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.
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 healthy grocery stores that offer 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 30, 2018 (“fiscal year 2018”) included in the Company’s Annual Report on Form 10-K, filed on February 21, 2019.
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 December 29, 2019 (“fiscal year 2019”) and fiscal year 2018 are 52-week years. The Company reports its results of operations on a 13-week quarter, except for 53-week fiscal years.
Certain reclassifications of amounts reported in prior periods have been made to conform with the current period presentation.
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
Change in Accounting Principle
In the fourth quarter of fiscal year 2018, the Company made a voluntary change in its accounting policy for the classification of certain expenses. Historically, the Company has presented store occupancy costs and buying costs in cost of goods sold. Under the new policy, the Company is presenting these expenses within selling, general and administrative expenses (“SG&A”). In addition, the Company changed the classification of depreciation and amortization (exclusive of supply chain-related depreciation included in cost of sales) from direct store expenses (“DSE”) and SG&A to a separate financial statement line item and combined DSE and store pre-opening costs into SG&A. These reclassifications had no impact on sales, income from operations, net income or earnings per share. In addition, there was no cumulative effect to retained earnings, equity, or net assets.
The Company made this voluntary change in accounting policy in order to better reflect the direct costs of acquiring products and making them available to its customers in cost of sales. Store occupancy costs and buying costs, which are largely sales and marketing driven, are more appropriately reflected in SG&A. The new presentation of operating expenses now largely disaggregates cash from non-cash operating expenses, which the Company believes provides better information to its financial statement users. The Company believes these changes are preferable because they enhance the comparability of its financial statements with those of many of its industry peers and align with how the Company internally manages and reviews costs and margin. These changes in presentation have been retrospectively applied to all prior periods. Refer to the table below for the impact to the thirteen and twenty-six weeks ended July 1, 2018, as currently presented:
|
|
Thirteen weeks ended July 1, 2018
|
|
|
|
Unadjusted
|
|
|
Change in
Accounting
Principle
|
|
|
As Adjusted
|
|
Cost of sales
|
|
$
|
941,281
|
|
|
$
|
(58,069
|
)
|
|
$
|
883,212
|
|
Gross profit
|
|
|
380,412
|
|
|
|
58,069
|
|
|
|
438,481
|
|
Direct store expenses
|
|
|
272,973
|
|
|
|
(272,973
|
)
|
|
|
—
|
|
Selling, general and administrative expenses
|
|
|
43,437
|
|
|
|
306,976
|
|
|
|
350,413
|
|
Depreciation and amortization (exclusive of
depreciation included in cost of sales)
|
|
|
—
|
|
|
|
26,341
|
|
|
|
26,341
|
|
Store pre-opening costs
|
|
|
2,275
|
|
|
|
(2,275
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended July 1, 2018
|
|
|
|
Unadjusted
|
|
|
Change in
Accounting
Principle
|
|
|
As Adjusted
|
|
Cost of sales
|
|
$
|
1,841,425
|
|
|
$
|
(115,626
|
)
|
|
$
|
1,725,799
|
|
Gross profit
|
|
|
767,464
|
|
|
|
115,626
|
|
|
|
883,090
|
|
Direct store expenses
|
|
|
535,568
|
|
|
|
(535,568
|
)
|
|
|
—
|
|
Selling, general and administrative expenses
|
|
|
84,884
|
|
|
|
604,303
|
|
|
|
689,187
|
|
Depreciation and amortization (exclusive of
depreciation included in cost of sales)
|
|
|
—
|
|
|
|
52,486
|
|
|
|
52,486
|
|
Store pre-opening costs
|
|
|
5,595
|
|
|
|
(5,595
|
)
|
|
|
—
|
|
11
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue Recognition
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 the June 30, 2019. The Company had a net gift card liability balance of $8.6 million as of June 30, 2019 and $14.6 million as of December 30, 2018. The Company recognized $1.9 million and $7.3 million in gift card revenue during the thirteen and twenty-six weeks ended June 30, 2019, respectively.
Restricted Cash
Restricted cash relates to defined benefit plan forfeitures as well as health and welfare restricted funds of approximately $1.5 million and $0.7 million as of June 30, 2019 and December 30, 2018, respectively. These balances are included in Prepaid expenses and other current assets in the consolidated balance sheets.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases (ASC 842).” ASU No. 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than twelve months. Recognition, measurement and presentation of expenses will depend on classification as a financing or operating lease.
