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

Hey, we are just so pleased to have Jack Sinclair, the CEO of Sprouts with us today, as well as Curtis Valentine, the CFO. And Susannah Livingston is probably here somewhere in the audience. Sorry, I didn't get a chance to say hi, how do you do? if you are out there. Anyways, I mean this -- Sprouts has had an impressive run of same-store sales and you guys had a really great quarter. It's been a really tough market.

But I'm going to -- I just want to start maybe just with Jack. Can you -- we know that Sprouts is not a typical grocery store. You've said that before, I think you call it a speciality, I think that's the word you used. Could you just sort of talk about what makes Sprouts so unique to just get us going here?

Yes. I think the starting point for everything that we're trying to do is our target customers, and we articulate that as health enthusiasts and innovation seekers. We split the U.S. food industry retail market, it is about $1.5 trillion, $1.6 trillion market. We split it into 6 groups. We are chasing after 2 groups that comprise $200 billion, which I say from a strategy point of view, it means we're not chasing after $1.3 trillion, $1.4 trillion worth of marketplace. So the target -- our target customer is particularly interested in healthy eating, health enthusiasts, we call them. They're very interested in what they eat, how they eat. They're very discerning. When you look at our customers, our target customers, they'll pick up the product -- if you watch them in the stores, they'll pick up what's happening in the -- on the labels, they'll read the labels, very discerning in that. And as we focus that, the whole of our organization behind those target customers, we've reshaped our merchandising organization to constantly bring in differentiated products that play to the attribute-based customer base that we have. Our marketing has switched from mass marketing paper flyers to very specific digital marketing, which is focused on individual customer needs and the supply chain, making sure that our fresh food distribution is short enough to make the freshness of the product the key for the customer. So as we look at our real estate, our supply chain, our merchandising, our marketing, we're focusing entirely on those target customers and everyone in the organization is geared behind that, and we've shaped the functions behind the -- that target customer base. And I think that's been one of the things that's helped us create this differentiated assortment. So that when you go into our -- you won't find many things in our store that you can find in other places. And that's been one of the kind of strength, I think, of why our customers have navigated towards that in a very specific way. We've put innovation centers into our stores where every 30 to 40 days, you regenerate the products that are there. We launched 7,200 products last year. When you compare that, that's a pretty remarkable number. It creates all its own inefficiencies and challenges which we can work on. But that idea that there's always something new plays to this and also always something new that's health-orientated is creating, I think, a bit of a momentum behind the customer trend.

So Jack, you've had this unbelievable response to what you've done with Sprouts, and same-store sales have been amazing. But same-store sales like yours invite competition. Maybe help people like me understand why it's been so hard for competition to really do anything to slow you guys down?

Well, I don't think they particularly want to slow us down because at the end of the day, it would mean chasing after the $200 billion as opposed to the $1.4 trillion. If you focus all your energies on the $200 billion, you would lose focus on the rest of the marketplace. And I think there's little chance of someone wanting to launch 7,200 health enthusiast-focused products when your target customer isn't that target customer. Yes, they've done some interesting things in that space, but nothing like to the sense, the scale that we're trying to do it at. So I think the reality is I'm not sure it would come out the other end as a successful strategy. And we're relatively small. We're a small part of this target that we're going at is a smaller part. Why would you go after the small part rather than focusing on the big part? So I think that's probably -- it's not -- they could if they wanted to. I just don't think it would be smart for them to do that.

Got it. And so you've said before -- or you talked earlier about how you're going after kind of a narrower group within the traditional grocery market. And I think we've heard you say before that Sprouts only needs crumbs at the table in order to grow your sales in a big way. So I was curious if you could talk a little more about that and maybe give us an idea of how often does an average shopper come to Sprouts? How big is the basket? And where do you see more opportunity to drive growth with those existing customers?

