Good day, ladies and gentlemen and welcome to Sprouts Farmers 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 hand the conference over to Ms. Susannah Livingston, Vice President, Investor Relations and Communications. Ma’am, you may begin.

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 10-Q, 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 revision to these forward-looking statements in light of new information or future events. For more information, please refer to the Risks 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 and 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. This is 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 in 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 top line growth. Revenues grew 24% during the quarter driven by new store openings and continued momentum in comparable same-store sales, which ended the quarter at 10.3% and 20.3% on a two-year stack basis underscoring the everyday consumer’s desire for healthier foods at affordable prices. As you know, the foundation of 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 transitioned many of these Sprout 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…

Thank you, Doug and thank you all for joining us today on the call. Before I start I want to remind you that we will refer to our 2012 financial results on a pro forma basis giving effect to our May 2012 acquisition of Sunflower Farmers Market as if that 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 the 2013 and deliver another strong quarter. New stores continued to perform above expectations through our brand building efforts and a more robust product offering. Comparable same store sales up 10.2% continued to be strong on a year-over-year basis and were consistent across all the departments, geographies and vintages. Our more recent vintages in our comp base also continued 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 the strong quarter comp performance, our two-year stack comparable store sales growth totaled 20.2% for the quarter. Gross profit for the third quarter which includes occupancy, buying and utility cost 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 realignment that we implemented in the third…

Thank you, Amin. As seen in the third quarter results, our sales trends remained strong and profitability remained on track. We continued to attract more and more everyday consumers wanting to eat healthier through our investment in healthy products at affordable prices. And natural and organic sector remains robust, our dedicated team is focused on operations we have mapped out a clear path for growth and we are confident and excited about the remainder of this year and years to come. Operator we are now ready to take questions.

Thank you. (Operator Instructions) And our first question comes from Kelly Bania from BMO.

Hi, good morning, thanks for taking my – good evening 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 maybe in Texas and Colorado when you first entered those markets?

Hi, Kelly. How are you? 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. And also the new stores that we have opened in 2012 in certain markets which are not comping yet are – 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, four years 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 generally starts in the 80% to 85% range. So to answer your question, there is generally a 10%, 15% delta between new stores and new markets versus stores in mature markets.

Great, that’s helpful. And then just one other one 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 is it – how are you thinking about that now?

Well, with the new store performance – hi, Kelly, it’s Jim Nielsen, COO. The new stores this year were obviously seeing some really great success from basket size and great growth in departments like grocery, frozen and dairy. So we obviously have a much more robust offering that we have had in the past for the 1200 more SKUs. So we are seeing bit of a shift, not a material shift, but a little bit.

Great, thank you.

Thank you. And our next question comes from Edward Kelly from Credit Suisse.

Yes, hi, good afternoon. Guys, 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 and I am just wondering if anything on that side is different today in terms of what you are doing?

Hi, Ed this is Doug. From an intensity of our promotions, I would necessarily say that it’s any different in say last year or in years past. I think what you are seeing is now that we have completed the integration of the banners. We had a stronger focus in seeing improved operational performance this year with the stores with not having the integration on top of everything else. So we have seen a very strong operational performance this year, which is just increasing the effectiveness of our promotional performance and our promotional activities. And that’s what you are seeing in the – the strong comps we are seeing in traffic and basket size.

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

And are you seeing anything different from your competition on this front, hopefully they mentioned yesterday that they been investing a little bit in price, they even talked about the response to some things they are doing in produce being well-received. And just wondering if you have seen any that? Is it impacting you? And then in addition, just related just an update on how your stores are performing that sort of directly compete with Whole Foods?

Well, I mean, it’s true. We have seen some increased competition in some of our markets, but I 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 just the everyday grocery consumer to our stores. So I think Jim, do you want to add to that question?

Yes, I think from a macro operating standpoint, we haven’t seen a material shift in how our competitors are feeling. We haven’t seen a real big shift from a pricing standpoint. Obviously, we are very mindful of our competitors in 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 material shift from Q2 to Q3.

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

Yes, it’s a very small percentage of our business.

Great, okay thank you.

Thank you. And our next question comes from 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 what – I mean obviously it implies a pretty wide range for the fourth quarter on the comp, any color on what would get you kind of the high end versus the low end?

Yes, I am just going to start with this, our full year guidance assumes sort of a midpoint of a or assumes a 9% comp. And given where we are obviously we don’t disclose October comps or inter-month comps, but given where we are sitting today we feel fairly confident in ability to each – 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, but obviously with as I stated on the script we are with that a goal of having a distribution center in the Southeast at some point.

Right, but the third party component of it?

Well, look there is a third party component not for produce, I mean 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 all the other departments we already have a distributor setup and supply chain will not be an issue.

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

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

And I think one thing that is very different is that we cannot take a different approach to it. So whether we are in California or we are in Texas, we are very opportunistic and have there relationships with our growers and suppliers. So if there is 34 loads of oranges on the market and we are taking a more probably pushing through it very low gross margins just to accelerate that. So just I don’t think it’s necessarily a distribution but it is also kind of a mindset that’s a little bit different about Sprouts.

