May 8, 2014
Executives
Susannah Livingston – Vice President, Investor Relations and Communications Douglas Sanders – President and Chief Executive Officer Amin Maredia – Chief Financial Officer James Nielsen – Chief Operating Officer
Analysts
Scott Mushkin – Wolfe Research Karen Short – Deutsche Bank Jason DeRise – UBS Rupesh Parikh – Oppenheimer John Heinbockel – Guggenheim Joe Edelstein – Stephens Inc. Stephen Grambling – Goldman Sachs Edward Kelly – Credit Suisse Kate Wendt – Wells Fargo David Magee – SunTrust.
Operator
Good day, ladies and gentlemen, and welcome to the Sprouts Farmers Market's First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).
I would now like to turn the call over to Susannah Livingston.
Susannah Livingston
Thank you, and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our first quarter 2014 earnings call.
Doug Sanders, President and Chief Executive Officer; Amin Maredia, Chief Financial Officer; and Jim Nielsen, Chief Operating Officer are also on the call with me today. Sprouts' Form 10-Q, the earnings release announcing our first quarter 2014 results and the webcast of this call can be accessed through the Investor Relations section of our website at sprouts.com.
During this call, management may make certain forward-looking statements, including statements regarding our future growth, product expansions, new store openings and 2014 expectations and guidance. These statements involve a number of risks and uncertainties that could cause actual results to differ materially.
For more information, please refer to the risk factors discussed in our filings with the Securities and Exchange Commission, along with the commentary and forward-looking statements at the end of our release filed today. In addition, our remarks today include reference to non-GAAP measures.
The reconciliation of our non-GAAP measures to GAAP figures, please see the schedules in our earnings release. We believe the adjusted results provide a good basis to assess the operating and financial results of the company year-over-year.
Let me now hand it over to Doug.
Douglas Sanders
Thank you, Susannah. Good afternoon, everyone, and thanks for joining us today.
The positive momentum Sprouts experienced in 2013 has certainly continued into the first quarter of this year. And I am proud to report another quarter, a strong financial results.
We reported adjusted diluted earnings per share of $0.23, a 64% growth in earnings from the same period in 2013. On a GAAP basis we reported diluted EPS of $0.23 per share compared to $0.14 in the same period in 2013.
These results clearly reflect the power of the Sprouts’ model and the strong execution of our skills and operations team. As a growing number of consumers embrace the need for a healthy diet, our focus on health and value continues to generate strong same store sales, customer traffic and top-line sales growth.
Our net sale grew to $723 million for the quarter up 26% from 2013. Thanks to improved same store sales and the strong performance of our new stores.
The first quarter ended with a robust same store sales increase of 12.8% and 20.8% on a two-year stack basis representing our 28 consecutive quarter a positive same store sales growth. The 12.8% comp was driven by 6.5% increase in customer traffic and 6% rise in the average basket size.
Now let me take a minute to discuss the drivers of our comp sales over the past key couple of years as well as the first quarter of 2014. The broad appeal of our healthy living for less strategy grows more evidence with each quarter as Sprouts continues to outpace not only overall food industry but also the natural and organic sector.
Our value based approach to natural foods appeals not only to the natural lifestyle customer but also the growing number of everyday grocery shoppers who are looking for healthier food choices. Sprouts celebrates a wide selection of healthy foods at affordable prices along with the well trained staff focused on delivering product knowledge and friendly service in a non-intimidating environment.
Our focus on health, selection, service and value continues to separate Sprouts from the competition as an evidence by our accelerating customer traffic and comps during 2013 and continuation of our strong comp performance during the first quarter of 2014. More specifically to the first quarter, we continue to see tremendous top-line in same store sales growth across the departments, geographies, and vintages.
Our strong comps in this quarter were driven by our ability to aggressively promote fresh produce which gives us a broad appeal with the everyday grocery shopper. A strong produce comp coupled with our store [widened] department promotions into a solid traffic and balance performance across the store.
During the quarter we also continue to see strong performance at the Farmer Sunflower stores delivering same store sales in the high teams and contributing 160 basis points to our overall comp store sales. In addition, significant growth in specialty categories which is organic, raw and gluten-free with sales growth of over 30% in each of these categories continued to drive basket in overall comp growth.
The growths in the specialty categories clearly demonstrate the shift in consumer preference towards food attributes and a keen focus on the health benefits of the foods they are eating. Lastly our private label category continues to grow as we leverage our sales to innovate and introduce new private label selections.
Private label comps during the first quarter grew by 30% over 2013 and our item count increased by 20% over the prior year to more than 1400 items. Our growing fan basis is also evidence in social media where a number of Facebook fans increased by more than 180% over the past year.
As our improved digital strategies successfully engaged our customers both inside and outside the store. Our new website which was launched in February has also seen increased traffic with over 1 million page views on the day it launched.
On the news forefront, we’ve opened five new stores this year, four of which occurred in the first quarter. In addition we completed the remodel of seven stores during the quarter.
With the opening of our first mid west store in Kansas City in January, we are now operating stores in nine states. Our Kansas City stores performing above our expectations and we continue to receive plenty of enthusiasm from our new customers in Kansas and Missouri.
Our successful performance in the Midwest further demonstrates the strength of our brand and our health relating (inaudible) model and we look forward to our continued expansion in Kansas City as well as other existing in new markets across all the states in which we are operating today. Most of our store openings for 2014 will occur during the middle part of the year.
We are on track to open 6 new stores during the second quarter including five in existing markets and our first new store in the southeast region in Atlanta, our expansion plans over the past decade has been very methodical and our move into the southeast will be no different. We engaged in a comprehensive analysis of the southeast region when developing our expansion plans including the review of the real estate availability, the labor market, customer demographics, competitive landscape, distribution cost and the region's economy.
