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
(UNAUDITED)
1. Basis of Presentation
Sprouts Farmers Market, Inc., a Delaware corporation, through its subsidiaries, operates as a healthy grocery store that 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 April 4, 2021, the Company operated 362 stores in 23 states. The “Company” is used to refer collectively to Sprouts Farmers Market, Inc. and unless the context otherwise requires, its subsidiaries.
The accompanying unaudited consolidated financial statements include the accounts of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission in instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company's financial position, results of operations and cash flows for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The information included in these consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the fiscal year ended January 3, 2021 (“fiscal year 2020”) included in the Company’s Annual Report on Form 10-K, filed on February 25, 2021.
The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.
The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. The fiscal year ending January 2, 2022 (“fiscal year 2021”) is a 52-week year and fiscal year 2020 was a 53-week year. The Company reports its results of operations on a 13-week quarter, except for 53-week fiscal years.
All dollar amounts are in thousands, unless otherwise noted.
9
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Summary of Significant Accounting Policies
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 at
January 3, 2021
|
|
|
Gift Cards Issued During
Current Period but Not
Redeemed(a)
|
|
|
Revenue Recognized from
Beginning Liability
|
|
|
Balance at
April 4, 2021
|
|
Gift card liability, net
|
|
$
|
15,888
|
|
|
$
|
8,120
|
|
|
$
|
(4,984
|
)
|
|
$
|
19,024
|
|
|
(a)
|
net of estimated breakage
|
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, or any remaining performance obligations as of April 4, 2021.
Restricted Cash
Restricted cash relates to defined benefit plan forfeitures as well as healthcare, general liability and workers’ compensation restricted funds of approximately $1.8 million and $1.7 million as of April 4, 2021 and January 3, 2021, respectively. These balances are included in prepaid expenses and other current assets in the consolidated balance sheets.
Recently Adopted Accounting Pronouncements
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 hybrid tax regimes, 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 Company adopted this standard effective January 4, 2021 on a prospective basis. There was no impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020 and January 2021, the FASB issued ASU no. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and ASU 2021-01, “Reference Rate Reform (Topic 848): Scope,” respectively. The amendments in these updates 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. These updates only apply to modifications made prior to December 31, 2022. No such modifications occurred in the period ending April 4, 2021. The Company expects to utilize this optional guidance but does not expect it to have a material impact on its consolidated financial statements.
10
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
No other new accounting pronouncements issued or effective during the thirteen weeks ended April 4, 2021 had, or are expected to have, a material impact on the Company’s consolidated financial statements.
3. 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.
The following tables present the fair value hierarchy for the Company’s financial liabilities measured at fair value on a recurring basis as of April 4, 2021 and January 3, 2021:
April 4, 2021
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
250,000
|
|
|
$
|
—
|
|
|
$
|
250,000
|
|
Interest rate swap liability
|
|
|
—
|
|
|
|
9,809
|
|
|
|
—
|
|
|
|
9,809
|
|
Total financial liabilities
|
|
$
|
—
|
|
|
$
|
259,809
|
|
|
$
|
—
|
|
|
$
|
259,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 financial liabilities
|
|
$
|
—
|
|
|
$
|
261,451
|
|
|
$
|
—
|
|
|
$
|
261,451
|
|
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 impairment evaluation as described above is based upon Level 3 inputs. The weighted average cost of capital is estimated using information from comparable companies and management’s judgment related to the risk associated with the operations of the stores.
Cash, cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, 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 April 4, 2021 and January 3, 2021.
11
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Long-Term Debt and Finance Lease Liabilities
A summary of long-term debt and finance lease liabilities is as follows:
|
|
|
|
|
|
As of
|
|
Facility
|
|
Maturity
|
|
Interest Rate
|
|
April 4, 2021
|
|
|
January 3, 2021
|
|
Senior secured debt
|
|
|
|
|
|
|
|
|
|
|
|
|
$700.0 million Credit Agreement
|
|
March 27, 2023
|
|
Variable
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Finance lease liabilities
|
|
Various
|
|
n/a
|
|
|
10,287
|
|
|
|
10,459
|
|
Long-term debt and finance lease liabilities
|
|
|
|
|
|
$
|
260,287
|
|
|
$
|
260,459
|
|
Senior Secured Revolving Credit Facility
The Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), is the borrower under an amended and restated credit agreement entered into on March 27, 2018 (the “Amended and Restated Credit Agreement”) to amend and restate the Company’s former’s 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.
