When you shop at Sprouts Farmers Market, you’ll feel
inspired, curious, and maybe a little adventurous. After
all, our diverse offering of fresh, natural and organic food
reflects an authentic farmers market—complete with field
bins, wooden barrels and natural light.
Sprouts attracts both the devout organic shopper and the
traditional supermarket consumer with best-in-class
service and everyday low prices. By making healthy foods
affordable, we empower customers to eat better and make
informed food choices.
The nationwide trend toward healthy living continues to
accelerate, and that motivates us. We are completely, utterly
passionate about driving down the price of healthy eating.
It’s what we call “healthy living for less!”
1
S P R O U T S F A R M E R S M A R K E T
From farm to
farmers market.
QU A l I T y , V A l U E A n d T A S T E
At the crack of dawn, the Sprouts distribution
centers are buzzing. Our quality control team
members move from cooler to cooler inspecting
each produce shipment for traceability, freshness,
quality and taste. Our seafood merchants scour
the freshest catch on both coasts and negotiate
for great prices while our grocery buyers taste
test new products and decide which ones make
the cut.
The morning frenzy assures Sprouts customers
are getting the freshest merchandise available.
This is a side of the food industry consumers
rarely see. They shop at Sprouts with the expec-
tation of “farm-fresh” produce. But they gen-
erally know little about how food gets from field
to plate, and the complex logistics on which the
system depends.
By self-distributing our produce, we go to great
lengths to guarantee that quality is there every
step of the way. Whether we’re sourcing our prod-
ucts from around the corner or around the globe,
our goal is always to offer fresh, quality products
at great value.
5
2 0 1 3 A n n U A l R E P O R T
A step beyond the
traditional grocery store.
T H E S P R O U T S E X P E R I E n C E
you often hear dietitians telling people to “shop
the perimeter” of their grocery store as a strategy
for eating well. But you don’t have to worry about
that at Sprouts. We put produce at the heart of
our store because fruits and vegetables are the
heart of healthy eating.
With a diverse offering of fresh, natural and
organic food, Sprouts stores are reminiscent
of an open-air farmers market—complete with
wooden bins, barrels and natural light. Our
low shelves and spacious aisles allow custom ers to
maneuver comfortably and view the entire store.
Mountains of fresh produce priced significantly
below the competition draw new customers through
our doors. They soon discover our fresh bakery,
full-service deli and butcher shop, thousands of
vitamins and supplements, natural and organic
groceries, and scoop-your-own bulk department.
Customers love our products, but it’s the in-store
experience that keeps them coming back for more.
Our team members are knowledgeable and
approachable. With a passion for people and a
flair for food, they engage our customers through
helpful service and education. That’s the Sprouts
difference, and that’s why our customers often
become our biggest advocates.
6
A step beyond the
traditional grocery store.
T H E S P R O U T S E X P E R I E n C E
S P R O U T S F A R M E R S M A R K E T
167 stores
in eight states.
T H E B R O A d A P P E A l O F O U R C O n C E P T
E X I S T I n g M A R K E T S
T A R g E T n E A R T E R M M A R K E T S
From health-conscious California to down-home
Oklahoma—and everywhere in between—the
Sprouts model is working. That’s because our
unique combination of high quality food, com-
petitive pricing and personal service enables us
to attract a broad customer demographic.
Sprouts ended the year with 167 stores and annual
sales of $2.4 billion, making us a strong competi-
tor to the supermarkets and health food stores
throughout the country. And while Sprouts may
not be a typical grocery store, we are a one-stop-
shop with a full assortment of specialty, natural
and organic products at affordable prices.
While adding 19 new stores in fiscal 2013 (new
store growth of 13%) we achieved economies of
scale in sourcing and distribution. We also made
significant investments in management, merchan-
dising, information technology systems, team
member training, marketing and compliance to
enable us to pursue our growth plans.
Research shows that the U.S. can support approxi-
mately 1,200 Sprouts locations, allowing us to
grow more than seven times our current footprint
over the next 15-plus years. We’ve set ambitious
but achievable growth targets, and look forward
to new opportunities on the horizon.
9
732326246429 2 0 1 3 A n n U A l R E P O R T
Improving the health of
the communities we serve.
R E S P On S I Bl E R E T A I l I n g
The concept of food in America has changed
dramatically in recent years. More than ever,
consumers are passionate about “eco-friendly”
food that has been harvested in a sustainable
way. In turn, we’re sourcing our food responsibly
and putting more certified organic, cruelty-free
and non-gMO items on our shelves.
to local pantries. We donated more than 3 million
pounds of food in 2013, equal to nearly 2.5 mil-
lion healthy meals for people in need. Additionally,
Sprouts has donated more than $1.1 million to
Autism Speaks, the nation’s largest autism research
and advocacy organization, through the generosity
of customers and business partners.
We also understand that successful companies
thrive in healthy communities. That’s why we’re
committed to improving the health of the com-
munities we serve.
As a responsible neighbor, we support organiza-
tions that share our healthy living goals. Through
our Food Rescue Program, each store donates food
We also reduce our environmental footprint by
installing energy-efficient lighting and equip-
ment and using fewer refrigerants.
With the support of our customers, team mem-
bers and suppliers, responsible retailing is at the
forefront of everything we do.
1 0
Improving the health of
the communities we serve.
R E S P On S I Bl E R E T A I l I n g
S P R O U T S F A R M E R S M A R K E T
2013 by
the numbers.
T H E P O W E R O F I
n T E g R A T I O n
P R O F O R M A C O M P A R A B l E
S T O R E S A l E S g R O W T H 2
( T W O - y E A R S T A C K )
20.4%
C U R R E n T P E R I Od
P R I O R P E R I Od
11.6%
2.6%
14.8%
10.7%
9.7%
7.4%
5.1%
4.9%
2.3%
‘09
‘10
‘11
‘12
‘13
S P R O U T S d O n A T E d M O R E T H A n
3,000,000 lbs
O F F O O d T O l O C A l H U n g E R
R E l I E F A g En C I E S
715
T R U C K lO A d S
O F A P P l E S
S Ol d
27,500
A v e r a g e s q u a r e f e e t p e r s t o r e
$
1.1mm
d o n a t i o n
M A d E T O A U T I S M
S P E A K S A n d
S A A R C
100mm
B A nA nA S S O l d
ne a r l y
325,000
F a c e b o o k f a n s
14,500
TEAM MEMBERS And COUnTIng
10,000
C A R S V I S I T E AC H S PROU T S
PA R K I ng l O T W E E K ly
13%
u nit
grow th
675
T R U C K l O A d S O F
W A T E R M E l O n S S O l d
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PROgR AM
f o r p l a s t i c ,
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a n d c o m p o s t
f o r S p r o u t s
s u p p o r t o f f i c e
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S P R O U T S .C O M
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E s t i m a t e d n u m b e r o f m e a l s p r o v i d e d t o
t h o s e i n n e e d s u p p l i e d b y d o n a t i o n s f r o m
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19
O P E n E d
S T O R E S
I n 2 0 1 3
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B R A n d P R I V A T E
l A B E l I T E M S
3,000
t e a m m e m b e r
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17mm
P O U n d S O F
O R A n g E S
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8
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,
2
$
P R O F O R M A n E T S A l E S
($ I n MM)1
1
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,
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3
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‘08
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’11
’12
’13
¹Pro forma net sales reflect the net sales of our predecessor entity and Sunflower as if the Henry’s Transaction and Sunflower Transaction had been consummated on the first day of fiscal 2008.
2 “Comparable store sales growth” refers to the percentage change in our comparable store sales as compared to the prior comparable period. Pro forma comparable store sales growth reflects comparable store
sales growth calculated as if the Henry’s Transaction and the Sunflower Transaction had been consummated on the first day of fiscal 2007. Comparable store sales growth on a “two-year stacked basis” is
computed by adding the pro forma comparable store sales growth of the period referenced and that of the same fiscal period ended twelve months prior.
1 3
2 0 1 3 A n n U A l R E P O R T
Message from the
President and CEO
M A R C H 1 7 , 2 0 1 4
dear Fellow Stockholders:
It’s difficult to put into words how amazing 2013
was for Sprouts Farmers Market. The success of
19 new stores, the excitement of our initial public
offering, and the celebration of nearly 3,000
team member promotions are just a few of the
milestones that made 2013 such a special year in
our company’s history.
Our business model is resonating across the
country; we are growing at a very healthy pace;
and every day we are helping Americans embrace
healthy living for less.
People often ask me, “What fuels Sprouts’ per-
formance, and how can you continue the
momentum?” There isn’t a magic formula. no
secret sauce or classified algorithm. We simply
remain authentic, and will continue to do so in
2014 and beyond.
authentiC growth
Sprouts’ heritage as a food retailer runs deep.
What began as a produce stand more than 70
years ago has transformed into a nationwide,
emerging market leader with nearly $2.5 billion
in annual revenue. Sprouts is one of the fastest
growing retailers in the United States, according
to the national Retail Federation, but our busi-
ness originated from humble roots.
When I joined Sprouts in 2002, we had one store
in Arizona and fewer than 50 team members.
Our headquarters was in converted storage space
where we worked on folding tables with power
strips hanging from the ceiling. But as the
Sprouts story illustrates, growth is in our dnA
and we’ve stayed true to our core values through-
out our history. Our company was built on hard
work and dedication—to the brand, to each
other, and most importantly, to our customers.
We set ambitious goals and met them despite
unprecedented challenges. For example, Sprouts
was one of the only retailers to post positive
comps and open new stores even during the
deepest part of the recession. We set an aggres-
sive target of growing organically to 50 stores by
2010, and exceeded it by 12 percent. Over the
next couple of years, we united with two excep-
tional companies in Henry’s and Sunflower to
become the company we are today.
In our short 11 years, we’ve learned to harness
our creativity, overcome growing pains and build
an exceptional culture. And we’ve arrived at this
point because we remained authentic in our
capacity to create, to endure, to transform and to
be great.
1 4
Message from the
President and CEO
M A R C H 1 7 , 2 0 1 4
S P R O U T S F A R M E R S M A R K E T
(From left to right: Jim Nielsen, Chief Operating Officer; Doug Sanders, President and Chief Executive Officer;
Amin Maredia, Chief Financial Officer.)
authentiC resuLts
We are proud to share with you the following
2013 financial and operational highlights:
• Top lines sales grew 22%;
• Comparable store sales increased 10.7%, and
20.4% on a two-year stacked basis;
• Unit growth reached 13% with the opening of
19 stores, including entry into new markets;
• Net income more than doubled;
• Our team member base grew 25% to support
our robust growth; and
• Sprouts became a publicly traded company.
As a result of all these accomplishments, we enter
2014 as a promising industry leader with the
financial resources necessary to fund our growth.
Our primary source of liquidity continues to be
cash generated from operations. In fiscal 2013,
we generated $159 million of cash from opera-
tions and completed a successful initial public
offering that raised approximately $334 million,
which we used to pay down debt.
Our performance was driven by continued prod-
uct innovation, the strength of our operational
execution and our steadfast focus on customer
service. growing awareness of the Sprouts brand
generated more customer loyalty and the nation-
wide shift toward healthier eating habits contin-
ues to bode well for our company.
As the Sprouts concept gains broad appeal, we’ll
continue our focus on strategic growth and inno-
vation. Our plans for 2014 are ambitious to say
the least.
We plan to enter the Southeast and Central
regions of the United States as part of our
strategy to expand geographically. We intend to
open more new stores, invest in more remodels,
drive more product innovation, serve more cus-
tomers, and promote more team members than
ever before.
We know that the success we enjoyed in 2013
doesn’t guarantee that same level of success in
2014. The marketplace isn’t going to relax, com-
petition isn’t going to let up, customers’ expec-
tations will not diminish, and the glory days of
the past will not protect us from the future. We
hit the ground running from day one, and will
continue with the same vigor that has always
characterized Sprouts.
authentiC strategY
Our success in 2013 underscored that we have
the right model, the right path forward, and the
right people leading the charge. The Sprouts
team is mission-driven, motivated by results and
focused on the long term.
1 5
2 0 1 3 A n n U A l R E P O R T
Because of our vow to provide superior customer
service, we may make decisions differently than
some companies. I want to take a moment to
explain how our commitment to excellence
shapes our management mindset:
industry of innovation. In that spirit, we are flex-
ible, adaptable and responsive. Foods will
change. Tastes will change. Times will change.
But our commitment to happy, healthy custom-
ers will never change.
• We place the customer experience at the core of
all we do. We are committed to providing best-
in-class service—and to improving it everyday.
• We focus on hiring, developing and retaining
versatile and talented team members. Our peo-
ple are our most important asset, and we are
deeply committed to their ongoing development.
• We negotiate for the best prices on fresh, natural
and organic food so we can pass those savings
onto the customer.
• We analyze our programs and measure the
effectiveness of our investments. We abandon
those that do not provide acceptable returns,
and back those that work best.
• We evaluate the major trends reshaping the
retail landscape—social media, personalized
marketing, multichannel commerce, and
emerging business models—and determine the
actions we must take for continued success.
• We push for product innovation and develop-
ment, and constantly improve our merchandise
offering, including our private label program.
• We develop sustainable sourcing guidelines as
part of our mission to conserve and protect the
natural resources on which we all depend.
• We give back through service and donations
and improve the health of the communities
we serve.
All that said, we understand that food, particu-
larly the natural and organic segment, is an
authentiC aPPreCiation
I’ve proudly watched this company grow from a
tenacious startup to an emerging market leader.
The determination and sacrifice that drove us
from the start made us work that much harder in
2013. And I have no doubt it will continue to
power our passion in the coming years.
The occasion of our first Annual Report gives
me an opportunity to publicly recognize those
who have helped Sprouts arrive at this important
milestone.
To the Sprouts team, thank you for your com-
mitment and hard work. I am proud and appre-
ciative of the 14,500 team members who work so
hard every day to make Sprouts great. Our com-
pany’s accomplishments are the direct result of
your dedication, enthusiasm and skill.
To our customers, thank you for shopping at
Sprouts. Our greatest accomplishment—and my
greatest satisfaction—is helping you achieve
healthy living for less.
Finally, I’d like to thank our stockholders. I
appreciate your confidence, and will work to
continue earning it.
Sincerely,
doug Sanders
President and Chief Executive Officer
1 6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 29, 2013
Commission File Number: 001-36029
Sprouts Farmers Market, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
32-0331600
(I.R.S. Employer
Identification No.)
11811 N. Tatum Boulevard, Suite 2400
Phoenix, Arizona 85028
(Address of principal executive offices and zip code)
(480) 814-8016
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes È No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. È
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ‘
Non-accelerated filer È (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È
As of June 30, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, there was no established public market for
the registrant’s common stock. The registrant’s common stock began trading on The NASDAQ Global Select Market on August 1, 2013.
‘
Accelerated filer
Smaller reporting company ‘
As of February 24, 2014, there were outstanding 147,719,537 shares of the registrant’s common stock, $0.001 par value per share.
Portions of the registrant’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual
Report on Form 10-K where indicated. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the
registrant’s fiscal year ended December 29, 2013.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . .
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
1
19
39
39
40
40
41
43
45
82
83
129
129
129
131
131
131
131
131
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
131
134
PART IV
EXPLANATORY NOTE
On July 29, 2013, Sprouts Farmers Markets, LLC, a Delaware limited liability company, converted
into Sprouts Farmers Market, Inc., a Delaware corporation, as described under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting
Comparability of Results of Operations—Corporate Conversion.” As used in this Annual Report on
Form 10-K, unless the context otherwise requires, references to the “Company,” “Sprouts,” “we,” “us”
and “our” refer to Sprouts Farmers Markets, LLC and, after the corporate conversion, to Sprouts
Farmers Market, Inc. and, where appropriate, its subsidiaries. In the corporate conversion, each unit of
Sprouts Farmers Markets, LLC was converted into 11 shares of common stock of Sprouts Farmers
Market, Inc., and each option to purchase units of Sprouts Farmers Markets, LLC was converted into
an option to purchase 11 shares of common stock of Sprouts Farmers Market, Inc. For the
convenience of the reader, except as the context otherwise requires, all information included in this
Annual Report on Form 10-K is presented giving effect to the corporate conversion.
On July 31, 2013, the Company’s Registration Statement on Form S-1 (Reg. No. 333-188493) and
the Company’s Registration Statement on Form 8-A became effective, and the Company became
subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (referred to
as the “Exchange Act”).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” that involve substantial
risks and uncertainties. The statements contained in this Annual Report on Form 10-K that are not
purely historical are forward-looking statements within the meaning of Section 27A of the Securities
Act, and Section 21E of the Exchange Act, including, but not limited to, statements regarding our
expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue,
projected expenses, and plans and objectives of management. In some cases, you can identify
forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,”
“may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,”
“objective,” or the negative of these terms, and similar expressions intended to identify forward-looking
statements. However, not all forward-looking statements contain these identifying words. These
forward-looking statements reflect our current views about future events and involve known risks,
uncertainties, and other factors that may cause our actual results, levels of activity, performance, or
achievement to be materially different from those expressed or implied by the forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited to,
those discussed in the section titled “Risk Factors” included in this Annual Report on Form 10-K.
Furthermore, such forward-looking statements speak only as of the date of this report. Except as
required by law, we undertake no obligation to update any forward-looking statements to reflect events
or circumstances after the date of such statements.
Item 1. Business
Who We Are
PART I
Sprouts Farmers Market is a high-growth, differentiated, specialty retailer of natural and organic
food focusing on health and wellness at great value. We offer a complete shopping experience that
includes fresh produce, bulk foods, vitamins and supplements, grocery, meat and seafood, bakery,
dairy, frozen foods, body care and natural household items catering to consumers’ growing interest in
eating and living healthier. Since our founding in 2002, we have grown rapidly, significantly increasing
our sales, store count and profitability. With 170 stores in nine states as of February 27, 2014, we are
one of the largest specialty retailers of natural and organic food in the United States.
The cornerstones of our business are fresh, natural and organic products at compelling prices, an
attractive and differentiated shopping experience, and knowledgeable team members who we believe
provide best-in-class customer service and product education.
Healthy Living For Less. The foundation of our value proposition is fresh, high-quality produce,
which we offer at prices we believe are significantly below those of conventional food retailers and
even further below high-end natural and organic food retailers. We believe that by combining our scale
in and self-distribution of produce, we ensure that our produce meets our high quality standards and
can be delivered to customers at market leading prices. In addition, our scale, operating structure and
deep industry relationships position us to consistently deliver “Healthy Living for Less.” Based on our
experience, we believe we attract a broad customer base, including conventional supermarket
customers, and appeal to a much wider demographic than other specialty retailers of natural and
organic food. Trial visits to our stores allow us to engage with customers while showcasing our
complete grocery offering and differentiated retail format. We believe that over time, our compelling
prices and product offering convert many “trial” customers into loyal “lifestyle” customers who shop
Sprouts with greater frequency and across an increasing number of departments.
Attractive, Differentiated Shopping Experience. In a convenient, small-box format (average store size
of 27,500 sq. ft.), our stores have a farmers market feel, with easy-to-shop floor plans, a bright open-air
atmosphere and low profile displays allowing customers to view the entire store upon entry. We design
our stores to create a comfortable and engaging shopping experience supported by our well-trained and
knowledgeable team members. We strive to be our customers’ everyday market. We dedicate significant
floor space in the center of our stores to our produce and bulk food departments, which we merchandise
in bountifully stacked crates and rows of self-service bins creating a farmers market environment.
Produce and bulk foods at the center of the store are surrounded by a complete grocery offering,
including vitamins and supplements, grocery, meat and seafood, bakery, dairy, frozen foods, beer and
wine, body care and natural household items. Consistent with our natural and organic offering, we
choose not to carry most of the traditional, national branded consumer packaged goods generally found
at conventional grocery retailers (e.g., Doritos, Tide and Lucky Charms). Instead, we offer high-quality
alternatives that emphasize our focus on fresh, natural and organic products at great values.
