Sprouts Farmers Market Inc (SFM) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Sprouts Farmer Market third-quarter 2013 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 )

As a reminder this conference call is being recorded.

I would now like to turn the conference over to Ms. Susannah Livingston, Vice President of Investor Relations and Communications.

Thank you, and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our third-quarter 2013 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 10Q, the earnings release announcing third-quarter 2013 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. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only of the date of this call. And we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. 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 filed today.

In addition, our remarks today include reference to non-GAAP measures. For reconciliations of our non-GAAP measures to GAAP figures, please see the schedules in our earnings release. Lastly, in comparing our results to the comparable period in 2012, we discussed results on a Company pro forma basis as if the Sunflower transaction had occurred at the beginning of our fiscal year 2012. We believe these pro forma adjusted results provide a good basis to look at the operating and financial results in the performance of the combined Company year over year.

Now, let me hand it over to Doug.

Thank you, Susannah.

Good afternoon everyone, and thanks for joining us today. It's definitely an exciting time at Sprouts, and we are very pleased to report strong third-quarter results. To quickly hit the EPS for the quarter we reported adjusted diluted earnings per share of $0.13, a significant improvement of 117% from the same period 2012.

On a GAAP basis we reported EPS of $0.08 per share, compared to $0.01 in the same period of 2012. The third quarter continued to benefit from our growing brand awareness, new product innovation, improved merchandising, strong operational performance and improving economies in the states in which we operate. Our performance this quarter further illustrates that Sprouts is sitting at the intersection of two big trends in America today; health and value. And our model continues to deliver strong topline growth.

Revenues grew 24% during the quarter driven by new store openings and continued momentun in comparable same-store sales, which ended the quarter at 10.2% and 20.2% on the two year [stag] basis, underscoring the everyday consumer's desire for healthier foods at affordable prices. As you know, the foundation our value proposition is fresh, high-quality produce, which we offer at prices we believe are significantly below those of conventional food retailers.

Our produce offering attracts a wide range of consumers to our stores, giving us the opportunity to showcase our extensive assortment of natural organic and fresh foods and knowledgeable customer service. Over time, we believe our value pricing, extensive product offering and differentiated customer experience transition many of these trial customers into loyal lifestyle customers who shop Sprouts with greater frequency and across an increasing number of departments.

Our customers responded positively to our promotional activity this quarter, as evidenced by the increase in store traffic and average basket size. Traffic increased approximately 5.5% during the quarter. We also saw more customers purchasing discretionary items, such as premium meats and wines, artisan breads and cheese, and packaged groceries, including Sprouts private label items. Our Sprouts private label products continued to gain traction with sales growth of 19% during the quarter on a comparable store basis. Our focus on the quality and value of our private label products is clearly resonating with our customers.

The natural and organic space continues to grow, reflecting the health and wellness movement across the country. With that growth comes more innovation, and this year we've introduced 100s of new items to our stores including more than 250 new private label items. In addition we have made improvements to our product quality, ingredient standards and overall assortment in areas such as packaged grocery, frozen foods, bulk, bakery and deli, as we align the three banners of Sprouts, Henry's, and Sunflower.

Organic store growth remains a top priority and in the third quarter we opened 7 new stores; 4 in Texas, 2 in Arizona, and 1 in Colorado. This brings our new store count to 19 for the year and completes our new store openings for 2013, ending with 167 stores and 13% unit growth. The new stores continue to exceed our expectations driven by increased awareness of our brand and a more robust product offering. In fact, 8 of the 15 biggest opening days in the history of our Company happened in 2013, and we also set a new opening day sales record, not once, but twice in two weeks, at stores in Colorado and Texas.

The majority of these stores opened in existing markets with the benefit of our brand awareness. The stores in new markets are performing at or above expectations and the 2012 stores that are not yet in our comp base are just starting to hit their stride and performing extremely well. In addition, we continue to reinvest in our current stores and have remodeled nine stores this year with three more to go by year end. The customers' response to these remodels has been positive, and early analysis has shown an incremental 2% to 4% lift in comp sales in these stores. That's an incremental positive and it allows us to maintain superior store conditions, which is one of our core promises to our customers.

