Sprouts Farmers Market CFO on Growth and Capital Allocation

Operating in eight states and set to grow, Sprouts Farmers Market (SFM 1.64%) describes itself as a neighborhood grocery store specializing in healthy living for less. CFO Amin Maredia joined the Fool to talk culture, margins, growth and more. A CPA and Harvard Business School alum, Maredia joined Sprouts in 2011 after serving at major companies including PricewaterhouseCoopers and  Burger King.

Moving into its ninth state as 2014 dawns, Sprouts is set to expand into a whole new region by midyear. In this video segment, Maredia discusses the company's growth strategy and shares the two questions he asks first when it comes to capital allocation.

A full transcript follows the video.

Brendan Byrnes: Let's talk about your strategy for growth. It's been a pretty highly acquisitive company, Sprouts has. Is that something we should expect going forward, or is the balance going to shift more toward organic growth? How do you see it?

Amin Maredia: I think the two acquisitions we did over the last couple of years were natural -- no pun intended! Both Henry's and Sunflower had legacy. Henry's was actually started by the same family who started Sprouts, and Sunflower had similar roots. All three of them were the same footprint, similar go-to-market strategy, similar products, so it made it a natural acquisition.

Going forward, we really see this as an organic growth story. We're in eight states today. We're opening our ninth state Wednesday, and in the middle of the year we're going to the Southeast, which is going to be a very new, exciting region for us. We're going to start in Atlanta, and then continue to expand from there over the next several years.

Byrnes: How do you decide how many stores to open per year? Like you said, you're in eight states, going into nine. How do you strike that balance between growth but also not growing too fast when you have such a big runway, just state-wise in the continental United States?

Maredia: I think there's a few things here. There's plenty of evidence, if you look at history over the last 30, 40, 50, 60 years, of companies "growing, growing, gone." I think there's a lot of backdrop here, and context, to think about.

When I think about Sprouts, and when we think internally as a management team about how fast to grow, there's a few metrics that we look at. First of all, over the last couple of years we've enjoyed incredible success of integrating and bringing consistency of all three brands together. It's one brand today, Sprouts, moving forward.

We're very excited about the improvement in the level of product, in the level of operational execution, in the level of service. When we think about growth, we have a very disciplined methodology to grow. We started in Arizona, then went to California, then went to Texas, then went to Colorado.

In every market we go to -- for example in Texas we started in Dallas, built a few stores, got a management team put in place, then started opening in the surroundings in Houston, Austin, San Antonio, then went to Oklahoma, and now we're going to Kansas City -- a very methodical approach.

For me, the key thing from an opening perspective is we look at customer service scores, customer compliments, our traffic in the stores, our overall operational scores, as well as our risk profile scores in the store. Then just the energy in the region; when that region's ready, we build more stores there.

Today, we're growing at about 12%-13% a year, which feels pretty good and confident. We continue to revisit that, to say, "What is the right pace of growth for us?"

Byrnes: I think a related question is capital allocation, which investors will tell you is one of the most important things as far as management team, when they're trying to evaluate. How do you especially, as CFO, evaluate capital allocation and, relatedly, your decision-making? What's your process on that?

Maredia: I'm going to give you a pretty nonconventional answer, from a capital allocation standpoint. We talked about growth and our disciplined methodology about growth. Today, we have way more sites than we want to open, which really gives us a choice of who we want to go with, which landlord we want to work with, which corner we want to go on. It's a great "problem" to have, if you will.

Then once it gets past new store growth, capital allocation to me is... I think too many people look at capital allocation, as CFOs, financially. The first question that I ask is, "Is this good for the customer?" If it's good for the customer, it's probably going to make you money over time. The second question is, "Is it core to what we do as a business?"

Once you get past those two frameworks, only then do you want to have a financial discussion around it. That keeps you rooted in who you are as a business, and being very customer-focused and customer-centric around it.