Customer Service & Education. We are dedicated to our mission of “Healthy Living for Less,” and
we attract team members who share our passion for educating and serving our customers with the
goal of making healthy eating easier and more accessible. Our passionate and well-trained team
members engage customers throughout the entire store and provide them with product and nutritional
education. As a result, we believe our customers increasingly understand that they can purchase a
wide selection of high-quality, healthy, and great tasting food for themselves and their families at
attractive prices by shopping at Sprouts. Over time, we believe our customers become passionate
about both Sprouts and eating healthy, and we experience growing sales as they shop Sprouts for a
greater percentage of their grocery needs.
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Our Industry
We operate within the grocery store industry which encompasses store formats ranging from small
grocery and convenience stores to large independent and chain supermarkets. According to the
Progressive Grocer, U.S. supermarket sales totaled over $600 billion in 2012. We believe Sprouts is
capturing significant market share from conventional supermarkets and other specialty concepts in this
supermarket segment.
The supermarket segment is comprised of various formats, including conventional, supercenter,
natural / gourmet, limited assortment and warehouse. While the natural and organic food segment is
one of the fastest growing segments in the industry, conventional supermarkets have experienced
overall share decline from approximately 73% in 2005 to 67% in 2012, according to the Progressive
Grocer, as customers have migrated to other grocery retail formats. Conventional supermarket
customers are attracted to competitors’ unique product offerings, formats and differentiated shopping
experiences.
Sprouts is a high-growth, natural and organic food retailer offering a complete grocery shopping
experience, catering to consumers’ growing interest in living and eating healthier while offering
consumers a compelling value relative to conventional supermarkets and mass retailers. We believe
Sprouts will continue to benefit from the following industry and consumer trends:
(cid:129)
Increasing consumer focus on health and wellness. We believe, based on our industry
experience, that consumers are increasingly focused on health and wellness and are actively
seeking healthy foods in order to improve eating habits. According to the Nutrition Business
Journal, sales of natural and organic food have grown at a CAGR of 12.0% from 1997 to
2012, reaching a total market size of $54 billion in the United States and are expected to
continue to grow to $113 billion in 2020, representing a CAGR of 11.3% from 2013 to 2020. In
addition, according to the Nutrition Business Journal, vitamin and supplement sales grew at a
CAGR of 5.8% from 1997 to 2012, reaching a total market size of $32 billion in the United
States. The Nutrition Business Journal forecasts this market will accelerate growth to a CAGR
of 7.1% from 2013 to 2020.
This overall demand for healthy products is driven by many factors, including increased
awareness about the benefits of eating healthy, a greater focus on preventative health
measures, and the rising costs of health care. We believe customers are attracted to retailers
with comprehensive health and wellness product offerings. As a result, food retailers are
offering an increased assortment of fresh, natural and organic foods as well as vitamins and
supplements to meet this demand.
(cid:129) Emphasis on the customer shopping experience. Consumers are increasingly focused on
their shopping experience. According to the 2011 Food Marketing Institute study, The Food
Retailing Industry Speaks, 60% of shoppers do not shop at the store most convenient to their
home. These consumers choose their shopping location based on variety, price and higher-
quality produce and meat. Shoppers are also loyal to their primary store, with 69% of their
total grocery budget spent at their primary store according to a survey in the Food Marketing
Institute’s U.S. Grocery Shopper Trends 2012. Grocers are therefore focused on providing a
broad selection of products along with exceptional customer service.
(cid:129) Consumer desire for value. Customers across formats seek quality products at compelling
value. Stores under our management experienced positive quarterly pro forma comparable
store sales growth throughout the recent economic downturn from 2008 to 2010, while certain
traditional, natural and organic retailers faced pressure on sales as customers shifted to
lower-priced items or eliminated certain discretionary purchases. We believe consumers will
continue to seek high-quality, value-priced offerings in their purchases over the long-term,
regardless of macroeconomic conditions.
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What Makes Us Different
We believe the following competitive strengths position Sprouts to capitalize on two powerful, long-
term consumer trends—a growing interest in health and wellness and a focus on value:
Comprehensive natural and organic product offering at great value. To capitalize on the growing
interest in health and wellness and the resulting consumer demand for healthy products, we feature an
expansive offering of high-quality natural and organic products. On average, our stores carry
approximately 16,500 SKUs across produce, bulk foods, vitamins and supplements, grocery, meat and
seafood, bakery, dairy, frozen foods, beer and wine, body care and natural household departments.
We believe, based on our industry experience, that our prices provide consumers a compelling relative
value and appeal to a broader demographic than other natural and organic food retailers. In particular,
we position Sprouts to be a value leader in fresh produce in order to drive trial visits to our stores by
new customers. We believe our produce allows us to engage more consumers and successfully
convert many of these trial customers into loyal, lifestyle customers shopping with greater frequency
and in more departments across the store. We believe this approach and our full product offering
enables us to grow our share of customers’ “food retail wallet” as they increasingly shop our stores for
a significant portion of their everyday grocery, vitamin and supplement and body care purchases.
Resilient business model with strong financial performance. We achieved positive, pro forma
comparable store sales growth of 2.6%, 2.3%, 5.1%, 9.7% and 10.7% in fiscal 2009, 2010, 2011, 2012
and 2013, respectively. We believe the consistency of our performance over time, even through the
recent economic downturn from 2008 to 2010, and across geographies and vintages is the result of a
number of factors, including our distinctive value positioning, innovative products and merchandising
strategies, and a well-trained staff focused on customer education and service. In addition, we believe
our high volume and low-cost store model enhance our ability to consistently offer competitive prices
on high-quality natural and organic products while maintaining our operating margins and strong cash
flow generation.
Proven and replicable economic store model. We believe our store model, combined with our
rigorous store selection process and a growing interest in health and wellness, contribute to our
consistent and attractive new store returns on investment. Smaller than conventional supermarkets, we
target store sizes of approximately 25,000 to 28,000 square feet, which allows for greater flexibility in
identifying and securing new locations, often in second generation store sites. Our typical store
requires an average new store cash investment of approximately $2.8 million, including store buildout
(net of contributions from landlords), inventory (net of payables) and cash pre-opening expenses. On
average, our stores reach a mature sales growth rate within three or four years after opening, with net
sales increasing 20-30% during this time period. Based on our historical performance, we target pre-
tax cash-on-cash returns of 35-40% within three to four years after opening. We believe the consistent
performance of our store portfolio across geographies and vintages supports the portability of the
Sprouts brand and store model into a wide range of markets.
Significant new store growth opportunity supported by broad demographic appeal. We believe,
based on our experience, that our broad product offering and value proposition appeals to a wider
demographic than other leading competitors, including higher-priced health food and gourmet food
retailers. Sprouts has been successful across a variety of geographies, from California to Oklahoma,
underscoring the heightened interest in eating healthy across markets. Based on research conducted
for us, we believe that the U.S. market can support approximately 1,200 Sprouts Farmers Market
stores operating under our current format, including 300 in states in which we currently operate. We
intend to achieve 12% or more annual new store growth over at least the next five years, balanced
among existing, adjacent and new markets.
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Passionate and experienced management team with proven track record. Since inception, we
have been dedicated to delivering “Healthy Living for Less.” Our passion and commitment is shared by
team members throughout the entire organization, from our stores to our corporate office. Our
executive management team has extensive experience in the grocery and food retail industry, and
deep roots in organic, natural and specialty food retail. Our President and Chief Executive Officer,
Doug Sanders, began with our company in 2002 with the first Sprouts store and has over 28 years of
experience in the grocery industry. Our Chief Operating Officer, Jim Nielsen, has over 25 years of
experience in the grocery industry, including most recently as the President of Henry’s Farmers
Market. Our Chief Financial Officer, Amin Maredia, has over 18 years of accounting and financial
experience, including six years of senior level experience at Burger King Holdings, one of the world’s
largest food retailers. In addition, our executive management is supported by a deep team comprised
of industry veterans across all key functional areas. With recent investments in people, systems and
other infrastructure, we believe we are well-positioned to achieve our future growth plans.
Growing Our Business
We believe we have significant opportunities to continue to grow our store base, drive comparable
store sales growth, enhance our operating margins and grow brand awareness. We are pursuing a
number of strategies designed to continue our growth and strong financial performance, including:
Expand our store base. We intend to continue expanding our store base by pursuing new store
openings in existing markets, expanding into adjacent markets, and penetrating new markets. In 2013,
we entered into leases for additional stores in several new markets, including the Houston and Kansas
City metropolitan areas, as well as in many of our existing markets. We believe we are a desirable
tenant for developers and landlords based on our historical and projected growth, the high customer
traffic generated by our stores, and our lifestyle positioning. These attributes along with our rigorous
real estate selection process help us to efficiently source new, high-quality store locations. From our
founding in 2002 through December 29, 2013, we opened 91 new stores while successfully rebranding
43 Henry’s Farmers Markets (“Henry’s”) and 39 Sunflower Farmers Market (“Sunflower”) stores to the
Sprouts banner. On a combined basis, Sprouts, Henry’s and Sunflower opened an average of 17
stores per year from fiscal 2008 through fiscal 2013. We expect to continue to expand our store base
with 22-24 store openings planned in fiscal 2014, of which three have opened as of the date of this
Annual Report on Form 10-K, and we intend to achieve 12% or more annual new store growth over at
least the next five years.
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The below diagram shows our current store footprint, by state, as of December 29, 2013.
Nevada
2
Utah
3
Colorado
24
California
73
Arizona
26
New Mexico
6
Oklahoma
4
Texas
29
Increase comparable store sales. For 27 consecutive quarters, including throughout the recent
economic downturn from 2008 to 2010, stores under our management have achieved positive
comparable store sales growth. As the natural and organic food sector continues to grow and take
market share from conventional supermarkets and other specialty concepts, we believe we can
continue to grow comparable store sales by increasing the number of customer transactions and our
average ticket at our existing stores. We believe we can grow the number of customer transactions at
our stores by continuing to focus on our core value proposition and distinctive customer-oriented
shopping experience as well as by further enhancing and expanding our marketing efforts. We aim to
grow our average ticket by continuing to expand and refine our fresh, natural and organic product
offering, our targeted and personalized marketing efforts and our in-store education designed to make
customers more aware of our full product offering. We believe these factors, combined with the
continued strong growth in natural and organic food consumption, will allow Sprouts to gain new
customers, increase customer loyalty and, over time, convert single-department trial customers into
core, lifestyle customers who shop Sprouts with greater frequency and across an increasing number of
departments.
Continue to enhance our operating margins. We believe we can continue to enhance our
operating margins though efficiencies of scale, improved systems, continued cost discipline and
enhancements to our merchandise offerings. We have made significant investments in management,
information technology systems, training, marketing, compliance and other infrastructure to enable us
to pursue our growth plans, which we believe will also enhance our margins over time. Furthermore, as
we open new stores, we expect to achieve economies of scale in sourcing and distribution and we
intend to maintain appropriate store labor levels and effectively manage product selection and pricing
to achieve additional margin expansion.
Grow the Sprouts Farmers Market brand. We plan to continue to increase awareness of Sprouts
as the value-oriented neighborhood grocery store destination for high-quality, natural and organic
products in each community in which we operate. We are committed to supporting our stores, product
offerings and brand through a variety of marketing programs, private label offerings, corporate
partnerships and community outreach and charity programs. These efforts and activities include
company-wide initiatives and other specific store events to more broadly connect with our communities
with the aim of promoting our brand and educating consumers on healthy choices. We will also
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continue to expand our innovative marketing and promotional strategy through print, digital and social
media platforms, all of which promote our mission of “Healthy Living for Less.”
Our Heritage
We were founded by members of a family with a long history of selling fresh and natural foods to a
broad demographic of customers. In 1969, Stan Boney and his brothers opened Boney’s Marketplace
in Southern California, which would later become Henry’s Farmers Market, a farmers market style
natural and organic specialty retailer. After selling Henry’s Farmers Market in 1999, Stan and his son,
Shon, and two family friends began plans for what would become Sprouts Farmers Market with the
goal of making affordable healthy foods, vitamins and other products available to everyone. In 2002,
we opened the first Sprouts Farmers Market store in Chandler, Arizona. In 2010, we had 54 stores and
reached over $620 million in net sales and approximately 3,700 team members. In April 2011, we
partnered with the investment funds affiliated with, and co-investment vehicles managed by, Apollo
Management VI, L.P. (referred to as the “Apollo Funds”), and added 43 stores by combining with
Henry’s and its Sun Harvest-brand stores (referred to as the “Henry’s Transaction”). The Henry’s
Transaction brought us to 103 total stores located in Arizona, California, Colorado and Texas as of the
end of 2011. In May 2012, we added another 37 stores through our acquisition of Sunflower (referred
to as the “Sunflower Transaction” and together with the Henry’s Transaction are collectively referred to
as the “Transactions”) and extended our footprint into New Mexico, Nevada, Oklahoma and Utah.
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.
During 2011, 2012 and 2013, we continued to open new stores and, as of December 29, 2013,
had 167 stores in eight states. We are one of the largest specialty retailers of natural and organic food
in the United States.
In connection with our initial public offering (referred to as our “IPO”), on July 29, 2013, Sprouts
Farmers Markets, LLC, a Delaware limited liability company, converted into Sprouts Farmers Market,
Inc., a Delaware corporation. As part of the corporate conversion, holders of membership interests of
Sprouts Farmers Markets, LLC in the form of Class A and Class B units received 11 shares of our
common stock for each unit held immediately prior to the corporate conversion, and options to
purchase units became options to purchase 11 shares of our common stock for each unit underlying
options outstanding immediately prior to the corporate conversion, at the same aggregate exercise
price in effect prior to the corporate conversion.
On August 1, 2013, our common stock began trading on the NASDAQ Global Select Market and
on August 6, 2013, we closed our IPO.
Our Stores and Operations
We believe our stores represent a blend of conventional supermarkets, farmers markets, natural
foods stores, and smaller specialty markets, differentiating us from other food retailers, while also
providing a complete offering for our customers.
(cid:129) Store Design. Our stores are organized in a “flipped” conventional food retail store model,
positioning our produce at the center of the store surrounded by a complete grocery offering.
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We typically dedicate approximately 15% of a store’s selling square footage to produce, which
we believe is significantly higher than many of our peers. The stores are designed with open
floor plans and low displays (typically set to a height of about six feet), intended to provide an
easy-to-shop environment that allows our customers to view the entire store. The design of
our stores is a farmers market style, with wooden crates stacked with fresh produce and self-
service bulk food barrels and bins in a bright and open atmosphere. We believe our stores
provide customers with a differentiated shopping experience and promote greater interaction
with our well-trained and enthusiastic team members, resulting in what we believe is an
enhanced level of customer service.
The below diagram shows a sample layout of our stores:
(cid:129) Culture of Service. We are committed to providing and believe we have best-in-class
customer service, which builds trust with our customers and differentiates the Sprouts
shopping experience from that of many of our competitors. We design our stores to maximize
customers’ interactions with our team members. For example, in addition to an open floor plan
and low displays, we do not have aisle numbers or self-service checkout lines in our stores,
which promotes interaction between customers and team members. We believe this
interaction provides an opportunity to educate customers and provides a valued, differentiated
customer service model, which enhances customer loyalty and increases visits and
purchases over time.
Customer service is critical to our culture and we place great importance on training our team
members on customer service and product knowledge to ensure there is friendly,
knowledgeable staff in every department. Our team members are trained and empowered to
proactively engage with customers throughout the entire store. This includes investing time
with them on the benefits of different vitamins, sharing ways to prepare a meal or cutting a
piece of produce or opening a package to offer customers product tastings throughout the
store. We consider customer education and service to be particularly important as many
conventional supermarket customers that have not shopped our stores believe that eating
healthy is expensive and difficult. At Sprouts, we believe in our motto of “Healthy Living for
Less” and strive to provide more consumers with the opportunity to offer their families great
tasting, healthy, natural and organic products for less.
Our stores are typically staffed with 75 to 85 full and part-time team members including a
store manager, an assistant store manager, eight department managers, five assistant
department managers, store office staff and other team members.
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(cid:129) Recruiting, Training, Development and Promotion. We strive to create a strong and unified
company culture and develop team members throughout the entire organization. We have
regional department level merchandisers and trainers who are focused on training team
members within departments and also assist with store and local merchandising strategies
and execution. For new stores, we typically have team members on site approximately three
to four weeks before opening to optimize initial and long-term store performance and
customer service. We also have approximately 65 people in the field as regional support
teams in human resources, operations and compliance. These teams focus on hiring,
retention, training, food safety, security, financial management and other operational best
practices. We regularly perform audits of our stores to assess customer service, inventory
quality and control, merchandising and other factors. We believe our team members
contribute to our consistently high service standards and that this helps us successfully open
new stores.
We believe Sprouts is an attractive place to work with significant growth opportunities for our
team members. We offer competitive wages and benefits as we believe active, educated and
passionate team members contribute to consumer satisfaction. In 2013, we promoted
approximately 3,000 team members. We also host quarterly Team Member Appreciation
Days at each store, hold town hall meetings between team members and company
management and provide our team members with discounts on purchases in the store.
(cid:129) Store Size. Our stores are generally between 25,000 and 28,000 square feet, which we
believe is smaller than many of our peers’ average stores. Our stores are located in a variety
of mid-sized and larger shopping centers, lifestyle centers and in certain cases, independent
single-unit, stand-alone developments. The size of our stores and our real estate strategy
provide us flexibility in site selection, including entering into new developments or existing
sites formerly operated by other retailers, including other grocery banners, office supply
stores, electronics retailers and other second generation space. Further, we believe our value
positioning allows us to serve a diverse customer base and provides us significant flexibility to
enter new markets across a variety of socio-economic areas, including markets with varying
levels of natural and organic grocer penetration.
The portability of our store design enabled us to open 11 stores in 2012 and 19 new stores in
2013. We have 22-24 store openings planned in fiscal 2014, of which three have opened as
of the date of this Annual Report on Form 10-K, and we intend to achieve 12% or more
annual new store growth over at least the next five years.
Our Product Offering
We are a complete food retailer. We focus and tailor our assortment to fresh, natural and organic
foods and healthier options throughout all of our departments. When possible, we also offer local
products, which we believe our customers value and trust, adding to our authenticity as a natural and
organic farmers market.
Fresh, Natural and Organic Foods
Our product offerings focus on fresh, natural and organic foods. Natural foods can be broadly
defined as foods that are minimally processed and are free of synthetic preservatives, artificial
sweeteners, colors, flavors and other additives, growth hormones, antibiotics, hydrogenated oils,
stabilizers and emulsifiers. Essentially, natural foods are largely or completely free of non-naturally
occurring chemicals and are as near to their whole, natural state as possible.
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Organic foods refer to the food itself as well as the method by which it is produced. In general,
organic operations must demonstrate that they are protecting natural resources, conserving
biodiversity, and using only approved substances and must be certified by a USDA-accredited
certifying agency. These organic standards include:
(cid:129) Crop production must not use irradiation, sewage sludge, synthetic fertilizers, prohibited
pesticides, and genetically modified organisms.
(cid:129)
Livestock producers must meet animal health and welfare standards, not use antibiotics or
growth hormones, use 100% organic feed, and provide animals with access to the outdoors.
(cid:129) Multi-ingredient organic food must be compromised of 95% or more certified organic content.
Further, retailers that handle, store or sell organic products must implement measures to protect
their organic character.
Products
We categorize the varieties of products we sell as perishable and non-perishable. Perishable
product categories include produce, meat, seafood, deli and bakery. Non-perishable product
categories include grocery, vitamins and supplements, bulk items, dairy and dairy alternatives, frozen
foods, beer and wine, and natural health and body care. The following is a breakdown of our
perishable and non-perishable sales mix:
Perishables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.1% 49.1% 49.2%
Non-Perishables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.9% 50.9% 50.8%
2013
2012
2011
Departments
Our stores include the following departments:
(cid:129) Produce. Placed at the center of our stores, our high-quality, value-oriented offering begins
with our produce department. We offer our customers a farmers market open-feel
environment consisting of an abundant and affordable offering of fresh fruits, vegetables and
herbs, focused on appearance, flavor and value. Our extensive produce selection includes
seasonal, specialty and organic items, often from local or regional farms, at prices targeted to
be significantly lower than our competitors.
(cid:129) Bulk Items. Our stores include a uniquely crafted selection of more than 450 varieties of
scoopable nuts, fruits, trail mixes, grains, beans, cereals, coffee, tea, spices, candy and
snacks featured in the center of the store. We believe this high-quality, value-oriented
department provides a feeling of an ‘old-time grocery store’ as customers are able to select
and scoop as much of these items as they wish, enabling them to buy just enough for a
particular recipe, sample a new item, or buy in abundance for home storage.
