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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 29, 2020

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from  to  

Commission File Number: 001-36029

Sprouts Farmers Market, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

32-0331600

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

5455 East High Street, Suite 111

Phoenix, Arizona 85054

(Address of principal executive offices and zip code)

(480) 814-8016

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

Name of Each Exchange on Which Registered

 

Common Stock, $0.001 par value

SFM

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No

As of May 1, 2020, the registrant had 117,786,608 shares of common stock, $0.001 par value per share, outstanding.

 

 


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 29, 2020

TABLE OF CONTENTS

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements.

4

 

 

 

 

Consolidated Balance Sheets as of March 29, 2020 (unaudited) and December 29, 2019

4

 

 

 

 

Consolidated Statements of Income for the thirteen weeks ended March 29, 2020 and March 31, 2019 (unaudited)

5

 

 

 

 

Consolidated Statements of Comprehensive Income for the thirteen ended March 29, 2020 and March 31, 2019 (unaudited)

6

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the thirteen weeks ended March 29, 2020 and March 31, 2019 (unaudited)

7

 

 

 

 

Consolidated Statements of Cash Flows for the thirteen weeks ended March 29, 2020 and March 31, 2019 (unaudited)

8

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

9

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

32

 

 

Item 4. Controls and Procedures.

33

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings.

34

 

 

Item 1A. Risk Factors.

34

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

35

 

 

Item 6. Exhibits.

36

 

 

Signatures

37

 

 


Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the “Exchange Act”), including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses, and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, and our other filings with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the “Company,” “Sprouts,” “Sprouts Farmers Market,” “we,” “us” and “our” refer to Sprouts Farmers Market, Inc. and, where appropriate, its subsidiaries.

 

 

 


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

 

 

March 29,

2020

 

 

December 29,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

247,101

 

 

$

85,314

 

Accounts receivable, net

 

 

12,411

 

 

 

15,713

 

Inventories

 

 

253,191

 

 

 

275,979

 

Prepaid expenses and other current assets

 

 

18,079

 

 

 

10,833

 

Total current assets

 

 

530,782

 

 

 

387,839

 

Property and equipment, net of accumulated depreciation

 

 

734,504

 

 

 

741,508

 

Operating lease assets, net

 

 

1,024,510

 

 

 

1,028,436

 

Intangible assets, net of accumulated amortization

 

 

185,350

 

 

 

185,395

 

Goodwill

 

 

368,078

 

 

 

368,078

 

Other assets

 

 

11,976

 

 

 

11,727

 

Total assets

 

$

2,855,200

 

 

$

2,722,983

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

200,762

 

 

$

122,839

 

Accrued liabilities

 

 

153,365

 

 

 

136,482

 

Accrued salaries and benefits

 

 

51,563

 

 

 

48,579

 

Accrued income tax

 

 

30,911

 

 

 

2,005

 

Current portion of operating lease liabilities

 

 

109,961

 

 

 

106,153

 

Current portion of finance lease liabilities

 

 

833

 

 

 

754

 

Total current liabilities

 

 

547,395

 

 

 

416,812

 

Long-term operating lease liabilities

 

 

1,074,318

 

 

 

1,078,927

 

Long-term debt and finance lease liabilities

 

 

462,185

 

 

 

549,419

 

Other long-term liabilities

 

 

45,993

 

 

 

41,517

 

Deferred income tax liability

 

 

54,587

 

 

 

54,356

 

Total liabilities

 

 

2,184,478

 

 

 

2,141,031

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Undesignated preferred stock; $0.001 par value; 10,000,000 shares

   authorized, no shares issued and outstanding

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized,

   117,786,608 shares issued and outstanding, March 29, 2020;

   117,543,668 shares issued and outstanding, December 29, 2019

 

 

117

 

 

 

117

 

Additional paid-in capital

 

 

673,366

 

 

 

670,966

 

Accumulated other comprehensive income (loss)

 

 

(10,122

)

 

 

(4,682

)

Retained earnings (Accumulated deficit)

 

 

7,361

 

 

 

(84,449

)

Total stockholders’ equity

 

 

670,722

 

 

 

581,952

 

Total liabilities and stockholders’ equity

 

$

2,855,200

 

 

$

2,722,983

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.  

