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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 June 28, 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 July 27, 2020, the registrant had 117,944,450 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 JUNE 28, 2020

TABLE OF CONTENTS

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements.

4

 

 

 

 

Consolidated Balance Sheets as of June 28, 2020 (unaudited) and December 29, 2019

4

 

 

 

 

Consolidated Statements of Income for the thirteen and twenty-six weeks ended June 28, 2020 and June 30, 2019 (unaudited)

5

 

 

 

 

Consolidated Statements of Comprehensive Income for the thirteen and twenty-six weeks ended June 28, 2020 and June 30, 2019 (unaudited)

6

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the thirteen and twenty-six weeks ended June 28, 2020 and June 30, 2019 (unaudited)

7

 

 

 

 

Consolidated Statements of Cash Flows for the twenty-six weeks ended June 28, 2020 and June 30, 2019 (unaudited)

9

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

10

 

 

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

23

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

35

 

 

Item 4. Controls and Procedures.

36

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings.

37

 

 

Item 1A. Risk Factors.

37

 

 

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

38

 

 

Item 6. Exhibits.

39

 

 

Signatures

40

 

 


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)

 

 

 

June 28,

2020

 

 

December 29,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

328,116

 

 

$

85,314

 

Accounts receivable, net

 

 

14,742

 

 

 

15,713

 

Inventories

 

 

255,352

 

 

 

275,979

 

Prepaid expenses and other current assets

 

 

14,648

 

 

 

10,833

 

Total current assets

 

 

612,858

 

 

 

387,839

 

Property and equipment, net of accumulated depreciation

 

 

740,075

 

 

 

741,508

 

Operating lease assets, net

 

 

1,041,702

 

 

 

1,028,436

 

Intangible assets, net of accumulated amortization

 

 

184,960

 

 

 

185,395

 

Goodwill

 

 

368,878

 

 

 

368,078

 

Other assets

 

 

14,716

 

 

 

11,727

 

Total assets

 

$

2,963,189

 

 

$

2,722,983

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

168,833

 

 

$

122,839

 

Accrued liabilities

 

 

155,531

 

 

 

136,482

 

Accrued salaries and benefits

 

 

75,837

 

 

 

48,579

 

Accrued income tax

 

 

49,237

 

 

 

2,005

 

Current portion of operating lease liabilities

 

 

122,404

 

 

 

106,153

 

Current portion of finance lease liabilities

 

 

914

 

 

 

754

 

Total current liabilities

 

 

572,756

 

 

 

416,812

 

Long-term operating lease liabilities

 

 

1,082,718

 

 

 

1,078,927

 

Long-term debt and finance lease liabilities

 

 

461,947

 

 

 

549,419

 

Other long-term liabilities

 

 

47,349

 

 

 

41,517

 

Deferred income tax liability

 

 

55,142

 

 

 

54,356

 

Total liabilities

 

 

2,219,912

 

 

 

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,

   117,944,450 shares issued and outstanding, June 28, 2020;

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

 

 

117

 

 

 

117

 

Additional paid-in capital

 

 

679,036

 

 

 

670,966

 

Accumulated other comprehensive income (loss)

 

 

(10,239

)

 

 

(4,682

)

Retained earnings (Accumulated deficit)

 

 

74,363

 

 

 

(84,449

)

Total stockholders’ equity

 

 

743,277

 

 

 

581,952

 

Total liabilities and stockholders’ equity

 

$

2,963,189

 

 

$

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

 

 

Twenty-six weeks ended

 

 

 

June 28,

2020

 

 

June 30,

2019

 

 

June 28,

2020

 

 

June 30,

2019

 

Net sales

 

$

1,642,788

 

 

$

1,415,736

 

 

$

3,289,327

 

 

$

2,829,623

 

Cost of sales

 

 

1,030,129

 

 

 

950,954

 

 

 

2,082,836

 

 

 

1,880,492

 

Gross profit

 

 

612,659

 

 

 

464,782

 

 

 

1,206,491

 

 

 

949,131

 

Selling, general and administrative expenses

 

 

488,877

 

 

 

383,116

 

 

 

925,181

 

 

 

757,942

 

Depreciation and amortization (exclusive of

   depreciation included in cost of sales)

 

 

30,549

 

 

 

29,565

 

 

 

61,570

 

 

 

59,024

 

Store closure and other costs, net

 

 

470

 

 

 

769

 

 

 

(612

)

 

 

1,277

 

Income from operations

 

 

92,763

 

