Ladies and gentlemen, thank you for standing by, and welcome to the Sprouts Farmers Market First Quarter 2021 Earnings Conference Call. At this time, all participants are on listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today, Susannah Livingston. You may begin. Thank you, and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our first quarter 2021 earnings call. Jack Sinclair, Chief Executive Officer, and Denise Paulonis, Chief Financial Officer, are with me today. The earnings release announcing our first quarter 2021 results, the webcast of this call, and quarterly 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 2021 and beyond. These statements involve a number of risks and uncertainties that could cause actual 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, along with the commentary on forward-looking statements at the end of our earnings release issued today. Our remarks today include references to non-GAAP measures. For a reconciliation of our non-GAAP measures to the GAAP figures, please see the tables in our earnings release. With that, let me hand it over to Jack. Thank you, Susannah, good afternoon, everyone. Thank you for joining our call today. I'm very pleased with how we have navigated the current environment as we begin to cycle some of the positive impacts from the onset of the COVID pandemic last year. Combining our strong financial performance with the strategic opportunities ahead of us makes me very optimistic about the future of Sprouts. For the first quarter, we generated diluted EPS of $0.70, up 52% from the first quarter of 2019, as our strategic initiatives in promotions and shrink continue to deliver strong, sustainable financial results. As I've stated before, I believe 2020 was a turning point for Sprouts, and we're continuing to build on that success and momentum this year. For 2021, our focus remains winning with our target customers by building our brand through meaningful marketing in and out of the store, curated merchandise, building an efficient supply chain, and unit growth supported by a new format to further expand our reach. 2020 was a pivotal year, not just for Sprouts, but for Americans in general, as we all tried to stay healthy. As we kick off a new year, this same focus on health is top of mind. For Sprouts, this plays well into who we are, a fresh, natural, and organic specialty retailer. Fresh produce has always been the mainstay at Sprouts, and it continues to be at the heart of our proposition, representing 22% of our business. In addition, what sets us apart from other grocers is the breadth of attribute-based products that we carry. Attribute-based trends like keto, paleo, organic, plant-based, gluten-free, and functional are all themes focused on wellness and play directly to our target customers. In 2020, our organic sales across the store increased 21% to $1.4 billion, and in produce, organic sales were up 23%, driven by the desire to eat healthier. We're becoming the leader in the attribute space, joined by our pioneering vendor community. Becoming the destination for up-and-coming vendors in the food industry is a fundamental part of our merchandising strategy and something our target customer desires. We like to lean in and take risks on these young companies. No one else is collaborating with their teams like we are. We help drive their innovation and improve their ingredient panels, which results in exclusive market entries with leading-edge products for Sprouts. Nutpods Creamer is one such example. We started partnering with them back in 2018 as a small women-owned company. Over the years, we've partnered to create first-to-market flavors and value sized offerings. This week, a new zero sugar sweetened option will be in our stores. The growth we have seen in nutpods and many others has been extraordinary, and we look forward to how much more we can do. In the long run, these relationships are creating a product innovation pipeline to keep our shelves full of unique trending merchandise. As I've said before and will continue to say, we are not a traditional grocer, and as we grow in scale, we're evolving as the go-to food retailer for natural, organic, and attribute-based partnerships and product releases. In the first quarter, as in quarters past, attribute-led product offering drove revenue. The plant-based trend is one such offering that we continue to expand on our shelves. For example, Take Two milk alternative made from rejuvenated barley and Brave Robot Dairy-Free ice cream are two products that help drive sales in dairy and frozen. Both deli and bakery continued to grow on top of last year's COVID run up. Fueled in part by innovation as well, like Sweet Earth plant-based chicken alternative meals and deli, and strength from seasonal offerings and keto-based products in bacon. In grocery, the team continued to drive forward our innovation pipeline, resulting in more than 400 new items in the first quarter, with still more to come this year. Many of these new products were the result of strategy work performed in 2020 to better serve our target customers. Throughout this year, we will bring even more new products to create that treasure hunt shopping experience. We'll be highlighting these new items in our innovation centers, in our new stores, and our Find a New Favorite merchandising displays throughout all stores. Moving on to our brand. Though we have 362 stores across the country, we are behind from a brand recognition perspective. Our awareness is very low. In 2021, this will change. Our Where Goodness Grows campaign was kicked off late last year with our first foray into TV and many other digital mediums. This year, the brand changes will start to come alive in the physical assets, starting with our five new format stores. Eventually, they will be reflected in our product offering through a common design principle, completing the entire umbrella of the Sprouts brand. On the marketing front, our digital-first initiatives, designed to connect with more target customers, continue to progress well. We're building our base of customers with emails up over 140% in the first quarter and website traffic growth of 39%. Importantly, email subscribers tend to have larger baskets than other customers, which is one reason why we remain focused in growing this number over time. Through our marketing journey, we have identified who our core customer is, have begun to increase our digital communication, and are starting to see this resonate with target customers. Through our data sources, we continue to see positive trends and data points suggesting that we are winning disproportionately with our target customers. As well, we continue to see customer counts improving, ending the quarter with the highest we have seen since last April, when the pandemic set in. We noted in one of our customer surveys that the majority of our customers who reduced or eliminated trips to Sprouts