Our target customers, we're a complementary shop for our target customers, and that's the reality of it. We get 13% to 14% of their spend. And some of it in a lot of different trips, some of it in less trips, some of it online, some of it pick up, some of it delivered, but it's a small share of that marketplace of that customer spend. And the opportunity for us is to understand that customer better and to grow that share of wallet. As we grow this share of wallet, that will come through a few more extra trips and have a little bit more within the basket if we do the right things within our stores. So what are the opportunities for us when a customer comes to the stores, we're going to do a lot more sampling in the initiative in terms of how do we drive the basket from the customer that's in the store, a lot more investment in people in our vitamins and supplements department. So the store experience is an important part of driving the basket. And in terms of driving the traffic, there's a lot of work going on in terms of being much more precise in our marketing activity. Much more, we've reshaped our marketing team, and we've got some very talented people working in that department. We are very focused on appropriate digital marketing, media spend, and a transformed kind of communication to our customers just to remind them who we are and to bring new ideas to those customers within that marketing sphere, I think, is an important part of it. And as we evolve into next year and the year after our loyalty -- our investment in loyalty is going to be a very important part. Customers who are health enthusiasts have got a very -- there's a lot of different things going on within our customer base, whether it's, I've been diagnosed with something and I need to change my diet or I'm a grass-fed meat guy or I like vegans or vegetarians or this dynamic of segmenting the segment that we have is going to open up a whole opportunity for us to just get a few more crumbs at the table to get this 13%, 14% to 17%, 18% transforms our numbers, and the loyalty program is going to be the important part of the '26-'27 initiatives as we work this one through.

That's helpful. And digging in more on differentiation. So around what percent of your assortment do you think can be found at other grocers? And then how internally does Sprouts approach the process of differentiation through private brands and finding new smaller unknown brands that aren't in other stores yet?

Yes. I think we changed the structure of merchandising a little bit, and we brought a foraging team in. So it's quite a neat title and it's a job I would like actually to be the Chief Forager. The job -- Kim Coffin, her name is. She drives all the -- chasing after the differential and the private brand, team work into it. How do we go about that? That group of people are constantly looking for new ideas, but there was a big crowd of them at Expo West last week, where there's literally thousands of entrepreneurial brands from -- America is a great place for bringing really entrepreneurial people who believe in the health space, and we get 46,000 applications every year onto our portal of ideas of things we've never seen before and no one else has ever seen before. The opportunity from that to source products that are differentiated. There's no limit to the 7,200 that we added last year. We've had to choose that from 46,000 opportunities. We're changing around looking at the trends on social media, chasing around, looking at all the exhibitions both in the U.S. and abroad. So the opportunity for us is how good are we at selecting within it? It's not -- there's not a limit to what we can get. So differentiated within our stores. When we see things in other places that we're selling, we don't really like that. We try and find a way of not having that in our stores if we can, probably about a 15% overlap or something like that would be the number. And that's -- hopefully, we can make that go down, if we can. And we also expect the fact that we're regenerating our assortment all the time, 7,200 items coming in, means something's going out. So the things that are going out. If they're selling well, they've tended to then move on to the bigger players in the marketplace. And we're pretty comfortable with that. We know that's going to happen. If we can get a year or 18 months of a product that no one else has got, that's enough for us, and then we move on and bring other things in.

Well, I get this question all the time, which is in an environment where consumers are feeling kind of pressured, there's people looking for signs of trade down right now. What do you -- how do you guys not feel risk from that? Some of these items that you bring in, these 7,200 items are above market prices. And then related to that, can you remind us what areas of the store would be, you'd say you're below market priced?