(cid:129) Vitamins and Supplements. Our stores feature more than 4,300 vitamins, supplements,
natural remedies, functional food, lifestyle support, and herbal supplements. This department
includes an extensive private label offering. We believe there is an education component to
shopping in our vitamins and supplements department and that our customers value friendly,
knowledgeable and dedicated team members to introduce products and to guide them
through their purchases. We employ a full-time nutritionist to assist and train team members
and we frequently host in-store, product-specific training sessions. Each store typically holds
four to five training sessions per month (including both internal and vendor-led). These
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training sessions prepare our vitamin and supplement team members to better educate and
serve our customers through personalized service and more than 300 annual in-store and
online seminars.
(cid:129) Grocery. Our grocery offering focuses on healthy options. We carry approximately 4,600
natural and organic products in our grocery aisles, including meal components, natural sodas
and other beverages, snacks and bars, baking goods, baby, pet and household items such as
detergent and paper towels, and earth-friendly mercantile items. Our product offering includes
more than 2,000 gluten-free items, and our own Sprouts private label brand products. We also
offer distinctive locally-produced products in each of our market areas, such as preserves,
honey, BBQ sauces, hot salsas and chips.
(cid:129) Meat. Our Olde Tyme Butcher Shops combine high-quality sourcing through our trusted supplier
network, product variety and old-fashioned customer service. Sprouts’ skilled butchers hand cut
meat fresh daily in store with real customer service available to “cut it any way you like it.” We
feature “choice natural” beef, pasture raised pork, grass fed organic beef, organic chicken and
Grade A all-natural poultry raised cage-free from trusted partner ranches and farms. We
consider our approach to be old-fashioned as we cut and grind meat fresh, as needed for our
customers, and unlike much of the industry today, we have no offsite facility delivering products
processed days in advance. We also offer up to 21 varieties of sausages made fresh daily in-
store as well as an abundant selection of entrees, including gourmet burgers, pinwheels, stuffed
chicken breasts, pork chops and roasts. Our customers value the freshness, quality and service
level of our meat department and this generates repeat traffic and purchases.
(cid:129) Seafood. We offer a wide variety of seafood favorites delivered up to six days a week. We
carry multiple options for baking, sautéing, or grilling and round out our assortment with wild
fresh species while in season.
(cid:129) Deli. We feature a broad array of fresh deli specialties, including high-quality sliced deli meat,
salads, dips, entrees, side dishes and fresh made to order sandwiches at value prices and an
abundant selection of over 250 varieties of cheeses from around the world.
(cid:129) Bakery. Our focus on fresh, high-quality and unique “signature” products is evident in our
bakery department, which is located at the entrance to each store. Sprouts’ bakery offering
includes artisan bread alongside a wide assortment of sandwich breads, rolls, tortillas, pitas,
muffins, cookies and pies as well as sugar free, gluten free and low carbohydrate products.
We bake a large selection of products fresh in-store every day to enhance the overall
customer experience.
(cid:129) Dairy and Dairy Alternatives. Our dairy department features a wide selection of organic,
natural and regionally sourced milk, yogurt (including Greek, Australian, organic, and soy-
based), butter and eggs, as well as a full selection of vegan and vegetarian alternative dairy
products.
(cid:129) Frozen Foods. Our freezer cases feature traditional and ethnic natural and organic entrees
and side dishes, along with frozen vegetables, desserts and specialty items, such as gluten-
free breads and non-dairy ice creams.
(cid:129) Beer and Wine. We offer a carefully selected assortment of craft beers, microbrews and
premium beers from around the world and an expansive variety of domestic and international
wines, many of which we price at $10 or less. We also stock Kosher, organic, sustainable and
biodynamic, local, exclusive-to-Sprouts and even non-alcoholic wines.
(cid:129) Natural Health and Body Care. Sprouts offers approximately 2,500 natural, cruelty-free health
and beauty products, old-fashioned remedies and modern body care innovations, including
facial care products and make up, skin, hair, dental, baby care and grooming products, all at
value-oriented prices.
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Private Label
We have been expanding the breadth of our Sprouts branded products over the last several years
and have a dedicated product development team focused on continuing this growth. These products
uphold our quality standards, and include no artificial flavors, colors or preservatives. We believe our
private label brand features competitively priced specialty and innovative products, at quality levels that
equal or exceed national brands. We have increased our portfolio of private label items from
approximately 800 items at the end of 2011 to approximately 1,400 as of December 29, 2013. We
believe our private label products build and enhance the Sprouts brand and allow us to distinguish
ourselves from our competitors, promoting customer loyalty. Our private label brands generally provide
us with increased margins and our customers with lower prices compared to branded products.
Sourcing and Distribution
We manage the buying of, and set the standards for, the products we sell, and we source our
products from over 800 vendors and suppliers, both domestically and internationally.
We believe, based on our industry experience, that our strong relationships in the produce
business provide us a competitive advantage and enable us to offer high-quality produce at prices we
believe are significantly below those of conventional food retailers and even further below high-end
natural and organic food retailers. Given the importance of produce to our stores, we source,
warehouse and distribute all produce in-house. This ensures our produce meets our high quality
standards. We are supported by dedicated regional procurement teams that provide us flexibility to
procure produce on local, regional and national levels.
We have department and product specifications that ensure a consistently high level of quality
across product ingredients, production standards and other key measures of freshness, natural and
organic standards. These specifications are measured at both entry and exit points to our facilities. We
distribute all produce to our stores from two leased distribution facilities and one third party operated
distribution facility, and we manage every aspect of quality control in this department. We believe we
have sufficient capacity at these facilities to support our near-term growth plans.
We believe our scale, together with this decentralized purchasing structure and flexibility
generates cost savings, which we then pass on to our customers. Distributors and farmers recognize
the volume of goods we sell through our stores and our flexible purchasing and distribution model
allows us to opportunistically acquire produce at great value which we will also pass along to our
customers.
For all non-produce products, we use third-party distributors and vendors to distribute products
directly to our stores following specifications and quality control standards that are set by us.
Nature’s Best, Inc. is our primary supplier of dry grocery and frozen food products, accounting for
approximately 23% and 17% of our total purchases in fiscal 2013 and 2012, respectively. See “Risk
Factors—Disruption of significant supplier relationships could negatively affect our business.”
Our Customers
Our target customer seeks a wide assortment of high-quality fresh and nutritious food as well as
vitamins and supplements at competitive prices. We believe our value proposition and complete
grocery offering engages both conventional and health-focused shoppers.
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We believe the majority of our customers are initially attracted to our stores by our fresh produce,
which we offer at prices we believe are significantly below those of conventional food retailers and
even further below high-end natural and organic food retailers. We drive customer traffic by
aggressively promoting produce and other items through weekly advertisements designed primarily to
reach the everyday supermarket shopper. These customers are typically “trial” customers that limit
their shopping to specific products or departments, such as produce. Through department-specific
promotions, in-store signage, and customer education, these trial customers become “transition”
customers that shop new departments and try new products. Over time, through customer service and
engagement, targeted marketing, and increased knowledge of our product offering, we believe that
transition customers become “lifestyle” customers that shop with greater frequency throughout the
entire store. The table below provides an overview of our trial, transition and lifestyle customer
maturation cycle.
Category
Trial
Transition
Lifestyle
Description
Trial customers are new to our stores and typically limit their shopping to a specific
product or visit a single department (e.g. produce).
Former trial customers that have become familiar with our stores through
promotions, in-store signage and customer education, and are shopping an
increasing number of departments.
Lifestyle customers are frequent customers that make Sprouts their primary grocery
shopping destination. They are very familiar with our stores and shop for products
throughout the entire store.
Our Pricing, Marketing and Advertising
(cid:129) Pricing. We are committed to a pricing strategy consistent with our motto of “Healthy Living for
Less.” As a farmers market style store, we emphasize low prices throughout the entire store,
as we are able to pass along the benefits of our scale and purchasing power to our
customers. We position our prices with everyday value for our customers with regular
promotions on selected products that drive traffic and trial. We typically have about 25% of
our approximately 16,500 products on sale at any given time.
(cid:129) Marketing and Advertising. We supplement and support our everyday competitive pricing
strategy through weekly advertised specials, a weekly e-circular, online coupons and special
promotions. We send over 11 million weekly advertisement circulars to encourage customers
to shop at our stores. These circulars focus on product education and offerings and aim to
engage the customer. We use sales flyers distributed through direct delivery or inserted into
local newspapers as our primary medium for advertising. These sales flyers include
representative products from our key departments. In addition, we have a customer database
of over 608,000 customers as of December 29, 2013, many of whom receive electronic
versions of our weekly circulars or monthly newsletters.
We tailor our advertisements to specific markets, which provides us with greater flexibility to
offer different promotions and respond to local competitive activity. In addition, we advertise
our sales promotions and support our brand image through the use of local radio, as well as
targeted direct mail in specific markets. We also maintain our website, www.sprouts.com, on
which we display our weekly sales flyers and offer special deals and coupons and continue to
expand our social media platform. The inclusion of our website address in this Annual Report
on Form 10-K does not include or incorporate by reference the information on or accessible
through our website into this Annual Report on Form 10-K. As of December 29, 2013, we had
approximately 324,000 Facebook fans, up from approximately 18,000 at the end of 2010. In
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2012, we also began launching Facebook pages for each new store opening, which we
believe helps build awareness and excitement around our new stores.
We believe our lead time for weekly print advertising is significantly shorter than many of our
peers, thereby providing a competitive advantage for Sprouts. This shorter period affords us
flexibility in our promotional offerings which can result in our ability to purchase perishable
inventory at greater volumes with better pricing from our sourcing partners and thus deliver
exceptional value to our customers.
In addition to the weekly circulars, the table below describes a few of the numerous other
saving opportunities for our customers, all of which are meant to reinforce our value offering
and are designed to appeal to specific target customers. In 2013, we had approximately
25 department-wide promotions at each store throughout the year.
Promotional Activity
Double-Ad Wednesday
As weekly ads run from Wednesday to Wednesday, on each Wednesday
there are twice as many items on sale
Description
Vitamin Extravaganza
Every vitamin, supplement and body care product is 25% off
Frozen Frenzy
20% off any frozen item a customer can fit into a Sprouts grocery bag.
These products include natural and organic entrees, side dishes, and
frozen vegetables and desserts
Gluten-Free Jubilee
25% off thousands of gluten-free products in all departments
72-Hour Sale
On select Fridays, Saturdays and Sundays, stores run special ad prices
on popular meat, vitamins, bulk items and everyday groceries
Incredible Bulk Sale
25% off all bulk bin items, bulk spices, and bulk coffees
Our Communities
We are actively involved in the communities in which we operate, and support many local non-
profit and educational institutions that share our goal of improved health, nutrition and fitness. Stores
are also encouraged to support charities important to their local communities. This involvement takes
many forms, including:
(cid:129) Alignment with Certain Causes. Sprouts has undertaken a number of innovative corporate
fundraising initiatives, including a multi-faceted program with Autism Speaks and the
Southwest Autism Research and Resource Center. Since 2010, we have raised more than
$3.8 million through our donations, as well as the donations by our customers (who made
donations at the cash register) and business partners. We have also adopted the Grab & Give
campaign pioneered by Henry’s, which encourages customers to buy bags of groceries at a
discount and then allow us to donate them to food banks in the markets in which we operate.
In September 2013, we collaborated with Sony Pictures Animation and Feeding America in a
campaign to support Hunger Action Month in connection with Sony Pictures Animation’s
Cloudy with a Chance of Meatballs 2 movie by participating in the donation of over 200,000
pounds of produce with some of the nation’s leading produce companies and raising funds
through donations by our customers at the cash register and online. During 2013, we donated
over three million pounds of produce and other food to local food banks.
(cid:129) Donations. Our donation goal is to contribute to the health of families and children and to
healthy environments through in-kind support. Many donations are made at store level, in the
form of food donations or gift cards, to qualifying organizations that are aligned with our goals.
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Examples include bananas or water for fundraising road races, reusable bags for health fairs
and green festivals and gift cards to be used as raffle items or to provide catering for a
fundraising event. In August 2013, we launched our Food Rescue Program to donate items to
local food banks in the markets in which we operate.
(cid:129) Volunteerism. Our team members are encouraged to help people and organizations in need.
We have provided major volunteer support to events like the Arizona Walk Now for Autism
Speaks, the Phoenix Rescue Mission, and various food banks. With an engaged base of
approximately 14,000 team members, we have the ability to use our leverage to support
causes.
Store Selection and Economics
We have an extensive and selective process for new store site selection, which includes in-depth
analysis of area demographics, competition, growth potential, traffic patterns, grocery spend and other
key criteria. We have a dedicated real estate team as well as a real estate committee comprised of our
Senior Vice President—Business Development and other members of senior management, including
our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. Multiple members of
our committee will also conduct an on-site inspection prior to approving any new location.
Our typical store requires an average new store cash investment of approximately $2.8 million,
consisting of store buildout (net of contributions from landlords) of approximately $2.4 million, and
inventory (net of payables) and cash pre-opening expenses of approximately $400,000. On average,
our stores reach a mature sales growth rate in three or four years after opening, with net sales
increasing 20-30% during this time period. Based on our historical performance, we target net sales of
$10-$12 million during the first year after opening and pre-tax cash-on-cash returns of 35-40% within
three to four years after opening. We believe the consistent performance of our store portfolio across
geographies and vintages supports the portability of the Sprouts brand and store model into a wide
range of markets.
Based upon research conducted for us by Buxton Company, we believe that the U.S. market can
support approximately 1,200 Sprouts Farmers Market stores operating under our current format. We
believe we have significant growth opportunity in existing markets, as approximately 300 of these
1,200 potential stores are located in our current markets (nine states). We intend to achieve 12% or
more annual new store growth over at least the next five years, with a balanced focus on existing,
adjacent and new market growth.
See “Properties” for additional information with respect to our store locations.
Competition
The $600 billion U.S. supermarket industry is large, intensely competitive and highly fragmented.
We compete for customers with a wide array of food retailers, including natural and organic, speciality,
conventional, mass and discount and other food retail formats. Our competitors include conventional
supermarkets such as Kroger and Safeway, as well as other food retailers such as Whole Foods,
Natural Grocers by Vitamin Cottage and Trader Joe’s.
Insurance and Risk Management
We use a combination of insurance and self-insurance to provide for potential liability for workers’
compensation, general liability, product liability, director and officers’ liability, team member healthcare
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benefits, and other casualty and property risks. Changes in legal trends and interpretations, variability
in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to
changes in applicable laws, insolvency of insurance carriers, and changes in discount rates could all
affect ultimate settlements of claims. We evaluate our insurance requirements on an ongoing basis to
ensure we maintain adequate levels of coverage.
Seasonality
Our business is subject to modest seasonality. Our average weekly sales fluctuate throughout the
year and are typically highest in the first half of the fiscal year. Produce, which contributed
approximately 26% of our net sales for the fiscal year ended December 29, 2013, is generally more
available in the first six months of our fiscal year due to the timing of peak growing seasons.
Trademarks and Other Intellectual Property
We believe that our intellectual property has substantial value and has contributed to the success
of our business. In particular, our trademarks, including our registered SPROUTS FARMERS
MARKET®, SPROUTS® and HEALTHY LIVING FOR LESS!® trademarks, are valuable assets that we
believe reinforce our customers’ favorable perception of our stores. In addition to our trademarks, we
believe that our trade dress, which includes the human-scale design, arrangement, color scheme and
other physical characteristics of our stores and product displays, is a large part of the farmers market
atmosphere we create in our stores and enables customers to distinguish our stores and products from
those of our competitors.
From time to time, third parties have used names similar to ours, have applied to register
trademarks similar to ours and, we believe, have infringed or misappropriated our intellectual property
rights. Third parties have also, from time to time, opposed our trademarks and challenged our
intellectual property rights. We respond to these actions on a case-by-case basis. The outcomes of
these actions have included both negotiated out-of-court settlements as well as litigation.
Information Technology Systems
We have made significant investments in information technology infrastructure, including
purchasing, receiving, inventory, point of sale, warehousing, distribution, accounting, reporting and
financial systems. We also maintain modern supply chain systems allowing for operating efficiencies
and scalability to support our continued growth. All of our stores, including those acquired in the
Transactions, operate under one integrated information technology platform. We believe our current
information technology infrastructure will support our growth plans but plan on continuing our history of
investment in this area.
Regulatory Compliance
Our stores are subject to various local, state and federal laws, regulations and administrative
practices affecting our business. We must comply with provisions regulating health and sanitation
standards, food labeling, equal employment, minimum wages, environmental protection, licensing for
the sale of food and, in many stores, licensing for beer and wine or other alcoholic beverages. Our
operations, including the manufacturing, processing, formulating, packaging, labeling and advertising
of products are subject to regulation by various federal agencies, including the Food and Drug
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Administration (referred to as the “FDA”), the Federal Trade Commission (referred to as the “FTC”), the
U.S. Department of Agriculture (referred to as the “USDA”), the Consumer Product Safety Commission
and the Environmental Protection Agency.
Food. The FDA has comprehensive authority to regulate the safety of food and food ingredients
(other than meat and poultry products), as well as dietary supplements. Food additives and food
contact substances are subject to pre-market approvals or notification requirements. The FDA’s overall
food safety authority was dramatically enhanced in 2011 with the passage of the Food Safety
Modernization Act (referred to as “FSMA”). The FSMA requires the FDA to issue regulations
mandating that risk-based preventive controls be observed by most food producers. This authority will
apply to domestic food facilities and, by way of imported food supplier verification requirements, to
foreign facilities that supply food products to the U.S. market. In addition, the FSMA requires the FDA
to establish science-based minimum standards for the safe production and harvesting of produce, to
identify “high risk” foods and “high risk” facilities and instructs the FDA to set goals for the frequency of
FDA inspections of such high risk facilities as well as non-high risk facilities and foreign facilities from
which food is imported into the United States. Though most of the regulations and guidance for this
program are being developed, the FSMA has an immediate impact.
For example, with respect to foods and dietary supplements the FSMA meaningfully augments the
FDA’s ability to access producers’ records and suppliers’ records. The FSMA gives the FDA authority
to require food producers, distributors and sellers to recall adulterated or misbranded food if the FDA
determines that there is a reasonable probability that the food will cause serious adverse health
consequences to persons or animals. Additionally, the FSMA increases the FDA’s authority to institute
administrative detentions of adulterated and misbranded foods. The FSMA is also likely to result in
enhanced tracking and tracing of food requirements and, as a result, added recordkeeping burdens
upon our suppliers and contract manufacturers.
The FDA also exercises broad jurisdiction over the labeling and promotion of food. Labeling is a
broad concept that, under certain circumstances, extends even to product-related claims and
representations made on a company’s website or similar printed or graphic medium. All foods,
including dietary supplements, must bear labeling that provides consumers with essential information
with respect to ingredients, product weight, etc. The FDA administers a systematic review and approval
program for certain “health claims” (claims describing the relationship between a food substance and a
health or disease condition). It has also promulgated regulatory definitions for various “nutrient content
claims” (e.g., “high in antioxidants,” “low in fat,” etc.).
FDA and USDA Enforcement. The FDA has broad authority to enforce the provisions of the Food,
Drug and Cosmetic Act (referred to as “FDCA”) applicable to the safety, labeling, manufacturing and
promotion of foods and dietary supplements, including powers to issue a public warning letter to a
company, publicize information about illegal products, institute an administrative detention of food,
request or order a recall of illegal products from the market, and request the Department of Justice to
initiate a seizure action, an injunction action or a criminal prosecution in the U.S. courts. Pursuant to
the FSMA, the FDA also has the power to refuse the import of any food or dietary supplement from a
foreign supplier that is not appropriately verified as in compliance with all FDA laws and regulations.
Moreover, the FDA has the authority to administratively suspend the registration of any facility
producing food, including supplements, deemed to present a reasonable probability of causing serious
adverse health consequences.