The Company adopted the standard as of December 31, 2018, the first day of fiscal year 2019. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, permits companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs. The Company did not elect the hindsight practical expedient.
The adoption of the standard resulted in the recognition of operating lease assets and liabilities of approximately $1.0 billion and $1.1 billion, respectively, as of December 31, 2018, including recognition of operating lease assets and liabilities for certain third-party operated distribution center locations. Included in the measurement of the new lease assets and liabilities is the reclassification of balances historically recorded as deferred rent and unfavorable and favorable leasehold interests. Additionally, the Company initially recognized a cumulative effect adjustment, which increased retained earnings by $21 million, net of tax. This adjustment was driven by the derecognition of approximately $114 million of lease obligations and $93 million of net assets related to leases that had been classified as financing lease obligations under the former failed-sale leaseback guidance, and are now classified as operating leases as of the transition date. During the thirteen weeks ended June 30, 2019, the Company reduced the initial cumulative effect adjustment recorded to retained earnings by $9.9 million, net of tax, to correct for an immaterial adjustment related to the adoption impact of certain tenant incentives, with a corresponding decrease to operating lease assets of $13.1 million and deferred tax liabilities of $3.2 million.
This reclassification also resulted in the recognition of rent expense beginning December 31, 2018, which was previously reported as interest expense under the former failed sale-leaseback guidance. Lastly, the adoption of this standard resulted in a change in naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases. The adoption of this standard did not have any impact on the Company’s liquidity or cash flows.
Refer to Note 5, “Leases”, for additional information related to the Company’s updated lease accounting policy.
Recently Issued Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this update eliminate the second step of the goodwill impairment test and provide that a
n entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The guidance will be effective for the Company for its fiscal year 2020, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.
12
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In August 2018, the FASB issued ASU No. 2018-14, “Compensation —Retirement Benefits —Defined Benefit Plans —General (Subtopic 715-20) —Disclosure Framework —Changes to the Disclosure Requirements for Defined Benefit Plans.” The amendments in this update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The guidance will be effective for the Company for its fiscal year 2020, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s disclosures.
No other new accounting pronouncements issued or effective during the thirteen weeks ended June 30, 2019 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 assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 30, 2018:
June 30, 2019
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
515,000
|
|
|
$
|
—
|
|
|
$
|
515,000
|
|
Interest rate swap liability
|
|
|
—
|
|
|
|
6,156
|
|
|
|
—
|
|
|
|
6,156
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
521,156
|
|
|
$
|
—
|
|
|
$
|
521,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap asset
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
453,000
|
|
|
$
|
—
|
|
|
$
|
453,000
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
453,000
|
|
|
$
|
—
|
|
|
$
|
453,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap asset
|
|
$
|
—
|
|
|
$
|
1,522
|
|
|
$
|
—
|
|
|
$
|
1,522
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
1,522
|
|
|
$
|
—
|
|
|
$
|
1,522
|
|
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.
13
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. Closed store reserves are recorded at net present value to approximate fair value which is classified as Level 3 in the hierarchy. 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 and other 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 30, 2019 and December 30, 2018.
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 30,
2019
|
|
|
December 30,
2018
|
|
Senior secured debt
|
|
|
|
|
|
|
|
|
|
|
|
|
$700.0 million Credit Agreement
|
|
March 27, 2023
|
|
Variable
|
|
$
|
515,000
|
|
|
$
|
453,000
|
|
Finance lease liabilities (see Note 5)
|
|
Various
|
|
n/a
|
|
|
11,861
|
|
|
|
—
|
|
Long-term debt and finance lease liabilities
|
|
|
|
|
|
$
|
526,861
|
|
|
$
|
453,000
|
|
Senior Secured Revolving Credit Facility
March 2018 Refinancing
On March 27, 2018, the Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), as borrower, entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) to amend and restate the Company’s existing senior secured credit facility, dated April 17, 2015 (the “Former Credit Facility”). The Amended and Restated Credit Agreement provides for a revolving credit facility with an initial aggregate commitment of $700.0 million, an increase from $450.0 million from the Former Credit Facility, which may be increased from time to time pursuant to an expansion feature set forth in the Amended and Restated Credit Agreement.
