SFM - NASDAQ

Ladies and gentlemen, thank you for standing by. Welcome to Sprout's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Susannah Livingston, Vice President, Investor Relations and Treasury. Please go ahead.

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our third quarter 2025 earnings call. Jack Sinclair, Chief Executive Officer; Curtis Valentine, Chief Financial Officer; and Nick Konat, President and Chief Operating Officer, are with me today. The earnings release announcing our third quarter 2025 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website at investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2025 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings and the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures. With that, let me hand it over to Jack.

Thanks, Susannah, and good afternoon, everyone. In the third quarter, we delivered strong earnings growth, up 34% year-on-year with a 5.9% comp and strong new store performance. Our results continue to be driven by our execution on the key pillars of our strategy. We saw an increase in customer traffic as we effectively engaged with our target customers, while our most differentiated and attribute-based products continued to drive sales as we continue to expand our store presence from C to shining C. In addition, our ongoing inventory management improvements in supply chain contributed to the expansion of our EBIT margin. Together, these achievements demonstrate the strength of our teams and the durability of our strategy. While it was a solid third quarter, it fell short of our top line expectations. As the quarter progressed, our comp sales moderated faster than expected as we came up against challenging year-on-year comparisons as well as signs of a softening consumer. As we look ahead, the investments we have made provide us with levers to manage our business and deliver earnings growth. Today, we'll walk you through our performance highlights, update you on our strategic initiatives and share how we're positioning Sprouts for the rest of 2025 and beyond. I want to thank the team for their ongoing commitment to supporting our customers on their health journey. For now, I'll hand it over to Curtis to review our third quarter financial results as well as our updated 2025 outlook. Curtis?

Thanks, Jack, and good afternoon, everyone. In the third quarter, total sales were $2.2 billion, up $255 million or 13% compared to the same period last year. This growth was driven by a 5.9% increase in comparable store sales and the strong results from new stores. Traffic remained positive and accounted for approximately 40% of our third quarter comp. Our key points of differentiation continued to drive our sales with attribute-forward products growing faster than our core business. E-commerce sales grew 21%, representing approximately 15.5% of our total sales for the quarter, with good performance from all partners. Additionally, Sprouts brand continues to resonate with our target customers and now represents more than 25% of our total sales for the quarter. While our third quarter yielded solid results, we expected more from our top line as we underestimated the impact of lapping strong numbers from last year in the context of a softening consumer backdrop. We believe our strategy always has us well-positioned to capitalize on the surging interest in health and wellness. Last year, we saw outsized gains in new customers, substantially growing our customer base. And by and large, we've kept those customers. Against that backdrop, we have managed our costs and margins effectively. Our third quarter gross margin was 38.7%, an increase of 60 basis points compared to the same period last year. This improvement was mainly attributable to improved shrink. SG&A for the quarter totaled $653 million, an increase of $73 million and 13 basis points of leverage compared to the same period last year. This improvement was largely driven by lower compensation expense, which was partially offset by increased benefit costs and pressure from our new store growth. Depreciation and amortization, excluding depreciation included in the cost of sales, was $39 million. For the third quarter, our earnings before interest and taxes were $157 million. Interest income was approximately $690,000, and our effective tax rate was 24%, including a benefit of $0.03 predominantly from a purchase discount for transferable tax credits. Net income was $120 million and diluted earnings per share were $1.22, an increase of 34% compared to the same period last year. During Q3, we opened 9 new stores, ending the quarter with 464 stores across 24 states. We are encouraged by our new store performance and the positive response we are getting from customers as we enter new communities across the country. The team continues to improve our processes and partnerships to accelerate our development cycle and our planned expansion into the Midwest and the Northeast is providing fertile ground for site approvals. We plan to open more stores in 2026 than in 2025 and believe we are on track to get to our 10% unit growth in 2027. A strong and healthy balance sheet has underpinned our financial performance. Year-to-date, we generated $577 million in operating cash flow, which allowed us to self-fund our investments of $194 million in capital expenditures, net of landlord reimbursement to grow our business. We have also returned $342 million to our shareholders by repurchasing 2.4 million shares. We have $966 million remaining under our new $1 billion share repurchase authorization that was approved by the Board of Directors in August. We ended the third quarter with $322 million in cash and cash equivalents and $23 million of outstanding letters of credit. On July 25, we closed a $600 million revolving credit facility, which replaced our previously existing $700 million revolver. The terms and conditions are substantially similar to our previous agreement with a new expiration date of July 2030. While we plan to fund operations and unit growth through our robust cash flow generation, this facility provides Sprouts with financial flexibility as we grow. As we look ahead for the remainder of this year, we are balancing the strength of our business strategy against the consumer uncertainty and challenging year-over-year comp compares. For the full year, we expect total sales growth to be approximately 14% and comp sales to be approximately 7%. Given the strong execution of our real estate pipeline and fewer time line delays, we now plan to open 37 new stores in 2025. Earnings before interest and taxes are expected to be between $675 million and $680 million, and earnings per share are expected to be between $5.24 and $5.28, assuming no additional share repurchases. That said, we expect to continue repurchasing shares opportunistically. We also expect our corporate tax rate to be approximately 24% -- during the year, we expect capital expenditures, net of landlord reimbursements, to be between $230 million and $250 million. For the fourth quarter, we expect comp sales to be in the range of 0% to 2% and earnings per share to be between $0.86 and $0.90. In the fourth quarter, year-over-year margin rate in both gross margin and SG&A are normalizing. Despite pressure to our top line, we expect to be able to grow EBIT dollars in line with our sales growth to deliver stable year-over-year margins in the fourth quarter. Despite facing challenging revenue comparisons, we remain confident that we have a resilient business capable of delivering solid earnings growth. This reflects our ongoing commitment to operational efficiency and disciplined cost management. These factors provide us with earnings stability while we continue to invest in our future growth. And with that, I'll turn it back to Jack.