The USDA’s Food Safety Inspection Service (referred to as “FSIS”) is the public health agency
responsible for ensuring that the nation’s commercial supply of meat, poultry, and egg products is safe,
wholesome, and correctly labeled and packaged. FSIS inspectors conduct regular, mandatory on-site
inspections of processing and manufacturing facilities. When violations occur, the agency has broad
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discretion to withhold FSIS inspection services, shut down processing facilities, and to take civil or
criminal actions against violators of applicable statutes and regulations. Additionally, the USDA’s
Agricultural Marketing Service (referred to as “AMS”) oversees the National Organics Program for all
foods making such “organic” claims. Under the Program, products labeled “organic” must be certified
by an accredited agent as compliant with USDA-established standards. The AMS may levy civil
monetary penalties and withdraw “organic” certification for up to five years per incident if violations are
discovered.
Dietary Supplements. The FDCA has been amended several times with respect to dietary
supplements, in particular by the Dietary Supplement Health and Education Act of 1994 (referred to as
“DSHEA”). DSHEA established a framework governing the composition, safety, labeling,
manufacturing and marketing of dietary supplements, defined “dietary supplement” and “new dietary
ingredient” and established new statutory criteria for evaluating the safety of substances meeting the
respective definitions. In the process, DSHEA removed dietary supplements and new dietary
ingredients from pre-market approval requirements that apply to food additives and pharmaceuticals
and established a combination of “notification” and “post marketing controls” for regulating product
safety, however, non-dietary ingredients in a dietary supplement remain subject to the FDA’s food
additive authorities. The FDA does not require notification to market a dietary supplement if it contains
only dietary ingredients that were present in the U.S. food supply prior to DSHEA’s enactment on
October 15, 1994. However, for a dietary ingredient not present in the food supply prior to this date, the
manufacturer must provide the FDA with information supporting the conclusion that the ingredient will
reasonably be expected to be safe at least 75 days before introducing a new dietary ingredient into
interstate commerce. As required by the FSMA, the FDA issued draft guidance in July 2011, which
attempts to clarify when an ingredient will be considered a “new dietary ingredient,” the evidence
needed to document the safety of a new dietary ingredient, and appropriate methods for establishing
the identity of a new dietary ingredient. In particular, the new guidance may cause dietary supplement
products available in the market before DSHEA to now be classified to include a “new dietary
ingredient” if the dietary supplement product was produced using manufacturing processes different
from those used in 1994.
DSHEA also empowered the FDA to establish binding good manufacturing practice regulations
governing key aspects of the production of dietary supplements. DSHEA expressly permits dietary
supplements to bear statements describing how a product affects the structure, function and/or general
well-being of the body. Although manufacturers must be able to substantiate any such statement, no
pre-market approval authorization is required for such statements and manufacturers need only notify
FDA that they are employing a given claim. No statement may expressly or implicitly represent that a
dietary supplement will diagnose, cure, mitigate, treat, or prevent a disease. DSHEA does, however,
authorize supplement sellers to provide “third-party literature,” (e.g., a reprint of a peer-reviewed
scientific publication linking a particular dietary ingredient with health benefits) in connection with the
sale of a dietary supplement to consumers. This authorization is limited and applies only if the
publication is printed in its entirety, is not false or misleading, presents a balanced view of the available
scientific information and does not “promote” a particular manufacturer or brand of dietary supplement,
and is displayed in an area physically separate from the dietary supplements.
Food and Dietary Supplement Advertising. The FTC exercises jurisdiction over the advertising of
foods and dietary supplements. The FTC has the power to institute monetary sanctions and the
imposition of “consent decrees” and penalties that can severely limit a company’s business practices.
In recent years, the FTC has instituted numerous enforcement actions against dietary supplement
companies for failure to have adequate substantiation for claims made in advertising or for the use of
false or misleading advertising claims.
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Compliance. As is common in our industry, we rely on our suppliers and contract manufacturers to
ensure that the products they manufacture and sell to us comply with all applicable regulatory and
legislative requirements. In general, we seek certifications of compliance, representations and
warranties, indemnification and/or insurance from our suppliers and contract manufacturers. However,
even with adequate insurance and indemnification, any claims of non-compliance could significantly
damage our reputation and consumer confidence in products we sell. In addition, the failure of such
products to comply with applicable regulatory and legislative requirements could prevent us from
marketing the products or require us to recall or remove such products from our stores. In order to
comply with applicable statutes and regulations, our suppliers and contract manufacturers have from
time to time reformulated, eliminated or relabeled certain of their products and we have revised certain
provisions of our sales and marketing program.
Employees
As of December 29, 2013, we had approximately 14,000 team members. None of our team
members are subject to collective bargaining agreements. We consider our relations with our team
members to be good, and we have never experienced a strike or significant work stoppage.
Available Information
We file periodic reports, proxy statements, and other information with the Securities and Exchange
Commission (referred to as the “SEC”). The public may read or copy any materials we file with, or
furnish to, the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.
The public may obtain information on the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with
the SEC.
We also maintain a website at www.sprouts.com. You may access our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of
charge at our website as soon as reasonably practicable after such material is electronically filed with,
or furnished to, the SEC. The information contained in, or that can be accessed through, our website is
not incorporated by reference into this Annual Report on Form 10-K.
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Item 1A. Risk Factors
Certain factors may have a material adverse effect on our business, financial condition and results
of operations. You should carefully consider the risks and uncertainties described below, together with
all of the other information in this Annual Report on Form 10-K, including our consolidated financial
statements and related notes. Any of the following risks could materially and adversely affect our
business, operating results, financial condition, or prospects and cause the value of our common stock
to decline, which could cause you to lose all or part of your investment.
Risks Related to Our Business and Industry
Competition in our industry is intense, and our failure to compete successfully may adversely
affect our revenues and profitability.
We operate in the highly competitive retail food industry. Our competitors include supermarkets,
natural food stores, mass or discount retailers, warehouse membership clubs, online retailers, and
specialty stores. These retailers compete with us for products, customers and locations. We compete
on a combination of factors, primarily product selection and quality, customer service, store format,
location and price. Our success depends on our ability to offer products that appeal to our customers’
preferences, and our failure to offer such products could lead to a decrease in our sales. To the extent
that our competitors lower prices, our ability to maintain profit margins and sales levels may be
negatively impacted. In addition, some competitors are aggressively expanding their number of stores
or their product offerings or increasing the space allocated to perishable and specialty foods, including
natural and organic foods. Some of these competitors may have been in business longer or may have
greater financial or marketing resources than we do and may be able to devote greater resources to
sourcing, promoting and selling their products. As competition in certain areas intensifies or
competitors open stores within close proximity to our stores, our results of operations may be
negatively impacted through a loss of sales, decrease in market share, reduction in margin from
competitive price changes or greater operating costs.
Our continued growth depends on new store openings, and our failure to successfully open
new stores could negatively impact our business and stock price.
Our continued growth depends, in large part, on our ability to open new stores and to operate
those stores successfully. Successful implementation of this strategy depends upon a number of
factors, including our ability to effectively achieve a level of cash flow or obtain necessary financing to
support our expansion; find suitable sites for new store locations; negotiate and execute leases on
acceptable terms; secure and manage the inventory necessary for the launch and operation of our new
stores; hire, train and retain skilled store personnel; promote and market new stores; and address
competitive merchandising, distribution and other challenges encountered in connection with
expansion into new geographic areas and markets. Although we plan to expand our store base
primarily through new store openings, we may grow through strategic acquisitions. Our ability to grow
through strategic acquisitions will depend upon our ability to identify suitable targets and negotiate
acceptable terms and conditions for their acquisition, as well as our ability to obtain financing for such
acquisitions, integrate the acquired stores into our existing store base and retain the customers of such
stores. If we are ineffective in performing these activities, then our efforts to open and operate new
stores may be unsuccessful or unprofitable, and we may be unable to execute our growth strategy.
Although we believe, based on research conducted for us by a third-party research firm, that the
U.S. market can support approximately 1,200 Sprouts Farmers Market stores operating under our
current format, we anticipate that it will take years to grow our store count to that number. We cannot
assure you that we will grow our store count to approximately 1,200 stores. We opened 19 stores in
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2013, and we intend to achieve 12% or more annual new store growth over at least the next five years.
However, we cannot assure you that we will achieve this expected level of new store growth. We may
not have the level of cash flow or financing necessary to support our growth strategy. Additionally, our
proposed expansion will place increased demands on our operational, managerial and administrative
resources. These increased demands could cause us to operate our existing business less effectively,
which in turn could cause deterioration in the financial performance of our existing stores. Further, new
store openings in markets where we have existing stores may result in reduced sales volumes at our
existing stores in those markets. If we experience a decline in performance, we may slow or
discontinue store openings, or we may decide to close stores that we are unable to operate in a
profitable manner. If we fail to successfully implement our growth strategy, including by opening new
stores, our financial condition and operating results may be adversely affected.
On many of our projects, including build-to-suit and existing repurposed locations, we have
received landlord contributions for leasehold improvements and other build-out costs. We cannot
guarantee that we will be able to continue to receive landlord contributions at the same levels or at all.
Any reductions of landlord contributions could have an adverse impact on our new store cash-on-cash
returns and our operating results.
We may be unable to maintain or increase comparable store sales, which could negatively
impact our business and stock price.
We may not be able to maintain or improve the levels of comparable store sales that we have
experienced in the past. Our comparable store sales growth could be lower than our historical average
for many reasons, including:
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general economic conditions;
slowing in the natural and organic retail sector;
the impact of new and acquired stores entering into the comparable store base;
the opening of new stores that cannibalize store sales in existing areas;
increased competitive activity;
price changes in response to competitive factors;
possible supply shortages;
consumer preferences, buying trends and spending levels;
product price inflation and deflation;
the number and dollar amount of customer transactions in our stores;
cycling against any year of above-average sales results;
our ability to provide product offerings that generate new and repeat visits to our stores; and
the level of customer service that we provide in our stores.
These factors may cause our comparable store sales results to be materially lower than in recent
periods, which could harm our business and result in a decline in the price of our common stock.
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Our newly opened stores may negatively impact our financial results in the short-term, and may
not achieve sales and operating levels consistent with our more mature stores on a timely
basis or at all.
We have actively pursued new store growth and plan to continue doing so in the future. We cannot
assure you that our new store openings will be successful or reach the sales and profitability levels of
our existing stores. New store openings may negatively impact our financial results in the short-term
due to the effect of store opening costs and lower sales and contribution to overall profitability during
the initial period following opening. New stores build their sales volume and their customer base over
time and, as a result, generally have lower margins and higher operating expenses, as a percentage of
net sales, than our more mature stores. New stores may not achieve sustained sales and operating
levels consistent with our more mature store base on a timely basis or at all. This may have an adverse
effect on our financial condition and operating results.
In addition, we may not be able to successfully integrate new stores into our existing store base
and those new stores may not be as profitable as our existing stores. Further, we have experienced in
the past, and expect to experience in the future, some sales volume transfer from our existing stores to
our new stores as some of our existing customers switch to new, closer locations. If our new stores are
less profitable than our existing stores, or if we experience sales volume transfer from our existing
stores, our financial condition and operating results may be adversely affected.
We may be unable to maintain or improve our operating margins, which could adversely affect
our financial condition and ability to grow.
If we are unable to successfully manage the potential difficulties associated with store growth, we
may not be able to capture the efficiencies of scale that we expect from expansion. If we are not able
to continue to capture efficiencies of scale, improve our systems, continue our cost discipline, and
maintain appropriate store labor levels and disciplined product selection, our operating margins may
stagnate or decline. In addition, competition and pricing pressures from competitors may also
adversely impact our operating margins. These factors could have a material adverse effect on our
business, financial condition and results of operations and adversely affect the price of our common
stock.
We rely heavily on sales of fresh produce and quality natural and organic products, and
product supply disruptions may have an adverse effect on our profitability and operating
results.
We have a significant focus on perishable products, including fresh produce and natural and
organic products. Sales of produce accounted for approximately 25% of our pro forma net sales in
fiscal 2012 and 26% of our net sales in fiscal 2013. Although we have not experienced difficulty to date
in maintaining the supply of our produce and natural and organic products that meet our quality
standards, there is no assurance that these products will be available to meet our needs in the future.
The availability of such products at competitive prices depends on many factors beyond our control,
including the number and size of farms that grow natural or organic crops or raise livestock that meet
our quality, welfare and production standards and the ability of our vendors to maintain organic, non-
genetically modified or other applicable third-party certifications for such products. Produce is also
vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, storms,
frosts, earthquakes, hurricanes and pestilences. Adverse weather conditions and natural disasters can
lower crop yields and reduce crop size and quality, which in turn could reduce the available supply of,
or increase the price of, fresh produce, which may adversely impact sales of our fresh produce and our
other products that rely on produce as a key ingredient.
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In addition, we and our suppliers compete with other food retailers in the procurement of natural
and organic products, which are often less available than conventional products. If our competitors
significantly increase their natural and organic product offerings due to increases in consumer demand
or otherwise, we and our suppliers may not be able to obtain a sufficient supply of such products on
favorable terms, or at all, our sales may decrease, which could have a material adverse effect on our
business, financial condition and results of operations. We could also suffer significant inventory losses
in the event of disruption of our distribution network or extended power outages in our distribution
centers. If we are unable to maintain inventory levels suitable for our business needs, it would
materially adversely affect our financial condition and results of operations.
If we are unable to successfully identify market trends and react to changing consumer
preferences in a timely manner, our sales may decrease.
We believe our success depends, in substantial part, on our ability to:
(cid:129)
(cid:129)
(cid:129)
anticipate, identify and react to natural and organic grocery and dietary supplement trends
and changing consumer preferences in a timely manner;
translate market trends into appropriate, saleable product and service offerings in our stores
before our competitors; and
develop and maintain vendor relationships that provide us access to the newest merchandise
on reasonable terms.
Consumer preferences often change rapidly and without warning, moving from one trend to
another among many product or retail concepts. Our performance is impacted by trends regarding
healthy lifestyles, dietary preferences, natural and organic products, and vitamins and supplements.
Consumer preferences towards vitamins, supplements or natural and organic food products might shift
as a result of, among other things, economic conditions, food safety perceptions, scientific research or
findings regarding the benefits or efficacy of such products, national media attention and the cost of
these products. Our store offerings currently include natural and organic products and dietary
supplements. A change in consumer preferences away from our offerings would have a material
adverse effect on our business. Additionally, negative publicity over the safety or benefits of any such
items may adversely affect demand for our products, and could result in lower customer traffic, sales
and results of operations.
If we are unable to anticipate and satisfy consumer preferences in the regions where we operate,
our sales may decrease, which could have a material adverse effect on our business, financial
condition and results of operations.
Real or perceived quality or food safety concerns could have an adverse effect on our sales
and reputation.
We could be materially adversely affected if consumers lose confidence in the safety and quality of
products we sell. We are a fresh, natural and organic retailer, and we believe that many customers
choose to shop our stores because of their interest in health, nutrition and food safety. As a result, we
believe that our customers hold us to a high food safety standard. Concerns regarding the safety of our
food products or the safety and quality of our food supply chain could cause shoppers to avoid
shopping with us, even if the basis for the concern is outside of our control. In addition, adverse
publicity about these concerns, whether or not ultimately based on fact, and whether or not involving
products sold at our stores, could discourage consumers from buying products we sell and have an
adverse effect on our sales. Any lost confidence on the part of our customers would be difficult and
costly to reestablish. Any such adverse effect could be exacerbated by our position in the market as a
natural and organic food retailer, and could significantly reduce our brand value. Issues regarding the
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quality or safety of any food items sold by us, regardless of the cause, could have a substantial and
adverse effect on our sales and operating results.
Products we sell could cause unexpected side effects, illness, injury or death that could result
in their discontinuance or expose us to lawsuits, either of which could result in unexpected
costs and damage to our reputation.
There is increasing governmental scrutiny of and public awareness regarding food safety.
Unexpected side effects, illness, injury, or death caused by products we sell could result in the
discontinuance of sales of these products or prevent us from achieving market acceptance of the
affected products. Such side effects, illnesses, injuries and death could also expose us to product
liability or negligence lawsuits. Any claims brought against us may exceed our existing or future
insurance policy coverage or limits. Any judgment against us that is in excess of our policy limits would
have to be paid from our cash reserves, which would reduce our capital resources. Further, we may
not have sufficient capital resources to pay a judgment, in which case our creditors could levy against
our assets. The real or perceived sale of contaminated or harmful products would cause negative
publicity regarding our company, brand, or products, which could in turn harm our reputation and net
sales, and could have a material adverse effect on our business, results of operations or financial
condition.
If we fail to maintain our reputation and the value of our brand, our sales may decline.
We believe our continued success depends on our ability to maintain and grow the value of the
Sprouts brand. Maintaining, promoting and positioning our brand and reputation will depend largely on
the success of our marketing and merchandising efforts and our ability to provide a consistent, high-
quality customer experience. Brand value is based in large part on perceptions of subjective qualities,
and even isolated incidents can erode trust and confidence, particularly if they result in adverse
publicity, governmental investigations or litigation. Our brand could be adversely affected if we fail to
achieve these objectives, or if our public image or reputation were to be tarnished by negative publicity.
Our reputation could also suffer from real or perceived issues involving the labeling or marketing of
products we sell as “natural.”
Although the FDA and the USDA have each issued statements regarding the appropriate use of
the word “natural,” there is no single, U.S. government-regulated definition of the term “natural” for use
in the food industry. The resulting uncertainty has led to consumer confusion, distrust and legal
challenges. Plaintiffs have commenced legal actions against a number of food companies that market
“natural” products, asserting false, misleading and deceptive advertising and labeling claims, including
claims related to genetically modified ingredients. In limited circumstances, the FDA has taken
regulatory action against products labeled “natural” that nonetheless contain synthetic ingredients or
components. Should we become subject to similar claims, consumers may avoid purchasing products
from us or seek alternatives, even if the basis for the claim is unfounded. Adverse publicity about these
matters may discourage consumers from buying our products. The cost of defending against any such
claims could be significant. Any loss of confidence on the part of consumers in the truthfulness of our
labeling or ingredient claims would be difficult and costly to overcome and may significantly reduce our
brand value. Any of these events could adversely affect our reputation and brand and decrease our
sales, which would have a material adverse effect on our business, financial condition and results of
operations.
The current geographic concentration of our stores creates an exposure to local or regional
downturns or catastrophic occurrences.
As of December 29, 2013, we operated 73 stores in California, making California our largest
market representing 44% of our total stores and 46% of our net sales in the fiscal year ended
23
December 29, 2013. We also have store concentration in Arizona, Colorado and Texas, operating 26,
24 and 29 stores in those states, respectively, and representing 45% in the aggregate of our net sales
in the fiscal year ended December 29, 2013. In addition, we source a large portion of our produce from
California, ranging from approximately 40% to approximately 70% depending on the time of year. As a
result, our business is currently more susceptible to regional conditions than the operations of more
geographically diversified competitors, and we are vulnerable to economic downturns in those regions.
Any unforeseen events or circumstances that negatively affect these areas in which we have stores or
from which we obtain products could materially adversely affect our revenues and profitability. These
factors include, among other things, changes in demographics, population and employee bases, wage
increases, changes in economic conditions, severe weather conditions and other catastrophic
occurrences. Such conditions may result in reduced customer traffic and spending in our stores,
physical damage to our stores, loss of inventory, closure of one or more of our stores, inadequate work
force in our markets, temporary disruption in the supply of products, delays in the delivery of goods to
our stores and a reduction in the availability of products in our stores. Any of these factors may disrupt
our business and materially adversely affect our financial condition and results of operations.
Disruption of significant supplier relationships could negatively affect our business.
Nature’s Best, Inc. (referred to as “NB”) is our primary supplier of dry grocery and frozen food
products, accounting for approximately 23% and 17% of our total purchases in fiscal 2013 and 2012,
respectively. We also have commitments in place with NB to order certain amounts of our distribution-
sourced organic and natural produce from NB, and to maintain certain minimum average annual store
purchase volumes, including for any new stores we open. Our current contractual relationship with NB
continues through April 2018. Due to this concentration of purchases from a single third-party supplier,
the cancellation of our distribution arrangement or the disruption, delay or inability of NB to deliver
product to our stores may materially and adversely affect our operating results while we establish
alternative distribution channels. Another 4% of our total purchases for both fiscal 2012 and 2013 were
made through our secondary supplier, United Natural Foods Inc. (referred to as “UNFI”). Our current
contractual relationship with UNFI continues through December 2, 2014 (subject to automatic renewal
for successive one-year periods unless either we or UNFI elect not to renew). There is no assurance
UNFI or other distributors will be able to fulfill our needs on favorable terms or at all. In addition, if NB,
UNFI or any of our other suppliers fail to comply with food safety or other laws and regulations, or face
allegations of non-compliance, their operations may be disrupted. We cannot assure you that we would
be able to find replacement suppliers on commercially reasonable terms, which would have a material
adverse effect on our financial condition and results of operations.
