Sprouts New Stores

[storewanderer]

I decided to do a quick search because frankly I'm baffled by this chain. Here is the situation in a nutshell. All their sales growth is being generated by additional stores. Comp increases are averaging 2.5% per year, which is actually really bad considering the incredible inflation the food industry is seeing plus what I mentioned (cannibalized stores aren't calculated in comp otherwise the chain would be negative comp for sure). And we know their price increases outpace even Safeway and other high priced grocers. The earnings are being driven by aggressive cost cutting, removal of services (I noticed no in store made bakery anymore, now all thaw and serve or thaw and bake), self checkout, and price hikes. The only good thing, and this is huge, is that they are only $8M from being a debt free company. They've paid down a few hundred million.

But Wall Street loves price hikes. They love slashing payrolls. They love self checkout. They love cost cutting. And I only like these things when they're used to pay off long term debts. So they're a Wall Street darling because they're expecting further giant increases in earnings as the retirement of debt is finished.

The stock price isn't driven up at all by anything good happening in the stores. It's only being driven by what's happening in the finance department.

For some reason they do not have any self checkout in my area (yet Sacramento stores got it added). They have installed all new POS equipment recently as well, but did not do self checkout, so I find that interesting in my area.

Their bakery has a lot of in-store made items here. Cookies, muffins, pies, various breads. Product appearance and execution is TERRIBLE. I bought a focaccia there that was TERRIBLE (refund). This was after I had bought some muffins there a couple weeks prior that were terrible (just threw those away). I will not be making any further purchases from Sprouts Bakery due to these and prior incidents. This was at two different locations so it isn't a location issue.

The lack of debt is a huge coup for them. They can throw a lot more money into expansion if they don't have to deal with debt service. Their loan is tied to ESG compliance goals.

What do you mean about the cannibalized stores being excluded from the comp sales number they report? I do not understand how that works.

So like they have store 101 that does $500k a week. Then they open store 854 2 miles away which opens up and settles out at $300k a week, but then store 101 volume drops to $400k a week... so they do not report store 101 as a -20% for comp sales, they exclude it? How long do they exclude it? What if a year later store 101 is doing $440k a week, and store 854 newness wore off and now it only does $270k a week. So they report a +10% comp for 101 and a -10% comp for 854 at that point?

[HCal]

Sprouts once did very well in the San Francisco Bay Area when they first opened. The parking lots were packed and prices were good.

Now the parking lots are empty. You might see a few cars in the evening, but most of the customers have been pushed away by the high prices. You can find cheaper prices at Safeway and Whole Foods.

Sprouts is really awful now. The Bakery is constantly out of stock of breads. I haven't seen any cake slices in months. The muffins are nasty mushy hunks of dough. Everything has gone down hill.

Curious shoppers will go to the new Hayward store, and then head right back to Safeway. The large organic variety is mostly gone now. You have a big overpriced vitamin section, but no one ever shops there.

Sprouts is beyond out of touch with its customers.

I can't figure out what is going on with Sprouts. I haven't been in one of their stores in ages, but they just posted 6% same store sales growth and their stock is at an all-time high. Meanwhile, people on this board are consistently reporting empty, out-of-touch stores. What exactly is happening? Is Sprouts doing really well somewhere in the country, perhaps outside the urban areas?

[ClownLoach]

I decided to do a quick search because frankly I'm baffled by this chain. Here is the situation in a nutshell. All their sales growth is being generated by additional stores. Comp increases are averaging 2.5% per year, which is actually really bad considering the incredible inflation the food industry is seeing plus what I mentioned (cannibalized stores aren't calculated in comp otherwise the chain would be negative comp for sure). And we know their price increases outpace even Safeway and other high priced grocers. The earnings are being driven by aggressive cost cutting, removal of services (I noticed no in store made bakery anymore, now all thaw and serve or thaw and bake), self checkout, and price hikes. The only good thing, and this is huge, is that they are only $8M from being a debt free company. They've paid down a few hundred million.

