Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the 2020 fiscal year, filed on February 25, 2021 (“Form 10-K”) with the Securities and Exchange Commission. All dollar amounts included below are in thousands, unless otherwise noted.
Business Overview
Sprouts Farmers Market offers a unique grocery experience featuring an open layout with fresh produce at the heart of the store. Sprouts inspires wellness naturally with a carefully curated assortment of better-for-you products paired with purpose-driven people. We continue to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and gluten-free. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. Headquartered in Phoenix with 363 stores in 23 states as of July 4, 2021, we are one of the largest specialty retailers of fresh, natural and organic food, and fastest growing retailers in the United States.
Our Heritage
In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability, including successfully rebranding 43 Henry’s Farmers Market and 39 Sunflower Farmers Market stores added in 2011 and 2012, respectively, through acquisitions to the Sprouts banner. These three businesses all trace their lineage back to Henry’s Farmers Market and were built with similar store formats and operations including a strong emphasis on value, produce and service in smaller, convenient locations. The consistency of these formats and operations was an important factor that allowed us to rapidly and successfully rebrand and integrate each of these businesses under the Sprouts banner and on a common platform.
Outlook
In 2020, we announced the initial steps of our new long-term growth strategy that we believe will transform our company and drive profitable growth. This strategy focuses on the following areas:
Win with Target Customers. We are refocusing attention on our target customers, where there is ample opportunity to gain share within these customer segments. Our business can grow by leveraging existing strengths in a unique assortment of better-for-you, quality products and by expanding ecommerce capabilities to allow customers easy access to differentiated products through delivery or pickup.
Update Format and Expand in Select Markets. We are beginning to deliver unique smaller stores with expectations of stronger returns, while maintaining the approachable, fresh-focused farmer’s market heritage Sprouts is known for. Our geographic store expansion and new store placement will intersect where our target customers live, in markets with growth potential and supply chain support, providing a long runway of at least 10% annual unit growth beginning in 2022.
Create an Advantaged Fresh Supply Chain. We believe our network of fresh distribution centers can drive efficiencies across the chain and support growth plans. To further deliver on our fresh commitment and reputation, as well as to improve financial results, we will aspire to ultimately position fresh distribution centers within a 250-mile radius of stores. With the opening of two fresh distribution centers in 2021, we now have more than 85% of our stores within 250 miles of a distribution center.
22
Refine Brand and Marketing Approach. We believe we are elevating our national brand recognition and positioning by telling our unique product innovation and differentiation story. Increased customer engagement through digital and social connections will drive additional sales growth and loyalty.
Deliver on Financial Targets and Box Economics. We are measuring and reporting on the success of this strategy against a number of long-term financial and operational targets.
Recent Developments – COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, and on March 13, 2020, the United States declared the pandemic to be a national emergency. As COVID-19 spread throughout the country, the situation has continued to evolve, including, more recently, the increasing adoption of the COVID-19 vaccine and the accelerating reopening of state economies to approach pre-pandemic levels. As we cycle periods of 2020 where our results benefited from the initial onset of the pandemic, we are reporting declines in year over year net sales and comparable store sales growth. We have seen varying levels of inflation in certain categories resulting from product supply disruptions caused by the pandemic. In addition, due to continued difficulties in obtaining necessary equipment from third parties due to supply chain delays complicated by the COVID-19 pandemic, approximately seven of our planned new store-openings in the fourth quarter of 2021 may be delayed until 2022. The ultimate impact of the COVID-19 pandemic on our results of operations for future periods will depend on the length and severity of the pandemic, vaccine efficacy and adoption, the emergence and severity of COVID-19 variants and governmental and consumer actions taken in response, which we cannot predict. These uncertainties make it challenging for our management to estimate our future business performance. See “Item 1A. Risk Factors— The coronavirus (COVID-19) pandemic has disrupted our business and could negatively impact our financial condition.” in our Form 10-K for additional information.
23
Results of Operations for Thirteen Weeks Ended July 4, 2021 and June 28, 2020
The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted.
