May 5, 2016
Executives
Susannah Livingston - Sprouts Farmers Markets, Inc. Amin N.
Maredia - Sprouts Farmers Markets, Inc. Bradley Lukow - Sprouts Farmers Markets, Inc.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Analysts
Scott A. Mushkin - Wolfe Research LLC Vincent J.
Sinisi - Morgan Stanley & Co. LLC John Heinbockel - Guggenheim Securities LLC Edward J.
Kelly - Credit Suisse Securities (USA) LLC (Broker) Kelly Ann Bania - BMO Capital Markets (United States) Robert F. Ohmes - Bank of America Merrill Lynch Stephen Grambling - Goldman Sachs & Co.
Rupesh Parikh - Oppenheimer & Co., Inc. (Broker) Charles Cerankosky - Northcoast Research Partners LLC Renato Basanta - CRT Capital Group LLC Shane P.
Higgins - Deutsche Bank Securities, Inc. Christopher Mandeville - Jefferies LLC Zachary Fadem - Wells Fargo Securities LLC William Kirk - RBC Capital Markets LLC
Operator
Good day, ladies and gentlemen, and welcome to the Sprouts Farmers Market First Quarter 2016 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 follow at that time. As a reminder, today's conference is being recorded.
I would now like to introduce your host for this conference call, Miss Susannah Livingston. You may begin.
Susannah Livingston - Sprouts Farmers Markets, Inc.
Thank you, and good morning, everyone. We are pleased you have taken the time to join Sprouts on our first quarter 2016 earnings call.
Amin Maredia, Chief Executive Officer; Brad Lukow, Chief Financial Officer; and Jim Nielsen, President and Chief Operating Officer are also on the call with me today. Sprouts' 10-Q, the earnings release announcing our first quarter 2016 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 performance and growth, product expansion, new store openings, and 2016 expectations and guidance. 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 filings with the Securities and Exchange Commission, along with the commentary on forward-looking statements at the end of our earnings release issued today. In addition, 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. For 2015 we have presented adjusted income, adjusted earnings per share and adjusted EBITDA with adjusted measures stated in the reconciliation tables in our earnings release.
For the first quarter of 2016 such adjustments would be immaterial as such we have presented net income, earnings per share and EBITDA without adjustments. For the first quarter ended April 3, 2016, we reported diluted earnings per share of $0.30, diluted earnings per share increased 20% from adjusted diluted earnings per share of $0.25 in the same period in 2015.
With that let me hand it over to Amin.
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Thank you, Susannah. Good morning, everyone, and thanks for joining us today.
We are pleased to report solid top line sales growth and bottom line results for the quarter as we continue to expand across the country engaging with both our existing and new customers. For the quarter net sales grew to $993 million, up 16% compared to the same period in 2015.
Comparable same-store sales for the quarter was 4.8% within our guidance of 4.5% to 6%. Our merchandising and operations teams continue to drive sales and comps across the store.
We were very pleased by the great comps in our non-perishable departments which were offset by the significant deflation in proteins and adverse weather conditions in certain states in the back half of the quarter. Excluding the impact of deflation and temporary weather impact, our business remains healthy and we remain excited by the momentum we are building in our strategic initiatives which I will cover later.
During the quarter we saw growth in both traffic and ticket with a 50/50 split for the quarter. To briefly expand on deflation, the low inflationary environment experienced last year continued in Q1, resulting in a 0.5% inflation in the first quarter, lower than our original expectation of 1% to 2%.
This was mainly driven by the quick leveling out of produce inflation towards the back half of the quarter in combination with the continued deflation in the protein category. We expect a near zero inflation to continue at least through the second quarter.
On the new store front, we added 11 new stores in the first quarter and three more to-date this quarter for our total current store count of 231 stores. Our pipeline remains strong with 53 approved sites and 43 signed leases for the coming years.
New store productivity continues to perform well in the 75% to 80% range. We remain confident in our ability to secure great locations as we expand over the coming years.
Let me shift and provide a quick update on our 2016 priorities focused on driving sales growth, investments in infrastructure, and investments in our teams. Let me start with sales growth.
We have already started to implement our expanded deli offering in our existing sites, as well as many new stores. To-date this year, 24 more stores, which includes 12 existing stores and 12 new stores, include components such as prepared salad offerings, customer facing sandwich stations, prepared food service cases, fresh juices and specialty coffee.
We are on track to achieve our goal of rolling out this initiative to 30 plus existing stores this year and approximately 70% of our new stores. Our home meal replacement offering area includes even better ingredient standards, more variety and improved packaging.
These enhancements are being received well by our customers and add to our breadth of healthy products selection at Sprouts. Our private label brand continues to grow and once again has outpaced our company average in both sales growth and comps.
Private label currently represents nearly 10% of our sales and we expect it to continue to grow and outpace company sales and comp growth. By year end, we plan to surpass the 2,000 item mark in our private label brand program.
The second focus is our investment in infrastructure. We are excited to build on our authentic in-store customer engagement to out-of-store engagement through the expansion of our digital offerings.
In April, we launched Sprouts mobile coupons to customers. Through our improved Sprouts App, customers can now clip mobile coupons that will be applied through an easy scan of a barcode on their smartphone at their next checkout.
We are already receiving great feedback from customers who love the ease of the App allowing them to make their grocery list, get their coupons, and scan at the register all at the touch of their phone. We also expanded our partnership with Amazon Prime Now home delivery to the San Jose area, bringing the total up to 5 stores in three markets.