Our real estate pipeline remains robust as we continue to invest in future growth. To date we have more than 55 sites approved for the coming years and have signed 30 leases for stores to be opened in 2014 and 2015. We're very excited about our planned 2014 entry into the Atlanta market and we believe our concept will be well-received as it has been in previous new markets.

We will develop Atlanta similar to our strategy we used when entering the Texas market in 2005, and the Colorado market in 2008. We will start with a small cluster stores, set up regional supervision, and eventually look to open a produce distribution center as part of our Southeast expansion. We have always been very methodical about our store openings and will continue this discipline as we work hard to grow our brand across the Southeast.

The growth we're achieving is not only bringing healthy living for less to more and more communities, but it is bringing jobs as well. We have already grown our team by 28% this year, with more than 14,000 Sprouts team members to date. We take training and support of our team members very seriously as they are the front line to our customers every day. That said, internal promotions are vital to protecting our brand and our bottom line. This year we have already promoted more than 2,000 team members, with over 700 of those occurring in the third quarter alone.

It is clear to us that our Company's accomplishments are the result of strong teamwork, and that was especially evident this quarter. As many of you know, Colorado fell victim to heavy rains and flash floods in September, and one of our stores in Boulder, Colorado, sustained major flood damage and was closed for 11 days. Now, fortunately, all of our team members were safe, but I bring this up to demonstrate the strength of our team. Keep in mind the store sustained about three feet of water, and everything in the store had to be cleared, rebuilt, and inspected prior to reopening. All products and damaged fixtures were replaced, from groceries to gondolas, and I am proud to announce that we were able to salvage 2.5 semi trailers of non-perishable food and paper products that we donated to local food banks.

In the days following the store's reopening, we continued to give back to the community through a 72 hour sale, a grab and give promotion, and a cash donation to the Foothills United Way. But even more impressive is what our team accomplished working 24/7 to get the store reopened and serving the Boulder community as they rebuilt after this tragic event. This is a true testament to the Sprouts organization and I couldn't be more proud of what our team accomplished in such a short time.

With that, I will turn the call over to Amin to speak about our third-quarter financials.

Thank you, Doug, and thank you all for joining us today on the call.

Before I start I want to remind you that I will refer to our 2012 financial results on a pro forma basis, giving effect to our May 2012 acquisition of Sunflower Farmer's Market as if it had occurred at the beginning of 2012.

Let me first start with Q3 performance. Net sales for the third quarter of 2013 ended higher than our expectations and increased to $634 million, up 24% over the same period in 2012. Once again, we have been able to build on our momentum from the first half of 2013 and deliver another strong quarter. New stores continue to perform above expectations through our brand-building efforts and a more robust product offering. Comparable same-store sales of 10.2% continued to be strong on a year-over-year basis and were consistent across all departments, geographies, and [vintages.]

Our more recent vintages in our comp base also continue to perform very well. The 10.2% comp increase was driven by approximately 5.5% rise in traffic and approximately 4.5% boost in average basket size. This basket size included inflation of approximately 2% with the remaining increase driven by an improved product mix. Inflation continued to be relatively modest across the board, with a strong quarter comp performance, a two year stacked comparable store sales growth totaled 20.2% for the quarter.

Gross profit for the third quarter, which includes occupancy, buying, and utility costs, increased 30% to $190 million over the same period in 2012. Gross margin as a percentage of sales increased 130 basis points to 30% over 2012. This increase of 130 basis points was driven by the cycling of certain promotions and product markdowns related to merchandise realigment that we implemented in the third quarter of 2012 during the integration of Sunflower. And also leverage in occupancy and buying cost driven by the strong comp sales performance. This leverage was partially offset by lower margins in produce due to tighter supplies in certain fruit and vegetable items compared to the prior year.

Direct store expenses of $129 million decreased as a percentage of sales by 10 basis points over 2012, driven by lower noncapitalizable store development costs, as well as leverage in store supplies and depreciation cost. This leverage in DSE was partially offset by higher healthcare costs and higher bonus payouts based on our strong Company's results.

