The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Sprouts Farmers Market, Inc., a Delaware corporation, through its subsidiaries, offers a unique grocery experience featuring an open layout with fresh produce at the heart of the store. The Company continues to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and gluten-free. As of January 3, 2021, the Company operated 362 stores in 23 states. For convenience, the “Company” is used to refer collectively to Sprouts Farmers Market, Inc. and, unless the context requires otherwise, its subsidiaries. The Company’s store operations are conducted by its subsidiaries.
2. Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All material intercompany accounts and transactions have been eliminated in consolidation.
The Company has one reportable and one operating segment, healthy grocery stores.
The Company categorizes the varieties of products it sells as perishable and non-perishable. Perishable product categories include produce, meat, seafood, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care.
The following is a breakdown of the Company’s perishable and non-perishable sales mix:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Perishables
|
|
|
57.2
|
%
|
|
|
57.7
|
%
|
|
|
57.5
|
%
|
Non-Perishables
|
|
|
42.8
|
%
|
|
|
42.3
|
%
|
|
|
42.5
|
%
|
All dollar amounts are in thousands, unless otherwise indicated. Certain prior period amounts have been reclassified to conform with the current year presentation.
3. Significant Accounting Policies
Fiscal Years
The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. Fiscal year 2020 ended on January 3, 2021 and included 53-weeks. Fiscal year 2019 ended on December 29, 2019 and included 52-weeks. Fiscal year 2018 ended on December 30, 2018 and included 52-weeks. Fiscal years 2020, 2019, and 2018 are referred to as 2020, 2019, and 2018, respectively.
Significant Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s critical accounting estimates include inventory valuations, lease assumptions, self-insurance reserves, impairment of long-lived assets, fair values of share-based awards, and income taxes. Actual results could differ from those estimates.
63
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents are maintained at financial institutions in the United States of America. Deposits in transit include sales through the end of the period, the majority of which were paid with credit and debit cards and settle within a few days of the sales transactions. The amounts due from banks for these transactions at each reporting date were as follows:
|
|
As Of
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
Due from banks for debit and credit card transactions
|
|
$
|
93,130
|
|
|
$
|
49,405
|
|
Restricted Cash
Restricted cash relates to the Company’s defined benefit plan forfeitures and the Company’s healthcare, general liability and workers’ compensation plan benefits of approximately $1.7 million and $1.5 million as of January 3, 2021 and December 29, 2019, respectively, and is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.
Accounts Receivable
Accounts receivable primarily represents billings to vendors for scan, advertising and other rebates, and billings to landlords for tenant allowances. Accounts receivable also includes receivables from the Company’s insurance carrier for payments expected to be made in excess of self-insured retentions. The Company provides an allowance for doubtful accounts when a specific account is determined to be uncollectible.
Inventories
Inventories consist of merchandise purchased for resale, which are stated at the lower of cost or net realizable value. The cost method is used for distribution center and store perishable department inventories by assigning costs to each of these items based on a first-in, first-out (FIFO) basis (net of vendor discounts).
The Company’s non-perishable inventory is valued at the lower of cost or net realizable value using weighted averaging, the use of which approximates the FIFO method.
The Company believes that all inventories are saleable and no allowances or reserves for obsolescence were recorded as of January 3, 2021 and December 29, 2019.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Expenditures for major additions and improvements to facilities are capitalized, while maintenance and repairs are charged to expense as incurred. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of income. Depreciation expense, which includes the amortization of assets recorded as finance leases, is computed using the straight-line method over the estimated useful lives of the individual assets. Terms of leases used in the determination of estimated useful lives may include renewal options if the exercise of the renewal option is determined to be reasonably certain.
64
The following table includes the estimated useful lives of certain of the Company’s asset classes:
Computer hardware and software
|
|
3 to 5 years
|
Furniture, fixtures and equipment
|
|
7 to 20 years
|
Leasehold improvements
|
|
up to 15 years
|
Buildings
|
|
40 years
|
Store development costs, which include costs associated with the selection and procurement of real estate sites, are also included in property and equipment. These costs are included in leasehold improvements and are amortized over the remaining lease term of the successful sites with which they are associated.
Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance programs to provide for costs associated with general liability, workers’ compensation and team member health benefits. Liabilities for self-insurance reserves are estimated based on independent actuarial estimates, which are based on historical information and assumptions about future events. The Company utilizes various techniques, including analysis of historical trends and actuarial valuation methods, to estimate the cost to settle reported claims and claims incurred but not yet reported as of the balance sheet date. The actuarial valuation methods consider loss development factors, which include the development time frame and expected claim reporting and settlement patterns, and expected loss costs, which include the expected frequency and severity of claim activity. Amounts expected to be recovered from insurance companies are included in the liability, with a corresponding amount recorded in accounts receivable.
Goodwill and Intangible Assets
Goodwill represents the cost of acquired businesses in excess of the fair value of assets and liabilities acquired. The Company’s indefinite-lived intangible assets consist of trade names related to “Sprouts Farmers Market” and liquor licenses. The Company also holds intangible assets with finite useful lives consisting of the “Sunflower Farmers Market” trade name. The trade name related to “Sunflower Farmers Market” meets the definition of a defensive intangible asset and was amortized on a straight-line basis over an estimated useful life of 10 years from the date of its acquisition by the Company.
Goodwill and indefinite-lived intangible assets are evaluated for impairment on an annual basis during the fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company’s impairment evaluation of goodwill consists of a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment considered factors including changes in the competitive market, budget-to-actual performance, trends in market capitalization for the Company and its peers, turnover in key management personnel and overall changes in macroeconomic environment. If this qualitative assessment indicates it is more likely than not that the estimated fair value of a reporting unit exceeds its carrying value, no further analysis is required and goodwill is not impaired. Otherwise, we compare the estimated fair value of the asset to its carrying amount with an impairment loss recognized for the amount, if any, by which carrying value exceeds estimated fair value.
The impairment evaluation for the Company’s indefinite-lived intangible assets consists of a qualitative assessment similar to that for goodwill. If the qualitative assessment indicates it is more likely than not that the estimated fair value of an indefinite-lived intangible asset exceeds its carrying value, no further analysis is required and the asset is not impaired. Otherwise, the Company compares the estimated fair value of the asset to its carrying amount with an impairment loss recognized for the amount, if any, by which carrying value exceeds estimated fair value.
65
The Company has determined its business consists of a single reporting unit, healthy grocery stores. The Company has had no goodwill impairment charges for the past three fiscal years. See Note 8, “Intangible Assets” and Note 9, “Goodwill” for further discussion.
Impairment of Long-Lived Assets
The Company assesses its long-lived assets, including property and equipment, right-of-use assets and finite-lived intangible assets, for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. These events primarily include current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in the market value of an asset or a decision to close or relocate a store. The Company groups and evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which independent identifiable cash flows are available. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the future undiscounted cash flows expected to be generated by that asset group. The Company’s impairment analysis contains management assumptions about key variables including sales growth rate, gross margin, payroll and other controllable expenses.
If impairment is indicated, a loss is recognized for any excess of the carrying value over the estimated fair value of the asset group. The fair value of the asset group is estimated based on the discounted future cash flows using a discount rate commensurate with the related risk or comparable market values, if available. There were no impairment charges in 2020. In 2019, the Company recorded an impairment loss as part of the normal course of business primarily related to the write-down of leasehold improvements. In fiscal year 2018, the Company recorded an impairment loss related to leasehold improvements, furniture, fixtures and equipment due to the closure of two stores. These charges are recorded as a component of Store closure and other costs, net in the accompanying consolidated statement of income.
Deferred Financing Costs
The Company capitalizes certain fees and costs incurred in connection with the issuance of debt. Deferred financing costs are amortized to interest expense over the term of the debt using the effective interest method. For the Amended and Restated Credit Agreement and Former Credit Facility (as defined in Note 13, “Long-Term Debt and Finance Lease Liabilities”), deferred financing costs are amortized on a straight-line basis over the term of the facility. Upon prepayment, redemption or conversion of debt, the Company accelerates the recognition of an appropriate amount of financing costs as loss on extinguishment of debt. The current and noncurrent portions of deferred financing costs are included in prepaid expenses and other current assets and other assets, respectively, in the accompanying consolidated balance sheets.
Leases
The Company leases all stores, distribution centers, and administrative offices. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease assets, current portion of operating lease liabilities and noncurrent portion of operating lease liabilities in the accompanying consolidated balance sheets. Finance leases are included in property, plant, equipment, net, current portion of finance lease liabilities, and long-term debt and finance lease liabilities in the accompanying consolidated balance sheets. Operating lease payments are charged on a straight-line basis to rent expense, a component of selling, general and administrative expenses, over the lease term and finance lease payments are charged to interest expense and depreciation and amortization expense using a debt model over the lease term.
The Company’s lease assets represent a right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease assets and liabilities and the related rent expense are recognized at the lease commencement date (date
66
on which the Company gains access to the property) based on the estimated present value of lease payments over the lease term, net of landlord allowances expected to be received. The Company accounts for the lease and non-lease components as a single lease component for all current classes of leases.
Most of the Company’s lease agreements include variable payments related to pass-through costs for maintenance, taxes, and insurance. Additionally, some of the Company’s lease agreements include rental payments based on a percentage of retail sales over contractual levels. These variable payments are not included in the measurement of the lease liability or asset and are expensed as incurred.
As most of the Company’s lease agreements do not provide an implicit rate, the Company uses an estimated incremental borrowing rate, which is derived from third-party information available at the lease commencement date, in determining the present value of lease payments. The rate used is for a secured borrowing of a similar term as the lease.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to twenty years or more. The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less (“short-term leases”) are not recorded on the balance sheet. The Company does not currently have any material short-term leases. Additionally, the Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants.
The Company subleases certain real estate to third parties, which have all been classified as operating leases. The Company recognized sublease income on a straight-line basis.
Fair Value Measurements
The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with ASC 820. This framework establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the valuation of derivative instruments, impairment analysis of goodwill, intangible assets, and long-lived assets. Impairment losses related to store-level assets are calculated using significant unobservable inputs including the present value of future cash flows expected to be generated using a risk-adjusted market based weighted-average cost of capital, comparable store sales growth assumptions, and third party property appraisal data. Therefore, these inputs are classified as a level 3 measurement in the fair value hierarchy.