Thanks, Curtis. Over the years, we have built a strong foundation for sustainable long-term value creation. We focus on driving growth through differentiated innovation, strengthening our operations, enhancing our digital capabilities to deepen customer engagement and expanding our store footprint, all while investing in our talent and technology. Together, these elements form the cornerstone of our strategy, positioning us to compete effectively. The broader health and wellness movement in the United States continues to gain popularity. With this in mind, we remain committed to expanding and strengthening our unique product offering. We continue to see strong customer demand for our attribute-driven products, which remain a key driver of our sales growth. Currently, more than 1/3 of our sales come from organic products, and we'll continue investing in this important attribute for our customers, ensuring they have access to the best in organic offerings at a great value. The supplement sector is also evolving within our stores, focused on areas such as longevity, women's health and gut health, trends that resonate with our health enthusiast customers. The Sprouts brand now accounts for more than 25% of our sales and with a robust product pipeline planned for the next 3 years, we are committed to continuing our growth. What makes our Sprouts brand unique are our innovative products and flavors, such as herb-stuffing potato chips and maple-flavored coconut pillows, new for this year's fall season. In the third quarter, we launched new wellness bowls, each priced under $10. These bowls feature attributes like grass-fed beef, organic tofu and responsibly-sourced salmon. They're packed with protein, bold flavors such as sesame garlic ponzu and high-quality fresh ingredients at a fantastic price. Our customers are responding, and we're pleased with the early results. As we look to the future of forging, we're investing to ensure that we continue to lead in this space, supported by a robust pipeline of innovation and deep partnerships with entrepreneurial brands that view Sprouts as the ideal launch platform. These partnerships energize us. And together, we're excited to introduce approximately 7,000 new products for 2025 that align with our customers' values and lifestyles. To stay ahead in a rapidly evolving market, we're expanding the capabilities of our forging team to better anticipate emerging trends and customer needs. Over the past year and into early 2025, we expanded our customer base, attracting a meaningful number of new shoppers. We are pleased to see that the vast majority have remained engaged. On the marketing front, we continue to partner with our influencers, extend our reach in new markets and have started utilizing our Sprouts Rewards to engage with our customers. Speaking of the Sprouts Rewards loyalty program, it's fully launched this week, marking an essential step in our Sprouts customer engagement and personalization journey. We have seen good growth in our identifiable customers and the stores are taking ownership of this important initiative. Although it's still early in the program, we are observing encouraging indications of increased shopping frequency and sales per customer in our early rollout geographies and are excited to see our progress in the coming months. On the supply chain front, we're excited about our ongoing transition to self-distribution in fresh meat and seafood. It has been a difficult year for us in the meat category as multiple third-party supply disruptions led to availability challenges and customer disruption, further underscoring the importance of controlling our destiny through self-distribution. Through October, we have successfully completed the transition at 4 of our existing distribution centers, leading to increased delivery frequency to our stores and improved fill rates. Looking ahead, we anticipate completing this transition by the second quarter of 2026 with the opening of our new Northern California distribution center, further solidifying our commitment to operational excellence. The new stores we've opened this year are performing well, both in terms of top line revenue and bottom line profitability. Additionally, last year's vintage is entering the comp base well, further validating the effectiveness of our model. We're particularly pleased about our robust new store pipeline, which currently includes 140 approved locations. This highlights the strength of our brand and also demonstrates the scalability of our format. We are confident that we will be able to meet the evolving needs of our customers while also achieving our ambitious growth targets. To that end, we are pleased that we plan to open 37 stores in 2025, exceeding our original target of 35. We're excited to welcome 3,700 new Sproutees to our team and to expand access for our target customers, allowing us to bring the Sprouts experience to more communities nationwide. The effective execution of our strategic initiative is made possible by the dedication and talent of our team members throughout the organization. Central to our culture is a shared belief in our purpose and values, which form the foundation of our long-term success. I want to express my gratitude to our 35,000 team members for their unwavering commitment to serving our customers every day. We acknowledge the challenges of sustaining the momentum built from last year's exceptional results alongside an evolving consumer backdrop. We have an amazing business that has significant potential. We are confident in the resilience of our business model and are dedicated to investing in our foundations for sustainable long-term earnings growth. Thank you for joining us today. We look forward to sharing more of this journey with you in the quarters to come. And with that, I'd like to turn it over for questions. Operator?