But Wall Street loves price hikes. They love slashing payrolls. They love self checkout. They love cost cutting. And I only like these things when they're used to pay off long term debts. So they're a Wall Street darling because they're expecting further giant increases in earnings as the retirement of debt is finished.

The stock price isn't driven up at all by anything good happening in the stores. It's only being driven by what's happening in the finance department.

For some reason they do not have any self checkout in my area (yet Sacramento stores got it added). They have installed all new POS equipment recently as well, but did not do self checkout, so I find that interesting in my area.

Their bakery has a lot of in-store made items here. Cookies, muffins, pies, various breads. Product appearance and execution is TERRIBLE. I bought a focaccia there that was TERRIBLE (refund). This was after I had bought some muffins there a couple weeks prior that were terrible (just threw those away). I will not be making any further purchases from Sprouts Bakery due to these and prior incidents. This was at two different locations so it isn't a location issue.

The lack of debt is a huge coup for them. They can throw a lot more money into expansion if they don't have to deal with debt service. Their loan is tied to ESG compliance goals.

What do you mean about the cannibalized stores being excluded from the comp sales number they report? I do not understand how that works.

So like they have store 101 that does $500k a week. Then they open store 854 2 miles away which opens up and settles out at $300k a week, but then store 101 volume drops to $400k a week... so they do not report store 101 as a -20% for comp sales, they exclude it? How long do they exclude it? What if a year later store 101 is doing $440k a week, and store 854 newness wore off and now it only does $270k a week. So they report a +10% comp for 101 and a -10% comp for 854 at that point?

Typically chains exclude comps for cannibalized stores for 18 months, and new stores aren't added to comp until they've been open 18 months. Relocation of comp stores seems to be handled differently from chain to chain, usually they include the relocation in comp. So in your example they would exclude both figures from the same store sales comp calculations that are publicly reported. The 18 months allows for cycling of a Grand Opening which depending on the level of promotional activity at the GO Event could be a big negative comp drop for a few months. 18 months is considered enough to stabilize things. So yes, theoretically the 20% drop at the old store in the example would be completely hidden from shareholders. Thus the difference in many chains between total store sales increases versus comp store increases. Furthermore, it is rare that a chain writes out the percentage of new stores. So you have to see if they're nice enough to explain each quarter how many new sites opened and then calculate what percentage of the chain that is. Some chains are nice enough to explain the count of new and cannibalized stores versus comp, but it is not required. So if the store count increases say 7% and total sales increase 5% forgive me but I'm not going to be excited by that figure because it indicates the new stores are underperforming to the chain and/or they cannibalize comp stores because they're being placed too closely together.

You can see why badly managed chains love to keep building stores.

Where I give credit to Sprouts here is getting out from debt, so at least they're not using new stores as a debt vehicle (borrowing against new at full value since nothing has depreciated yet). That new store, new debt cycle has taken a lot of retailers to the graveyard, sometimes with stores switching from grand opening to store closing sale banners.

Separate, the bakery operation seems to vary by store now. One of the Sprouts I dislike near me has completely walled off the old bakery with wood slat racking for the bread. You can see through and it is all mothballed and unused, so whatever appears to be store baked is coming from a different store or it's just thaw and serve. The racks are too close to the ovens to allow the doors to open thus I know they're unused. These are converted Henry's sites but they seem to have expensive and nice looking ovens sitting and going to waste. They also have a big empty space under vent hoods in the kitchen where I assume the stove was removed, just a little fryer and oven for chickens. The oven is like the crappy ones Kroger uses that isn't even a real rotisserie, but the bags/labels will call it rotisserie "style" chicken. Not the same at all which is why they're dry and flavorless.