Selling, General, and Administrative expenses, or SG&A, were $23 million for the quarter. SG&A during the quarter included a $3.2 million bonus payout to our team members in connection with our IPO. In the third quarter of 2012, SG&A included $5.6 million from costs associated with the Sunflower integration and a $2.7 million legal settlement charge. Excluding these items, SG&A decreased as a percentage of sales and leveraged by 10 basis points, mainly as a result of leverage in advertising cost. In support of our group's future growth plans, including expansion into the Southeast, we continue to invest in people and infrastructure for future growth. Adjusted EBITDA for the third quarter totaled $53 million, up 63% over the same period in 2012. This increase was driven by higher sales margins, and the resulting operating leverage. Adjusted EBIT for the quarter totaled $40 million, up 83% over the same period in the prior year as we continued to leverage depreciation and amortization costs.

On a GAAP basis, net income for the third quarter was $11.5 million, up $10.2 million from the same period in 2012. Adjusted net income for the third quarter totaled $19.5 million, an improvement of 160% compared to the prior year. This increase was driven by the explanations I mentioned earlier, as well as a reduction in interest expense from the partial payout of our term loan with the proceeds of our IPO, and reduction in interest rate versus the prior year from our April 2013 refinancing.

For the 39-week period ended September 29, 2013, on a pro forma basis, net sales increased 21% to $1.8 billion driven by strong performance in the core stores as well as new store openings, which are performing above expectations. Gross profit for the year increased 22% to $551 million over the same period in 2012. Gross margin rate of 30.1% increased by 20 basis points from the same period in 2012. Adjusted EBITDA totaled $157 million year to date, up 33% from the same period in 2012, demonstrating our ability to continue to drive the business with a laser focus on bringing our customers quality and innovative healthy product offerings and strong customer engagement through service and education.

Moving to balance sheet and liquidity, our focus remains on funding organic growth in our business through our operating cash flows. We generated cash flows from operations of $143 million year to date, through the end of the third quarter, and reinvested $75 million in Capital Expenditures, primarily for new stores. We ended the quarter with a principal balance on our term loan of $360 after paying down $340 million of outstanding debt with proceeds from the IPO of 21.3 million shares of common stock. As a result of this debt pay down, our net debt to adjusted EBITDA leverage ratio on an LTM basis is now at 2.1 times, and as a result the interest rate on our term loan dropped 50 basis points post-IPO to LIBOR plus 3%. In addition, cash and cash equivalents totaled $92 million at the end of the third quarter, and we had $52 million available under our undrawn revolving credit facility.

Our sustained strong performance this quarter gives us confidence to increase our guidance for the year to adjusted diluted earnings per share of $0.45 to $0.46 from our previous estimate of $0.41 to $0.43. Our previous guidance -- our EPS guidance for the year assumes a weighted average share count of approximately 140 million shares. We project diluted earnings per share from $0.05 to $0.06 for the fourth quarter, which assumes a share count of approximately 153 million for the fourth quarter. As noted on our last earnings call, our average sales and gross profit margins are typically lowest in the first quarter -- fourth quarter -- due to seasonally slower produce sales in the winter months and increased promotional activities during the holiday season, which have an adverse impact on our overall margins in the fourth quarter compared to the first three quarters of the year. ¶

Embedded in our full-year guidance, we expect to generate comparable store sales growth of 9% to 9.5% for the full year, higher from our previous guidance of 8.5% to 9%. We expect full-year 2013 sales growth of 20% to 21% compared to -- again, higher from our previous range of 19% to 21%. We also expect to generate adjusted EBITDA of $188 million to $192 million, higher than our previous range of $180 million to $185 million. Our net income is expected to be in the $48 million to $50 million range, and adjusted net income in the $63 million to $65 million range from our previous adjusted net income range of $57 million to $60 million. Lastly, we expect to spend approximately $70 million to $75 million on Capital Expenditures net of landlord reimbursements, consistent with our previous guidance.