[Operator Instructions] And the first question comes from Michael Montani with Evercore.

I just wanted to ask, we've had some questions about concerns around competition that might be potentially encroaching on your core consumer. I just wanted to see kind of how you would respond to that, if there was other cyclical temporal headwinds that we should be thinking about in the quarter and then how that could play out in the fourth quarter? And also, do you see this as a function of competition? Or is it something else?

Well, I think what we talked about in the script there, Mike, was very much there's -- we're lapping some tough numbers from last year. And at the same time, there's a kind of consumer context that feels like things are getting a little bit more difficult for the consumer. So putting that into context, we always look at what our competitors are also doing and what the competitors are playing in there. But our strategy is pretty clear. We've got 7,500 new innovative products launched. I don't think -- I haven't seen anyone else launching that kind of number of innovation and differentiation. We're building a lot of stores up to 37 stores, which we're very confident about, and we've got a great pipeline of stores coming through going forward. And we're very excited about the loyalty and personalization work. So the context of all of that, I think, shields us from what we've seen happening from our competitors. And as I say, we're pretty confident about the future, Mike.

And the next question comes from Seth Sigman with Barclays.

There's a concern in the market that there have been some unique drivers helping your business over the last 12 months. You've had great performance and the concern is that those drivers are going away. As you reflect on that and the current slowdown that you're seeing, is there anything you would call out that's proving more difficult to lap? And then you talked about keeping your customers. You grew your customers quite a bit last year. I mean, how are you seeing that play out? Are we seeing perhaps a change in spending behavior, lower spend per customer?

Hi Seth, this is Curtis. We've just seen some pockets and windows where we've had some outsized growth and gains. We've talked about those on the call. Certainly, last October was our strongest month that we've compared against. It was a 13-and-change comp. February, we had some help from a strike at a competitor that was upside. And then May and June, we had strong months with a good customer season from produce and some challenges in the industry from a supply and a cyber issue. We saw customers come our way in those moments. We're always well positioned to kind of capitalize in those moments. But we don't see anything structural in -- outside of those types of things that we're up against. But we do have those moments that we'll be up against over the course of the next 10 months. And then just, yes, a little bit of softness in our business. I mean we see things in more of our middle-income trade areas, some of our younger trade areas where we see those demographics, we've seen the business soften just a little bit more than the rest of the business. And those are the things that we're kind of pointing to as it relates to the customer pressure.

And our next question will come from Leah Jordan with Goldman Sachs.

I'll kind of stick with the same theme around the comp slowdown. Just seeing if you could provide some more detail on the key surprises versus your expectations because this was a notable miss, right, below even your guide. Has there been any major difference across the regions or product categories? And I think ultimately, you've historically talked about your offering being resilient to macro pressures as people are committed to their diets. But now you're talking about a softer consumer. So I think ultimately, has something shifted around your value proposition today? How do you view it? And I guess, why don't you see the need to invest a bit more to reengage your core consumer as you're really implying market share losses in the fourth quarter?

Well, I think the first thing we'd say is we're lapping some tough numbers from last year, and we may have underestimated the challenge of lapping those numbers. And it happened through the quarter as opposed to in the quarter. And as we look forward, we're anticipating a challenging environment. We know what we've got to lap going forward, and we're anticipating a little bit of pressure on the consumer going forward. The health and wellness macro trends are still strong for us, and we see a real opportunity in doubling down on the loyalty program behind that going forward. And there are some macro pressures that I think you'll see coming through in the marketplace that we are certainly experiencing. With regard to thinking about what should we do with -- we're not seeing a competitive dynamic changing dramatically in the marketplace in terms of pricing or activity. We've always promoted and we're very comfortable with promoting going forward. And we'll do what we need to do, but we're very strong in terms of managing our margins, managing our costs, and we'll consistently do that. You can see that from the numbers that we've just produced and the numbers that we will produce going forward. So no, we're not seeing anything dramatic in terms of the competitive dynamic in this space. We are seeing consumers under a bit of pressure, and we'll have to react to that in some ways, and we are reacting to that in the appropriate way.

