Meet Sprouts Farmers Market, Inc. CFO Amin Maredia

Currently operating in eight states and set to expand, Sprouts Farmers Market (SFM 0.47%) describes itself as a neighborhood grocery store specializing in healthy living for less. CFO Amin Maredia joins the Fool to talk culture, margins, growth, and more. A CPA and HBS alum, Maredia joined Sprouts in 2011 after serving at major companies including PriceWaterhouseCoopers, Burger King (NYSE: BKW), and others.

Maredia sits down with Brendan Byrnes to provide an overview of Sprouts and its approach to business, from culture and customer relations to margins and marketing. They discuss the company's recent acquisitions, target market, metrics, and growth projections.

A full transcript follows the video.

Brendan Byrnes: Hey, folks, I'm Brendan Byrnes and I'm joined today by Amin Maredia, who is the CFO of Sprouts. Thanks for sitting down with us today.

Amin Maredia: Brendan, thanks for having us on the show.

Byrnes: Great. I wanted to first start with someone that might not be familiar with Sprouts. Could you give an overview of what makes Sprouts different from other grocers?

Maredia: Yeah. When you think about Sprouts, just think "Healthy living for less." We're a 27,000-square-foot store, which is about half the size of a conventional grocery store, and we sell fresh, natural, organic in our stores. We have all departments in our stores, from our produce department to our bulk foods department, to bakery, deli, seafood, meat, dairy, frozen, our four-star grocery section, as well as vitamins and supplements, as well as health and beauty care products.

The way we go to market is really focus on four things: We're health, selection, value, and service.

To break that down a little bit, when we think about healthy foods, Sprouts is not a grocery store, which just happens to sell healthy foods; it's what we do. We've got 16,000 SKUs in our store, products across every department, and deep penetration of health foods across the store, especially in products like gluten-free, raw foods, vegan foods.

Second is selection. We have a wide selection of healthy foods throughout the store. We're a small format, again, which makes it easy for shoppers to shop. We're not a store that you're going to find "potatoes to patio furniture and tomatoes to TVs." We're a health food store, and that's what we focus on, and we do that well, with a wide selection of health foods.

Third is value. When was the last time you heard "natural and organic" and "value and affordable prices" in the same sentence? That really differentiates Sprouts.

The last thing is service. Our stores are actually, besides being a medium-sized footprint, very low-profile. If you're standing in the front of the store, the middle of the store, or the back of the store, you can see across the store. What that does is allow customers to see our team members, which are our staff at the store, and staff to see customers. It allows for that engagement point, and a high level of service.

That makes it exciting, but at the end of the day, Brendan, no matter how much I describe Sprouts -- and we describe Sprouts to a lot of people, especially in the Northeast because we don't have any stores here today -- when people come to Phoenix and we take them to the store, in about 10-15 minutes, after they walk through the value prices, they've walked through the selection, they've walked through the energy that you feel from the customers in the store and the service that they see, the next comment is, "This is awesome. When are you coming to my town?" That's when you know you're doing something right.

The last example I would use is a customer one, which is when you do a word cloud on social media on Sprouts, one of the biggest words that pops up is "love." When was the last time you heard the word "love" about a grocery store?

Byrnes: Sure. 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?

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.

Byrnes: What are some big metrics that you look at, at Sprouts, and what are some that investors should pay attention to?

Maredia: We look at a number of metrics, but I think the key metric is, Sprouts has always been a sales company. We've always been a top-line company, so our lifeblood is, we look at traffic.

We look at traffic; we've always been 50/50 traffic and ticket, so traffic is a very important number to us. What customers are buying, our department comps; we look at those, and that's important to us. The other thing that's important to us is consistency across all the states; making sure that no states are falling behind.

One of the most important ones to me is looking at customer service and customer compliments. Of course, there are other risk metrics that we also look at in the store, like slips and falls in the store, etc. that are more risk-management-based, but I think that, to sum it up, traffic and customer service, at the end of the day are the two biggest metrics I look at.

This year has been fantastic. We've been running double-digit comps most of this year. Over the last couple of years, we've been running double-digit comps. In the recession, we were one of the few companies who continued to drive positive traffic and comps -- few retailers out there -- throughout the recession. That just shows the resiliency of the business, and the resiliency of the model, as more and more people are looking to eat healthy today.

Byrnes: How about margins? Obviously, grocery stores have been known to be a very low-margin business, overall. How do you guys look at margins when it comes to the choice between keeping prices low, versus using that incremental and the margins on the upside? What's your balance there, and where do you like that to be, long term?

Maredia: Today, we're about an 8% EBITDA margin business. When we think about margins, we're in the very early innings of Sprouts, at 167 stores. Over time, just in the U.S. we'll have 1,200-plus stores, so seven times of where we're sitting today.