Concurrently with the closing of the Amended and Restated Credit Agreement, all commitments under the Former Credit Facility were terminated, resulting in a $0.3 million loss on early extinguishment of debt, recorded in interest expense during the first quarter of fiscal year 2018. The loss was due to the write-off of a proportional amount of deferred financing costs associated with the Former Credit Facility as the result of certain banks exiting the Amended and Restated Credit Agreement in connection with the refinancing. No amounts were outstanding under the Former Credit Facility as of
June 30, 2019
.
The Company capitalized debt issuance costs of $2.1 million related to the refinancing which combined with the remaining $0.7 million debt issuance costs for the Former Credit Facility, are being amortized on a straight-line basis to interest expense over the five-year term of the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement also provides for a letter of credit 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 $26.9 million have been issued as of June 30, 2019, 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.
14
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. 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 49% of outstanding debt under the Amended and Restated Credit Agreement is fixed, reflecting the effects of floating to fixed interest rate swaps (see Note 11, “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 and twenty-six weeks ended June 30, 2019 the Company borrowed an additional $33.2 million and $122.9 million, respectively, primarily for share repurchases. During the same periods, the Company made principal payments totaling $18.2 million and $60.9 million, respectively; resulting in total outstanding debt under the Amended and Restated Credit Agreement of $515.0 million as of June 30, 2019. During fiscal year 2018, the Company borrowed $233.0 million to be used in connection with the Company’s share repurchase programs (see Note 9, “Stockholders’ Equity”) and made a total of $128.0 million of principal payments; resulting in total outstanding debt under the Amended and Restated Credit Agreement of $453.0 million at December 30, 2018.
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;
|
15
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 June 30, 2019.
Former Credit Facility
On
April 17, 2015, Intermediate Holdings, as borrower, entered into the Former Credit Facility that provided for a revolving credit facility with an initial aggregate commitment of $450.0 million, subject to an expansion feature set forth therein. The Former Credit Facility also provided for a letter of credit sub-facility and a $15.0 million swingline facility.
The Former Credit Facility was scheduled to mature, and the commitments thereunder were scheduled to terminate, on April 17, 2020.
Loans under the Former Credit Facility bore interest, at the Company’s option, either at adjusted LIBOR plus 1.50% per annum, or a base rate plus 0.50% per annum. The interest rate margins were subject to adjustment pursuant to a pricing grid based on the Company’s total gross leverage ratio, as defined in the Former Credit Facility. Under the terms of the Former Credit Facility, the Company was obligated to pay a commitment fee on the available unused amount of the commitments equal to 0.20% per annum.
5. Leases
The Company leases all stores, distribution centers, and administrative offices. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease assets, current portion of operating lease liabilities and noncurrent portion of operating lease liabilities in the Company’s fiscal year 2019 consolidated balance sheet. Finance leases are included in property, plant, equipment, net, current portion of finance lease liabilities, and long-term debt and finance lease liabilities in the Company’s fiscal year 2019 consolidated balance sheet. Operating lease payments are charged on a straight-line basis to rent expense, a component of selling, general and administrative expenses, over the lease term and finance lease payments are charged to interest expense and depreciation and amortization expense using a debt model over the lease term.
The Company’s lease assets represent a right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease assets and liabilities and the related rent expense are recognized at the lease commencement date (date on which the Company gains access to the property) based on the estimated present value of lease payments over the lease term, net of landlord allowances to be received. The Company accounts for the lease and non-lease components as a single lease component for all current classes of leases.
Most of the Company’s lease agreements include variable payments related to pass-through costs for maintenance, taxes, and insurance. Additionally, some of the Company’s lease agreements include rental payments based on a percentage of retail sales over contractual levels. These variable payments are not included in the measurement of the lease liability or asset and are expensed as incurred.
16
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As most of the Company’s lease agreements do not provide an implicit rate, the Company
use
s
an
estimated incremental borrowing
rate
, which is derived from third-party information
available at the lease commencement date, in determining the present value of lease payments
.
The rate used is for a secured borrowing of a similar term as the lease.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to twenty years or more. The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less (“short-term leases”) are not recorded on the balance sheet. The Company does not currently have any material short-term leases. Additionally, the Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants.
The Company subleases certain real estate to third parties, which have all been classified as operating leases. The Company recognized sublease income on a straight-line basis.