In addition our category leaders spent significant time studying consumer preferences and produce, meat, and grocery and made minor changes to our product assortment to accommodate regional differences. In the course, we reviewed our advertising and marketing strategies across our plant, social and digital channels to successfully introduce the Sprouts brands to the southeast market.
We have also been building a strong southeast team in infrastructure which includes a number of experienced store managers and other team members who are relocating to the region. As you know, our unique culture and commitment to excellent customer service and product knowledge is extremely important to the Sprouts model.
These moves give us further confidence in southeast expansion and our overall store level execution. Bottom line we feel confident that the Sprouts brand will be well received in the southeast as it has been in the numerous markets we have been entered over the past several years.
Our tremendous financial performance this quarter as in the past is the direct result of more than 15,000 team members operating our stores every day. I’m delighted to report that more than 650 of our team members will be promoted in the first quarter alone further strengthening the Sprouts team.
Professional development, the result and engaged team members will continue to drive the success of our stores and sustain the positive customers focus culture we foster here in Sprouts. Of course our growth plans which currently includes more than 60 non-approved sites and 49 signed leases for the coming years helps create meaningful career opportunities for our team members.
We are on track to open 23 to 24 new locations this year representing a 14% unit growth. Today all new stores are performing better than expected as we continue to serve as the healthy grocery store for our customers.
Before handing the call over to Amin let me quickly touch on commodity and inflation. First inflation was moderate during the first quarter at approximately 1%.
During the past two months, we have started to see acceleration in certain commodities and will expect higher levels of inflation in these categories during the coming months, mainly in meat, dairy, (inaudible) and nuts. Overall we expect inflation for the full-year to be approximately 2% to 3%.
Our ability to pass along modest inflation is very similar to the rest of the industries. Historically, the industry has passed along modest in higher levels of inflation except for the unique period like 2009 when during the recession we felt significant retail deflation.
While we are seeing some of the retail deflation today, we closely monitor market pricing and competition and maintain our spread to competitors. Let me specifically (inaudible) produce inflation in both availability and pricing.
From a decade of experience we have in the produce business, it's not unusual to see things varies in this industry driven by freezes, floods and droughts and the resulting impact on availability and price volatility. As many of you know produce represents approximately 25% of our business and we source quality control and distribute all the produce we sell.
Today produce is a global industry and we have dedicated teams throughout the country who have relationships with and source product from a variety of local, regional, national and international suppliers. The drought conditions in California has resulted in some produce planting for the central valley for this year.
The planning in this reason represents approximately 5% to 8% of our sales in produce or approximately 1.5% to 2% of our overall sales and is therefore manageable. Now fortunately, the southern parts of California are producing strong yields due to favorable weather conditions and we expect this trend to continue throughout the transitional growing season into central and northern California.
We are seeing moderate inflation in our overall produce basket and have impacting along the majority of these increases has we done historically given our broad network and strong relationships we feel very comfortable in our ability to secure the volume and quality of produce our customers have come to expect in Sprouts. So in summary the success of our health relating strategy and our ability to connect with a very broad and fast growing customer base truly differentiate Sprouts from our competition and positions us well to increase our EPS guidance for the year.
With that let me pass the call to Amin to cover our financial results and full-year guidance.
Amin Maredia
Thank you, Doug and good afternoon everyone. We are very pleased with our record setting results for the quarter and our continued outperformance to targets.
Following then highlight of the business drivers, let me spend a few minutes on full income statement followed by our 2014 guidance. For the first quarter gross profit increased 29% to $224 million over the same period in 2013.
Gross margin rate as a percentage of sales increased 17 basis points to 31%. This improvement was driven by leverage in occupancy, utilities and buying cost.
In addition, merchandise margin improved during the quarter despite minor inflation (inaudible) pressure experienced in certain categories including dairy, nuts, meat and citrus. The strong produce growing condition in the first quarter let to improved margin in the produce category.
Staying true to our value focus model, we continued our strong promotional activities to set up apart from competition. This is nothing new to Sprouts as value has always been the foundation of our model and driving traffic and top line growth, top line growth relating to priority.
Direct store expenses were $138 million for the quarter this included a loss under disposition of assets of $700,000 in the quarter, excluding this item direct store expense is as a percentage of sales decreased by 100 basis points compared to 2013. This improvement was driven primarily by leverage in pay roll, depreciation and lower utilization of medical benefits during the quarter.
Selling, general and administrative expenses were $22 million for the quarter. SG&A during the quarter included $1.4 million of pretax secondary offering expenses.
Excluding this item, SG&A at the percentage of sales was consistent to last year of leverage in advertising was offset by higher corporate overhead as we continued to make necessary investments to support our expansion plans. Adjusted EBITDA for the first quarter totaled $77 million up 49% over the same period in 2013 driven by higher sales and improved gross profit margin.
This coupled with the resulting operating leverage and lower pre-opening expense led to EBITDA margin expansion of 165 basis points moving from 9.1% to 10.7%. Starting 2014 was strong EBITDA margin expansion and overall adjusted EBITDA growth of 49% gives us tremendous momentum and flexibility in executing our business plan as we enter the middle of the year with an increasing number of new store openings.
Adjusted net income for the quarter totaled $35.4 million an improvement of 90% compared to 2013. This increase was driven by strong business performance as well as reduced interest expense as a result of a lower principal balance on our term loan and a decrease in interest rates from our April 2013 refinancing.
Moving to balance sheet and liquidity. We generated $76 million of cash flows from operations.
During the first quarter we invested $18 million in capital expenditures primarily for new stores. We ended the first quarter with a balance on our term loan of $317 million and the net debt to adjusted EBITDA leverage ratio excluding leases at 0.8 times.
We ended the quarter with cash and cash equivalents of $149 million and $53 million available under our undrawn revolving credit facility. Sprouts continues to maintain significant liquidity and generate strong cash flows to soft fund our future growth and also creating flexibility in usage of excess free cash flow for store level initiatives and repayment on our debt.