Any significant interruption in the operations of our distribution centers or supply chain
network could disrupt our ability to deliver our produce and other products in a timely manner.
We self-distribute our produce through our two distribution centers located in Arizona and Texas
and a third-party distribution center in California. Any significant interruption in the operation of our
distribution center infrastructure, such as disruptions due to fire, severe weather or other catastrophic
events, power outages, labor disagreements, or shipping problems, could adversely impact our ability
to distribute produce to our stores. Such interruptions could result in lost sales and a loss of customer
loyalty to our brand. While we maintain business interruption and property insurance, if the operation of
our distribution centers were interrupted for any reason causing delays in shipment of produce to our
stores, our insurance may not be sufficient to cover losses we experience, which could have a material
adverse effect on our business, financial condition and results of operations.
In addition, unexpected delays in deliveries from vendors that ship directly to our stores or
increases in transportation costs (including through increased fuel costs) could have a material
adverse effect on our financial condition and results of operations. Labor shortages in the
transportation industry, long-term disruptions to the national and international transportation
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infrastructure, reduction in capacity and industry-specific regulations such as hours-of-service rules
that lead to delays or interruptions of deliveries could negatively affect our business.
We, as well as our vendors, are subject to numerous laws and regulations and our compliance
with these laws and regulations, as they currently exist or as modified in the future, may
increase our costs, limit or eliminate our ability to sell certain products, raise regulatory
enforcement risks not present in the past, or otherwise adversely affect our business, results of
operations and financial condition.
As a retailer of food, vitamins and supplements and a seller of many of our private label products,
we are subject to numerous health and safety laws and regulations. Our suppliers and contract
manufacturers are also subject to such laws and regulations. These laws and regulations apply to
many aspects of our business, including the manufacturing, packaging, labeling, distribution,
advertising, sale, quality and safety of products we sell, as well as the health and safety of our team
members and the protection of the environment. We are subject to regulation by various government
agencies, including the FDA, the USDA, the FTC, the Occupational Safety and Health Administration,
the Consumer Product Safety Commission and the Environmental Protection Agency, as well as
various state and local agencies.
We are also subject to the USDA’s Organic Rule, which facilitates interstate commerce and the
marketing of organically produced food, and provides assurance to our customers that such products
meet consistent, uniform standards. Compliance with the USDA’s Organic Rule also places a
significant burden on some of our suppliers, which may cause a disruption in some of our product
offerings. In addition, the USDA’s Food Safety Inspection Service (referred to as “FSIS”) conducts
regular, mandatory on-site inspections of processing and manufacturing facilities. When violations
occur, the agency has broad discretion to withhold FSIS inspection services, shut down processing
facilities and take civil or criminal actions against violators of applicable statutes and regulations.
As a retailer of supplements, our sales of vitamins and supplements are regulated under DSHEA,
a statute which is administered by the FDA as part of its responsibilities under the FDCA. DSHEA
expressly permits vitamins and supplements to bear statements describing how a product affects the
structure, function and/or general well-being of the body. However, no statement may expressly or
implicitly represent that a supplement will diagnose, cure, mitigate, treat or prevent a disease.
New or revised government laws and regulations, such as the FSMA, passed in January 2011,
which grants the FDA greater authority over the safety of the national food supply, as well as increased
enforcement by government agencies, could result in additional compliance costs and civil remedies.
Specifically, the FSMA requires the FDA to issue regulations mandating that risk-based preventive
controls be observed by the majority of food producers. This authority applies to all domestic food
facilities and, by way of imported food supplier verification requirements, to all foreign facilities that
supply food products. In addition, the FSMA requires the FDA to establish science-based minimum
standards for the safe production and harvesting of produce, requires the FDA to identify “high risk”
foods and “high risk” facilities and instructs the FDA to set goals for the frequency of FDA inspections
of such high risk facilities as well as non-high risk facilities and foreign facilities from which food is
imported into the United States.
With respect to both food and dietary supplements, the FSMA meaningfully augments the FDA’s
ability to access a producer’s records and a supplier’s records. This increased access could permit the
FDA to identify areas of concern it had not previously considered to be problematic either for us or for
our suppliers. The FSMA is also likely to result in enhanced tracking and tracing of food requirements
and, as a result, added recordkeeping burdens upon our suppliers. In addition, under the FSMA, the
FDA has the authority to inspect certifications and therefore evaluate whether foods and ingredients
25
from our suppliers are compliant with the FDA’s regulatory requirements. Such inspections may delay
the supply of certain products or result in certain products being unavailable to us for sale in our stores.
DSHEA established that no notification to the FDA is required to market a dietary supplement if it
contains only dietary ingredients that were present in the U.S. food supply prior to DSHEA’s
enactment. However, for a dietary ingredient not present in the food supply prior to DSHEA’s
enactment, the manufacturer is required to provide the FDA with information supporting the conclusion
that the ingredient will reasonably be expected to be safe at least 75 days before introducing a new
dietary ingredient into interstate commerce. As required by the FSMA, the FDA issued draft guidance
in July 2011, which attempts to clarify when an ingredient will be considered a “new dietary ingredient,”
the evidence needed to document the safety of a new dietary ingredient, and appropriate methods for
establishing the identity of a new dietary ingredient. In particular, the guidance may cause dietary
supplement products available in the market before DSHEA to now be classified to include a new
dietary ingredient if the dietary supplement product was produced using manufacturing processes
different from those used in 1994. Accordingly, the adoption of the draft FDA guidance or similar
guidance could materially adversely affect the availability of dietary supplement products.
The FDA has broad authority to enforce the provisions of the FDCA applicable to the safety,
labeling, manufacturing and promotion of foods and dietary supplements, including powers to issue a
public warning letter to a company, publicize information about illegal products, institute an
administrative detention of food, request or order a recall of illegal products from the market, and
request the Department of Justice to initiate a seizure action, an injunction action or a criminal
prosecution in the U.S. courts. Pursuant to the FSMA, the FDA also has the power to refuse the import
of any food or dietary supplement from a foreign supplier that is not appropriately verified as in
compliance with all FDA laws and regulations. Moreover, the FDA has the authority to administratively
suspend the registration of any facility producing food, including supplements, deemed to present a
reasonable probability of causing serious adverse health consequences.
In connection with the marketing and advertisement of products we sell, we could be the target of
claims relating to false or deceptive advertising, including under the auspices of the FTC and the
consumer protection statutes of some states. Furthermore, in recent years, the FDA has been
aggressive in enforcing its regulations with respect to nutrient content claims (e.g., “low fat,” “good
source of,” “calorie free,” etc.), unauthorized “health claims” (claims that characterize the relationship
between a food or food ingredient and a disease or health condition), and other claims that
impermissibly suggest therapeutic benefits for certain foods or food components. These events could
interrupt the marketing and sales of products in our stores, including our private label products,
severely damage our brand reputation and public image, increase the cost of products in our stores,
result in product recalls or litigation, and impede our ability to deliver merchandise in sufficient
quantities or quality to our stores, which could result in a material adverse effect on our business,
financial condition and results of operations.
We are also subject to laws and regulations more generally applicable to retailers, including labor
and employment, taxation, zoning and land use, environmental protection, workplace safety, public
health, community right-to-know and alcoholic beverage sales. Our stores are subject to unscheduled
inspections on a regular basis, which, if violations are found, could result in the assessment of fines,
suspension of one or more needed licenses and, in the case of repeated “critical” violations, closure of
the store until a re-inspection demonstrates that we have remediated the problem. Further, our new
store openings could be delayed or prevented or our existing stores could be impacted by difficulties or
failures in our ability to obtain or maintain required approvals or licenses. In addition, we are subject to
environmental laws pursuant to which we could be held responsible for all of the costs or liabilities
relating to any contamination at our or our predecessors’ past or present facilities and at third-party
waste disposal sites, regardless of our knowledge of, or responsibility for, such contamination.
26
As is common in our industry, we rely on our suppliers and contract manufacturers to ensure that
the products they manufacture and sell to us comply with all applicable regulatory and legislative
requirements. In general, we seek certifications of compliance, representations and warranties,
indemnification and/or insurance from our suppliers and contract manufacturers. However, even with
adequate insurance and indemnification, any claims of non-compliance could significantly damage our
reputation and consumer confidence in our products. In order to comply with applicable statutes and
regulations, our suppliers and contract manufacturers have from time to time reformulated, eliminated
or relabeled certain of their products and we have revised certain provisions of our sales and marketing
program.
We cannot predict the nature of future laws, regulations, interpretations or applications, or
determine what effect either additional government regulations or administrative orders, when and if
promulgated, or disparate federal, state and local regulatory schemes would have on our business in
the future. They could, however, increase our costs or require the reformulation of certain products to
meet new standards, the recall or discontinuance of certain products not able to be reformulated,
additional recordkeeping, expanded documentation of the properties of certain products, expanded or
different labeling and/or scientific substantiation. Any or all of such requirements could have a material
adverse effect on our business, financial condition and results of operations.
Our nutrition-oriented educational activities may be impacted by government regulation or our
inability to secure adequate liability insurance.
We provide nutrition-oriented education to our customers, and these activities may be subject to
state and federal regulation, and oversight by professional organizations. In the past, the FDA has
expressed concerns regarding summarized health and nutrition-related information that (i) does not, in
the FDA’s view, accurately present such information, (ii) diverts a consumer’s attention and focus from
FDA-required nutrition labeling and information or (iii) impermissibly promotes drug-type disease-
related benefits. If our team members or third parties we engage to provide this information do not act
in accordance with regulatory requirements, we may become subject to penalties that could have a
material adverse effect on our business. We believe we are currently in compliance with relevant
regulatory requirements, and we maintain professional liability insurance in order to mitigate risks
associated with this nutrition-oriented education. However, we cannot predict the nature of future
government regulation and oversight, including the potential impact of any such regulation on this
activity. Furthermore, the availability of professional liability insurance or the scope of such coverage
may change, or our insurance coverage may prove inadequate, which may adversely impact the ability
of our customer educators to provide some information to our customers. The occurrence of any such
developments could negatively impact the perception of our brand, our sales and our ability to attract
new customers.
Disruptions to, or security breaches involving, our information technology systems could harm
our ability to run our business.
We rely extensively on information technology systems for point of sale processing in our stores,
supply chain, financial reporting, human resources and various other processes and transactions. Our
information technology systems are subject to damage or interruption from power outages, computer
and telecommunications failures, computer viruses, security breaches, including breaches of our
transaction processing or other systems that could result in the compromise of confidential customer
data, catastrophic events, and usage errors by our team members. In January 2013, we discovered
sophisticated malware installed on certain credit card “pin pads” in a limited number of our stores
designed to illegally access our customers’ credit card information. We discovered the malware shortly
after it was planted and promptly shut down its access to our systems, but it is possible that our
customers’ credit card information was compromised. In connection with the January 2013 breach, in
addition to replacing the affected card terminals for a total cost of approximately $170,000, we
27
engaged a nationally recognized cybersecurity firm to investigate the incident. The costs associated
with the investigation, and any penalties assessed by our credit card vendors, are covered by our
insurance policy, subject to our insurance deductible of $100,000. We have implemented numerous
additional security protocols since the attack in order to further tighten security, but there can be no
assurance similar breaches will not occur in the future, be detected in a timely manner or be covered
by our insurance policy. Our information technology systems may also fail to perform as we anticipate,
and we may encounter difficulties in adapting these systems to changing technologies or expanding
them to meet the future needs of our business. If our systems are breached, damaged or cease to
function properly, we may have to make significant investments to fix or replace them, suffer
interruptions in our operations, incur liability to our customers and others, face costly litigation, and our
reputation with our customers may be harmed. Various third parties, such as our suppliers and
payment processors, also rely heavily on information technology systems, and any failure of these
systems could also cause significant interruptions to our business. Any material interruption in the
information technology systems we rely on may have a material adverse effect on our operating results
and financial condition.
General economic conditions that impact consumer spending could adversely affect our
business.
The retail food business is sensitive to changes in general economic conditions. Recessionary
economic cycles, increases in interest rates, higher prices for commodities, fuel and other energy, inflation,
high levels of unemployment and consumer debt, depressed home values, high tax rates and other
economic factors that affect consumer spending and confidence or buying habits may materially adversely
affect the demand for products we sell in our stores. In recent years, the U.S. economy has experienced
volatility due to uncertainties related to energy prices, credit availability, difficulties in the banking and
financial services sectors, decreases in home values and retirement accounts, high unemployment and
falling consumer confidence. As a result, consumers are more cautious and could shift their spending to
lower-priced competition, such as warehouse membership clubs, dollar stores or extreme value formats,
which could have a material and adverse effect on our operating results and financial condition.
In addition, inflation or deflation can impact our business. Food deflation could reduce sales
growth and earnings, while food inflation, combined with reduced consumer spending, could reduce
gross profit margins. As a result, our operating results and financial condition could be materially
adversely affected.
A widespread health epidemic could materially impact our business.
Our business could be severely impacted by a widespread regional, national or global health
epidemic. A widespread health epidemic may cause customers to avoid public gathering places such
as our stores or otherwise change their shopping behaviors. Additionally, a widespread health
epidemic could also adversely impact our business by disrupting production and delivery of products to
our stores and by impacting our ability to appropriately staff our stores.
Increased commodity prices and availability may impact profitability.
Many products we sell include ingredients such as wheat, corn, oils, milk, sugar, cocoa and other
key ingredients. Commodity prices worldwide have been increasing. Any increase in prices of such key
ingredients may cause our vendors to seek price increases from us. We cannot assure you that we will
be able to mitigate vendor efforts to increase our costs, either in whole or in part. In the event we are
unable to continue mitigating potential vendor price increases, we may in turn consider raising our
prices, and our customers may be deterred by any such price increases. Our profitability may be
impacted through increased costs to us which may impact gross margins, or through reduced revenue
as a result of a decline in the number and average size of customer transactions.
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Energy costs are an increasingly significant component of our operating expenses and
increasing energy costs, unless offset by more efficient usage or other operational responses,
may impact our profitability.
We utilize natural gas, water, sewer and electricity in our stores and use gasoline and diesel in
trucks that deliver products to our stores. We may also be required to pay certain adjustments or other
amounts pursuant to our supply and delivery contracts in connection with increases in fuel prices.
Increases in energy costs, whether driven by increased demand, decreased or disrupted supply,
increased environmental regulations or an anticipation of any such events will increase the costs of
operating our stores. Our shipping costs have also increased recently due to rising fuel and freight
prices, and these costs may continue to increase. We may not be able to recover these rising costs
through increased prices charged to our customers, and any increased prices may exacerbate the risk
of customers choosing lower-cost alternatives. In addition, if we are unsuccessful in attempts to protect
against these increases in energy costs through long-term energy contracts, improved energy
procurement, improved efficiency and other operational improvements, the overall costs of operating
our stores will increase, which would impact our profitability, financial condition and results of
operations.
Increases in certain costs affecting our marketing, advertising and promotions may adversely
impact our ability to advertise effectively and reduce our profitability.
Postal rate increases, and increasing paper and printing costs affect the cost of our promotional
mailings. In response to any future increase in mailing costs, we may consider reducing the number
and size of certain promotional pieces. In addition, we rely on discounts from the basic postal rate
structure, such as discounts for bulk mailings and sorting by zip code and carrier routes. We are not
party to any long-term contracts for the supply of paper. Future increases in costs affecting our
marketing, advertising and promotions could adversely impact our ability to advertise effectively and
our profitability.
We may be unable to adequately protect our intellectual property rights, which could harm our
business.
We rely on a combination of trademark, trade secret, copyright and domain name law and internal
procedures and nondisclosure agreements to protect our intellectual property. In particular, we believe
our trademarks, including SPROUTS FARMERS MARKET®, SPROUTS® and HEALTHY LIVING FOR
LESS!®, and our domain names, including sprouts.com, are valuable assets. However, there can be no
assurance that our intellectual property rights will be sufficient to distinguish our products and services
from those of our competitors and to provide us with a competitive advantage. From time to time, third
parties may use names and logos similar to ours, may apply to register trademarks or domain names
similar to ours, and may infringe or otherwise violate our intellectual property rights. There can be no
assurance that our intellectual property rights can be successfully asserted against such third parties or
will not be invalidated, circumvented or challenged. Asserting or defending our intellectual property
rights could be time consuming and costly and could distract management’s attention and resources. If
we are unable to prevent our competitors from using names, logos and domain names similar to ours,
consumer confusion could result, the perception of our brand and products could be negatively
affected, and our sales and profitability could suffer as a result. We also license the SPROUTS
FARMERS MARKETS trademark to a third party for use in operating two grocery stores. If the licensee
fails to maintain the quality of the goods and services used in connection with this trademark, our rights
to, and the value of, this and similar trademarks could potentially be harmed. Negative publicity relating
to the licensee could also be incorrectly associated with us, which could harm the business. Failure to
protect our proprietary information could also have a material adverse effect on our business.
We may also be subject to claims that our activities or the products we sell infringe,
misappropriate or otherwise violate the intellectual property rights of others. Any such claims can be
29
time consuming and costly to defend and may distract management’s attention and resources, even if
the claims are without merit. Such claims may also require us to enter into costly settlement or license
agreements (which could, for example, prevent us from using our trademarks in certain geographies or
in connection with certain products and services), pay costly damage awards, and face a temporary or
permanent injunction prohibiting us from marketing or providing the affected products and services,
any of which could have a material adverse effect on our business.
Changes in accounting standards may materially impact reporting of our financial condition
and results of operations.
Accounting principles generally accepted in the United States and related accounting
pronouncements, implementation guidelines, and interpretations for many aspects of our business,
such as accounting for inventories, goodwill and intangible assets, store closures, leases, insurance,
income taxes, stock-based compensation and accounting for mergers and acquisitions, are complex
and involve subjective judgments. Changes in these rules or their interpretation may significantly
change or add significant volatility to our reported earnings without a comparable underlying change in
cash flow from operations. As a result, changes in accounting standards may materially impact our
reported financial condition and results of operations.
Specifically, proposed changes to financial accounting standards could require such leases to be
recognized on our balance sheet. In addition to our indebtedness, we have significant obligations
relating to our current operating leases. All of our existing stores are subject to leases, which have
average remaining terms of nine years and, as of December 29, 2013, we had undiscounted operating
lease commitments of approximately $915 million, scheduled through 2032, related primarily to our
stores, including stores that are not yet open. These commitments represent the minimum lease
payments due under our operating leases, excluding common area maintenance, insurance and taxes
related to our operating lease obligations, and do not reflect fair market value rent reset provisions in
the leases. These leases are classified as operating leases and disclosed in Note 20 to our
consolidated financial statements included elsewhere in this Annual Report on Form 10-K, but are not
reflected as liabilities on our consolidated balance sheets. During fiscal 2013, our rent expense
charged under operating leases was approximately $64.7 million.