We continue to join our customers on their healthy living journey both inside and outside our store and you'll hear even more about our customer connections as these implementations take place. The third and final area is our continued investment in our team members.
We have been extremely pleased with the feedback we are hearing from our team members in regards to our in-depth training program. Our expanded 2016 training program is in full flight.
It includes a comprehensive training program focused on functional product knowledge, as well as training and developing future leaders to help our team members maximize their potential for new and growing responsibilities, given our significant expansion plans in the coming years. In summary, our business fundamentals remain strong and our current strategic initiatives are on track.
Our team remains focused on delivering a differentiated shopping experience through continued better-for-you product innovation across all categories in the store, great in-store customer engagement, and increasing customer engagement outside the store through our digital platform strategies. With that, let me turn the call over to Brad to speak about our financial results and guidance.
Bradley Lukow - Sprouts Farmers Markets, Inc.
Thank you, Amin. First, I have to say how excited I am to be joining such a strong team and a great brand of Sprouts.
I look forward to meeting many of our investors on the road in the months to come. As for the first quarter, let me spend a few minutes discussing some of the business drivers and guidance for the remainder of the year.
As Amin stated, we are pleased with our top and bottom-line results for the first quarter of 2016 and are pleased with our comps of 4.8%, considering inflation of only about 0.5%. As well, the first quarter diluted earnings per share increase of 20%, is reflective of the strong business model and our ability to remain value oriented to our customer while responding to market conditions.
For the first quarter, gross profit increased by 19% to $307 million and our gross margin rate improved 80 basis points to 30.9% compared to the same period in 2015. This leverage was primarily due to deflation in certain categories driving higher margins and more normalized promotions compared to the prior year.
Direct store expense was $194 million for the quarter and as a percentage of sales, was 19.5%, an increase of 50 basis points compared to the same period in 2015. This was primarily due to higher payroll expense from planned wage increases, partially offset by less holiday pay from the timing of New Year's Day 2016, which landed in the fourth quarter of last year.
In addition, as mentioned by Amin, we have increased our training costs as we continued to invest in our team members in 2016. SG&A totaled $31 million for the quarter and as a percentage of sales, was 3.1%, an increase of 30 basis points compared to the same period last year.
This was primarily due to higher stock-based compensation expense due to executive changes made in the third quarter of 2015 and higher corporate overhead as we continue to build the foundation to support our growth by building out infrastructure and technology including the business intelligence function and human resource systems. EBITDA for the first quarter totaled $97 million.
This was an improvement of 15% when compared to adjusted EBITDA in the same period of 2015. EBITDA margin came in at 9.8%, equal to the first quarter of last year.
Net income for the first quarter totaled $46.2 million, an increase of 20% from adjusted net income in the same period last year. These results were driven by top line sales and margin improvement in addition to lower interest expense as a result of last year's voluntary pay down on our revolver, a decrease in the interest rate from our April 2015 refinancing, as well as a slightly lower effective tax rate.
Shifting to the balance sheet and liquidity, our balance sheet remains strong as we continue to generate solid operating cash flows. For the quarter, we generated $98 million of cash from operations and invested $32 million in capital expenditures net of landlord reimbursement primarily for new stores.
During the first quarter, we repurchased $59 million or approximately 2.4 million shares of common stock under our $150 million share repurchase authorization. We ended the quarter with $146 million in cash and cash equivalents.
With our strong operating cash flows and low debt levels we are well-positioned to self-fund our growth plan and build upon our strong liquidity position. Let me now turn to 2016 guidance.
Due to the lower inflationary environment and shift in timing of some of our 2016 new store openings, we are adjusting our sales guidance for the year to the following. Net sales growth of 15% to 17% and on a comparable 52-week basis this would equate to net sales growth of 17% to 19% from the previous 52-week basis range of 18% to 21%.
All other guidance remains intact from our last call which includes comp store sales growth in the range of 4% to 6% for the year, and we remain on track to open 36 new stores. Adjusted EBITDA growth of 9% to 11% on a comparable 52-week basis and this equates to 12% to 14%.
Adjusted diluted earnings per share of $0.96 to $0.98, which equates to a 14% to 17% growth on a 52-week basis; and CapEx net of landlord reimbursements in the range of $145 million to $155 million. A few additional items to note on our 2016 guidance.
First, we expect inflation for the year to now be in the 0% to 1% range as we expect to see continued protein deflation through mid-summer as well as limited inflation in produce in the near-term. Second, the timing adjustment in some of our new store openings is mainly attributed to inclement weather.
Third, as it relates to margins, as we have done in the past, we will continue to make price investments as necessary to drive traffic and top-line sales and to maintain our competitive position. We do not expect the level of gross margin improvement experienced in the first quarter to be sustained.
Fourth, on the direct store expense line, our investments in our team members through training and strategic wage increases will continue to delever DSE as a percentage of sales throughout the year compared to 2015. We continue to believe these strategic investments are important to build a strong pipeline of future leaders given our unit growth across the country.
And below the EBIT line we expect to have approximately $15 million in interest expense including capital leases and other interest expense. A weighted average diluted share count of approximately 154 million shares for the year and a corporate tax rate of roughly 38%.
Lastly for the second quarter of 2016, we expect comp store sales growth to be in the range of 4% to 5% which reflects our expectation that low levels of inflation will at least remain until mid-summer. And as a reminder, in the second quarter of last year we reported an improvement of 50 basis points on the SG&A line, primarily driven by lower bonus expense which we will be cycling this second quarter.
In conclusion, we are pleased with our financial and operating performance in the first quarter. We remain focused on driving top-line sales growth.