As you can see our strong financial performance over the past three years continued into the first quarter of 2014. The robust top-line performance leverage in the business and tremendous growth in profitability and cash flows gives us a high level of confidence as we continue to grow the business.
A strong growth in the natural and organic sector which is well outpacing the overall grocery industry. A broad demographic appeal to a wide range of customers our solid business performance across geographies and vintages, strong performance in our new stores in both existing and new markets gives us tremendous confidence to increase our full-year 2014 guidance as follows.
Net sales growth of 18% to 20% driven by 14% unit growth and same-store sales growth range of 8.5% to 9.5%. Adjusted EBITDA growth range of 23% to 25%, 40%-plus growth in adjusted net income and adjusted diluted earnings per share range of $0.63 to $0.65 a targeted growth of 31% to 35% over 2013.
Let me review a few additional items regarding our full-year guidance. First in our guidance we expect same-store sales growth to moderate in the back half of the year as we are cycling higher same-store sales from the back half of 2013.
We expect the two year same-store sales strong to be in the 19% to 20% range. This 19% to 20% three year strong comp sales still remains amongst the best in retail and well outpaces the grocery sector.
Second as Dough stated, over the past several months we have started to see increases in commodities and expect higher levels of inflation in certain categories. With the full-year 2% to 3% inflation expectations, we assume the ability to pass on inflation in the normal course of business and have reflected this in our guidance.
Third in 2014 our store openings are more weighted to the second and third quarter and therefore we expect higher pre-opening cost during these quarters compared to the first quarter of 2014. Further as you know in our model, our new store start off with the lower gross margin than our matured stores and yet build in the compression for overall margins from the new store openings for the remainder of the year in our guidance.
Fourth, we continue to build our team to support a feature growth in our southeast expansion. We expect to see some increases in SG&A and the percentage of sales for the remainder of the year to support this growth in both advertising expense as well as store level overhead and again have considered this in our guidance.
After taking this into account, including the increased cost for expansion into new region of the country, we are very pleased in our ability to continue to grow top line sales and bottomline profitability well above our long term guidance and at level separating us from competition. Specific to the second quarter of 2014, we are forecasting same store sales growth of 8% to 9% into a lead to a two years same-store stack comp of 19% to 20%.
In conclusion our strong results for first quarter for 2014 gives us confidence as we continue to expand the brand. Sprouts growth comes from the fastest rolling segment of the natural and organic sector, the everyday grocery shopper who recognizes that eating healthy no longer has to be expensive.
This broad appeal in addition to our low cost news for economic model in our significant white space opportunity, it’s all leadership very confident and our ability to continue to deliver on our business results and financial targets. With that we would like to open up the call for questions.
Operator?
Operator
(Operator Instructions) The first question comes from Scott Mushkin from Wolfe Research.
Scott Mushkin – Wolfe Research
Hey guys. Thanks for taking my question.
I was wondering what maybe have the data maybe I have missed it before but what do you think the average income of your customers is, household income? That’s going to be my first one.
Douglas Sanders
Sure. That can depend by market and we generally think of it as median and above median customers so on average in a normal market that the median income of that customer will be in the $40,000, $45,000 all the way up to the $80,000, $85,000 and our upper middle income customer will be above, slightly above the $100,000 in income.
Douglas Sanders
Sure, Scott when you look at it's typically the middle income and upper middle income consumer (inaudible).
Scott Mushkin – Wolfe Research
So you guys have been saying you are right down the middle, is that how you would think of kind of the grocery shopping customer is that a good way to look at it?
Douglas Sanders
Probably, I think the middle income to upper middle income consumers kind of the everyday grocery shopper as we discussed in the past, the great strength of this model is our ability to attract a very broad basic consumers which when you talk about the middle and – middle and upper middle income consumer, that is a pretty big segment of the population. So, you know, to your comment, is it right down middle of the path probably because I mean when you look at the -- our ability to attract the everyday grocery shopper, which goes into pretty much everywhere from where we placed those stores out to market our products that is kind of the core customer for Sprouts.
Scott Mushkin – Wolfe Research
Perfect and then I am just wondering if you could think maybe what do you think the difference in pricing between you and maybe an upscale guy like Whole Foods on produce, what do you think there the differentials – the differential is there?
James Nielsen
You know, I don't know if we want to disclose the individual retailers. We have come up publicly – and this is Jim, sorry Scott.
Scott Mushkin – Wolfe Research
Hi, Jim.
James Nielsen
Publicly and said, you know, we try and maintain our 20% to 25% spread beside traditional counterparts and there has been lot of research out there that's available to you that shows that sometimes especially the retailers are much higher than that so – but we won’t disclose that in this call, but the 20% to 25% is what –
Douglas Sanders
20% to 25% in produce against the traditional grocery retailers?
Scott Mushkin – Wolfe Research
So that will make it probably at least 50% cheaper it would seem to me. Okay and then one final one I will squeeze in, competition I think Lucky's, Freshtime, how do you guys think about that?
Douglas Sanders
Yeah you know I think this – the national organic sector is growing fairly quickly, so we are going to see new competitors. I think one thing to remember is the national organic space from 10, 15, 20 years ago has changed quite a bit today.
So we think that scale, sophistication, customer service, bringing strong operational skills are all even more important today and scale becomes a more important part of the equation compared to perhaps a new start up 10 or 15 years ago like Sprouts was in 2010.
Scott Mushkin – Wolfe Research
Alright. Perfect.
Thank you for taking my questions.
Douglas Sanders
Thanks Scott.
Operator
The next question comes from Karen Short from Deutsche Bank.
Karen Short – Deutsche Bank
Hi, actually just kind of following on Scott’s question. I am wondering when you think about the competitive landscape I guess that I am wondering who do you think of as your most formidable competitor?
Is it conventional or I am just curious how would you answer that?
Douglas Sanders
Sure. Again, you know, kind of like I said earlier, the core customer for Sprouts is just the everyday grocery shopper.