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
Unaudited Quarterly Consolidated Statement of Income Data:
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,521,993
|
|
|
$
|
1,642,788
|
|
Cost of sales
|
|
|
971,912
|
|
|
|
1,030,129
|
|
Gross profit
|
|
|
550,081
|
|
|
|
612,659
|
|
Selling, general and administrative expenses
|
|
|
436,420
|
|
|
|
488,877
|
|
Depreciation and amortization (exclusive of depreciation included
in cost of sales)
|
|
|
30,430
|
|
|
|
30,549
|
|
Store closure and other costs, net
|
|
|
(419
|
)
|
|
|
470
|
|
Income from operations
|
|
|
83,650
|
|
|
|
92,763
|
|
Interest expense, net
|
|
|
2,938
|
|
|
|
3,737
|
|
Income before income taxes
|
|
|
80,712
|
|
|
|
89,026
|
|
Income tax provision
|
|
|
19,698
|
|
|
|
22,024
|
|
Net income
|
|
$
|
61,014
|
|
|
$
|
67,002
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
117,246
|
|
|
|
117,832
|
|
Diluted effect of equity-based awards
|
|
|
585
|
|
|
|
357
|
|
Weighted average shares and equivalent shares outstanding
|
|
|
117,831
|
|
|
|
118,189
|
|
Diluted net income per share
|
|
$
|
0.52
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
Other Operating Data:
|
|
|
|
|
|
|
Comparable store sales growth
|
|
|
(10.0
|
)%
|
|
|
9.1
|
%
|
Stores at beginning of period
|
|
|
362
|
|
|
|
344
|
|
Closed
|
|
|
—
|
|
|
|
—
|
|
Opened
|
|
|
1
|
|
|
|
6
|
|
Stores at end of period
|
|
|
363
|
|
|
|
350
|
|
Comparison of Thirteen Weeks Ended July 4, 2021 to Thirteen Weeks Ended
June 28, 2020
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
1,521,993
|
|
|
$
|
1,642,788
|
|
|
$
|
(120,795
|
)
|
|
|
(7
|
)%
|
Comparable store sales growth
|
|
|
(10.0
|
)%
|
|
|
9.1
|
%
|
|
|
|
|
|
|
Net sales during the thirteen weeks ended July 4, 2021 totaled $1.5 billion, a decrease of $120.8 million, or 7%, compared to the thirteen weeks ended June 28, 2020. The sales decrease was primarily due to a 10.0% decrease in comparable store sales as a result of cycling the impact of the COVID-19 pandemic. Comparable stores contributed approximately 96% of total sales for the thirteen weeks ended July 4, 2021 and approximately 93% for the thirteen weeks ended June 28, 2020.
24
Cost of sales and gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
1,521,993
|
|
|
$
|
1,642,788
|
|
|
$
|
(120,795
|
)
|
|
|
(7
|
)%
|
Cost of sales
|
|
|
971,912
|
|
|
|
1,030,129
|
|
|
|
(58,217
|
)
|
|
|
(6
|
)%
|
Gross profit
|
|
|
550,081
|
|
|
|
612,659
|
|
|
|
(62,578
|
)
|
|
|
(10
|
)%
|
Gross margin
|
|
|
36.1
|
%
|
|
|
37.3
|
%
|
|
|
(1.2
|
)%
|
|
|
|
Gross profit totaled $550.1 million during the thirteen weeks ended July 4, 2021, a decrease of $62.6 million, or 10%, compared to the thirteen weeks ended June 28, 2020, driven by decreased sales volume for the reasons discussed above. Gross margin decreased by 1.2% to 36.1%, compared to 37.3% for the thirteen weeks ended July 4, 2021, primarily due to cycling opportunistic produce buys and exceptionally low shrink in the prior period from the elevated demand due to the COVID-19 pandemic.
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Selling, general and administrative
expenses
|
|
$
|
436,420
|
|
|
$
|
488,877
|
|
|
$
|
(52,457
|
)
|
|
|
(11
|
)%
|
Percentage of net sales
|
|
|
28.7
|
%
|
|
|
29.8
|
%
|
|
|
(1.1
|
)%
|
|
|
|
Selling, general and administrative expenses decreased $52.5 million, or 11%, compared to the thirteen weeks ended June 28, 2020. The decrease was primarily driven by lower COVID related costs including payroll and bonus expense and lower ecommerce fees. As a result of this decrease, partially offset by the effect of sales deleverage, selling, general and administrative expenses as a percentage of net sales decreased to 28.7% from 29.8%.
