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

Okay. There we go. So yes, good morning, and I think we can kick off. So welcome to Sprouts' fireside chat presentation today. Thank you for joining us. My name is Krisztina Katai. I'm Deutsche Banks' U.S. retail analyst. It is my pleasure to have with us Sprout Farmers' Market management team, so we have Jack Sinclair, who's our Chief Executive Officer; and Curtis Valentine, Chief Financial Officer. So for those that might not know, Sprouts is one of the largest natural organic grocers in the United States. They're getting close to operating 500 stores, growing close to a 10% clip. So with that, I think we can kick it off.

And Jack, I wanted to start with you. Obviously, Sprouts has had an impressive run of same-store sales. You've expanded your profitability. You had really strong performance, including in your most recent first quarter period. So for those that are not as familiar with Sprouts story, maybe if you could describe what differentiates Sprouts from the competition and what you think clearly has been a critical element to your overall success?

Yes, Krisztina, thanks for that. And a very key part of our business and why we've been really, I think, creating some success over the last few years is being very focused on our target customer. We've been very intentional that we would focus on 5 years ago when we put the strategy together, there was a $200 billion dollar market and what we described as health enthusiast and innovation seeker. And that is $200 billion of $1.2 trillion marketplace. So focusing in on $200 billion meant we had to not focus on $1 trillion of business. And one of the things that's been successful for us is shaping the individual, shaping the business behind that target customer, increasingly trying to understand that target customer better and better. Our merchandising team has been focused on attribute-based products that really do resonate with that target customer. So what products we're putting in front of customers, whether it be keto, paleo or vegan, vegetarian that whole dynamic organic -- the whole dynamic has been about how do we create the right products for that customer base, supply chain, we've spent a lot of time -- we focused a lot on building supply chain capability in terms of distribution centers within 250 miles of our stores. That allows us to get fresher products. Fresher product resonates very well with 20% of our sales are fresh produce because we've really doubled down on that freshness. And that resonates very well with that target customer as well. Real estate, putting stores in the right place because we understand that target customer and not putting stores in the wrong place. Not trying to be all things to all men by building stores in every single corner of the country, but being very specific and we're getting better at that in terms of putting stores in the right place, which is, I think, one of the reasons the new store program has been pretty successful as well. And marketing, being very intentional about who you're speaking to and how you're speaking to them, moving from 21 million paper flyers to 100% digital and multimedia approach to it. And that's been a very significant change in terms of trying to attract. Taking promotion this high low promotional context, which is such a predominance in the grocery sector in the United States and unraveling that and being very careful to target those target customers being specific to marketing, merchandising, supply chain. And I think that's been a big part of why we've had some -- made some progress in the last few years. But I will say, we've got 1 million miles to go on top of this. We're not far down the road where we need to get to.

Okay. And I just wanted to dig into on your target customer base that you've really narrow them to help enthusiast and innovation seekers. If you could just touch on what exactly are they looking for? How do you ensure that the assortment and the store experience will resonates with this demographic and then secondly is just how do you see the right balance between small brands that are not widely distributed, the Sprouts branded products that you are increasingly having success with and also more well recognized national brands?