And then to the miss in Q3, Leah, yes, I think we sailed through that first step change in the comp in May and June and didn't really see the underlying pressure again, probably masked a little bit of what was starting to go on there. But it was really the end of Q3, as Jack mentioned, where it really started to drop off a bit, and that's when we get up against the 10-plus comps here in September and then 13-plus in October. And so being a little bit cautious with where we are and looking ahead as we go up against the 10.5% and 10.5% roughly in November and December.

Okay. That's super helpful. And I was going to ask about the compares in November, December. So that's really helpful. I guess -- so my related follow-up would be then for -- as we look into '26, right, you're going to have some difficult lapse in the front half of the year. You just talked about how you sailed through it in March of last year. So -- how should -- I know you haven't -- it's a little bit early for the guide, but how should we think about the building blocks for the comp next year, driving engagement and lapping that as well?

Well, from the building blocks point of view, I'll let Curtis talk a little about how the numbers play through. From the building blocks point of view, Leah, we've got real confidence in the innovation pipeline that we've got coming through. We're really confident about the store pipeline that we've got coming through in terms of new stores. We're really confident about the work we've been doing that hasn't come through yet in loyalty and personalization, which we're excited about. So there's a lot of real positives in terms of the consumer side of this equation going forward. I'll let Curtis talk a little bit about the numbers.

Yes. And you called it out. We are early. Obviously, we'll be going through our budget process here in the fourth quarter, and we'll talk in more specifics in February. So yes, we'll have a bit of a challenging first half up against the double-digit comps. And then as we get to the second half, again, we've got those building blocks that Jack just referenced. And so we're pretty excited about those things coming online and getting us back into kind of that algorithm range and getting back to driving towards the high end of that algorithm comp as we hit the second half of next year. Again, we'll get specific when we get to February, but we've been investing in the business to create levers to kind of manage through any environment, and we'll be working through that, and we'll manage our margins effectively here in the first half of 2026.

And the next question will come from Mark Carden with UBS.

So to start, you guys called out strength in your most differentiated products even with the slowdown. Do you think customers are spreading out their shopping more and becoming any more price sensitive on some of the less differentiated items like, say, produce? Have you seen shifts in what you think your overall wallet share is for customers today? And just how you're thinking about really the broader promotional environment over the next few periods?

Yes. Thanks, Mark. It's Nick. On the differentiation front, we measure that really closely since it's so strategically important to us, and we haven't seen our levels of differentiation wane at all in the last year, even through, as we mentioned, some of the business dynamics here. So we feel really good about where we are from a differentiation standpoint in the market. And yes, our most differentiated and innovative products continue to be the place that we see the strongest growth in comps. And so as we continue to fill that pipeline and bring all the new products we do to market, we feel bullish about what that's going to do for us moving forward, as Jack mentioned. I do want to touch on share of wallet to your question. We're actually seeing our share of wallet hold to slightly up. So to the competitive questions and dynamics, we're not seeing our customer take their share of spend other places. We're holding our own on the share of wallet side, which I think portends to some of the macro we're seeing. And at the last part of your question, I think for us, we're not seeing a major exodus of customers. We're just seeing our customer at times spend maybe a little bit less on the tail end of their basket as they manage some of those pressures, and that's how we're seeing it come across in our dynamic.

Got it. That's helpful. And then you're seeing a lot of strength in private label with penetration climbing again this quarter. Just given the softening of the consumer that you talked about, any changes to how you're thinking about the pace of adding additional SKUs to your assortment?

Sure. We've been on a pretty aggressive pace over the last couple of years, adding hundreds of SKUs each year. And our team has done an amazing job of doing that. And I think what's important to keep in mind is when we build our Sprouts brand program, we're not -- we don't play sort of that national brand compare strategy. We look to find unique items that our health enthusiasts can't find other places. And to your point, what's happening around, that's really winning. We continue to see our penetration grow. Our sales growth in Sprouts brands have been really, really good. So we will continue to fill that pipeline and overinvest in that space to capture the momentum we have in the brand.

And we've got some pretty exciting plans, Nick, going forward in terms of what's happening next year and some holiday products are pretty exciting as well. So the investment in Sprouts brand will continue aggressively going forward, Mark.

And the next question will come from Ed Kelly with Wells Fargo.

I was curious if you could talk a bit more about the fourth quarter comp expectation and what you've seen so far quarter-to-date. Obviously, the October compare is tougher. But have you seen any stabilization yet in the 2-year as it pertains to October? And then what's the assumption that's based into the comp guidance as you think about the quarter itself?

