Maybe building on to the labor point there a little bit, you guys have obviously made some big investment in labor over the course of the last few years. How are you thinking about the environment heading through 2023 and just the degree of pressure we might see relative to, I guess, what you've seen in recent years?

So there's clearly been wage pressure across the industry, which we saw the cost per labor hour has gone up as it a little better. It's stabilizing. What's happened very, very recently in the last 2 or 3 months, we're seeing much more applications for hours and jobs in our stores, we're seeing bigger applications for people to work overnight, the night shift because people are looking for second and third jobs. It's interesting how the economy is just beginning to put pressure on individuals, and we're seeing better quality applicants retention rates of -- retention rates are going down, applications are going up, the quality of the applications are going up. So the labor challenge, I think, is beginning to subside a little bit. So I mean that's what we've seen in our business. And it was something that we were pretty worried about a year or so ago as those kind of -- as people had a lot of money. We seem to not need the jobs as much over the last little while.

The rate of increases is just coming down, so we're not seeing -- we'll have -- 2021 they were up substantially. We were able to manage through that, through some other efficiencies. 2022 sort of managing through it. Right now, we're working really hard to manage through it. It's just some opportunities but we'll still have tail of that labor that we're managing through. I think we'll be fine as part of our guidance for this year and then it's starting to stabilize, as Jack said. So I don't think you'll see the same kind of rate of increase in 2024 as you've seen the tail, we're seeing the tail of it.

Sure. So time for I think a couple of more questions. Some tweaks you guys made the new store format last year, you just talk about some of the changes that you've made is you've been able to respond to some of the customer behaviors you've been seeing. One that jumps out is e-commerce and how you went from one door to two doors to better handle traffic between the 2 channels. Within the past year, have you made many other incremental changes to your new store prototype or they remain pretty consistent with what you guys have evolved into?

I think the answer would be both through that particular question. We've looked the V6 which we call it, our sixth version of this price store. Big changes that we made only two door. We changed the amount of space that was devoted to non-customer. It's base fairly significantly down. So integrated mid to daily preparation area integrated with meat and bakeries so it significantly changed. We've been happy with that. We've been happy with the e-commerce investment allowing people to take that door and go straight into the car, people go straight out. And I think that's being one of the reasons that's worked quite well as far as the new stores. New stores have done well in e-com. And then when you take other tweaks made we weren't happy where we ended up wine and beer assortment. So we're going to tweak that and move that around. We weren't happy -- we didn't have enough space for some of the meals that I was talking about so we're going to have to pitch some new competence to do that. We overdid -- it's interesting how the plant-based meat world just went crazy, and we got behind it. We probably overdid that a little bit in terms of the kind of meat replacement products that was on fire for a while, so we're going to cut that back and be much more plant-based in the different sort of way. Our daily base wasn't quite what we want to do. So we're tweaking things but by and large, we're happy with the assortment effect, which is what I mean by both point to what you said, happy with what we're doing, but that some tweaks always we're going to need to go forward to the next stage.

Fantastic. And let's wrap up one last one on e-commerce. So currently, you guys are north of 11% on e-commerce penetration, what's interesting enough I mean that's higher than conventional competitors have been spending a lot more on e-commerce than you guys have then.

Well, we've spent nothing on it.

Pretty good return right there. But how do you think about your capacity overall to do some more penetration further from here? Do you reach a penetration level where it becomes destructive to the in-store shopper? Do you think you're going to have to at some point invest in automation, areas like microfulfillment just because you've been so successful on that front?

I think we're going to go -- one, we're going to go with the customer wants, right? So if the customer wants to do more that way. We're going to continue to fulfill that way. We have a great relationship with our partners. We now have two instead of just one. We had a great relationship before. We've done a really fine job for us. It's disruptive. They're actually -- our associates in the stores, they're fine -- they do a really nice job. So we don't see that being disruptive in the stores. There are many fulfillment centers and they fill both needs. So I will think it changes. Where is the endpoint. Who knows. Who knows if it's going to be 15, it's going to be 20%? Is it going to stay at 11, who knows. We're going to go where the customer is and provide that service.

Just to mean further we'll go over the customer -- when I took this job, I thought e-com would not grow the way it has grown in our business because it's an experiential thing. But as I've evolved through this is truly an omnichannel business that reflects -- if you're interested in the health of the food that you're buying, it's an only omnichannel solution, whether it be in the store, whether it's pickup or whether it be delivered to -- I'm using a lot of partners I think has been the right thing to do because it's quite expensive investments to try and create infrastructure for yourselves. But ultimately, as Chip said, it's about evolving with the customer, and that's kind of what we've done and as we will continue to do in this space that will be.

And by far the economical or highest return on the investment to go acquire a new customer in our space is still to build new stores.

Makes sense. I think that's a good spot to wrap. Jack, Chip thank you guys so much for putting this together. I really appreciate it. Thank you for everyone in the audience for joining us today. And hope you have a great rest of the day.