4


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

 

 

Thirteen weeks ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

Net sales

 

$

1,646,539

 

 

$

1,413,887

 

Cost of sales

 

 

1,052,707

 

 

 

929,538

 

Gross profit

 

 

593,832

 

 

 

484,349

 

Selling, general and administrative expenses

 

 

436,304

 

 

 

374,826

 

Depreciation and amortization (exclusive of depreciation included in cost of sales)

 

 

31,021

 

 

 

29,459

 

Store closure costs and other credits

 

 

(1,082

)

 

 

508

 

Income from operations

 

 

127,589

 

 

 

79,556

 

Interest expense, net

 

 

4,827

 

 

 

5,002

 

Income before income taxes

 

 

122,762

 

 

 

74,554

 

Income tax provision

 

 

30,952

 

 

 

18,162

 

Net income

 

$

91,810

 

 

$

56,392

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.78

 

 

$

0.46

 

Diluted

 

$

0.78

 

 

$

0.46

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

117,545

 

 

 

123,258

 

Diluted

 

 

117,748

 

 

 

123,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.


5


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN THOUSANDS)

 

 

 

Thirteen weeks ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

Net income

 

$

91,810

 

 

$

56,392

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on cash flow hedging

   activities, net of income tax of ($1,882) and ($905)

 

 

(5,440

)

 

 

(2,616

)

Total other comprehensive income (loss)

 

$

(5,440

)

 

 

(2,616

)

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

86,370

 

 

$

53,776

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

6


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

 

For the thirteen weeks ended March 29, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

Stock

 

 

Additional

Paid In

Capital

 

 

(Accumulated

Deficit)

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Stockholders’

Equity

 

Balances at December 29, 2019

 

 

117,452,918

 

 

$

117

 

 

$

670,966

 

 

$

(84,449

)

 

$

(4,682

)

 

$

581,952

 

Net income

 

 

 

 

 

 

 

 

 

 

 

91,810

 

 

 

 

 

 

91,810

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,440

)

 

 

(5,440

)

Issuance of shares under stock plans

 

 

333,690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

2,400

 

 

 

 

 

 

 

 

 

2,400

 

Balances at March 29, 2020

 

 

117,786,608

 

 

$

117

 

 

$

673,366

 

 

$

7,361

 

 

$

(10,122

)

 

 

670,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the thirteen weeks ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

Stock

 

 

Additional

Paid In

Capital

 

 

(Accumulated

Deficit)

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Stockholders’

Equity

 

Balances at December 30, 2018

 

 

124,581,190

 

 

$

124

 

 

$

657,140

 

 

$

(69,202

)

 

$

1,134

 

 

$

589,196

 

Net income

 

 

 

 

 

 

 

 

 

 

 

56,392

 

 

 

 

 

 

56,392

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,616

)

 

 

(2,616

)

Issuance of shares under stock plans

 

 

549,212

 

 

 

1

 

 

 

1,664

 

 

 

 

 

 

 

 

 

1,665

 

Repurchase and retirement of common

   stock

 

 

(4,890,766

)

 

 

(5

)

 

 

 

 

 

(111,880

)

 

 

 

 

 

(111,885

)

Share-based compensation

 

 

 

 

 

 

 

 

2,450

 

 

 

 

 

 

 

 

 

2,450

 

Impact of adoption of ASC 842 related

   to leases

 

 

 

 

 

 

 

 

 

 

 

21,319

 

 

 

 

 

 

21,319

 

Balances at March 31, 2019

 

 

120,239,636

 

 

$

120

 

 

$

661,254

 

 

$

(103,371

)

 

$

(1,482

)

 

$

556,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

7


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

 

 

Thirteen weeks ended

 

 

 

March 29, 2020

 

 

March 31, 2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

91,810

 

 

$

56,392

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

31,600

 

 

 

30,073

 

Operating lease asset amortization

 

 

23,137

 

 

 

20,653

 

Store closure costs and other credits

 

 

 

 

 

710

 

Share-based compensation

 