Well, we're very -- I mean, there's a lot to unpack in that question. But the reality of it when you say below and we're above market price, we're not really when other people aren't selling it. So our pricing on products that other people don't sell is based on our elasticity. Does it sell? Does it not sell? So just on that side of it. Produce is a very important price differentiator for us. That's one where you can directly compare everybody selling produce, we can directly compare our pricing. So we've got a significant price advantage on the marketplace in fresh produce and particularly in organic fresh produce, produce is 20% of our sales. Over 50% of our produce sales is organic. We've got a very -- much wider differentiation on organic pricing than we do on regular conventional pricing in products. And that's something we're doubling down on as we invest in it going forward. There's clearly different regional dynamics that we look at in terms of different markets having different prices. But by and large, we have a price differentiator across the board on projects with everybody in the marketplace, wider in some places, narrow in others. And that's something that's an important part of -- the whole rationale, the whole DNA of Sprouts in the first place started off with a fruit stand in San Diego, and it was based on people who want to eat healthier and the pricing on projects is really important. So we're kind of building on that DNA all the way through. And it has been an important part of differentiation for us and from a pricing point of view.

Maybe just to add on the consumer side of it, if they're under pressure a bit, I mean, we do have some points of insulation there in that our customers skews a little bit higher income. I think their first move will be away from kind of restaurant and food away from home and back into food at home. So the first wave of that is actually probably a bit of a tailwind for us. And then the other part is the dietary piece that Jack talks about. If you're -- if you have a dairy allergy, if you have -- if you're a vegan, it really doesn't matter what the price of ground beef is, you're going to continue to shop your vegan products. And the long tail, we carry the choice that we offer there, I think, insulates us a little bit as well. It's not particularly discretionary for those customers with those dietary needs.

And then a topic that's very important to me, which is store growth, and we're -- and part of that is deciding where you're going to open new stores. And you can maybe -- why you're not going to open a new store in Westchester, the county anytime soon. Maybe we can go through that?

You never know.

Maybe review with us how you think about store growth in new markets?

We revamped that pretty substantially 3 years ago, 4 years ago, 2021 time frame. We revamped the analytics around it, got a third-party platform that we partnered with to kind of set the model right. We incorporated much more local expertise and operational expertise into the site selection process. And so we know we have a map, and there's 1,200-plus pins, including our open stores today, but there's 1,200-plus pins in the map. And we know where we want to be. And then within that, it's not just the 3-mile ring or the trade area, but it's the actual cross street where we feel like we'll do the best within that 3-mile ring. And so we used to be, here's your 3-mile ring and go find us what you could and what was available within that. Now, the team is actually starting at the point that we want to be at and working their way out to the next closest opportunity. And what the tool or the platform is doing is helping us understand the interplay between where our customer is, where the competitor is, drive times, barriers within the trade area so that we can put ourselves in the best possible position to service that customer. So that's been the shift that we've made in 2024 was really the first year where all of the openings were kind of approved within that new process within that new model. And we're really pleased with the results we saw last year where we've seen across the country, new markets, older markets, really strong performance out of our new stores last year, and we're excited to see the 2025 openings kind of add further proof points to the fact that we think we're making some progress on the modeling and where to put stores. And then longer term, I think we'll just continue to expand. The distribution piece is important to us. So we've got a time that right to get enough units in the pipeline so that we can create some scale and get to distribution so that we can get our fresh products to the store. But we'll be opening up in all likelihood, the Northeast and the Midwest in '27 and beyond to start looking for stores in those spaces. We're doing some market research and kind of building our plan so that we can get the scale somewhat quickly and limit some of the inefficiency of move into new markets.

And one of the things about the news -- about our new store. We talked a little bit about differentiation on product. Our -- the format that we've got low profile, smaller stores resonates really well with customers. They like the fact that they can get in and out quickly. They like the fact there's a sight line all the way through the store. So as well as where we're building the stores, the stores that we're actually building and evolving. We're seeing really strong customer reaction to that. And it's part of the differentiation, the type of store that we have is a bigger differentiator as what we've got inside the store.

Customer experience that goes with that, too. Just the fact that you can see everywhere, you've got 15 or 20 team members in the store, you can see them, you can find them if you need help. They're there. We're working really hard on the service aspect of it so that they're greeting and helping the customers through the journey. But that's a little bit different in our store because you can see across the whole thing and find somebody quickly if you need help.