Hi Ed, this is Curtis. Yes. So quarter-to-date, we are just north of 1 up against that 13-and-change last year for October. So the 2-year has started to stabilize a little bit here in the last, call it, 6 or 8 weeks, but we've definitely seen some ups and some downs week-to-week in the 1-year and the 2-year, and that's what's got us a little bit cautious. So we're up against, again, as I said earlier, about 10.5% in both November and December. And so we're really watching closely the 1-year versus the 2-year and there -- and how that plays out, particularly as we go through holidays with some of the consumer pressure that we've noted already. So watching closely, and we'll see how we go. We've had 2 months now up against 10-plus comps. We ran about 4% in September against the 10%, and we've run about 1% here against the 13%. And so we just want to see a few more of those months against the double digits to shore that up.

Okay. And then just a follow-up, Jack, you mentioned on the loyalty side that you were encouraged by some of the things that you have seen so far. I was wondering if you could elaborate on that. And as we think about 2026, how are you thinking about utilizing the loyalty card? What you can do to sort of push on that and the contribution that you think that it might begin to deliver?

Well, we won't commit specifically to what it might deliver, Ed, but it's a great question and it's very much at the heart of. What we're encouraged by is the execution literally this week, I think where all stores have now got access. It's taken us a full 9 months or so to get this rolled out across the country. We've been really encouraged by the number of customers that are signing up, and we're encouraged by the number of customers that are scanning. So we're in a better place with identifiable customers going forward to understand exactly what they're doing. And as we go on our personalized journey and the customers go on their personalized journey, we're going to be able to take, I think, a real opportunity to sell the story of how we can tell or sell the story to our customers of new products that are relevant to them and be very targeted and efficient in that. The team are working hard on that. We made a little bit of progress on it, but I can anticipate -- I'll let Nick build on this. But I think there's real opportunity in 2026 to build even further growth from our loyalty program.

Yes. Hi Ed, it's Nick. Just a little more context there. We are seeing an ability to move customer behavior through loyalty right now with increased frequency and stronger sales per customer. The team has done a great job of getting us rolled out completely nationally. And so now we can turn the team's attention fully to how do we make that work even harder for us in '26. I think Jack gave good color on how we can do so. But we've got the rollout behind us, and we know what we've been able to move behavior. And I think we've got a lot of levers to pull next year to do even more to again, bottom line, serve our unique customers on things that's most important to them and distinctive to us to drive long-term value.

And the next question will come from Tom Palmer with JPMorgan.

Look, I know you don't always give too much detail here, but I thought I'd ask on just some of the changes in customer behavior. So first, I think you made a reference smaller baskets, not fewer customer visits driving the comp slowdown. I just want to make sure I heard that right. And then second, are you seeing any notable shifts when we think regionally or in certain departments of the store? I'm just kind of wondering because it does seem to be a little bit influx in terms of customer behavior, if anything stands out on that side.

Hi Thomas, it's Curtis. Yes, I think similar to how we talked about it on the way up last year, it was traffic and it was brick-and-mortar traffic that really accelerated, and we saw it be pretty balanced across categories and geographies, and we're seeing it really play out similarly as we lap those numbers this year. So it's been a traffic slowdown. Traffic is still positive, as we noted in the script, but that's a piece that slowed down. And then, yes, we're seeing a little bit of pressure at the end of the basket, as we called out earlier now as the consumer pressure builds a bit, similar to what we saw during the inflationary period in '22 and '23, they're really managing the end of the basket, and it's creating kind of a units-per-basket-type pressure that we've seen before. So that's been the dynamic.

Okay. And then just on the fourth quarter, you noted the expectation, Curtis, for margin to be flat year-over-year. I just want to clarify, is that both gross margin and SG&A would be relatively flat? Or is one kind of moving in one direction and the other the other?

Yes. I think it's flat for EBIT margins is how we think about it, stable EBIT margins. It will be a little bit positive on the growth side and then a little bit of pressure at a 0% to 2% comp, it will be a little bit of pressure on SG&A.

And the next question will come from Rupesh Parikh with Oppenheimer.

So given the moderation that you've seen in your business recently, does this at all impact how aggressively you invest next year? And then are there levers to pull if you do see further softening from here?

Yes. I think we're going to continue to invest in the business. I think we will always make smart choices about how we allocate resources against the highest kind of priority and highest value type projects. And so we've had a good level of investment for the last 2 years. And I think that's created some levers for us. Certainly, we've talked about inventory management, category management and the things that we've been working on helping drive some of those gross margin gains. We think there's still some room to go there. And we're working hard on our cost capability on our indirect cost side, and we spent a lot of time on that this year. So we're preparing ourselves to be able to manage through, and we feel like we're in a good position as we head towards 2026.