Cash, cash equivalents and restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued salaries and benefits and other accrued liabilities approximate fair value because of the short maturity of those instruments.
Derivative Financial Instruments
The Company records derivatives at fair value. The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the Company reflects the change in fair value of the derivative instrument in its financial statements. A derivative qualifies for hedge accounting if, at inception, the derivative is expected to be highly effective in offsetting the underlying
67
hedged cash flows, and the Company fulfills the hedge documentation standards at the time it enters into the derivative contract. The Company designates its hedge based on the exposure it is hedging. For qualifying cash flow hedges, the Company records changes in fair value in other comprehensive income (“OCI”). The Company releases the derivative’s gain or loss from OCI to match the timing of the underlying hedged item’s effect on earnings.
The Company reviews the effectiveness of its hedging instruments quarterly. The Company recognizes changes in the fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. The Company discontinues hedge accounting for any hedge that is no longer evaluated to be highly effective.
The Company does not enter into derivative financial instruments for trading or speculative purposes, and it monitors the financial stability and credit standing of its counterparties in these transactions.
Share-Based Compensation
The Company measures share-based compensation cost at the grant date based on the fair value of the award and recognizes share-based compensation cost as expense over the vesting period. As share-based compensation expense recognized in the consolidated statements of income is based on awards ultimately expected to vest, the amount of expense has been reduced for actual forfeitures as they occur. The Company uses the Black-Scholes option-pricing model to determine the grant date fair value for each option grant. The Black-Scholes option-pricing model requires extensive use of subjective assumptions. See Note 26, “Share-Based Compensation” for a discussion of assumptions used in the calculation of fair values. Application of alternative assumptions could produce different estimates of the fair value of share-based compensation and, consequently, the related amounts recognized in the accompanying consolidated statements of income. The grant date fair value of restricted stock units (“RSUs”), performance share awards (“PSAs”), and restricted stock awards (“RSAs”) is based on the closing price per share of the Company’s stock on the grant date. The Company recognizes compensation expense for time-based awards on a straight-line basis and for performance-based awards on the graded-vesting method over the vesting period of the awards.
Revenue Recognition
The Company’s performance obligations are satisfied upon the transfer of goods to the customer, which occurs at the point of sale, and payment from customers is also due at the time of sale. Proceeds from the sale of gift cards are recorded as a liability at the time of sale and recognized as sales when they are redeemed by the customer and the performance obligation is satisfied by the Company. The Company’s gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions and was not material in any period presented.
|
|
Balance as of December 29,
2019
|
|
|
Gift Cards Issued During Current Period But Not Redeemed(a)
|
|
|
Revenue Recognized From Beginning Liability
|
|
|
Balance as of January 3,
2021
|
|
Gift card liability, net
|
|
$
|
15,902
|
|
|
$
|
9,895
|
|
|
$
|
(9,909
|
)
|
|
$
|
15,888
|
|
(a)net of estimated breakage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The nature of goods the Company transfers to customers at the point of sale are inventories, consisting of merchandise purchased for resale.
The Company does not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current period from performance obligations satisfied in previous periods, any contract performance obligations, or any material costs to obtain or fulfill a contract as of January 3, 2021.
68
Cost of Sales
Cost of sales includes the cost of inventory sold during the period, including the direct costs of purchased merchandise (net of discounts and allowances), distribution and supply chain costs, supplies and depreciation and amortization for distribution centers and supply chain related assets. The Company recognizes vendor allowances and merchandise volume related rebate allowances as a reduction of inventories during the period when earned and reflects the allowances as a component of cost of sales as the inventory is sold.
The Company’s largest supplier accounted for approximately 42%, 40% and 34% of total purchases during 2020, 2019, and 2018, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of salaries, wages and benefits costs, share-based compensation, occupancy costs (including rent, property taxes, utilities, common area maintenance and insurance), advertising costs, buying cost, pre-opening and other administrative costs.
The Company charges certain vendors to place advertisements in the Company’s in-store guide and circulars under a cooperative advertising program. The Company records rebates received from vendors in connection with cooperative advertising programs as a reduction to advertising costs when the allowance represents a reimbursement of a specific incremental and identifiable cost. Advertising costs are expensed as incurred. Advertising expense, net of rebates, was $54.4 million, $57.2 million and $50.2 million for 2020, 2019, and 2018, respectively.
Depreciation and amortization
Depreciation and amortization expense (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company’s deferred tax assets are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. Realization of the deferred tax assets is principally dependent upon achievement of projected future taxable income offset by deferred tax liabilities. Changes in recognition or measurement are reflected in the period in which the judgment occurs.
The Company files income tax returns for federal purposes and in many states. The Company’s tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three years, following the tax year to which those filings relate. The Company’s U.S. federal income tax return for the fiscal year ended December 31, 2017, is currently under examination by the Internal Revenue Service.
The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits as part of income tax expense.
69
Share Repurchases
The Company has elected to retire shares repurchased to date. Shares retired become part of the pool of authorized but unissued shares. The Company has elected to record purchase price of the retired shares in excess of par value directly as a reduction of retained earnings.
Net Income per Share
Basic net income per share is calculated by dividing net income by the weighted average number of shares outstanding during the fiscal period.
Diluted net income per share is based on the weighted average number of shares outstanding, plus, where applicable, shares that would have been outstanding related to dilutive options, PSAs, RSAs, and RSUs.
Comprehensive Income
Comprehensive income consists of net income and the unrealized gains or losses on derivative instruments that qualify for and have been designated as cash flow hedges, for all periods presented.
Recently Adopted Accounting Pronouncements
Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU no. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this update introduce a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Subsequent to the initial standards, the FASB has also issued several ASUs to clarify specific topics. The Company adopted ASU 2016-13 effective December 30, 2019, using the modified retrospective approach. There was no impact to opening retained earnings as of December 30, 2019 or on the Company’s consolidated financial statements.
Compensation – Fair Value Disclosures
In August 2018, the FASB issued ASU No. 2018-13, “Fair value measurement (Topic 820) – Disclosure framework – Changes to the disclosure requirements for fair value measurement.” The amendments in this update improve the effectiveness of fair value measurement disclosures. The Company adopted this standard effective December 30, 2019. There was no impact on the Company’s disclosure in its consolidated financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, “Leases (ASC 842).” ASU No. 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than twelve months. Recognition, measurement and presentation of expenses will depend on classification as a financing or operating lease.
The Company adopted the standard as of December 31, 2018, the first day of fiscal year 2019. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, permits companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs. The Company did not elect the hindsight practical expedient.
The adoption of the standard resulted in the recognition of operating lease assets and liabilities of approximately $1.0 billion and $1.1 billion, respectively, as of December 31, 2018, including recognition of operating lease assets and liabilities for certain third-party operated distribution center locations. Included
70
in the measurement of the new lease assets and liabilities is the reclassification of balances historically recorded as deferred rent and unfavorable and favorable leasehold interests. Additionally, the Company recognized a cumulative effect adjustment, which increased retained earnings by $11.4 million, net of tax. This adjustment was driven by the derecognition of approximately $114.0 million of lease obligations and $102.6 million of net assets related to leases that had been classified as financing lease obligations under the former failed-sale leaseback guidance, and are now classified as operating leases as of the transition date.
This reclassification also resulted in the recognition of rent expense beginning December 31, 2018, which was previously reported as interest expense under the former failed sale-leaseback guidance. Lastly, the adoption of this standard resulted in a change in naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases. The adoption of this standard did not have any impact on the Company’s liquidity or cash flows.
Refer to Note 7, “Leases”, for additional information related to the Company’s leases.
Recently Issued Accounting Pronouncements Not Yet Adopted
Income Taxes –Accounting for Income Taxes
In December 2019, the FASB issued ASU no. 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.” Among other things, the amendment removes certain exceptions for periods with operating losses, and reduces the complexity surrounding franchise tax, step up in tax basis of goodwill in conjunction with a business combination, and timing of enacting changes in tax laws during interim periods. The amendments in this update are effective for the Company for its fiscal year 2021 with early adoption permitted. The Company does not expect this update to have a material effect on the Company’s consolidated financial statements.
Reference Rate Reform
In March 2020, the FASB issued ASU no. 2020-04, “Reference rate reform (Topic 848) – Facilitation of the effects of reference rate reform on financial reporting”. The amendments in this update provide optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationships, and other transactions affected by reference rate reform. Generally, the guidance allows contract modifications related to reference rate reform to be considered events that do not require remeasurements or reassessments of previous accounting determinations at the modification date. This update only applies to modifications made prior to December 31, 2022. No such modifications occurred in the year ending January 3, 2021. The Company expects to utilize this optional guidance but does not expect it to have a material impact on its consolidated financial statements.
No other new accounting pronouncements issued or effective during fiscal 2020 had, or are expected to have, a material impact on the Company’s consolidated financial statements.
71
4. Accounts Receivable
A summary of accounts receivable is as follows:
|
|
As Of
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
Landlords
|
|
$
|
4,715
|
|
|
$
|
7,565
|
|
Vendors
|
|
|
3,275
|
|
|
|
5,378
|
|
Insurance
|
|
|
1,279
|
|
|
|
938
|
|
Supply rebates
|
|
|
—
|
|
|
|
749
|
|
Other
|
|
|
5,546
|
|
|
|
1,083
|
|
Total
|
|
$
|
14,815
|
|
|
$
|
15,713
|
|
The Company recorded allowances for certain vendor receivables of $0.4 million and $0.5 million at January 3, 2021 and December 29, 2019, respectively.
5. Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets is as follows:
|
|
As Of
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
Prepaid expenses
|
|
$
|
15,948
|
|
|
$
|
8,784
|
|
Restricted cash
|
|
|
1,744
|
|
|
|
1,470
|
|
Prepaid rent
|
|
|
141
|
|
|
|
15
|
|
Income tax receivable
|
|
|
8,827
|
|
|
|
—
|
|
Other current assets
|
|
|
564
|
|
|
|
564
|
|
Total
|
|
$
|
27,224
|
|
|
$
|
10,833
|
|
6. Property and Equipment
A summary of property and equipment, net is as follows:
|
|
As Of
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
Land and finance lease assets
|
|
$
|
15,753
|
|
|
$
|
15,753
|
|
Furniture, fixtures and equipment
|
|
|
745,514
|
|
|
|
666,050
|
|
Leasehold improvements
|
|
|
638,149
|
|
|
|
589,211
|
|
Construction in progress
|
|
|
27,140
|
|
|
|
48,311
|
|
Total property and equipment
|
|
|
1,426,556
|
|
|
|
1,319,325
|
|
Accumulated depreciation and amortization
|
|
|
(700,056
|
)
|
|
|
(577,817
|
)
|
Property and equipment, net
|
|
$
|
726,500
|
|
|
$
|
741,508
|
|
Depreciation expense was $125.6 million, $121.3 million and $110.3 million for 2020, 2019, and 2018, respectively. Depreciation expense is primarily reflected in depreciation and amortization on the consolidated statements of income.
There was no impairment expense recognized in 2020. Impairment expense was $4.1 million and $4.6 million for 2019 and 2018, respectively.
72
7. Leases
Lease cost includes both the fixed and variable expenses recorded for leases. The components of lease cost are as follows:
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
Classification
|
|
January 3, 2021
|
|
|
December 29, 2019
|
|
Operating lease cost
|
|
Selling, general and administrative expenses(1), (2)
|
|
$
|
191,279
|
|
|
$
|
177,089
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
|
|
Amortization of Property
and Equipment
|
|
Depreciation and amortization
|
|
|
966
|
|
|
|
966
|
|
Interest on lease liabilities
|
|
Interest expense
|
|
|
970
|
|
|
|
997
|
|
Variable lease cost
|
|
Selling, general and administrative expenses(1)
|
|
|
57,789
|
|
|
|
53,731
|
|
Sublease income
|
|
Selling, general and administrative expenses
|
|
|
(1,192
|
)
|
|
|
(1,057
|
)
|
Total net lease cost
|
|
|
|
$
|
249,812
|
|
|
$
|
231,726
|
|
|
(1)
|
Supply chain-related amounts of $7.8 million and $8.2 million were included in cost of sales for 2020 and 2019, respectively.
|
|
(2)
|
Rent expense in fiscal year 2018 totaled $137.5 million under ASC 840.
|
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
As of
|
|
|
As of
|
|
|
|
Classification
|
|
January 3, 2021
|
|
|
December 29, 2019
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating lease assets
|
|
$
|
1,045,408
|
|
|
$
|
1,028,436
|
|
Finance
|
|
Property and equipment, net
|
|
|
9,218
|
|
|
|
10,184
|
|
Total lease assets
|
|
|
|
$
|
1,054,626
|
|
|
$
|
1,038,620
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Current portion of operating lease liabilities
|
|
$
|
135,739
|
|
|
$
|
106,153
|
|
Finance
|
|
Current portion of finance lease liabilities
|
|
|
959
|
|
|
|
754
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Long-term operating lease liabilities
|
|
|
1,069,535
|
|
|
|
1,078,927
|
|
Finance
|
|
Long-term debt and finance lease liabilities
|
|
|
10,459
|
|
|
|
11,419
|
|
Total lease liabilities
|
|
|
|
$
|
1,216,692
|
|
|
$
|
1,197,253
|
|
|
|
January 3, 2021
|
|
|
December 29, 2019
|
|
Weighted average remaining lease term (years)
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
9.8
|
|
|
|
10.2
|
|
Finance leases
|
|
|
9.7
|
|
|
|
10.7
|
|
Weighted average discount rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
7.2
|
%
|
|
|
7.5
|
%
|
Finance leases
|
|
|
8.4
|
%
|
|
|
8.3
|
%
|
73
Supplemental cash flow and other information related to leases is as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 3, 2021
|
|
|
December 29, 2019
|
|
Cash paid for amounts included in measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
186,280
|
|
|
$
|
153,292
|
|
Operating cash flows for finance leases
|
|
|
970
|
|
|
|
997
|
|
|
|
|
|
|
|
|
|
|
Lease assets obtained in exchange for lease liabilities:
|
|
|
|
|
|
|
|
|
Finance leases
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating leases
|
|
|
118,075
|
|
|
|
160,134
|
|
A summary of maturities of lease liabilities is as follows:
|
|
Operating Leases(1)
|
|
|
Finance Leases
|
|
|
Total
|
|
2021
|
|
$
|
195,910
|
|
|
$
|
1,591
|
|
|
$
|
197,501
|
|
2022
|
|
|
197,145
|
|
|
|
1,671
|
|
|
|
198,816
|
|
2023
|
|
|
173,498
|
|
|
|
1,556
|
|
|
|
175,054
|
|
2024
|
|
|
175,700
|
|
|
|
1,734
|
|
|
|
177,434
|
|
2025
|
|
|
171,292
|
|
|
|
1,904
|
|
|
|
173,196
|
|
Thereafter
|
|
|
807,312
|
|
|
|
8,562
|
|
|
|
815,874
|
|
Total lease payments
|
|
|
1,720,857
|
|
|
|
17,018
|
|
|
|
1,737,875
|
|
Less: Imputed interest
|
|
|
(515,583
|
)
|
|
|
(5,600
|
)
|
|
|
(521,183
|
)
|
Total lease liabilities
|
|
|
1,205,274
|
|
|
|
11,418
|
|
|
|
1,216,692
|
|
Less: Current portion
|
|
|
(135,739
|
)
|
|
|
(959
|
)
|
|
|
(136,698
|
)
|
Long-term lease liabilities
|
|
$
|
1,069,535
|
|
|
$
|
10,459
|
|
|
$
|
1,079,994
|
|
(1)
|
Operating lease payments include $184.8 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $183.0 million of legally binding minimum lease payments for leases executed but not yet commenced.
|
8. Intangible Assets
A summary of the activity and balances in intangible assets is as follows:
|
|
Balance at
December 30,
2018
|
|
|
Adjustments/
Transfers(1)
|
|
|
Balance at
December 29,
2019
|
|
Gross Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived trade names
|
|
$
|
182,937
|
|
|
$
|
—
|
|
|
$
|
182,937
|
|
Indefinite-lived liquor licenses
|
|
|
2,023
|
|
|
|
—
|
|
|
|
2,023
|
|
Finite-lived trade names
|
|
|
1,800
|
|
|
|
—
|
|
|
|
1,800
|
|
Leasehold interests
|
|
|
18,773
|
|
|
|
(18,773
|
)
|
|
|
—
|
|
Total intangible assets
|
|
$
|
205,533
|
|
|
$
|
(18,773
|
)
|
|
$
|
186,760
|
|
Accumulated Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived trade names
|
|
$
|
(1,185
|
)
|
|
$
|
(180
|
)
|
|
$
|
(1,365
|
)
|
Leasehold interests
|
|
|
(9,545
|
)
|
|
|
9,545
|
|
|
|
—
|
|
Total accumulated amortization
|
|
$
|
(10,730
|
)
|
|
$
|
9,365
|
|
|
$
|
(1,365
|
)
|
|
(1)
|
As of the first day of fiscal 2019, the favorable leasehold interest balance was reclassified into the new operating lease asset balance due to the adoption of ASC 842. As a result, the amortization of these assets is recorded as part of the single rent expense to be recorded on a monthly basis for each lease. Refer to Note 7, “Leases”, for further details.
|
74
|
|
Balance at December 29, 2019
|
|
|
Adjustments/
Transfers
|
|
|
Balance at January 3, 2021
|
|
Gross Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived trade names
|
|
$
|
182,937
|
|
|
$
|
—
|
|
|
$
|
182,937
|
|
Indefinite-lived liquor licenses
|
|
|
2,023
|
|
|
|
—
|
|
|
|
2,023
|
|
Finite-lived trade names
|
|
|
1,800
|
|
|
|
(800
|
)
|
|
|
1,000
|
|
Total intangible assets
|
|
$
|
186,760
|
|
|
$
|
(800
|
)
|
|
$
|
185,960
|
|
Accumulated Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived trade names
|
|
$
|
(1,365
|
)
|
|
$
|
365
|
|
|
$
|
(1,000
|
)
|
Total accumulated amortization
|
|
$
|
(1,365
|
)
|
|
$
|
365
|
|
|
$
|
(1,000
|
)
|
Amortization expense was ($0.4) million, $0.2 million and $1.4 million for 2020, 2019, and 2018, respectively.
9. Goodwill
The Company’s goodwill balance was $368.9 million and $368.1 million as of January 3, 2021 and December 29, 2019, respectively. As of January 3, 2021 and December 29, 2019, the Company had no accumulated goodwill impairment losses. The goodwill was related to the acquisition of Sunflower Farmers Market stores and Henry’s Farmers Market stores.
A summary of the activity and balance in goodwill is as follows:
|
|
Balance at
December 29, 2019
|
|
|
Adjustments
|
|
|
Balance at
January 3, 2021
|
|
Goodwill
|
|
$
|
368,078
|
|
|
$
|
800
|
|
|
$
|
368,878
|
|
10. Other Assets
As of January 3, 2021 and December 29, 2019, other assets of $14.7 and $11.7 million, respectively, primarily consisted of deferred software as a service, capitalized durable supplies, sublease deferred rent, and miscellaneous other assets.