Yes. Our customers are increasingly -- they're a little bit better educated and very discerning about the food that they buy. If you watch our customers in the stores, they walk around and they turn product over and read the label at a level that I haven't seen before in terms of the intentionality of what's in the product and a real discernment about what they want to buy and what they want to see. And a lot of it is about product attributes that play to their particular dietary needs, whether it be gluten-free, whether it be lactose intolerant, whether it be dynamics within the specific organic requirements. We've seen a big step up in our organic business. What did we do to try and make sure we're getting the right balance? We put together what is a foraging team, and that foraging team are balancing out, Krisztina, the difference between the private brand requirements that we have and the small brands that you identify, which are very important to our lifeblood. Private brand has been -- we've changed the whole private brand approach rather than it being, let's bring a branded product equivalent and at a lower price and make a better margin, we kind of didn't want any of that commodity thing in our business, and we created a private brand team who we recruited from some other places, some from the U.K., and we've made some real progress on creating differentiated private brand product whether -- and every time you look at, we've redesigned all of our private brands and when you look at what's on the labeling, it will call out the attribute that makes it different and we've made some progress there. The small brands, the lifeblood, we launched 7,500 items last year, which is extraordinary really in a business that's got 20,000 in total. So 7,500 of them in, 7,500 out, but we've become the destination for small entrepreneurial. And the U.S. is pretty strong in terms of bringing entrepreneurial differentiated products into the marketplace. We want to be the destination for that. We had 65,000 applications for products into our portal. For products that could potentially come into our business. We only manage 7,500 of them. So we're -- and execution that makes it more difficult than it would be for many other retailers, but it's something that we think is really important to that target customer to have a very long tailored product with a lot of interesting, innovative, different attribute-based products in the middle of it. So I think we've got a lot to do in this space, but I think we're creating this destination for the small entrepreneurial guys to come to us first and we've got a much bigger presence than we ever had at Expo West and all the shows around the country as we try and balance this out going forward. But we want both. We want private brand, and we want the innovative entrepreneurial products.

Great. And then just touching further on this foraging team that you have created. Maybe if you could talk a little bit more about their specific approaches, how do they source products and then maybe we could drill into how an average shopper comes to Sprouts? How have they been discovering you? Maybe talk about basket dynamics? And then where do you see more opportunities to drive growth with this existing customer?

Well, the foraging teams are very -- is something we kind of -- we wanted to be this destination for new innovative differentiated products. So the team came together under someone who -- Kim Coffin, who is on our ELT, She's a senior leader in the business, She's put the team together. And what do they do to try and find it? They go to, as I mentioned, Expo West, they go to all the big shows around the country and internationally. So they spend a lot of time out there. They have things called pitch slams. And in fact, I think there's one going on today where 30 or 40 individual vendors will come into the office and pitch, either virtually or in the office pitch products to us. And there's constantly -- we're constantly evaluating those products. So -- and being very close to what's happening in social media, what are the trends. We've seen something like sea moss, which has been an extraordinary success for us. Started with us seeing it on social media. So that whole context of being close to what's happening nutrition wise, being close to what's happening in terms of diet on the social media space. The team have worked very hard on that. So this combination of social media visiting, going around a lot of very specific shows and being very in tune with the ecosystem that exists around these products. And we have to end up holding hands a little bit with some of these vendors who to exaggerate to make the point, they started in the garage and how do we work them so that they can come to the marketplace and be first with us. We're kind of -- we feel as if we can be the starting point for a lot of very exciting young brands in the country and we're making progress with that. And then, maybe you could talk a little bit, Curtis, about how the customer kind of in basket works and dynamic in terms of where things are.

I think you asked kind of where they're coming from, and they're coming from everywhere. I think there's a real health and wellness tailwind that's sending customers our way, Krisztina. And so we see them coming through. Certainly, we believe they're omnichannel. And so our digital efforts, our in-store efforts, really, it's about providing more and more access to what we do. And so the 2 ways we'll do that going forward. New store growth, just get to more communities where these target customers live and introduce them to Sprouts. And then the loyalty program, I think, as we get on that path and better understand who they are and what they care about and which part of this attribute ecosystem they're engaging in that will allow us to kind of deepen our engagement with them and then get them to come in just a little bit more often or maybe add one more item to the basket will be how we'll continue to create growth.

Great. And I just wanted to ask a more near-term oriented question. It looks like Sprout doesn't experience or experiences very little just from the volatile consumer confidence and the overall backdrop that we're experiencing in the U.S. Well, for example, yesterday, we heard about higher income household trade and accelerating from a dollar store? Could you speak to what you're seeing regarding your current consumer behavior? Have you seen any shifts over the last couple of weeks or even months as well?