The Company capitalized debt issuance costs of $2.1 million related to the Amended and Restated Credit Agreement 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 sub-facility 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 $38.8 million have been issued as of April 4, 2021, primarily to support the Company’s insurance programs.
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.
12
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Interest and Fees
Loans under the Amended and Restated Credit Agreement initially bore interest at LIBOR plus 1.50% per annum or prime plus 0.50%. 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 April 4, 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 9, “Derivative Financial Instruments”).
As of April 4, 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 the thirteen weeks ended April 4, 2021, the Company made no additional borrowings or principal payments, resulting in total outstanding debt under the Amended and Restated Credit Agreement of $250.0 million as of April 4, 2021. 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 $250.0 million at January 3, 2021.
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;
|
|
•
|
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.
13
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
The Company was in compliance with all applicable covenants under the Amended and Restated Credit Agreement as of April 4, 2021.
5. Income Taxes
The Company’s effective tax rate decreased to 24.7% for the thirteen weeks ended April 4, 2021, compared to 25.2% for the thirteen weeks ended March 29, 2020. The decrease in the effective tax rate was primarily due to an increase in enhanced charitable contributions and a benefit for share-based payment awards in the current year period, partially offset by a decrease in federal tax credits. The income tax effect resulting from excess tax detriments/(benefits) of equity-based compensation were ($0.1) million and $0.5 million for the thirteen weeks ended April 4, 2021 and March 29, 2020, respectively.
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.
6. Commitments and 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 judgment and actual claim settlements and associated expenses may differ from the Company’s current provisions for loss.
“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
14
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 October 1, 2019, before the court tried damages, remedies and attorneys' fees, California’s Office of Environmental Health Hazard Assessment adopted a regulation that exempted “Exposures to listed chemicals in coffee created by and inherent in the processes of roasting coffee beans or brewing coffee” from Proposition 65’s warning requirement. On August 25, 2020, the court granted the defense motion for summary judgment based on the regulation, 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. The case is currently being briefed, with a decision expected in 2022. 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.
7. Stockholders’ Equity
Share Repurchases
On March 3, 2021, the Company’s board of directors authorized a new $300 million share repurchase program for its common stock. The following table outlines the common stock share repurchase programs authorized by the Company’s board of directors and the related repurchase activity and available authorization as of April 4, 2021.
Effective date
|
|
Expiration date
|
|
Amount
authorized
|
|
|
Cost of
repurchases
|
|
|
Authorization
available
|
|
February 20, 2018
|
|
December 31, 2019
|
|
$
|
350,000
|
|
|
$
|
308,017
|
|
|
$
|
—
|
|
March 3, 2021
|
|
March 3, 2024
|
|
$
|
300,000
|
|
|
$
|
3,209
|
|
|
$
|
296,791
|
|
The shares under the Company’s repurchase programs may be purchased on a discretionary basis from time to time through March 3, 2024, 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.
Share repurchase activity under the Company’s repurchase programs for the periods indicated was as follows (total cost in thousands):
|
|
Thirteen weeks ended
|
|
|
|
April 4, 2021
|
|
|
March 29, 2020
|
|
Number of common shares acquired
|
|
|
129,968
|
|
|
|
—
|
|
Average price per common share acquired
|
|
$
|
24.69
|
|
|
$
|
—
|
|
Total cost of common shares acquired
|
|
$
|
3,209
|
|
|
$
|
—
|
|
Shares purchased under the Company’s repurchase programs were subsequently retired.
Subsequent to April 4, 2021 and through May 6, 2021, we repurchased an additional 75,000 shares of common stock for $1.9 million.
8. 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
15
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
options, assumed vesting of restricted stock units (“RSUs”), assumed vesting of performance stock awards (“PSAs”), and assumed vesting of restricted stock awards (“RSAs”).