And while the inflationary environment has impacted our sales, we feel confident about our business model, our solid balance sheet, and our strategic investments in growth plans to position Sprouts to be relevant with our customers today and into the future. With that we would like to open up the call for questions.
Operator?
Operator
. Our first question comes from Scott Mushkin with Wolfe Research.
Scott A. Mushkin - Wolfe Research LLC
Hey guys, thanks for taking my questions. A lot to chew on here.
So I guess the first thing I would go to is the gross margins obviously huge performance, and I think, you guys referenced that don't expect it to continue. I guess just kind of taking a step back with some of your competitors clearly having a much harder road than you guys are and them talking about investing in price.
How do we think about price going forward in gross margins if the environment continues to be rocky for – not for you guys, but just generally speaking? I mean, is this something that's concerning to you?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Hey, Scott, yeah, two things. I think, in the first quarter, what aided our better than normal gross margins are really two things is, one is the deflation in protein and continuing to have higher margins in that category.
I think, that's true for us and a number of retailers. And second is we had a more normalized promotions calendar in the back half of the quarter, particularly versus the prior year.
You recall last year there was a flush of produce after the ports opened which really allowed us to promote heavily, and so this year we had a more normalized promotions calendar there. So, that's kind of context of Q1.
As we look forward, fundamentally our approach to pricing and competition has not changed. We're, as you know, we have a significant investment in our processes to look at pricing and competition in every price zone that we have.
And fundamentally, we're always maintaining the spreads that we've talked about historically in produce and then based on the competitive landscape in each market taking a position. We've probably seen a little bit more competitiveness on the protein side lately.
No surprise, I've said this before. When deflation sustains for a while, it's not uncommon for people to start thinking about how to drive sales and being more promotional.
So when I talk about competition, we are not seeing it in everyday retails, we're seeing probably higher promotional activity from competitors. So we feel really good about where – how we're situated in a quarter where we had near zero inflation, pulling out a 4.8% comp is a testament to our ability to continue to drive traffic and our ticket, and engage with our customers in our stores.
So, no change strategically from a mid-term perspective on how we run the business.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Scott, this is Jim Nielsen. I think, the other part of that which gives us a lot of confidence is the success of the non-perishable departments and the promotional penetration we're getting and the activity we're getting on that side of business.
So, it's given us much more dimensional dynamic business. So we couldn't be more pleased with that side of the business driving foot traffic as well.
Scott A. Mushkin - Wolfe Research LLC
So a little bit more promotional for some competitors, particularly in protein, but nothing to get crazy about there.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Protein and dairy were the primary drivers in terms of the promotional investment we saw within the marketplace.
Scott A. Mushkin - Wolfe Research LLC
Okay. And then just more of a understanding the cadence of the second quarter because I think it was said that there's – we're going over 50 basis points of SG&A benefit from last year.
And are we going to see -- I guess maybe walk through the second quarter and what we should expect on the SG&A line? I just want to make sure we all model that correctly.
It seems like we could have SG&A up a lot as a percentage of sales, if we – or deteriorate a lot as a percentage of sales is probably better way to put it in the second quarter. And then I'll yield.
Thank you.
Bradley Lukow - Sprouts Farmers Markets, Inc.
Yeah, Scott, it's Brad Lukow. As we pointed out in our February call, the company is making strategic investments in training and systems infrastructure and we said that that was going to result in about 20 basis points or 30 basis points on DSE.
Obviously with the lower top line sales, that has an impact of driving the basis points impact and so we're 50 bps in Q1, and we would anticipate we'd be at the same – similar level, 40 basis points to 50 basis points in Q2 as we pointed out previously, but a lot of these investments will come in the first half of the year.
Scott A. Mushkin - Wolfe Research LLC
That's perfect. That's exactly what I was looking for.
Thank you.
Bradley Lukow - Sprouts Farmers Markets, Inc.
You're welcome.
Operator
Our next question comes from Vincent Sinisi with Morgan Stanley.
Vincent J. Sinisi - Morgan Stanley & Co. LLC
Hey. Good morning, guys.
Thanks very much for taking my question. Appreciate the color that you gave on the category changes.
Just wondering if you could maybe just go a little further in terms of the comment about the leveling off of the produce, kind of give us a better sense, hopefully, for how inflationary that is right now, expectations going forward there and outside of basically the protein, any further color on some of the other categories would be helpful.
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Sure. Obviously, the near zero inflation is primarily driven by the continued deflation in protein and we would expect that if you recall the protein deflation really started or got heavy in the third quarter in the August timeframe.
So, we'll be lapping that at that point in time. And produce, there was a number of key categories which were tight in the early part of the first quarter and late part for the first quarter and that drove – and it drove inflation particularly in the first part of the quarter and so produce really tempered off in the back half of the quarter and today we're seeing produce in the, sort of, the low single digits.
So when you blend all that together, we're really sitting in a near zero environment today and we see that for the rest of the second quarter based on the visibility we have. And then in the back half of the year the key change – the only key change we would expect is one, the protein will start lapping and then, of course, Mother Nature will drive produce, so it's hard to see too far out but we're seeing low levels of inflation in produce today, low-single-digits.
Vincent J. Sinisi - Morgan Stanley & Co. LLC
Great. That's helpful.
Amin, thank you. And maybe just a quick follow-up.
I know it's still early, but with your digital initiatives starting to expand a bit further, can you just give us a little bit more sense for when you're seeing either the coupons that will be coming in through the app or particularly maybe that the ordering from online. What's going into the basket?