Well, we're clearly watching this very closely because there's so much dialogue about consumer confidence and what's happening. And so you would have expected some things to have changed in our environment. The reality is we aren't seeing any change whatsoever, which is quite surprising even in the last few weeks. Now whether that will stay, we're kind of second guessing whether it will stay like that. And we're very clear that by region, by category, trading up, trading down, we're not really seeing a significant change in the pattern of what's happening in our business. And you would probably have expected it by now, Krisztina to have seen something in that. I think our customer base is a little bit more resilient to what's going on in the macro environment, I think you've got customers who are very health focused. And if you're interested in your diet and you're a vegan, you've got to eat. You're probably going to stay eating the things that you're going to -- you're focused on in terms of our target customer. So I think that resilience comes and that gives us a lot of confidence going forward that irrespective of what happens in this pretty significantly uncertain time that we're going to be able to cope and deal with the changes as they come to us.

And then just maybe add a couple of things. I think from a trade perspective, trade-in or trade down in that higher income consumer, I mean, one of those trades would be out of food away from home and into food at home, right, which actually creates maybe a little bit of a tailwind as that first wave of activity happens. The second thing is to Jack's point on following the diet and being more interested in health, that is sending people our way up and down the demographic scale. So you've got boomers who are really focused on longevity and just live in a little bit longer. You've got the younger generation and I'm wearing an Oura Ring here, and they've got wearables and they're keen on their heart rate and how well did they sleep? And I know when I eat something lousy late at night as I did last night for dessert, I don't sleep quite as good, and my ring tells me that. And so I think people are just very aware of what they put in their bodies, this food as medicine concept, and it's sending more and more people our way every day. And as Jack said 5 years ago, we experience health enthusiasts, 5 years from now than there are today, and that's played out. And we said the same thing today. We'd expect more of our target customers tomorrow than we have today. And I think those are the things that are driving people to us.

No, that makes sense, and I would be one of those types of customers that is always actively tracking their sleep and making sure that is a high quality. Just in terms of categories or type of products, can you talk about what has been resonating the most with your customer, especially as we think about the potential for trade down or trade in activity to happen and then have you seen any underlying shifts in buying patterns? And how do you think about rebuilding the basket going forward?

Well, the reality is that the important attribute-based products that we sell are the things that are working well for us. we're seeing a real growth in organic. That's been pretty dramatic for us. More than 50% of our produce sales are now organic, which is leading us to some really good long-term relationships in the agriculture space. The whole diet trend around gluten-free has been pretty significant for us. We've seen a pretty significant growth in keto for us. Protein, if you go around Expo West, all -- everyone was talking about protein and protein is getting added to the most weird and wonderful products in our categories. So as you look, that's probably a very significant trend that how that's evolving. And what it's translating into is we're seeing strong performances in our dairy, frozen grocery for all the same reasons, it's all attribute-based products across different categories. You're also seeing some interesting things happening in non-alcohol. Alcohol that's non-alcohol, which I know is a bit of a misnomer really. But we're seeing some real success in that space. Nondairy, dairy, we've seen some real success in. But a lot of it is driven by attributes. And that's the progress that we're seeing significantly across the different categories.

Right. So you have obviously embarked on the strategy shift, you've eliminated what you referred to as the coupon clippers that has resulted in a significant upgrade in household income. So do you think that your model post the strategy change just makes you may be less vulnerable to the overall macro and overall price intensity of food retail. Then I wanted to touch on, if you think about your pricing perception of Sprouts in particular, key departments across the store?

Well, very specifically, as -- we're not -- I'll talk about pricing specifically. Produce pricing is very important to us. We spend a lot of time, it's the origins of the company, it's the DNA of the company, it's a bigger proportion of our business than anything else. So we spend a lot of time looking at produce pricing. We will have a very strong gap in organic product pricing, and we spend a lot of time analyzing where we need to be against conventional grocers and against Whole Foods as we look at our produce pricing. Other categories, we don't have the direct comparison. Increasingly, we've been getting ourselves in a place where the assortment that we're carrying is not -- does not appear in other places with the possible exception of Whole Foods across the rest of the marketplace, we're not really carrying the same things as the other people. And the way we look at pricing is about elasticity if we put a product out there that's got a fair value for the customer, and no one else to sell and that the customer will buy it. If they don't buy it, then maybe we've got the pricing wrong. So there's a lot of micro pricing work being done in our organization to try and understand exactly where that needs to play out. And by and large, that the focus of our value proposition is we're giving customers healthy products, differentiated products, innovative products and they will respond to that. And they've responded pretty well. And we don't see our price perception in the context of what is it against other grocers. We see it in the context of how does it work with our individual customers, and that's the context of our pricing decisions. It's taken me a little while to get my mind around that as having been a grocer for 100 years in every other place. The context of thinking about this in a different way, reflects that we really love being different as a company and thinking that through is how we navigate our way to thinking about our price perception.