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Depreciation and amortization
|
|
$
|
30,430
|
|
|
$
|
30,549
|
|
|
$
|
(119
|
)
|
|
|
0
|
%
|
Percentage of net sales
|
|
|
2.0
|
%
|
|
|
1.9
|
%
|
|
|
0.1
|
%
|
|
|
|
Depreciation and amortization expenses (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment. As a percentage of net sales, depreciation and amortization expenses (exclusive of depreciation included in cost of sales) increased slightly to 2.0% from 1.9% as a result of sales deleverage.
Store closure and other costs, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Store closure and other costs, net
|
|
$
|
(419
|
)
|
|
$
|
470
|
|
|
$
|
(889
|
)
|
|
|
(189
|
)%
|
Percentage of net sales
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
Store closure and other costs, net decreased $0.9 million to a credit of $0.4 million, compared to $0.5 million for the thirteen weeks ended June 28, 2020. The credit in the current year period was primarily related to an insurance recovery from a fire at one of our stores in the first quarter of 2021. Store closure and other costs, net during the thirteen weeks ended June 28, 2020 primarily related to ongoing activity associated with our closed store locations.
25
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Long-term debt
|
|
$
|
1,160
|
|
|
$
|
2,256
|
|
|
$
|
(1,096
|
)
|
|
|
(49
|
)%
|
Capital and financing leases
|
|
|
228
|
|
|
|
241
|
|
|
|
(13
|
)
|
|
|
(5
|
)%
|
Deferred financing costs
|
|
|
141
|
|
|
|
141
|
|
|
|
—
|
|
|
|
0
|
%
|
Interest rate hedge and other
|
|
|
1,409
|
|
|
|
1,099
|
|
|
|
310
|
|
|
|
28
|
%
|
Total interest expense, net
|
|
$
|
2,938
|
|
|
$
|
3,737
|
|
|
$
|
(799
|
)
|
|
|
(21
|
)%
|
The decrease in interest expense, net was primarily due to the decrease in the average balance outstanding under the Amended and Restated Credit Agreement. This was partially offset by the interest expense paid as a result of an unfavorable interest rate swap.
Income tax provision
Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
Change in income taxes resulting from:
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
4.7
|
%
|
|
|
4.6
|
%
|
|
Enhanced charitable contributions
|
|
|
(1.2
|
)%
|
|
|
(0.9
|
)%
|
|
Federal credits
|
|
|
(0.4
|
)%
|
|
|
(0.3
|
)%
|
|
Share-based payment awards
|
|
|
(0.1
|
)%
|
|
|
0.0
|
%
|
|
Other, net
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
|
Effective tax rate
|
|
|
24.4
|
%
|
|
|
24.7
|
%
|
|
The effective tax rate decreased to 24.4% for the thirteen weeks ended July 4, 2021 from 24.7% for the thirteen weeks ended June 28, 2020. The decrease in the effective tax rate was primarily due to an increase in enhanced charitable contributions.
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Net income
|
|
$
|
61,014
|
|
|
$
|
67,002
|
|
|
$
|
(5,988
|
)
|
|
|
(9
|
)%
|
Percentage of net sales
|
|
|
4.0
|
%
|
|
|
4.1
|
%
|
|
|
(0.1
|
)%
|
|
|
|
Net income decreased $6.0 million primarily due to decreased net sales and unfavorable margin impact, partially offset by lower selling, general and administrative expenses.
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Diluted earnings per share
|
|
$
|
0.52
|
|
|
$
|
0.57
|
|
|
$
|
(0.05
|
)
|
|
|
(9
|
)%
|
Diluted weighted average shares
outstanding
|
|
|
117,831
|
|
|
|
118,189
|
|
|
|
(358
|
)
|
|
|
|
The decrease in diluted earnings per share of $0.05 was driven by lower net income.
