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

Good afternoon, everybody. Welcome to Sprouts' fireside presentation today. Thank you for joining us. My name is Krisztina Katai. I'm Deutsche Bank's broadlines and food retail's analyst. It is my pleasure to have with me Sprouts Farmers Market's management. We have Jack Sinclair, Chief Executive Officer; and Chip Molloy, Chief Financial Officer. So for those that might not know, Sprouts is one of the largest natural organic grocers in the United States with over 400 stores. So with that, I think we can go ahead and kick it off.

So I think many in the room are familiar with Sprouts. But just that might not be as familiar with the Sprouts' story, I wanted to start with the strategy change. You implemented that, Jack, in 2020. It's been a couple of years. There was also COVID in between. But as you look back, how would you evaluate your progress? What have been the biggest hurdles? And maybe what have been the easiest changes to implement?

Sure. Well, it's been an interesting 2 or 3 years to say the least in terms of what's happened since 2020. So in the middle of implementing a strategy, we've got a pandemic and pretty extraordinary food inflation. So both of those things have taken some managing through that. But we've stuck to our guns through the process in terms of -- and that's probably been the biggest thing that we've had to be very disciplined about. What we brought in was being very clear about our target customer that we weren't going to chase every customer in the marketplace. A natural and organic retailer with some very unique proposition around produce and bulk and vitamins, that creating the target customer and focusing in on the target customer, health enthusiasts and innovation seekers. We estimated that was about $200 billion. The total available market for food grocers in the United States is about $1.2 trillion. So we kind of very consciously took the view that a lot of the people we had been chasing in terms of coupon clippers buying -- responding to our paper flyers. We're sending 21 million paper flyers every week, and that was chasing after people who were responding to those promotions. And after 2 or 3 years of that, that runs out -- high low runs out of runway. So being very clear about our customer was the first pivot to the strategy. The second pivot to the strategy was build smaller stores that could get better returns. And the principle for that was we were building 32,000 -- there's an opportunity in the marketplace and the stores we were building good stores at 32,000 square feet didn't need to be as big as they were with a lot of unproductive space in them. We went to visit -- I went in my early days with Chip. We went down to the San Diego stores, which is where the origin of the company was. And these stores of 19,000, 20,000 square feet. Sales per square foot much higher and a real opportunity for us to take that model and translate it into our new format. So we worked through a pretty -- I think it took a little bit longer to do the new format than it probably always does. There's a gestation period when you want to change the size of stores that you're doing. So we had to work our way through. That was probably one of the biggest challenges, working our way through. I've got these 32,000 square foot stores I didn't really want to build. So we kind of did a contrived version, making it a bit smaller before we got to our new format. And that's really only up and running. This year, all of our stores -- the 30 stores that we're building this year, all of those stores will be in our new format, 23,000 square feet, much more productive space and you can operate the store cheaper. You can pay less rent on the store and you can get -- if we can get -- and we are getting that same sales that you would get in a 32,000 square feet, you can imagine that allows us to do more stores. And we really believe in our purpose, which is to giving more access to more people to healthy organic natural food. And we've got ourselves at a scale now that I think is pretty relevant, and we want to keep moving that forward aggressively in terms of the stores. So target customers unravel the promotional mix, which has helped us drive some margin growth within the business, change the format of the business and then invent a very clear challenge around supply chain. When -- produce is so important to our business, it's over 20% of our sales. And given that, we wanted to make sure our distribution channel was as short as it could be. So 250 miles was the number that I think is relevant and is appropriate for our fresh food business to supply to the stores. We were traveling from Atlanta to Naples. Now, I'm not American, as you can tell from my accent, but it's a long way from and the project doesn't get any better when it's traveling that distance. So we built a new distribution center in Orlando, built a new distribution center in Colorado. We've just completed a new distribution center in -- an updated distribution center in Southern California, all with the aim of improving our fresh food distribution, our produce distribution. That took a bit of a challenge. Again, with all the challenges of the pandemic, getting the equipment, building stores and building distribution centers, it hasn't been the easiest 2 years to do that, but the team have done a really great job of making that come alive. So we've pivoted the strategy pretty dramatically towards target customer, pivoted the strategy in terms of underlying economics of the business, both in terms of the margin and the size of stores. And going forward now, we're very much focusing in on what is the merchandising that we need to be differentiated in the marketplace. We kind of said, well, we can't be Walmart, we can't be Kroger. We can't be Amazon. We've got to be ourselves. And that means creating products that are appropriate for our customers, building on fresh produce and a healthy kind of lifestyle and health attribution. People are getting more and more interested in plant-based Keto, Paleo, gluten-free and can we be the broadest retailer in that narrow segment, and that's very much what the merchandising team have been doing. That's taken a pivot as well to get merchants away from this is what sells in other places and start bringing things in that are absolutely unique to us and unique to that target customers. Marketing, we've had some challenges. We've spent a lot of time working our way through from a paper-based flyer to a digital base, and we've got some work to do there. And so that might be one of the things that we haven't made as much progress. We made a little bit of progress, but I'd like us to make a lot more in that space. So we've been quite busy.