And we're full steam ahead on building stores. We're excited about that. As we talked about, the new stores are opening well. We're really encouraged by that within the context of the macro environment that we're in the middle of. We're full steam ahead in terms of self-distribution. So we'll continue to invest in that, which will bring forward some benefits in terms of in-stocks and benefits in terms of margins. We're full steam ahead in terms of investing in innovation pipeline and making new products come through in our business. And as Nick said a minute ago, we're full steam ahead on our loyalty and personalization journey. So we're very confident in the investments that we're making going forward. And once we get past some of these lapping challenges, I think we're in really good shape.

And then maybe just one quick follow-up. On the capital allocation front, it sounds like you're going to continue buy back shares. But has your approach at all changes given a more certain environment, but at the same time, your stock is much lower. So just curious if there's any differences in how you approach share buybacks at these levels?

Yes. I think we'll be more aggressive depending on where the shares settle out here when we're done. Certainly, we've talked about buying opportunistically over the course of the year, and we bought pretty aggressively early in the year when the stock price was a little lower through the year. And I think we'll be thinking about it the same way as we exit our quiet period here, our close period here in the third quarter. So we're excited about the $1 billion authorization, and we'll see where things land come Friday, but we'll go get after it.

And the next question comes from John Heinbockel with Guggenheim.

So guys, 2 operational things. What's your -- has your thought changed now that you've rolled out loyalty, how much data you're going to need, how much history, right, to really market very effectively to your base? And then secondly, how do you guys size the opportunity in in-stock, right? Because what we keep hearing, right, is that natural and organic fill rates are not anywhere near where they need to be. How can you fix that? How long will that take to address? And how big is that opportunity in in-stock?

Yes. Hi John, it's Nick. Let me tackle first the loyalty question around data and history. So listen, part of your point, the more data we get, the better we can be at personalizing and driving behavior. There's no doubt about it, right? And this is -- we mentioned loyalty is a long-term play for us to drive long-term comp, and we're going to continue to be able to create much better depth of how we personalize and more insights, the more data we get. So you're right on there, and I'm looking forward to that over the next number of years. But I will also say we're -- as we mentioned, we're able to use the data we have to drive customer behavior and plan on doing so in '26. I think as you know, our customers are not quite as frequent as your typical maybe grocery -- conventional grocer shopper. So there's a little bit of time and just hey, getting that frequency in that basket doesn't happen as quickly when you have a super high frequency customer. But we've got enough data and tools, and we're going to continue to build it now that we're rolled out nationally to increase the level of engagement with the customer and I think continue to drive a lot of value for them. So that's on the loyalty side. Do you want to talk about?

And with regard to the supply chain and the in-stock, we've talked a lot about what we've done in meat this year. That's going to make a significant difference in terms of in-stocks in meat, and we believe that will help drive some sales in that space. Natural and organic is a very long tail, John, as you know. And that does create a challenge in terms of being as in-stock as people with less SKU count in the middle of their kind of assortment. We will be looking at expanding some other areas potentially on self-distribution, which we've talked about in the past. We would like to be better as Sprouts brand in terms of how we can get more in-stock on that. We think there are certain categories that we need to double down on. Having said that, we are working very hard with our partners to get better forecasting and better anticipation of how demand could be -- we could anticipate demand even better. But there's certainly an upside in sales, in in-stock numbers. We haven't put a clear number to that. We have in the meat category. But in other categories, we haven't put a really clear number to it. But instinctively, there's some upside for us in that if we can get better over the years -- months and years ahead.

All right. And maybe a follow-up, for Curtis. I know historically, right, or at least recently, right, the breakeven comp has been closer to 4%. How much do you think you can reduce that? Because you don't want to do damage to the business, right? Say, okay, we'll live with some deleverage for a while. How do you think about that trade-off?

Yes. I think it's a good call out. I think we do think about it, in the shorter term, we feel like we can manage around it with some of the levers that we've created with the investments we've made. Certainly, longer term, it's hard at 0 to 2 for a long period of time. We don't expect to be there for a long period of time. And so we believe it will be a bit of a short-term phenomenon as we go up against the numbers from last year. Again, we're working on our cost capability and how we get -- as we scale and we get more efficient and we get a little bit more automated through process and things like that. There should be some opportunities for us to better manage costs. And so that's how we'll be thinking about it, and we'll be exercising those levers here in the very near term while we get the comp momentum going again with the building blocks for '26.

And the next question comes from Robbie Ohmes with Bank of America.

You guys gave thoughts on fourth quarter gross margin being up a little. When you guys come up against the tough comparisons in the first half of '26, any thoughts you can give us on gross margin puts and takes as you go through that?

I think, Robbie, it's a little bit early to be talking about '26, and I want to go through our planning process and work through that. I'll just say that we talk about stable margins. And when I think about the full year for '26, I don't see a reason why we won't be talking about that when we get there. We've got a -- we've invested in levers to help manage around some of the pressures we're facing right now. And then we'll continue to invest in some things. And so there'll always be a bit of a put and take as it relates to the EBIT margin. we like the idea of stable, but we're not going to get too specific yet on first half, second half, those types of things.