11. Accrued Liabilities
A summary of accrued liabilities is as follows:
|
|
As Of
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
Self-insurance reserves
|
|
$
|
25,227
|
|
|
$
|
22,806
|
|
Accrued occupancy related (CAM, property taxes, etc.)
|
|
|
19,939
|
|
|
|
16,211
|
|
Gift cards, net of breakage
|
|
|
15,888
|
|
|
|
15,902
|
|
Accrued sales and use tax
|
|
|
14,712
|
|
|
|
12,010
|
|
Other accrued liabilities
|
|
|
67,636
|
|
|
|
69,553
|
|
Total
|
|
$
|
143,402
|
|
|
$
|
136,482
|
|
75
12. Accrued Salaries and Benefits
A summary of accrued salaries and benefits is as follows:
|
|
As Of
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
Bonuses
|
|
$
|
41,637
|
|
|
$
|
16,800
|
|
Payroll
|
|
|
18,171
|
|
|
|
15,667
|
|
Vacation
|
|
|
14,669
|
|
|
|
11,880
|
|
Severance and other
|
|
|
2,218
|
|
|
|
4,232
|
|
Total
|
|
$
|
76,695
|
|
|
$
|
48,579
|
|
13. Long-Term Debt and Finance Lease Liabilities
A summary of long-term debt is as follows:
|
|
|
|
|
|
As Of
|
|
Facility
|
|
Maturity
|
|
Interest Rate
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
Senior secured debt
|
|
|
|
|
|
|
|
|
|
|
|
|
$700.0 million Credit Agreement
|
|
March 27, 2023
|
|
Variable
|
|
$
|
250,000
|
|
|
$
|
538,000
|
|
Finance lease liabilities
(see Note 7, "Leases")
|
|
Various
|
|
n/a
|
|
|
10,459
|
|
|
|
11,419
|
|
Long-term debt and finance lease liabilities
|
|
|
|
|
|
$
|
260,459
|
|
|
$
|
549,419
|
|
Senior Secured Revolving Credit Facility
March 2018 Refinancing
On March 27, 2018, the Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), as borrower, entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) to amend and restate the Company’s existing senior secured credit facility, dated April 17, 2015 (the “Former Credit Facility”). The Amended and Restated Credit Agreement provides for a revolving credit facility with an initial aggregate commitment of $700.0 million, an increase from $450.0 million from the Former Credit Facility, which may be increased from time to time pursuant to an expansion feature set forth in the Amended and Restated Credit Agreement.
Concurrently with the closing of the Amended and Restated Credit Agreement, all commitments under the Former Credit Facility were terminated, resulting in a $0.3 million loss on early extinguishment of debt, recorded in interest expense during the first quarter of fiscal year 2018. The loss was due to the write-off of a proportional amount of deferred financing costs associated with the Former Credit Facility as the result of certain banks exiting the Amended and Restated Credit Agreement in connection with the refinancing. No amounts were outstanding under the Former Credit Facility as of January 3, 2021.
The Company capitalized debt issuance costs of $2.1 million related to the refinancing which combined with the remaining $0.7 million debt issuance costs for the Former Credit Facility, are being amortized on a straight-line basis to interest expense over the five-year term of the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement also provides for a letter of credit subfacility and a $15.0 million swingline facility. Letters of credit issued under the Amended and Restated Credit Agreement reduce its borrowing capacity. Letters of credit totaling $34.2 million have been issued as of January 3, 2021, primarily to support the Company’s insurance programs.
76
On March 6, 2019, Intermediate Holdings entered into an amendment to the Amended and Restated Credit Agreement intended to align the treatment of certain lease accounting terms with the Company’s adoption of ASC 842. This amendment had no impact on borrowing capacity, interest rate, or maturity.
Guarantees
Obligations under the Amended and Restated Credit Agreement are guaranteed by the Company and all of its current and future wholly-owned material domestic subsidiaries (other than the borrower) and are secured by first-priority security interests in substantially all of the assets of the Company and its subsidiary guarantors, including, without limitation, a pledge by the Company of its equity interest in Intermediate Holdings.
Interest and Fees
Loans under the Amended and Restated Credit Agreement initially bore interest at LIBOR plus 1.50% per annum or prime plus 0.5%. The interest rate margins are subject to adjustment pursuant to a pricing grid based on the Company’s total net leverage ratio, as set forth in the Amended and Restated Credit Agreement. Under the terms of the Amended and Restated Credit Agreement, the Company is obligated to pay a commitment fee on the available unused amount of the commitments between 0.15% to 0.30% per annum, also pursuant to a pricing grid based on the Company’s total net leverage ratio. As of January 3, 2021, loans under the Amended and Restated Credit Agreement bore interest at LIBOR plus 1.25% per annum or prime plus 0.25%.
The interest rate on 100% of outstanding debt under the Amended and Restated Credit Agreement is fixed, reflecting the effects of floating to fixed interest rate swaps (see Note 22, “Derivative Financial Instruments”).
As of January 3, 2021, outstanding letters of credit under the Amended and Restated Credit Agreement were subject to a participation fee of 1.25% per annum and an issuance fee of 0.125% per annum.
Payments and Borrowings
The Amended and Restated Credit Agreement is scheduled to mature, and the commitments thereunder will terminate on March 27, 2023, subject to extensions as set forth therein.
The Company may prepay loans and permanently reduce commitments under the Amended and Restated Credit Agreement at any time in agreed-upon minimum principal amounts, without premium or penalty (except LIBOR breakage costs, if applicable).
During fiscal year 2020, the Company made no additional borrowings and made a total of $288.0 million of principal payments, resulting in total outstanding debt under the Amended and Restated Credit Agreement of $250 million as of January 3, 2021. During fiscal year 2019, the Company borrowed an additional $265.4 million, primarily for share repurchases, and made a total of $180.4 million of principal payments; resulting in total outstanding debt under the Amended and Restated Credit Agreement of $538.0 million as of December 29, 2019.
Covenants
The Amended and Restated Credit Agreement contains financial, affirmative and negative covenants. The negative covenants include, among other things, limitations on the Company’s ability to:
|
•
|
incur additional indebtedness;
|
|
•
|
grant additional liens;
|
|
•
|
enter into sale-leaseback transactions;
|
77
|
•
|
make loans or investments;
|
|
•
|
merge, consolidate or enter into acquisitions;
|
|
•
|
pay dividends or distributions;
|
|
•
|
enter into transactions with affiliates;
|
|
•
|
enter into new lines of business;
|
|
•
|
modify the terms of debt or other material agreements; and
|
|
•
|
change its fiscal year.
|
Each of these covenants is subject to customary and other agreed-upon exceptions.
In addition, the Amended and Restated Credit Agreement requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed 3.25 to 1.00 and minimum interest coverage ratio not to be less than 1.75 to 1.00. Each of these covenants is tested on the last day of each fiscal quarter, starting with the fiscal quarter ended April 1, 2018.
The Company was in compliance with all applicable covenants under the Amended and Restated Credit Agreement as of January 3, 2021.
Former Credit Facility
On April 17, 2015, Intermediate Holdings, as borrower, entered into the Former Credit Facility that provided for a revolving credit facility with an initial aggregate commitment of $450.0 million, subject to an expansion feature set forth therein. The Former Credit Facility also provided for a letter of credit subfacility and a $15.0 million swingline facility.
The Former Credit Facility was scheduled to mature, and the commitments thereunder were scheduled to terminate, on April 17, 2020.
Loans under the Former Credit Facility bore interest, at the Company’s option, either at adjusted LIBOR plus 1.50% per annum, or a base rate plus 0.50% per annum. The interest rate margins were subject to adjustment pursuant to a pricing grid based on the Company’s total gross leverage ratio, as defined in the Former Credit Facility. Under the terms of the Former Credit Facility, the Company was obligated to pay a commitment fee on the available unused amount of the commitments equal to 0.20% per annum.
14. Other Long-Term Liabilities
A summary of other long-term liabilities is as follows:
|
|
As Of
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
Long-term portion of self-insurance reserves
|
|
$
|
23,291
|
|
|
$
|
24,058
|
|
Other
|
|
|
17,621
|
|
|
|
17,459
|
|
Total
|
|
$
|
40,912
|
|
|
$
|
41,517
|
|
15. Self-Insurance Programs
The Company is self-insured for costs related to workers’ compensation, general liability and employee health benefits up to certain stop-loss limits. The Company establishes reserves for the ultimate obligation of reported and incurred but not reported (“IBNR”) claims. IBNR claims are estimated using various techniques, including analysis of historical trends and actuarial valuation methods.
78
The Company purchases coverage from third-party insurers for exposures in excess of certain stop-loss limits and recorded receivables of $1.0 million and a $1.6 million from its insurance carriers for payments expected to be made in excess of self-insured retentions at January 3, 2021 and December 29, 2019, respectively. The Company recorded amounts for general liability, worker’s compensation and team member health benefit liabilities of $48.5 million and $46.9 million at January 3, 2021 and December 29, 2019, respectively. See Note 11, “Accrued Liabilities” for current amounts recorded for general liability, workers’ compensation and team member health benefit liabilities.
16. Defined Contribution Plan
The Company maintains the Sprouts Farmers Market, Inc. Employee 401(k) Savings Plan (the “Plan”), which is a defined contribution plan covering all eligible team members. Under the provisions of the Plan, participants may direct the Company to defer a portion of their compensation to the Plan, subject to the Internal Revenue Code limitations. The Company provides for an employer matching contribution equal to 50% of each dollar contributed by the participants up to 6% of their eligible compensation.
Total expense recorded for the matching under the Plan:
Year Ended
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
$
|
6,588
|
|
|
$
|
5,756
|
|
|
$
|
4,981
|
|
17. Income Taxes
On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”) was enacted into law, which changed various corporate income tax provisions within the existing Internal Revenue Code. Substantially all the provisions of the Tax Act were effective for taxable years beginning after December 31, 2017. The most significant change that impacted the Company was the reduction in the corporate federal income tax rate from 35% to 21%.
The Company realized a $2.6 million non-cash income tax benefit in the third quarter of 2018 in the filing of the 2017 return related to the reduction of the federal corporate income tax rate. The Company changed its method of tax accounting on certain items resulting in the acceleration of deductions into prior periods subject to a higher 35% corporate income tax rate.