And just one more on competition. We've talked about consumers increasingly shifting to health and wellness. We've also been seeing some of your conventional competitors promote Sprouts like events or really launching differentiated own brand products. Can you talk about your confidence that Sprouts can maintain its differentiated position in the face of growing competition. Certainly, when you're performing so well ahead of the market that is going to be drawing some attention to you. So how are you thinking about sustaining the market?

It gets back to your original question about what we're trying to do and that focus on a narrow customer segment allows us to be very focused on it. And remember, what we said, there's $1.4 trillion that we don't go after that the other guys, the main conventional guys certainly have to go after. And you can't chase and they're doing quite well on some of those products. but it's not going to do enough for them. They have to spend their energies chasing after the $1.4 trillion that we're not chasing after. So we can be very -- we feel very confident that the way we think about a long tail of assortment is something that other people won't want to do. Not that they couldn't do it, but they wouldn't want to do it because they would lose a lot of their capabilities of selling high-volume products in the $1.4 trillion marketplace. We only said -- you'd have to take Coca-Cola your business to really focus. We sell probiotic sodas, we don't sell Coca-Cola to bring all those probiotics sodas into the business and take Coca-Cola out would be, frankly, pretty silly for those guys to do that. So we think we've got an inherent strength in that, and they are doing fairly well with it because the customer are evolving to it. But the reality is we're in a position I think, to be so narrow in our focus. And we're relatively small still in the great scheme of things. Our $8 billion doesn't compare really with some of the other people you're identifying in that conversation, Krisztina.

Right. And I wanted to bring in Curtis a little bit more. Switching gears to gross margin. Obviously, this has been another aspect of the Sprouts story over the last few years as you've really eliminated just broad-based promotions. Will you continue to find gross margin upside even this year. You have many initiatives, including category management and supply chain enhancement. So Curtis, can you walk us through maybe where you see incremental opportunities that you still see ahead? And then just overall philosophy of how much you want to flow through versus how much you want to reinvest in the business?

Yes, sure. Yes. So we're still a fairly immature business. It's only been 10, 12 years since we went public, and we're growing really fast. And so we continue to find opportunities to just do things more effectively and efficiently. And we're not reinventing the wheel here. These are tried and true kind of grocery and retail techniques. But inventory management has been in the space in the last 12 to 18 months that we've really seen gains in so much lower shrink, more efficient in the 7,500 products that we're taking in and out of our business every year. So from a markdown perspective, just getting sharper and using tools and data and process to make better decisions in that space. And so these are kind of behind the scenes cost items that we've taken out. It's not an impact to the consumer at all. We haven't been raising prices to get that margin. It's been cost takeout and process efficiency and how we work through the entire supply chain. And so those are things that we've taken advantage of recently, but we'll also have opportunities still to go because we're not done yet as we continue to invest in replenishment in those types of capabilities. I think the other thing we think about and it kind of goes to the last part of your question is we're going to continue to reinvest in the business for the long-term sustainable earnings growth and the health of the business in 2027 and beyond. And that's a little bit of how we've gotten some of those gains as well. A couple of years ago, we invested in capacity in the supply chain, right? And that allowed us to then come back and as we add new stores, create leverage or as we look ahead to meat and seafood self-distribution, right, it gives us the capacity in the room to go do those types of things that continue to drive gross margin leverage. And then lastly, we'll have loyalty, which at the early stages as we're in right now, will be a bit of an investment for the points that we'll give on the loyalty program. But as we take in that first-party data and we get to know our customers at a deeper level, should create opportunities not only in growth but throughout our business to go ahead and reshape our merchandising, our operations and service, our marketing and how we serve those customers. We'll get to go do that again with the benefit of first-party data and the insights and the learnings that we've had in the last 5 years. And so we're pretty excited about the opportunity in the upside. But again, we really -- we talk about stable more than bottom line, stable EBIT margin is the commitment we've made, and then that becomes kind of the floor. So as we go execute these programs, one, if the comp momentum continues, then you'll see a little bit of leverage drop to the bottom line from strong comps but as we go execute these programs and we do it well, we outperform our business case, then you'll see a little bit of a flow-through to the bottom line as well. And because these are foundational elements we're just making better. These are not one-time things that we're doing. That just creates a new floor for next year's stable guidance. And so as we get gains, as we have the last few years, we'll keep them and we'll just keep moving forward, looking to stamp out more inefficiency in our business.