 

 

51,332

 

 

 

220,352

 

 

 

130,888

 

Interest expense, net

 

 

3,737

 

 

 

5,438

 

 

 

8,564

 

 

 

10,440

 

Income before income taxes

 

 

89,026

 

 

 

45,894

 

 

 

211,788

 

 

 

120,448

 

Income tax provision

 

 

22,024

 

 

 

10,551

 

 

 

52,976

 

 

 

28,713

 

Net income

 

$

67,002

 

 

$

35,343

 

 

$

158,812

 

 

$

91,735

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.57

 

 

$

0.30

 

 

$

1.35

 

 

$

0.76

 

Diluted

 

$

0.57

 

 

$

0.30

 

 

$

1.35

 

 

$

0.76

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

117,832

 

 

 

118,251

 

 

 

117,688

 

 

 

120,754

 

Diluted

 

 

118,189

 

 

 

118,436

 

 

 

117,977

 

 

 

121,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

Twenty-six weeks ended

 

 

 

June 28,

2020

 

 

June 30,

2019

 

 

June 28,

2020

 

 

June 30,

2019

 

Net income

 

$

67,002

 

 

$

35,343

 

 

$

158,812

 

 

$

91,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on cash flow hedging

   activities, net of income tax of ($40),

   ($1,071), ($1,922), and ($1,976)

 

 

(117

)

 

 

(3,097

)

 

 

(5,557

)

 

 

(5,713

)

Total other comprehensive income (loss)

 

 

(117

)

 

 

(3,097

)

 

 

(5,557

)

 

 

(5,713

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

66,885

 

 

$

32,246

 

 

$

153,255

 

 

$

86,022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 and twenty-six weeks ended June 28, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

Stock

 

 

Additional

Paid In

Capital

 

 

(Accumulated

Deficit)

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Stockholders’

Equity

 

Balances at March 29, 2020

 

 

117,786,608

 

 

$

117

 

 

$

673,366

 

 

$

7,361

 

 

$

(10,122

)

 

$

670,722

 

Net income

 

 

 

 

 

 

 

 

 

 

 

67,002

 

 

 

 

 

 

67,002

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(117

)

 

 

(117

)

Issuance of shares under stock plans

 

 

157,842

 

 

 

 

 

 

1,343

 

 

 

 

 

 

 

 

 

1,343

 

Share-based compensation

 

 

 

 

 

 

 

 

4,327

 

 

 

 

 

 

 

 

 

4,327

 

Balances at June 28, 2020

 

 

117,944,450

 

 

$

117

 

 

$

679,036

 

 

$

74,363

 

 

$

(10,239

)

 

$

743,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

158,812

 

 

 

 

 

 

158,812

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,557

)

 

 

(5,557

)

Issuance of shares under stock plans

 

 

491,532

 

 

 

 

 

 

1,343

 

 

 

 

 

 

 

 

 

1,343

 

Share-based compensation

 

 

 

 

 

 

 

 

6,727

 

 

 

 

 

 

 

 

 

6,727

 

Balances at June 28, 2020

 

 

117,944,450

 

 

$

117

 

 

$

679,036

 

 

$

74,363

 

 

$

(10,239

)

 

$

743,277

 

 

 

 

 

 

 

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

7


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

 

For the thirteen and twenty-six weeks ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

Stock

 

 

Additional

Paid In

Capital

 

 

(Accumulated

Deficit)

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Stockholders’

Equity

 

Balances at March 31, 2019

 

 

120,239,636

 

 

$

120

 

 

$

661,254

 

 

$

(103,371

)

 

$

(1,482

)

 

$

556,521

 

Net income

 

 

 

 

 

 

 

 

 

 

 

35,343

 

 

 

 

 

 

35,343

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,097

)

 

 

(3,097

)

Issuance of shares under stock plans

 

 

194,747

 

 

 

 

 

 

2,459

 

 

 

 

 

 

 

 

 

2,459

 

Repurchase and retirement of common stock

 

 

(2,412,112

)

 

 

(2

)

 

 

 

 

 

(51,423

)

 

 

 

 

 

(51,425

)

Share-based compensation

 

 

 

 

 

 

 

 

1,741

 

 

 

 

 

 

 

 

 

1,741

 

Adjustment to the impact of adoption of ASC 842 related to

   leases

 

 

 

 

 

 

 

 

 

 

 

(9,893

)

 

 

 

 

 

(9,893

)

Balances at June 30, 2019

 

 

118,022,271

 