Right. So following up on the more targeted approach to segmenting your customers, I think you both referred to as eliminating the coupon clippers. So as of right now, how would you describe your overall promotional approach? And what are some of the key learnings that you found that really works with your more targeted approach and maybe where are some opportunities where you could do better with them?

Well, I think in essence, the start of it was not trying to appeal to those customers who just go from one store to the next, looking for the deals because what we were finding was when we did the kind of deals that worked, customers were coming in and just buying that. So effectively diluting at both our topline and our bottom line in terms of when they were coming into our store. So going forward, it's been about how do we drive very specific promotions. We've been relatively successful in some of the very targeted -- vitamins is an important part of our operation. Customers who are buying vitamins from us get into a regimen. If you buy a vitamin D, you want them to buy it next month and the month after and the month after. So when we identify that group of people, we've done some quite nice work in terms of communicating directly with them and getting them to get involved in that regimen. So an organic customers -- organic has been a pretty important part of our proposition, as you can imagine. 40% of our produce sales are organic. We sell a lot of other organic products around the store. So when we've got someone buying organic produce, how do we get them to buy more organic. And that's about personalization, using data in a better way, getting information from our customers, and we're pretty immature in terms of customer sharing -- e-mail sharing. So that would be one of the challenges, getting customers to share more of their information, giving them a reason to share their information. And then we'll be able through SMS or through e-mail or other techniques, able to communicate directly with that target exactly the things that we're bringing in the work. And that will be one that we're pushing quite hard at the moment.

And another aspect of the strategy is, obviously, the differentiation, the boxes there different from conventional grocery peers. You've talked about an increased focus on being different and going more depth into that. Can you just quantify us maybe how different is the assortment? How has that evolved? And as we look at some of your conventional or big box peers, maybe talk about how different versus what is some of the overlap on specifically dry grocery?

Very specifically, when I walk around a Walmart store, if I see it, and I love Walmart -- used to work for them. So it's not a knock on Walmart, but when I walk around a Walmart store, and I see anything in a Walmart store that we are selling, I think how on earth can I not be selling that product? And how do we get -- so we're not in a position now where on our core grocery, frozen and dairy business, we're only at about 11% of the SKUs that we carry -- would be carried in a Walmart. So that means there's 89% of the products that we're selling that you can't find in a Walmart. I mean traditionally, what you can find in a Kroger is just a little bit less than what you can find in a Walmart. So we're pretty well positioned in that. Produce is clearly a direct overlap. We try and make sure that our organic positioning in terms of the breadth of the offering produce and the pricing in produce is differentiated from the marketplace. So produce is one where it's obviously everybody sells produce, but we're trying to be differentiated there. In our grocery, dairy, frozen business, we're operating things that whether it fits in with the attribute that you just won't find and it wouldn't make sense for the other guys to sell that much because they're chasing up to the $1 trillion, not the $200 billion. And that's why we think we've got a bit of a moat around our assortment if we keep working at what we're doing.

Great. And you recently hired a new chief marketing officer. You are now also collecting much more customer data. I think you last said it's about 9% of customers are now specifically identified. So can you talk to us about how different the approach might be right now to just really try to engage with existing customers, the loyal customers, but also when you bring in somebody new, how you're thinking about really getting them into the ecosystem?

Yes. So the number drifted up a little bit in terms of the sharing of the information. We're still way below what people -- our true loyalty engagement scheme would have. We're into sort of low-teen in terms of the mix of customers that are sharing that information with us. We're being very specific and deliberate about investing in that space so that we can emerge towards not what we would call a loyalty scheme, but a mechanism by which we can personalize our offers and personalize our communication. That's been a big driver in terms of Alisa, who's our new Marketing Director, and we're very pleased with the start that we've made in terms of really engaging our customers. Because it's -- we're a specialty grocer, as opposed to a mass merchant, we have to be very specific and targeted in how we're going about that. And you'll see significant emerging things happening through this year as we evolve and develop to get more information and then use that information more effectively.

Great. And you recently have called out some trade down behavior that you have seen even losing items in the basket. It's not unique to Sprouts in particular. But have you seen any more changes in your consumers' behavior? And how are you approaching a potentially tougher back half? What are some of the offsets that you might be able to do to essentially not lose more items in the basket?

Do you want to take a little bit of the basket, Chip, and then I'm just going to talk a bit about what we...

So we've seen a little bit of trade down just barely in things like proteins, meats. But predominantly, we like to say it's been more of a teeny trade. So the units in the basket, our baskets, call it, 10, 11 units in a basket, it's not a huge basket from a unit. And we've seen our customers put in, and that is probably 40% is produce units wise and we've seen 1 less unit go in the basket over time. And we believe that the consumer the way that they're managing their basket is that they're taking that 1 less item of produce and really managing their shrink at home. Many of us, at least in the states, many of us waste a lot of produce. We buy it, we fit it, throw it away, and that's how they're managing their wallet. And produce happens to be the item, like I said, the most units in our basket are produce items, and it's the lowest price point. So it is a way for the consumer to do that. How we're thinking about that going forward? That's been a phenomenon that's been going on for a while. And we've also benefited from inflation. So we've had less units in the basket, but we've had inflation year-over-year. And as we see the back half making its way, we'll still see inflation from a year-over-year perspective, but prices sequentially are beginning to stabilize. And so as that happens, we'll see less benefit in the back half of the year from AUR or inflation. But also sequentially, we expect -- we're not expecting a big unit reversal. But what we are expecting is that sequentially, that will begin to stabilize. And net-net, that provides a comp that we can manage around.

So what we're actually doing to help drive the business in the same -- as we get into a kind of uncertain period in terms of inflation. As customers come into the store, we want to reengage our DNA around sampling and engaging with customers. One of the things that the pandemic took away from all of us was that engagement with customers when they come into the store. And we fundamentally believe that was part of the magic of Sprouts in its very early days. So engage, say hello, greet customers, take customers, give customers advice. We've got really strong people in our vitamin department, strong, knowledgeable people in our business. We want to reengage that because when you're wearing a mask and you're not allowed to speak to people, it kind of staples that feeling of a farmers market, which we're trying to replicate. So when we launch the Florida strawberries in the Florida Market, we want something going on. We want to really engage at the right time in the right place. So sampling is a big deal. And as we build our innovation center, it's a big deal. We actually think and if the economy comes under a lot of pressure, there might be a significant switch from restaurants and out-of-home consumption to in-home consumption. We're investing a lot in meals around vegan meals, plant-based meals, meals that are appropriate to our target customers. And these things are great. We've got a really good team working on that, putting the cabinets in place. So always trying to stimulate that extra item in the basket. At the same time, we're changing our media approach and being much more targeted in media links to some of the things I was talking about earlier. We got new media agency on board who are very digitally savvy, and we're very excited about how that's going to make our thing come alive. And we're looking at a few influencers as well. I think part of the thing that works in our business is word of mouth because when you come into Sprouts, if you don't know it, it's kind of a little bit confused as to what it is if you think it's a normal grocery store. And what people tend to find is as they emerge through it, actually, the ones that really like it, really like it and they tell other people who like them to really like it, and that's part of this influencer strategy that's increasingly important, I think, across the consumer spectrum at the moment.

Right. And Chip, you talked about a little bit just in terms of inflation is moderating, but one of our sort of key takes has been that inflation has started to moderate, potentially a bit quicker than perhaps some of us would have anticipated. So maybe if you could just talk about how you think the back half of the year can play out from an inflation perspective? And historically, if you look at tougher economic backdrops, like how quickly can that unit start to come back into the basket? And would that be necessary to still drive your targeted low single-digit comp?