during the pandemic expect to return post pandemic. These are all steps in the right direction for our marketing strategy, and we look forward to increased sales from these initiatives as the year progresses. When I first joined Sprouts, I noted that our supply chain was disjointed, with stores too far from our distribution centers. I'm very excited about the opening of our fresh distribution center in Aurora, Colorado, serving 45 stores and bringing us to six DCs across the country. The opening went well, and we are now supplying all stores in our Colorado, Utah, and New Mexico region, a testament to the strength of the team. This new DC, along with the new Florida DC to be opened this quarter, will create a faster supply chain and build on our goal to have our DCs within a 250-mile radius of our stores. In addition, they will allow us to serve more stores and customers with fresher produce, aided with the benefit of ripening rooms and allowing us to support local farmers. In season, our local produce offering in Colorado will increase by more than four times our past assortment. The Colorado DC will house produce from family-owned Strohauer Farms, who have been growing potatoes in Colorado since 1910. Family-owned Petrocco Farms, only 30 minutes from our DC, who grow everything from leafy greens to sweet corn and peppers, as well as Hazel Dell Exotic Organic Mushrooms, grown year-round in temperature-controlled sheds, among others. These farming relationships will expand with our new local sourcing team housed out of the DC with a wealth of experience in local sourcing. This sourcing model is being replicated across all our distribution centers to ensure we are supplied with seasonal and locally relevant produce in every store. With this initiative, we will also decrease the miles our trucks drive, therefore reducing our greenhouse gas emissions and creating operational efficiencies like less shrink and a reduction in food waste. I can unequivocally say this piece of our strategy is good for our customers, our business, and our planet. Our investments in 2021 go beyond the DCs. Considering we're a young company, we were only 54 stores a decade ago, we have opportunities to invest and upgrade our systems that support and drive our future growth. A few of the investments this year are focused on perpetual inventory, replenishment, computer-assisted ordering, labor management, and a new human capital management system. These projects are intended to improve in stocks, improve our labor productivity and overall store conditions, and provide team members with an efficient modern HR access point. As for unit growth, our pipeline remains strong with deals reaching out to 2024. As planned, we didn't open any stores in the first quarter as we were developing our new format. Continuing with our plan, we have one store scheduled to open in Q2. As stated before, COVID pushed most all of our openings to the back half of the year, and we remain on track to open approximately 20 new stores this year. By the end of July, we will have two new format stores open, a new store and one remodel of an existing store. In walking a virtual 3D rendition of the new store, consumers overwhelmingly gave it positive marks on the low profile and overall feel, while also rating the store better than their current store experience. As a reminder, this new format will have a smaller footprint, but more selling space per square foot, cost 20% less to build, and we expect to have similar sales to our boxes today, resulting in expected higher returns. One last topic. Last week, we issued our 2020 environmental, social, and governance report that highlights the tremendous work our team has accomplished during the year, bringing positive change to our nation's health, which goes well beyond the food we sell. From our response to the COVID-19 pandemic, to our efforts to reduce our environmental footprint, and improve the well-being of our many stakeholders, we've made great progress on our journey to improving our sustainability program. We've done great work reducing our climate impact by decreasing our normalized carbon emission on a square foot basis, aided by our strategy to switch to digital marketing from print. Our team's focus on waste reduction has reached a new milestone at almost 60% landfill diversion rate, rooted in our drive to increase food security for our communities through donating the equivalent of 23 million meals to local food banks. Developing the next generation of leaders to grow with Sprouts is of great importance to me and the future of Sprouts. In 2020, we promoted 7,200 team members, half of whom were ethnically diverse team members, and we filled 72% of store manager positions with internal candidates, ensuring at Sprouts you can create a career, not just a job. I encourage you to review all the details in the ESG report, which will give you good insight to the work we are doing. I'm very convinced we can do good by doing good for our customers and for all our stakeholders. Before I hand it off to Denise, I want to acknowledge the incredible work the teams at the stores, DCs, and in the support office continue to do week- after- week. They're driving customer engagement and sales, supported by their depth of knowledge in the natural and organic space. As you've heard me state before, we're only in the early innings of our strategic changes, with many improvements still to come. Yet one constant remains through the changes we have all gone through. People want healthy foods now more than ever, which at Sprouts, it's all we do. Now let me hand off to Denise to discuss our financials in more detail, as well as our 2021 outlook. Denise? Thanks, Jack. Good afternoon, everyone. For the first quarter, net sales decreased 4% to $1.6 billion, and comparable store sales were down 9.4% compared to the same period last year. Our year-over-year comparison is not a straightforward indication of growth. We believe it's important to focus our performance on a two-year basis. To that end, our net sales were up 11% compared to the first quarter of 2019, and our two-year comp stack was up 2.2%. After posting positive comps to start the quarter, as expected, same store sales turned negative as we began to cycle the 2020 COVID impact and reopening progressed. Importantly, towards the end of the first quarter and into the current quarter, we have seen a return to positive traffic. Due to our ongoing strategic changes, even with some sales deleverage and record high e-commerce sales penetration, profitability remained strong with an adjusted EBIT margin of 7.2%, trending well ahead of our 5.7% margin in the first quarter of 2019. As Jack mentioned, innovation continued to help drive sales across many categories with deli and bakery notable winners. Offsetting this, we saw some sales pressure in vitamins due to a nonexistent cold and flu season. E-commerce sales continued to remain strong