Got you. That's helpful. And then just another follow-up on the kind of pressure on the consumer you're seeing. How narrow is it? Is it a -- is it just the, say, 25- to 35-year-old demographic that you guys are seeing some of the pressures? And maybe related to that, separate from the loyalty program, is there anything on the marketing side that you might need to change to get momentum going again?

Yes, I mean I think the pressure on the consumer, I'll speak to that, and then I'll turn it over to Nick on the second question. But from a consumer pressure perspective, I mean, I think that's building everywhere is what you see in the macro, a little bit more in the kind of lower and middle income is what you read about and what you hear. I think those are the things where we just see that be a little bit outsized in those spaces. So again, I talked about middle-income trade areas, younger demographics. It's just a little more pronounced in those, but I think the pressure is there for everybody and everyone is trying to figure out how they manage through that in a dynamic environment.

Yes. Robbie, it's Nick. And then to the second part of your question there on the marketing side. I think we have a great story to tell, but we're always testing, learning how well we're telling it. I think to your point, I think we can always tighten up our value proposition. Right now, it's a good chance to continue to just refine what makes us unique. It's about innovation, freshness, quality and health. And I think if we hit those at the great prices and fair prices that we have, I think we'll be in a good place. So we're always testing, but I don't think there's any significant changes or pivots other than what we always do, which is look at how well we're telling our story and then where we're spending the money by channel and location to maximize it.

And the next question comes from Scott Mushkin with R5 Capital.

So I guess I wanted to get back to the competitive environment a little bit. Our research, both research and consulting work, we've done a lot of work down in Texas, in particular, market for you guys that says the produce area has become hypercompetitive. And I guess I was wondering, where do you think you guys are priced if we're going to look specifically at the fresh basket? And who do you think you're actually competing with? In other words, if the traditional market goes hypercompetitive, is that something you actually need to react to?

We watch our -- we talk regularly, Scott, we watch produce pricing more attentively than anything else. And Texas has become a more aggressive market with H-E-B's expansion into Dallas. We're having a great time opening new store. I'm delighted with our Dallas performance alongside H-E-B. We're doing really well in terms of how those new stores are opening, and we're having success in San Antonio and Austin as well. We watch the Texas market closely. It is more competitive on produce than other parts of the country. We've got a fairly significant price gap on most grocery competitors around the country. Texas is more competitive, and we're watching that closely. When you look at the rest of the country, produce remains a competitive advantage for us going forward, and we focus on that a lot as it's such a direct comparison. But we're feeling pretty good about our produce pricing going forward. there's a lot of volatility in it, as you know, and people are -- I don't see it getting any more aggressive from a margin point of view outside of Texas going forward.

Okay. And then, Jack, when you think about your competitive set, again, some of our research suggests that Amazon proper has gotten very aggressive again on pricing of everyday essentials. If you think about Whole Foods, do you think of them as a direct competitor? I guess you would, but I mean, how sensitive are you to things that they are doing, competitive?

We watch it very close. Yes, sorry, I'll let you finish the question, Scott.

No, that was it.

Okay. Well, we do watch those guys very closely and very intently because they do sell a lot of things that we sell. But we've got very clear data over what they overlap with those guys, and we're not seeing any significant change in the stores that are facing those guys than in the stores across the rest of the country. And you kind of touched on what I think Amazon [indiscernible] Whole Foods are doing, which is chasing after maybe the 365, maybe the more entry point prices. So it's drifting away into trying to get the full basket from people. We're very much a complementary retailer and are in the space that if we keep differentiating ourselves, we're feeling pretty confident that that's the right place for us to be. And we keep watching it very closely. And we're not getting overexcited about what's happening in any of our competitors at the moment.

And the next question comes from Scott Marks with Jefferies.

First thing I wanted to ask about is last quarter, you had called out a cannibalization factor with new stores impacting existing markets. Given that new stores are performing well for your commentary, wondering if you can just update that and update us on how you're thinking about that dynamic.

Scott, this is Curtis. Yes, I think it's still in the same general range. I think we talked about 125-ish basis points, 125 to 150, and that's kind of what we've seen. Certainly, as we ramp up the number of new stores, that will continue to grow a bit, but that's about the range we've seen. And we've had some strong openings, particularly in some dense areas that have had some larger cannibalizations, but it's in line with our expectations and not a huge change from quarter-to-quarter.

Okay. Appreciate that. And then next question from me. Maybe you're a little bit less exposed to that, but just wondering SNAP spend, how exposed is your business to that? And have you seen any impacts given some of the policy changes and obviously, the government shutdown having a potential to impact that?