This solid growth not only demonstrates the strength of our operations team, our successful store expansion capabilities, and growing awareness of the Sprouts brand across our geographies, but it also further defines our growth plans for the future. We are currently in the middle of the planning process for 2014 and we will provide you full-year 2014 guidance on our year-end call. However, we would like to give our shareholders some insight into 2014. THe encouraging results that we're seeing in 2013 and the continued momentum in health and wellness trends and growth trends in the natural and organic sector, gives us confidence to believe our 2014 plan will fall within our stated long-term guidance of 15%-plus sales growth, 17% to 20% EBIT growth, and over 20% net income growth.

We are closely monitoring the potential impact of the Affordable Care Act as we are now in our benefits enrollment period, and we will share any potential impact of this on our 2014 guidance during our year-end call.

Lastly, as you may have seen, earlier today we filed a form S-1 registration statement relating to the proposed sale of our common stock held by Apollo and certain other shareholders. Sprouts will not be receiving any proceeds from the sale of stock in this offering.

With that, let me now pass it back to Doug for some closing remarks.

Thank you, Amin.

As seen in the third-quarter results, our sales strength remained strong and profitability remains on track. We continue to attract more and more everyday consumers wanting to eat healthier through our investment in healthy products at affordable prices. The natural and organic sector remains robust, our dedicated team is focused on operations, we've mapped out a clear path for growth and we are confident and excited about the remainder of this year and the years to come.

Operator, we are now ready to take questions.

(Operator Instructions)

Kelly Bania from BMO.

Good evening, and thanks for taking my question. Just a question about the new store productivity, which remains impressively strong, and just thoughts on how you expect that to trend in new markets like Atlanta next year? Maybe just some color on how you experienced new store productivity in the past in new markets in Texas and Colorado when you first entered those markets?

Hi, Kelly, how are you? A couple of key things there to keep in mind is this year our 2013 stores, they performed extremely well, and a majority of these stores opened in existing markets and are doing well. Also, the new stores that we opened in 2012 in certain markets which are not comping yet have also performed extremely well this year.

With respect to new store productivity trends, historically what we have seen -- so based on this year's productivity, I would just say it's a little bit early to call any type of shift in the model. In terms of new markets, historically in the past we have seen that in new markets, productivity can range in the 75% mark and work their way up to, over three or four years in the new market.

And places like Arizona where we have been around for 10 years and our brand is well recognized, new store productivity starts in the 80% to 85% range. So to answer your question, there is generally a 10% to 15% delta between new stores in new markets versus stores in mature markets.

Great. That's helpful. And just one other if I can.

Are you seeing any differences in that ramp from trial to transition given this new strong productivity when those customers transition to those higher-margin categories within your stores? Or is it relatively similar, or how are you thinking about that now?

Well with the new store performance -- hi, Kelly it's Jim Nelson, COO. In the new stores this year, we are obviously seeing some really great success from basket size and great growth in departments Iike grocery, frozen and dairy.

So we obviously have a much more robust offering than we've had in the past with the 1200 more SKU, so we're seeing a bit of a shift. Not a material shift, but a little bit.

Great. Thank you.

Edward Kelley from Credit Suisse.

I was wondering, if the -- from a promotional standpoint, in terms of your own activity, has the intensity or the focus of your promotional program changed at all recently? It does sound like it's been even more effective in driving traffic; I'm just wondering if anything on that side is different today in terms of what you're doing?

Hi, yes, this is Doug. From an intensity of our promotions, I wouldn't necessarily say that it is any different from say last year or in years past.

I think what you're seeing is now that we've completed the integration of the banners, we've had a stronger focus in seeing improved operational performance this year with the stores -- with not having integration on top of everything else, that we've seen a very strong operational performance this year which is just increasing the effectiveness of our promotional performance and our promotional activities. That's what you're seeing in the strong comps we're seeing in traffic and basket size.

I think those customers that were at Sunflower and maybe formally Sprouts and some of these newer promotions are getting more comfortable with the promotions, and the penetration has actually gone up in some of the activities that we do, the BOGO, or the Frozen Frenzy or the 72 hours. So we are getting better traction with our consumer, and they are learning how to shop with us.