 

2,400

 

 

 

2,450

 

Deferred income taxes

 

 

232

 

 

 

6,217

 

Other non-cash items

 

 

(768

)

 

 

(30

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

12,652

 

 

 

3,247

 

Inventories

 

 

22,787

 

 

 

6,500

 

Prepaid expenses and other current assets

 

 

(8,652

)

 

 

(744

)

Other assets

 

 

656

 

 

 

(1,086

)

Accounts payable

 

 

80,669

 

 

 

(5,531

)

Accrued liabilities

 

 

16,492

 

 

 

13,840

 

Accrued salaries and benefits

 

 

2,984

 

 

 

(9,634

)

Accrued income tax

 

 

28,906

 

 

 

10,510

 

Operating lease liabilities

 

 

(30,107

)

 

 

(20,632

)

Other long-term liabilities

 

 

2,274

 

 

 

(330

)

Cash flows from operating activities

 

 

277,072

 

 

 

112,605

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(28,036

)

 

 

(30,142

)

Cash flows used in investing activities

 

 

(28,036

)

 

 

(30,142

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from revolving credit facilities

 

 

 

 

 

89,734

 

Payments on revolving credit facilities

 

 

(87,000

)

 

 

(42,734

)

Payments on finance lease liabilities

 

 

(154

)

 

 

(186

)

Repurchase of common stock

 

 

 

 

 

(111,885

)

Proceeds from exercise of stock options

 

 

 

 

 

1,661

 

Other

 

 

 

 

 

(319

)

Cash flows used in financing activities

 

 

(87,154

)

 

 

(63,729

)

Increase in cash, cash equivalents, and restricted cash

 

 

161,882

 

 

 

18,734

 

Cash, cash equivalents, and restricted cash at beginning of the period

 

 

86,785

 

 

 

2,248

 

Cash, cash equivalents, and restricted cash at the end of the period

 

$

248,667

 

 

$

20,982

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,905

 

 

$

5,046

 

Cash paid for income taxes

 

 

(58

)

 

 

(22

)

Leased assets obtained in exchange for new operating lease liabilities

 

 

26,287

 

 

 

81,691

 

Leased assets obtained in exchange for new finance lease liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Property and equipment in accounts payable

 

$

13,999

 

 

$

28,617

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8


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 fresh, natural and organic food through a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, beer and wine, natural body care and household items catering to consumers’ growing interest in health and wellness. 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 December 29, 2019 (“fiscal year 2019”) included in the Company’s Annual Report on Form 10-K, filed on February 20, 2020.

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 3, 2021 (“fiscal year 2020”) is a 53-week year and fiscal year 2019 is a 52-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 as of

December 29,

2019

 

 

Gift Cards Issued During

Current Period but Not

Redeemed(a)

 

 

Revenue Recognized from Beginning Liability

 

 

Balance as of

March 29, 2020

 

Gift card liability, net

 

$

15,902

 

 

$

1,178

 

 

$

(6,299

)

 

$

10,781

 

 

 

(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 March 29, 2020.

Restricted Cash

Restricted cash relates to defined benefit plan forfeitures as well as health and welfare restricted funds of approximately $1.6 million and $1.5 million as of March 29, 2020 and December 29, 2019, respectively. These balances are included in prepaid expenses and other current assets in the consolidated balance sheets.

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 the consolidated financial statements dated March 29, 2020.

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 Quarterly Report on Form 10-Q for the quarter ended March 29, 2020.

10


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 guidance related to changes in contracts, hedging relationships, and other transactions affected by reference rate reform. This update only applies to modifications made prior to December 31, 2022. No such modifications occurred in the period ending March 29, 2020. The Company will evaluate the impact of this update if and when it is applicable.

No other new accounting pronouncements issued or effective during the thirteen weeks ended March 29, 2020 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 March 29, 2020 and December 29, 2019:

 

March 29, 2020

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Long-term debt

 

$

 

 

$

451,000

 

 

$

 

 

$

451,000

 

Interest rate swap liability

 

 

 

 

 

13,632

 

 

 

 

 

 

13,632

 

Total financial liabilities

 

$

 

 

$

464,632

 

 

$

 

 

$

464,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 financial liabilities

 

$

 

 

$

544,305

 

 

$

 

 

$

544,305

 

 

11


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 March 29, 2020 and December 29, 2019.