26
Results of Operations for Twenty-six Weeks Ended July 4, 2021 and June 28, 2020
The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted.
Comparison of Twenty-six Weeks Ended July 4, 2021 to Twenty-six Weeks Ended
June 28, 2020
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
Unaudited Quarterly Consolidated Statement of Income Data:
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,097,440
|
|
|
$
|
3,289,327
|
|
Cost of sales
|
|
|
1,961,185
|
|
|
|
2,082,836
|
|
Gross profit
|
|
|
1,136,255
|
|
|
|
1,206,491
|
|
Selling, general and administrative expenses
|
|
|
876,082
|
|
|
|
925,181
|
|
Depreciation and amortization (exclusive of depreciation included
in cost of sales)
|
|
|
61,659
|
|
|
|
61,570
|
|
Store closure and other costs, net
|
|
|
1,629
|
|
|
|
(612
|
)
|
Income from operations
|
|
|
196,885
|
|
|
|
220,352
|
|
Interest expense, net
|
|
|
5,929
|
|
|
|
8,564
|
|
Income before income taxes
|
|
|
190,956
|
|
|
|
211,788
|
|
Income tax provision
|
|
|
46,894
|
|
|
|
52,976
|
|
Net income
|
|
$
|
144,062
|
|
|
$
|
158,812
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
117,645
|
|
|
|
117,688
|
|
Diluted effect of equity-based awards
|
|
|
620
|
|
|
|
289
|
|
Weighted average shares and equivalent shares outstanding
|
|
|
118,265
|
|
|
|
117,977
|
|
Diluted net income per share
|
|
$
|
1.22
|
|
|
$
|
1.35
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
Other Operating Data:
|
|
|
|
|
|
|
Comparable store sales growth
|
|
|
(9.7
|
)%
|
|
|
9.9
|
%
|
Stores at beginning of period
|
|
|
362
|
|
|
|
340
|
|
Closed
|
|
|
—
|
|
|
|
—
|
|
Opened
|
|
|
1
|
|
|
|
10
|
|
Stores at end of period
|
|
|
363
|
|
|
350
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
3,097,440
|
|
|
$
|
3,289,327
|
|
|
$
|
(191,887
|
)
|
|
|
(6
|
)%
|
Comparable store sales growth
|
|
|
(9.7
|
)%
|
|
|
9.9
|
%
|
|
|
|
|
|
|
Net sales during the twenty-six weeks ended July 4, 2021 totaled $3.1 billion, a decrease of $191.9 million, or 6%, over the same period of the prior fiscal year. The sales decrease was primarily due to a 9.7% decrease in comparable store sales as a result of cycling the impact of COVID-19 in the prior year. Comparable stores contributed approximately 96% of total sales for the twenty-six weeks ended July 4, 2021 and approximately 94% for the twenty-six weeks ended June 28, 2020.
27
Cost of sales and gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
3,097,440
|
|
|
$
|
3,289,327
|
|
|
$
|
(191,887
|
)
|
|
|
(6
|
)%
|
Cost of sales, buying and occupancy
|
|
|
1,961,185
|
|
|
|
2,082,836
|
|
|
|
(121,651
|
)
|
|
|
(6
|
)%
|
Gross profit
|
|
|
1,136,255
|
|
|
|
1,206,491
|
|
|
|
(70,236
|
)
|
|
|
(6
|
)%
|
Gross margin
|
|
|
36.7
|
%
|
|
|
36.7
|
%
|
|
|
0.0
|
%
|
|
|
|
Gross profit totaled $1.1 billion during the twenty-six weeks ended July 4, 2021, a decrease of $70.2 million, or 6%, compared to the twenty-six weeks ended June 28, 2020, primarily driven by decreased sales volume for the reasons discussed above. Strategic initiatives contributed to gross margin remaining flat at 36.7% for the twenty-six weeks ended July 4, 2021 and June 28, 2020 despite the decrease in sales.