Any sense for basket size, realizing it's still early, but just any early read there?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Yeah. When we think about engaging the customer outside the store on the digital side, as you know, we already have over 2.5 million customers engaged with Sprouts digitally and the mobile coupon now we've got 350,000 known IDs suggest another enhancement to our overall customer engagement strategy there.
And as we continue to engage with the customer, I would encourage everybody to go to the app. We have some pretty neat things with respect to unique in the industry, with respect to customers being able to filter based on attributes, which is pretty new.
And so that also allows us to personalize to the customer over time. We're in the early phases there today.
So, we've started off with a base level of bringing our coupons that we already have and ads that we already have from physical to digital and then we'll continue to go deeper into personalization there over time. And then on the APN side, we are seeing – sorry – Amazon Prime Now partnership, we're seeing good incremental volumes in the stores that we've launched.
And we're continuing to talk to Amazon about how we deepen our partnership for mutual benefit to both companies. And we're in that process now.
And we'll talk a little bit more about it based on our dialog on how we continue to expand and deepen that partnership over time. So, hopefully that answers your question.
Vincent J. Sinisi - Morgan Stanley & Co. LLC
It does. Now thank you, Amin.
Good luck going forward.
Operator
Our next question comes from John Heinbockel with SFM (sic) [Guggenheim Securities LLC] (24:36).
John Heinbockel - Guggenheim Securities LLC
So, two things. Jim, maybe a question on deflation and philosophy.
How do you think about managing deflation whether it be protein or – and I understand all the categories are going to be different – but maybe take protein for example. In terms of the pass-through whether it be in shelf price or promotion.
And then when you have this much deflation in the summer as we head toward Memorial Day and into the summer, how do you think about that in terms of – and I guess everybody also have the same idea, but being promotional to try to use that as a traffic driver and drive volume. How do you think about that protein in particular and protein this time of year?
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Well, I mean, John, we always look at all of the categories. As Amin mentioned just before, we have pricing strategies by all departments so...
John Heinbockel - Guggenheim Securities LLC
Yeah.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
...which has proven to be successful for us. So we line up with that.
And categories that are commoditized like proteins are obviously very elastic. So, if the market moves we move with it.
But we feel comfortable in our current price position and where we stand relative to our strategies. In terms of the promotional kind of expectation looking forward, we continue to see strong success in our promotions.
We look at holidays and we put our best foot forward during the holidays. Build a very good program and continue to improve our execution at store level, so (26:15).
John Heinbockel - Guggenheim Securities LLC
I mean, do you see the speed with which deflation is getting pass-through, is that changed from prior cycles?
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Relative to protein?
John Heinbockel - Guggenheim Securities LLC
Yeah.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Just relative to protein. Yeah, we did see an acceleration of people taking down price on the promotional end of proteins.
Not as much at the shelf, but on the promotional side, we saw that in Q1 relative to Q4.
John Heinbockel - Guggenheim Securities LLC
Okay. And then secondly when you think about your expanded prepared food offering, is that performing about the same in new stores versus existing?
Or is it doing better in new because you've sort of designed the store with that in mind?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Yeah. I think that it's pretty early.
We – as we said it's 24 stores that we put it in, 12 new and 12 existing. It's really more of a function of daytime traffic and overall traffic counts and, sort of, the customer base in the area, John.
So we've seen new stores perform exceptionally well, as well as existing stores perform really well. Probably the only one thing I would add to that is from a data perspective the one thing we do know is, which stores have a higher deli penetration in the existing stores.
So we have the, sort of, the benefit walking in and making our decision that where you do not only have theoretical daytime traffic, but also proven higher deli – penetration in deli that just gives us a signal that's an opportunity to deepen it even further. So that's probably the only added benefit.
But we've not seen any material difference in terms of how they behave in new versus existing stores.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
John, the only caveat to that is anything that's branded, Sprouts. Where we have existing stores just because of the strength of the brand, I mean, the core and the loyalty of the customer, we do see a little bit more strength, an acceleration in item movement just because of the overall brand strength.
John Heinbockel - Guggenheim Securities LLC
Okay. Thank you.
Operator
Our next question comes from Edward Kelly with Credit Suisse.
Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker)
Yeah. Hi.
Good morning, guys. Thanks for taking my question.
I'd ask one quick follow-up first to Scott's question, just on the pricing. I don't know, maybe it's just me, but it feels like the color around what you're saying about price investments feels a little incremental.
I just want to ask the question, are you anticipating some ramp in price investments from where you are in Q1? And then as part of all this, like, how do we think about the gross margin in the medium-term?
Has there been any change in your philosophy there?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
From a philosophy in the medium-term, I don't think there's any change there. I think in terms of your first question, I think, as I mentioned earlier, there's really two things that have been driving, in the first quarter that drove the expanded margins, right.
One is the deflation in produce and sort of – I am sorry – deflation in protein and wider margins there. And second is what I alluded to is a more normalized promotion calendar versus the prior year.
So, if you go back and look at quarter-by-quarter margins over 8-quarter, 10-quarter period, you'll see that our margins this year in the first quarter are more in line with the first quarter of 2014, whereas 2015 was really compressed. So I think that as we go through forward quarters that, sort of, catch up is more evident in the first quarter of 2016 than it will be in the future quarters.
So I don't think you read too much into what the market is doing out there except for the expanded margin in protein that everybody has been benefiting from. And that's starting to – as Jim said, that's starting to normalize a little bit as people are getting more promotional there.
Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker)
Okay. And then just one other one for you.
As we think about your comp guidance it does imply some re-acceleration, I guess in the back half of the year, but your comparisons also get more difficult. Can you just, sort of, like give us some color behind all the puts and takes there?
And specifically like is the queue for holiday comparison difficult or do you, sort of, cycle that and build on that? Just how should we think about this ramp as your comparisons get more challenging?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Yeah, I think, the key thing is we're going to start lapping the protein in the back half of the year, so that plays part into the equation there. And I think the key thing is, we're seeing good traffic today and we're seeing momentum build in traffic.
And then some of the key initiatives, we have a variety of initiatives whether it's our deli program, our private label program, couple of other programs that we are starting to test that we haven't announced yet, as well as even a stronger holiday program. We've been continuing to build on our holiday program over the last two years, three years and think that we can even do better because we're – if you compare Sprouts call it sales in the fourth quarter they're lower than the other quarters of the year.
And if you compare it to the conventional chains that pattern is a little bit different. So we know we can even do better in the fourth quarter.
So while we've had good success in the fourth quarter over the last couple of years, our execution is really getting better and better. And we've got some new promotional items in the back half of the year that we are pretty excited about that we haven't done in the past.
Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker)
Okay. Thank you.
Operator
Our next question comes from Kelly Bania with BMO Capital.
Kelly Ann Bania - BMO Capital Markets (United States)
Hi. Good morning.
Thanks for taking my question. I guess just a couple more on deflation.
I guess, first, are you seeing any deflation in the center store? It doesn't sound like it, but if you could just confirm that.
And then, two, last year the produce inflation slowed, turned deflationary very quickly, became a challenging environment, a lot of promotion step up. Right now protein deflation seems like it's slowing, maybe sounding a little bit more cautious about Q2 on the margin benefit from that relative to Q1.
So I'm just wondering, I mean, how much risk is there that the protein category starts to get really aggressive and how much of that is built into your guidance?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Kelly, probably have two or three questions in there. One thing just clarification.
When you say center store are you talking about Sprouts center store? Or how are you thinking about center store, make sure we answer what you're looking for there?
Kelly Ann Bania - BMO Capital Markets (United States)
Yeah. I guess, your grocery category.
I mean, outside produce and protein, the core verticals you've got.
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Got it, because our center store is obviously produce and bulk. So in terms of – do you want to jump in, Jim, on the grocery side?
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Yeah, I mean, as far as the non-perishable environment, we look at it's relatively neutral, slightly inflationary, 0% to 1%. On the deflation side, it's the items we just talked about, protein, dairy and bulk as you look forward, and obviously protein becomes more inflationary.
Does that answer your question, Kelly?
Susannah Livingston - Sprouts Farmers Markets, Inc.
Her other half of the question was on protein?
Kelly Ann Bania - BMO Capital Markets (United States)
Yes. I'm just curious if you could talk a little bit more about protein.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Yeah, so, Kelly, if you look at protein, is there any – I think what you're asking is there any, I guess, any comp risk in protein if people become I guess you would say a little bit more promotional? I think, we hit the bottom.
We've actually started to see people from a retail perspective and promotional retail perspective over the course of the last two weeks to three weeks, start to move up as we start to see categories like pork and poultry inch up on a cost basis. So we've already started to see some retails change from a promotional perspective on the protein side.
So, I don't see any downside risk on the retail side in protein.
Kelly Ann Bania - BMO Capital Markets (United States)
Got it. Okay.
That's very helpful. And then, curious if you could comment at all about Southern California?
Just a lot of questions on Aldi's entry there. And I don't know how much crossover you have with that competitor currently?
It doesn't look like that much, but they seem to have a lot of natural and organics, and have you seen any openings? Do you have any visibility into how close some of those openings could be to you in the Southern California market?
Thanks.
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Yeah. Kelly, overall we have a pretty robust process to track all competitors and what we call competitive intrusions when they open up near us.
And we actually have a plan ahead of them opening and post. As far as Aldi is concerned, what we've seen is we've had a number of stores opened within a two mile radius of Sprouts.
And it appears to be a pretty different concept and a very different customer. And we've tracked it very closely and we've not seen any impact from those openings to-date.
And we'll continue to monitor that just like we do for all competitors.
Kelly Ann Bania - BMO Capital Markets (United States)
Thank you.
Operator
Our next question comes from Robby Ohmes with Bank of America.
Robert F. Ohmes - Bank of America Merrill Lynch
Hey, thanks guys. Two just follow-up questions, the first just can we get a lot more color on competition in terms of, sort of, what the natural organic independents are doing versus the conventional grocers?
And maybe for Jim, more on the non-perishable side, it sounds like you guys are very pleased with the momentum you're seeing there. Maybe some context on incremental competition coming from the conventionals in non-perishables since we've been talking a lot about the protein side?
And the second question, I was just curious, could we get a little more color on – I think, you guys talked about some of the weather impacts in the quarter in some of the states. And just maybe a little more detail on where you saw the weather impacts and how much of an impact that might have been on the comps?
Thanks.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Yeah. So, I'll answer the last question first.
From a weather perspective, overall comp impact was roughly 30 basis points and the majority of that was in P3 (37:02). And specific markets that were impacted were Colorado, Texas, and Oklahoma.
With regards to your first question, around non-perishable performance and the conventionals and expanded assortment, we anticipate the conventionals to continue to expand their assortment. The natural organic industry continues to grow at roughly 10% pace.
I think last year it was 9%, projected at 10% for the next three years to five years. So we're anticipating that, but you can look at the syndicated data as well.