with sales up 221% compared to last year. For the quarter, e-commerce was 12.5% of sales, reflecting a notable increase in January as the country experienced a spike in COVID cases, settling back down to our fourth quarter 2020 levels by March. Clearly, the work done last year to create a full omni-channel experience by expanding pickup to every store and the addition of shop.sprouts.com continues to resonate with our customers. For the first quarter, gross profit was $586 million, and our gross margin was 37.2%, an increase of 114 basis points versus the first quarter of 2020. Efficient promotions and good everyday pricing, as well as continued benefits from our ongoing shrink initiatives drove improvement. As a reminder, the first quarter included the annualization of the promotional changes we implemented in late Q1 and early Q2 last year. SG&A costs increased $3 million to $440 million, or 27.9% of sales, deleveraging 141 basis points compared to the same period last year. The majority of this deleverage was attributed to sales deleverage from cycling the onset of COVID last year and increased e-commerce fees due to higher omni-channel sales as more customers have continued to rely on home delivery and curbside pickup. As well, SG&A was impacted by additional COVID costs related to sick time and hero pay, more than offset by lower bonus payouts versus last year. For the quarter, our adjusted earnings before interest and taxes were $113 million, an increase of 41% when compared to the first quarter of 2019, a significant positive step change in performance that we will continue to build upon. Our interest expense was $3 million, and our effective tax rate was 25%. First quarter diluted and adjusted diluted earnings per share were $0.70, up 52% from the first quarter of 2019. We continue to generate strong cash flow from operations, $105 million in the first quarter, to fund future expansion and sales initiatives. For the quarter, cash was impacted by higher bonus payout for the strong 2020 performance and an increase in inventory in preparation of opening the Colorado DC. In the quarter, we invested $9 million in capital expenditures, net of landlord reimbursement, primarily for new stores. Additionally, following the board's approval of a share repurchase authorization in mid-March, we restarted our share buyback program, purchasing approximately $3 million in stock by the end of the first quarter. We continued share buybacks in the second quarter, and year to date through May 3, 2021, we've repurchased $5 million in stock under the current authorization. We ended the quarter with $250 million outstanding on a revolver, $39 million of outstanding letters of credit, $256 million in cash and cash equivalents, and $297 million available under our current $300 million share repurchase authorization. Reflective of strong balance sheet, we continue to maintain a low debt position, ending the quarter with a net debt to EBITDA ratio of nearly zero at 0.01 times. Let me provide an update on our 2021 outlook. The impact that the pandemic will have on the U.S. economy, food at home demand, and consumer habits is still in flux, and in turn, we continue to manage the business under a number of scenarios, creating a bit wider than typical range for our outlook. As a reminder, I'm giving these comparisons on a 52 to 52-week basis as fiscal 2020 was a 53-week year. We continue to expect net sales to be flat to up slightly versus 2020, driven by unit growth of approximately 20 new stores, which will open in the back half of the year, and comparable store sales down low to mid single digits. As stated before, underpinning our assumptions are negative comps in the first and second quarter as we lap the height of COVID, with an improving two-year comp sales stack each quarter. Capital expenditures, net of landlord reimbursement, are expected to be in the range of $140 million to $160 million. We now expect our corporate tax rate to be approximately 25%. Due to slightly better performance in SG&A than expected in the first quarter, we are increasing our adjusted EBIT expectation by $10 million to be in the range of $305 million-$325 million and increasing our adjusted diluted earnings per share to be in the range of $1.87-$2. We continue to expect to maintain a majority of the gross margin rate improvement we realized in 2020, with the first quarter experiencing outsized benefit and the remaining three quarters being pressured as we cycle some COVID benefits from shrink and buying opportunities we don't expect to repeat. We see several puts and takes for SG&A margin for the year, with reduced expenses from bonus normalizing, mostly offset by annualized COVID related costs, as well as increased healthcare costs and sales deleverage. We have started 2021 on a good footing with a strong balance sheet, and I'm confident that the strategic changes we began last year structurally changed our financial algorithm for the long term. At this time, we're happy to take your questions. Thank you. Ladies and gentlemen, as a reminder, to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the star key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mark Carden with UBS. Your line is open. Great, good afternoon. Thanks a lot for taking the questions. On the comp, you were up 2.2% on a two-year stack in a period where there were still some COVID restrictions in place. I know you guys don't sell as much as some of your competitors in the way of popular CPG products, but are there any other factors that we should be aware of on the top line that may have held you back? Was it mainly vitamin driven? Are customers still consolidating trips to larger stores? Are they still adjusting to your new strategy? Any color here would be great. Thanks. Well, you kind of answered the question there, Mark, in the things that you mentioned specifically to the first quarter. As we look, clearly there's an overlap. Jan, Feb was a different overlap to March's overlap. One of the things that would probably have been a factor that we didn't quite take into account was the vitamin growth that we would have expected from a cold and flu season in January. That's something that probably didn't happen to the extent because everyone's wearing a mask and nobody had the flu. That certainly made some impact on that in the early stages of the quarter. The reopening program and what's happened with regard to restaurants opening and not opening had some impact on us in the meat space and probably in the alcohol space as well a little bit. That's something that certainly had an impact. As we've said all along in this dialogue around what's been happening through the pandemic is probably as people have reduced the number of places they go to do their food shopping, that we didn't benefit from some of the growth that happened. Previously, that's certainly something that continues and is beginning, we think, to kind of mitigate