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Selling, general and administrative expenses
|
|
$
|
876,082
|
|
|
$
|
925,181
|
|
|
$
|
(49,099
|
)
|
|
|
(5
|
)%
|
Percentage of net sales
|
|
|
28.3
|
%
|
|
|
28.1
|
%
|
|
|
0.2
|
%
|
|
|
|
Selling, general and administrative expenses decreased $49.1 million, or 5%, compared to the twenty-six weeks ended June 28, 2020. The decrease is primarily due to lower compensation and other COVID driven costs in the current year, partially offset by new stores opened since the comparable period in the prior year. As a percentage of net sales, selling, general and administrative expenses increased to 28.3% from 28.1% due to the deleveraging effect from lower sales.
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Depreciation and amortization
|
|
$
|
61,659
|
|
|
$
|
61,570
|
|
|
$
|
89
|
|
|
|
0
|
%
|
Percentage of net sales
|
|
|
2.0
|
%
|
|
|
1.9
|
%
|
|
|
0.1
|
%
|
|
|
|
Depreciation and amortization expenses (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment. As a percentage of net sales, depreciation and amortization expenses (exclusive of depreciation included in cost of sales) increased slightly to 2.0% from 1.9% as a result of sales deleverage.
Store closure and other costs, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Store closure and other costs, net
|
|
$
|
1,629
|
|
|
$
|
(612
|
)
|
|
$
|
2,241
|
|
|
|
366
|
%
|
Percentage of net sales
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
|
Store closure and other costs, net increased $2.2 million to $1.6 million, compared to a credit of $0.6 million for the twenty-six weeks ended June 28, 2020. The increase was driven by inventory loss and additional expenses, net of insurance recovery, related to the impact of winter storms at several of our stores and a fire at one of our stores during the twenty-six weeks ended July 4, 2021. Store closure and other costs, net during the twenty-six weeks ended June 28, 2020 primarily represents a recognized gain on the assignment of the lease for one of our closed locations in the first quarter of 2020.
28
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Long-term debt
|
|
$
|
2,341
|
|
|
$
|
6,303
|
|
|
$
|
(3,962
|
)
|
|
|
(63
|
)%
|
Capital and financing leases
|
|
|
463
|
|
|
|
484
|
|
|
|
(21
|
)
|
|
|
(4
|
)%
|
Deferred financing costs
|
|
|
282
|
|
|
|
282
|
|
|
|
—
|
|
|
|
0
|
%
|
Interest rate hedge and other
|
|
|
2,843
|
|
|
|
1,495
|
|
|
|
1,348
|
|
|
|
90
|
%
|
Total interest expense, net
|
|
$
|
5,929
|
|
|
$
|
8,564
|
|
|
$
|
(2,635
|
)
|
|
|
(31
|
)%
|
The decrease in interest expense, net is primarily due to the decrease in the average balance outstanding under the Amended and Restated Credit Agreement. This is partially offset by the interest expense paid as a result of an unfavorable interest rate swap.
Income tax provision
Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Decrease in income taxes resulting from:
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
4.8
|
%
|
|
|
4.7
|
%
|
Enhanced charitable contributions
|
|
|
(1.2
|
)%
|
|
|
(0.8
|
)%
|
Federal Credits
|
|
|
(0.4
|
)%
|
|
|
(0.4
|
)%
|
Share-based payment awards
|
|
|
(0.1
|
)%
|
|
|
0.2
|
%
|
Other, net
|
|
|
0.5
|
%
|
|
|
0.3
|
%
|
Effective tax rate
|
|
|
24.6
|
%
|
|
|
25.0
|
%
|
The effective tax rate decreased to 24.6% for the twenty-six weeks ended July 4, 2021 from 25.0% in the same period last year. The decrease in the effective tax rate is primarily due to an increase in enhanced charitable contributions along with tax benefits for share-based payment awards in the current year period compared to prior year period detriments, partially offset by an increase in disallowed executive compensation.
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Net income
|
|
$
|
144,062
|
|
|
$
|
158,812
|
|
|
$
|
(14,750
|
)
|
|
|
(9
|
)%
|
Percentage of net sales
|
|
|
4.7
|
%
|
|
|
4.8
|
%
|
|
|
(0.1
|
)%
|
|
|
|
Net income decreased $14.8 million primarily due to decreased net sales, partially offset by lower selling, general and administrative expenses.