 

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

 

March 29,

2020

 

 

December 29, 2019

 

Senior secured debt

 

 

 

 

 

 

 

 

 

 

 

 

$700.0 million Credit Agreement

 

March 27, 2023

 

Variable

 

$

451,000

 

 

$

538,000

 

Finance lease liabilities

 

Various

 

n/a

 

 

11,185

 

 

 

11,419

 

Long-term debt and finance lease liabilities

 

 

 

 

 

$

462,185

 

 

$

549,419

 

 

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 $34.4 million have been issued as of March 29, 2020, 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.

12


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 bear 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.

The interest rate on approximately 55% 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”).

Outstanding letters of credit under the Amended and Restated Credit Agreement are subject to a participation fee of 1.50% 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 March 29, 2020, the Company made no additional borrowings and made principal payments totaling $87.0 million; resulting in total outstanding debt under the Amended and Restated Credit Agreement of $451.0 million as of March 29, 2020. During fiscal year 2019, the Company borrowed an additional $265.4 million to be used in connection with the Company’s share repurchase programs (see Note 7, “Stockholders’ Equity”) 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 at 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;

 

make loans or investments;

 

merge, consolidate or enter into acquisitions;

 

pay dividends or distributions;

 

enter into transactions with affiliates;

13


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

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.

The Company was in compliance with all applicable covenants under the Amended and Restated Credit Agreement as of March 29, 2020.

 

5. Income Taxes 

 

The Company’s effective tax rate increased to 25.2% for the thirteen weeks ended March 29, 2020, compared to 24.4% for the thirteen weeks ended March 31, 2019. The increase in the effective tax rate is primarily due to tax detriments for share-based payment awards in the current year period compared to prior year period benefits. The income tax effect resulting from excess tax detriments/(benefits) of share-based payment awards were $0.5 million and $(0.2) million for the thirteen weeks ended March 29, 2020 and March 31, 2019, 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.

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, 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.

14


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

“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. A small group of three (3) individual claimants will proceed with arbitration of their claims in the fourth quarter of 2020.  The Company intends to defend the arbitrations vigorously, but it is not possible at this time to reasonably estimate the outcome of, or any potential liability from, the arbitrations.

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 July 15, 2020, the trial court will hear cross-motions for summary judgment on the affirmative defense. If the court determines that the regulation applies to this case, and rejects CERT’s challenges to the validity of the regulation, the case will be dismissed. If the court determines that the regulation does not apply to this case, or upholds one or more of CERT’s challenges, then the court will set the case for trial of the remaining issues – civil penalties and injunctive relief.

At this stage of the proceedings, prior to a trial on the remedies issues, the Company is unable to predict or reasonably estimate the potential loss or effect on the Company or its operations. Accordingly, no loss contingency was recorded for this matter.

 

15


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

7. Stockholders’ Equity

Share Repurchases

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 March 29, 2020.

 

Effective date

 

Expiration date

 

Amount

authorized

 

 

Cost of

repurchases

 

 

Authorization

available

 

February 20, 2017

 

December 31, 2018

 

$

250,000

 

 

$

250,000

 

 

$

 

February 20, 2018

 

December 31, 2019

 

$

350,000

 

 

$

308,017

 

 

$

 

 

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 March 29, 2020.

Share repurchase activity under the Company’s repurchase programs for the periods indicated was as follows (total cost in thousands):

 

 

 

Thirteen weeks ended

 

 

 

March 29, 2020

 

 

March 31, 2019

 

Number of common shares acquired

 

 

 

 

 

4,890,766

 

Average price per common share acquired

 

$

 

 

$

22.88

 

Total cost of common shares acquired

 

$

 

 

$

111,885

 

 

Shares purchased under the Company’s repurchase programs were subsequently retired.

 

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 options, assumed vesting of restricted stock units (“RSUs”), assumed vesting of performance stock awards (“PSAs”), and assumed vesting of restricted stock awards (“RSAs”).