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):
|
|
Thirteen weeks ended
|
|
|
|
April 4, 2021
|
|
|
March 29, 2020
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
83,048
|
|
|
$
|
91,810
|
|
Weighted average shares outstanding
|
|
|
118,044
|
|
|
|
117,545
|
|
Basic net income per share
|
|
$
|
0.70
|
|
|
$
|
0.78
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
83,048
|
|
|
$
|
91,810
|
|
Weighted average shares outstanding -
basic
|
|
|
118,044
|
|
|
|
117,545
|
|
Dilutive effect of share-based awards:
|
|
|
|
|
|
|
|
|
Assumed exercise of options to purchase
shares
|
|
|
139
|
|
|
|
—
|
|
RSUs
|
|
|
404
|
|
|
|
144
|
|
RSAs
|
|
|
—
|
|
|
|
35
|
|
PSAs
|
|
|
20
|
|
|
|
24
|
|
Weighted average shares and
equivalent shares outstanding
|
|
|
118,607
|
|
|
|
117,748
|
|
Diluted net income per share
|
|
$
|
0.70
|
|
|
$
|
0.78
|
|
For the thirteen weeks ended April 4, 2021, the Company had 0.6 million options, 0.4 million RSUs, and 0.5 million 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 thirteen weeks ended March 29, 2020, the Company had 1.6 million options and 0.4 million 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.
9. 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 initially consisted of five cash flow hedges, of which two were outstanding at April 4, 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 April 4, 2021 and 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.
16
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 designated as hedging instruments:
|
|
As of
April 4, 2021
|
|
|
As of
January 3, 2021
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Interest rate swaps
|
|
Accrued liabilities
|
|
$
|
4,288
|
|
|
Accrued liabilities
|
|
$
|
5,695
|
|
Interest rate swaps
|
|
Other long-term liabilities
|
|
|
5,521
|
|
|
Other long-term liabilities
|
|
|
5,756
|
|
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 statements of income. The following table summarizes these losses (gains) classified on the consolidated statements of income:
|
|
Thirteen weeks ended
|
|
|
|
April 4, 2021
|
|
|
March 29, 2020
|
|
Consolidated Statements of
Income Classification
|
|
|
|
|
|
|
|
|
Interest expense (income), net
|
|
$
|
1,440
|
|
|
$
|
393
|
|
10. Comprehensive Income
The following table presents the changes in accumulated other comprehensive income (loss) for the thirteen weeks ended March 29, 2020 and April 4, 2021.
|
|
Cash Flow
Hedges
|
|
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 ($1,781)
|
|
|
(5,148
|
)
|
Reclassification of net losses on cash flow hedges to net income, net of income
tax of ($101)
|
|
|
(292
|
)
|
Total other comprehensive income (loss)
|
|
|
(5,440
|
)
|
Balance at March 29, 2020
|
|
$
|
(10,122
|
)
|
|
|
|
|
|
Balance at January 3, 2021
|
|
$
|
(8,474
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
Unrealized gains on cash flow hedging activities, net of income tax of $800
|
|
|
2,314
|
|
Reclassification of net losses on cash flow hedges to net income, net of income
tax of ($370)
|
|
|
(1,070
|
)
|
Total other comprehensive income (loss)
|
|
|
1,244
|
|
Balance at April 4, 2021
|
|
$
|
(7,230
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) are included within interest expense, net on the consolidated statements of income.
17
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. 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 the thirteen weeks ended April 4, 2021 and March 29, 2020.
|
|
Thirteen weeks ended
|
|
|
|
April 4, 2021
|
|
|
March 29, 2020
|
|
Perishables
|
|
$
|
910,968
|
|
|
|
57.8
|
%
|
|
$
|
912,640
|
|
|
|
55.4
|
%
|
Non-Perishables
|
|
|
664,479
|
|
|
|
42.2
|
%
|
|
|
733,899
|
|
|
|
44.6
|
%
|
Net Sales
|
|
$
|
1,575,447
|
|
|
|
100.0
|
%
|
|
$
|
1,646,539
|
|
|
|
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.
12. Share-Based Compensation
2013 Incentive Plan
The Company’s board of directors adopted, and its equity holders 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. 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. Awards granted under these plans include RSUs, PSAs, and RSAs. 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 as then in effect.
