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Metrics and Margins at Sprouts Farmers Market, Inc.

By Brendan Byrnes – Feb 28, 2014 at 12:00PM

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It all comes down to traffic and customer service, according to the CFO.

Currently operating in eight states and set to expand, Sprouts Farmers Market (SFM 1.86%) 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 Harvard Business School alum, Maredia joined Sprouts in 2011 after serving at major companies including PriceWaterhouseCoopers, Burger King, and others.

Amin Maredia says Sprouts emphasizes two main metrics; traffic and customer service. In this video segment, he also explains the two key elements of the grocery chain's approach to margins and profitability, and says the company will be focusing on growth over margins in the coming years.

A full transcript follows the video.

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

Amin 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.

Brendan Byrnes has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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