ASC 842 Disclosures
Lease cost includes both the fixed and variable expenses recorded for leases. The components of lease cost for the twenty-six weeks ended June 30, 2019 were as follows:
|
|
|
|
Twenty-six weeks
ended
|
|
|
|
Classification
|
|
June 30, 2019
|
|
Operating lease cost
|
|
Selling, general and administrative expenses (1)
|
|
$
|
86,114
|
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of Property and
Equipment
|
|
Depreciation and amortization
|
|
|
484
|
|
Interest on lease liabilities
|
|
Interest expense
|
|
|
507
|
|
Variable lease cost
|
|
Selling, general and administrative expenses (1)
|
|
|
25,798
|
|
Sublease income
|
|
Selling, general and administrative expenses
|
|
|
(496
|
)
|
Total net lease cost
|
|
|
|
$
|
112,407
|
|
(1)
|
Supply chain-related amounts of $4.3 million of total net lease cost are included in cost of sales.
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
As of
|
|
|
|
Classification
|
|
June 30, 2019
|
|
Assets
|
|
|
|
|
|
|
Operating
|
|
Operating lease assets
|
|
$
|
1,018,301
|
|
Finance
|
|
Property and equipment, net
|
|
|
10,667
|
|
Total lease assets
|
|
|
|
$
|
1,028,968
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating
|
|
Current portion of operating lease liabilities
|
|
$
|
75,700
|
|
Finance
|
|
Current portion of finance lease liabilities
|
|
|
610
|
|
Noncurrent
|
|
|
|
|
|
|
Operating
|
|
Long-term operating lease liabilities
|
|
|
1,078,513
|
|
Finance
|
|
Long-term debt and finance lease liabilities
|
|
|
11,861
|
|
Total lease liabilities
|
|
|
|
$
|
1,166,684
|
|
17
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
As of
June 30, 2019
|
|
Weighted average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
10.3
|
|
Finance leases
|
|
|
11.2
|
|
Weighted average discount rate
|
|
|
|
|
Operating leases
|
|
|
7.5
|
%
|
Finance leases
|
|
|
8.3
|
%
|
Supplemental cash flow and other information related to leases was as follows:
|
|
Twenty-six weeks ended
|
|
|
|
June 30, 2019
|
|
Cash paid for amounts included in measurement of lease liabilities:
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
77,174
|
|
Operating cash flows for finance leases
|
|
|
507
|
|
|
|
|
|
|
Lease assets obtained in exchange for lease liabilities:
|
|
|
|
|
Finance leases
|
|
|
—
|
|
Operating leases
|
|
|
108,514
|
|
Maturities of lease liabilities:
|
|
Operating Leases (1)
|
|
|
Finance Leases
|
|
|
Total
|
|
2019
|
|
$
|
67,692
|
|
|
$
|
789
|
|
|
$
|
68,481
|
|
2020
|
|
|
200,770
|
|
|
|
1,724
|
|
|
|
202,494
|
|
2021
|
|
|
182,641
|
|
|
|
1,591
|
|
|
|
184,232
|
|
2022
|
|
|
173,303
|
|
|
|
1,671
|
|
|
|
174,974
|
|
2023
|
|
|
151,706
|
|
|
|
1,556
|
|
|
|
153,262
|
|
2024
|
|
|
152,068
|
|
|
|
1,734
|
|
|
|
153,802
|
|
Thereafter
|
|
|
773,892
|
|
|
|
10,466
|
|
|
|
784,358
|
|
Total lease payments
|
|
|
1,702,072
|
|
|
|
19,531
|
|
|
|
1,721,603
|
|
Less: Imputed interest
|
|
|
(547,859
|
)
|
|
|
(7,060
|
)
|
|
|
(554,919
|
)
|
Total lease liabilities
|
|
|
1,154,213
|
|
|
|
12,471
|
|
|
|
1,166,684
|
|
Less: Current portion
|
|
|
(75,700
|
)
|
|
|
(610
|
)
|
|
|
(76,310
|
)
|
Long-term lease liabilities
|
|
$
|
1,078,513
|
|
|
$
|
11,861
|
|
|
$
|
1,090,374
|
|
(1)
|
Operating lease payment include $79.5 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $266.5 million of legally binding minimum lease payments for leases executed but not yet commenced.
|
ASC 840 Disclosures related to periods prior to adoption of ASC 842:
Operating Lease Commitments
The Company’s leases include stores, office and distribution centers. These leases had an average remaining lease term of approximately nine years as of December 30, 2018.