Yes. So certainly, again, not going to be helpful from a consumer perspective. Our SNAP is about -- it's somewhere between 2% and 3% is historically where it's been. So it's a limited impact to us. I think we're just starting to see the effects of that, both from either a shutdown perspective or SNAP. I think that's happening kind of in real time in the last several weeks. So I don't think it's a huge impact to our business, but it's certainly not helping.

And the next question comes from Benjamin Wood with BMO Capital.

I think this might be for Kelly Bania from BMO. I'm not sure how that happened. I wanted to talk about the promotional strategy. It seems like to us that the messaging is more aggressive with respect to price and promotion lately as opposed to the shift over the last few years, which has been to lean more on product attributes and seasonal highlights. Is that accurate? Is there any change in response to the comp trajectory from a promotional strategy? And is there any -- can you talk about how your consumers are responding to promotions today? Is there any difference in how that has been progressing through the quarter or into the quarter-to-date period in October?

Hi Kelly, thanks for the question. It's Nick. Overall, we're not changing our pricing or promotional philosophy in any consequential way. As I mentioned, for us, the customers continue to tell us they define value through quality, innovation, freshness and health, and that's what we continue to lean in on. We have a handful of key events that we do every quarter or so, things like our organic sale or vitamin sale. We do a BOGO event. And within those, we certainly try to promote the things that we know are most important to the customer, and we will play around at times with price points or messaging to try to learn what's happening with the customer. But overall, we're not having any significant changes in our strategy. And I think I want to also make clear we're not changing how we manage to our margins or our overall value proposition to the customer. So I think you're going to see us be pretty consistent. And as the onset of our personalization capability. I think that gives us another lever to target our price promotional spend to drive better return and take care of our best customers.

And I guess maybe just a follow-up on that. If this consumer softness were to continue, would you reconsider your level of promotional activity at all, particularly for this customer that seems to be most sensitive to whatever is going on right now?

Yes. With what we're seeing right now, no, we wouldn't. I mean, like I said, we are always looking at -- Jack mentioned earlier, we're always monitoring our pricing on produce and our key items and the competition and making adjustments as we think we need to based on the dynamics of the local market items. But from a broad strategic standpoint, no, we don't see that. And we just don't see the same impact doing that, that maybe others do because of who our customer is. And again, what we want to win in the marketplace is winning with the areas I just mentioned.

And the next question will come from Chuck Cerankosky with Northcoast Research.

To what degree, if any, would Sprouts slow down new store openings to deal with an increased level of shopper caution?

Yes. I think, Chuck, I think we're really positive with the way the new stores are responding as we've called out a couple of times throughout. We're seeing really strong openings. We're seeing really good comps out of the second, third, fourth year vintages, and that's continued. We're continuing to get markers here on '24 vintages as they get into the comp base here in Q4 and into next year. But the results have been positive there. The customer is telling us they're looking for Sprouts and a Sprouts-like solution, and we're excited to get into as many communities as we can. Over the long term, we'll see how the pipeline plays out and those types of things. But right now, we're pretty bullish on the white space and pretty bullish on the performance we've seen.

We've got a clear purpose to help people live -- we've got a very clear purpose to help people live and eat better. And the opportunity that we've got to do that by taking our brand across the country into places where they don't exist is a key part of what we want to achieve going forward. And we're absolutely delighted by the way new stores are opening and the teams that are making this happen are doing a terrific job, and we're continuing to grow on it. And we have absolutely no intention of backing off from that. At the moment, really excited about our new stores, and it really fulfills the purpose of what everyone here is working to try and do, and we're excited about it going forward.

Do you sense any need to maybe promote a little differently or more aggressively with some of the new stores as they debut?

Well, I think -- I think the new stores are opening really well because I think we're getting better and better understanding where to build new stores, the models that we're building about where exactly the health enthusiast customers are, are working well. And the marketing team have done a really nice job in different locations, communicating the values and what we have and grow the business within each market. We're a pretty unique business, 24 states, relatively small business, and we're going to get to a lot more states over the next year or 2 as we -- as Curtis talked about in the Midwest and the Northeast corridor. So we're going to have to think about having a different marketing approach by market, but not in terms of promotional approach. We're not going to be doing big aggressive things to drive people into the store.

Chuck, I'd just add one of the things that's been really positive in the way that we've marketed those new stores is more about getting -- it's getting into the local community and getting more local earlier in the process to really build some excitement around the store and some enthusiasm in the local community. And so again, it's just about telling our story. It's about engaging with the community, and we've seen a lot of positive traction when we've showed up in some new places.

I see no further questions in the queue at this time. I would now like to turn the call back over to Jack for closing remarks.

Well, thanks, everybody, for taking the time and showing so much -- asking such great questions and showing so much attention to our company, and we look forward to continuing the dialogue with you going forward. Thanks again. Take care.