So we really look at the traditional supermarket as more of our competition because again when you look at the growth of national organic coming from that middle income, upper middle income, everyday grocery shopper, that's really the customer that we are targeting. You know, if you look at the way we go market obviously leading the parties that the common, you know, product at the everyday grocery shopper and in a natural food shop or both buy the product they understand, they buy it often and when you look at our model, it's based on health, selection, value and service.
All those components work together (inaudible) to take that that everyday grocery shopper, get him in the stores using that great prices on produce, and then eventually, you know, teach him how to eat healthier and draw more (inaudible) Sprouts.
Karen Short - Deutsche Bank
So when you look at the produce quality and I know you guys have very high quality produce, but obviously so does one of your larger publically traded natural and organic retailers, but how do you think of where – how do you rate the quality of your produce versus some of your competitors?
James Nielsen
Well first of all like Doug said, this is Jim Nielsen Karen, you know, we are focused on the middle to upper middle, and we (inaudible) to traditional so if you look at specs, sizing, you know, that's who we trying a lot and compare ourself to and I think we are doing an excellent job and there has been a lot of (inaudible) most recent study that had us number two I think in the country for produce. That kind of, you know, just echoes that same message about our produce quality.
So we cannot line up in terms of specs and sizing against the traditional grocery.
Douglas Sanders
Now it's just that, Karen is that because we sell so much produce, that being 25% of our business our ability to get produce into the store typically within 48 hours, you know, into the store and then also turn it faster allows for a much better quality product to stay in the refrigerator or in ambient temperature when a customer takes it home. So we think that also gives us an advantage from a produce quality perspective not only getting to the store but also when it is sitting at that home with the customer.
James Nielsen
And I think Karen there is one last thing I like to add to that when you really compare ourselves when you look at traditional grocery there is one thing, I think we do much better is that our depth and variety of organics, so when you talk about spec and sizing, you know, being general terms (inaudible) side of produce but we do a great job our buying team does a great job in the organic side of the business.
Karen Short - Deutsche Bank
Okay. That's yeah – I mean I agree.
That's helpful and then I am just curious on the remodels obviously you have been fairly vocal on what your Arizona remodels did to benefit your comp and now you are moving on to remodel the Texas market. I guess I am wondering is there any reason why the comp lift in Texas would be any different as a benefit from the benefit on your overall comp perspective from the benefit that you saw in Arizona?
James Nielsen
You know, it has been fairly similar. The only difference we had Karen, this is Jim, and I apologize is that some of the elements to the store that we did in the remodels here in Arizona were already put in place as part of the sales initiatives in 2013.
So in some of those stores are a little bit newer. So say for example, frozen doors were already in the Dallas market where here in Arizona we didn’t have frozen doors.
We had (inaudible). So we had a bit of a – or much better up-tick in Arizona but we are seeing, you know, relatively same results and we are excited about not only the seven we completed, but the eight we have the remainder here.
Karen Short - Deutsche Bank
And then sorry, just last one housekeeping I mean we are calculating your store productivity, but your number is always a little different so can you just provide that number if you gave it, I didn’t catch it?
James Nielsen
Yeah, you know, (inaudible) but if you look at our public data, the new store productivity continues to run above 100%. I know different people will calculate it slightly different but for this quarter it's 110%, so as Doug alluded to in his opening remarks is that our new source continued to perform extremely well including our new store in Kansas City, which was our first in that market.
Karen Short - Deutsche Bank
Great. Thanks very much.
Douglas Sanders
Thanks Karen.
Operator
The next question comes from Jason DeRise from UBS.
Jason DeRise – UBS
Hi. It is Jason DeRise.
Sorry if I missed this but did you comment at all about the Q2 EPS, I guess the consensus range is $ 0.17 to $0.20 are you comfortable with that? Is there any –
Douglas Sanders
Yeah, the only guidance we give quarter out is our comp guidance on the top line. So we do not provide the EPS range for Q2 Jason.
Jason DeRise – UBS
Okay. Are you comfortable with that range, is there anything you can add color-wise to that which you consider?
Douglas Sanders
You know, and I won’t speak to that number but what I would say is in Q2 there is nothing unusual. We do have some increased operating cost getting ready for our southeast openings.
But it's not a material number overall. So I won’t be – the only other thing I would point out is this our pre-opening cost is going to increase slightly in Q2 and more so in Q3, we are going to open six stores in Q2, and then another 13 to 14 stores in Q3.
So that – those are the only two considerations that are – I would say are material. I don't know if that would add anything else, but both of those items that I spoke to are in our guidance numbers for the full year.
Jason DeRise – UBS
I appreciate that. I want to ask about maybe helping us finish the bridge of why the comps are let's take the quarter that just happened the 12.8 versus the long-term of 6 to 6.5, so I guess 160 basis points is how well the Sunflower stores are doing?
Can you help bridge the rest, I mean we have talked about it at various points in time about (inaudible) contribution and so on?
James Nielsen
Yeah, you know, I think this quarter, you know, each quarter they vary. In the fourth quarter we talked about the holiday season.
This quarter we got off to the year would be good solid quality and availability of produce. Produce comps are very solid this quarter so that really helped drive the line in terms of our overall, you heard Doug talk about is our ticket and traffic are both very strong in terms of basket, up from the basket perspective we continue to drive additional items into the basket.
We had some – minimal amount of the basket increase was coming from inflation. In addition the mix side has been very strong as well.
We are seeing an increase, you know, increase in sales in things like raw food, vegan foods, organics, gluten free items, so all of those are performing 20%, 30% plus or higher from a comps perspective. So that’s giving us a nice mix in the basket, so it's really Sunflower produce what we are seeing in terms of the specialty products because of the breadth and depth of specialty products we carry are really moving through the store nicely, and then outside of that all of our vintages even our oldest vintages are performing very strongly, you know, in the high single digits.
So we are very, very pleased with our vintages across the board and all of the states are performing well.