itself as we play through the year. We're certainly seeing some encouraging signs on our target customers with the intention that they're telling us that they're going to be more comfortable about going out and shopping in more places. That's something that gives us a little bit of encouragement going forward. I think that's pretty clear. Our healthy enthusiast target customers were probably more concerned about the pandemic and the implications for their health than maybe the average customer. I think in some ways, I think that's why our e-commerce business is quite strong. I think people that are more comfortable at going out, we're thinking there's some encouragement going forward in the data that we're seeing. Great. That's helpful. Then we're hearing more about rising inflation in food. I know Sprouts has historically had a bit of a different profile on this front. How are you thinking about inflation over the course of the next few months? Does your new promotional strategy really change your thought process with respect to passing through any higher costs? Thanks. Certainly what we're seeing, as you know, our mix of business is different, and looking at the first quarter, our produce was actually deflationary, not inflationary in the first quarter, a little bit, but not hugely, but a little bit. That's something that means that our mix going forward, we're actually anticipating the produce going forward, because there's going to be pretty good yields and pretty strong opportunities for us to take advantage of price in the marketplace. We're not as worried about inflation in our fresh produce business. Probably a little bit more worried about inflation, if worried is the right word, but a little more conscious of inflation in the meat space and one or two of the other parts of the grocery business, and we're watching that closely. Transportation's clearly putting some pressure on the supply chain of our vendor base, and we're watching that closely. By large, we're feeling pretty confident given that we sell a pretty differentiated range of products that as inflation plays in, cost inflation plays into our business, we're feeling pretty confident that we can pass it on appropriately. I f it gets too big, w e'll have to watch and have dialogue with our vendor base on it. From what we're hearing so far and what's in front of us, we're feeling that we can pass it on and not have the kind of huge worry about what might happen going forward. Got it. Thanks so much. Thanks. Thank you. Our next question comes from the line of Scott Mushkin with R5 Capital. Your line is open. Hey, guys. Thanks for taking my question. First one is a little bit along the same lines as the last one, but I wanted to broaden it out a little bit about comps. The big thing that we hear from clients is, "Hey, Sprouts is a good business, but let's face it, they just can't comp like they should, and the gross margin gains that they're seeing are not sustainable, that they're going to have to come in and lower pricing and some of these earnings really is a little bit of a mirage, and that's why it trades so cheaply, the equity." What do you guys say to that? What's your rebuttal to that line of thinking? Well, I think, Scott, so far we've had pretty consistent record of delivering on that. The sustainability so far, quarter- after- quarter after quarter, we're feeling confident about that. We're certainly aware of where the margins have come from, and partly it's about the promotional unraveling of a very aggressive, high-low promotional, and actually negative profitability promotional. We're not going to bring those back. I can kind of guarantee that mix that was driving a lot of the margin issues in the business has gone away, and sustainably gone away. We know we can continue to improve our shrink. We're seeing that in our business week after week- after -week. We're feeling very confident about the sustainability of that. The fact that we're selling such differentiated product allows us to manage our EDLP pricing. As long as those products that we're selling are different, we are able to price it based on elasticity. As long as that plays through and works out, I'm pleased with some of the work we've been doing, the pricing team and the pricing systems we've been bringing in, is allowing it to give us a lot of confidence that there's sustainability in the gross margin and there's sustainability in our operating margin. Think about the other things that we're doing. The distribution costs should be coming down as we drive less miles to the stores. The operating ratios in our business should be kept under. Although there's some labor pressures, the operating ratios, we're a fairly immature young business, so the things that we're working on in terms of inventory management and operating the stores, self-checkouts at the registers. There's some sustainable operating improvements that will help us drive bottom line. We've got sustainable logistics improvements that can help to drive bottom line, and we're pretty confident that, well, we know the promotions aren't coming back in any aggressive way on high-low promotions or aggressive below-cost promotions. You put that together, if I'm confident about anything, I'm confident about the fact that our margin growth is sustainable. Yeah, and I think one piece I'd add on the customer front is, we have been making a pivot with our strategy, and we knew that there would be some folks who might be more of a coupon clipper profile that wouldn't be the ones that would stick with us. The intent was to gain a lot more of our target customer going forward. I think it's interesting that we've seen a couple pieces of research that we've done that are pointing things in the right direction with some green shoots, and that is all starting to resonate. I'd say, first, we actually did research directly, and people have told us that where they had reduced their shopping trips to Sprouts before because of the pandemic, that the majority of them have intent to return as the pandemic subsides. We said, "That's great," but what's even better is that as we've come into April, we're starting to see this prove out a bit. We ended the quarter with the highest customer counts we'd seen since the start of the pandemic. A nice positive direction and more customers starting to come into the store. We're also seeing that customer count, in particular, with the reactivated and reacquired customers. The same ones who told us they had stopped shopping with us because of the pandemic, we're starting to see those numbers trend up a bit. With the positive return to traffic, I think everybody was wondering, "Well, what will happen to basket?" We've been very pleased to see that while traffic has turned positive at the end of the quarter and into Q2, we're actually holding our basket pretty much in line with where we were coming through last year, rather than there being a