Income Tax Provision
The income tax provision consists of the following:
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
U.S. Federal—current
|
|
$
|
63,957
|
|
|
$
|
36,091
|
|
|
$
|
9,319
|
|
U.S. Federal—deferred
|
|
|
3,725
|
|
|
|
186
|
|
|
|
19,441
|
|
U.S. Federal—total
|
|
|
67,682
|
|
|
|
36,277
|
|
|
|
28,760
|
|
State—current
|
|
|
20,442
|
|
|
|
8,649
|
|
|
|
5,271
|
|
State—deferred
|
|
|
1,304
|
|
|
|
1,613
|
|
|
|
3,229
|
|
State—total
|
|
|
21,746
|
|
|
|
10,262
|
|
|
|
8,500
|
|
Total provision
|
|
$
|
89,428
|
|
|
$
|
46,539
|
|
|
$
|
37,260
|
|
79
Tax Rate Reconciliation
Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pre-tax income as a result of the following:
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
4.6
|
|
|
|
4.4
|
|
|
|
3.8
|
|
Enhanced charitable contribution impact
|
|
|
(1.0
|
)
|
|
|
(0.7
|
)
|
|
|
—
|
|
Excess tax benefits from share based payments
|
|
|
—
|
|
|
|
—
|
|
|
|
(5.2
|
)
|
Change in uncertain tax position reserves
|
|
|
0.1
|
|
|
|
(1.1
|
)
|
|
|
1.5
|
|
Amended returns
|
|
|
(1.0
|
)
|
|
|
—
|
|
|
|
—
|
|
Benefit of federal tax credit
|
|
|
(0.9
|
)
|
|
|
(1.6
|
)
|
|
|
(0.7
|
)
|
Other, net
|
|
|
0.9
|
|
|
|
1.7
|
|
|
|
(1.4
|
)
|
Effective tax rate
|
|
|
23.7
|
%
|
|
|
23.7
|
%
|
|
|
19.0
|
%
|
The effective income tax rate was 23.7% in 2020 and 2019. The effective income tax rate in 2020 was primarily affected by a decrease in federal tax credits and prior year release of uncertain tax positions, partially offset by an increase in charitable contribution deductions and the benefit recognized from amended returns. The effective income tax rate increased to 23.7% in 2019 from 19.0% in 2018 primarily due to the volume of expiring pre-IPO option exercises in 2018, partially offset by an increase in the Company’s federal tax credit benefit.
Excess tax benefits or detriments associated with share-based payment awards are recognized as income tax benefits or expense in the income statement. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. The income tax detriment resulting from share-based awards were $0.5 million and $1.6 million for 2020 and 2019, respectively, and are reflected as an increase to the 2020 and 2019 income tax provisions. The income tax benefit resulting from share-based awards was $12.4 million for 2018 and is reflected as a reduction to the 2018 income tax provision.
80
Deferred Taxes
Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows:
|
|
As Of
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
19,498
|
|
|
$
|
14,663
|
|
Tax credits
|
|
|
270
|
|
|
|
427
|
|
Operating leases(1)
|
|
|
309,756
|
|
|
|
303,950
|
|
Other lease related(1)
|
|
|
4,955
|
|
|
|
5,177
|
|
Other accrued liabilities
|
|
|
3,926
|
|
|
|
5,027
|
|
Charitable contribution carryforward
|
|
|
1,028
|
|
|
|
7,819
|
|
Inventories and other
|
|
|
4,504
|
|
|
|
3,520
|
|
Total gross deferred tax assets
|
|
|
343,937
|
|
|
|
340,583
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(93,738
|
)
|
|
|
(97,309
|
)
|
Intangible assets
|
|
|
(39,602
|
)
|
|
|
(33,293
|
)
|
Operating leases(1)
|
|
|
(268,670
|
)
|
|
|
(264,337
|
)
|
Total gross deferred tax liabilities
|
|
|
(402,010
|
)
|
|
|
(394,939
|
)
|
Net deferred tax (liability) / asset
|
|
$
|
(58,073
|
)
|
|
$
|
(54,356
|
)
|
|
(1)
|
The deferred tax assets and liabilities disclosure at December 29, 2019 has been adjusted to reflect the gross deferred tax right-of-use asset and related gross deferred lease liability recognized in accordance with ASC 842.
|
A valuation allowance is established for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that the realization of future deductions is uncertain.
Management performs an assessment over future taxable income to analyze whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company has evaluated all available positive and negative evidence and believes it is probable that the deferred tax assets will be realized and has not recorded a valuation allowance against the Company’s deferred tax assets as of January 3, 2021 and December 29, 2019.
The Company applies the authoritative accounting guidance under ASC 740 for the recognition, measurement, classification and disclosure of uncertain tax positions taken or expected to be taken in a tax return.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
|
|
As Of
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
Beginning balance
|
|
$
|
1,343
|
|
|
$
|
3,658
|
|
|
$
|
794
|
|
Additions based on tax positions related to the
current year
|
|
|
16
|
|
|
|
289
|
|
|
|
2,864
|
|
Additions based on tax positions related to prior years
|
|
|
647
|
|
|
|
—
|
|
|
|
—
|
|
Reductions for tax positions for prior years
|
|
|
(203
|
)
|
|
|
(2,604
|
)
|
|
|
—
|
|
Ending balance
|
|
$
|
1,803
|
|
|
$
|
1,343
|
|
|
$
|
3,658
|
|
81
The Company had unrecognized tax benefits (tax effected) of $1.8 million and $1.3 million as of January 3, 2021 and December 29, 2019, respectively. These would impact the effective tax rate if recognized.
The Company’s policy is to recognize accrued interest and penalties as a component of income tax expense.
The Company does not anticipate a decrease in the total amount of unrecognized tax benefits during the next twelve months..
The Company files income tax returns with federal and state tax authorities within the United States. The general statute of limitations for income tax examinations remains open for federal tax returns for tax years 2017 through 2019 and state tax returns for the tax years 2016 through 2019. The Company’s U.S. federal income tax return for the fiscal year ended December 31, 2017 is currently under examination by the Internal Revenue Service.
18. Related-Party Transactions
A former member of the Company’s board of directors was an investor in a company that is a supplier of coffee to the Company for resale. Effective January 1, 2019, this director no longer held an ownership interest in the supplier and effective June 20, 2019, this director resigned from the Company’s board of directors. During 2020 and 2019, there were no purchases from this supplier. During 2018, there were $2.6 million in purchases. As of January 3, 2021 and December 29, 2019, the Company had no recorded accounts payable due to this vendor.
19. Commitments and Contingencies
Commitments
Real estate obligations, which include legally binding minimum lease payments for leases executed but not yet commenced were $183.0 million as of January 3, 2021.
In addition to its lease obligations, the Company maintains certain purchase commitments with various vendors to ensure its operational needs are fulfilled. As of January 3, 2021, total future purchase commitments were $9.0 million.
Commitments related to the Company’s business operations cover varying periods of time and are not individually significant. These commitments are expected to be fulfilled with no adverse consequences to the Company’s operations or financial conditions.
Contingencies
The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters that are believed to best serve the interests of the Company’s stakeholders. The Company’s primary contingencies are associated with self-insurance obligations and litigation matters. Self-insurance liabilities require significant judgments and actual claim settlements and associated expenses may differ from the Company’s current provisions for loss. See Note 15, “Self-Insurance Programs” for more information.
Securities Action
On March 4, 2016, a complaint was filed in the Superior Court for the State of Arizona against the Company and certain of its directors and officers on behalf of a purported class of purchasers of shares of the Company’s common stock in its underwritten secondary public offering which closed on March 10,
82
2015 (the “March 2015 Offering”). The complaint purported to state claims under Sections 11, 12 and 15 of the Securities Act of 1933, as amended, based on an alleged failure by the Company to disclose adequate information about produce price deflation in the March 2015 Offering documents. The complaint sought damages on behalf of the purported class in an unspecified amount, rescission, and an award of reasonable costs and attorneys’ fees. On August 4, 2018, the Company reached an agreement in principle to settle these claims. The parties’ settlement agreement was approved by the court on May 31, 2019 and the complaint was subsequently dismissed. The settlement was funded from the Company’s directors and officers liability insurance policy and did not have a material impact on the consolidated financial statements.
“Phishing” Scam Actions
In April 2016, four complaints were filed, two in the federal courts of California, one in the Superior Court of California and one in the federal court in the District of Colorado, each on behalf of a purported class of the Company’s current and former team members whose personally identifiable information (“PII”) was inadvertently disclosed to an unauthorized third party that perpetrated an email “phishing” scam against one of the Company’s team members. The complaints alleged the Company failed to properly safeguard the PII in accordance with applicable law. The complaints sought damages on behalf of the purported class in unspecified amounts, attorneys’ fees and litigation expenses. On March 1, 2019, a number of individual plaintiffs filed arbitration demands. On May 15, 2019, certain other plaintiffs filed a second amended class action complaint in the District of Arizona, alleging that certain subclasses of team members are not subject to the Company’s arbitration agreement and attempted to pursue those team members’ claims in federal court. In late August 2019, the Company reached an agreement in principle to settle the majority of these claims, which were funded in the fourth quarter of 2019. Primary funding for the settlement came from the Company’s cyber insurance policy, and the settlement did not have a material impact on the consolidated financial statements. Following the group settlement, three (3) individual claimants planned to proceed with arbitration of their claims. The three individual arbitrations were settled in late June and early July 2020, with immaterial settlement amounts fully funded by the Company’s cyber insurance policy.
Proposition 65 Coffee Action
On April 13, 2010, an organization named Council for Education and Research on Toxics (“CERT”) filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against nearly 80 defendants who manufacture, package, distribute or sell brewed coffee, including the Company. CERT alleged that the defendants failed to provide warnings for their coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986, better known as Proposition 65. CERT seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties.
The Company, as part of a joint defense group, asserted multiple defenses against the lawsuit. On May 7, 2018, the trial court issued a ruling adverse to defendants on these defenses to liability. On June 15, 2018, before the court tried damages, remedies and attorneys' fees, California’s Office of Environmental Health Hazard Assessment (“OEHHA”) published a proposal to amend Proposition 65’s implementing regulations by adding a stand-alone sentence that reads as follows: “Exposures to listed chemicals in coffee created by and inherent in the processes of roasting coffee beans or brewing coffee do not pose a significant risk of cancer.” The proposed regulation has been finalized with an effective date of October 1, 2019. The defendants have amended their answers to assert the regulation as an affirmative defense. On August 25, 2020, the court granted the defense motion for summary judgment on the affirmative defense, and the case was dismissed.
On November 20, 2020, CERT filed a notice of appeal to appeal the ruling on the defense motion for summary judgment. At this stage of the proceedings, the Company is unable to predict or reasonably estimate any potential loss or effect on the Company or its operations. Accordingly, no loss contingency was recorded for this matter.