Great. And you touched on self-distribution. Fresh meat and seafood is something that you're undertaking this year. Can you talk about the expected benefits in terms of freshness, control, and then overall profitability to the gross margin. And maybe later down the road, what are some potential other areas for soft distribution that you see in the business?

I'm going to cover the benefits side, and I'll turn it over to you for the future. Yes. So on the benefit side, I think you've got it, right? So I think a little bit closer relationship with our suppliers. We just like that direct connection to them to be able to work better together. Right out of the gates, we've got the fee that we're paying for the distribution historically is the pool of funds, and then we've got to pay for it ourselves in our own ecosystem. And so there's just a little bit of arbitrage that will flow through the gross margin there assuming that we execute really well, which is where we're heads down and focused on this year is getting it right so that we do capture that little bit of gross margin benefit. Beyond that, then we should see in the partnership with the vendors better in stocks, right? So better allocations, better fill rates, getting the right product to the right stores with just one less complication in that dynamic. We can go direct to suppliers and do that a little bit better, and that should result in some better sales for us down the line as we have better in-stocks and then I'll kind of let Jack talk about what this might lead to in the longer term.

Yes. And specifically on the meat thing I'm anticipating when you become a specialist meat retailer, which we have become grass-fed, no antibiotics, very conscious of the husbandry of the animals. We can work longer-term programs with the vendor base, and that's going to be something that's I think going to help us instead, good stead as we grow scale. As we grow scale, how do we think this through. As Curtis said, we've invested in distribution capacity, which gives us optionality going forward. And we've got a number of areas as we grow geographically, we're going to have to build some more DCs as well. And we'll build them with enough capacity, which will have some effect in the short term, but it will get enough capacity going forward. So what are the areas that are going to matter to us in private brand is going to be important to us. Sprouts brand is going to be important to us as we grow in scale. Should we find some way of becoming more -- having more control of our destiny in that space, probably our vitamins and supplements departments, which are really important to the differentiation of the company, grocers of pharmacies, we have vitamins and supplements departments where you can get people advice as to how they can navigate their health journey and navigate the way they can look after themselves. And we've got people that are really important. We probably haven't got the supply chain behind it that I would like going forward. So areas like that as we think about it, might not be self-distribution. It might be, but those are the kind of categories as we grow that we're going to have to take a little bit more control of our own destiny so that we can free up our business to look after customers more effectively. And that's very much a big part of the kind of supply chain investment. How do we create resource to make the world a better place for our customers when they come and interface with our team members.

Great. And one other exciting aspect is you're launching a loyalty program that's going to be rolled out starting in the third quarter. If you can talk about the overall road map to provide that tailored unique need for your customer, what kind of uplift do you expect to gain from the program in order to keep it margin neutral? And any insights that you can share from your initial pilot program?