The Financial Accounting Standards Board (referred to as “FASB”) is currently working on
amendments to existing accounting standards governing a number of areas including, but not limited
to, accounting for leases. In May 2013, the FASB issued a new exposure draft, Leases (referred to as
the “Exposure Draft”), which would replace the existing guidance in Accounting Standards Codification
840 (referred to as “ASC 840”), Leases (formerly Statement of Financial Accounting Standards 13,
Accounting for Leases). Under the Exposure Draft, among other changes in practice, a lessee’s rights
and obligations under most leases, including existing and new arrangements, would be recognized as
assets and liabilities, respectively, on the balance sheet. Other significant provisions of the Exposure
Draft include (i) defining the “lease term” to include the noncancellable period together with periods for
which there is a significant economic incentive for the lessee to extend or not terminate the lease;
(ii) defining the initial lease liability to be recorded on the balance sheet to contemplate only those
variable lease payments that depend on an index or that are in substance “fixed;” and (iii) a dual
approach for determining whether lease expense is recognized on a straight-line or accelerated basis,
depending on whether the lessee is expected to consume more than an insignificant portion of the
leased asset’s economic benefits. The comment period for the Exposure Draft ended on
September 13, 2013. If and when effective, this Exposure Draft will likely have a significant impact on
our consolidated financial statements, as a majority of our store leases have been classified as
operating leases, which results in rental payments being charged to expense over the terms of the
related leases. Additionally, operating leases are not reflected in our consolidated balance sheets,
which means that neither a leased asset nor an obligation for future lease payments is reflected in our
30
consolidated balance sheets. The proposed changes to ASC 840 would require that substantially all
operating leases be recognized as assets and liabilities on our balance sheet. The right to use the
leased property would be capitalized as an asset and the present value of future lease payments would
be accounted for as a liability. However, as the standard-setting process is still ongoing, we are unable
to determine the impact this proposed change in accounting standards will have on our consolidated
financial statements.
Legal proceedings could materially impact our business, financial condition and results of
operations.
Our operations, which are characterized by a high volume of customer traffic and by transactions
involving a wide variety of product selections, carry a higher exposure to consumer litigation risk when
compared to the operations of companies operating in some other industries. Consequently, we may
be a party to individual personal injury, product liability, intellectual property, employment-related and
other legal actions in the ordinary course of our business, including litigation arising from food-related
illness. The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify.
Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the
magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of
time. While we maintain insurance, insurance coverage may not be adequate, and the cost to defend
against future litigation may be significant. There may also be adverse publicity associated with
litigation that may decrease consumer confidence in our business, regardless of whether the
allegations are valid or whether we are ultimately found liable. As a result, litigation may materially
adversely affect our business, financial condition, and results of operations.
Claims under our insurance plans may differ from our estimates, which could materially impact
our results of operations.
We use a combination of insurance and self-insurance plans to provide for the potential liabilities
for workers’ compensation, general liability (including, in connection with legal proceedings described
under “—Legal proceedings could materially impact our business, financial condition and results of
operations” above), property insurance, director and officers’ liability insurance, vehicle liability and
team member health-care benefits. Liabilities associated with the risks that are retained by us are
estimated, in part, by considering historical claims experience, demographic factors, severity factors
and other actuarial assumptions. Our results could be materially impacted by claims and other
expenses related to such plans if future occurrences and claims differ from these assumptions and
historical trends.
Our high level of fixed lease obligations could adversely affect our financial performance.
Our high level of fixed lease obligations will require us to use a portion of cash generated by our
operations to satisfy these obligations, and could adversely impact our ability to obtain future financing,
if required, to support our growth or other operational investments. We will require substantial cash
flows from operations to make our payments under our operating leases, all of which provide for
periodic increases in rent. If we are not able to make the required payments under the leases, the
lenders or owners of the relevant stores, distribution centers or administrative offices may, among
other things, repossess those assets, which could adversely affect our ability to conduct our
operations. In addition, our failure to make payments under our operating leases could trigger defaults
under other leases or under agreements governing our indebtedness, which could cause the
counterparties under those agreements to accelerate the obligations due thereunder.
31
Our lease obligations may require us to continue paying rent for store locations that we no
longer operate.
We are subject to risks associated with our current and future store, distribution center and
administrative office real estate leases. We generally cannot cancel our leases, so if we decide to close
or relocate a location, we may nonetheless be committed to perform our obligations under the
applicable lease, including paying the base rent for the remaining lease term. In addition, as our leases
expire, we may fail to negotiate renewals, either on commercially acceptable terms or any terms at all,
which could materially adversely affect our business, results of operations or financial condition.
The loss of key management could negatively affect our business.
We are dependent upon a number of key management and other team members. If we were to
lose the services of a significant number of key team members within a short period of time, this could
have a material adverse effect on our operations as we may not be able to find suitable individuals to
replace them on a timely basis, if at all. In addition, any such departure could be viewed in a negative
light by investors and analysts, which may cause our stock price to decline. We do not maintain key
person insurance on any team member.
If we are unable to attract, train and retain team members, we may not be able to grow or
successfully operate our business.
The food retail industry is labor intensive. Our continued success is dependent upon our ability to
attract and retain qualified team members who understand and appreciate our culture and are able to
represent our brand effectively and establish credibility with our business partners and consumers. We
face intense competition for qualified team members, many of whom are subject to offers from
competing employers. Our ability to meet our labor needs, while controlling wage and labor-related
costs, is subject to numerous external factors, including the availability of a sufficient number of
qualified persons in the work force in the markets in which we are located, unemployment levels within
those markets, unionization of the available work force, prevailing wage rates, changing demographics,
health and other insurance costs and changes in employment legislation. In the event of increasing
wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline,
causing our customer service to suffer, while increasing our wages could cause our earnings to
decrease. If we are unable to hire and retain team members capable of meeting our business needs
and expectations, our business and brand image may be impaired. Any failure to meet our staffing
needs or any material increase in turnover rates of our team members or team member wages may
adversely affect our business, results of operations or financial condition.
Higher wage and benefit costs could adversely affect our business.
Changes in federal and state minimum wage laws and other laws relating to employee benefits,
including the Patient Protection and Affordable Care Act, could cause us to incur additional wage and
benefit costs. Increased labor costs would increase our expenses and have an adverse impact on our
profitability.
Union attempts to organize our team members could negatively affect our business.
None of our team members are currently subject to a collective bargaining agreement. As we
continue to grow and enter different regions, unions may attempt to organize all or part of our team
member base at certain stores or within certain regions. Responding to such organization attempts
may distract management and team members and may have a negative financial impact on individual
stores, or on our business as a whole.
32
We may require additional capital to fund the expansion of our business, and our inability to
obtain such capital could harm our business.
To support our expanding business, we must have sufficient capital to continue to make significant
investments in our new and existing stores and advertising. We cannot assure you that cash generated
by our operations will be sufficient to allow us to fund such expansion. If cash flows from operations are
not sufficient, we may need additional equity or debt financing to provide the funds required to expand
our business. If such financing is not available on satisfactory terms or at all, we may be unable to
expand our business or to develop new business at the rate desired and our operating results may
suffer. Debt financing increases expenses, may contain covenants that restrict the operation of our
business, and must be repaid regardless of operating results. Equity financing, or debt financing that is
convertible into equity, could result in additional dilution to our existing stockholders.
Our inability to obtain adequate capital resources, whether in the form of equity or debt, to fund our
business and growth strategies may require us to delay, scale back or eliminate some or all of our
operations or the expansion of our business, which may have a material adverse effect on our
business, operating results, financial condition or prospects.
We may be unable to generate sufficient cash flow to satisfy our debt service obligations,
which could adversely impact our business.
As of December 29, 2013, we had outstanding indebtedness of $318.3 million. We may incur
additional indebtedness in the future, including borrowings under our credit agreement (referred to as
the “Credit Facility”). Our indebtedness, or any additional indebtedness we may incur, could require us
to divert funds identified for other purposes for debt service and impair our liquidity position. If we
cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our
debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we will be
able to take any of such actions on a timely basis, on terms satisfactory to us or at all.
The fact that a substantial portion of our cash flow from operations could be needed to make
payments on this indebtedness could have important consequences, including the following:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
reducing our ability to execute our growth strategy, including new store development;
impacting our ability to continue to execute our operational strategies in existing stores;
increasing our vulnerability to general adverse economic and industry conditions;
reducing the availability of our cash flow for other purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and the market in
which we operate, which would place us at a competitive disadvantage compared to our
competitors that may have less debt;
limiting our ability to borrow additional funds; and
failing to comply with the covenants in our debt agreements could result in all of our
indebtedness becoming immediately due and payable.
Our ability to obtain necessary funds through borrowing will depend on our ability to generate cash
flow from operations. Our ability to generate cash is subject to general economic, financial,
competitive, legislative, regulatory, and other factors that are beyond our control. If our business does
not generate sufficient cash flow from operations or if future borrowings are not available to us under
our Credit Facility or otherwise in amounts sufficient to enable us to fund our liquidity needs, our
operating results and financial condition may be adversely affected. Our inability to make scheduled
33
payments on our debt obligations in the future would require us to refinance all or a portion of our
indebtedness on or before maturity, sell assets, delay capital expenditures, or seek additional equity
investment.
Covenants in our debt agreements restrict our operational flexibility.
The agreement governing our Credit Facility contains usual and customary restrictive covenants
relating to our management and the operation of our business, including the following:
(cid:129)
incurring additional indebtedness;
(cid:129) making certain investments;
(cid:129) merging, dissolving, liquidating, consolidating, or disposing of all or substantially all of our
assets;
(cid:129)
(cid:129)
(cid:129)
paying dividends, making distributions, or redeeming capital stock;
entering into transactions with our affiliates; and
granting liens on our assets.
Our Credit Facility also requires us to maintain a specified financial ratio at the end of any fiscal
quarter at any time the Revolving Credit Facility is drawn. Our ability to meet this financial ratio, if
applicable, could be affected by events beyond our control. Failure to comply with any of the covenants
under our Credit Facility could result in a default under the facility, which could cause our lenders to
accelerate the timing of payments and exercise their lien on substantially all of our assets, which would
have a material adverse effect on our business, operating results, and financial condition.
We incur substantial costs as a result of being a public company.
As a public company, we are subject to public company reporting obligations under the Exchange
Act, and the rules and regulations regarding corporate governance practices, including those under the
Sarbanes-Oxley Act of 2002 (referred to as the “Sarbanes-Oxley Act”), the Dodd-Frank Act of 2010,
and the listing requirements of NASDAQ Global Select Market. We incur significant legal, accounting,
and other expenses as a public company, including costs resulting from our public company reporting
obligations and maintenance of corporate governance practices. Our management and other
personnel devote a substantial amount of time to ensure that we comply with all of these requirements.
The reporting requirements, rules, and regulations require substantial legal and financial compliance
costs and will make some activities more time-consuming and costly than when we were a private
company.
Our management has limited experience managing a public company, and our current
resources may not be sufficient to fulfill our public company obligations.
As a public company, we are subject to various regulatory requirements, including those of the
SEC and the NASDAQ Global Select Market. These requirements include record keeping, financial
reporting and corporate governance rules and regulations. Our management team has limited
experience in managing a public company and, historically, has not had the resources typically found
in a public company. Our internal infrastructure may not be adequate to support our increased
reporting obligations, and we may be unable to hire, train or retain necessary staff and may initially be
reliant on engaging outside consultants or professionals to overcome our lack of experience. Our
business could be adversely affected if our internal infrastructure is inadequate, we are unable to
engage outside consultants, or are otherwise unable to fulfill our public company obligations.
34
If we are unable to maintain effective internal control over financial reporting in the future, we
may fail to prevent or detect material misstatements in our financial statements, in which case
investors may lose confidence in the accuracy and completeness of our financial reports and
the market price of our common stock may decline.
As a public company, we are required to maintain internal control over financial reporting. In
addition, beginning with our 2014 annual report on Form 10-K to be filed in 2015, pursuant to
Section 404 of the Sarbanes-Oxley Act, we will be required to file a report by management on the
effectiveness of our internal control over financial reporting, and our independent registered public
accounting firm will be required to attest to the effectiveness of our internal control over financial
reporting.
In connection with the audit of our financial statements for fiscal 2012, we identified a material
weakness related to our failure to design and maintain effective internal controls with respect to the
application of an appropriate GAAP method in determining inventory costs for non-perishable products.
In fiscal 2012, we implemented a weighted-average costing methodology in accordance with GAAP
that utilizes statistical sampling and other estimation methods to value our non-perishable inventory.
Additionally, we have continued to develop and implement an automated solution for the calculation of
weighted-average cost on a per unit basis that is designed to replace our statistical sampling method in
the future. We will continue to use statistical sampling and other estimation methods until we believe
that the automated solution is in place for a sufficient period of time and can be relied upon.
Accordingly, as of December 29, 2013, we continued to have a material weakness related to our
internal controls with respect to costing of non-perishable inventories.
If we are unable to maintain effective internal control over financial reporting, if we identify any
material weaknesses therein, if we are unsuccessful in our efforts to remediate any such material
weakness, including the material weakness related to our non-perishable inventories described above,
if our management is unable to report that our internal control over financial reporting is effective when
required, or if our independent registered public accounting firm is unable to express an opinion as to
the effectiveness of our internal control over financial reporting when required, investors may lose
confidence in the accuracy and completeness of our financial reports and the market price of our
common stock could be negatively affected. In addition, we could become subject to investigations by
NASDAQ Global Select Market, the SEC, or other regulatory authorities, which could require additional
financial and management resources.
If our goodwill becomes impaired, we may be required to record a significant charge to
earnings.
We have a significant amount of goodwill. As of December 29, 2013, we had goodwill of
approximately $368.1 million, which represented 31% of our total assets as of such date. Goodwill is
reviewed for impairment on an annual basis in the fourth fiscal quarter or whenever events occur or
circumstances change that would more likely than not reduce the fair value of our reporting unit below
its carrying amount. Fair value is determined based on the discounted cash flows and comparable
market values of our single reporting unit. If the fair value of the reporting unit is less than its carrying
value, the fair value of the implied goodwill is calculated as the difference between the fair value of our
reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. In the event
an impairment to goodwill is identified, an immediate charge to earnings in an amount equal to the
excess of the carrying value over the implied fair value would be recorded, which would adversely
affect our operating results. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Critical Accounting Estimates—Goodwill and Intangible Assets.”
35
Determining market values using a discounted cash flow method requires that we make significant
estimates and assumptions, including long-term projections of cash flows, market conditions and
appropriate market rates. Our judgments are based on historical experience, current market trends and
other information. In estimating future cash flows, we rely on internally generated forecasts for
operating profits and cash flows, including capital expenditures. Based on our annual impairment test
during fiscal 2011, 2012 and 2013, no goodwill impairment charge was required to be recorded.
Changes in estimates of future cash flows caused by items such as unforeseen events or changes in
market conditions could negatively affect our reporting unit’s fair value and result in an impairment
charge. Factors that could cause us to change our estimates of future cash flows include a prolonged
economic crisis, successful efforts by our competitors to gain market share in our core markets, our
inability to compete effectively with other retailers or our inability to maintain price competitiveness. An
impairment of a significant portion of our goodwill could materially adversely affect our financial
condition and results of operations.
Risks Related to Ownership of our Common Stock
Our stock price may be volatile, and you may not be able to resell your shares at or above
the price you paid for them or at all.
Prior to our IPO, there had been no public market for our common stock. An active public market
for our common stock may not be sustained. If an active public market is not sustained, it may be
difficult for you to sell your shares of our common stock at a price that is attractive to you, or at all. The
price of our common stock in any such market may be higher or lower than the price that you paid.
There is no guarantee that our common stock will appreciate in value or even maintain the price at
which our stockholders have purchased their shares. The trading price of our common stock may be
volatile and subject to wide price fluctuations in response to various factors, many of which are beyond
our control, including the following:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
actual or anticipated fluctuations in our quarterly or annual financial results;
the financial guidance we may provide to the public, any changes in such guidance, or our
failure to meet such guidance;
failure of industry or securities analysts to maintain coverage of our company, changes in
financial estimates by any industry or securities analysts that follow our company, or our
failure to meet such estimates;
various market factors or perceived market factors, including rumors, whether or not correct,
involving us or our competitors;
fluctuations in stock market prices and trading volumes of securities of similar companies;
sales, or anticipated sales, of large blocks of our stock;
short selling of our common stock by investors;
additions or departures of key personnel;
new store openings or entry into new markets by us or by our competitors;
regulatory or political developments;
changes in accounting principles or methodologies;
litigation and governmental investigations;
acquisitions by us or by our competitors; and
general financial market conditions or events.
36
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have
affected and continue to affect the market prices of equity securities of many companies. These
fluctuations often have been unrelated or disproportionate to the operating performance of those
companies. These and other factors may cause the market price and demand for our common stock to
fluctuate substantially, which may limit or prevent investors from readily selling their shares of common
stock and may otherwise negatively affect the price or liquidity of our common stock. In addition, in the
past, when the market price of a stock has been volatile, holders of that stock have sometimes
instituted securities class action litigation against the company that issued the stock. If any of our
stockholders were to bring a lawsuit against us, we could incur substantial costs defending the lawsuit
or paying for settlements or damages. Such a lawsuit could also divert the time and attention of our
management from our business.
The large number of shares eligible for public sale could depress the market price of our
common stock.
The market price of our common stock could decline as a result of sales of a large number of
shares of our common stock in the market, and the perception that these sales could occur may
depress the market price. We had 147,616,560 shares of common stock outstanding as of
December 29, 2013. Of these shares, an aggregate of 40,825,000 shares of common stock sold in our
IPO and November 2013 offering by selling stockholders (referred to as our “November 2013 Offering”)
are freely tradable, except for any shares purchased by our “affiliates” as defined in Rule 144 under the
Securities Act of 1933, as amended (referred to as the “Securities Act”). We, our officers and directors
and the selling stockholders in our November 2013 Offering entered into lock-up agreements in
connection with the November 2013 Offering that restrict transfers for a period of 90 days beginning on
November 25, 2013, subject to certain exceptions. This 90-day period has been extended through
March 17, 2014 as a result of our release of earnings results on February 27, 2014.
In addition, the stockholders agreement by and among us and holders of all of the outstanding
shares of our common stock prior to our IPO (referred to as the “Stockholders Agreement”) limits the
ability of current equity holders (other than the Apollo Funds) to sell their shares, subject to various
exceptions, until October 31, 2014 (subject to a potential extension of up to 90 days). However, the
Apollo Funds will have the ability to require us to register shares of our common stock held by them for
resale, and our stockholders party to the stockholders agreement will also have the ability to participate
in such registered offerings or to otherwise sell the same percentage of their shares of our common
stock as the percentage of shares sold by the Apollo Funds in any such registered offering. We
registered the shares offered by the selling stockholders in our November 2013 Offering pursuant to
the exercise by the Apollo Funds of a demand registration right under the Stockholders Agreement.
Subject to the foregoing, after the expiration of the restricted period, these shares may be sold in the
public market, subject to prior registration or qualification for an exemption from registration, including,
in the case of shares held by affiliates, compliance with the volume restrictions of Rule 144.
We have registered all shares of common stock that we may issue under our incentive plans. They
can be freely sold in the public market upon issuance, subject to volume limitations applicable to
affiliates and the lock-up arrangements described above.
Sales of common stock as restrictions end may make it more difficult for us to sell equity securities
in the future at a time and at a price that we deem appropriate.
In the future, we may also issue our securities in connection with a capital raise or acquisitions.
The amount of shares of our common stock issued in connection with a capital raise or acquisition
could constitute a material portion of our then-outstanding shares of our common stock, which would
result in dilution.
37
Our principal stockholders have substantial control over us and are able to influence corporate
matters.
As of December 29, 2013, our directors, executive officers, and holders of more than 5% of our
common stock, together with their affiliates, beneficially own, in the aggregate, approximately 54.6% of
our outstanding common stock. In particular, as of December 29, 2013 the Apollo Funds beneficially
owned, in the aggregate, approximately 38.2% of our outstanding common stock. As a result, these
stockholders, acting together, or the Apollo Funds acting alone, will be able to exercise significant
influence over all matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions, such as a merger or other sale of our company or its
assets. This concentration of ownership could limit your ability to influence corporate matters and may
have the effect of delaying or preventing a third party from acquiring control over us.
Anti-takeover provisions could impair a takeover attempt and adversely affect existing
stockholders.