When we look at our margin structure and our profitability structure, there are two key elements. First is, we want to be very disciplined about keeping the cost and the investment per store very low. On average, we build our stores for about $2.5 million -- which is incredible, best in class in the industry -- which really allows us to pass on the savings to the customers.

We're going to take the no-beat attitude in natural and organic; in every department we are going to be the lowest-priced company. The first question, when we have increased leverage and synergies and buying costs and occupancy costs, etcetera, we ask ourselves, "Do we need to invest more and create a deeper moat in our business for the long term?"

We're too early in the phase of Sprouts to harvest margins, so we'll continue to see 10-20 basis points of margin accretion a year, but we don't want to push too hard on that at this point. We've got a decade, two decades of growth ahead of us, and we'll worry about harnessing margins at a much later point in time of our history.

Byrnes: How about culture? I know a lot of companies that have been successful -- Costco (COST -0.12%), The Container Store (TCS -2.34%), etc. -- view culture as a huge part of that success. They pay employees more than they probably have to, their turnover is very, very low. How does Sprouts view that, when you're talking about over 14,000 employees? Do you see this as a priority?

Maredia: Brendan, I'll tell you that when I came out of Harvard Business School I talked to about 45 different companies. I chose Sprouts for two reasons. One was the business model and the strength of the business model and the industry trends, and the second was culture.

The culture is one of doing the right thing at all times. It's a very customer-focused, and a very employee-focused culture, and that's what really Sean and Stan, founders of the company, build the culture on; phenomenal guys. Doug Sanders, who became president in 2005 when we had 10 stores, really continued to embody that culture; he's a true leader from behind.

The entire senior executive team, when we think about over the long term what do we need to protect in this business, the culture is one of the most important things to us. We sometimes joke and say, "No matter how smart somebody is, if they don't fit our culture, they're not right for Sprouts." We see that in the stores every day.

We have not only an open door at the support office, but even in the stores. You're never going to find me dressed like this in the store. It's going to be jeans and a T-shirt. It's going to be a Sprouts T-shirt. At the end of the day, we're in the people business, and we're in the service business, for our customers and our employees.

The company has just got a phenomenal culture, and one of our biggest challenges is to make sure we protect that and continue that as we move forward and become a larger company.

Byrnes: A lot of our viewers that are watching right now, and a lot of our members, are invested in Whole Foods (WFM). Could you talk about whether you view them as a competitor, how you see Whole Foods, and the contrast there?

Maredia: Yeah. I think there are several points here. First is, anybody who sells grocery is our competitor, because our focus and our core customer is really the everyday supermarket customer. For us, it's the middle income, upper-middle income. We focus on going into areas where there is median income all the way up to upper-middle income or to a higher-income customer; from a lifestyle customer to somebody who is new and starting to learn how to eat healthier, so it's a very broad customer base that we have today.

Really, our primary competitor is the everyday supermarkets. That's who we're competing with on a day-in, day-out basis. We're in the same markets as Whole Foods. I think three of their four largest markets are California,Colorado, and Texas, and those are also three of our largest markets today. We've been coexisting with Whole Foods for almost a decade now, so nothing new for us.

Byrnes: I wanted to ask you; you mentioned "traditional" grocers. They're getting more into the organic/healthy, albeit slowly. Is this something you see as a possible threat, and does that change the way you do things at all?

Maredia: I think when you really look at retailing, and you look at what Sprouts does and the tenets that we're built on -- health, selection, value, and service -- over the last 20-30 years, since Wal-Mart (WMT 0.57%) got into the game, conventional retailing became focused on sales per square foot and how to cut cost out of the system.

You're seeing lower service in the stores today, lower investment back into the stores today; all the things that make food retailing exciting, attractive to customers. As we go forward, we're continuing to focus on what we know, what food retailing was successful back in the '50s, '60s, '70s; putting a new dimension to it, which is the healthy trend.

Two of the biggest things that we hear customers talk about when it comes to healthy living is, "I don't know where to start," and "It's too expensive," and Sprouts is breaking both those barriers.

Byrnes: Let's talk about your recent IPO. It popped over 100% and it's maintained that, pretty much. Could you talk about the process leading up to the IPO, what that was like, and also how Sprouts changes now, as a public company?

Maredia: This was my third IPO. I think that, from a company standpoint, if anything it's been a positive because it's allowed our brand to get out in the public marketplace a little bit more. As far as changes, we're laser-focused on the four tenets of the business, and focused on opening the stores right, focused on training in the stores, focused on growing talent within the stores.

One of the things I think is a positive benefit of becoming a public company has also been that attracting talent has become even easier. Over the last year it's been incredible, some of the people we've been able to hire. I've been in scenarios where somebody comes in to interview, and I sit back and reflect -- because I've come from $20, $30, $40 billion companies and you step back and go, "Am I going to be able to attract this person?" -- and the same night you get an email from that person, who's passionate about coming to Sprouts. That's fun.