Well, I'll let you build on it, Curtis. The starting point of this is we're really excited about our loyalty program. The reality of our customer base is such -- we have to understand the nuances of what -- when we say health enthusiast innovation seeker, there's a lot of nuance within it that we need to kind of understand even better than we have been, whether it be you're a grass-fed meat customer, you're a vegan customer, you're a keto customer. You're an organic customer. How do we understand that nuance more effectively so that we can communicate more effectively. Where we are at the moment, we're in 35 stores. Those 35 stores, we've been working very hard on the user experience around the loyalty program to make it much more customer -- to take the friction out of the customer journey on that, and we've worked our way through that. It's been expensive. It's been a long journey. And we're feeling we've got to the end of that journey now, and we're ready now to roll it out. That journey now starts to roll out in July. And by the end of the year, we'll be in all stores. What do we want customers to do as this rolls to all stores, we want them to sign up. They're signing up on the basis that they get points. They get $2 for every 100, basically the way it will work. And how did -- then from that, how do we get them to scan. We need them to sign up and scan, and that's the basis of getting this thing kicked off. From that data, what are we going to do with it is a kind of exciting thing for our business right at the moment. And we draw inspiration from people like Sephora and Ulta, who I think are in the conference here today and other people like REI, more so than we draw inspiration from the grocery schemes that we see around the world, all of which tend to be a little bit transactional, a little bit about here's $0.10 off your gas or here's some price for you that the other guy can't get. We don't want to get into that space. What we do want to do is understand the customer. And the vision would be that when you open the app, it's individual to you. It makes really clear that the personalization dynamics so that you feel special and feel something special. And we'll build on that by creating ways to spend your points to go beyond just getting money of your -- of the register and how do you access different things. And the team are in the middle of that. It's a really exciting phase of our evolution back to how we -- who we want to serve and how do we look after that customer. And that will help our purpose to help people live and eat better. We think this loyalty program is going to help us do that in a very individual way. You want to?

Yes. I think from a -- I think we expect it to be a little bit of a longer journey, too, Krisztina. I mean we have a lower frequency customer that comes through our doors, and so it will take us a little bit longer to gather all the data we'll need to really create and stimulate the demand in the ways that Jack is talking about. And so we expect it to be incremental and multiyear incremental to our comp. It should be a tailwind for the next several years that will help us deliver, sustain the momentum we're on and deliver the comps that we promise. And then I think it will evolve as well. It will iterate from an experiential perspective, right? We do want to create that community feel to it. And so we'll be working on different ways to do that beyond just the points -- starting point that we're using. But certainly, you could get to our innovation, is a big part of what we do, and so access to new products and unique products first. I think you could think about demonstrations around cooking and recipes and influencer-led events and things like that and giving access to some of those things for the folks that are in our loyalty program. I don't know that specifically will be it. I'll leave that up to the marketers to deal with, but they'll be coming up with great ideas like that and better ideas than that in all likelihood, and that will create that kind of community feel that we're after for our target customer.

Well, I'm already signed up. I'm excited for these. You just have to open store near Manhattan for me to attend.

We're on our way. I suspect we'll get to that question here shortly. So we're on our way.

So that's a good segue for us to get to new store growth. Another big part of your story. Maybe just given your differentiated sourcing approach. If you could talk to us about how you see the long-term store growth potential, where do you see the greatest white space opportunity ahead? And when do you expect the new store openings to start tilting more towards newer market as opposed to filling in existing markets. So that 50-50 balance that you're currently achieving?

Yes. So 1,200 to 1,400. So 1,200-plus sites. I mean we've got them kind of plotted out as you know, we've talked about our journey on the site selection process and the analytics that underpin that. And so we've got pins in the map across the U.S. and about 1,400 different places, and we'll be able to get there in due course. More specifically, we'll get into the Midwest with kind of Chicago as the center point, and then we'll get into the Northeast, kind of Greater New York and into Boston. We've opened up those geographies after doing a little bit of consumer research to confirm that we're ready to go with the right go-to-market in that space. But that will allow us to go a little bit faster and continue to accelerate our unit growth as we head towards 10%. That will probably start in 2027 practically as we start signing them off now, it will take a couple of years to get those out of the ground. And the shift of the business, it's been interesting in the last 5 years that really the 50-50 has been kind of the East Coast, right? The 50% nonestablished a lot of Florida, a little bit in the Southeast, up into the Mid-Atlantic. That's been our nonestablished 50. The performance we've seen has been really encouraging, and it gives us a lot of confidence to continue to go fast and that they're doing really well. They're starting to open at higher levels. They're comping really strongly. It's starting to resonate, really resonate with the target customer. And so those markets are almost graduating into a more established market. And so I view the 50-50, it will kind of just stay the same. It will just be a little bit -- it will be the different markets. It will be the Northeast and the Midwest that will become our nonestablished markets where we'll start with a little lower density and awareness. But those other markets will fold into a more established state and probably look a little bit more like your Texas, Colorado, Arizona, California type markets as we evolve going forward. So it should continue to have that split, which gives us a nice kind of cannibalization balance where we don't see much in those new markets, and we see a little bit in the existing markets as we infill. And so it will kind of play out similarly we expect over the next 5 years. As the last 5 years just with different markets.