So shifting gears a little bit. I'm sure everyone here has all heard about the challenges the industry has been having in terms of eggs and supply challenges, pricing challenges. But interestingly, when you guys reported 4Q, I know you said that Sprouts didn't have a lot of those problems just because of how the company sources differently and more locally than a lot of large grocers. So curious if you could walk us through just how sourcing looks different for Sprouts versus other larger peers and what the benefits of that model are?

Well, specifically to eggs, Kendall, I think the starting point of it is if you don't sell commodity style eggs, which is the high-intensity production of eggs. All of our eggs are organic, pasture raised, free range, cage -- all the dynamics. So when you have -- when you source those type of products, you have to give longer-term commitments to the vendor base and the grower base. So our egg sourcing is working with a lot of smaller people who've given -- who we've given long-term commitments to. And that stood us in good stead in the context of what has been a pretty scary environment around avian flu and the impact it's having on the egg flocks, on chicken -- the egg flocks across the country. We've been protected a little bit by that by having longer-term commitments, where we've committed to price over a longer period of time on particular attribute-based product. That allows us, I think, to get more supply than we would have got otherwise. Although it's amazing whenever we get any eggs into our store, I think every customer in the United States must have 1,000 eggs in their fridge because it gets sold really quickly at the moment, supply constraints. So we've been pleased at how we've managed that. We haven't put our prices up, which has given us a lot of credit from the customer. From a produce point of view, local sourcing is a really important part of our produce. We sell -- we've got DCs right across America, right, we call it the Smile of America, where our DCs are. And we've got local sourcing teams in each of those distribution centers. So our Colorado operation, there's a short window where you've got to be really good at fresh produce in Colorado. But most of the year, you don't. So seasonally focused and locally focused. What we would do in those markets is give longer-term 2-, 3-year commitments to farmers and growers who would allow them to invest in the facility, and we'll guarantee to take the crop when it's ready at the right time of the year. So giving guarantees and longer-term focus on local sourcing on produce, giving us the opportunity on categories where we're differentiated in the space. It applies to grass-fed beef a little bit in terms of working. We don't sell commodity chicken or commodity beef. We are operating in the space of trying to build long-term relationships with vendors and bringing new and differentiated products that are no antibiotics or organic or free range and those kind of things. But having the differentiated assortment allows us to give a longer-term commitment. Well, we need to give longer-term commitment to get the consistency of supply in that, and that's probably why we're in a -- we've been comfortable how we've been working through some of the challenges that have existed.

Interesting. And as we think about the local sourcing and working with a lot of smaller suppliers, how should we think about that in context of Sprouts growing its store base and gaining more scale? Does it, in any sense, make that sourcing model more complicated? Or does it create more opportunities as you...?

Well, I think the fact that we're so spread out is actually a good thing because it gives us access to a lot more local things. If you're concentrated, you wouldn't have the same opportunity to grow. And one, we wouldn't be able to grow the store base to the same extent. The fact that we're going to different markets, if we -- if and when we get to the Midwest, which we're talking about, we'll have to rethink the whole thing as to how things work. But we'll have a distribution center, and we'll work it all through. And that's a whole new world for us, as we go into new markets, which we wouldn't have to do otherwise. There's plenty of innovative products in terms of the core business in frozen dairy grocery for us to be able to get plenty of assortment and broader that we need going forward. And I'm not seeing that as a constraint. Although we will have to think about the local aspect of this as we go to different markets.

Jack, you guys are rolling out your first-ever loyalty program.

Yes.

Maybe you could walk us through the timing on that and what that can do for Sprouts from here?