Jason DeRise – UBS
And on that point about the vintages the – obviously last year's vintage and I guess towards the tail end of the previous year's vintage, you saw productivity was very high. Is there anything that we can learn from their first year in the comp base and how they are performing, is there anything that we can take away in terms of if this is just accelerating the consumer or the stores potentially have a new high level for maturity?
James Nielsen
Yeah, so good question Jason. I think two things are there.
I think the 2013 vintage is not into the comp base yet. It's still a little bit early but in terms of our 2012 vintage, which was right prior to our full sort of remodel or new prototype that we rolled out, but even our 2012 vintages is running very strongly and running above our [capable] new store model of 10% to 12% in the second year.
So our 2012 vintages are running above what we would call our normal second year cycle.
Douglas Sanders
And the 2012 vintage, this is Doug, the 2012 vintage did contain quite a few new stores in Northern California, which was a relatively new market for us. So historically, you know, new stores will ramp over time but new markets will ramp over time so you kind of have a combination of both in those – in several of those 2012 vintage stores that’s really kind of feeling some of those very, very strong comp growth.
James Nielsen
Yeah we just also just re-branded those as well and opened the Sunflower for a very short time and then we opened them back up as Sprouts. So we did get a lot of tailwinds there in ’13.
Jason DeRise – UBS
And I will let other people have a chance to question. Thanks.
Douglas Sanders
Thanks Jason.
James Nielsen
Thank you, Jason.
Operator
The next question comes from Rupesh Parikh from Oppenheimer.
Rupesh Parikh – Oppenheimer
Thanks for taking my question. Congrats on a very strong quarter.
So I just want to delve a little bit more further into competition. Now in terms of your – in terms of your markets, did you guys see any change in maybe the number of competitor openings this – in Q1 versus maybe some of the prior periods?
James Nielsen
Yeah, you know, this is Jim Nielsen. The way we look at were obviously is a group here we are very well aware of our competitors.
We are tracking the competitors within five miles and ten minutes and we actually track even stuff outside of that we keep relative size five miles and ten minutes but as you look back in 2013 and looking forward to ‘14 we are actually keeping relatively the same number of competitors as in 2013. So obviously we are pretty pleased with the 2013 results and we are pretty pleased with the start of 2014.
So it's going to be fractionally less in ‘14 and actually from 2013 but pretty consistent which really I think speaks to the strength of the brand and its ability to defend itself just from the customer loyalty standpoint speaks of the strength of quality, value, selection in our service and really good brand out there in market.
Rupesh Parikh – Oppenheimer
Right. Thank you.
And one quick question just on store expenses, again very strong leverage this quarter at about 100 basis points of leverage. What were some of the key drivers of the much better trends this period versus on your prior quarters?
Douglas Sanders Yes. I think that really three key things is first is with the (inaudible) comp we have got and the first quarter result always a great start to the year.
It's our high sales quarter of the year typically so we have got great labor leverage in that area specially when you have sort of the higher mix, we talk about the mix when you have higher price items that really allows you to drive labor cost. The second piece was with high you know with the (inaudible) comp, the depreciation leverage was also a key factor.
The third element we saw is on as far as the healthcare cost, we saw it lower utilization as well in healthcare cost overall and then so from a DSC perspective the healthcare utilization so this is kind of consistent across the board. We would see a slight increase from the healthcare cost perspective we did change our plan last year so we are probably not going to see the same benefit, it’s about 20 basis points benefit in Q1 in healthcare cost that we saw that we will probably won’t see in the middle and the back half of the year because we are on a higher deductible plan and low employees path at that deductible level then we will be funding some incremental portions of those costs, so I think at least that 20 basis points healthcare we will expect to sort of diminish over the course of the year.
Rupesh Parikh – Oppenheimer
Thank you.
Douglas Sanders
Thanks Jason.
Operator
Your next question comes from John Heinbockel from Guggenheim.
John Heinbockel – Guggenheim
(inaudible) if you see any material now in the spread versus price per grocery conventional competitors and where?
James Nielsen
I am sorry. John this is Jim.
Can you repeat the question? I couldn’t hear you.
John Heinbockel – Guggenheim
Yes, have you seen any material narrowing in the price spread versus conventional competitors anywhere?
James Nielsen
No, I think John as you look back, obviously models been set for the value and we have been price checking our competitors for years not only the produce side of the business but the non-perishable side of the business well and mostly 18 months ago we got into (inaudible) departments on a little bit smaller scale but it's been consistent. It really has been consistent over the last four quarters now.
I will say you John that in some markets, there has been different reaction but in terms of balance and where the investment is, from an enterprise level for us it's been overall consistent just a little bit different by geographies.
John Heinbockel – Guggenheim
Douglas Sanders
We haven’t and listen this is more than just price. It's in those quality value, selection and service here too.
So we will stick to the model that we have in terms of how we are going to price but we will continue to perfect the level of engagement we have in store including the strong points of different store as well, at this point John I haven’t noticed that it can't happen or it won’t happen.
John Heinbockel – Guggenheim
And I think, you also heard a number of the public competitors certainly talk about on their calls about passing on the inflation to the customers. So we will continue to see that passing on in the inflation in normal course today.
Douglas Sanders
Yes, we have and it happened all the way through the first period and for a smaller department.
John Heinbockel – Guggenheim
(inaudible) we are looking for two to three years that’s for your number 1% in the quarter, that sort of suggest maybe we are three to four in the back half of the year or (inaudible) in a range?
Amin Maredia
Yes, I think it's generally in that range John, obviously different departments are at different levels. We are seeing certainly having higher level inflation portions of bulks some of the nuts are higher level inflation and we have all know about variant (inaudible) so it varies by department and the subcategories within department that based on what we are seeing today we would sort of see that 3% to 4% range would be a fair call out at this point.