83
20. Capital Stock
Common stock
As of January 3, 2021, 117,953,435 shares of the Company’s common stock were issued and outstanding after the repurchase and retirement of no shares in 2020 and the repurchase and retirement of 7,950,858 shares during 2019, as described below. As of January 3, 2021, 4,433,820 shares of common stock are reserved for issuance under the 2013 Incentive Plan (see Note 26, “Share-Based Compensation”). The following table outlines the options exercised in exchange for the issuance of shares of common stock during 2020, 2019, and 2018.
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
Options exercised
|
|
|
59,561
|
|
|
|
316,493
|
|
|
|
2,824,460
|
|
Other share issuances under stock plans
|
|
|
440,956
|
|
|
|
506,093
|
|
|
|
403,233
|
|
Share Repurchases
On February 20, 2018, the Company’s board of directors authorized a new $350 million common stock share repurchase program, replacing the previous share repurchase program which was completed in the second quarter of 2018. Upon this authorization’s December 31, 2019 expiration, $42.0 million remained unused. The Company’s board of directors has not authorized additional share repurchases subsequent to the expiration of the prior authorization on December 31, 2019, and there was no share repurchase authorization available as of January 3, 2021.
The shares under the Company’s repurchase programs may be purchased on a discretionary basis from time to time prior to the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. The board’s authorization of the share repurchase programs does not obligate the Company to acquire any particular amount of common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time. The Company has used borrowings under its Former Credit Facility and Amended and Restated Credit Agreement to assist with the repurchase programs (see Note 13, “Long-Term Debt and Finance Lease Liabilities”).
Share repurchase activity under the Company’s repurchase programs for the periods indicated was as follows (total cost in thousands):
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
Number of common shares acquired
|
|
|
—
|
|
|
|
7,950,858
|
|
Average price per common share acquired
|
|
$
|
—
|
|
|
$
|
22.18
|
|
Total cost of common shares acquired
|
|
$
|
—
|
|
|
$
|
176,310
|
|
Shares purchased under the Company’s repurchase programs were subsequently retired.
Preferred Stock
The Company’s board of directors is authorized, subject to limitations prescribed by Delaware law, to issue up to 10,000,000 shares of the Company’s preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the designation, powers, preferences, and rights of the shares of each series and any of its qualifications, limitations, or restrictions, in each case without further action by the Company’s stockholders. The Company’s board of directors can also increase or decrease the number of shares of any series of preferred stock, but not below the number of shares of that series then outstanding. The Company’s board of directors may
84
authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring, or preventing a change in control of the Company and might adversely affect the market price of the Company’s common stock and the voting and other rights of the holders of the Company’s common stock. The Company has no current plan to issue any shares of preferred stock.
21. Net Income per Share
The computation of net income per share is based on the number of weighted average shares outstanding during the period. The computation of diluted net income per share includes the dilutive effect of share equivalents consisting of incremental shares deemed outstanding from the assumed exercise of options.
A reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is as follows (in thousands, except per share amounts):
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
287,450
|
|
|
$
|
149,629
|
|
|
$
|
158,536
|
|
Weighted average shares outstanding
|
|
|
117,821
|
|
|
|
119,368
|
|
|
|
128,827
|
|
Basic net income per share
|
|
$
|
2.44
|
|
|
$
|
1.25
|
|
|
$
|
1.23
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
287,450
|
|
|
$
|
149,629
|
|
|
$
|
158,536
|
|
Weighted average shares outstanding
|
|
|
117,821
|
|
|
|
119,368
|
|
|
|
128,827
|
|
Dilutive effect of equity-based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed exercise of options to purchase
shares
|
|
|
16
|
|
|
|
52
|
|
|
|
429
|
|
Restricted Stock Units
|
|
|
341
|
|
|
|
178
|
|
|
|
220
|
|
Restricted Stock Awards
|
|
|
9
|
|
|
|
55
|
|
|
|
136
|
|
Performance Share Awards
|
|
|
37
|
|
|
|
89
|
|
|
|
164
|
|
Weighted average shares and equivalent
shares outstanding
|
|
|
118,224
|
|
|
|
119,742
|
|
|
|
129,776
|
|
Diluted net income per share
|
|
$
|
2.43
|
|
|
$
|
1.25
|
|
|
$
|
1.22
|
|
For the year ended January 3, 2021, the Company had 219,736 options, 62,347 RSUs and 299,629 PSAs outstanding which were excluded from the computation of diluted net income per share as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met. For the year ended December 29, 2019, the Company had 521,502 options and 302,621 PSAs outstanding which were excluded from the computation of diluted net income per share as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met. For the year ended December 30, 2018, the Company had 1,105,334 options and 128,854 PSAs which were excluded from the computation of diluted net income per share as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met.
85
22. Derivative Financial Instruments
The Company entered into an interest rate swap agreement in December 2017 to manage its cash flow associated with variable interest rates. This forward contract has been designated and qualifies as a cash flow hedge, and its change in fair value is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the forecasted transaction occurs. The forward contract consisted of five cash flow hedges, of which two remain outstanding as of January 3, 2021. To qualify as a hedge, the Company needs to formally document, designate and assess the effectiveness of the transactions that receive hedge accounting.
The notional dollar amount of the two outstanding swaps was $250.0 million at January 3, 2021, under which the Company pays a fixed rate and receives a variable rate of interest (cash flow swap). The cash flow swaps hedge the change in interest rates on debt related to fluctuations in interest rates and each have a length of one year and mature annually from 2021 to 2022. These interest rate swaps have been designated and qualify as cash flow hedges and have met the requirements to assume zero ineffectiveness. The Company reviews the effectiveness of its hedging instruments on a quarterly basis.
The counterparties to these derivative financial instruments are major financial institutions. The Company evaluates the credit ratings of the financial institutions and believes that credit risk is at an acceptable level.
The following table summarizes the fair value of the Company’s derivative instruments:
|
|
As of January 3, 2021
|
|
|
As of December 29, 2019
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Interest rate swaps
|
|
Accrued liabilities
|
|
$
|
5,695
|
|
|
Accrued liabilities
|
|
$
|
1,736
|
|
Interest rate swaps
|
|
Other long-term liabilities
|
|
|
5,756
|
|
|
Other long-term liabilities
|
|
|
4,569
|
|
The gain or loss on these derivative instruments is recognized in other comprehensive income, net of tax, with the portion related to current period interest payments reclassified to interest expense, net on the consolidated statement of income. The following table summarizes these gains and losses for 2020 and 2019:
|
|
Year Ended
|
|
|
|
January 3, 2021
|
|
|
December 29, 2019
|
|
Consolidated Statements of
Income Classification
|
|
|
|
|
|
|
|
|
Interest expense (income), net
|
|
$
|
4,307
|
|
|
$
|
(256
|
)
|
86
23. Comprehensive Income
The following table presents the changes in accumulated other comprehensive income (loss) for the year ended January 3, 2021:
|
|
Cash Flow
Hedges
|
|
Balance at December 30, 2018
|
|
$
|
1,134
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
Unrealized losses on cash flow hedging activities, net of income tax of ($2,078)
|
|
|
(6,006
|
)
|
Reclassification of net gains on cash flow hedges to net income, net of income
tax of $66
|
|
|
190
|
|
Total other comprehensive income (loss)
|
|
|
(5,816
|
)
|
Balance at December 29, 2019
|
|
$
|
(4,682
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
Unrealized losses on cash flow hedging activities, net of income tax of ($205)
|
|
|
(592
|
)
|
Reclassification of net losses on cash flow hedges to net income, net of income
tax of ($1,107)
|
|
|
(3,200
|
)
|
Total other comprehensive income (loss)
|
|
|
(3,792
|
)
|
Balance at January 3, 2021
|
|
$
|
(8,474
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) to net income are included within interest expense, net on the consolidated statement of income. The estimated amount expected to be reclassified from accumulated other comprehensive income (loss) to net income within the next twelve months, based on interest rates at January 3, 2021, is a loss of $5.7 million.
24. Fair Value Measurements
The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with GAAP. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the valuation of derivative instruments, impairment analysis of goodwill, intangible assets, and long-lived assets.
87
The following tables present the Company’s fair value hierarchy for the Company’s financial assets and liabilities measured at fair value on a recurring basis as of January 3, 2021 and December 29, 2019:
January 3, 2021
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
250,000
|
|
|
$
|
—
|
|
|
$
|
250,000
|
|
Interest rate swap liability
|
|
|
—
|
|
|
|
11,451
|
|
|
|
—
|
|
|
|
11,451
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
261,451
|
|
|
$
|
—
|
|
|
$
|
261,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2019
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
538,000
|
|
|
$
|
—
|
|
|
$
|
538,000
|
|
Interest rate swap liability
|
|
|
—
|
|
|
|
6,305
|
|
|
|
—
|
|
|
|
6,305
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
544,305
|
|
|
$
|
—
|
|
|
$
|
544,305
|
|
The Company’s interest rate swaps are considered Level 2 in the hierarchy and are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of the yield curve on floating interest rates, which is readily available on public markets.
The determination of fair values of certain tangible and intangible assets for purposes of the Company’s goodwill or long-lived asset impairment evaluation as described above is based upon Level 3 inputs. When necessary, the Company uses third party market data and market participant assumptions to derive the fair value of its asset groupings, which primarily include right-of-use lease assets and property and equipment. For further details, see Note 3, “Significant Accounting Policies – Impairment of Long-lived Assets”.
Cash, cash equivalents, and restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities, and accrued salaries and benefits approximate fair value because of the short maturity of those instruments. Based on comparable open market transactions, the fair value of the long-term debt approximated carrying value as of January 3, 2021 and December 29, 2019.
25. Segments
The Company has one reportable and one operating segment, healthy grocery stores.
In accordance with ASC 606, the following table represents a disaggregation of revenue for fiscal 2020 and 2019.
|
|
Year Ended
|
|
|
|
January 3, 2021
|
|
|
December 29, 2019
|
|
Perishables
|
|
$
|
3,700,878
|
|
|
|
57.2
|
%
|
|
$
|
3,252,928
|
|
|
|
57.7
|
%
|
Non-Perishables
|
|
|
2,767,881
|
|
|
|
42.8
|
%
|
|
|
2,381,907
|
|
|
|
42.3
|
%
|
Net Sales
|
|
$
|
6,468,759
|
|
|
|
100.0
|
%
|
|
$
|
5,634,835
|
|
|
|
100.0
|
%
|
The Company categorizes the varieties of products it sells as perishable and non-perishable. Perishable product categories include produce, meat, seafood, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care.