[storewanderer]

Typically chains exclude comps for cannibalized stores for 18 months, and new stores aren't added to comp until they've been open 18 months. Relocation of comp stores seems to be handled differently from chain to chain, usually they include the relocation in comp. So in your example they would exclude both figures from the same store sales comp calculations that are publicly reported. The 18 months allows for cycling of a Grand Opening which depending on the level of promotional activity at the GO Event could be a big negative comp drop for a few months. 18 months is considered enough to stabilize things. So yes, theoretically the 20% drop at the old store in the example would be completely hidden from shareholders. Thus the difference in many chains between total store sales increases versus comp store increases. Furthermore, it is rare that a chain writes out the percentage of new stores. So you have to see if they're nice enough to explain each quarter how many new sites opened and then calculate what percentage of the chain that is. Some chains are nice enough to explain the count of new and cannibalized stores versus comp, but it is not required. So if the store count increases say 7% and total sales increase 5% forgive me but I'm not going to be excited by that figure because it indicates the new stores are underperforming to the chain and/or they cannibalize comp stores because they're being placed too closely together.

You can see why badly managed chains love to keep building stores.

Where I give credit to Sprouts here is getting out from debt, so at least they're not using new stores as a debt vehicle (borrowing against new at full value since nothing has depreciated yet). That new store, new debt cycle has taken a lot of retailers to the graveyard, sometimes with stores switching from grand opening to store closing sale banners.

Separate, the bakery operation seems to vary by store now. One of the Sprouts I dislike near me has completely walled off the old bakery with wood slat racking for the bread. You can see through and it is all mothballed and unused, so whatever appears to be store baked is coming from a different store or it's just thaw and serve. The racks are too close to the ovens to allow the doors to open thus I know they're unused. These are converted Henry's sites but they seem to have expensive and nice looking ovens sitting and going to waste. They also have a big empty space under vent hoods in the kitchen where I assume the stove was removed, just a little fryer and oven for chickens. The oven is like the crappy ones Kroger uses that isn't even a real rotisserie, but the bags/labels will call it rotisserie "style" chicken. Not the same at all which is why they're dry and flavorless.

More and more stores are transitioning to that oven for rotisserie chicken. It isn't just Kroger. Some chains always used those in the first place. Safeway for instance their product is described as a "Roasted Chicken." Not a "Rotisserie Chicken." Not sure what they use but it is terrible and they often look pale and uncooked. The Kroger chicken is also absolutely terrible but typically has a more browned look to it at least. There are some Kroger banner stores that still have 20+ year old rotisseries in their stores but those are going in remodels. Ralphs never did rotisseries on a wide scale (maybe the "Signature" in San Diego got one) but Smiths and King Soopers did in late 90's and early-mid 00's stores. I've NEVER seen an actual rotisserie in any Safeway or Albertsons store. What I have seen in some (few) Albertsons Stores is large BBQ grills where they make "mesquite" BBQ chicken- this was an LLC thing in stores near hispanic populations- I've seen it in AZ, NM, and one of those UT Lucky units- REALLY good.

I'm not sure if Sprouts owns any real estate or if they just lease everything...

I see about $1.6 billion left of debt for Sprouts long term. The $8m is short term. This is the note tied to ESG goals. Their interest rate varies depending if they meet certain ESG goals.

As I recall Henry's always walled off bakery prep with that wood slat shelving. Keep in mind Sprouts didn't do in store bakery with an actual oven before they took Henry's over- they just did thaw and serve. Sprouts did not do service deli- they just had that tiny counter for discount sandwiches. The bakery program was basically a roll over of Henry's program and the deli program (using Boar's Head and various of the heat and eat foods) was a roll over of the Sunflower deli program. So in one regard some of what may be happening is Sprouts is shedding the labor/shrink intensive programs of these chains they bought years ago and reverting back to their old Sprouts model (which was part of what made Sprouts the WORST of these chains back then and why Henry's and Sunflower seemed so much better).

Meanwhile just yesterday Sprouts stock hit another all time high. I am SO confused when I look at this financial data then go walk Sprouts Stores and observe how these stores look and how little traffic they have. All kinds of insiders/directors keep selling stock but really at this level I'd be cashing in those options too. The market cap of Sprouts is within $1 billion of the market cap of Albertsons.