Rent expense in fiscal years 2018, 2017 and 2016 totaled $137.5 million, $120.5 million and $104.8 million, respectively.
18
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Future minimum lease obligations for operating leases with initial terms in excess of one year at December 30, 2018 are as follows:
2019
|
|
$
|
167,595
|
|
2020
|
|
|
179,058
|
|
2021
|
|
|
178,722
|
|
2022
|
|
|
170,515
|
|
2023
|
|
|
155,173
|
|
Thereafter
|
|
|
893,274
|
|
Total payments
|
|
$
|
1,744,337
|
|
The Company has subtenant agreements under which it will receive rent as follows:
2019
|
|
$
|
1,544
|
|
2020
|
|
|
1,623
|
|
2021
|
|
|
1,384
|
|
2022
|
|
|
1,290
|
|
2023
|
|
|
1,190
|
|
Thereafter
|
|
|
3,158
|
|
Total subtenant rent
|
|
$
|
10,189
|
|
Capital and Financing Lease Commitments
The Company is committed under certain capital and financing leases for rental of buildings and equipment. These leases expire or become subject to renewal clauses at various dates from 2019 to 2034.
As of December 30, 2018, future minimum lease payments required by all capital and financing leases during the initial lease term are as follows:
Fiscal Year
|
|
Capital Leases
|
|
|
Financing Leases
|
|
2019
|
|
$
|
1,692
|
|
|
$
|
14,881
|
|
2020
|
|
|
1,591
|
|
|
|
14,865
|
|
2021
|
|
|
1,591
|
|
|
|
14,202
|
|
2022
|
|
|
1,662
|
|
|
|
12,538
|
|
2023
|
|
|
1,697
|
|
|
|
10,944
|
|
Thereafter
|
|
|
12,202
|
|
|
|
35,269
|
|
Total
|
|
|
20,435
|
|
|
|
102,699
|
|
Plus balloon payment (financing leases)
|
|
|
—
|
|
|
|
93,629
|
|
Less amount representing interest
|
|
|
(7,655
|
)
|
|
|
(84,227
|
)
|
Net present value of capital and financing lease
obligations
|
|
|
12,780
|
|
|
|
112,101
|
|
Less current portion
|
|
|
(683
|
)
|
|
|
(4,556
|
)
|
Total long-term
|
|
$
|
12,097
|
|
|
$
|
107,545
|
|
The table above does not include $2.2 million of current financing lease obligations expected to pass sale-leaseback accounting during 2019. The final payment under the financing lease obligations is a non-cash payment which represents the conveyance of the property to the buyer-lessor at the end of the lease term, described as balloon payment in the table above.
19
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Income Taxes
The Company’s effective tax rate decreased to 23.0% for the thirteen weeks ended June 30, 2019 compared to 24.5% for the thirteen weeks ended July 1, 2018. The decrease was primarily due to an increase in federal tax credits and enhanced deductions associated with the charitable donations of inventory food items.
The Company’s effective tax rate increased to 23.8% for the twenty-six weeks ended June 30, 2019 compared to 16.1% for the twenty-six weeks ended July 1, 2018. The lower effective tax rate for the period ended on July 1, 2018, was driven primarily from the exercise of expiring pre-IPO options. Excess tax benefits associated with share-based payment awards are recognized as income tax expense or benefit in the statements of income. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. The income tax benefits resulting from excess tax benefits of share-based payment awards were $0.4 million and $11.4 million for the twenty-six weeks ended June 30, 2019 and July 1, 2018, respectively.
7. Related-Party Transactions
A former member of the Company’s board of directors was an investor in a company that is a supplier of coffee to the Company for resale. During the thirteen and twenty-six weeks ended June 30, 2019, there were no purchases from this supplier. During the thirteen and twenty-six weeks ended July 1, 2018, there were $0.3 million and $2.6 million respectively, in purchases from this supplier. As of June 30, 2019, and December 30, 2018, there were no balances in accounts payable to this vendor. Effective January 1, 2019, this director no longer held an ownership interest in the supplier, and effective June 20, 2019, this director resigned from the Company’s board of directors.