It's interesting, customers who -- our customers that like Sprouts, really like Sprouts, and we've had a lot of feedback from the customers that say, why have you not got a loyalty program, and that was part of the kind of stimulate. As we said earlier, we've got a small proportion of our customers' wallet. So what are the opportunities for us to grow that? The loyalty program, we've currently got in 30 stores or 35 stores. We've grown it gradually over the course of the last few months. That exercise we've been working on is to make sure that the investment that we're doing creates a customer experience that's seamless and works effectively. I've been surprised by the challenges that, that has faced as we made a load of progress on making it a seamless experience for the customer. And hopefully, what we've been measuring is, are the customers signing up to the program in these 30 stores and are they scanning? What we then do with this, we'll talk about in a second. But specifically, we're at 30-odd stores at the moment. By the end of the year, we'll be in all stores. We think we've ironed out a number of the cracks, a number of the challenges are making that work and we feel we're on the cusp now of something that's going to make a big difference to our comp sales going through '26 and '27. How will we do that? We're not going to have a loyalty program that looks like get a bit of money off gas or you can have a better price if you get a card and you don't have a card, we're trying to build a program that creates real loyalty, an incremental sale from the customer. How are we going to do that? And that's about understanding this dynamic of the customer. We don't want to send information to grass -- to vegans about grass-fed beef. And as we see the patterns, as we people scan, we'll see a lot of information. We'll be able to navigate the vitamins and supplements. Why have you -- if you're on a vitamins regimen, why did you not buy 30 days from now. So there's lots of work we're doing as we speak to understand how we navigate through the stimulant that we're going to take from the data that we get. But we're going to have enough data by the end of the year for us to -- really, the limit is going to be our imagination. That's how we can make this come alive. And we want the customers to feel a sense of kind of loyalty to Sprouts and loyalty to the brand, and we'll be able to do lots of interesting things, vegan meals for vegans, recipes, ideas, stimulate with entrepreneurs that have got products, bring people products that they've never had before the marketplace. We're quite excited about what it can do for us, and we'll roll out next year. I don't know if you want to build on that a little bit?

I think you got it. Yes, start the rollout in the middle of the year, we'll be out in all markets. Not counting on much of this year, but it should be, as Jack said, a comp driver for us for '26 and beyond.

Curtis has had to approve all the money over the last little while that we've been spending. So I'll try to convince him, it's all going to make sense.

I'm getting excited for 2026 and beyond. It's been a lot of investment, a lot of spend for the last few years. So we're excited to get to the other side and start delivering for the customer.

Well, something you rolled out and it drove comps was you started doing e-commerce more significantly, I think many years ago, or not many, but years ago with -- I think you guys started with Instacart, right?

Yes.

Can you walk us through the Instacart to, I think, was it Uber Eats and then more recently, DoorDash and how you've thought about working with partners and what's that done for comps and how does that impact margins also?

Yes. So 3 really great partners, did start with Instacart. The large majority of our business does come through Instacart. We're a little different than the conventional grocer in that 80% or so of our mix is delivery. And it'll probably be flipped. It'd be about 80% pickup in most grocers. And so well, why is that? We think that one is, once you've gotten to our store, the hard part is over. We're not on every corner. We're not as convenient as we build our footprint. And so this becomes a nice -- it provides access to the customer in a different way when they're not willing to make a long drive to our store. So that's been great. And then we've expanded over time. We're happy that we didn't go in and invest in our own infrastructure and ecosystem. We've got a lot of things that we've been working on in the last few years from systems and technology to data to put new stores in the ground across the country, and we wanted to stay focused on those things that were foundational to the business. So we found great partners, and Instacart was fantastic and is fantastic. And then we added DoorDash as you said, 2 years ago and we added Uber Eats last December. And so all 3 partners have been great for us. All 3 partners are growing really well. They were growing faster than our in-store business, which I think just speaks to this omnichannel customer that we have and that there's a low share of wallet, and this is a share of wallet extension for them. As far as economics go, it's same as in-store pricing. What we find pretty remarkable is that's the same basket mix as we have in store. And so with our fresh penetration, particularly in produce, you would assume or expect maybe that to be a little bit lower online, but it speaks to the trust that our customer has with us as it relates to fresh product that they're willing to buy the same amount of fresh product online as they do in store. And then from a margin mix perspective, it's effectively the same as well. So the sales mix is the same and the margins generally play out about the same as a brick-and-mortar basket. So we see, particularly from Instacart to higher basket, our in-store basket is about $40 and the Instacart delivery basket will be a little over double that. So it's a broader, more full shop. So we do dollar/penny profit, it's a better outcome for us, and then we pay the fee to Instacart or the third-party provider to pick, pack and deliver. And that hits in our SG&A and provides a little bit of pressure there while all the benefits land in sales and margin that you've seen as our comps accelerated in the last few years.

