Dive Brief:

• Sprouts Farmers Market recorded a reduction in same store sales during the third quarter of 2021 compared with the same period last year and Q3 of 2019, continuing a trend that began earlier this year, the specialty grocer said Thursday.
• The grocer has not been able to regain the approximately 25% of transactions it lost when the pandemic was surging in the second quarter of 2020, CEO Jack Sinclair said during the company's earnings call.
• Sprouts has run into difficulty driving sales despite continuing efforts to connect with the health-conscious customers it describes as its core constituency.

Dive Insight:

Sinclair did not mince words in discussing Sprouts' disappointing performance during Q3, emphasizing he was not pleased that the company's marketing strategy has not paid off in stronger sales.

In particular, he said, the company has not done well in its efforts to draw in consumers who would be interested in its fresh-focused assortment even though it has tried to connect with these shoppers and build its brand around a heavy focus on fruits and vegetables.

"Earlier this year, we fell short in communicating our commitment to great prices in our marketing, especially in produce. While it was present in store, we didn't effectively communicate our value message to our customers," Sinclair said. "We probably need to talk a bit better about that."

Sprouts comparable store sales for Q3 declined 5.4% compared to the same period in 2020 and were down 2.1% compared with the 2019 period. Net sales increased 4%, to $1.5 billion, while gross profit declined 7%, to $540 million, compared to the third quarter of 2020. 

In a note to investors Thursday, Barclays analyst Karen Short wrote that Sprouts' results "don't inspire confidence" in the trajectory of the business, noting the "stickiness" of one-stop shopping behaviors that have benefited larger-size supermarkets as the pandemic approaches the two-year mark.

Sinclair said, however, that he is not overly focused on the fact that other grocers have had more success at growing their sales compared with 2020 and 2019.

"We tend to not focus too much on what other people's comps are. We focus very much on being ... a complementary retailer," Sinclair said. "And we believe our comps are kind of controlled by our own destiny, that if we get this right and do the right thing that we'll be in a position to drive the additional share of wallet that we need from our target customers."

Sinclair added that the grocer's ongoing rollout of stores based on the smaller, more efficient format it has been developing is poised to help it regain steam. These stores are intended to bring in the same level of sales as their larger counterparts by fitting the same assortment into a space that is approximately 20% smaller. The stores are also less expensive to build and run because they don't have costly fixtures like deli counters and occupy smaller footprints, according to Sinclair.

During Q3, Sprouts opened two stores based on the design, one a relocated store in Phoenix and the other a remodeled location in Tustin, California, Sinclair said. Three additional new-format Sprouts stores are due to open "over the next few months," Sinclair noted.

Sinclair also indicated he thinks Sprouts' broad assortment of vitamins and other health-oriented items, combined with the expertise of its staff, is a key strength for the retailer, especially given the spotlight the pandemic and impending flu season are placing on those types of products. "We see that as a fairly key differentiator. The people that we have working in that department really do add significant value," Sinclair said.

He also said Sprouts has been making progress in its efforts to highlight unique products in its stores through "innovation centers" and bring smaller brands into its assortment.

Chief Financial Officer Chip Molloy, who was speaking during his first Sprouts earnings call in the role, said Sprouts recorded e-commerce penetration of 10% in Q3 and believes its online sales are stabilizing at that rate. A former Sprouts board member, Molloy assumed his post in September following the departure of former CFO Denie Paulonis, who left Sprouts to become CEO of hair care supply chain Sally Beauty Holdings.