Yes. So to go back to that is even if prices were to not move up at all at this point going forward from a year-over-year perspective, you'd still be seeing AUR increases in the back half of this year from mid-single digits down to low single digits as you migrate through the year. And that's our expectation as we're beginning to see sequentially prices stabilize, you'll see that year-over-year come down and they'll be relatively flat sequentially. So we'll be low to mid-single digits in the back half of the year. From a units perspective, our expectation, as we planned our business for the year and as we think about our business for the year, our expectation is that the units don't turn around and reverse that all of a sudden the consumer says, "I got a lot more money just because price is stabilized, we're going to buy more units." Our expectation is to sequential bleed of units will slow moderate stock. And therefore, you don't have the dilution year-over-year from a loss in a unit, but you're not getting accretion either and you've got a little bit of AUR that is going to make its way through the rest of this year. At some point next year, all the efforts that Jack is talking about, and there's a ton of efforts going, whether it's in stocks, whether it's sampling, et cetera, those are all out there to help us with those extra units in the basket, and we think we're putting a lot of effort and resources behind that.

Right. And another key topic really has been just what's happening industry-wide with promotions or pricing. And as inflation has really started to hold, there's an increasing worry among the investor community that some larger players might start to implement some price investments. So can you talk about how you currently view the promotional landscape? How do you see that evolving? Do you see meaningful risk that there could be a lot of price investments coming from larger players? And how would that impact Sprouts?

Well, we certainly haven't seen anything in that space so far. There's clearly a lot of dialogue around is this what's going to happen. So we're constantly having that conversation about how we do it. One of the things that's important from how would that affect Sprouts. The reality of it is, if we are selling things that are also different to everybody else, then if people price aggressively on things that we're not selling, what people -- people are in the mindset to be the attribute-based shopper that we have, which is I'm very conscious of my diet. I'm plant-based, I'm vegan, I'm vegetarian, I'm gluten-free, whatever it is, it's in kind of consideration set. If other people then promote things that are not in that space, it's unlikely to change their behavior. So we think there's a moat around our assortment if it does come to pass, that there's a huge grocery price. So I think it unlikely anyway. But if it did come to pass, the piece that we would pay a lot of attention to is have it happened in the produce world, which, again, is a difficult thing to predict because there's so much volatility in produce anyway. So getting yourself where you dramatically reduce the price of produce, we feel as if we're -- that would be the piece that we would pay a lot of attention to. But we're pretty well placed. 40% of our produce is organic. We're very well priced on organic. Other retailers tend to price a little bit higher in organic and a little bit lower on conventional produce. So I think if it came to pass that produce was part of it, we think we're in a good place from a starting point relative to the rest of the marketplace because of where we are in organic. And that's the piece we'll pay a lot of attention to. The rest of it, we think, is kind of a little bit -- we will be an interesting observer as opposed to feeling that we're going to get dramatically hurt by it or have to make a lot of changes on it. We're very confident that our margins are pretty stable and pretty solid. And I think we've shown that over the last 3 or 4 quarters.

The idea that -- I sometimes think it gets lost that when we shifted our strategy, we asked those overly price-sensitive customers to go shop somewhere else. So they're not part of our mix today like they were prior to 2019. So it's not a sensitive operating model from a customer perspective as it was 3 or 4 years ago.

Great. And speaking of margins, just another pushback that we hear a lot on Sprouts is that since the strategy has been implemented, margins have really stepped up, and they haven't really come down yet. But maybe if you could talk about the strategy piece itself, how do you view the sustainability of margins at this level? And as we think about the P&L, what are some additional levers that you might have to continue maybe an upward trajectory or at least to keep your margins stable?

Take that.

I think from this -- from the margin perspective, the way we're thinking about it, we did make a step change. It was a piece of it, about 1/3 of it was operational changes that helped improve shrink and 2/3 of it were really being less promotional. And we believe that those are sustainable. Is there a step-up from this point going forward? Probably not. The way we're managing our businesses, we think they'll be very stable from this point on. There'll be some opportunities within categories, take some margin, and there will be some opportunities to invest in margin. But net-net, our merchants are very focused on driving the business at stable margin -- from a stable margin perspective. And we feel very confident that we can do that.

Okay. And industry-wide pressure point this has been labor. You have been making labor investments. I think you've talked about over the last couple of months, the labor market has gotten a lot easier. But can you just talk about your view on labor over the next several years? Where do you see opportunities inside of the store to reduce maybe some redundancies, increase efficiencies. If you could just talk about labor for the store?