Certain provisions of our certificate of incorporation and bylaws and applicable provisions of
Delaware law may have the effect of rendering more difficult, delaying, or preventing an acquisition of
our company, even when this would be in the best interest of our stockholders. Our corporate
governance documents include the following provisions:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
creating a classified board of directors whose members serve staggered three-year terms;
authorizing “blank check” preferred stock, which could be issued by our board of directors
without stockholder approval and may contain voting, liquidation, dividend, and other rights
superior to our common stock;
limiting the liability of, and providing indemnification to, our directors and officers;
prohibiting our stockholders from acting by written consent, thereby requiring stockholder
action to be taken at an annual or special meeting of stockholders;
prohibiting our stockholders from calling special meetings of stockholders, which may delay
the ability of our stockholders to force consideration of a proposal or the ability of holders
controlling a majority of our capital stock to take any action, including the removal of directors;
requiring advance notice of stockholder proposals for business to be conducted at meetings
of our stockholders and for nominations of candidates for election to our board of directors;
controlling the procedures for the conduct and scheduling of board and stockholder meetings;
providing the board of directors with the express power to postpone previously scheduled
annual meetings and to cancel previously scheduled special meetings;
permitting newly created directorships resulting from an increase in the authorized number of
directors or vacancies on our board of directors to be filled only by a majority of our remaining
directors, even if less than a quorum is then in office, or by a sole remaining director; and
providing that our board of directors is expressly authorized to make, repeal, alter, or amend
our bylaws.
In addition, Delaware law imposes conditions on the voting of “control shares” and on certain
business combination transactions with “interested stockholders.”
These provisions, alone or together, could delay or prevent hostile takeovers and changes in
control or changes in our management. Any provision of our certificate of incorporation or bylaws or
Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity
for our stockholders to receive a premium for their shares of our common stock, and could also affect
the price that some investors are willing to pay for our common stock.
38
If securities or industry analysts cease publishing research or reports about us, our business,
or our market, or if they adversely change their recommendations regarding our stock, our
stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or
securities analysts may publish about us, our business, our market or our competitors. If we do not
maintain adequate research coverage, or if any of the analysts who may cover us downgrade our stock
or publish inaccurate or unfavorable research about our business or provide relatively more favorable
recommendations about our competitors, our stock price could decline. If any analyst who may cover
us were to cease coverage of our company or fail to regularly publish reports on us, we could lose
visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Since we do not expect to pay any cash dividends for the foreseeable future, investors may be
forced to sell their stock in order to obtain a return on their investment.
We do not anticipate declaring or paying in the foreseeable future any cash dividends on our
capital stock. Instead, we plan to retain any earnings to finance our operations and growth plans. In
addition, our Credit Facility contains covenants that would restrict our ability to pay cash dividends.
Accordingly, investors must rely on sales of their common stock after price appreciation, which may
never occur, as the only way to realize any return on their investment. As a result, investors seeking
cash dividends should not purchase our common stock.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Properties
As of December 29, 2013, we had 167 stores located in eight states, as shown in the chart below:
State
Number of Stores State
Number of Stores
Arizona . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . .
Colorado . . . . . . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . . . . . . . . .
26
73
24
2
New Mexico . . . . . . . . . . . . . . . .
Oklahoma . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . .
6
4
29
3
In fiscal 2012, on a combined company basis, we opened 11 new stores, and we opened 19 new
stores in fiscal 2013. As of the date of this Annual Report on Form 10-K, we have opened three stores
in 2014, including our first store in Kansas and relocated one store in Texas bringing our total store
count to 170.
We lease all of our stores from unaffiliated third parties. A typical store lease is for an initial 10 to
20 year term with four renewal options of five years each. We expect that we will be able to renegotiate
these leases or relocate these stores as necessary. In addition to new store openings, we remodel or
relocate stores periodically in order to improve performance. For fiscal 2013, we remodeled 12 stores,
and for fiscal 2014, we plan to remodel approximately 15 stores.
39
As of December 29, 2013, we leased our two distribution warehouses, as well as our corporate
office in Phoenix, Arizona, from unaffiliated third parties. Information about such facilities is set forth in
the table below:
Facility
State
Square Footage*
Owned/Leased
Corporate Office . . . . . . . . . . . . . . . . . . .
Distribution Warehouse . . . . . . . . . . . . .
Distribution Warehouse . . . . . . . . . . . . .
Arizona
Arizona
Texas
43,000
106,000
117,000
Leased
Leased
Leased
* Rounded to the nearest 1,000 square feet
We believe our portfolio of long-term leases is a valuable asset supporting our retail operations,
but we do not believe that any individual store property is material to our financial condition or results of
operations.
Item 3.
Legal Proceedings
From time to time we are a party to legal proceedings, including matters involving personnel and
employment issues, product liability, personal injury, intellectual property and other proceedings arising
in the ordinary course of business, which have not resulted in any material losses to date. Although
management does not expect that the outcome in these proceedings will have a material adverse
effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore,
we could incur judgments or enter into settlements of claims that could materially impact our results.
Item 4. Mine Safety Disclosures
Not applicable.
40
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market Information
Our common stock began trading on the NASDAQ Global Select Market under the symbol “SFM”
on August 1, 2013. Prior to that date, there was no public market for our common stock. The price
range per share of common stock presented below represents the highest and lowest closing prices for
our common stock on the NASDAQ Global Select Market for each full quarterly period since our IPO.
2013
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$46.31
$49.45
$33.00
$35.58
High
Low
The closing price of our common stock as of February 24, 2014 was $35.93 per share, and the
number of stockholders of record of our common stock as of February 24, 2013 was 530. This number
excludes stockholders whose stock is held in nominee or street name by brokers.
Dividend Policy
Since we became a publicly traded company on August 1, 2013, we have not declared or paid,
and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our capital
stock. Any future determination as to the declaration and payment of dividends, if any, will be at the
discretion of our board of directors and will depend on then existing conditions, including our operating
results, financial condition, contractual restrictions, capital requirements, business prospects, and other
factors our board of directors may deem relevant. Our Credit Facility contains covenants that would
restrict our ability to pay cash dividends.
Issuer Purchases of Equity Securities
None.
Equity Compensation Plan Information
As of December 29, 2013, the following table shows the number of securities to be issued upon
exercise of outstanding options under our equity compensation plans.
Number of
Securities
Remaining
Available
for Future
Issuance
Under Equity
Compensation
Plans
(Excluding
Securities
Reflected in
Column (a))
(c)
Number of
Securities to
Be Issued
Upon
Exercise of
Outstanding
Options
(a)
Weighted-
Average
Exercise
Price of
Outstanding
Options
(b)
Plan Category
Equity Compensation Plans Approved
by Stockholders(1) . . . . . . . . . . . . . . .
405,279
$18.00
9,681,960
Equity Compensation Plans Not
Approved by Stockholders(2) . . . . . .
10,447,394
Total
. . . . . . . . . . . . . . . . . . . . . . . .
10,852,673
$ 3.00
$ 3.56
—
9,681,960
41
(1) Represents our Sprouts Farmers Market, Inc. 2013 Incentive Plan (referred to as the “2013
Incentive Plan”).
(2) Represents our Sprouts Farmers Markets, LLC Option Plan (referred to as the “2011 Option
Plan”).
Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock
between August 1, 2013 (the date our stock began trading on the Nasdaq Global Select Market) and
December 29, 2013, with the cumulative total return of (i) the Nasdaq Composite Index and (ii) the
S&P Food Retail Index, over the same period.
The comparison assumes that $100.00 was invested in our common stock, the Nasdaq Composite
Index and the S&P Food Retail Index, and assumes reinvestment of dividends, if any. The graph
assumes the initial value of our common stock on August 1, 2013 was the closing sale price on that
day of $40.11 per share and not the initial offering price to the public of $18.00 per share. The
performance shown on the graph below is based on historical results and is not intended to suggest
future performance.
COMPARISON OF 5 MONTH CUMULATIVE TOTAL RETURN*
Among Sprouts Farmers Market Inc., the NASDAQ Composite Index, and the S&P Food Retail Index
$140
$130
$120
$110
$100
$90
$80
$70
$60
8/1/13
8/31/13
9/30/13
10/31/13
11/30/13
12/29/13
Sprouts Farmers Market Inc.
NASDAQ Composite
S&P Food Retail
*$100 invested on 8/1/13 in stock or 7/31/13 in index, including reinvestment of dividends.
Indexes calculated on month-end basis.
Copyright© 2014 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for
purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that section,
and shall not be deemed to be incorporated by reference into any filing of Sprouts Farmers Market, Inc.
under the Securities Act or the Exchange Act.
42
Item 6.
Selected Financial Data
Fiscal
2013(3)
Fiscal
2012(2)
Fiscal
2011(1)
Fiscal
2010(1)
Fiscal
2009(1)
(dollars in thousands, except per share data)
Statements of Operations Data:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,437,911 $1,794,823 $1,105,879 $516,816 $487,693
346,310
1,712,644
Cost of sales, buying and occupancy . . . . .
1,264,514
366,947
794,905
Gross profit
. . . . . . . . . . . . . . . . . . . . . .
Direct store expenses . . . . . . . . . . . . . . . . . .
Selling, general and administrative
725,267
496,183
530,309
368,323
310,974
238,245
149,869
114,463
141,383
106,373
expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
81,795
86,364
58,528
23,277
23,506
Amortization of Henry’s trade names and
capitalized software . . . . . . . . . . . . . . . . .
Store pre-opening costs . . . . . . . . . . . . . . . .
Store closure and exit costs . . . . . . . . . . . . .
Income (loss) from operations . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . .
Income (loss) before income taxes . . .
. . . . . . . . . . .
Income tax (provision) benefit
—
5,734
2,051
139,504
(37,203)
487
(18,721)
84,067
(32,741)
—
2,782
2,155
70,685
(35,488)
562
(992)
34,767
(15,267)
32,202
1,338
6,382
(25,721)
(19,813)
358
—
(45,176)
17,731
867
2,341
354
8,567
(681)
295
—
—
2,647
299
8,558
(582)
343
—
8,181
(3,320)
8,319
(3,346)
Net income (loss)
. . . . . . . . . . . . . . . . . $
51,326 $
19,500 $ (27,445) $ 4,861 $ 4,973
Per Share Data:
Net income (loss) per share—basic . . . . . . $
Net income (loss) per share—diluted . . . . . $
Weighted average shares outstanding—
0.38 $
0.37 $
0.16 $
0.16 $
(0.28) $
(0.28) $
0.08 $
0.08 $
0.08
0.08
basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134,622
119,427
96,954
64,350
64,350
Weighted average shares outstanding—
diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139,765
121,781
96,954
64,350
64,350
Pro forma comparable store sales
growth(4) . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma stores at end of period . . . . . . .
10.7%
167
9.7%
148
5.1%
138
2.3%
129
2.6%
109
Fiscal
2013
Fiscal
2012(2)
Fiscal
2011(1)
Fiscal
2010(1)
Fiscal
2009(1)
Other Operating Data:
Stores at beginning of period . . . . . . . . . . . .
Opened . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Closed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stores at end of period . . . . . . . . . . . . . . . . .
40
Gross square feet at end of period . . . . . . . . 4,582,743 4,064,888 2,721,430 1,035,841 949,627
Average store size at end of period (gross
103
9
37
(1)
148
43
7
56
(3)
103
148
19
—
—
167
—
—
43
40
3
36
4
square feet) . . . . . . . . . . . . . . . . . . . . . . . . .
27,442
27,465
26,422
24,089
23,741
43
December 29,
2013
December 30,
2012(2)
January 1,
2012(1)
January 2,
2011(1)
January 3,
2010(1)
As of
Balance Sheet Data
Cash and cash equivalents . . . . . . . . . . . . . . $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital and finance lease obligations,
77,652 $
1,172,404
67,211 $ 14,542 $ 4,918 $ 6,232
220,818
232,636
761,646
1,103,236
including current portion . . . . . . . . . . . . . . .
119,572
107,639
75,409
8,248
7,967
Total long-term debt, including current
portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . .
311,240
513,771
426,544
386,755
294,764
267,453
—
—
156,660
157,932
(1) Fiscal 2009, fiscal 2010 and the period from January 3, 2011 through April 18, 2011 reflect the
sales and expenses directly attributable to Henry’s operations and include allocations of expenses
from Henry’s previous parent company. These expenses were allocated to Henry’s on the basis
that was considered to reflect fairly or reasonably the utilization of the services provided to, or the
benefit obtained by, Henry’s. Historical financial statements for Henry’s prior to April 18, 2011 do
not reflect the interest expense or debt Henry’s might have incurred if it had been a stand-alone
entity. Additionally, we would have expected to incur other expenses not reflected in our historical
financial statements prior to April 18, 2011, if Henry’s had operated as a stand-alone entity.
Commencing on April 18, 2011, our consolidated financial statements also include the financial
position, results of operations and cash flows of the business we operated prior to the acquisition
of Henry’s (such prior business referred to as “Sprouts Arizona”).
(2) For the period from April 18, 2011 to May 28, 2012 our consolidated financial statements include
the financial position, results of operations and cash flows of Henry’s and Sprouts Arizona.
Commencing on May 29, 2012, our consolidated financial statements also include the financial
position, results of operations and cash flows of Sunflower. Fiscal 2012 included $19.5 million of
expenses related to the acquisition and integration of Sunflower and Henry’s.
(3) Fiscal 2013 selling, general and administrative expense included $3.2 million for IPO related
bonuses and $2.0 million for expenses related to the November 2013 Offering.
(4) Pro forma comparable store sales growth reflects comparable store sales growth calculated
including stores acquired in the Transactions for all reported periods. Our practice is to include
sales from a store in comparable store sales beginning on the first day of the 61st week following
the store’s opening and to exclude sales from a closed store from comparable store sales on the
day of closure. We include sales from an acquired store in comparable store sales on the later of
(i) the day of acquisition or (ii) the first day of the 61st week following the store’s opening. We use
pro forma comparable store sales to calculate pro forma comparable store sales growth.
Supplemental Pro Forma Data—Net Sales
Fiscal
2013
Fiscal
2012
Fiscal
2011
Fiscal
2010
Fiscal
2009
(dollars in thousands)
Net sales—actual
Pro forma adjustments(a) . . . . . . . .
. . . . . . . . . . . . . . $2,437,911 $1,794,823 $1,105,879 $ 516,816 $ 487,693
751,677
616,776
973,543
196,140
—
Pro forma net sales . . . . . . . . . . . . . $2,437,911 $1,990,963 $1,722,655 $1,490,359 $1,239,370
Pro forma comparable store sales
growth(b) . . . . . . . . . . . . . . . . . . .
10.7%
9.7%
5.1%
2.3%
2.6%
(a) Pro forma adjustments reflect the net sales of Sprouts Arizona and Sunflower for all periods
reported.
(b) Pro forma comparable store sales growth is calculated including all stores acquired in the
Transactions for all periods reported.
44
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
You should read the following discussion and analysis of our financial condition and results of
operations together with “Selected Financial Data,” “—Unaudited Supplemental Fiscal 2011 Pro Forma
Information” and the consolidated financial statements and related notes that are included elsewhere in
this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of various factors, including those set
forth under “Risk Factors” or in other parts of this Annual Report on Form 10-K. Please also see the
section entitled “Special Note Regarding Forward-Looking Statements.”
Business Overview
Sprouts Farmers Market is a high-growth, differentiated, specialty retailer of natural and organic
food focusing on health and wellness at great value. We offer a complete shopping experience that
includes fresh produce, bulk foods, vitamins and supplements, grocery, meat and seafood, bakery,
dairy, frozen foods, body care and natural household items catering to consumers’ growing interest in
eating and living healthier. Since our founding in 2002, we have grown rapidly, significantly increasing
our sales, store count and profitability. With fiscal 2013 net sales of $2.4 billion and 167 stores in eight
states as of December 29, 2013, we are one of the largest specialty retailers of natural and organic
food in the United States. As of February 27, 2013, we have grown to 170 stores in nine states
(including our first store in Kansas). According to research conducted for us by Buxton Company, a
customer analytics research firm, we have significant growth opportunities in existing and new markets
across the United States with the potential for approximately 1,200 locations operating under our
current format.
The cornerstones of our business are fresh, natural and organic products at compelling prices
(which we refer to as “Healthy Living for Less”), an attractive and differentiated shopping experience,
and knowledgeable team members who we believe provide best-in-class customer service and product
education.
Our History
In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. In 2010, we had
54 stores and reached over $620 million in net sales and approximately 3,700 team members. In
April 2011, we partnered with the Apollo Funds, and added 43 stores by merging with Henry’s and its
Sun Harvest-brand stores. Our merger with Henry’s brought us to 103 total stores located in Arizona,
California, Colorado and Texas as of the end of 2011. In May 2012, we added another 37 stores
through our acquisition of Sunflower and extended our footprint into New Mexico, Nevada, Oklahoma
and Utah. On August 1, 2013, our common stock began trading on the NASDAQ Global Select Market
and on August 6, 2013, we closed our IPO.
Outlook
We are pursuing a number of strategies designed to continue our growth, including expansion of
our store base, driving comparable store sales growth, enhancing our operating margins and growing
the Sprouts brand. We intend to continue expanding our store base by pursuing new store openings in
our existing markets, expanding into adjacent markets and penetrating new markets. Although we plan
45
to expand our store base primarily through new store openings, we may grow through strategic
acquisitions if we identify suitable targets and are able to negotiate acceptable terms and conditions for
acquisition. We intend to achieve 12% or more annual new store growth for at least the next five years,
including 22 to 24 planned new store openings in 2014, of which three have opened as of the date of
this Annual Report on Form 10-K.
We also believe we can continue to improve our comparable store sales growth by enhancing our
core value proposition and distinctive customer-oriented shopping experience, as well as through
expanding and refining our fresh, natural and organic product offerings, our targeted and personalized
marketing efforts and our in-store education. We believe our operating margins will continue to benefit
from scale efficiencies, information technology systems, continued cost discipline and enhancements
to our merchandise offerings. We are committed to growing the Sprouts brand by supporting our
stores, product offerings and corporate partnerships, including the expansion of innovative marketing
and promotional strategies through print, digital and social media platforms, all of which promote our
mission of “Healthy Living for Less.”
Components of Operating Results
We report our results of operations on a 52- or 53-week fiscal year ending on the Sunday closest
to December 31, with each fiscal quarter generally divided into three periods consisting of two four-
week periods and one five-week period. Fiscal 2013, 2012 and 2011 were 52-week years ending on
December 29, 2013, December 30, 2012 and January 1, 2012, respectively.
Net Sales
We recognize sales revenue at the point of sale, with discounts provided to customers reflected as
a reduction in sales revenue. Proceeds from sales of gift cards are recorded as a liability at the time of
sale, and recognized as sales when they are redeemed by the customer. We do not include sales
taxes in net sales.
We monitor our pro forma comparable store sales growth to evaluate and identify trends in our
sales performance. Pro forma comparable store sales growth reflects comparable store sales growth
calculated including all stores acquired in the Transactions. Our practice is to include sales from a
store in comparable store sales beginning on the first day of the 61st week following the store’s
opening and to exclude sales from a closed store from comparable store sales beginning on the day of
closure. We include sales from an acquired store in comparable store sales on the later of (i) the day of
acquisition or (ii) the first day of the 61st week following the store’s opening. This practice may differ
from the methods that other retailers use to calculate similar measures. We use pro forma comparable
store sales to calculate pro forma comparable store sales growth. See “Unaudited Supplemental Fiscal
2012 Pro Forma Information” and “Unaudited Supplemental Fiscal 2011 Pro Forma Information” for a
reconciliation of historical net sales to pro forma net sales.
Our net sales have increased substantially as a result of the Transactions. Net sales are also
affected by store openings and closings and comparable store sales growth. Factors that influence
comparable store sales growth and other sales trends include:
(cid:129)
(cid:129)
(cid:129)
general economic conditions and trends, including levels of disposable income and consumer
confidence;
consumer preferences and buying trends;
our ability to identify market trends, and to source and provide product offerings that promote
customer traffic and growth in average ticket;
46
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
the number of customer transactions and average ticket;
the prices of our products, including the effects of inflation and deflation;
opening new stores in the vicinity of our existing stores;
advertising, in-store merchandising and other marketing activities; and
our competition, including competitive store openings in the vicinity of our stores and
competitor pricing and merchandising strategies.
Cost of sales, buying and occupancy and gross profit
Cost of sales includes the cost of inventory sold during the period, including direct costs of
purchased merchandise (net of discounts and allowances), distribution and supply chain costs, buying
costs and supplies. Merchandise incentives received from vendors are reflected in the carrying value of
inventory when earned or as progress is made toward earning the rebate or allowance, and are
reflected as a component of cost of sales as the inventory is sold. Inflation and deflation in the prices of
food and other products we sell may periodically affect our gross profit and gross margin. The short-
term impact of inflation and deflation is largely dependent on whether or not we pass the effects
through to our customers, which will depend upon competitive market conditions. In the first half of
fiscal 2012, we experienced produce price deflation, which contributed to higher gross margins in our
business during that period and the full fiscal year.