James Nielsen
John, look this the distance around you note might get some relief you know may get us some relief in (inaudible). And we hopeful that we can see some relief in chicken in the third quarter, poultry absolutely.
But that number that we gave earlier it's kind of based on kind of status call and all the information that we have within the marketplace today.
John Heinbockel – Guggenheim
Right. And one lastly, if you were – if you decided obviously you are in the better position in any (inaudible) your share gains and you are picking up here, if you decided to go way the pass through on key items for a quarter or so, is the (inaudible) there where that's the good the things to do or no it’s just at least to go (inaudible).
Douglas Sanders
Yeah, we are pretty promoting those John and so in terms of passing it on to the customer, as you know our pricing strategy is really market driven so we are continuing to love to see where the market is and this year we did increase the number of promotions, the total number of promotions we are doing – doing throughout the year because what we do find is when we – what we found is when we increased promotions that we’re generating incremental traffic into the store which is really great for not only the promotions for example for these all the other department within the store and really drives sort of that cross shopping within the store and brings in incremental traffic, incremental sales then brings in incremental margins, dollars, (inaudible) margin rate maybe static.
James Nielsen
You know John I think what's amazing and I’m extremely said about the some of the numbers that we look at, we look at obviously penetration (inaudible) your monthly panel penetration, TPR penetration. So we look at it very closely and we start to see that balance out a little bit better so meaning that some of the consumers are moving more to TPR, ELP which generate little bit higher margin which has helped us offset sometimes cost increases could be which is moving over which is even more -- it's a better basket you are buying approximately not just what's on sales.
So some good indicators there.
John Heinbockel – Guggenheim
Thank you.
Operator
The next question comes from Joe Edelstein from Stephens.
Joe Edelstein - Stephens Inc.
Good afternoon everyone. (inaudible) direct the first question to you, you spoke about the comp slow down that you are expecting in the second half, I am curious when would you fully expect to let benefits from the Sunflower remodel?
Is that ending June 30 or is there any bit of a small benefit that might be carrying throughout the rest of the year?
Amin Maredia
Well, we should start lapping that probably in the early part of the Q3 again we will lap that at how much further we are able to continue we will know but we want to start lapping actually time that we implemented those changes early on in Q3.
Douglas Sanders
I think just to make a note that we contemplated that in our guidance and so what we are really excited about is even with that adjustment in and not assuming our continuation into the second year, two years back for two years in a row continues to remain in the 19% to 20% range last year or two years back ending 2013 was right at around 20% I think it’s 20.1% and this year our guidance is continuing to be in the 19% to 20% range and last year we obviously had a great holiday season and we are going to continue to drive that part and that opportunity during the holidays and so I think that we continue to see strong momentum in the business today.
John Heinbockel – Guggenheim
I guess I would like to ask just another question on remodels. I think today the average age of the store base is still quite young only about eight years or so, can you give us or quantify total number of stores that might need to be remodeled looking forward?
I am just trying to get a sense of how many years worth looking forward that you might have in which you can still see some top list out of each of these remodels.
James Nielsen
Sure. When you look at the – you are right the average age of our store is just still quite young but we do have several vintages from 2000 to in 2002, 2003, 2004 which are the ones that we tackled this past year which were phenomenally be Arizona stores but when you look at the (inaudible) organization and they have some stores that were opened in the 80s and 90s as well.
So we do have the opportunity to go back and remodel some of those stores. I would probably say that we still have opportunity for probably 30% of the store base for remodel.
So we probably have at least (inaudible) three to four years of opportunity left from remodel perspective.
Douglas Sanders
And Joe I think, once you get to that point obviously we will continue to try and intervene ourselves and it's obviously very dynamic industry, so despite the fact we have sales initiatives very well outlined within the existing stores every year so we are very aggressive there. We have a robust remodel program and new store program but as you get to that three years, one people – stores will be getting a bit older and there will be a lot of different sales and stores we will get through and rolled out and some of those stores that are a bit old are going to need the refresh and realigned just to improve their overall shopping experience.
John Heinbockel – Guggenheim
Okay. That's helpful and earlier somebody mentioned fresh time, that group is being led by really the Farmer Sunflower team.
They are running the similar Farmer’s Market concept and (inaudible) gross plans, has there anything changed in your view in terms of whether you would consider additional M&A opportunity just as these potential competitors or similar businesses take off in other parts of the country.
Douglas Sanders
I mean from an M&A well from a growth perspective we are very-very focused on organic growth today. I think when you look at the white space opportunities that are available for Sprouts, there is just tremendous opportunities for fresh to grow from organic standpoint, it doesn’t mean that we would make it M&A I mean you never say never but they step (inaudible) plans right now given the opportunities we have ahead of us.
Amin Maredia
And we continue to see a lot of existing real estate opportunities also coming to market from various sectors, sectors which are in consolidation phase, the pipeline (inaudible) the number of leases that are approved and signed remains very robust.
John Heinbockel – Guggenheim
That was great. Good luck for the rest of the year.
Douglas Sanders
Thank you very much
Operator
The next question comes from Stephen Grambling from Goldman Sachs.
Stephen Grambling - Goldman Sachs
Good afternoon, thanks for taking the question. This is more related to your response to John, can you just remind us how you think about margins longer-term given the strong performance since the IPO and perhaps more specifically do you have a philosophical view that Sprouts will continue to reinvest margin rate to maintain that 20% to 25% price cap?
Douglas Sanders
Yes, I think that we overall kind of stepping back and look at the business we really like the business on an annual basis we have been running about 8% business and we have kind of talked about having 10 to 20 basis points of accretion in margin annually overtime and a lot of that we think will continue to come from continued traffic coming to your stores and that allows the natural flow into the business. I think that we feel very good about the core value proposition, (inaudible) every month where we sit within every department from the margin perspective and talk through and from what we see out there in the marketplace, we are not seeing a significant amount of change and frankly the higher price competitors have ways to go to get our values statement.
So we feel really good where we are positioned.