88
26. Share-Based Compensation
2013 Incentive Plan
The Company’s board of directors adopted, and its shareholders approved, the Sprouts Farmers Market, Inc. 2013 Incentive Plan (the “2013 Incentive Plan”). The 2013 Incentive Plan became effective July 31, 2013 in connection with the Company’s initial public offering and replaced the Sprouts Farmers Markets, LLC Option Plan. The 2013 Incentive Plan serves as the umbrella plan for the Company’s share-based and cash-based incentive compensation programs for its directors, officers and other team members. On May 1, 2015, the Company’s stockholders approved the material terms of the performance goals under the 2013 Incentive Plan for purposes of Section 162(m) of the Internal Revenue Code.
The Company granted to certain officers, directors and team members the following awards during 2019, under the 2013 Incentive Plan:
Grant Date
|
|
Award Type
|
|
Shares of
common
stock
|
|
|
Exercise
Price
|
|
|
Grant date
fair value
|
|
March 4, 2019
|
|
RSUs
|
|
|
386,115
|
|
|
|
—
|
|
|
$
|
23.12
|
|
|
|
PSAs
|
|
|
95,768
|
|
|
|
—
|
|
|
$
|
23.12
|
|
|
|
Options
|
|
|
53,866
|
|
|
$
|
23.12
|
|
|
$
|
7.63
|
|
May 13, 2019
|
|
RSUs
|
|
|
45,682
|
|
|
|
—
|
|
|
$
|
21.70
|
|
|
|
PSAs
|
|
|
2,999
|
|
|
|
—
|
|
|
$
|
21.70
|
|
June 24, 2019
|
|
RSUs
|
|
|
177,975
|
|
|
|
—
|
|
|
$
|
18.64
|
|
|
|
PSAs
|
|
|
75,000
|
|
|
|
—
|
|
|
$
|
18.64
|
|
August 12, 2019
|
|
RSUs
|
|
|
12,313
|
|
|
|
—
|
|
|
$
|
17.54
|
|
December 3, 2019
|
|
RSUs
|
|
|
3,159
|
|
|
|
—
|
|
|
$
|
20.22
|
|
The RSUs vest either one-third each year for three years or one-half each year for two years for team members. RSUs granted to independent members of the Company’s board of directors cliff vest in one year. The options expire seven years from grant date. The PSAs are described below.
The Company granted to certain officers, directors and team members the following awards during 2020, under the 2013 Incentive Plan:
Grant Date
|
|
Award Type
|
|
Shares of
common
stock
|
|
|
Exercise
Price
|
|
|
Grant date
fair value
|
|
March 9, 2020
|
|
RSUs
|
|
|
485,367
|
|
|
|
—
|
|
|
$
|
16.47
|
|
|
|
PSAs
|
|
|
174,902
|
|
|
|
—
|
|
|
$
|
16.47
|
|
|
|
Options
|
|
|
1,055,907
|
|
|
$
|
16.47
|
|
|
$
|
4.86
|
|
May 12, 2020
|
|
RSUs
|
|
|
66,550
|
|
|
|
—
|
|
|
$
|
25.58
|
|
|
|
PSAs
|
|
|
11,389
|
|
|
|
—
|
|
|
$
|
25.58
|
|
|
|
Options
|
|
|
15,569
|
|
|
$
|
25.58
|
|
|
$
|
8.03
|
|
August 10, 2020
|
|
RSUs
|
|
|
35,655
|
|
|
|
—
|
|
|
$
|
24.77
|
|
|
|
PSAs
|
|
|
5,762
|
|
|
|
—
|
|
|
$
|
24.77
|
|
|
|
Options
|
|
|
14,052
|
|
|
$
|
24.77
|
|
|
$
|
7.74
|
|
The RSUs vest either one-third each year for three years or one-half each year for two years for team members. RSUs granted to independent members of the Company’s board of directors cliff vest in one year. The options expire seven years from grant date. The PSAs are described below.
89
The aggregate number of shares of common stock that may be issued to team members and directors under the 2013 Incentive Plan may not exceed 10,089,072. Shares subject to awards granted under the 2013 Incentive Plan which are subsequently forfeited, expire unexercised or are otherwise not issued will not be treated as having been issued for purposes of the share limitation. As of January 3, 2021, there were 2,547,567 stock awards outstanding and 4,433,820 shares remaining available for issuance under the 2013 Incentive Plan.
Stock Options
In the event of a change in control as defined in the award agreements issued under the 2013 Incentive Plan, all options and awards issued prior to 2015 become immediately vested and exercisable. For grants issued in and subsequent to 2015, the options and awards only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the grants are not continued or assumed by the acquirer on a substantially equivalent basis. If the options and awards continue or are assumed on a substantially equivalent basis, but employment is terminated by the Company or an acquirer without cause or by the team member for good reason (as such terms are defined in the applicable team member award agreement) within 24 months following the change in control, such options or awards will become immediately vested upon such termination. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable award agreement.
Shares issued for option exercises are newly issued shares.
The estimated weighted average fair values of options granted during 2020, 2019, and 2018 are $4.94, $7.63 and $7.80, respectively, and were calculated using the following assumptions in the table below:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
34.80
|
%
|
|
|
34.89
|
%
|
|
|
35.20
|
%
|
Risk free interest rate
|
|
|
0.46
|
%
|
|
|
2.53
|
%
|
|
|
2.76
|
%
|
Expected term, in years
|
|
|
4.50
|
|
|
|
4.50
|
|
|
|
4.50
|
|
The grant date weighted average fair value of the 1.1 million options issued but not vested as of January 3, 2021 was $5.00. The grant date weighted average fair value of the 0.1 million options issued but not vested as of December 29, 2019 was $7.63. The grant date weighted average fair value of the 0.1 million options issued but not vested as of December 30, 2018 was $8.35.
The following table summarizes grant date weighted average fair value of options granted and options forfeited:
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
Grant date weighted average fair value of options granted
|
|
$
|
4.94
|
|
|
$
|
7.63
|
|
|
$
|
7.80
|
|
Grant date weighted average fair value of options forfeited
|
|
$
|
8.94
|
|
|
$
|
7.03
|
|
|
$
|
9.32
|
|
Expected volatility for option grants and modifications are calculated based upon the Company’s historical volatility data over a time frame consistent with the expected life of the awards. The expected term is estimated based on the expected period that the options are anticipated to be outstanding after initial grant until exercise or expiration based upon various factors including the contractual terms of the awards and vesting schedules. The expected risk-free rate is based on the U.S. Treasury yield curve rates in effect at the time of the grant using the term most consistent with the expected life of the award. Dividend yield was estimated at zero as the Company does not anticipate making regular future distributions to stockholders. The total intrinsic value of options exercised was $0.2 million, $2.1 million, and $53.3 million for 2020, 2019, and 2018, respectively.
90
The following table summarizes option activity during 2020:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (In Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 29, 2019
|
|
|
523,725
|
|
|
$
|
29.84
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,085,528
|
|
|
|
16.71
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(219,484
|
)
|
|
|
31.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(59,561
|
)
|
|
|
22.56
|
|
|
|
|
|
|
$
|
156
|
|
Outstanding at January 3, 2021
|
|
|
1,330,208
|
|
|
|
19.19
|
|
|
|
5.30
|
|
|
$
|
3,784
|
|
Exercisable—January 3, 2021
|
|
|
234,703
|
|
|
|
30.13
|
|
|
|
1.27
|
|
|
$
|
—
|
|
Vested/Expected to vest—January 3, 2021
|
|
|
1,330,208
|
|
|
$
|
19.19
|
|
|
|
5.30
|
|
|
$
|
3,784
|
|
RSUs
In the event of a change in control as defined in the award agreements issued under the 2013 Incentive Plan, all RSUs granted prior to 2015 become immediately vested. RSUs granted in and subsequent to 2015 only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the awards are not continued or assumed by the acquirer on a substantially equivalent basis. If the awards continue or are assumed on a substantially equivalent basis, but employment is terminated by the Company or an acquirer without cause or by the team member for good reason (as such terms are defined in the applicable team member award agreement) within 24 months following the change in control, such awards will become immediately vested upon such termination. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable award agreement.
Shares issued for RSU vesting are newly issued shares.
The fair value for restricted stock units is calculated based on the closing stock price on the date of grant. The total grant date fair value of RSUs vested during 2020, 2019 and 2018 was $7.8 million, $7.4 million and $5.1 million, respectively.
The following table summarizes the weighted average grant date fair value of RSUs awarded during 2020, 2019, and 2018:
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
RSUs awarded
|
|
$
|
18.01
|
|
|
$
|
21.62
|
|
|
$
|
24.80
|
|
The following table summarizes RSU activity during 2020:
|
|
Number of
RSUs
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding at December 29, 2019
|
|
|
725,653
|
|
|
$
|
22.02
|
|
Awarded
|
|
|
587,572
|
|
|
|
18.01
|
|
Released
|
|
|
(350,206
|
)
|
|
|
22.23
|
|
Forfeited
|
|
|
(60,761
|
)
|
|
|
20.55
|
|
Outstanding at January 3, 2021
|
|
|
902,258
|
|
|
$
|
19.43
|
|
91
PSAs
PSAs granted in fiscal year 2016 were restricted shares that were subject to the Company achieving certain earnings before interest and taxes (“EBIT”) performance targets on an annual and cumulative basis over a three-year performance period, as well as additional time-vesting conditions. The EBIT target for each of the three years during the performance period was based on a percentage increase over the previous year’s actual EBIT, with each annual performance tranche measured independently of the previous and next tranche. Cumulative performance was based on the aggregate annual performance and was measured against a cumulative performance target. Payout of the performance shares was either to have been 0% or range from 50% to 150% of the target number of shares granted, depending upon goal achievement. If the performance conditions had been met, the applicable number of performance shares was subject to cliff vesting on the third anniversary of the grant date (March 2019); however, neither the annual nor cumulative performance conditions were deemed to have been met.