 

$

118

 

 

$

665,454

 

 

$

(129,344

)

 

$

(4,579

)

 

$

531,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

91,735

 

 

 

 

 

 

91,735

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,713

)

 

 

(5,713

)

Issuance of shares under stock plans

 

 

743,959

 

 

 

1

 

 

 

4,123

 

 

 

 

 

 

 

 

 

4,124

 

Repurchase and retirement of common  stock

 

 

(7,302,878

)

 

 

(7

)

 

 

 

 

 

(163,303

)

 

 

 

 

 

(163,310

)

Share-based compensation

 

 

 

 

 

 

 

 

4,191

 

 

 

 

 

 

 

 

 

4,191

 

Impact of adoption of ASC 842 related to leases

 

 

 

 

 

 

 

 

 

 

 

11,426

 

 

 

 

 

 

11,426

 

Balances at June 30, 2019

 

 

118,022,271

 

 

$

118

 

 

$

665,454

 

 

$

(129,344

)

 

$

(4,579

)

 

$

531,649

 

 

 

 

 

 

 

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

 

8


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

 

 

Twenty-six weeks ended

 

 

 

June 28, 2020

 

 

June 30, 2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

158,812

 

 

$

91,735

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

62,928

 

 

 

60,211

 

Operating lease asset amortization

 

 

47,074

 

 

 

40,477

 

Store closure and other costs, net

 

 

(321

)

 

 

824

 

Share-based compensation

 

 

6,727

 

 

 

4,191

 

Deferred income taxes

 

 

786

 

 

 

10,691

 

Other non-cash items

 

 

1,286

 

 

 

32

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

14,423

 

 

 

20,378

 

Inventories

 

 

20,627

 

 

 

(5,096

)

Prepaid expenses and other current assets

 

 

(8,311

)

 

 

(9,644

)

Other assets

 

 

(1,879

)

 

 

(451

)

Accounts payable

 

 

46,554

 

 

 

59,989

 

Accrued liabilities

 

 

18,240

 

 

 

26,018

 

Accrued salaries and benefits

 

 

27,258

 

 

 

(6,288

)

Accrued income tax

 

 

47,231

 

 

 

 

Operating lease liabilities

 

 

(52,063

)

 

 

(40,297

)

Other long-term liabilities

 

 

3,976

 

 

 

(3,585

)

Cash flows from operating activities

 

 

393,348

 

 

 

249,185

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(64,571

)

 

 

(93,414

)

Cash flows used in investing activities

 

 

(64,571

)

 

 

(93,414

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from revolving credit facilities

 

 

 

 

 

122,860

 

Payments on revolving credit facilities

 

 

(87,000

)

 

 

(60,860

)

Payments on finance lease liabilities

 

 

(311

)

 

 

(325

)

Repurchase of common stock

 

 

 

 

 

(163,310

)

Proceeds from exercise of stock options

 

 

1,343

 

 

 

4,118

 

Other

 

 

 

 

 

(319

)

Cash flows used in financing activities

 

 

(85,968

)

 

 

(97,836

)

Increase in cash, cash equivalents, and restricted cash

 

 

242,809

 

 

 

57,935

 

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

 

$

329,594

 

 

$

60,183

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

8,195

 

 

$

10,805

 

Cash paid for income taxes

 

 

3,023

 

 

 

25,716

 

Leased assets obtained in exchange for new operating lease liabilities

 

 

67,433

 

 

 

108,514

 

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

 

$

16,513

 

 

$

28,094

 

 

 

 

 

 

 

 

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

 

9


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.

 

 

10


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

June 28, 2020

 

Gift card liability, net

 

$

15,902

 

 

$

1,873

 

 

$

(7,874

)

 

$

9,901

 

 

 

(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 June 28, 2020.

Restricted Cash

Restricted cash relates to defined benefit plan forfeitures as well as health and welfare restricted funds of approximately $1.5 million and $1.5 million as of June 28, 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 June 28, 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 consolidated financial statements.

11


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 June 28, 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 June 28, 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 June 28, 2020 and December 29, 2019:

 

June 28, 2020

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Long-term debt

 

$

 

 

$

451,000

 

 

$

 

 

$

451,000

 

Interest rate swap liability

 

 

 

 

 

14,239

 

 

 

 

 

 

14,239

 

Total financial liabilities

 

$

 

 

$

465,239

 

 

$

 

 

$

465,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

12


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 June 28, 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

 

June 28,

2020

 

 

December 29, 2019