We're a relatively young business when it comes to the kind of disciplined approach to operating stores. We really only became public in '24 -- we only became public in 2014. And a lot of the way we had -- the company had run the stores was almost based on a 25, 50 store chain. So the things we've done as the pressure on labor has come over the last couple of years in terms of cost, cost per labor, we've been building a lot of efficiency into our model that wasn't there, that it wasn't reinventing the wheel to have self-checkouts at the front of the store. It wasn't reinventing the wheel to have a disciplined product ordering system that allowed the stores to do it much more efficiently so we can get product onto the shelf more efficiently. It wasn't really reinventing the wheel in terms of how we do the price tickets in the store. Those are buckets of cost that we've taken the cost, while the cost per labor hour has been going up, the number of hours that we needed to run our store has been coming down. So we've created some efficiency and taken some labor out of that cost. That's one of the reasons we've been able to mitigate some of the challenges that many people have had because we're a little bit more immature, we've had more opportunity to do some things in that space. Going forward we're, as you said, Krisztina, we're finding that getting a little bit easier. The pandemic created some really unusual employment things going on, people not wanting to work or people have been given a lot of money in different places. So we had a tough time. As everyone did through the pandemic, where wages went up and we were struggling to get the people to fill the vacancies in our stores. That's kind of reversed very significantly in the last 2 or 3 months where it's becoming easier to get people. And the people we're getting are -- the quality is really getting better. And the retention, we've always had a good retention rate versus the industry. Our retention rates again are improving as well, which all plays to the same kind of dynamics that are going on. Going forward, we think there's more efficiencies to be have in our labor. But what we're going to do with that is we invest in the customer, we invest in giving the sampling programs, engaging with customers. I would rather as much of our cost that we're operating in the store is about customer-facing costs as opposed to some of the efficiencies we've already created, and there's some more that we can do in that. So our labor model, I think, has got some stability going forward. We've got a little bit more efficiency to do. We'll take that efficiency and reinvest it in the customer.

Right. And I'll ask you the same question, not from a store, but from a distribution center perspective. And there's a lot of talk about automation and what that can do. Can you talk about how you foresee automation changing potentially your business, just given your mix is so different and you're so over-indexing in produce, which is proving to be difficult. But how do you see automation, especially in the warehouses?

Well, we've got 7 warehouses. They are very important in terms of the fresh produce. Warehouses that we want to control the most important part of our store. So we control all of our fresh produce. It is much harder to put automation into those capabilities. Is there some opportunities for us to work on different things? Maybe as we look at our health and beauty age, which is of low volume. Is there a way that we could work with some partners and are more -- with some more robotics in that space and computerization in the distribution center? A lot of talk about it. The one category that's less relevant is the fresh produce category where you don't need a lot -- you don't need as many SKU counts. There's not as much picking going on relative to the amount of picking that you need to do in a traditional ambient grocery environment. So it's not something that we're putting into our distribution capabilities. It's something we're thinking about going forward on certain categories if we wanted to take responsibility for our vitamins business, if we wanted to take responsibility for HABA. But we're not there at the moment. And we'll have to think about a Sprouts brand to gets bigger, we'll have to think about how we're distributing that and is there a better way of doing it than we're doing it at the moment.

Okay. Switching gears to e-commerce a little bit. You've been seeing a lot of healthy growth there. First quarter saw still double-digit increases. How do you view the sustainability of the e-commerce channel? What has been the key driver there for you? And as a second piece to that question is, you've recently ended your exclusive partnership with Instacart, you've added DoorDash. How is that working out for you? Is that bringing in an incremental customer for you at all?

I'll let you talk about the Instacart and DoorDash thing, Chip. But the broader context of it is, when I joined the company in -- back end of 2019, we were -- 2% our sales was e-com. At one point during the pandemic, we were at 14%. We're settling down at about 12% at the moment. I think that makes us the fastest-growing e-commerce retailer and grocery in the United States. And we've done it all through our partners of Instacart and DoorDash, which -- they've been good partners in it. We're letting the customer take us where they want to go there, where I think the average in the U.S. is somewhere like 7% or 8%. So we're significantly higher than that from being lower than it. I don't believe it's going to go significantly higher than that. I think the pandemic created that behavior. I don't think unless there's some other shock to the system, I don't see people not significantly growing that, and we're -- the omnichannel nature of commerce on our business, we're responding to it. And if customers want to engage in a different way with us, we see it as a very significant that we were able to grow e-com so much. Without putting a lot of resource in it. Customer took us there because our assortment back to what we talk about differentiation. You can buy grocery online anywhere if you're just buying everything that you buy from a normal grocery store. The fact that so many of our customers chose to use says that our assortment and the work we've been doing on curation and differentiation has been working well within the context of who we are and what we're trying to be as a brand purpose that we have. So we're encouraged that gives us some encouragement for the whole business that this omnichannel nature of the customer is there. And it will be what it will be in the future.