And in terms of how that's going to evolve, we've gone from 2% to 14.5% of our sales as how that will evolve will grow, will be determined by the customer. We're pretty relaxed about the nature of how this grows. I think it will grow a little bit over the next 5 years or so, but maybe not at the same rate that it's grown in the last little while.

So you've talked recently about how Sprouts has seen a lot of success with social media and influencer marketing. Curious if you could walk us through that approach, which platforms you're leveraging? And is it predominantly younger customers that you're getting the response from there? Or is it broader?

I think it's fairly broad, although we are seeing a slight reduction in our customer -- the age of our customer base, it's gone down a couple of years. We start from a little bit of a higher age group than most. It's coming down largely because of the influence of a number of the activity that we're putting in on social media. We've been pretty excited by some of the response. Even when we do sponsorship, the response that we've got from social media behind the sponsorship, celebrities that have got involved in our business and influencers have got involved in our business. A number of celebrities showing a lot of interest in the health enthusiast product. So they're bringing us ideas. The people we have in our office is talking to us. It's pretty interesting about the kind of the dynamic of what they're bringing to us. Tom Holland's got this new non-alcohol beer that's just been launched that's creating a lot of noise in the marketplace. You've got Once Upon a Farm with Jennifer Garner. That's been a big driver for us. So using some of that, and sometimes, that's been working really well for us in terms of driving demand. CMOS, there was a TikTok video on CMOS. And literally by mid-day, we were out of stock as people responded to those kind of initiatives. We're using across the board, a number of different platforms. We've been pretty successful in all of them. We are seeing a slight reduction in the age of our customer base. And I think to me, it's just about part of this innovation and differentiation that we create this dynamism behind it. We launched smoothies in a few stores. And now everybody is talking about we created some smoothie stores and a number of stores. That's gone viral almost before we're ready for it in terms of execution. So it's been an interesting time for us.

It's really interesting. And shifting over to margins. I know you've had to remind us that as a smaller and relatively younger company than a lot of larger grocery peers, and you still have a lot of self-help opportunities on margin. I'm curious if you could just remind us what the biggest opportunities are going forward?

Yes. I'll cover that. Yes. So I think we've made some really good progress last year in the growth, particularly with inventory management, whether it was a lot of shrink last year, and we kind of got to some of those inefficiencies quicker than maybe we even thought we could at the beginning of the year. There's still more room to go there as we mature our processes as we get a little bit smarter with data, getting the right order and the right forecast into the right store at the right time to keep the shelves full and then to not shrink it. I think there's still room to go there, and the teams continue to find opportunities as we improve the process and the systems and the data. I think with -- Jack mentioned 7,200 new items every year, there's a lot of inefficiency in that. So how quickly do you take a mark? How deep is that first mark, how deep is the second mark? Those are things that we're learning and we're getting smarter at every year. And so that was a piece of the story last year that will continue to be an opportunity for us as we continue to innovate. We'll have to figure out the loyalty points part of it, right? That's a bit of an investment in the short term. But as we build that customer data and we understand our customers better, we believe that will unlock opportunities for us in the longer term from a margin perspective. And then scale provides opportunities for us, both in the SG&A and in the gross margin as we continue to do things more efficiently. We fill our warehouses, our partners fill their warehouses. And the empty space they have now, be it on a truck or in a warehouse, there's efficiency to be gained there. The growth drives that. And then that allows us to then reinvest in further growth and drive further efficiency. And so it becomes a bit of a virtuous cycle, and we're working really hard to collaborate with our suppliers so we can both kind of take advantage of that scale and that growth together.