29
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
|
|
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
Change
|
|
|
% Change
|
|
Diluted earnings per share
|
|
$
|
1.22
|
|
|
$
|
1.35
|
|
|
$
|
(0.13
|
)
|
|
|
(10
|
)%
|
Diluted weighted average shares
outstanding
|
|
|
118,265
|
|
|
|
117,977
|
|
|
|
288
|
|
|
|
|
The decrease in diluted earnings per share of $0.13 was driven by lower net income.
30
Return on Invested Capital
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we provide information regarding Return on Invested Capital (referred to as “ROIC”) as additional information about our operating results. ROIC is a non-GAAP financial measure and should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital and provides a meaningful measure of the effectiveness of our capital allocation over time.
We define ROIC as net operating profit after tax (referred to as “NOPAT”), including the effect of capitalized operating leases, divided by average invested capital. Operating lease interest represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as a finance lease (capital lease prior to adoption of ASC 842). The assumed ownership and associated interest expense are calculated using the discount rate for each lease as recorded as a component of rent expense within selling, general and administrative expenses. Invested capital reflects a trailing twelve-month average.
As numerous methods exist for calculating ROIC, our method may differ from methods used by other companies to calculate their ROIC. It is important to understand the methods and the differences in those methods used by other companies to calculate their ROIC before comparing our ROIC to that of other companies.
Our calculation of ROIC for the fiscal periods indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
Rolling Four Quarters Ended
|
|
|
|
July 4. 2021 (1)
|
|
|
June 28, 2020
|
|
|
|
(dollars in thousands)
|
|
Net Income (2)
|
|
$
|
272,700
|
|
|
$
|
216,705
|
|
Special items, net of tax (3), (4)
|
|
|
3,134
|
|
|
|
3,431
|
|
Interest Expense, net of tax (4)
|
|
|
9,304
|
|
|
|
14,557
|
|
Net operating profit after tax (NOPAT)
|
|
$
|
285,138
|
|
|
$
|
234,693
|
|
|
|
|
|
|
|
|
Total rent expense, net of tax (4)
|
|
|
151,041
|
|
|
|
136,883
|
|
Estimated depreciation on operating leases, net of tax (4)
|
|
|
(84,411
|
)
|
|
|
(69,063
|
)
|
Estimated interest on operating leases, net of tax (4), (5)
|
|
|
66,630
|
|
|
|
67,820
|
|
NOPAT, including effect of operating leases
|
|
$
|
351,768
|
|
|
$
|
302,513
|
|
|
|
|
|
|
|
|
Average working capital
|
|
|
153,098
|
|
|
|
75,016
|
|
Average property and equipment
|
|
|
722,570
|
|
|
|
738,999
|
|
Average other assets
|
|
|
568,964
|
|
|
|
566,192
|
|
Average other liabilities
|
|
|
(103,198
|
)
|
|
|
(99,934
|
)
|
Average invested capital
|
|
$
|
1,341,434
|
|
|
$
|
1,280,273
|
|
|
|
|
|
|
|
|
Average operating leases (6)
|
|
|
1,208,682
|
|
|
|
1,184,185
|
|
Average invested capital, including operating leases
|
|
$
|
2,550,116
|
|
|
$
|
2,464,458
|
|
|
|
|
|
|
|
|
ROIC, including operating leases
|
|
|
13.8
|
%
|
|
|
12.3
|
%
|
(1)
Fiscal 2020 included 53 weeks.
(2)
Net income amounts represent total net income for the past four trailing quarters.
(3)
Special items include professional fees related to strategic initiatives.
(4)
Net of tax amounts are calculated using the normalized effective tax rate for the periods presented.
31
(5)
2021 and 2020 estimated interest on operating leases is calculated by multiplying operating leases by the 7.2% and 7.6% discount rate, respectively, for each lease recorded as rent expense within direct store expense.
(6)
Average operating leases represents the average net present value of outstanding lease obligations over the past four trailing quarters.