Yes. And we added DoorDash at the fourth quarter of last year. It was a decision we made just because we talked a lot about that's where the customer wanted to be, so we wanted to provide another vehicle for customers to access our product. We're pleased with the start with DoorDash. So pleased with it. Instacart is still way over indexes versus DoorDash, and it's established for us, and it's very a great partner as well. So we're encouraged -- we're encouraged by it. Instacart, it is a little bit different. We do think it's an incremental customer with DoorDash. Instacart customers, the basket is 2x, before walls on the box transaction, whereas DoorDash is more in line with a regular transaction that we have in our stores. So we feel that it's truly incremental. It's just a customer that wants to comment. And what's really -- the other thing that's really encouraging about our e-commerce business, I think, is it's a testament to our business model because you can see customers that are far away, for instance, we don't have any stores in San Francisco. But yes, we do a lot of e-commerce business in San Francisco, where they could choose 10 other retailers and just buy whatever -- 10 other groceries and pick whatever, but they're going to us because we offer a differentiated offering. And so they're specifically going to Sprouts. So that's an encouraging element of our e-commerce business that knows that our business model is relevant.

Great. And I wanted to talk about store growth. You obviously have a targeted 10% unit algorithm. Because of COVID and various disruptions, that has slowed, but you're well on your way to actually achieve that in 2024. So can you talk about the white space opportunity as you look ahead to the next 5 or so years? Where do you see some of the biggest opportunities for newer markets? What opportunity is there to continue to fill in existing and deeper penetrated markets? And then I'm going to add the second part to that, is there any region specifically that you would not want to go to based on customer demographics or competition?

We've got a model that has 1,200 seed points in the United States with enough people that can support a 23,000 square foot Sprouts store. We've got our distribution network with 7, and we will have an eighth one in, in the Mid-Atlantic, that would support about -- there's about 800 seed points within 250 miles, not exactly, but by and large, within 250 miles of those distribution centers. So there's plenty of room for us to grow between now. And you're not going to get all of those sites as you work this one through and we're being very disciplined about not taking sites if they're not absolutely perfect. So we've got 30 on the books for this year, which we'll do. North of 40 next year. And then we're in a place where -- we've got 90 sites already signed off within the context of where we're at, at the moment. So we've got plenty of growth. We're very comfortable for '24, '25. After that, we probably need to think about '26, '27. Do we want to get into the Midwest -- like Chicago market, DC and potentially Chicago market to service the Midwest and then potentially an opportunity in the Northeast corridor because there's a lot of customers that look like our target customers from New York up to Boston really effectively. So there's some opportunities in those 2 markets. I don't think there's anywhere we wouldn't go because we find people say to us, well, is there any way that people don't -- this isn't relevant. There's not too many places. We just opened a store in Tulsa, Oklahoma. It's doing great. Some people would say, well, that's not where you would go. We might not go to Helena, Montana, simply because it takes a long time to get there, and it's not going to be as efficient as we'd like it to be. So it would more be the geography that would prevent us going somewhere, not really the demographics because there's people that like what we do that -- in every marketplace, somewhere maybe not quite enough, but -- so '26, '27, we'll probably need to think about going to somewhere else to keep the momentum going, which we have there at the moment.

There is a mix of the seed points that are in current markets today. So we're still building in Arizona, we're still building in California, we're building in Texas. And quite honestly, it's about a 50-50 mix between our new markets and our -- what we call our established markets today, and we think that will continue for a while.

Great. We have about 5 minutes left. So I wanted to see if there's any questions in the audience.

Can you hear me?

Yes.

I was just wondering your take on the macro situation in the U.S. Do you see anything in the consumer space having a link with the macro deteriorating a little bit? Or don't you feel that at some point, some of your customer will disappear because they will not have the purchasing power to buy organic food and will go to less quality food?

If you take the second part of your -- sorry, go ahead.