I think one of the things that's quite interesting about the new stores is what's happened to places like Florida for awareness and as we -- what we've done and awareness going from 30% to 75% in some of our markets down in Florida as we build the store. So getting critical mass and getting enough stores quickly to make their awareness move fast is going to be one of the big challenges for us in places like Chicago and Boston and the New York Metro area. Those opportunities, and we're thinking very hard about how we can market and move a little bit faster so that this dynamic of new markets and old markets, fuses into one, and we're just able to open stores everywhere and a little bit of that is building awareness in advance and we're thinking very hard about that. We're having some real thoughts of what our marketing teams of how we can get ahead of some of the markets that we're not in and maybe move a little bit faster with awareness, which will allow us to maybe get the stores opening and you won't have this difference between old stores -- new markets and old markets that we've traditionally talked about, and we're working pretty hard about that. The other thing I would say is the smaller stores is now much easier for us to execute than we've ever -- we've now got the cadence of building 23,000 square foot stores, as I don't think we've talked about. We've gone from 32 to 23. We can launch these much more effectively, and we're finding that. I think we can -- I think we'll be able to do better in new markets than we traditionally have done.

Right. And what interesting aspect of your business is your overall sourcing and then your increased focus on local sourcing as well. But as we think about where the majority of your footprint sits and where you've been growing in areas like Florida and Texas, it really has been more or less concentrated in areas with stronger growing seasons or just overall closer to areas where more food generally is grown. So as you think about the expansion more into the Northeast, then followed by the Midwest, just how did you manage that expansion while maintaining the farmers market appeal of the overall Sprouts experience?

Yes, I think it's a great question, and we're thinking pretty hard about it. I think about markets like Colorado. Each of our distribution center, we have a local sourcing expertise, building long-term relationships. And a lot of it primarily links to our fresh produce business, which as we keep saying is so important to us. Colorado has got a very short window because it snows a lot there. So you've got a short window, but you have to work really hard at when it really matters to source it appropriately. We'll have to think about that a little bit in Chicago when we get to Chicago and building relationship with growers in Michigan and building relationship which, again, Colorado is a good parallel to think about how you would do that. We'll be building relationships so that you can source product locally. And we'll work -- we'll bring some partners on board who can help us with this in markets where we're not known. But each distribution center will be sourcing locally, and we'll be sensitive. At the moment, we've got a partner helping us in the Mid-Atlantic. So Jersey tomatoes being ahead of that kind of program, you wouldn't have said that, that would be a Sprouts expertise a few years ago. And we think we're working very hard. When the markets are there, we'll be there to support the growers and give longer-term commitments 2, 3-year commitments so that people will grow for us, encouraging them to grow organic regenerative agriculture. We're working very hard locally and each market is going to have its own dynamic. But we'll do this -- people are eating a lot of fresh produce in Chicago. And when they get it, it says local, it will be as local as we can get it, and hopefully, we'll be better than most. And we've certainly had a lot of -- made a lot of progress in Florida. I was with the Florida agriculture people last week, and we've really doubled down on how we can work closely in the season when it matters. And so we're confident about it. It's something that's in our DNA, and it's something that we're working hard at.