There's 2 questions I think Kendall and I get all the time. So I'm going to assume that Curtis, you get these all the time. You came off this great quarter. Same-store sales are amazing. How do you answer the question -- well the 2 questions. But the first one is, what is the right sustainable same-store sales run rate for Sprouts? Because it's been double digit more recently. How long can it stay double digit? And does it go back? Does it go double digit then back to 0 to 2? Like a regular grocer? Or how should we think about that?

I'll let Curtis answer that question. We're very ambitious, and we're a small share of wallet.

Yes. Yes. It's a big opportunity pool, as we've talked about. So $8.5 billion, probably somewhere in there this year at the midpoint of our guide against $200 billion that we're chasing. So there's plenty of room for us to grow. We talk about the 2% to 4% low single-digit comp as the algorithm comp. And I really think about that in terms of every quarter, every year, no matter what the compare is, no matter what the environment is, we feel pretty confident we can deliver that. Clearly, last year, we were ahead of that curve. As the business accelerated, we're not going to slow that down. We're happy to drive those higher comps. And we're certainly -- in our 4 walls and in our stores, we're working really hard to drive that better outcome all the time. I think what we're intrigued about this year is to see, okay, when we get up against an 8% plus in Q3 and an 11.5% in Q4, how do we lap that comp? Is it going to be higher than the 2% to 4%? And we're just in a little bit of a wait-and-see mode. Certainly, we're putting the effort into things like loyalty and personalization, store experience, inventory management, the things we've been working on the last few years, all designed to drive a better outcome more sustainably in the long term. So this will be an interesting year for us as we get some of those things rolled out and in place, and we start to lap those bigger comps, whether that can be a bigger number in the future. And we get a chance every quarter to update everybody and tell you how we're doing progress-wise, but we're certainly going to try to drive something better.

And then the other one is obviously a grocery store is not allowed to have a gross margin that's as high as your -- and not anywhere near yours. Why can it stay there? Why can it get better?

Well, I'm a numbers nerd, so you can have some fun with math after the fireside here. And think about the conventional grocer and the things that they sell and where they drive their business, look at their front page ad, it's Cheerios, Coke, Lays potato chip, ties, Bounty paper towels. They've got 30%, 40% of their business on these single-digit margin, high-volume items. So they're just on throughput and supply chain efficiency and moving as much as they can. We don't sell any of that. And so our business has none of that. If you do the math on where their gross margins are, assuming 30% or 40% of their business is at 5%, well their margins have to be a lot higher around the rest of the store. And so that's just where we operate. We operate in the rest of that space. And the uniqueness, the innovation, as Jack mentioned earlier, we -- there is no market for most of what we sell. We kind of set the market and then the customer votes every day on whether we set it at the right place. And so we can continue to do those things as long as we stay innovative. We've got our levers to pull as far as the opportunities to still drive a better gross margin. And that will fuel the investments we need to make in the business to kind of do that over the longer term as well. And so that would be, for me, I think it's -- margin is a choice in our 4 walls because of the unique products we sell. And we've driven that over the last few years, and we intend to keep the inefficiencies that we found and continue to drive it going forward.

We'd like to say that we're not a grocer.

Yes. Speciality food retailers, Jack says.

Specialty.

Let me pause and see if there's any questions in the audience out there? None? Oh, we have one.

Is it fair to say that the investment spend on technology and the loyalty program are in kind of back half of this year, it starts to be reaped the rewards of that and most of the investment spend going forward is towards new store growth? Or what are kind of some projects you see on the pipeline that might replace some of that investment?