No. Is it something that you fear? Or is it something that you've seen in the past or previous crisis because we expect probably the GDP to be negative at some point in the U.S. in Q4 or Q1. Do you share that view or not?

Well, from the point of the second part of your question as well, people trade out -- just so that I kind of get in my mind what you're asking. Will people trade out of the organic nice food and into not such nice food and that that will be part of a dynamic when -- is that the kind of context of the question?

Exactly.

So from my point of view, I think people that are conscious about these target customers that we have, those are the kind of customers who really do stick to their guns in terms of I'm going to eat well, I'm going to understand the provenance of the food that I buy, where it came from. And organic is a pretty key driver in that space for our customers. I think there's a chance that might happen in some of the other retailers who are moving around with it. Organic produce, particularly for us, we will mitigate that if there's any chance of it by the way we price that organic space. The reason people are doing that is to try and save it. Our organic -- I think there's a chance the way we're sourcing our organic produce that we can squeeze the gap between organic pricing and conventional pricing. If you take the full complement of the product from the farmer, if you commit to farmers over a longer period of time. So specifically to organic, I think there's things we can do to mitigate it. And it's not something that super worries us. Maybe -- and we'll clearly watch it carefully, but the context of that -- so will the U.S. get into a recessionary space? I think there it's been -- the consumer has been pretty robust in the U.S. over the last little while. And there's a few murmurings everywhere, but one of the things my mother said to me when I was going into the grocery industry was people will always have to eat. So you should be okay to have a job for a lengthy time. So I think they're always going to eat and we'll try hard to make sure they don't trade down because we -- that's part of what Chip was talking about when we lost all those customers that were very price sensitive, and that was a deliberate thing in terms of how we work that one through. Good question.

Any other questions? Okay. Okay. We have 3 minutes. I think we can continue going. So you have a new store prototype and it seems to be working out pretty well for you. Can you maybe touch on what are some of the key changes that you've implemented there? What might be driving this performance that also gives you confidence in your future growth ambitions?

Yes. Well, the smaller stores, as I said earlier, were based on the premise of what we've done in San Diego all those years ago which was really get the offer tight. You want -- in those farmers market, you want people kind of bumping into one another a little bit more than in wide stores, but the 32,000 square foot stores we're building, a lot of nonproductive space in it. So what have we done in these new stores? We added on to Frozen foods. Frozen just had a bit of renaissance in the last couple of years from what was seen as bad quality, and we've seen some -- it's allowed us to access a lot of products in that. We've increased the space for what we call an innovation center where 20 or 30 items come in every month that customers have never seen anywhere. If it has been sold anywhere, we won't sell it in that space, and that's created this kind of momentum from the small entrepreneurial food guys coming to us as we want to be the destination for that. So that's worked well for us. And we've -- our vitamins and harbor space, we've kind of consolidated some of the key SKUs in that space and worked it through, doubled down on our meat and the presentation of our meat where we're doing a lot of grass-fed, a lot of non-antibiotics, organic, getting on that kind of attribute-based space in that environment. Cut down on Daily space. And our Daily sales have done better since we've cut down on them. That will be easier to operate. So the actual execution within the Daily has worked well with us. Our dairy has been working very well. So the big space changes were frozen. We cut down a little bit on vitamins and we reorganized the space around our Daily and our meat, and it seems to be working pretty well.

We took a fair amount of space out of the back as well as we took space. We had the sit-downs, eating areas that the only people that ever use them were our associates when they were on break and not that we don't want to have a space for them, but they have other space to use. So we took out a lot of that excess space.

Right. And we have 50 seconds, so very lastly from you, Chip, capital allocation priorities.

Okay. So capital allocation. We certainly will want to invest in the business first and our strategy. And so if you think about that, that's about growing the 10% square footage growth and then all the other keep our stores fresh and clean, some innovation, innovation centers. Jack just described, always being able to do that. So our expectation is that we'll spend roughly 3.5% of sales in any given year that will help us do that. Build the stores, build the DCs, all that will be taken care of with 3.5% of sales. After that, we still have a lot of cash. And so we've been on a trajectory. We continue -- we like share repurchases. We've continued to do that. Our goal is to really take out about 4% to 6% of the share count every year. And so we've consistently been doing that, and we'll continue to do that.

Right. Thank you, everyone, for joining us. That was today's fireside chat. This will conclude our presentation.

Thanks very much.