Awards Granted
During the thirteen weeks ended April 4, 2021, the Company granted the following share-based compensation awards under the 2013 Incentive Plan:
Grant Date
|
|
RSUs
|
|
|
PSAs
|
|
|
Options
|
|
March 16, 2021
|
|
|
356,503
|
|
|
|
178,780
|
|
|
|
404,016
|
|
Weighted-average grant date fair value
|
|
$
|
24.42
|
|
|
$
|
24.42
|
|
|
$
|
7.65
|
|
Weighted-average exercise price
|
|
|
—
|
|
|
|
—
|
|
|
$
|
24.42
|
|
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 April 4, 2021, there were 3,040,142 stock awards outstanding and 3,570,436 shares remaining available for issuance under the 2013 Incentive Plan.
18
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock Options
The Company uses the Black-Scholes option pricing model to estimate the fair value of options at grant date. Options vest in accordance with the terms set forth in the grant letter.
Time-based options granted prior to fiscal year 2016 generally vested ratably over a period of 12 quarters (three years), and time-based options granted after 2016 vest annually over a period of three years.
RSUs
The fair value of RSUs is based on the closing price of the Company’s common stock on the grant date. RSUs generally vest annually over a period of two or three years from the grant date.
PSAs
PSAs granted in 2017 were subject to the Company achieving certain earnings per share performance targets during fiscal year 2017. The criteria was based on a range of performance targets in which grantees could earn between 10% and 150% of the base number of awards granted. The performance conditions with respect to fiscal year 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 vested 50% on the third anniversary of the grant date (March 2020). There were no outstanding 2017 PSAs as of April 4, 2021.
PSAs granted in 2018 were subject to the Company achieving certain earnings before interest and taxes (“EBIT”) performance targets for the 2020 fiscal year. The criteria was based on a range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. The performance conditions with respect to fiscal year 2020 EBIT were deemed to have been met, and the PSAs vested at the maximum pay out level on the third anniversary of the grant date (March 2021). During the thirteen weeks ended April 4, 2021, 31,544 of the 2018 PSAs vested. There were no outstanding 2018 PSAs as of April 4, 2021.
PSAs 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).
PSAs granted in 2021 are subject to the Company achieving certain EBIT performance targets for the 2023 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 2024).
RSAs
The fair value of RSAs is based on the closing price of the Company’s common stock on the grant date. Outstanding RSA grants vest annually over three years. There were no outstanding RSAs as of April 4, 2021.
19
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
|
|
Thirteen weeks ended
|
|
|
|
April 4, 2021
|
|
|
March 29, 2020
|
|
Share-based compensation expense
before income taxes
|
|
$
|
3,613
|
|
|
$
|
2,400
|
|
Income tax benefit
|
|
|
(623
|
)
|
|
|
(558
|
)
|
Net share-based compensation expense
|
|
$
|
2,990
|
|
|
$
|
1,842
|
|
The following share-based awards were outstanding as of April 4, 2021 and March 29, 2020:
|
|
As of
|
|
|
|
April 4, 2021
|
|
|
March 29, 2020
|
|
|
|
(in thousands)
|
|
Options
|
|
|
|
|
|
|
|
|
Vested
|
|
|
314
|
|
|
|
470
|
|
Unvested
|
|
|
1,304
|
|
|
|
1,093
|
|
RSUs
|
|
|
944
|
|
|
|
973
|
|
PSAs
|
|
|
478
|
|
|
|
353
|
|
As of April 4, 2021, total unrecognized compensation expense and remaining weighted average recognition period related to outstanding share-based awards was as follows:
|
|
Unrecognized
compensation
expense
|
|
|
Remaining
weighted
average
recognition
period
|
|
Options
|
|
$
|
6,508
|
|
|
|
2.2
|
|
RSUs
|
|
|
17,120
|
|
|
|
1.9
|
|
PSAs
|
|
|
10,014
|
|
|
|
2.1
|
|
Total unrecognized compensation expense at April 4, 2021
|
|
$
|
33,642
|
|
|
|
|
|
During the thirteen weeks ended April 4, 2021 and March 29, 2020, the Company received $0.9 million and $0.0 million, respectively, in cash proceeds from the exercise of options.
20