James Nielsen
And Stephen just from a bigger picture perspective you know we are still – we are obviously still in growth mode. This is still a very – we are in a very opportunistic time right now because we are growing and growing our market share and our store count given that the growth in natural organic is in the sector that we cater to the best and the core customers of our – of Sprouts being that every supermarket customers so we are going to continue to switch hard to really drop our value proposition and continue to grow our basket in our market share and if anything increase the appeal of Sprouts model.
Stephen Grambling - Goldman Sachs
Alright. That's super helpful.
Changing gears a bit we have been getting a lot more comments from some of your peers and certainly there has been some new additions to some of your markets regarding online services in groceries and even another period enhancing the digital reach. So what are you seeing in your markets and how do you think about this channel as a comp – as a competitor and as an opportunity in the long-term?
Douglas Sanders
Yes, I think the e-commerce business will study it, we started to look at it much closely. We certainly have met with various people in the space and I think the way we think about this business is you know this is a $55 million, $50 billion sector, natural organic sector and it's expected to go over $100 billion in the next five to seven years and when you look at the capital rate in any particular departments, the difference between the growth of traditional channel, I’ll call it the brick and mortar and online.
And you started looking at the share dollars that are going online. We still think that, based on that delta it's not a fast growing sector so we feel pretty good about the customer experience and what the customer expects and people coming to the stores to shop perishables particularly the perishable department.
So I think the short is that we're continuing to keep our eye very closely on it, we are not seeing a wide divergence today, and to the extent that significant dollars are starting to flow to that market then we will look at that at that point in time much more seriously.
James Nielsen
I think Stephen to the [means] points we have met with several people within the sector that have the ability to do e-commerce and so we look at it with more of a branding opportunity for us and not necessarily huge top line sales driver. So you don’t be surprised that in ’15 you don't see is experimenting on a very light level doing this from a branding standpoint.
So.
Stephen Grambling - Goldman Sachs
That makes sense. So if I can squeeze one quick follow-up to another question in there.
It's just, on the acquisition front, is there any way you can help us frame your approach to acquisitions. I mean is there specific things that you would be looking for whether it's either a multiple threshold or something else as you look at potential acquisitions?
Thanks.
James Nielsen
Yeah I think the biggest challenge with acquisition is realistically the two that made the more sense whether to that we did with Henry and Sunflower because they were very-very similar formats, models, go to market strategies, customers products and so on. You know the good thing is that not too many people do exactly what we do and the bad thing is not too many people do exactly what we did.
So we start looking at M&A, there’s not a whole lot of people out there that do exactly what we do. So when you talk about who we would acquire when you look at the natural food industry, typically the typical natural food stores is going to be a bit too small for a sprout and have a different assortment.
And then you look at the traditional supermarket as far as an acquisition for a small regional supermarket chain you are completely – you are acquiring a business that completely change the business. So it's a little different dynamic when you start looking at M&A and completely changing the model when you are buying a company.
But on the other side is, when you look at the cost from a -- kind of cost perspective of opening a new store at about $2.5 million, $2.8 million investment process to open a new store, and the returns that we get on these stores organic growth right now just makes so much more sense.
Stephen Grambling - Goldman Sachs
Thanks for all the color. Good luck for the rest of the year.
Operator
The next question comes from Ed Kelly from Credit Suisse.
Edward Kelly - Credit Suisse
Hi guys! Nice quarter.
Doug, I have a question for you here. Obviously there has been a lot of talk about pricing and competition etcetera, right.
The markets are worried about it, because you can see what your stock prices has been and I am curious how much time internally are you guys actually spending on any of this? Do you feel that you know the market is just over reacting?
I’m just curious as to you know you are in the business everyday right? So you know what you think about all this talk about what's going on and how has it been impacted the way you even think about strategy at all?
Douglas Sanders
Let me tackle that one first and then I will turn it over to Jim, to probably give you a bit more color on it. I think the thing to understand about Sprouts is the fact that pricing is something we always pay attention to, because our model has been focused on being a value since the day we found that the company you know 12 plus years ago.
So pricing is always top of my mind, doing competitive price checks which we do consistently on a weekly, monthly, quarterly basis is extremely important to our profit here. So turning to your point directly, yes it's something that's on top of mind, yes it's something that we spend a lot of time and devote a lot of resource to making sure that we fulfill our value commitment to your consumers.
And now I will let James give you probably little bit more color.
James Nielsen
I think first and foremost is if we are going to go out with value statements for consumers, we want to make sure we stand behind itself. I get very involved in it myself and make sure that we are in the right position, but do we spend more time than we did two years ago?
Maybe a few more hours because more and more markets and we have more price zone and that would be really the only reason and as we get great technology that comes in and make simplifies the pricing side of it, no problem, certainly well less time. So from a day-to-day basis, within the market area, no we don't spend any time more time but just, quite frankly because we have more markets that we are covering today, there’s a bigger overall time investment but not as percentage of sales.
Unidentified Company Speaker
` Yes what I would add to that is we are spending that time that Jim talked about in pricing where we are really starting to spend a lot more and more time is also talking about how we widen the customers base, how do we bring more people to the store, how do we differentiate ourselves, how do we get better in customer service, how we love to do things from a marketing perspective to accelerate our maturity curve of our new stores. Those are all sort of top line business drivers that we are spending a lot of time on and like I said, it is we feel very-very strong that we have a fantastic value statement and trust and transparency around value with our customers and so given that and the fact that we have routine check, we don't plan on taking any shock on our strategies based on something that the competitor might love to do.
Edward Kelly - Credit Suisse
Okay great. Thank you.
James Nielsen
Alright. Thank you.
Operator
The next question comes from Kate Wendt from Wells Fargo.
Kate Wendt - Wells Fargo
Yeah thanks and congratulations for the quarter, which feels like a rare comment over the past 24 hours? I wanted to ask based on that actually there’s been some concerns about trends in the supplement industry.