Are you seeing anything different from your competition on this front? Hopefully they mentioned yesterday that they been investing a little bit in price and even talked about the response to things they're doing in produce being well-received, and just wondering if you've seen any that?

Is it impacting you? And then in addition, just related, just an update on how your stores are performing that directly compete with Whole Foods?

Well, it's true we have seen some increased competition in some of our markets, but it think it's important to understand that our model is and always has been built on value. Providing healthy foods at affordable prices is really at the core of our business here at Sprouts, and that gives us that very broad appeal that we talked about and really the ability to attract the everyday grocery consumer to our stores. I think, Jim, do you want to add to it?

Yes, I think from a macro operating standpoint, we haven't seen a material shift in how our competitors are competing. We haven't seen a real big shift from a pricing standpoint.

Obviously we're very mindful of our competitors and pricing, and we do price checks on a weekly basis, bi-weekly, monthly, quarterly, semi-annual basis. Obviously that's based on the commodity price elasticity, but we haven't seen a material shift from Q2 to Q3.

Okay. And one final question for you, this might actually end up being a dumb question -- but food stamps, what percentage of your business is this? Is it fairly small? I mean you are value, so.

Yes. It's a very small percentage of our business.

Okay. Thank you.

Karen Short from Deutsche Bank

Hi there. Just looking at your guidance for the full year on your Comps. Can you just talk a little bit about -- I mean obviously it implies a pretty wide range for the fourth quarter on the comp. Any color on what would get you to the high-end versus the low end?

Yes. I was going to start with -- our full-year guidance assumes a midpoint or 9% comp. And given where we are, obviously we don't disclose our October comps or inter-month comps, but given where we are sitting today, we feel fairly confident in ability to reach our comp targets as well as our overall guidance for the fourth quarter of $0.05 to $0.06.

Okay, and then just turning to Atlanta. I don't know if you talked about this more broadly, but any thoughts on how you plan on supplying those stores?

Well, the only thing we self-distribute ourselves is fresh produce. And we will be supporting the Atlanta market in the near-term out of our facility in Dallas. Obviously as I stated on this script, with the goal of having a distribution center in the Southeast at some point.

Right, but the third-party component of it?

There is a third-party component -- not for produce. There will be some local produce, we will get bananas and stuff that will obviously be local, we won't be shipping those across the country. But for deli, bakery, grocery, vitamins and all the other departments, we already have a distributor set up, and supply chain will not be an issue.

Okay. Last question, some pushback I seem to get on your store, which I don't necessarily agree with, is that your advantage in procurement on produce isn't necessarily sustainable as you reach a much larger store count. I don't agree with that, but I am just curious how you respond to that in terms of that not being a constraint to your growth longer-term?

I think we've discussed in the past the decentralized buying strategy and buying model that we have actually increases our scalability as we expand across the country. So having our buyers located -- decentralized and located inside the markets gives us the ability not only to buy local regional and national, but also gives us the flexibility run different items in different regions. So it actually lends itself to increased scalability as we expand.

I think one thing that's very different is that we kind of take a different approach to it. Whether we're in California or we're in Texas, we are very opportunistic and have great relationships with our growers and suppliers.

So if there's 34 loads of oranges on the market and we are taking them and we are probably pushing them through at very low gross margins just to accelerate that. I don't think it's necessarily a distribution, but it's also kind of a mindset that is a little bit different about Sprouts.

I agree. Thank you.

Thank you.

Steven Grambling from Goldman Sachs.

Just a follow-up, I think it was on Ed's questions -- you mentioned stronger discretionary and better basket. Can you tell if that's driven by your core customer spending more or a new customer who's coming in and maybe spending a bigger basket?

When you look at the basket overall, there hasn't been a material shift within the basket, and what I mean by that is within the department. It's been fairly consistent from department to department, and it's really kind of difficult to determine whether that's a big change between the core or transitional.

And then on the private label which was very strong, it didn't really call out -- this is a margin driver during the quarter. Are these primarily being used as low-priced traffic drivers?

Is there a meaningful margin drift benefit? And also is the strength driven by any kind of merchandise changes from last year that you're just lapping over? Thanks.

Great question. It's not a material improvement in margin, obviously we're value oriented and make sure that when we roll out a private label item, we are priced accordingly within the market on like items. But the growth is a function of getting a better focus around private label and merchandising and making sure we're streaming that value to the consumer.

The great opportunity for us with Sprouts' private label is you get one place to buy it, and that's a great opportunity now at 167 stores, and we are really excited about the ability to import products and buy container fulls of products and really get a chance expand our offerings and get into categories that we couldn't have just two years ago. So we're very excited about the future of private label.

That's very helpful; and one more if I may. Just to get Amin back on the line here -- looks like you will quickly be below 2 times on lease adjusted debt to EBITDA. Can you just remind us how you think about the appropriate leverage ratio in capital allocation longer-term? Thanks.

I think no shift in strategy than what we have discussed before, Steven, is that we will continue to look at the best opportunity to reinvest in the business whether it's on new stores and new stores or remodeling stores or new sales initiatives. And to the extent that we have still incremental capital left, we will look to continue to pay down our debt over time.

So we have not really set our target, but we will continue to pay off that. We won't be in a rush, but we'll continue to pay off the $360 million of debt, some every year.

Thanks. Good luck into the holiday.

John Heinbockel from Guggenheim

Two things. I know you want to be disciplined, but given how successful the new stores have been, when if ever do you go back and rethink that 12% physical growth target?

And if you did, where do you think there is a real operational max that you clearly would not want to go beyond? Is 15% that? Or some other number?

Hi, John. This is Doug. On the growth, the pace of growth, obviously the customer experience and customer service is a big piece of what makes Sprouts Sprouts. We are very careful to not get too far ahead of ourselves because obviously having that knowledgeable customer service is -- there is a large training component that comes with that, and we have to make sure that we can supply that and not get too far ahead of it.

Now from a growth perspective, we have a lot of opportunity to continue growth inside the markets that we operate in today, so we are going to continue to maximize that while continuing to look at new markets. But again, we want to make sure that the new markets are even probably right in the 30% range of our total mix as far as the store opening schedule for a year.

Now, at some point in time as we continue to build more infrastructure and we get more comfortable that our training programs are in place and we get a deeper bench, could we look to accelerate that growth? Absolutely.

And we will keep that under review. I can't really speak to what a maximum store count would be, because obviously we haven't gotten to that point yet, but we are very comfortable with that12% plus unit growth that we have stated so far, and we will continue along that path until we are comfortable to look at accelerating.

And with all of the so-called growth to retailers -- accelerating the growth -- I don't know that there's necessarily a race for space, but at this point do you not see good locations going elsewhere? Or because you're looking at different kinds of locations, that's not an issue.

You're not running up against some of these competitors and markets and losing some opportunities. Is that fair?

Yes. I think there's always competition for space. But we are seeing opportunities for Sprouts, like we discussed, is in those industries that are in transition from brick and mortar to online.

We talked about office, we talked about electronics, and some other areas. So again, we are opportunistic, and we've developed really great relationships with all the major REITs out there for new development, and I am confident that there is going to be inventory there as we continue to grow.

I would just add that as we've seen our pipeline continue to get full, it just allows us to be even more selective and more aggressive with landlords in getting the right site and the right location for success.

All right. And then lastly, it's interesting you mentioned premium wines and meats doing very well.

Just talk about the opportunity to continue to move up in price point in those areas and maybe others, but also without damaging your good value perception, because I think that's helped you versus one of your primary competitors. Is there an opportunity at a little higher price point -- wine, meats, and other categories that your customers would buy?

Yes. I think -- Jim again, I'm sorry. I think there is, and the kind of consumer that we are attracting today is not only our core, but we are attracting some of those transitional lifestyle customers right out of the gate.

You have got to be true to what you do; you have to be very careful and opportunistic, and when you look at the holidays, there's an opportunity to shift a little bit, go little more premium. And I think everything has a value, so whether it's [LaCreme] at $11.99, it's still obviously a great value.