trade-off between that basket and traffic number. Some positive indications there that the pivot and the strategy that we're making is starting to resonate, and hopefully we'll be able to see that with a bit more clarity as some of the COVID haze subsides. That's a really good color, guys. I just have one follow-up question. Obviously, your balance sheet is really good. There's not really any debt on it. You're producing good free cash flow, and the store crank up doesn't really come till next year. Why not get more aggressive and just buy back a chunk of stock and say, "Hey, it's cheap. It's our best investment right now." I know you have a buyback, but it seems like you could do a lot more if you wanted. Yeah, I think we're really pleased that we have the authorization out there, and we do intend to utilize that authorization. I think we would all agree that we think that the stock has a lot of positives that it can run in the future years, and we'd like to get in on that too. I think what really happened in the first quarter for us is that an authorization got put in place fairly late in the quarter, and we were trading under a 10b5-1 plan. You didn't see quite as much come through as we could have done. We have all intent to be utilizing the authorization as the weeks and months here evolve. Perfect. Thanks, guys. Thanks. Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open. Good afternoon. Thanks for taking my question. I guess, Denise, just following up with your commentary on the, I guess, improving traffic lately. Is there a way to give more color on maybe the quarter date comp trends or just any way so we can better understand the types of trends you guys are seeing in April? I don't think we're going to call out any numbers because we know week by week, there's a lot of volatility in what we're seeing. I think there's some positives specifically related to the target customer that we'd reiterate. I think with our target customer in specific, they have a larger basket, and their basket has continued to increase more kind of post pandemic than that non-target customer, suggesting innovation and other things in the store are resonating with them. We have seen target customer retention turning higher and increasing over this period of time as well. Reasons to believe, particularly with those target customers, that the positive traffic turn and holding the basket is something that we will continue to see. Okay, great. Maybe just one follow-up question. On the SG&A line, I think last call you mentioned you expected SG&A dollars, I believe, to be roughly flat for the year. What's the right way to think about it now? Yeah. Actually, first, we expect SG&A rate to be directionally flat for the year. That might be a little bit different in what you were hearing. What we believe is we're going to continue to see benefit as we have bonus that's going to roll off and be a tailwind for us, with in turn some additional expense as we continue to manage hero pay, healthcare expenses, and then just some general sales deleverage. The two of those every quarter won't necessarily be flat, but we'd expect the year will be approximately flat. Great. Thank you. I'll pass it along. Thank you. Our next question comes from the line of Ken Goldman with JP Morgan. Your line is open. Hi, it's Tom Palmer on for Ken. Thanks for the question. Just wanted to ask on the e-commerce side, looks like penetration rates for you are still climbing. Do you expect this to continue as the year progresses, just because more stores offering services and the improved app? Do you think we've reached a peak and as we kind of reach reopening, that starts to ease a bit? Alongside that, how has fulfillment been? Have you been figuring out ways to make it more efficient, kind of reduce the SG&A burden that it has put on your stores? Yeah, I'll let Denise talk a little bit about the cost side of this. In terms of the demand side of it, Tom, we're feeling that we probably have reached a peak on this. As I said a little bit earlier, I think we're probably one of the fastest growing e-commerce businesses in grocery over the course of the last year or so. Probably been driven by the sensitivity of our customers to going out, and they want access to this product, but they've had to use it through our e-commerce vehicles. We expanded our pickup, which made a big difference too. We were only in 55 stores for pickup, and we expanded that to all 360 stores, as we've talked about in previous calls. That's been a driver to our mix and a driver to the fact that we're growing faster than most in this space. As this settles down, as people are more comfortable getting out, as the mask mandates change, as vaccination rolls out, we're expecting it to settle down. It won't settle all the way back down to 3.5% where we were when I came in. I think it'll settle back down, if I was guessing, somewhere around 8%, 10% of our business rather than significantly anywhere near where we're at at the moment. In terms of how we're specifically figuring out ways to try. Remember, it's all profitable for us. We're pretty pleased by the fact that it makes us money. The margin mix isn't quite as strong, as you know. We're doing some specific things to try and minimize the cost of that. We're handling all of the pickup at our store through our own labor, which is making a difference to that in terms of both the speed and efficiency of that and the cost of it. We'll continue to look at that. I don't know you, if you want to expand on that a little bit, Denise? Yeah. Jack, I think you covered a lot of the points. I think the point we'd reemphasize is even with that penetration at 12.5% in the first quarter, we delivered a strong operating margin up substantially from where we were two years ago, where penetration was next to nothing. I think the other part that I'd mention as well is we continue to invest behind our owned channel, our shop.sprouts.com channel. Yeah. The white label penetration, for lack of a better way to put it, is now up to about 17% of our total e-commerce sales. As we're bringing those customers in a little closer to us, we have an opportunity to have more customer data, have a more direct relationship with those customers, and to monetize that a little bit more than what we can simply do when we'd be selling through a marketplace. We just reinforce the fact that for us, it is a profitable business, and we have absorbed the costs in our P&L to date at a relatively high level of penetration. Everything here and in working forward, as Jack said, is efficiencies of picking ourselves in our stores. We'll only be able to build on that as we go forward and improve that profitability more. Thanks for all the color there. I wanted to ask just on the promotional environment. Obviously, the large pullback in promotional activity has really driven stronger margins over the past year and a half now. Is there a point where it