16


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

 

 

 

March 29, 2020

 

 

March 31, 2019

 

Basic net income per share:

 

 

 

 

 

 

 

 

Net income

 

$

91,810

 

 

$

56,392

 

Weighted average shares outstanding

 

 

117,545

 

 

 

123,258

 

Basic net income per share

 

$

0.78

 

 

$

0.46

 

Diluted net income per share:

 

 

 

 

 

 

 

 

Net income

 

$

91,810

 

 

$

56,392

 

Weighted average shares outstanding -

   basic

 

 

117,545

 

 

 

123,258

 

Dilutive effect of share-based awards:

 

 

 

 

 

 

 

 

Assumed exercise of options to purchase

   shares

 

 

 

 

 

152

 

RSUs

 

 

144

 

 

 

244

 

RSAs

 

 

35

 

 

 

91

 

PSAs

 

 

24

 

 

 

181

 

Weighted average shares and

   equivalent shares outstanding

 

 

117,748

 

 

 

123,926

 

Diluted net income per share

 

$

0.78

 

 

$

0.46

 

 

For the thirteen weeks ended March 29, 2020, the computation of diluted net income per share does not include 1.6 million options and 0.4 million PSAs as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met. For the thirteen weeks ended March 31, 2019, the computation of diluted net income per share does not include 1.1 million options and 0.2 million PSAs 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 consists of three cash flow hedges. 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 three outstanding swaps was $250.0 million at March 29, 2020 and December 29, 2019, 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 2020 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.

 

17


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

March 29, 2020

 

 

As of

December 29, 2019

 

 

 

Balance Sheet Location

 

Fair Value

 

 

Balance Sheet Location

 

Fair Value

 

Interest rate swaps

 

Accrued liabilities

 

 

3,507

 

 

Accrued liabilities

 

 

1,736

 

Interest rate swaps

 

Other long-term liabilities

 

 

10,125

 

 

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 on the consolidated statements of income. The following table summarizes these gains and losses classified on the consolidated statements of income:

 

 

 

Thirteen weeks ended

 

 

 

March 29, 2020

 

 

March 31, 2019

 

Consolidated Statements of

   Income Classification

 

 

 

 

 

 

 

 

Interest expense (income), net

 

$

393

 

 

$

(213

)

 

10. Comprehensive Income

The following table presents the changes in accumulated other comprehensive income for the thirteen weeks ended March 29, 2020 and March 31, 2019.

 

 

 

Cash Flow

Hedges

 

Balance at December 30, 2018

 

$

1,134

 

Other comprehensive income (loss), net of tax

 

 

 

 

Unrealized loss on cash flow hedging activities, net of income tax of ($905)

 

 

(2,616

)

Total other comprehensive income (loss)

 

 

(2,616

)

Balance at March 31, 2019

 

$

(1,482

)

 

 

 

 

 

Balance at December 29, 2019

 

$

(4,682

)

Other comprehensive income (loss), net of tax

 

 

 

 

Unrealized loss on cash flow hedging activities, net of income tax of ($1,882)

 

 

(5,440

)

Total other comprehensive income (loss)

 

 

(5,440

)

Balance at March 29, 2020

 

$

(10,122

)

 

Amounts reclassified from accumulated other comprehensive income (loss) are included within interest expense on the consolidated statements of income.

 

18


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 Accounting Standards Codification 606, “Revenue from Contracts with Customers,” the following table represents a disaggregation of revenue for the thirteen weeks ended March 29, 2020 and March 31, 2019.

 

 

 

Thirteen weeks ended

 

 

 

March 29, 2020

 

 

March 31, 2019

 

Perishables

 

$

912,640

 

 

 

55.4

%

 

$

807,051

 

 

 

57.1

%

Non-Perishables

 

 

733,899

 

 

 

44.6

%

 

 

606,836

 

 

 

42.9

%

Net Sales

 

$

1,646,539

 

 

 

100.0

%

 

$

1,413,887

 

 

 

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 March 29, 2020, the Company granted the following share-based compensation awards under the 2013 Incentive Plan: