Sprouts Farmers Market, Inc. (SFM) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to Sprouts Farmers Market Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Susannah Livingston. Please go ahead.

Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our third quarter 2026 earnings call. Nick Konat, President, Chief Operating Officer and incoming Chief Executive Officer; Curtis Valentine, Chief Financial Officer; and Jack Sinclair, outgoing Chief Executive Officer, are with me today. The earnings release announcing our third quarter 2026 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website at investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2026 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings and the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures. With that, let me hand it over to Jack.

Thanks, Susannah, and good afternoon, everyone. Before we get into the quarter and an update on our business. I am looking forward to working with Sprouts in a different capacity as Executive Chairman. It has been the opportunity of a lifetime to be the CEO of Sprouts. We have grown the business, strengthened our competitive position and built a more resilient organization. I'm especially proud of the culture behind that progress and the thousands of team members who bring our purpose to life every day. I feel very good about entrusting Sprouts next chapter to Nick. He knows our company, our customers and our opportunities well. The Board and I have great confidence in him, the broader leadership team and the long-term potential of Sprouts. We recognize that our recent performance needs to improve. While the consumer environment and the Cyclospora disruption affected the quarter, we also have work to do to strengthen our execution and customer proposition. In a few moments, Nick will outline the actions we are taking and the investments needed to support stronger performance. For now, I will turn it over to Curtis, who will discuss results and our updated outlook. Curtis?

Thanks, Jack, and good afternoon, everyone. Before I review the quarter, I want to thank Jack for his leadership of Sprouts and for the partnership over the years. I'm looking forward to working with him in his new role. For the third quarter, after seeing progress in our sales trajectory through July, comparable sales softened in August and September and did not improve as comparisons eased. Total sales were $2.3 billion, up $104 million or 5% compared to the same period last year. This growth was driven by strong new store performance, partially offset by a 0.9% decline in comparable store sales. The comp results reflect the Cyclospora for disruption, which reduced comparable store sales by approximately 60 basis points during the quarter. The decline was driven by a 3.3% decrease in comp transactions, partially offset by a 2.5% increase in comp basket. These factors inform both our revised outlook and the investments we will discuss. New stores remain a key proof point around the overall potential of our model. Our 2026 vintage is outperforming our expectations and our recent vintages are comping positively, reinforcing our confidence in the long-term unit growth opportunity. E-commerce was another bright spot in the quarter, with sales growing 12% and representing more than 16% of total sales. This month, we also expanded our e-commerce reach with the launch of Shipt, our fourth platform. Sprouts brand also continued to outpace national brands in our stores and represented approximately 26% of sales. Both of these growth drivers benefit from our differentiated assortment and products customers often cannot find elsewhere. Gross margin for the third quarter was 38.2%, a decrease of 50 basis points compared to the same period last year. This primarily reflected higher shrink due to lower sales in the Cyclospora disruption, as well as higher fuel costs. These pressures were partially offset by the benefits from self-distribution. SG&A for the quarter totaled $683 million, an increase of $30 million and a decrease of 10 basis points as a percentage of sales compared to the same period last year. This was primarily driven by fixed cost deleverage from lower comparable store sales, partially offset by lower incentive compensation compared to the last year. We continue to pursue opportunities across the short, medium and long term to manage costs effectively while supporting our strategic priorities. Depreciation and amortization, excluding depreciation included in the cost of sales, was $45 million. For the third quarter, our earnings before interest and taxes were $153 million. Interest expense was approximately $1 million, and our effective tax rate was 25%. Net income was $113 million and diluted earnings per share were $1.21, down 1% compared to the same period last year. Turning to unit growth, we opened 15 new stores, representing our largest quarterly opening cadence. We also closed 1 underperforming store at lease expiration, resulting in 504 stores across 25 states at the end of the quarter. Year-to-date, Sprouts has opened 27 net new stores. Our pipeline remains strong with more than 105 executed leases and over 160 approved new stores. We continue to expect 42 net new stores in 2026. Our balance sheet and cash generation continue to provide flexibility. Year-to-date we have generated $555 million in operating cash flow and invested $275 million in capital expenditures net of landlord reimbursement. We returned $299 million to our shareholders through the third quarter by repurchasing 3.9 million shares and have $537 million remaining on our $1 billion share repurchase authorization. Based on current activity, we now expect full year share repurchases to exceed $300 million. We ended the quarter with $229 million in cash and cash equivalents and $22 million of outstanding letters of credit. Turning to our outlook, recent trends support a more measured view for the remainder of the year. Traffic units and frequency are not recovering, even against easier compares that began late in the third quarter. This was an important signal that the pressure on the business was not cyclical and that a more meaningful response is required. Our revised outlook reflects those recent trends and the actions we are taking to increase and accelerate investments to improve affordability and to strengthen the long-term health of the business. We are listening to our customer, and we need to respond now to help them live and eat better in a challenging backdrop. As a reminder, 2026 is a 53-week year, with the extra week falling at the end of the fourth quarter. For the full year, on a 52-week basis, we now expect total sales growth of approximately 4.3% and comparable store sales of approximately negative 1.7%. We continue to expect to open 42 net new stores. Earnings before interest and taxes are expected to be approximately $605 million. We expect our corporate tax rate to be approximately 25% and capital expenditures net of landlord reimbursements to be approximately $310 million. Diluted earnings per share are expected to be approximately $4.80, assuming more than $300 million in share repurchases. For the fourth quarter, we expect comparable store sales to be between negative 2% to negative 4%, and diluted earnings per share to be between $0.47 and $0.51. This includes gross margin deleverage of approximately 90 basis points driven by deeper investments in affordability and SG&A deleverage of approximately 170 basis points driven by fixed cost deleverage due to lower-than-expected comps and higher store labor and benefits costs. Our full year outlook is presented on a 52-week basis. We now expect the additional 53rd week to contribute approximately $190 million of sales, $20 million in EBIT and $0.16 of diluted earnings per share. As Nick will discuss more in a moment, we know our challenges and are taking significant actions to address our performance for the long term. These actions include investments in affordability, technology and supply chain. While we plan for near-term margin pressure as we reset the business for long-term growth, we expect EBIT margins to remain above 5%. From there, we remain committed to using the self-help opportunities we've previously discussed to rebuild our margin profile over time. Over the next several months, we will assess customer response and refine the scale and pace of our investments accordingly. And with that, let me hand it over to Nick.

Thank you, Curtis. And Jack, thank you for your leadership, your partnership and your commitment to Sprouts. I look forward to continuing working together in our new capacities. For the past 4 years, I have had the opportunity to help shape and execute our strategy. That experience has given me a deep understanding of what makes Sprouts distinctive, where we need to improve and how much potential remains ahead of us. We operate in the health and wellness market with a target customer who is focused on healthy, fresh and innovative ways to meet their nutrition needs. These customers remain an attractive and growing segment of the U.S. food-at-home market with an estimated market opportunity of more than $290 billion. We have a unique position in the market. Our curated assortment and product innovation continue to differentiate Sprouts. Strong recent store openings across established and newer markets reinforce the appeal of our proposition, while our strong store pipeline and smaller format model provide a long runway for disciplined growth. These strengths give us confidence in our model. At the same time, our recent performance is not where it needs to be. We understand why. We are taking actions to improve it. Competition is intensifying. Affordability is a bigger driver of choice. And the target customers' needs are constantly evolving. Sprouts must evolve faster as well. Our level of innovation, investment and execution must rise to meet the customer and market opportunity in front of us. Our customers continue to tell us they love Sprouts, particularly our shopping experience and the differentiated products that help meet their individual needs. At the same time, they're looking for us to make healthy eating more affordable to help them meet their evolving nutrition and health goals. That is the larger opportunity for Sprouts to become an even more relevant and trusted partner, leveraging our strengths with innovative products, practical meal and health solutions and greater value, giving them more reasons to shop with us. As I step into the CEO role, we have more work to do, but our immediate priorities are clear: improving comparable sales and customer traffic. We are already taking actions that will affect the fourth quarter and shape our plan for 2027. Today we need to do more to support our customers and strengthen the Sprouts proposition to be more accessible and affordable. Our efforts to date have not been enough, and our current pricing strategy has not delivered against that goal. This means making more meaningful price investments across a broader range of products. To that end, we are rebuilding our pricing strategy, and we'll roll it out nationally in January when Sprouts is most top of mind for healthy solutions. This is not a shift to broad-based discounting or an effort to compete on price alone. Our objective is to offer more compelling value within our differentiated proposition by offering a greater role for Sprouts brand, innovative products across price points, value on healthy essentials, convenient meal solutions, and a personalized experience to help customers discover and save. We have seen encouraging customer response to assortment innovations such as wellness goals, price below $10, $29.99 family meals for 4, and fresh baked organic sourdough for $4. These are examples of how Sprouts can combine differentiation, quality, convenience and value in ways meaningful to our customers. We need to build that response and go further. For the holidays, we are going to be reducing prices on healthy and holiday staples across the country, a deeper investment on the key items most important to our customer and what drives them into stores. Supply chain will remain a significant self-help lever to drive profitability. Greater control over freshness, service levels, inventory and shrink will help us respond faster to changes in demand and improve execution over time. We are now planning the next phase of self-distribution with a selection of Sprouts brand products representing a logical next step as we look to expand the benefits of our network. Technology will also be another critical enabler. Modernizing our systems and selectively applying AI will help us connect data across the business, move faster and scale more efficiently. The growing amount of first-party data captured through loyalty will deepen our understanding of customers while giving our marketing teams better insights into reaching prospective customers who most resemble our loyal shoppers. We recognize these investments will affect our near-term margins. Our immediate priority is to strengthen the customer proposition and support healthier traffic and sales. Over time, we believe stronger sales performance, together with expanded self-distribution, improved retail media, vendor partnership, sourcing initiatives and continued cost savings can help us rebuild profitability and create long-term shareholder value. As we look ahead to 2027 and beyond, we have 3 jobs to do, all grounded in serving our customers better and giving them more reasons to choose Sprouts. First is to grow our reach. We will continue opening high-quality new stores and expanding e-commerce, bringing Sprouts to more customers and making it easier for them to find the unique items they need. Second is strengthening our model. We need to accelerate the differentiation that brings customers to Sprouts and make healthy eating more affordable. That means increasing the pace and impact of innovation, investing where value matters most, and improving freshness and availability, all while preserving the distinctive experience our customers value. We are also evaluating opportunities to refresh the experience in our stores and make our products and solutions easier to discover. And third, build what's next. We have the potential to become a stronger partner in our customers' health journeys. Our forging team will keep Sprouts at the forefront for their health and wellness needs, partnering with emerging brands early in their journey in developing practical solutions, their evolving priorities through our Sprouts brand. Connecting that differentiated assortment with deeper customer insights and more personalized engagement will help us deliver practical solutions that are relevant and easy to discover. In addition, our culture will remain a fundamental differentiator in how we win. Our approachable, knowledgeable team members and their personal connections with customers are central to what makes Sprouts distinctive. As we grow, we will continue to strengthen that culture, both in the experience we deliver to customers and in the opportunities we create for team members to learn, grow and build careers. That commitment underpins the freshness, service and consistent executions customers experience in every store. In summary, we are clear on our direction: put the customer at the center, extend our differentiation, improve affordability and build the capabilities to unlock value for our customer and our business. We are clear on our priorities and are moving with urgency, while continuing to refine our longer-term plans. Sprouts has a differentiated model, a large and growing customer segment, compelling unit growth, and a great team and culture that's hard to replicate. This gives me confidence in our next chapter and our ability to create long-term value for our customers, team members and shareholders. Now I will turn the call back to Jack.

Thanks, Nick. Before we close, I want to thank our team members across the company. The progress we have made in helping people live and eat better is a tribute to the thousands of team members who show up every day committed to our purpose, our customers and each other. My greatest privilege has been working alongside this team and watching what can be accomplished when we work together. As Executive Chairman, I'm aligned with Nick and the leadership team on the challenges we need to solve and the actions we are taking. These changes are required to meet the needs of our customer. We will be working closely over the next few months on our short and long-term actions that will reposition Sprouts for future growth. And with that, we would like to turn it over for questions to the operator.

[Operator Instructions] Our first question will be coming from the line of Seth Sigman of Barclays.

A few key questions here. So when we look at the fourth quarter guidance and the implications beyond, it's a really big change in margins versus what was implied before. It looks like a 100 basis point swing at least on the gross margin. I understand the urgency. But what gives you confidence to make such an aggressive change now? Maybe if you could speak to the testing, the case studies that you've seen that give you confidence to make the big changes in the investments that you're speaking to here in the fourth quarter.

Yes, Seth. It's Nick. We've been paying very close attention to what's going with our customer. And as we look at what's happening in business right now, as I mentioned in the call, we are focused right now on getting our customer back in our stores and driving sales and transactions. And as we look at what we've seen from the customer, both in what they tell us and how they respond through their wallet, affordability is the key current issue we need to address and solve. We -- they made it clear to us that what we are doing isn't far enough. We have confidence in what we're doing, because a lot of the things we did early in the year have shown promise. Like I mentioned, we've been invested in innovation with health and value together. We've seen the customer respond. But it wasn't deep enough or broad enough to move the customer and move transactions as we need. And so rather than wait over a longer period of time, we're acting with conviction now because we believe in the long-term health of the model. We're not going to let the customer fade away from us. We're going to make moves to get them here and to get the business back on track and recognize the potential of the long-term model with a healthy customer, strong market, great performance in new stores and additional growth.

And Seth, this is Curtis. I'd just add, I mean, the other part of Q4 is shrink is not where we want it to be right now either. So we expected that to be a tailwind, and it's continuing to be a challenge. So from a year-over-year perspective, again, shrink isn't where we want it to be. And then obviously, we've got the fuel challenge that continues to be elevated. So a couple of other pieces within the fourth quarter. But again, we feel to take bold action now to take care of the customer and keep moving forward with that.

Okay. That's helpful. Look, I guess the message is that this is not a 1-quarter dynamic. So some of these investments are going to wrap into next year. Can you give us some perspective today on what the total level of investment should look like from a gross margin perspective? I guess the concern would be that your gross margins are still significantly above where a lot of other folks in the industry are today. And so where does that need to get reset to? And then -- and just the last piece related to that, maybe you could speak to the ways that you can fund that, whether it's through media or vendor funding or supply chain. How should we be thinking about those as potential offsets to these investments?

Yes. Seth, it's Curtis again. Yes, so when we put the kind of the 5% in there to help understand what the level could be, obviously, we're going to take dramatic action here with the gross margin bit and get the affordability investments and the next wave of those going in the very near term and short term. What we'll watch closely is the customer responds to that. And that will help us pace the timing and the depth from a gross margin perspective. As you highlighted, we have lots of self-help opportunities, we talked about over several quarters now and the things that we'll be landing here in 2027 and beyond. And so self-distribution, the retail media, the opportunity with the data from the loyalty program and vendor partnership there, all opportunities all still in front of us to go unlock value in the P&L and create some offset to the affordability investment. Again, what we need to understand now is how is the customer is going to respond to this next wave, and that will give us a lot of clarity into February and into 2027 guidance.

[Operator Instructions] Our next question is coming from the line of Rupesh Parikh of Oppenheimer.

So first, I guess, on unit growth as we look to FY '27 and beyond, just given some of the challenges in the core business, how does your team think about potentially slowing unit growth to maybe improve or stabilize profitability even faster?

Rupesh, it's Curtis. Yes, I mean, clearly, we're going to have to think about that as we look ahead. It's going to be a strong part of our story going forward. We continue to be pleased with the new stores as they've opened well, they're comping in their year 2, 3 for the last few vintages. So it's a high-return vehicle for us. But we've got to balance that with the other needs of the business. And we need to balance our investment portfolio to address traffic in the core store challenges. But we do believe new stores is going to continue to be a strong opportunity for us.

Great. And then my follow-up question, just on traffic. So as you look at some of the new efforts that you're doing, are you seeing any green shoots or just your overall confidence you have in actually being able to improve traffic with the new efforts underway?

Yes, Nick. We are. What we've seen is some of our efforts that we've made across either pricing affordability investments or affordability investments in the product side have seen some fruit. As I mentioned in the previous question, it just hasn't been enough to move enough traffic to our stores. We've seen really good category response and item response, but it hasn't been broad enough or deep enough to do so. And that's what gives me confidence that the investment we're making in some of the things that are most important to our customers that builds trust, that provides access to key health categories and the items that hear about most is going to continue to drive traffic. I also go back to what I said in the call, we've seen good results with e-commerce. We've seen strong results with our new stores. And so we know the model and the proposition is very strong. Our customers tell us that. So you'll see us continue to lean into that. And then we still have a lot of areas where we can continue to focus on how we win. Our innovation is growing in our stores. The areas where we've innovated continues to show strong growth. As I mentioned, we've got really good marks on our store experience, and that will continue to be a key area. E-commerce, Sprouts brand and then the continued development of loyalty and personalization all give me a lot of confidence in our ability to continue to grow.

And the next question will be coming from the line of John Heinbockel of Guggenheim.