makes sense to get more promotional as a way to drive traffic trends higher? Not back to prior levels, but just higher than we've seen over the past few quarters. At what point does that make sense, I guess? I think it's a good question, Tom. As we continue to experiment with different ways to attract our target customers, our marketing activity and our promotion activity is very much geared to how do we communicate directly with our target customer. We've been learning that. Remember, traffic and transactions have been distorted pretty dramatically over the course of the last year or so. As we work our way through different techniques that we can use, certainly product and price won't be the driver that's going to attract the customers that we're trying to attract. It's more likely to be techniques that build loyalty amongst our target customer base. We're getting increasingly, we've done a lot of what we call test and learn through Q1, which we've learned some different techniques, some of which have worked and some of which haven't worked, and we're working our way through different techniques as to how we can drive that business. But very focused on target customers as opposed to doing broad brush product and price promotions. Because what we want to have is a really good value in our produce business, communicate that really strongly, communicate the benefits that we talked about in terms of our attribute-based products, and drive people into the stores on the back of that. Remember, our awareness is low, and the fact that awareness is low gives us a lot of comfort that if we really communicate the proposition effectively using the techniques that we're using, and we might have to spend a little bit more on marketing as opposed to on promotions going forward. As I say, we're going through a test and learn phase, and we'll figure out the right way to handle it over the course of the next few quarters. Great. Thank you. Thank you. Our next question comes from the line of Karen Short with Barclays. Your line is open. Hi. Good evening. This is actually Renato Basanta on for Karen. Thanks for taking our questions. My first question is sort of bigger picture and maybe a follow-up to Scott question earlier. Right now, obviously you have a lot of initiatives that are helping drive profitability and those are certainly showing up in the numbers and are commendable. One could argue that at some point, those start to dry up. My question is, how do you think about prioritizing profitability initiatives versus sales growth? I think at some point, you're going to have to get that top line really going again, to reach your longer term objectives. Well, the longer term objectives in our business are fundamentally the growth plan that we've got in terms of new stores is going to give so much more access for our Health Enthusiast and Innovation Seeker customers to get access to the Sprouts proposition, which is already pretty unique. We're going to make it even more unique so that the specificity of why you come to Sprouts and who you are as a target customer is the focus of all our work, whether it be merchandising work, real estate work, marketing work. We're focusing it all on our target customers. We know from all the data that we've done that there's plenty of people there who aren't spending the dollars that we'd like them to spend with us, partly because of awareness and partly as we work better to communicate effectively with those target customers. It's very true in markets where we're not known. If you go to Florida or Texas or Baltimore, where I was last week, you've got very different dynamics going on there as opposed to San Diego or Denver, where we've already got a pretty strong presence. The premise of the question is that we have to invest margin to get top line. We're not in that space. We're in the space of our proposition and the algorithm that Denise outlined in the remarks earlier. We've got an algorithm that base gives us a strong underlying profitability. We've got customers out there that look like the customers that we want to attract, and it's up to us to do that effectively through communication, not through investing tons of money in margin. That's the reality of it. We've got some immaturity in our operating base that gives us even more comfort that going forward, we can sustain the margins while attracting more of our target customers. Okay, that's helpful. Then just a question on the comp guidance. A bit of a slowdown from a two-year stack perspective in terms of comp for 1 Q. I presume some of that's due to California dining restrictions being lifted and maybe some of the other things you called out. Just wondering if you can provide some color on how you're thinking about that re-acceleration in stack trends for the rest of the year. Certainly, you should benefit from less trip consolidation as you talked about as things start to normalize. That also means there's likely more of a shift to food away from home from food at home. Just any help reconciling those two things would be appreciated. Thank you. Yeah. They're all things that we're looking at. I'll let Denise expand on this a little. It's all things that we'll look at going forward. We've said fairly consistently that Q1, Q2 was always going to be a leap, not just for us, but for the whole industry in terms of how that played through. On the two-year stack basis, we're expecting a lot of our initiatives to gradually and just see an improvement in Q3, Q4 on the two-year stack basis as we start to kind of normalize the comparisons. As you said, we didn't get as big an upside last year, so we shouldn't get as big a we should be able to see our Q3, Q4 two-year stack just improve naturally as part of the underlying business that we have. As I said, we're very excited about the marketing activity that we've put in place, the test and learn that we've done, that that work will start to pay dividends for us in Q3, Q4. I think the only other point that I would add is don't forget the fact that we will continue to have new innovation coming into our stores, building off of all the category management work that we worked on through the fourth quarter last year. It takes a little time to then get that into our stores. We already have one of our new DCs open as of the end of the first quarter. We'll have a second DC opening now here in the second quarter, both of which are going to bring fresher, more local product into Florida, into Colorado, important core markets for us where we really believe that that's going to resonate with customers as well. All these strategy points coming together are where we see the momentum coming from as we turn from the first half of the year, which certainly has its unusual overlaps into the second half of the year where we can really have these things shine for our customers. Great. Thanks for the color. Thank you. Our next question comes from the line of Chuck