So yes, we look at that and we look at categories like gluten-free and organic and raw foods that inherently drive a higher retail, and our consumers are willing to pay for it. I think the consumer is shifting and they are demanding a better product.

Okay, thanks.

Thanks, John.

Scott Mushkin from Wolfe Research.

Thanks for taking my questions. The first, Amin, is to you, and you piqued my curiosity on the ACA comment. Looking at your long-term forecast for 2014, is that inclusive of any additional costs from the Affordable Care Act, or is that excluding what may be additional costs?

Yes. Two comments there. What we were reiterating is that based on what we're seeing in the momentum of the business, we feel fairly confident in our ability to meet our long-term targets next year.

With respect to that ACA component, it really, we just started our open enrolment process and what really is a big piece there is that with the individual mandate coming in, even though the penalties are not significant in the first year, it really depends on would we see any significant movement in the number of participants who are trying to adopt the individual mandate early, if you will, or doing a period of -- where there is a fairly low penalty, not to take it. So I think that once we see what that take is and we finalize our budget, we will have a better sense of whether or not that 17% to 20% will be able to get to, inclusive of it.

But I think overall right now that ACA piece, it's hard to tell, but we feel very good about positioning from a long-term target perspective. We feel really good about where we are sitting today in the business overall and the trends that we're seeing in the business today.

That's perfect, and then I have a follow-up on this. And this is more of a -- not necessarily about your Company, but just generally -- a number of companies we talked to, one of the things that they are being forced to do is increase the cost of dependent care and spouse and dependent care coverage as a way to try to help offset the higher cost. Is that a move that Sprouts has made as well?

No, when we looked at our overall costs this year, clearly healthcare costs are going up. And what we looked at is -- we looked at across the board our programs, our existing programs that have been a place for years and newer programs which we brought into place a couple years ago with slightly higher deductibles, and some of our own programs just made very little sense economically for most of our employee base.

So we decided to phase out those programs and go to slightly higher deductible programs along with some Company contribution to offset it for the employees. Our focus was really was around, for our employee base, what is the best value you can provide at the end of the day and make sure that their family is taken care of from a healthcare perspective.

Okay. Thanks, that's obviously important for you guys; given the service levels that you drive, that's good news. And then I want to move on if that is okay to comps, and maybe the cadence during the quarter.

I know Karen talked about this a little bit. I was wondering if you could maybe talk to the cadence during the quarter. And then I had a follow-up, actually, after you talk to the cadence.

Yes, I think -- we don't break out monthly comps. But during the quarter the consistency has been there now for several quarters in a row.

Beginning in the second quarter, we have seen very consistent comps, and you have seen both second and third quarter, but we're about 10%. And so we have seen good consistency there across the months. So we don't have a situation where one month is 3%, 4%, 5% higher than the other.

Very consistent across all departments as well.

That's a good point, Jim.

That's great, and I have one more. And this is the heart of what Karen was talking about. I think if I do the math, the stack in kind of the midpoint of the range, the stack does slow down quite a bit in the fourth quarter, because I think your compare is decently easier.

Am I reading too much into that? Are you guys just being conservative? How should we view that?

Yes. We had a fairly good comp last year at 8.6%, and we started a number of promotions last year at the Sunflower stores. So we are cycling those now, but at the same time, I think as Jim mentioned, the execution continues to get better as well -- and even in those stores, the customers learning how to shop these promotions that may not have occurred in the previous year. So overall I wouldn't read too much into any suggestion of deceleration of comp, if that's where you were going.

That was, and that is clear. Thanks so much.

Thank you.

I show no further questions at this time, and I would like to hand the conference over to Mr. Doug Sanders for closing remarks.

Thank you. On behalf of the team, I want to thank you for your time today and your interest in Sprouts.

We hope you have a great holiday, and we look forward to speaking with you in the coming months. Thanks very much.

Ladies and gentlemen thank you for participating in today's conference. This concludes our program. You may disconnect and have a wonderful day.