We continue to outpace all food channels in terms of our overall performance and that's on the top line, and that's in all the major attribute categories when you look at non-GMO, gluten-free, or organics or vegan. So I feel extremely confident that we're on the leading edge of not only product development innovation, but promotional innovation as well, so I think we're in a really good position.
Robert F. Ohmes - Bank of America Merrill Lynch
That's great. Thanks very much.
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Thank you, Robbie.
Operator
Our next question comes from Stephen Grambling with Goldman Sachs.
Stephen Grambling - Goldman Sachs & Co.
Hey, good morning. Thanks for taking the question.
This is really just I guess a follow-up to the last comments. Maybe this is just related to weather, but it looks like traffic certainly decelerated despite the easier comparison and you said it had been accelerating a bit recently.
So as you look at the softness can you point to any change in behavior by type of consumer or by those – specific to those weather impacted geography, or even by maybe the age of store or anything else that would explain it?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Yeah. That's a great question.
In context as I've mentioned is traffic if you look at fourth quarter versus first quarter, obviously, the holiday season is a big part of it. But specifically in the first quarter, the weather in Colorado and Texas and Oklahoma, Jim talked about impacted traffic for the back half of the quarter.
And then second also in the back half of the quarter we're hurdling the fresh produce season. We hurdled the fresh produce season from last year where there was plethora of produce coming into the market and we were able to promote it heavily.
So as we're sitting here today we're continuing to see good momentum sort of across the chain in traffic. So, I think, the back half of the quarter were a couple of more specific anomalies in my mind and we're pretty pleased with what we're seeing in the current environment and then that combined with the momentum in a number of initiatives that we've talked about that are really just starting to come to fruition is we feel good on how that's going to bear fruit into our traffic as well as overall comps.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
And as you look at weather and why it impacts us, our drawing power because our mousetrap is so unique has ability to draw from five miles to seven miles away. And when you get severe weather in market places, consumers have a tendency to shop more conveniently.
And so when that happens, we traditionally will lose some of the ad shoppers that would be driven into our produce and meat departments.
Stephen Grambling - Goldman Sachs & Co.
That's helpful. And then it looks like you're still getting very good basket growth.
Are you seeing any change in the behavior or the mix there, particularly as you look at the higher-margin categories such as supplements and vitamins or bulk?
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Yes. As we alluded to in the non-perishable performance, obviously, we've seen a slight mix change, it's not material enough to discuss, and it's not greatly impacting our overall gross margin, but we're starting to see positive mix change relative to movement towards non-perishables and higher grossing categories.
Stephen Grambling - Goldman Sachs & Co.
Great. Thanks so much.
Best of luck.
Operator
Our next question comes from Rupesh Parikh with Oppenheimer.
Rupesh Parikh - Oppenheimer & Co., Inc. (Broker)
Thanks for taking my question. So, I want to drill down a little more on the comp trends.
So, this I guess the past few months or even, I guess, all the reporters this earnings season have missed comps, so I just want to get a sense, I mean, as you look out there, clearly deflation and weather seem to be the main culprits, but is there anything that you're seeing that could suggest there's any incremental weakening happening out there right now?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
No. I think, the only thing more unique to Sprouts, so from a broad industry perspective, I think that the deflation piece is clearly impacting the overall comps, especially what's happening on the retails.
And then second the weather, people have talked about. But structurally at least we're not seeing anything that we're seeing differently than the past six quarters or eight quarters, and how we think about the business and when I talk about weather and these normalized promotions as we came into April, we're seeing those sort of behind us and we're seeing at least our traffic patterns are building as we expect, coming off these two anomalies.
So, Rupesh, I don't see anything structurally in the industry that's really causing any noise outside of the deflation, really.
Rupesh Parikh - Oppenheimer & Co., Inc. (Broker)
Okay, great. And then one more question just on the guidance.
So, you kept your comp guidance the same even though you now expect lower inflation for the year. If you can help us understand why the comp guidance is still consistent with the prior expectations?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Yeah. I mean, if you look at our 4% to 5% we gave for the second quarter with a near zero inflation environment, that sort of puts you into the mid to high 4%s for the first half of the year and then when we combine that with lapping sort of the protein deflation, as well as more importantly some of the merchandising and sales initiatives that we have planned for the back half of the year, we really think that we can continue to drive the traffic that we're seeing today and going into the future.
So, I think to the extent that the back half of the year, produce – I'm sorry, back half of the year, the overall inflation remains muted, that could perhaps make that number come off the 6%, but we think that it's too early of a call at this point to move our full year guidance and we felt that it was more prudent to just talk about what we're seeing in the second quarter.
Rupesh Parikh - Oppenheimer & Co., Inc. (Broker)
Okay, great. Thank you.
Operator
Our next question comes from Chuck Cerankosky with Northcoast Research.
Charles Cerankosky - Northcoast Research Partners LLC
Good morning, everyone. Amin, could you talk a little bit about the changing in-store opening timings and how that might be affecting the sales outlook for the year?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Yeah. I think the key thing there was is unfortunately we hate the word weather, but it was for the most part weather-related in the middle part of the country particularly and then some in Southern California which had gotten heavy rains.
And then some permitting issues, but that was to a lesser degree. So, I think the weather has really pushed some of our construction timeline back in the middle of the country and some in Southern California.
So – and as you sort of go through that, it just pushes some of our second quarter openings into third quarter and third quarter openings shifting slightly from early in the third quarter to middle of the third quarter. So, some sales weeks lost there.