Yes, I agree. Thank you very much.

Okay, thanks Karen.

Thank you. And our next question comes from Steven Grambling from Goldman Sachs.

Good evening. Thanks for taking my question. Just a follow-up I think it was on Ed‘s questions just you had mentioned stronger discretionary and better basket can you tell us that’s driven by your core customers spending more or a new customer who is coming maybe spending a bigger basket?

When you look at the basket overall there isn’t going to be a material shift within the basket. And what I mean by that is I mean what’s the department. So it’s been fairly consistent from department to department and it’s really kind of difficult to determine whether there is 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 in the quarter, are these that primarily being used as low priced traffic drivers or is there a meaningful margin drift benefit and also is the strength driven by any kind of merchandise changes from last year that you are just lapping over? Thanks.

It’s a great question. Is that a material improvement in margin, obviously we are value-oriented, make sure that when we rollout private label item we are priced accordingly within the market unlike items. But the growth is a function of getting a better focus around private label and merchandising and make sure that we are streaming that value to consumer. The great opportunity for us with Sprouts private label is you got a one place to buy it and that’s a great opportunity now at 167 stores. We are really excited about the ability to import products and buy container fulls of products and really get a chance to expand our offering and get into categories that we couldn’t have just two years ago. So we are very excited about the future private label.

That’s very helpful. And one more if I may, just to get Amin back on the line here, it looks like you are going to quickly be below two 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.

Yes. 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 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 haven’t really set our target, but we will continue to pay off that. We will be in a rush while we continue to payoff that $360 million of debt sum every year.

Okay, thanks. Good luck into the holiday.

Thanks Steve.

Thank you. And our next question comes from John Heinbockel from Guggenheim.

Hey guys. So 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 the 12% physical growth target? And if you did where do you think there is sort of 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. So on the growth, the pace of growth obviously the customer experience and customer service is a big piece of what makes Sprouts proud. So we are very careful not to get too far ahead of our sales, because obviously having that knowledgeable customer service, there is a large training component that comes in that and we have to make sure that we can supply that and not to be too far ahead of it. Now from a growth perspective, we have a lot of opportunity to continue growth inside the markets that we will 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 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, because 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 got to that point yet, but we are very comfortable with our 12% plus unit growth that we 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, food retailers, accelerating their growth, I don’t know that there is necessarily a race for space, but at this point do you not see good locations going elsewhere or because you are looking at different kinds of locations, that’s not an issue, you are not running up against some of these competitors and markets and losing some opportunities. Is that fair?

Well, yes, I mean, I think there is 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 have developed really great relationships with all the major REITs out there for new development. And I mean I am confident that there was going to be inventory there as we continue to grow.

And as I said that quick add I would make is this, as we have 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.

And then lastly, it’s interesting you mentioned premium wines and meats doing very well, so 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, some other categories that your customers would buy?

Yes, I mean I think there are – so this is Jim again, I am sorry. I think there is a 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. So you got to be true to do what you do, so you got to be very careful and opportunistic and when you look at the holidays there is an opportunity to shift a little bit and go a little bit more premium. And I think everything has a value so whether it’s (indiscernible) $11.99 it’s still obviously great value. So we look at that, 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, so I think the consumer is shifting, they are demanding a better product so…

Okay thanks.

Thanks John.

Thank you. And our next question comes from the line of from Scott Mushkin from Wolfe Research.

Hi guys. Thanks for taking my questions. So the first Amin is to you and you kind of peaked my curiosity on this ACA comment looking at your long-term forecast for ’14, is that inclusive of any additional costs from the Affordable Care Act or is that excluding what maybe additional costs?

Yes, two comments there is what we were sort of reiterating is that based on what we are 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 the ACA component, it really we just started our open enrollment 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 thoroughly if you will or during a period of where there is 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 on whether or not that 17% to 20% we would be bale to get to inclusive of it. But I think overall right now the ACA piece that’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 are seeing in the business today.

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

No, when we looked at our overall costs this year clearly healthcare costs were going up. And what we looked at is - we looked at across the board our programs, our existing programs which have been in place for years and newer programs which we brought into place a couple of years ago with slightly hard deductibles. And some of our old 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 employee. So our focus was really 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 taking 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. So then I had – I want to move on if that’s okay to the comps and maybe the cadence during the quarter I know Karen talked on this – about this a little bit, I was wondering if you can 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 breakout monthly comps but during the quarter the consistency has been there now for several quarters in a row, beginning it’s the second quarter we have seen very consistent comps that you have seen both second and third quarter, but we are 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.

It’s very consistent across all departments as well.

That’s a good point.

That’s great and then 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 the 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? And then…

Yes. We had a fairly good comp last year at 8.6%. And we started the 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 is the executions continues to get better as well as even in those stores the customers learning how to shop these promotions that may not have occurred in the previous years. So overall, I wouldn’t read too much into any sort of suggestion of deceleration of comp if that’s where you were going.

That was and that’s clear. Thanks so much.

Alright, thanks Scott.

Thank you. I am showing no further questions at this time. 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. Thank you very much.

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