Cerankosky with Northcoast Research. Your line is open. Good afternoon, everyone. Could you talk to us, Jack, about the sort of regional trends in sales without being overly specific, as different states and even different counties have reopened in varying ways, and what you're seeing in the stores, and especially things we might not expect? California is clearly important to us, and we saw in December a little bit of a boost in our California business as the closedown went down, and then in January, it went the other way. California has clearly seen some. That's beginning to settle down. As we look across, we're seeing more consistency across the country in the last few weeks than we had seen previously. I think as you just gradually people feeling more confident about getting out and moving around, I think the vaccination program, and again, I think our customers are more likely to get vaccinated than the average and more likely to be comfortable at coming out. We're seeing that kind of consistency as we kind of talked about our baskets holding quite well, and that would be true across the country. We're not seeing the differences that we probably saw last year and certainly in Q4 that we're starting to see now. I don't know if that helps really, but I think we're seeing more consistency than differentiation over the course of the last few weeks. Anything in the product mix that you would point out? Yeah, I think as I said a little bit earlier, as restaurants reopen, you see a change in the meat business a little bit. That slows down a bit. The alcohol, which went absolutely crazy for all sorts of reasons last year, that's beginning to slow down a little bit relative to where we would've expected, maybe would've expected it to have been. By and large, it's generally to do with restaurants. Funnily enough, we're seeing some pretty interesting things happening in vitamins. Although the cold and flu season went down in January, as we start to navigate through April and May, you're starting to see people, I think, migrating back to things that are very health-focused. There's a little bit of an interesting trends happening in that space to the positive for us that we're intrigued by. If that kind of maybe vitamins would be the biggest. I don't know if there's anything else, Denise, that we should be commenting on. No, I think you hit the big ones. All right. Thank you very much. Thanks. Thank you. Our next question comes from the line of Kelly Bania with BMO Capital. Your line is open. Hi. Thanks for taking our questions. First I just wanted to follow up on the comment about traffic in March and April, and great to hear that it turned positive. Just was curious if you could help us understand a little more context about what that looked like last year and what you were maybe comparing up against, and is that comment just about in-store traffic or is that total transactions? Then I have another follow-up. Yep. Let me put first in context last year. Last year, if we all remember, really all of March and particularly early in March, but continuing March into April, what we saw was a dramatic reduction in the number of times people were coming into the stores and very large baskets. People coming in and buying whatever they could get, wherever they could get it. As we all knew, there were silly things like shortages of yeast, or pepperoni, or cheese that people would go and look for it wherever they could find it. Last year we definitely saw a notable downtick in traffic, but a correspondingly big growth in basket. As we worked through the year, our traffic trends got a little bit better, but they stayed negative through the year. Basket fell off a little, as we would expect after that big stock-up, but also kind of stabilized Q3 into Q4. When we turned into Q1, those same trends really existed in January and February, which were all pre-COVID last year, so that made a great deal of sense. I think we saw the same volatility that others would see in the early part of March, where this was lapping the height of things from last year and that would be where we just fundamentally all were readjusting to our businesses. What we saw as we got to the very end of March and into April was the recovery of traffic. On a two-year stack, it's not a net positive yet, but it is headed in the right direction. I think the most encouraging part to us is not only is that number headed in the right direction, but the basket really held. That tells us that things are resonating about what people are putting into their carts and what they've come to adopt in shopping at Sprouts. Hopefully, that's just a bit of color that helps. Yes. Thank you. Thank you, Denise. That's really helpful. Just also kind of along the same lines, you talked about some customers, I guess, relaying to you that they have plans to come back to Sprouts post-pandemic, and maybe you're starting to see that a little bit, but can you quantify what percent of your customer base you think that is and what maybe is embedded in your guidance with regards to that customer coming back? Do you expect that to be a certain% of them coming back? Is that expected to just improve as we move through the quarters? Do you know who you lost them to in the meantime? Yeah. I think in general, we do know who we lost them to. We lost them to the folks that were just consolidating shop, which could've been whatever they chose to consolidate to. They could've consolidated to Kroger, to an Albertsons, to a regional conventional, some even a bit into a Target or that type of environment. They told us loud and clear, they just reduced the number of places that they were going. Anywhere they could get a full shop, is where we would have seen them consolidate a bit. In terms of the way we're planning, we haven't built the plan at the level of detail of this customer we lost, what percent of them do we think that we'll get back. I think what we're more reacting to is we do expect through the year that our customer counts will continue to improve. We believe a good portion of that from what the customer has told us, the majority of the folks who told us they had slowed down or stopped coming to us through the pandemic, who told us that they would return, we think that will be a good proportion of where we see those gains. We also have expectation that with the marketing campaigns and programs that we have out there, that we'll be able to continue to bring new customers in as that kind of fear of COVID, fear of shopping starts to subside and the resonance of the messaging of Where Goodness Grows and what we stand for, we might be able to get a bit more reach out there to some folks who might not know about us as much today. Certainly those new customers, I think we built a lot of stores through that year, and it wasn't the time for people to experiment with new stores and try new things out. That's a big part of the marketing going forward. We