Really, as we go forward it's so important to the success in the future for the company.

Byrnes: Let's talk longer term, maybe 10 years out. What are some of the big drivers that investors can expect if they're going to hold the stock for a while, like we would; we're long-term investors here. Not in-and-out. If they were looking for the long-term trends, what are we doing?

Maredia: Well, we hope every investor is like Warren Buffett: Buy the stock and put it in the drawer!

Byrnes: Yeah, exactly. His favorite holding period is "forever."

Maredia: I think what I laid out in terms of our four key things -- of healthy food, service, value pricing, and selection -- is something that, baseline, we have to continue to do as a company. Culture and building talent; that we have to continue to do. We have a great leadership team who has been at $10, $20, $30 billion companies in their past, so who knows how to grow the company, so we're not worried about that.

Then when you think about five to 10 years out, you've really got to step back and reflect and look at food retailing and customer-facing companies. There's a lot of research, and you see a lot of the successful companies; you mentioned some. Whether it's Apple (NASDAQ: AAPL) or McDonald's (NYSE: MCD); I actually like 7-Eleven. It's been a very successful retailer over the last decade. You look at companies that sustain, and what have they done really well? When I was in business school, if I've learned one thing in business, it's that you hear the term "customer-centric" sometimes, but I like to use the term "product sense."

For us to be successful long term, we've got to have good product sense. That to me means one, product innovation has to be there, and second you have to really focus on the customer and what the customer wants. Sometimes, the customer may not know what's coming up and that's where product innovation plays a key role.

Today, health, selection, value, and service are our key tenets. As we go forward, there may be different things. Today we're looking a lot at how do we engage more with the customer, just not in our stores, but outside the store?

We send over 11 million flyers to our customers every week, and that's one point of engagement. We're starting to look more and more at social media engagement and have some fantastic platforms that we're building out to engage with me, talk to me as a consumer -- because remember we cater from the everyday supermarket customer to the lifestyle customer.

There's a lot of young people who are coming into our stores, and the millennials more and more are looking for knowledge, and are looking for ways to understand attributes in products. They're not just looking for that big brand; the Coke or Pepsi or Tide. They're looking for "What's actually in my product? What is the attribute of the product?"

That's exciting for us, and it plays right into our wheelhouse, so we have some pretty exciting things under way to build on that. The bottom line is, as we grow as a brand we've got to continue to widen our moat. When we see our service scores -- which are way higher than your conventional supermarkets' -- that's not good enough for us. It's continuing to widen the moat, continuing to look forward, to the side, and to the back.

Byrnes: How about advertising? Some would say that advertising is evil because it eats into margins in an already low-margin business. Some would say that branding is important -- it's so competitive in this space. How do you view advertising at Sprouts, and how does that factor into the capital allocation process?

Maredia: Advertising is really interesting at Sprouts. Prior to Sprouts, I was at a couple of big brand-name companies who had massive advertising programs. Sprouts, over the last decade, has really been a brand that's built from the bottom up. The biggest voice of the brand today is the consumer, and I think there's no more powerful way to build the brand than the consumer speaking.

I give the example, when a customer says, "I love Sprouts," those are the things that get us excited and make the brand work. As we move forward, when we think about advertising, we think about advertising as, first, letting customers know what we sell and educating them on what we sell. Two, showing them that we're value, and we're not value in one department or another department; we're value across the store.

I think a lot of people are, still today, looking for simple ways to eat healthier and it's a huge opportunity for us to continue to engage with that customer, in the store and outside the store, and build on that. A lot of that is part of our advertising platform.

We've actually recently combined our advertising; our CMO and our CIO is one position now, because of what we're seeing happen in the digital world.

Byrnes: Word of mouth is the most powerful advertising, right?

Maredia: Absolutely. When we talk about, our brand is really built from the bottom up, we get over 3,000 emails from customers a year saying, "When are you coming to this area of town?" or "When are you coming to my town?" That's the most powerful compliment that you can get from a customer.

Byrnes: How about challenges at Sprouts? What keeps you up at night as CFO?

Maredia: I think you hit on it earlier; maintaining our culture is important as we grow as a company. It's an opportunity to continue to expand on that culture and maintain that culture, and that's very important in who we are. We take hiring very seriously; when we're hiring, we're looking for certain attributes from people.

Of course, you want smart people, but you also want hard-working people. I think you guys call it the "motley value." To me, one of the biggest motley values would be curiosity. We have 14,000 employees today. If you could have 14,000 curious people, that's pretty powerful.

I think these are the things that we continually focus on, and as we're growing, even more important for us to continue to build on.

Byrnes: Great discussion. Thank you so much for your time today.

Maredia: Thank you.