Nick, to start off, can you -- when you think about breadth and depth of -- you didn't go deep enough or broad enough, which I'm not sure both are equally an opportunity, but where do you see, which one is more important? And then I know the unengaged member or the unengaged customer was not responding. Have you seen weakness spread to the more engaged customer?

Yes, John. I think as we look at the -- what we've learned and also what we're looking at as we rebuild our pricing strategy, I think I'd kind of put it into 3 buckets when I think about breadth. Number one is there's an opportunity for us to provide more affordable entry points in the categories. So think about that as really a place where Sprouts brand can play, things like cage-free eggs or [ roam ] and in areas where we haven't been as affordable entering in new -- some key categories for us. The second part of the breadth on the strategy is around trust builders, those kind of higher frequency, more competitive items. Think, in our case, like conventional produce. I think we've got room to be much sharper there. We've done a great job on organic, but that's an area where I see a lot of opportunity for us. And then the third bucket around breadth is the -- as I -- we're calling the target customer KPIs. These are the items that drive customer choice in their healthy options and selections, Think of these as things like organic grass-fed beef. And that's where I look at the breadth and where we're pointing our pricing strategy. The depth will just depend more, John, on market, and we're going to make sure that we're right by market and be more focused there. Some we're in a good place and some we have more work to do. The second question on the customer. You're right, the less engaged customer has been the biggest driver of our traffic decline and footsteps into the store. But to your point, we have started to see it a little bit more with our core customer. They're still stronger, but we've seen a little bit of softening in behavior, which was one of the key indicators for me and for us that we need to take action now.

And then my follow-up real quick, when you think about the spread, right, between new to our productivity, has remained very, very good, the comps have softened, how do you assess that, that increasing spread between the 2. Usually, they kind of track together at least a little bit.

Yes, John, it's Curtis. It's unique. I think it's not what you would expect to see. And that's -- again, the new stores have continued to perform well, and we're seeing good response when we open new stores. And so on the one side, that's positive for us, that the new stores are performing the way that they are, and we haven't seen as much of a challenge in the new store portfolio. It's the core stores that we've got to do a better job with, and the things that Nick spoke about there and what we're getting after here in the very short term we're really addressing that core store challenge to improve the comps.

Our next question will be coming from the line of Thomas Palmer of JPMorgan.

Curtis, if I heard you right, you noted that you expect EBIT margin to remain above 5%. The 4Q outlook, obviously, implies something quite a bit lower. I'm just trying to think about maybe the progression of EBIT margin. Should we be thinking about 4Q is kind of the low point for margins and then you return to this 5% plus? Just any color there given that 5% comment?

Yes. Q4 is always our kind of lowest quarter from that perspective. We're typically -- we've got the full weight of the new store vintage out there. It's a lower sales quarter for us. January is our Super Bowl, as we say, and that's our fresh start to the new year. And so we see our strongest sales in January. And we're a little bit softer usually in the holidays where we're less top of mind maybe for customers. And so that's a typical kind of historical phenomenon. And then within that, you've got some of those unique challenges. Last year, we saw the business slowing in the fourth quarter and we took some action, pulled forward some changes from a labor perspective, accelerated some of the investments in that space to try and manage it. As we talked about throughout the quarter, we can kind of work our way through a few quarters at those lower comps, but the longer you go, the more challenging that gets. And so we got our new stores opening up, we've got our investments landing, and the comp just simply isn't where we need it to be. So I don't expect that to be indicative of the shape of Q1 or where we're headed. It's a little bit more of a 2026 Q4 phenomenon. And as I just mentioned a couple of questions ago, shrink is not where we want it to be either. That is higher than it should be. Some of that is the sales and some of that is we got to continue to a better job managing our inventory and our SKUs and in and out and all those things. So a few different kind of Q4 '26 specific type phenomenon, not particularly indicative of where Q1 or Q2 or Q3 [ were ].

Okay. One more follow-up, I guess, on kind of this 4Q versus 2027 dynamic. There was the reference to some planned actions really coming in January, but also mention of some deeper investments as we think about the holidays. So presumably kind of November, December. Is that like the experiment time where you kind of over-invest in price and see what sticks, and that's where January you start to institute more permanent changes? I mean, what's really, I guess, in mind for this nearer term versus what comes in January?

