Sprouts Farmers Market, Inc. (SFM) Earnings

Management highlights

- Overall Business Context * Q2 2026 results were in-line with management expectations, following difficult year-over-year comparisons from outsized prior year growth driven by natural/organic supply chain disruptions that drove incremental customers to Sprouts. The most difficult comparisons are now behind the company. * Total Q2 sales reached $2.3 billion, up 5% year-over-year, driven by strong new store performance, partially offset by a 1% decline in comparable store sales. Sequential comp improvement was seen through May, with June coming in as the lowest comp of the quarter as expected. * Net income was $129 million, with diluted EPS of $1.37, up 1% year-over-year. Gross margin came in at 38.7%, down 12 basis points year-over-year, driven by loyalty program investments and elevated fuel costs, partially offset by self-distribution savings and vendor support. - Affordability Strategy * First half 2026 affordability tests produced mixed results: most actions drove improved unit movement, but broader traffic growth has developed more gradually than expected amid a challenging consumer macro environment. * Management is refining second half efforts to focus price and affordability investments on high-priority items that resonate most with customers, including health-focused meal solutions, Sprouts brand healthy essentials, and core staples. - Product Innovation & Assortment * Launched approximately 1,300 new items in Q2, focused on customer-valued attributes including organic, seed oil-free, fiber, gut health, and high-protein solutions. Recent successful launches include nationwide pasture-raised chicken, Better Pop, and Bitty Soup Shots. * New product innovations launched in the last year continue to significantly outperform the overall company base, driven by targeted merchandising and outreach to attribute-focused customers. - Loyalty, Personalization & Marketing * First-party data and loyalty program capabilities continue to progress, with new tactics identified to drive second half sales growth. Deeper customer behavior data is being leveraged to improve targeted marketing to both existing and new customers. * Marketing creative is being refreshed to more clearly communicate Sprouts' unique value proposition focused on health, product discovery, differentiated products, and compelling value on healthy essentials. Vendor participation in the loyalty program is still in early stages, with growing participation and early positive results. - Supply Chain Expansion * The new Northern California distribution center is now open and operating smoothly, bringing nearly 85% of Sprouts stores under company self-distribution for fresh meat. This transition improves control over freshness, service levels, and shrink, with ongoing cost benefits that support affordability investments. * Management is beginning the next phase of self-distribution expansion, starting with select Sprouts brand SKUs beyond existing produce and meat categories. - Real Estate & Store Growth * Opened 7 new stores in Q2, ending the quarter with 40 stores across 25 states. The pipeline remains robust, with over 110 executed leases and 155 approved new stores. * Process improvements have shortened store build timelines, enabling a 2026 target of 42 net new stores, slightly above original guidance, with 15 planned openings in Q3 2026, the largest quarterly opening cadence in company history to date. New stores continue to perform ahead of expectations across both existing and new markets.

Guidance

- Full Year 2026 (52-week basis): * Total sales growth guidance is maintained at 5.5% to 6.5%. Comparable store sales guidance is narrowed to between -0.5% to +0.5%. * Net new store openings are now expected to hit 42 for the full year, including 43 new openings and 1 closure of an underperforming store with an expiring lease, slightly above original guidance. * EBIT guidance is narrowed to between $675 million and $685 million, adjusted for elevated persistent fuel costs. Diluted EPS guidance is $5.32 to $5.40, assuming at least $300 million in share repurchases for the full year. * Capital expenditures net of landlord reimbursements are expected to be approximately $310 million, and the corporate effective tax rate is expected to be ~25.5%. A one-time gross margin benefit is expected in Q4 2026 from easier shrink comparisons and lapping 2025 loyalty program changes. - Third Quarter 2026: * Comparable store sales are expected to range between -0.5% to +1.5%. Diluted EPS is expected between $1.20 and $1.24. * EBIT margin pressure is expected to be approximately 50 basis points, driven by fixed cost deleverage from lower comparable store sales and a higher number of new store openings compared to Q3 2025.

Segment performance

Sprouts Farmers Market does not break out formal geographic or product segment financials beyond category-specific revenue contributions reported in the quarter. Key category-level performance is as follows: - E-commerce: Grew more than 12% year-over-year, representing 16% of total Q2 2026 sales. - Sprouts private label: Continued outperforming the rest of the business, representing 26% of total Q2 2026 sales. - Organic offerings: Now represent more than 30% of total company sales, including over half of sales in the dairy and produce departments.

Risks & headwinds

- Persistent macroeconomic pressure continues to strain consumer budgets, leading to gradual customer response to affordability initiatives and slower than expected traffic growth, particularly among lower-engaged, lower-income customer cohorts. - Elevated and volatile fuel costs create ongoing margin pressure that has required downward adjustment to full year EBIT guidance. - Ongoing Cyclospora outbreaks linked to leafy greens have created recent, modest negative impact on customer shopping behavior for salad and lettuce-related products, with the ultimate magnitude of impact on Q3 results still uncertain as the situation develops. - Customer behavior remains uneven amid inflation, with consumers actively managing the number of units in their baskets across most categories, creating pressure on same-store sales.

Analyst Q&A

• Q: Can you provide detail on July comparable store sales performance, the impact of the Cyclospora outbreak, and the trajectory of year-over-year comparisons moving forward?

  A: Comparisons got much easier after June, as the difficult 2025 comparisons tied to strong 2025 produce performance and supply chain disruptions are now behind the company. July came in slightly negative, within the stated Q3 guidance range. The Cyclospora outbreak has only impacted the business over the last two weeks, with no product recalls to date, but it has shifted customer demand away from fresh leafy greens to frozen alternatives, and management is monitoring the situation closely with food safety as its top priority.

• Q: First half affordability tests produced mixed results. What adjustments are you making for the second half, and what has the company learned about customer response?

  A: The company is focusing affordability investments on high-priority customer items across fresh and non-perishable healthy essentials, including new value-focused items like $29.99 family meals, all fresh salads under $9, $4 organic sourdough bread, and top-selling seed oil-free frozen potatoes. Price and promotion actions have driven strong unit and basket velocity, but broader traffic growth has been slower than expected in the challenging macro environment, so management is continuing to test and learn on pricing and messaging while maintaining disciplined investment.

• Q: New stores continue to perform well, even in the difficult macro environment. Are you seeing any changes to ramping or cannibalization of existing stores, and what is your strategy for expanding self-distribution beyond meat?

  A: New stores across all regions are performing in line with or ahead of expectations, with recent store vintages still posting positive comparable sales even as core comps are pressured. Cannibalization of existing stores from new openings is currently at the lower end of the historical 100-150 basis point range, better than expected. After successfully completing the fresh meat self-distribution rollout, the company is now testing insourcing a small number of Sprouts brand SKUs using existing distribution capacity, and will expand gradually as it learns from this initial phase to improve service levels and profitability.

• Q: E-commerce growth accelerated to over 12% in the quarter, even as the channel becomes more competitive. What is driving this growth, and what is the value of e-commerce customers to Sprouts?

  A: Strong e-commerce growth is driven by Sprouts' differentiated assortment of hard-to-find healthy products that customers cannot get from other grocers, and the company's good partnerships with third-party delivery platforms. Most Sprouts e-commerce customers are omni-channel shoppers that also shop in-store, and they are the company's highest-value customers. E-commerce baskets have a similar product mix to in-store, with a high share of fresh produce, reflecting customer trust in Sprouts' fresh offerings.