think the stores that we did open over the course of the last year have got a great opportunity to build once the pandemic kind of dies down a little bit. Thank you. Thank you. Our next question comes from the line of Chris Jordan with Goldman Sachs. Your line is open. Hi, great quarter. I have something. A debt-free grocery store with a history of strong profitability in a world with 0% interest rates is a crime against capital structure theory in Modigliani and Miller, and I'd like your perspective on your balance sheet. That's my only question. Good job. Good quarter. Thank you. It's a good question. I'll give it to Denise. It's a great question. In general, we're incredibly pleased to have a very strong balance sheet at this point in time. Clearly, compared to a prior history of the company, we currently have more cash on our balance sheet than we would have had before or we would plan to have go forward. We're going to be putting quite a bit of that cash on the balance sheet to use when we think about building out new stores, the technology we've talked about, our second DC coming online. We feel good about that. Then I think as we announced last quarter with our share repurchase authorization, you're going to see us investing in ourselves and buying back more of our stock go forward. Overall, I will take a flush with cash balance sheet for a period of time here, and we will work our way back into all of that being great investment for the company go forward. What I would say a little bit about what we might do with that. As we look at our new format stores, of which we've got a couple happening in July, there'll be elements of that that we want to try and put into our existing store base, and we'll have to think through exactly the things that particularly I'm excited about, the innovation centers and how we can make that really relevant and really effective in lots of. There's some things we can do with this going forward, and Denise and I often talk about such issues. Thank you. Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Your line is open. Yeah, hi. Good afternoon. Jack, I wanted to ask you've obviously made the argument that the company is running sort of lower profit or lower return promotions in the past. My question around this, though, is that the company wasn't really comping all that well for a number of years, though. That doesn't really suggest that Sprouts was buying sales. It's probably more complicated than that, but what are we missing here if we're just sort of thinking about it more simplistically like that? Well, you're kind of taking me back a little bit to where we were a year and a half ago. I think my own view as to what was happening was as the company was chasing top line, it was actually deflating top line at the same time. Buying an awful lot of empty volume and an awful lot of empty customers that not only were they attracting these, what we called the coupon clippers, and we've identified those people. When the coupon clippers were coming in, they were getting a deal. Everybody else was getting that deal and not responding in terms of any volume. You had the combination of the kind of target customers that we've got at the moment getting access to very low below profit, negative profitability items, whether it be in commodity chicken or sweet corn or the things that they were chasing after. Not only was it giving people something for nothing and not generating volume and attracting customers who weren't spending anything and just losing money. I think that's why the top line started to dissipate from that. You started to see it getting into very low numbers. I think it was that downward spiral that grocers often get into, where they chase it and actually you deflate it. I think that's what was happening. We've changed the kind of momentum of that so that we're chasing after customers who value what we've got. We will promote with those customers, and they'll be promotions that are accretive to us rather than negative to us. We'll take it kind of going forward. I think that's the reason that that happened. What you find is the business was trying to become a conventional grocer by doing conventional grocery kind of things. What we've tried to do is be really clear that we're a specialty grocer, that we sell things that other people don't sell. We've got a very big proportion of business in fresh produce. We've got a big proportion of business in bulk. We've got a big proportion of business in vitamins. In many ways, the commercial strategy of the business was missing the differentiation and chasing after conventional. That's what we're in the middle of changing. As we said earlier, we're in the early innings of this, but we're very clear that where we were going was probably deflating our business and not attracting customers who are going to give you long-term profitability, if that makes sense. Yeah. Just, I guess, a follow-up to that. You've heard a lot on this call, I guess, right? It's hard to imagine Sprouts getting the multiple that you probably think it deserves without this comp improving from here. How are you thinking about the timeframe around when you would expect comps to reflect what you believe the underlying fundamentals of this business are? Are we waiting for store growth to ramp up and then these stores beginning to mature and then that building into the comp? I'm just kind of curious as to what the timeframe is that you think it's acceptable for comps to get to a more reasonable level. We're focused on growth, not comp. That's the real kind of focus on our business. I think it's interesting. A lot of the grocery guys are hitting higher comps. If you look at the actual underlying growth of their business is significantly less than the comp number. We're exactly the opposite to that. You are right. There'll be some maturity in the new stores that'll drive some comp sales going forward. Our focus is very much on how do we grow our business, which we've been pretty clear that we can grow our EBIT substantially. I'm quoting certain numbers, but we've been pretty clear that our sales growth can be north of 10%, and our EBITDA growth will be north of that. If we can consistently deliver that month- after- month, quarter- after- quarter, that's the direction we're moving in. This business will move from a $6.5 billion business to north of $8 billion business over the course of the next few years, and at very substantial margin growth. Generating very significant EBITDA growth. That's the program we're on, Ed, and that's what we're driving. Okay. Thank you. Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Jack for closing remarks. Yeah. Thanks very much, everybody. I appreciate the time, and I really appreciate your interest in our business. I look forward to continuing the dialogue over the next few quarters. Take care, everyone. Thanks ever so much. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.