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash for each of the periods set forth below, as well as our cash, cash equivalents and restricted cash at the end of each period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
222,754
|
|
|
$
|
329,594
|
|
Cash flows from operating activities
|
|
$
|
177,305
|
|
|
$
|
393,348
|
|
Cash flows used in investing activities
|
|
$
|
(39,421
|
)
|
|
$
|
(64,571
|
)
|
Cash flows used in financing activities
|
|
$
|
(86,571
|
)
|
|
$
|
(85,968
|
)
|
We have generally financed our operations principally through cash generated from operations and borrowings under our credit facilities. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures primarily for opening new stores, remodels and maintenance, repurchases of our common stock and debt service. We believe that our existing cash, cash equivalents and restricted cash, and cash anticipated to be generated from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including the impact of the COVID-19 pandemic on our operations, new store openings, remodel and maintenance capital expenditures at existing stores, store initiatives and other corporate capital expenditures and activities. Our cash, cash equivalents and restricted cash position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.
Operating Activities
Cash flows from operating activities decreased $216.0 million to $177.3 million for the twenty-six weeks ended July 4, 2021 compared to $393.3 million for the twenty-six weeks ended June 28, 2020. The decrease in cash flows from operating activities was primarily a result of changes in working capital.
Cash flows provided by/(used in) operating activities from changes in working capital were ($32.2) million in the twenty-six weeks ended July 4, 2021 compared to $166.0 million in the twenty-six weeks ended June 28, 2020. The decrease was primarily driven by elevated accrual balances in the prior year period.
Investing Activities
Cash flows used in investing activities consist primarily of capital expenditures in new stores, including leasehold improvements and store equipment, capital expenditures to maintain the appearance of our stores, sales enhancing initiatives and other corporate investments. Cash flows used in investing activities were $39.4 million and $64.6 million, for the twenty-six weeks ended July 4, 2021 and June 28, 2020, respectively.
We expect capital expenditures to be in the range of $110 - $125 million in 2021, including expenditures incurred to date, net of estimated landlord tenant improvement allowances, primarily to fund investments in new stores, remodels, maintenance capital expenditures and corporate capital expenditures. We expect to fund our capital expenditures with cash on hand and cash generated from operating activities.
32
Financing Activities
Cash flows used in financing activities were $86.6 million for the twenty-six weeks ended July 4, 2021 compared to $86.0 million for the twenty-six weeks ended June 28, 2020. During the twenty-six weeks ended July 4, 2021, cash flows used in financing activities primarily consisted of $87.5 million for stock repurchases.
During the twenty-six weeks ended June 28, 2020, cash flows used in financing activities primarily consisted of $87.0 million in payments on our credit facilities.
Long-Term Debt and Credit Facilities
Long-term debt outstanding was $250.0 million as of July 4, 2021 and January 3, 2021.
See Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements for a description of our Amended and Restated Credit Agreement and our Former Credit Facility (each as defined therein).
Share Repurchase Program
Our board of directors from time to time authorizes share repurchase programs for our common stock. The following table outlines the share repurchase programs authorized by our board, and the related repurchase activity and available authorization as of July 4, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective date
|
|
Expiration date
|
|
Amount
authorized
|
|
|
Cost of
repurchases
|
|
|
Authorization
available
|
|
February 20, 2018
|
|
December 31, 2019
|
|
$
|
350,000
|
|
|
$
|
308,017
|
|
|
$
|
—
|
|
March 3, 2021
|
|
March 3, 2024
|
|
$
|
300,000
|
|
|
$
|
87,484
|
|
|
$
|
212,516
|
|
The shares under our current repurchase program may be purchased on a discretionary basis from time to time through March 3, 2024, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. Our board’s authorization of the share repurchase program does not obligate our Company to acquire any particular amount of common stock, and the repurchase program may be commenced, suspended, or discontinued at any time.
Share repurchase activity under our repurchase program for the periods indicated was as follows (total cost in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
Twenty-six weeks ended
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
|
|
July 4, 2021
|
|
|
June 28, 2020
|
|
Number of common shares acquired
|
|
|
3,150,649
|
|
|
|
—
|
|
|
|
|
3,280,617
|
|
|
|
—
|
|
Average price per common share acquired
|
|
$
|
26.75
|
|
|
$
|
—
|
|
|
|
$
|
26.67
|
|
|
$
|
—
|
|
Total cost of common shares acquired
|
|
$
|
84,275
|
|
|
$
|
—
|
|
|
|
$
|
87,484
|
|
|
$
|
—
|
|
Shares purchased under our repurchase programs were subsequently retired.