So not ideal, but it's Mother Nature-driven for the most part.
Charles Cerankosky - Northcoast Research Partners LLC
But the idea is still to get all 36 opened in the first three quarters of the year?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Yes. What we always do is we try to carry alternate sites and what that allows is if for some reason a particular project does get delayed whether it's a city or weather or whatnot or multiple projects, then we have flexibility in our agreements which allow us to pull other sites up and then bump these sites back and not pay incremental rent.
So, we try to be prudent and always carry some backup sites.
Charles Cerankosky - Northcoast Research Partners LLC
And then looking at the protein categories, how do you feel about the volume trends in those?
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
We're confident in overall tonnage organizationally. Produce was slightly off and that was more just a function of the fresh markets, Amin alluded to, in Q4, but protein almost was real close to double-digit tonnage.
So we feel good – we feel very, very good about the tonnage. Obviously as Amin talked about, we took – there was a little bit of promotional activity, so there was a little bit of retail compression, but overall tonnage was very, very strong.
Charles Cerankosky - Northcoast Research Partners LLC
And Jim, while you're on that, how would you describe the mood of the shoppers at this point in the economy in the markets you're entering?
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
I think they're very excited if they're coming in for our strong promotions. And I think, the overall mood is good, and I think, if we're going to look at kind of the space that we're in, in the natural and organic space, as well as doing a much better job overall on the perishable side of the business, we continue to see, as I mentioned before, a strong, close to double-digit growth in the sector.
The attribute growth is strong, people are gravitating towards our concept and seeing us more as a one-stop shop as opposed to a secondary or in the past even a tertiary. So, the sense we get is good and consistent with the prior quarters.
Charles Cerankosky - Northcoast Research Partners LLC
Thank you. Nice quarter.
Operator
Our next question comes from Renato Basanta with Sterne Agee.
Renato Basanta - CRT Capital Group LLC
Good morning. Thanks for taking my question.
So, I just have a quick one on private label. Can you just give us a better sense of the product margin gap between private label and branded products?
And then can you just talk about where you see that 10% penetration level sort of going over time? I mean, can you see it going to sort of a high teens level which I think is where overall food penetration is?
And then, if so, what's the timeframe for that? Thanks.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Yeah. This is Jim.
Relative to the benefit you get to gross margin for private label, we don't disclose that. There's obviously a benefit to it, but from where we've always position it as more of strengthening our brand and strengthening our overall mousetrap and creating unique products that drive you into our stores.
So we do see some positive growth on the gross margin side, but that's never been our primary driver. In terms of overall penetration, we're very close to 10% penetration this year which was – for this quarter which was 150 basis points growth over first quarter of last year, so significant growth.
Where's kind of the penetration overall target? And we want to be well-balanced.
We want to make sure that we have great variety for our consumer so we don't want to become too one-dimensional on private label. And as we calculate our penetration number, just to remind you, we don't – obviously we sell 25% produce.
There's not a lot of UPC driven items in there that can be private label. So that along with your vitamin category that has 7,500 items, we're well represented in all categories but we'll have lower penetration there as well.
And so all random weight we don't count and so it's just specific UPCs. So you really have to compare us to the chains when you look at our non-perishable environment and we'll get excess of 20% over the next two years to three years.
And I think overall penetration for us is we kind of target at low teens, 13% to 14% and we'd be very, very comfortable with that number.
Renato Basanta - CRT Capital Group LLC
All right. That's helpful.
I'll pass it on. Thanks.
Operator
Our next question comes from Shane Higgins with Deutsche Bank.
Shane P. Higgins - Deutsche Bank Securities, Inc.
Yes, good morning. Thanks for taking the questions.
Hey guys, just wanted to talk about cannibalization. Did you see any kind of change here in the first quarter and what's your outlook for that going forward throughout the rest of the year?
Bradley Lukow - Sprouts Farmers Markets, Inc.
Sure, it's Brad. We're seeing very little change at all in both cannibalization impact as well as competitive intrusions and so as we said in the past we're trending around 125 basis points and that's what our line of sight is for the balance of the year at this point.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
And Shane to the extent that in forward years so that – as Brad said for – that's a line of sight for this year and forward years to the extent that we're seeing anything materially higher or lower than that number we'll always call it out and why, we think that's a good thing.
Shane P. Higgins - Deutsche Bank Securities, Inc.
Great. Thanks.
And if I could squeeze in one more quickly. There are dozens of Haggen stores – former Haggen stores that are now opening in Southern California.
Can you just talk briefly about how those stores – how that factors into your outlook – current outlook? Thanks.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Yes. In the fourth quarter we had called out the Haggen stores benefited us by 25 basis points and as those stores have opened we've probably seen slight impact in the early opening periods from the grand promotion ads.
But it settled down and a lot of those stores are now open. So, in general what we're seeing is that that 25 basis point benefit we had for a couple of quarters – a quarter, a quarter-and-a-half has disappeared or dissipated.
But as we've passed those grand openings we're seeing our comps come right back to kind of normalized levels. So, no significant impact there except loss of that incremental traffic for a short period of time.
Shane P. Higgins - Deutsche Bank Securities, Inc.
Got it. Thanks so much.
I'll yield.
Operator
Our next question comes from Mark Wiltamuth with Jefferies.
Christopher Mandeville - Jefferies LLC
Yeah. Hi, good morning.
This is actually Chris Mandeville on for Mark. At the risk of sounding redundant here can you talk about what's implied in the guidance here as it relates to margins, maybe a little quick update their particularly on the gross margin side.
I believe initially you're expecting for flat gross margin, but in light of the Q1 results I was hoping for a refresh there. And then just maybe building on that for Q2 you're also lapping kind of a 90 basis point contraction on a year-over-year basis, but can you remind me in the prior year was that largely price investment?
Bradley Lukow - Sprouts Farmers Markets, Inc.
Yeah. I think from a gross margin standpoint just to go back to Q1, a lot of that incremental year-over-year expansion was due to the deflation in the protein categories.
And we're seeing that continue but to a lesser extent in the second quarter. So I think it's fair to say that when you look at our original guidance of flat margins, obviously with the 80 basis points benefit in Q1 and a more muted impact in Q2, it will definitely have some expansion for the full-year is our anticipation.
But again as we've pointed out earlier on this call, we are seeing some step up in promotional activity. And always want to remind everyone that we're always looking at our competitive pricing position across all the markets that we're doing business in and we'll make the right call to maintain a very strong value proposition with the customer.
Christopher Mandeville - Jefferies LLC
Okay. And then just a quick follow-up here, you have about $65 million left on your current buyback program, but given today's stock reaction and how aggressive you are on buying back shares in Q1 at similar levels, I imagine you see value here.
So I'm just kind of curious to get an update on your capital allocation thoughts? Thanks.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
Yeah. So, after the repurchase that we completed in the first quarter there's about $65 million left on the authorization of $150 million and obviously we'll be strategic where we see opportunity and clearly there's value.
So, we'll monitor that on an ongoing basis.
Operator
Our next question comes from Zack Fadem with Wells Fargo.
Zachary Fadem - Wells Fargo Securities LLC
Good morning. There have been a few recent economic data points that point to increased pressure on the higher income consumer.
I'm curious, first of all, if you would agree if it's impacting your stores and consumer behavior in your stores and maybe discuss how you think – how it impacts your business going forward in terms of product trade down or heightened buying on promo? Thanks.
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Yeah, I'll start and then let Jim add. If you remember our core customer – we've got actually a very wide swath of customers, but our core customer is that middle income customer and upper middle income customer.
And so in terms of buying patterns what we're seeing is, is customers are continuing to want to eat fresh and clean ingredient products, so we've not seen any type of step down in purchasing behavior. In fact, as Jim alluded to, we're seeing even deeper penetration in some of our attribute driven categories.
And a lot of that has to do with the way Sprouts goes to market. The customer engagements and service in the store and also the promotions and other sales and merchandising approach that we take to the marketplace in our non-perishables department.
I don't know, Jim, if you want to add anything else that you're seeing out there at a deeper level.
James Leroy Nielsen - Sprouts Farmers Markets, Inc.
I'm not seeing anything at a deeper level. But I think that if there's a softness in the economy we're always been well-positioned being a value proposition for our customer.
And if you look at historical numbers we fared extremely well in the tough times of 2007, 2008. So we haven't seen anything as of yet, but our value position really protects us on a down market.
Zachary Fadem - Wells Fargo Securities LLC
Okay. And I just want to follow-up also on the oil industry impacted regions.
You mentioned that you were seeing some pockets of softness a quarter or two quarters ago, but you didn't really call it out as a big deal. I'm curious what the impact was in this quarter and if it's getting better or getting worse.
And how you think about it going forward?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Yeah, I think for the most part the quarter we were seeing it driven more meaningfully from weather as well as some cannibalization of some of our stores. The only pocket that we've seen – perhaps a little bit of softness and we don't have a lot of stores there, but it's Oklahoma.
But we're not seeing that anywhere else within our portfolio. And even within Oklahoma maybe a couple of points differential, but not any deeper than that.
Zachary Fadem - Wells Fargo Securities LLC
Great. Thanks for taking my questions.
Operator
Our next question comes from Bill Kirk with RBC Capital Markets.
William Kirk - RBC Capital Markets LLC
Hi, guys. Can you give us an update on how the new store and the density building in the southeast is going?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Sure. Yeah, the southeast is in line with our model and our expectations and it's continuing to build on the track that we've seen historically in new markets.
And when we look at historically how we built in Dallas and Denver, Arizona, Northern California, as we've built new markets we always see this continuing momentum building up the brand and see that traction build into the stores. So we're starting to see that in the southeast which is exciting is that momentum starting to build.
There is a deeper awareness of the brand and understanding of the business and understanding of the value proposition across the store. So there's good momentum building in places like Atlanta where we've been for about two years now and that customers – the Sprouts brand is really starting to resonate with that everyday middle income customer.
So good start and good deep and it's ahead, if you look at the curve, it's ahead of where I would put it when we first went into Dallas or Denver, et cetera, in terms of average volumes.
William Kirk - RBC Capital Markets LLC
And that curve you're referencing that's, kind of, a maturity? I think at the end you said the average (57:59) volume curve?
Is that fair?
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Yeah. The average weekly sales curve.
That's correct.
William Kirk - RBC Capital Markets LLC
Okay. Okay.
That's all from me. Thank you.
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Okay. Great.
Operator
Ladies and gentlemen, this conclude today's question-and-answer portion. I would now like to turn the call back over to our host.
Amin N. Maredia - Sprouts Farmers Markets, Inc.
Okay. Well, thank you everybody for your interest in Sprouts and as we mentioned as we think we've gone past most of the weather and some of the normalization and promotions in the first quarter, and we're looking forward to an exciting summer and reporting back out on that on our next call.
And hope to see you soon. Thank you.
Operator
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.