PSAs granted in March 2017 were subject to the Company achieving certain earnings per share performance targets during 2017. The criteria is based on a range of performance targets in which grantees may earn between 10% and 150% of the base number of awards granted. The performance conditions with respect to 2017 earnings per share were deemed to have been met, and the PSAs vested 50% on the second anniversary of the grant date (March 2019) and the remaining 50% vested on the third anniversary of the grant date (March 2020). During the year ended January 3, 2021, 35,697 of the 2017 PSAs vested. There were no outstanding 2017 PSAs as of January 3, 2021.
PSAs granted in March 2018 are subject to the Company achieving certain EBIT performance targets for the 2020 fiscal year. The criteria is based on a range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (March 2021). Based on 2020 performance, the Company has accrued at the maximum pay out level.
PSA’s granted in 2019 are subject to the Company achieving certain EBIT performance targets for the 2021 fiscal year. The criteria is based on a range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (March 2022).
PSAs granted in 2020 are subject to the Company achieving certain earnings before taxes (“EBT”) performance targets for the 2022 fiscal year. The criteria is based on a range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (March 2023).
The PSAs only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the awards are not continued or assumed by the acquirer on a substantially equivalent basis. If the awards continue or are assumed on a substantially equivalent basis, but employment is terminated by the Company or an acquirer without cause or by the team member for good reason (as such terms are defined in the applicable team member award agreement) within 24 months following the change in control, such awards will become immediately vested upon such termination. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable team member award agreement.
Shares issued for PSA vesting are newly issued shares.
The fair value for performance stock awards is calculated based on the closing stock price on the date of grant.
92
The total grant date fair value of PSAs granted during 2020 was $3.3 million. The total grant date fair value of PSAs vested during 2020 was $0.6 million. The total grant date fair value of performance shares forfeited or not earned during 2020 was $0.3 million. The total grant date fair value of the 0.3 million PSAs issued but not released as of January 3, 2021 was $5.8 million.
The total grant date fair value of PSAs granted during 2019 was $3.7 million. The total grant date fair value of PSAs vested during 2019 was $1.9 million. The total grant date fair value of performance shares forfeited or not earned during 2019 was $3.9 million. The total grant date fair value of the 0.2 million PSAs issued but not released as of December 29, 2019 was $3.4 million.
The total grant date fair value of PSAs granted during 2018 was $3.2 million. The total grant date fair value of PSAs vested during 2018 was $0.7 million. The total grant date fair value of performance shares forfeited or not earned during 2018 was $3.5 million. The total grant date fair value of the 0.3 million PSAs issued but not released as of December 30, 2018 was $5.5 million.
The following table summarizes PSA activity during 2020:
|
|
Number of
PSAs
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding at December 29, 2019
|
|
|
169,771
|
|
|
$
|
20.26
|
|
Awarded
|
|
|
192,053
|
|
|
|
17.26
|
|
Released
|
|
|
(35,697
|
)
|
|
|
18.11
|
|
Forfeited
|
|
|
(10,726
|
)
|
|
|
24.08
|
|
PSA earned
|
|
|
—
|
|
|
|
—
|
|
PSAs not earned
|
|
|
—
|
|
|
|
—
|
|
Outstanding at January 3, 2021
|
|
|
315,401
|
|
|
$
|
18.54
|
|
RSAs
The fair value of RSAs is based on the closing price of the Company’s common stock on the grant date. RSAs either vested ratably over a seven quarter period beginning on December 31, 2016, cliff vested on June 30, 2018, or vest annually over three years.
The RSAs only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the awards are not continued. If the awards continue, but employment is terminated by the Company or an acquirer without cause or by the team member for good reason (as such terms are defined in the applicable team member award agreement) within 24 months following the change in control, such awards will become immediately vested upon such termination. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable team member award agreement.
Shares issued for RSA vesting are newly issued shares. The fair value for restricted stock awards is calculated based on the closing stock price on the date of grant.
There were no RSAs granted during 2020, 2019 or 2018. The total grant date fair value of shares of restricted stock released upon vesting during 2020, 2019 and 2018 was $1.0 million, $1.6 million and $3.3 million, respectively. There were no RSAs forfeited in 2020, and the total grant date fair value of shares of restricted stock forfeited during 2019 and 2018 was $0.3 million and $0.6 million, respectively. There were no outstanding RSAs as of January 3, 2021.
93
The following table summarizes RSA activity during 2020:
|
|
Number of
RSAs
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding at December 29, 2019
|
|
|
55,053
|
|
|
$
|
18.11
|
|
Awarded
|
|
|
—
|
|
|
|
—
|
|
Released
|
|
|
(55,053
|
)
|
|
|
18.11
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding at January 3, 2021
|
|
|
—
|
|
|
$
|
—
|
|
Share-Based Compensation Expense
The Company presents share-based compensation expense in selling, general and administrative expenses on the Company’s consolidated statements of income. The amount recognized was as follows:
|
|
Year Ended
|
|
|
|
January 3,
2021
|
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
Share-based compensation expense
before income taxes
|
|
$
|
14,339
|
|
|
$
|
8,949
|
|
|
$
|
14,512
|
|
Income tax benefit
|
|
|
(2,662
|
)
|
|
|
(2,093
|
)
|
|
|
(3,383
|
)
|
Net share-based compensation expense
|
|
$
|
11,677
|
|
|
$
|
6,856
|
|
|
$
|
11,129
|
|
As of January 3, 2021, total unrecognized compensation expense and remaining weighted average recognition period related to outstanding share-based awards were as follows:
|
|
Unrecognized
compensation
expense
|
|
|
Remaining
weighted
average
recognition
period
|
|
Options
|
|
$
|
3,971
|
|
|
|
2.2
|
|
RSUs
|
|
|
10,886
|
|
|
|
1.6
|
|
PSAs
|
|
|
6,709
|
|
|
|
1.7
|
|
RSAs
|
|
|
—
|
|
|
|
—
|
|
Total unrecognized compensation expense at January 3, 2021
|
|
$
|
21,566
|
|
|
|
|
|
During 2020, 2019 and 2018, the Company received $1.3 million, $4.9 million and $21.8 million in cash proceeds from the exercise of options, respectively.
The Company recorded tax detriments of $0.5 million and $1.6 million during 2020 and 2019, respectively, resulting from share-based awards. During 2018, the company recorded $12.4 million of excess tax benefits from the exercise of options.
94
Share Award Restructuring
During the year ended December 29, 2019, certain stock options and awards were modified pursuant to a separation agreement with the Company’s former President and Chief Operating Officer. A total of 216,044 options and awards (RSUs, PSAs, and RSAs) were modified such that they will be permitted to vest in March 2020, which is subsequent to the former President and Chief Operating Officer’s separation date. These options and awards will expire three months after vesting, consistent with the other modified options and awards. These modifications resulted in an incremental expense, net of $1.0 million of stock compensation reversals, of $0.2 million during the year ended December 29, 2019. All other unvested options and awards were forfeited. This expense was presented in store closure and other costs, net on the Company’s consolidated statements of income.
During the year ended December 30, 2018, certain stock options were modified pursuant to a separation agreement with the Company’s former Chief Executive Officer. A total of 995,937 vested options were modified such that their remaining exercise period was increased from three months to six months after the separation date. Additionally, a total of 125,241 options and awards (RSUs, PSAs, and RSAs) were modified such that they will be permitted to vest in March 2019, which is subsequent to the former Chief Executive Officer’s separation date. These options and awards will expire three months after vesting, consistent with the other modified options. These modifications resulted in an incremental expense, net of $2.5 million of stock compensation reversals, of $0.2 million during the year ended December 30, 2018. All other unvested options and awards were forfeited. This expense was presented in store closure and other costs, net on the Company’s consolidated statements of income.
27. Quarterly Financial Data (Unaudited)
The following table sets forth certain of the Company’s unaudited consolidated statements of income data for each of the fiscal quarters in 2020 and 2019.
|
|
Fiscal Quarter Ended
|
|
|
|
January 3,
2021
|
|
|
September 27,
2020
|
|
|
June 28,
2020
|
|
|
March 29,
2020
|
|
|
December 29,
2019
|
|
|
September 29,
2019
|
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
(dollars in thousands, except per share amounts)
|
|
Net sales
|
|
$
|
1,601,834
|
|
|
$
|
1,577,598
|
|
|
$
|
1,642,788
|
|
|
$
|
1,646,539
|
|
|
$
|
1,364,991
|
|
|
$
|
1,440,222
|
|
|
$
|
1,415,736
|
|
|
$
|
1,413,887
|
|
Gross profit
|
|
$
|
588,029
|
|
|
$
|
584,769
|
|
|
$
|
612,659
|
|
|
$
|
593,832
|
|
|
$
|
468,963
|
|
|
$
|
476,725
|
|
|
$
|
464,782
|
|
|
$
|
484,349
|
|
Income from
operations
|
|
$
|
92,932
|
|
|
$
|
78,381
|
|
|
$
|
92,763
|
|
|
$
|
127,589
|
|
|
$
|
46,915
|
|
|
$
|
39,557
|
|
|
$
|
51,332
|
|
|
$
|
79,556
|
|
Net income
|
|
$
|
68,397
|
|
|
$
|
60,241
|
|
|
$
|
67,002
|
|
|
$
|
91,810
|
|
|
$
|
31,634
|
|
|
$
|
26,260
|
|
|
$
|
35,343
|
|
|
$
|
56,392
|
|
Net income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
|
$
|
0.51
|
|
|
$
|
0.57
|
|
|
$
|
0.78
|
|
|
$
|
0.27
|
|
|
$
|
0.22
|
|
|
$
|
0.30
|
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
0.58
|
|
|
$
|
0.51
|
|
|
$
|
0.57
|
|
|
$
|
0.78
|
|
|
$
|
0.27
|
|
|
$
|
0.22
|
|
|
$
|
0.30
|
|
|
$
|
0.46
|
|
The Company follows the same accounting policies for preparing quarterly and annual financial data and, in the opinion of management, the amounts above reflect all normal and recurring adjustments necessary for a fair statement of results for the interim periods presented. Annual amounts may not sum due to rounding. Annual period 2020 represents a 53-week fiscal year and annual period 2019 represents a 52-week fiscal year.
95