Right. And just wanted to switch to digital where you have seen really strong growth over the last several years, not only with your original partner, Instacart, but even with newer partners, DoorDash, Uber Eats and then when you started to anniversary those ambitions as well. What has been such -- what has been contributing to this such strong growth -- how do you think about digital growth from here? And maybe talk about what are some of the key differences in digital orders versus in-store shopping habits?

Yes. Sure. Well, I think for us, it starts with the assortment always. So it's that differentiated attribute-based assortment. If you're going online to get groceries, if you're going for Coca-Cola, you've got 1,000 options. If you're looking for something in the long tail of keto, you don't have that many options. And so I think that's what our customer is seeking our assortment out online. That's why you've seen the growth you've seen in our business, which gives us a lot of confidence that it is different and it is unique because of the way that the customer responds digitally. I think secondarily, we have growing up as a fresh foods retailer and particularly with fresh produce. We've got an inherent kind of brand trust in what we do that you'll find the best and the freshest produce at Sprouts. And so our online mix for produce is the same as it is for a brick-and-mortar transaction in store, which just again reinforces that they trust that. If you're going to have somebody pick your apple for you, it better be somebody that you trust that you know will do it well, and will have the freshest product. And so that's what we see is the assortment and the mix of departments is roughly the same online as it is in store. The basket size is a little bit different. It's about 2x on the Instacart delivery order, what it is brick-and-mortar. And then Uber Eats and DoorDash is a little bit more of the convenience shop and a little bit more milk, eggs, bread kind of what's for dinner tonight. So a slightly different mix for them, but still really strong baskets. They are in the same range as our brick-and-mortar in-store basket kind of in that low to mid-40s range. And so yes, all 3 partners have been excellent partners. They get on great with the stores. They take great care of the customers. They pick great fresh produce for the customer. And we'd expect that to continue to grow for us. It's a convenience play and an access play for our target customer. Our brick-and-mortar trade area will be about 10 minutes drive time for most of the customers. The e-comm trade area allows us to expand to about 30 minutes drive time. So if you live 25 minutes away from a Sprouts, and have a 50-minute round trip maybe you have a new baby at home, and you're not willing to make that 50-minute round trip, but you love what Sprouts does. Well, now you've got another option. So that was the idea around Instacart, Uber, DoorDash, it's a different pool of customers that just provides access and a bit of convenience that we can't provide with our brick-and-mortar footprint. They now have that online. And so I think the assortment continues to be different. We continue to have that opportunity to access the customer in different ways. We'll allow them to choose, the penetration will be what it will be, based on how the customer chooses to interact with us but we expect it to continue to grow in the next 5 years.

Great. And maybe 30-second rapid fire to round this out, Curtis. Just capital allocation priority balance between store growth, share repurchases, any potential for M&A opportunities.

Yes, we always invest in the business first. And so the things that are driving EBIT in our business today are the things that we're going to continue to invest in, so store growth, supply chain, loyalty personalization, innovation, team and technology. That's our first priority, our 3% to 3.5% of sales guidance kind of allows us to do all the things that we've got the bandwidth to do in that space and feel good about driving returns on. Outside of that, we paid down on the debt. We're really toggling between interest income and share repurchase. So when the price is a little bit lower, we buy a few more shares when the price is a little bit higher, we'll learn a little bit on the interest and there's just a math equation there. And so we'll always take the excess free cash flow and return it to the shareholder in the most efficient way possible. On the M&A side, we look and things come along and we'll always look. But practically, it's important for us that it's got to fit our target customer. It's got to accelerate our strategy. It has to make sense financially and then we've got to be able to execute it and have the bandwidth to do it in such a way that it doesn't impact the core business, which is really going right now. And so when you think about a short list of potential players there. There might not even be a list to think about. And so we're pretty...

We've got plenty to do what we're doing.

We're pretty heads down and pretty focused on the organic.

It's not a big part of our thinking at the moment.

Correct.

Great. Well, I think that rounds us out for time. So thank you so much, Jack, and Curtis for a great presentation. This has been a very enjoyable conversation. So thank you again, everyone, for attending. This will conclude our fireside chat.

Thank you and Good luck.

Good luck, Krisztina. Good to see you. We'll see you again soon.

Thank you.