Subsequent to July 4, 2021 and through August 5, 2021, we repurchased an additional 1.0 million shares of common stock for $25.0 million.
33
Contractual Obligations
We are committed under certain operating and finance leases for the rental of land, buildings, and for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates through 2040.
The following table summarizes our contractual obligations as of July 4, 2021, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More Than
5 Years
|
|
|
|
(in thousands)
|
|
$700.0 million Credit Agreement (1)
|
|
$
|
250,000
|
|
|
$
|
—
|
|
|
$
|
250,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest payments on $700.0 million
Credit Agreement (2)
|
|
|
16,797
|
|
|
|
5,119
|
|
|
|
11,678
|
|
|
|
—
|
|
|
|
—
|
|
Finance lease obligations (3)
|
|
|
41,957
|
|
|
|
2,179
|
|
|
|
6,345
|
|
|
|
6,668
|
|
|
|
26,765
|
|
Operating lease obligations (3)
|
|
|
1,857,544
|
|
|
|
212,946
|
|
|
|
409,714
|
|
|
|
347,684
|
|
|
|
887,200
|
|
Totals
|
|
$
|
2,166,298
|
|
|
$
|
220,244
|
|
|
$
|
677,737
|
|
|
$
|
354,352
|
|
|
$
|
913,965
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(1)
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. These borrowings are reflected in the “1-3 Years” column and discussed in the financing activities section above. See Note 4, “Long-Term Debt and Finance Lease Liabilities” to our unaudited consolidated financial statements located elsewhere in this Quarterly Report on Form 10-Q.
(2)
Represents estimated interest payments through the March 27, 2023 maturity date of our Amended and Restated Credit Agreement based on the outstanding amounts as of July 4, 2021 and based on LIBOR rates in effect at the time of this report, net of interest rate swaps.
(3)
Represents estimated payments for finance and operating lease obligations as of July 4, 2021. Lease obligations are presented gross without offset for subtenant rentals. We have subtenant agreements under which we will receive $1.0 million for the period of less than one year, $1.8 million for years one to three, $1.7 million for years three to five, and $1.3 million for the period beyond five years.
We have other contractual commitments which were presented under Contractual Obligations in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021, and for which there have not been material changes since that filing through July 4, 2021.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities.
Impact of Deflation and Inflation
Deflation and inflation in the prices of food and other products we sell may periodically affect our sales, gross profit and gross margin. Food deflation across multiple categories, particularly in produce, could reduce sales growth and earnings if our competitors react by lowering their retail pricing and expanding their promotional activities, which can lead to retail deflation higher than cost deflation that could reduce our sales, gross profit margins and comparable store sales. Food inflation, when combined with reduced consumer spending, could also reduce sales, gross profit margins and comparable store sales. The short-term impact of deflation and inflation is largely dependent on whether or not the effects are passed through to our customers, which is subject to competitive market conditions.
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Food deflation and inflation is affected by a variety of factors and our determination of whether to pass on the effects of deflation or inflation to our customers is made in conjunction with our overall pricing and marketing strategies, as well as our competitors’ responses. Although we may experience periodic effects on sales, gross profit, gross margins and cash flows as a result of changing prices, we do not expect the effect of deflation or inflation to have a material impact on our ability to execute our long-term business strategy.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. Our critical accounting estimates include inventory valuations, lease assumptions, self-insurance reserves, impairment of long-lived assets, fair values of share-based awards, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
There have been no substantial changes to these estimates, or the policies related to them during thirteen and twenty-six weeks ended July 4, 2021. For a full discussion of these estimates and policies, see “Critical Accounting Estimates” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 3, 2021.
Recently Issued Accounting Pronouncements
See Note 2, “Summary of Significant Accounting Policies” to our accompanying unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.