I am wondering if you guys saw any deceleration in the quarter in that category... And quarter in that category, and receiving that you said all categories so comp positive.
James Nielsen
How are you doing [Kate] this is Jim. We had a real nice balance in the overall department comps, but we were just a hair light in vitamins but [dhaba] was significantly higher than the overall comp rate.
So there’s some nice tail winds happening over there. If you look at the sector, we’re still getting great growth in plant based proteins.
I think some of the bad press that came out on multi use and some different things you know put the category through but we’ve seen some nice positive momentum sort of happening over the last let’s call it two or three months. But more importantly is what we are trying to perfect in that side of the business is that engagement that we’ve always felt we did a good job, but we are looking to a great job that really separate ourselves.
I’ve noticed people getting into that category, but its unfortunate product does not sell, it takes a high level of expertise and we know that we can really separate ourselves so we continue addressing education service on the floor and be the leader in that environment category.
Kate Wendt - Wells Fargo
That’s really helpful. And then just on lease service productivity obviously just really hitting on throughout this year.
Can you talk a little bit about what you are doing differently you know above and beyond the general appeal of the concept. I know you said you have success with offering lower prices and doing some more of pre opening advertising out of the gate?
Douglas Sanders
Excuse me, this is Doug. It’s been a combination of a handful of things.
Obviously we’ve gone ahead of the stores with some additional marketing both on the grassroots side and on the digital side. But in addition, I think you are seeing, you are seeing a lot of – is the success of the newest product – store that we introduced in the beginning of 2013 with three models and all the new stores that opened last year.
If you remember back when we talked about the new product type was the combination of the best parts of Henry's, Sprouts and Sunflower. And by far the best product we ever brought to market.
So you are definitely seeing the benefit of the greater selection and greater offering in the new prototype. And then I think on top of that is you are saying that the strength of our brand, today with a 170 plus stores, our brand is much more powerful than it was and much more recognizable than it was say three years ago.
So I think like I said, I think it’s a combination of a lot of different things and circling back to again, to my earlier comments and I think from the first question where, when you look at the growth and national organic being in that everyday middle income customer, everyday supermarket customer, that really is the core customer for ourselves. And I think when you look at, when you look at the sprout model and our ability to attract that customer and in teach them and transition them into a natural foods customer and that’s really the strength.
So like I said it’s a lot of different things, but its definitely heading the right direction.
Kate Wendt - Wells Fargo
Alright, thanks so much.
Douglas Sanders
And as part of our jobs fair in Atlanta, the turnout we’ve had for people wanting jobs to work in Sprout was an indicator of our success when I have them; I am pretty excited about it.
Douglas Sanders
Yeah and we obviously have an open door for a store day, yes but just even being a month and a half away or 45 days away from opening our first store there and in our our Snellville Facebook page, we already have over 13,000 fans in a regional country where we don’t even have the stores. So when we started seeing, start seeing that organic excitement build around the brand that excites us quite a bit.
Kate Wendt - Wells Fargo
Alright, thanks so much.
Douglas Sanders
Alright, thank you.
Operator
The next question comes from David Magee from SunTrust.
David Magee - SunTrust.
Yeah hi everybody and good quarter. Nice [impact] and best of luck for the way – coming into Atlanta, we are looking forward to your stores.
Couple of questions, at this point if you look at inflation picking up in the second half is you know a positive because the retailers are passing it on, do you feel confident that the protector in a broad sense is strong enough to keep that going that way.
James Nielsen
And as far as its ability to pass it on.
David Magee - SunTrust.
Yeah and…
James Nielsen
That comes to you, you know as you look at the backhalf of the year, I mean obviously the first quarter as Doug mentioned we’ve been able to pass it on and not much difference and specifically I have talked to produce here. I don’t get overall concerns that they will be able to pass it through and you know our focus has continued to be as make sure that we do continuously focus on our sales and promotions and make sure that we are driving in that traffic.
But looking forward to there’s just a lot of great commodities out there just on the produce side we are looking at looking at grapes, tomatoes, watermelons, corn, stone fruit coming out with abundant craft that get us excited. You know I can say we traditionally promote and give us like price point to drive consumers in.
But, again, I guess you got to look back the last two quarter and it’s been pretty consistent, everyone has been passing it through, so we got to use as an indicator.
David Magee - SunTrust.
Thank you. And then secondly, how do you do the announcements by the discounters that they are getting into the space.
Do you think its probably a positive because you – expand the same for moderate income customers or do you see there something that might peel away some share from where you are.
James Nielsen
Are you referring to like traditional mass structure/
David Magee - SunTrust.
That’s right. But they are more on target.
James Nielsen
Listen, I don’t want to speak to – one particular retailer, but we are always aware retailers obviously most of the traditional today have, a fairly wide assortment and natural have their own private label within the store. So you know we are where we shop (indiscernible) look at the pricing and to Doug’s point earlier I made sure that almost all of them lets make sure that its’ our customer and we’re not giving away retail sales and to our margin if we don’t need to sell.
But and we’re looking forward to seeing how that looks up.
Douglas Sanders
I think the only point I would make in addition to that would be just keep in mind that you know we are not successful because we carry healthy products (inaudible) because we provide probably knowledge and customer experience and the value around those products. It makes it easier for the customers to eat healthy, so it's not necessarily just about caring the products, it's about all the other pieces that go with it.
David Magee - SunTrust.
Great. Thanks.
Good luck.
Douglas Sanders
Alright. Thank you.
Operator
Ladies and gentlemen that is all the time that we have for questions today. I would now like to turn the call back over to Dough for closing remark.
Douglas Sanders
Alright. Well thanks everybody for joining us today and for your interest in Sprouts and I look forward to speaking with many of you in the coming months.
Have a good evening.
Operator
Ladies and gentlemen that does conclude the conference for today. Again thank you for your participation.
You may all disconnect. Have a good day.