Yes, Tom, a couple of things. So first off, as we have mentioned, we're rebuilding a pricing strategy, and we're putting some of those elements into market now, to help us kind of learn to be prepared for January overall. So we're rebuilding now with the input or the belief or the plan, excuse me, to launch in Jan. So we are doing things in market right now to test and learn. And the other thing I mentioned is we are making action now on items that we know right now drive transactions for our customer on the healthy holiday essentials that matter most. These are areas that we can go deeper right now where a customer needs it for the holidays and to help drive more traffic into the store. As Curtis noted, January is our -- is kind of our win time. That's when we're most top of mind for our customers. And so that's why we wanted to go national with the strategy with all the noise in the holidays in November, December. We're using this to get ourselves ready to take care of the customer in Jan, but at the same time making moves right now to serve them within the things they need most over the holidays.

Our next question will be coming from the line of Mark Carden of UBS.

So I wanted to start with a follow-up on shopper behavior by customer type. It sounds like it's starting to impact your core customer a bit as well. When you think about it from an income cohort perspective, are you seeing pressure across the board? Or has it been more isolated to call it the lower third? In other words, are headwinds starting to creep up even the income chain?

Mark, so what we're seeing -- what hasn't changed at all is that the less engaged customers is still where we're seeing the biggest leakage. So that's been the case. And within that customer set, there is a -- it's a larger impact with slightly lower income. So we are seeing that. What's changed recently is we've seen a little bit more of an impact on our core customer, slightly fewer units in the basket, a little bit of softening on the trip side. And we see it generally across the board. It's not strictly based on income level, but we're seeing it overall with that customer, which is, as I mentioned earlier, why I just said that we need to make a change and make a move now to take care of the customer and get the margin set up to allow us to do that.

Great. And then on competition, you talked about it accelerating in the space. Are you seeing it both at natural organic focused retailers as well as the conventional players? Do you think more customers are shifting their natural organic spend over to mass and conventional just because of where prices are at, even if it's not necessarily something they prefer to do? And how do you think about best approach for advertising your new strategy and making sure they're aware of what you guys are able to do on that front?

Yes. I think there's 3 factors in this that I think all play together. We are seeing competition across a number of channels, continue to chase the health of the customer, which we think validates the opportunity in the space that we believe in the long term. So we're not surprised by that. We are seeing it happen. As we've talked about, affordability is a challenge for the customers in this space. And then the third piece is the macro is not helping, right? I think that's only exacerbating, making it tougher for us, making it tougher for the customers. So those 3 things together, I think, are what's impacting the customer. From a competitive standpoint, I'm not surprised that they're continuing to play more in the space. I think it's, overall, we're seeing customers migrate to value channels, which is another indicator that affordability is a key opportunity for us. But I feel really good about our ability to win and compete in this environment because our whole model is built to serve the needs of this unique customer, not just about the items that some of the other people will carry. So as I look at our core competencies of innovating, a really fantastic store experience, those are our strongest muscles, and we need to flex them faster and stronger to serve the customer where they are now. And I know we can do that to help offset any competitive challenges. And as I mentioned right now, invest in affordability to help the customer mood that is a barrier to come to stores.

Kelly Bania of BMO Capital Markets.

Also I just wanted to go back to gross margin here, and 2 questions. I guess as you look at the fourth quarter, I think you said 90 basis points of deleverage. How much price is in that because you mentioned shrink, fuel, I'm guessing some sales deleverage impact, so just trying to understand how much price is in the fourth quarter? And this comment that you are committed to maintaining EBIT margins above 5%, I mean, how can you commit to that? Where do we -- where do gross margins -- where do you think gross margins can settle out here?

Kelly, it's Curtis. Yes, the gross margin will go maybe in reverse order. I mean certainly, that 5% creates a lot of space between where we are today and that mark. So it gives us a lot of room to assess the things that we're going to go do. We're going to make some investments in the gross margin. I think the lion's share of the P&L impact will come through gross margin and that affordability investment, the technology and the supply chain activity, a little bit of SG&A, but a lot of capital in that space. And that's -- some of that's already kind of built into the model and the way we think about capital going forward. So those are things that we're going to go after and we'll see what the customer response is. Obviously, we're talking about traffic being a priority and traffic first and repairing that with the customer, and then we go from there. So the investments we'll make here between the holiday activity and the January pricing, and then we'll see how the customer responds. And then all those self-help levers we have over time become optionality for us to continue to go further if we need to. So we feel like we've got some space now to do what we need to do. We'll see how the customer responds and we'll again adjust the pace and the scale accordingly.