8. 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 the Company’s underwritten secondary public offering which closed on March 10, 2015 (the “March 2015 Offering”). The complaint purports 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 seeks damages on behalf of the purported class in an unspecified amount, rescission, and an award of reasonable costs and attorneys’ fees. After removal to federal court, the plaintiff sought remand, which the court granted in March 2017. On May 25, 2017, the Company filed a Motion to Dismiss in the Superior Court for the State of Arizona, which the court granted in part and denied in part by order entered August 30, 2017. 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 Company’s consolidated financial statements.
20
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. 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 June 30, 2019.
Effective date
|
|
Expiration date
|
|
Amount
authorized
|
|
|
Cost of
repurchases
|
|
|
Authorization
available
|
|
November 4, 2015
|
|
November 4, 2017
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
$
|
—
|
|
September 6, 2016
|
|
December 31, 2017
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
$
|
—
|
|
February 20, 2017
|
|
December 31, 2018
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
$
|
—
|
|
February 20, 2018
|
|
December 31, 2019
|
|
$
|
350,000
|
|
|
$
|
295,017
|
|
|
$
|
54,983
|
|
The shares under the Company’s repurchase programs may be purchased on a discretionary basis from time to time prior to the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. The board’s authorization of the share repurchase programs does not obligate the Company to acquire any particular amount of common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time. The Company has used borrowings under its Former Credit Facility and Amended and Restated Credit Agreement to assist with the repurchase programs (see Note 4, “Long-Term Debt and Finance Lease Liabilities”).
Share repurchase activity under the Company’s repurchase programs for the periods indicated was as follows (total cost in thousands):
|
|
Thirteen weeks ended
|
|
|
Twenty-six weeks ended
|
|
|
|
June 30,
2019
|
|
|
July 1,
2018
|
|
|
June 30,
2019
|
|
|
July 1,
2018
|
|
Number of common shares acquired
|
|
|
2,412,112
|
|
|
|
4,363,162
|
|
|
|
7,302,878
|
|
|
|
7,692,571
|
|
Average price per common share acquired
|
|
$
|
21.32
|
|
|
$
|
21.77
|
|
|
$
|
22.36
|
|
|
$
|
23.14
|
|
Total cost of common shares acquired
|
|
$
|
51,425
|
|
|
$
|
95,000
|
|
|
$
|
163,310
|
|
|
$
|
178,000
|
|
Shares purchased under the Company’s repurchase programs were subsequently retired.
10. 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”).
21
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
|
|
|
Twenty-six weeks ended
|
|
|
|
June 30,
2019
|
|
|
July 1,
2018
|
|
|
June 30,
2019
|
|
|
July 1,
2018
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
35,343
|
|
|
$
|
41,709
|
|
|
$
|
91,735
|
|
|
$
|
108,333
|
|
Weighted average shares outstanding
|
|
|
118,251
|
|
|
|
129,423
|
|
|
|
120,754
|
|
|
|
130,924
|
|
Basic net income per share
|
|
$
|
0.30
|
|
|
$
|
0.32
|
|
|
$
|
0.76
|
|
|
$
|
0.83
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
35,343
|
|
|
$
|
41,709
|
|
|
$
|
91,735
|
|
|
$
|
108,333
|
|
Weighted average shares outstanding -
basic
|
|
|
118,251
|
|
|
|
129,423
|
|
|
|
120,754
|
|
|
|
130,924
|
|
Dilutive effect of share-based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed exercise of options to purchase
shares
|
|
|
65
|
|
|
|
314
|
|
|
|
105
|
|
|
|
561
|
|
RSUs
|
|
|
40
|
|
|
|
68
|
|
|
|
185
|
|
|
|
179
|
|
RSAs
|
|
|
20
|
|
|
|
73
|
|
|
|
68
|
|
|
|
145
|
|
PSAs
|
|
|
60
|
|
|
|
134
|
|
|
|
119
|
|
|
|
140
|
|
Weighted average shares and
equivalent shares outstanding
|
|
|
118,436
|
|
|
|
130,012
|
|
|
|
121,231
|
|
|
|
131,949
|
|
Diluted net income per share
|
|
$
|
0.30
|
|
|
$
|
0.32
|
|
|
$
|
0.76
|
|
|
$
|
0.82
|
|
For the thirteen weeks ended June 30, 2019, the computation of diluted net income per share does not include 0.7 million options, 0.4 million RSUs and 0.1 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 July 1, 2018, the computation of diluted net income per share does not include 1.1 million options, and 0.4 million RSUs as those awards would have been antidilutive.
