Release Date: July 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sales grew by 12% compared to the second quarter of 2023, driven by a 6.7% increase in comparable store sales.
- Diluted earnings per share increased by more than 32% from last year's adjusted diluted earnings per share.
- E-commerce sales increased by 30%, representing 14% of total sales for the quarter.
- Gross margin improved to 37.9%, approximately 80 basis points higher than the same period last year.
- Strong cash flow generation enabled the company to self-fund investments and pay down all outstanding revolver debt.
Negative Points
- SG&A expenses increased by 20 basis points compared to the same period last year, primarily due to strategic investments and new store openings.
- Ongoing wage and benefits pressure continue to impact SG&A expenses.
- The challenging development environment and high interest rates have caused some delays in new store openings.
- Despite strong sales, increased e-commerce fees and higher incentive compensation have added pressure to SG&A expenses.
- The company expects continued pressure on SG&A due to new store deleverage and strategic investments.
Q & A Highlights
Q: Can you talk about the forging process and how you ensure product differentiation from competitors like Walmart?
A: Our forging team has done an amazing job finding unique products not sold elsewhere. We focus on products with appropriate ingredients and no additives. We have open sessions where entrepreneurs can present their products, and we use our in-store Innovation Center to quickly introduce new items. About 25% of these products move to our main fixtures, maintaining our differentiation.
Q: When will you know enough about the loyalty program to expand it?
A: It's very early days, but the initial feedback from our beta tests in Tucson and Nashville is positive. The technology is working well, and we are gathering data to better understand our customers. We aim to create a loyalty club that makes customers feel special and will provide more updates in the next few Board meetings.
Q: Are you seeing any slippage in new store openings due to the current economic environment?
A: Yes, there have been some timing challenges due to higher interest rates, which have slowed down development. However, our pipeline is healthy with over 110 approved sites and more than 70 signed leases. We are committed to not compromising on the quality of our sites.
Q: How do you balance gross margin expansion with reinvesting for the long term?
A: We focus on maintaining the right price while leveraging tools and data to improve gross margins. We are not investing in gross margin pricing but rather in areas like inventory management and promotional effectiveness. Our top line remains strong, and we will continue to manage costs appropriately.
Q: Are you seeing any pressure from the lower end of your customer base?
A: We lost the coupon clippers long ago, and our target customers are resilient to broader economic circumstances. Our focus on health and wellness products keeps us insulated, and we continue to see strong engagement from our core customer segments.
Q: Can you provide an update on the regionalization of your assortment?
A: We have invested in close relationships with local farmers to take advantage of seasonal produce. We are also working on regional assortments for other categories, allowing us to launch new products in specific regions before expanding them nationwide.
Q: How do you view the opportunity if Kroger and Albertsons merge?
A: We see ourselves as complementary to conventional supermarkets and focus on winning our share of wallet from our target customers. We benefit from the traffic generated by these larger retailers and remain focused on our unique value proposition.
Q: What is the profitability of your e-commerce business?
A: E-commerce is slightly dilutive due to fee structures but generally has larger baskets and strong net dollar profitability. The mix of fresh produce in our e-commerce business is higher than most retailers, reflecting our customers' confidence in our assortment.
Q: How do you think about the sustainability of digital growth and its future penetration?
A: We are pleased with our digital growth, which reflects our target customers' preferences. While we expect digital penetration to increase slightly, we don't foresee a dramatic rise. Our focus remains on understanding our customers better and providing a seamless omnichannel experience.
Q: Can you explain the SG&A deleverage despite strong comps?
A: The deleverage is primarily due to increased e-commerce fees, higher incentive compensation, and strategic investments. We are investing in our teams and technology to support long-term growth, and these investments are already yielding positive results.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