Yes. We kind of got the base right last year with the $15 million spend last year. And the returns that we're getting on the things we're investing in, things like inventory management, landing and shrink, we're really happy with the level of returns. And so I'm -- we're thinking about it more in terms of that's just now in our baseline. And so there's investments to be made in the business, and we'll continue to invest at a similar level as we get beyond loyalty, which is a big part of our investment this year. We're doing a lot of work on our technology foundation, a master data management, and our data and analytics is a place that we can continue to drive and maybe catch up a little bit. And so that will be some of the investment there. We'll continue to invest in the supply chain as we expand our footprint, we're going to need to add DCs as we go and then the new stores will be a huge part of our capital investment as we go forward. So we're going to continue to invest in talent as well as we open new stores. Again, we want a different experience in the store. We want our Sproutees, as we call them, to really be excited to be at work and taking care of the customer. They're passionate about the products we sell and the things that we're doing and that you just can't hire that any old person off the street. And so we're really focused on developing talent in our existing stores so that we can seed new stores with Sproutees who know who we are and what we're about, and then they can go out and find the right talent in the local market and develop them as well. So a lot of investment in our talent engine, as we call it, along with some of the systems and foundational investments that we're making.

Another question. We only have a few minutes left, but just curious, we mentioned before how right now or in the past 2 years, we've been in an environment where consumers have been feeling pressured and more so trading down, if anything. So curious if we did have some kind of rebound and you had consumers with more discretionary income to spend and maybe back to trading up things in their grocery purchases. What do you think the impact would look like for Sprouts?

Yes. I think the macro environment, I think we're shielded and protected on the downside. And I'm not sure we'll get as much of the upside when that plays through. I think the reality for us is we have this target customer, the ones who are interested in what they eat and how they eat, the discernment that they have about diet. I think there's going to be more people irrespective of the macro climate for the customer. There's going to be more people in 5 years' time interested in this space. I kind of just -- there's just a general trend to be more interested in the food that we're eating and where the food comes from, the provenance of the food, and that we're well placed to take advantage of that. Almost in whatever context that the market, clearly, if the things are a bit better the top line, things on the macro environment, things will be a little bit easier for us. But going forward, we kind of try and think to ourselves as almost whatever happens, that we can -- if we take control of our own destiny, that we've got the opportunity to be successful in good times and bad in the macro environment. That's how we think about it.

How many Sproutees or Swifties?

Maybe we should link it too. I like that idea. I'm not sure we can get Taylor Swift to back us, but we'll see.

Can you just talk a little more about your own brands' philosophy? Because it's interesting, right? You want brands that they recognize that are not necessarily -- they're not CPG brands, but they might not be brands that are yours.

Yes, we've got a combination, our Sprouts brand team, when we've reinvented the team, we brought a number of talent, brought a new talented team together. They're launching a lot of products. We've gone to 23% of our sales as Sprouts brand. What we're not trying to do is drive margin from Sprouts brand. Margins on Sprouts brand are in line with the rest of the marketplace, a little bit higher in some, a little bit lower in others, but it's in line with the rest of our sales product. What we're trying to do with that is to bring products that are differentiated. We got rid of a number of commodity style products in private brand and tried to bring in differentiation. So whatever we sell, there will be an attribute that differentiates the product within the marketplace. And it's all focused on attributes, and we have a lot of success on that. We're really encouraged by the progress that we're making on our private brand team. And the principle behind that is, it becomes a destination for customers that they can't get anywhere else, in line with the other brands that are -- the names that are being brought -- and we're not a branded company, but we sell a lot of brands that are new and differentiated. And those are the things that kind of working well within our environment. And we're pretty relaxed about whether Sprouts brand goes to 30 or gets to 20, as long as we've got differentiation, whether it be branded goods or private brand, that's the key to the proposition.

Are we out of time or -- we're out of time. Sorry. All right. I want to thank Jack and Curtis for a great presentation. This is really a...

Thanks very much.