For the twenty-six weeks ended June 30, 2019, the computation of diluted net income per share does not include 0.6 million options and 0.3 million PSAs as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met. For the twenty-six weeks ended July 1, 2018, the computation of diluted net income per share does not include 1.1 million options and 0.1 million PSAs as those awards would have antidilutive or were performance awards with performance conditions not yet deemed met.
11. 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 four 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 four outstanding swaps was
$250.0
million at June 30, 2019 and December 30, 2018, 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 2019 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.
22
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
June 30, 2019
|
|
|
As of
December 30, 2018
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Interest rate swaps
|
|
Other current assets
|
|
|
—
|
|
|
Other current assets
|
|
$
|
944
|
|
Interest rate swaps
|
|
Accrued liabilities
|
|
|
159
|
|
|
Other assets
|
|
|
578
|
|
Interest rate swaps
|
|
Other long-term
liabilities
|
|
|
5,997
|
|
|
Other long-term
liabilities
|
|
|
—
|
|
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
|
|
|
Twenty-six Weeks Ended
|
|
|
|
June 30,
2019
|
|
|
July 1,
2018
|
|
|
June 30,
2019
|
|
|
July 1,
2018
|
|
Consolidated Statements of
Income Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net
|
|
$
|
(192
|
)
|
|
$
|
71
|
|
|
$
|
(405
|
)
|
|
$
|
(61
|
)
|
12. Comprehensive Income
The following table presents the changes in accumulated other comprehensive income for the twenty-six weeks ended June 30, 2019 and July 1, 2018.
|
|
Cash Flow
Hedges
|
|
Balance at December 31, 2017
|
|
$
|
(784
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
Unrealized gain on cash flow hedging activities, net of income tax of $1,552
|
|
|
4,486
|
|
Total other comprehensive income
|
|
|
4,486
|
|
Balance at July 1, 2018
|
|
$
|
3,702
|
|
|
|
|
|
|
Balance at December 30, 2018
|
|
|
1,134
|
|
Other comprehensive income, net of tax
|
|
|
|
|
Unrealized loss on cash flow hedging activities, net of income tax of ($1,976)
|
|
|
(5,713
|
)
|
Total other comprehensive income (loss)
|
|
|
(5,713
|
)
|
Balance at June 30, 2019
|
|
$
|
(4,579
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) are included within interest expense on the consolidated statements of income.
23
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. 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 and twenty-six weeks ended June 30, 2019 and July 1, 2018).
|
|
Thirteen weeks ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Perishables
|
|
$
|
827,470
|
|
|
|
58.4
|
%
|
|
$
|
773,332
|
|
|
|
58.5
|
%
|
Non-Perishables
|
|
|
588,266
|
|
|
|
41.6
|
%
|
|
|
548,361
|
|
|
|
41.5
|
%
|
Net Sales
|
|
$
|
1,415,736
|
|
|
|
100.0
|
%
|
|
$
|
1,321,693
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Perishables
|
|
$
|
1,634,533
|
|
|
|
57.8
|
%
|
|
$
|
1,505,935
|
|
|
|
57.7
|
%
|
Non-Perishables
|
|
|
1,195,090
|
|
|
|
42.2
|
%
|
|
|
1,102,954
|
|
|
|
42.3
|
%
|
Net Sales
|
|
$
|
2,829,623
|
|
|
|
100.0
|
%
|
|
$
|
2,608,889
|
|
|
|
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.
14. 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 and replaced the 2011 Option Plan (as defined below) (except with respect to outstanding options under the 2011 Option Plan). The 2013 Incentive Plan serves as the umbrella plan for the Company’s share-based and cash-based incentive compensation programs for its directors, officers and other team members. Awards granted under these plans include restricted stock units (“RSUs”), performance share awards (“PSAs”), and restricted stock awards (“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.
Awards Granted
During the twenty-six weeks ended June 30, 2019, the Company granted the following share-based compensation awards, under the 2013 Incentive Plan:
Grant Date
|
|
RSUs
|
|
|
PSAs
|
|
|
Options
|
|
March 2019
|
|
|
386,115
|
|
|
|
95,768
|
|
|
|
53,866
|
|
May 2019
|
|
|
45,682
|
|
|
|
2,999
|
|
|
|
|
|
June 2019
|
|
|
177,975
|
|
|
|
75,000
|
|
|
|
|
|
Total
|
|
|
609,772
|
|
|
|
173,767
|
|
|
|
53,866
|
|
Weighted-average grant date fair value
|
|
$
|
21.71
|
|
|
$
|
21.16
|
|
|
$
|
7.63
|
|
Weighted-average exercise price
|
|
|
—
|
|
|
|
—
|
|
|
$
|
23.12
|
|
24
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 2019, there were 1,843,352
stock awards outstanding and 5,667,179 shares remaining available for issuance under the 2013 Incentive Plan
2011 Option Plan
In May 2011, the Company adopted the Sprouts Farmers Markets, LLC Option Plan (the “2011 Option Plan”) to provide team members or directors of the Company with options to acquire shares of the Company. The Company had authorized 12,100,000 shares for issuance under the 2011 Option Plan. Options may no longer be issued under the 2011 Option Plan. As of June 30, 2019, there were 50,000 options outstanding under the 2011 Option Plan.
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 vest 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 fiscal year 2016 are restricted shares that were subject to the Company achieving certain earnings before interest and taxes (“EBIT”) performance targets on an annual and cumulative basis over a three-year performance period, as well as additional time-vesting conditions.
The performance conditions with respect to the EBIT targets were deemed to not have been met, and all relevant PSAs have forfeited.
PSAs granted in March 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 will vest 50% on the third anniversary of the grant date (March 2020).
During the twenty-six weeks ended June 30, 2019, 106,360 of the 2017 PSAs were vested.
PSAs granted in March 2018 are subject to the Company achieving certain EBIT performance targets for the 2020 fiscal year. The criteria is based on a range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (March 2021).
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 in March 2022.
25
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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
|
|
|
Twenty-six weeks ended
|
|
|
|
June 30,
2019
|
|
|
July 1,
2018
|
|
|
June 30,
2019
|
|
|
July 1,
2018
|
|
Share-based compensation expense before
income taxes
|
|
$
|
1,741
|
|
|
$
|
4,662
|
|
|
$
|
4,191
|
|
|
$
|
8,630
|
|
Income tax benefit
|
|
|
(374
|
)
|
|
|
(1,198
|
)
|
|
|
(950
|
)
|
|
|
(2,218
|
)
|
Net share-based compensation expense
|
|
$
|
1,367
|
|
|
$
|
3,464
|
|
|
$
|
3,241
|
|
|
$
|
6,412
|
|
The following share-based awards were outstanding as of June 30, 2019 and July 1, 2018:
|
|
As of
|
|
|
|
June 30,
2019
|
|
|
July 1,
2018
|
|
|
|
(in thousands)
|
|
Options
|
|
|
|
|
|
|
|
|
Vested
|
|
|
720
|
|
|
|
2,588
|
|
Unvested
|
|
|
64
|
|
|
|
101
|
|
RSUs
|
|
|
826
|
|
|
|
704
|
|
PSAs
|
|
|
228
|
|
|
|
383
|
|
RSAs
|
|
|
55
|
|
|
|
192
|
|
As of June 30, 2019, 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
|
|
$
|
430
|
|
|
|
2.6
|
|
RSUs
|
|
|
16,018
|
|
|
|
2.2
|
|
PSAs
|
|
|
3,496
|
|
|
|
2.2
|
|
RSAs
|
|
|
674
|
|
|
|
0.7
|
|
Total unrecognized compensation expense at June 30, 2019
|
|
$
|
20,618
|
|
|
|
|
|
During the twenty-six weeks ended June 30, 2019 and July 1, 2018, the Company received $4.1 million and $6.7 million, respectively, in cash proceeds from the exercise of options.
15. Subsequent Events
On August 1, 2019, the Company entered into an agreement with its President and Chief Operating Officer providing for his transition to the role of Senior Advisor through March 31, 2020. The Company expects to recognize approximately $2.0 million in compensation expense related to this arrangement during the third quarter of fiscal year 2019.
26