Occupancy costs include store rental, property taxes, utilities, common area maintenance,
amortization of favorable and unfavorable leasehold interests and property insurance. Occupancy
costs do not include building depreciation, which is classified as a direct store expense.
Our cost of sales, buying and occupancy and gross profit are correlated to sales volumes. As
sales increase, gross margin is affected by the relative mix of products sold, pricing strategies,
inventory shrinkage and improved leverage of fixed costs of sales, buying and occupancy.
Direct store expenses
Direct store expenses consist of store-level expenses such as salaries and benefits, related
equity-based compensation, supplies, depreciation and amortization for buildings, store leasehold
improvements, equipment and other store specific costs. As sales increase, direct store expenses
generally decline as a percentage of sales.
Selling, general and administrative expenses
Selling, general and administrative expenses primarily consist of salaries and benefits costs,
equity-based compensation, advertising, acquisition-related costs and corporate overhead.
We charge third-parties to place advertisements in our in-store guide and newspaper circulars. We
record consideration received from vendors in connection with cooperative advertising programs as a
reduction to advertising costs when the allowance represents reimbursement of a specific and
identifiable cost. Advertising costs are expensed as incurred.
We expect our selling, general and administrative expenses will increase in future periods as a
result of incremental share-based compensation, legal, accounting and other compliance-related
expenses associated with being a public company and increases resulting from growth in the number
of our stores.
47
Store pre-opening costs
Store pre-opening costs include rent expense during construction of new stores and costs related
to new store openings, including costs associated with hiring and training personnel and other
miscellaneous costs. Store pre-opening costs are expensed as incurred.
Store closure and exit costs
We recognize a reserve for future operating lease payments associated with facilities that are no
longer being utilized in our current operations. The reserve is recorded based on the present value of the
remaining non-cancelable lease payments after the cease use date less an estimate of subtenant income.
If subtenant income is expected to be higher than the lease payments, no accrual is recorded. Lease
payments included in the closed store reserve are expected to be paid over the remaining terms of the
respective leases. Our assumptions about subtenant income are based on our experience and knowledge
of the area in which the closed property is located, guidance received from local brokers and agent and
existing economic conditions. Adjustments to the closed store reserve relate primarily to changes in actual
or estimated subtenant income and changes in actual lease payments from original estimates.
Adjustments are made for changes in estimates in the period in which the change becomes known,
considering timing of new information regarding market, subleases or other lease updates. Changes in
reserve estimates are classified as store closure and exit costs in the consolidated statements of
operations. Store closure and exit costs in fiscal 2011 and fiscal 2012 consisted primarily of reserves to
close redundant store locations and facilities following the Transactions. Store closure and exit costs in
fiscal 2012 and fiscal 2013 also include adjustments to estimates recorded in fiscal 2012 and 2011.
Benefit (provision) for income taxes
Prior to the Henry’s Transaction, Henry’s was included in the consolidated federal and certain
state income tax groups of its previous parent for income tax reporting purposes. Henry’s was not a
separate taxpaying entity before the Henry’s Transaction. However, for the periods presented through
the Henry’s Transaction, the consolidated financial statements have been prepared on the basis as if
Henry’s prepared its tax returns and accounted for income taxes on a separate company basis. As a
result of the Henry’s Transaction, for tax purposes, Henry’s was acquired in a taxable asset acquisition.
The purchase price was allocated to all identifiable assets with the residual assigned to tax deductible
goodwill. The resulting basis differences between the new tax values and historical amounts resulted in
a deferred tax asset of $47.6 million being recorded through stockholders’ equity. See Note 18 to our
audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a
discussion of the tax deductibility of goodwill.
Since the Henry’s Transaction, our income tax (provision) benefit has been based on the new tax
return filing group. Although we were structured as a limited liability company, we elected to be taxed
as a corporation for income tax purposes. We are subject to federal income tax as well as state income
tax in various jurisdictions of the United States in which we conduct business. Income taxes are
accounted for under the asset and liability method.
On July 29, 2013, Sprouts Farmers Markets, LLC, a Delaware limited liability company, converted
into Sprouts Farmers Market, Inc., a Delaware corporation. See “—Factors Affecting Comparability of
Result of Operations—Corporate Conversion.” The corporate conversion has not had a material impact
on our results of operations, financial position or cash flows since we were treated as a corporation for
income tax purposes prior to the conversion.
In September 2013, the Internal Revenue Service issued final regulations related to tangible
property, which govern when a taxpayer must capitalize or deduct expenses for acquiring, maintaining,
repairing and replacing tangible property. The regulations are effective for tax years beginning
January 1, 2014; however, early adoption is permitted. We have analyzed the impacts of the tangible
property regulations, and have determined we are in compliance with the regulations. The adoption of
the regulations will not have a significant effect on our consolidated financial statements.
48
Factors Affecting Comparability of Results of Operations
Henry’s Transaction
Apollo held a controlling interest in Henry’s former parent prior to the Henry’s Transaction and
continued to hold a controlling interest in the Company afterwards. Due to Apollo’s continued
controlling interest, the Henry’s Transaction resulted in Henry’s financial statements becoming the
financial statements of the Company, followed immediately by the acquisition by the Company of the
Sprouts Farmers Market business. As a result, the Company was determined to be the accounting
acquirer, effective April 18, 2011. Accordingly, the results of operations for fiscal 2010 and for the
period from January 3, 2011 through April 18, 2011 reflect the sales and expenses directly attributable
to Henry’s operations and allocations of direct expenses from Henry’s previous parent company. These
expenses were allocated to Henry’s on the basis that was considered to reflect fairly or reasonably the
utilization of the services provided to, or the benefit obtained by, Henry’s. Historical financial
statements for Henry’s prior to April 18, 2011 do not reflect the interest expense Henry’s might have
incurred if it had been a stand-alone entity. Additionally, we would have expected to incur other
expenses, not reflected in our historical financial statements prior to April 18, 2011, if Henry’s were to
operate as a stand-alone entity. Commencing on April 18, 2011, our consolidated financial statements
also include the financial position, results of operations and cash flows of Sprouts Arizona.
Sunflower Transaction
In May 2012, we acquired Sunflower in the Sunflower Transaction. Commencing on May 29, 2012,
our consolidated financial statements also include the financial position, results of operations and cash
flows of Sunflower.
Pro Forma Information
The effects of the Transactions have a material effect on the comparability of our results of
operations. Consequently, we have supplemented the comparative discussion of our results of
operations for fiscal 2013 and fiscal 2012 and for fiscal 2011 with a comparative discussion of our
historical results of operations on a pro forma basis for fiscal 2012 and fiscal 2011. In this discussion,
pro forma statement of operations information for fiscal 2011 gives pro forma effect to the Transactions
as if they were consummated on the first day of fiscal 2011, as set out in “—Unaudited Supplemental
Fiscal 2011 Pro Forma Information” below. The unaudited supplemental pro forma information for fiscal
2011 was prepared in a manner comparable to the requirements of Article 11 of Regulation S-X, but
does not comply with Article 11 in that Rule 11-02(c) of Article 11 does not allow for the presentation of
pro forma condensed statements of operations prior to the most recent year. The unaudited
supplemental pro forma information for fiscal 2011 reflects the impact of the Transactions using the
assumptions set forth in the notes to the unaudited supplemental pro forma information for fiscal 2011.
Pro forma statement of operations information for fiscal 2012 gives effect to the Sunflower Transaction
as if it was consummated on the first day of fiscal 2012 as set out under “Pro Forma for the Sunflower
Transaction” in “Unaudited Supplemental Fiscal 2012 Pro Forma Information.” This fiscal 2012 pro
forma information presented in this “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” does not include the impact of the April 2013 Refinancing, described below in “-
Liquidity and Capital Resources”, or the IPO.
April 2013 Refinancing
In April 2013, we completed a transaction in which we refinanced our debt (the “April 2013
Refinancing”) and made a distribution to our equity and option holders, as further discussed in “—
Liquidity and Capital Resources” below. The April 2013 Refinancing resulted in an increase in
borrowings, a reduction in interest rate and the recording of a loss on extinguishment of debt.
49
Corporate Conversion
In connection with our IPO, on July 29, 2013, Sprouts Farmers Markets, LLC, a Delaware limited
liability company, converted into Sprouts Farmers Market, Inc., a Delaware corporation. As part of the
corporate conversion, holders of membership interests of Sprouts Farmers Markets, LLC in the form of
Class A and Class B units received 11 shares of our common stock for each unit held immediately
prior to the corporate conversion, and options to purchase units became options to purchase 11 shares
of our common stock for each unit underlying options outstanding immediately prior to the corporate
conversion, at the same aggregate exercise price in effect prior to the corporate conversion. For the
convenience of the reader, except where the context otherwise requires, information in this Annual
Report on Form 10-K has been presented giving effect to the corporate conversion. The corporate
conversion has not had a material impact on the comparability of our results of operations, since we
were treated as a corporation for income tax purposes prior to the conversion.
IPO
On August 6, 2013, we completed our initial public offering of 21,275,000 shares of common stock
of Sprouts Farmers Market, Inc., including 2,775,000 shares of common stock issued as a result of the
exercise in full of the underwriters’ option to purchase additional shares, at a price of $18.00 per share.
We sold 20,477,215 shares of common stock, including the additional shares, and certain stockholders
sold the remaining 797,785 shares.
We received net proceeds from our IPO of approximately $344.1 million, after deducting
underwriting discounts and offering expenses. We used the net proceeds to repay $340.0 million of
outstanding indebtedness under the Term Loan and for general corporate purposes. We recorded a
loss on extinguishment of debt related to the repayment.
Results of Operations for Fiscal 2013, 2012 and 2011
The following tables set forth our results of operations, unaudited supplemental pro forma
information 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.
Consolidated Statement of Operations
Data:
Fiscal 2013
Fiscal 2012
Fiscal 2011
(in thousands)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,437,911 $1,794,823 $1,105,879
794,905
Cost of sales, buying and occupancy . . . . . . .
310,974
. . . . . . . . . . . . . . . . . . . . . . . .
238,245
Direct store expenses . . . . . . . . . . . . . . . . . . .
Selling, general and administrative
1,712,644
725,267
496,183
1,264,514
530,309
368,323
Gross profit
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81,795
86,364
58,528
Amortization of Henry’s trade names and
capitalized software . . . . . . . . . . . . . . . . . . .
Store pre-opening costs . . . . . . . . . . . . . . . . . .
Store closure and exit costs . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . .
Income (loss) before income taxes . . . . .
Income tax (provision) benefit . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . $
—
5,734
2,051
139,504
(37,203)
487
(18,721)
84,067
(32,741)
51,326 $
32,202
1,338
6,382
(25,721)
(19,813)
358
—
—
2,782
2,155
70,685
(35,488)
562
(992)
(45,176)
34,767
(15,267)
17,731
19,500 $ (27,445)
50
Fiscal 2012
Fiscal 2011
(in thousands)
Unaudited Supplemental Pro Forma
Information(1):
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales, buying and occupancy . . . . . . . .
$1,990,963
1,403,158
$1,722,655
1,234,166
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . .
Direct store expenses . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative
587,805
403,731
488,489
360,437
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,611
83,077
Amortization of Henry’s trade names and
capitalized software . . . . . . . . . . . . . . . . . . . .
Store pre-opening costs . . . . . . . . . . . . . . . . . .
Store closure and exit costs . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .
Loss on extinguishment of debt
Income (loss) before income taxes . . . . . .
Income tax (provision) benefit . . . . . . . . . . . . . .
—
5,218
2,214
85,031
(40,250)
649
(992)
44,438
(19,912)
32,202
5,009
7,009
755
(40,436)
643
—
(39,038)
8,163
Net income (loss) . . . . . . . . . . . . . . . . . . . .
$
24,526
$ (30,875)
(1) Unaudited supplemental pro forma information for fiscal 2011 gives effect to the Transactions as if
they were consummated on the first day of fiscal 2011. See “—Unaudited Supplemental Fiscal
2011 Pro Forma Information” below for a presentation of historical financial information, adjusted
to give pro forma effect to the Transactions using the assumptions set forth in the notes to the
unaudited supplemental pro forma information for fiscal 2011. Unaudited supplemental pro forma
information for fiscal 2012 gives effect to the Sunflower Transaction as if it were consummated on
the first day of fiscal 2012 (but does not give effect to the April 2013 Refinancing or the IPO). See
“Unaudited Supplemental Fiscal 2012 Pro Forma Information” for pro forma information for fiscal
2012 presented as “Pro Forma for Sunflower Transaction.”
Fiscal 2013
Fiscal 2012
Fiscal 2011
Other Operating Data:
Pro forma comparable store sales growth . . .
Stores at beginning of period . . . . . . . . . . . . . .
Opened . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closed . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stores at end of period . . . . . . . . . . . . . . . . . . .
10.7%
148
19
—
—
167
9.7%
103
9
37
(1)
148
5.1%
43
7
56
(3)
103
Comparison of Fiscal 2013 to Fiscal 2012
Net sales
Net sales . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma net sales . . . . . . . . . . . . . . . .
Comparable store sales growth . . . . . . .
Fiscal 2013
Fiscal 2012
Change
% Change
(dollars in thousands)
$2,437,911
2,437,911
$1,794,823
1,990,963
$643,088
446,948
36%
22%
10.7%
9.7%
51
Net sales increased during 2013 as compared to 2012, primarily as a result of (i) stores added
through the Sunflower Transaction in fiscal 2012, (ii) sales growth at stores operated prior to 2013 and
(iii) new store openings.
Stores added through the Sunflower Transaction contributed $252.5 million, or 39%, of the
increase in net sales for 2013. Net sales growth at stores operated prior to December 30, 2012
contributed $206.4 million, or 32% of the increase in net sales for 2013. New store openings during
2013 contributed $186.1 million, or 29%, of the increase in net sales during 2013. These increases
were partially offset by $2.0 million of net sales related to a store closed in 2012.
Comparing 2013 to pro forma 2012, net sales increased primarily as a result of pro forma
comparable store sales growth and new store openings. Pro forma comparable store sales growth of
10.7% during 2013 contributed $206.4 million, or 46% of the increase in pro forma net sales during
2013. New store openings during 2013 contributed $186.1 million, or 42%, of the increase in net sales
during 2013. The remaining $54.4 million, or 12%, of the increase in net sales during 2013 was
attributable to new store openings during fiscal 2012 not yet reflected in pro forma comparable store
sales growth.
Cost of sales, buying and occupancy and gross profit
As reported:
Fiscal 2013
Fiscal 2012
Change % Change
(dollars in thousands)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $2,437,911 $1,794,823 $643,088
448,130
Cost of sales, buying and occupancy . . .
194,958
. . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
Gross margin . . . . . . . . . . . . . . . . . . . . . . .
1,712,644
725,267
1,264,514
530,309
29.5%
29.7%
0.2%
Pro forma:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $2,437,911 $1,990,963 $446,948
309,486
Cost of sales, buying and occupancy . . .
Gross profit
137,462
. . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . .
1,712,644
725,267
1,403,158
587,805
29.5%
29.7%
0.2%
36%
35%
37%
22%
22%
23%
Cost of sales, buying and occupancy increased during 2013 compared to 2012, primarily due to
the increase in sales following the Sunflower Transaction, comparable store sales growth and new
store openings, as discussed above. During 2013, gross profit increased $190.0 million as a result of
increased sales volume and $5.0 million as a result of an increase in gross margin. Gross margin for
2013 increased 20 basis points. This improvement was driven by leverage in occupancy, promotional
and buying costs. This leverage was partially offset by lower margins in produce driven by inflation in
certain commodity items when compared to the exceptional produce growing season in 2012. In
addition, we experienced lower margins in the vitamin, supplement and body care departments as a
result of mark downs from merchandise alignment.
Comparing 2013 to pro forma 2012, cost of sales, buying and occupancy and gross margin
increased primarily due to the factors noted above.
52
Direct store expenses
As reported:
Fiscal 2013
Fiscal 2012
Change
% Change
(dollars in thousands)
Direct store expenses . . . . . . . . . . . . .
Percentage of net sales . . . . . . . . . . . .
$496,183
$368,323
$127,860
35%
20.4%
20.5%
(0.1)%
Pro forma:
Direct store expenses . . . . . . . . . . . . .
Percentage of net sales . . . . . . . . . . . .
$496,183
$403,731
$ 92,452
23%
20.4%
20.3%
0.1%
Direct store expenses increased during 2013 compared to 2012, primarily due to $89.6 million of
direct store expenses associated with additional stores we operated during 2013 related to the
Sunflower Transaction and new store openings. Direct store expenses, as a percentage of net sales,
decreased 10 basis points primarily related to a reduction in non-capitalizable store development costs
as a percentage of sales.
Comparing 2013 to pro forma 2012, direct store expenses increased due to $39.6 million of direct
store expenses associated with new store openings in 2013. The remainder of the increase is related
to stores that were opened during or prior to 2012. Direct store expenses, as a percentage of net sales
were relatively in-line compared to pro forma 2012, as we utilized the leverage in payroll to invest in
store level compensation programs and to fund higher health care costs.
Selling, general and administrative expenses
As reported:
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $81,795
$86,364
$(4,569)
-5%
Percentage of net sales . . . . . . . . . . . . . . . . . .
3.4%
4.8%
(1.4)%
Fiscal 2013
Fiscal 2012
Change % Change
(dollars in thousands)
Pro forma:
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $81,795
$91,611
$(9,816)
-11%
Percentage of net sales . . . . . . . . . . . . . . . . . .
3.4%
4.6%
(1.2)%
The decrease in selling, general and administrative expenses during 2013 includes a $19.5 million
decrease in acquisition and integration costs and $2.7 million related to settlement of a tradename
dispute recorded in 2012. These decreases were partially offset by $4.1 million in expenses related to
technology initiatives, $3.2 million of bonuses paid in conjunction with our IPO, a $2.3 million increase
in regional personnel and travel expenses related to increased store count, a $2.2 million increase in
advertising expenses, $2.0 million of expenses related to our November 2013 secondary offering,
including employer payroll taxes on options exercised, $1.0 million of IPO related expenses, $1.0
million of increased equity-based compensation and payroll taxes including expense related to the anti-
dilution payments made in April 2013, $0.9 million in corporate payroll and benefits expenses and $0.5
million in legal settlements. Selling, general and administrative expenses decreased as a percentage of
net sales during 2013 due to improved leverage of payroll and store advertising costs and the
decrease in acquisition and integration costs described above.
Comparing 2013 to pro forma 2012, selling, general and administrative expenses decreased
primarily due a $17.1 million decrease in acquisition and integration costs, $2.7 million decrease
related to settlement of a tradename dispute recorded in 2012 and a $2.5 million decrease in
administrative payroll and benefits related to synergies achieved from the integration of Sunflower.
53
These items were offset by the items discussed in the paragraph above. Selling, general and
administrative expenses decreased as a percentage of net sales during 2013 due to improved
leverage of payroll and store advertising costs and the decrease in acquisition and integration costs
described above.
Store pre-opening costs
Store pre-opening costs increased to $5.7 million for 2013 from $2.8 million for 2012. Store pre-
opening costs in 2013 primarily include pre-opening costs related to the 19 stores opened during that
period and $0.5 million of expenses related to stores opening in early 2014. Store pre-opening costs
for 2012 include pre-opening costs related to nine stores opened during that time period and $0.8
million for stores opened in 2013. Of those nine stores, two were stores acquired in the Sunflower
Transaction, where a portion of the related pre-opening costs are reflected in the Sunflower pre-
acquisition financial statements (and accordingly, in the pro forma pre-opening costs discussed below).
The increase in store pre-opening costs in 2013 is due to the increased number of stores opened,
increases related to opening stores in new markets which require additional pre-opening advertising,
travel and team member training expenses, and certain pre-opening costs for stores opened in 2012
that were incurred in the Sunflower pre-acquisition financial statements. See pro forma pre-opening
cost discussion below.
Store pre-opening costs increased to $5.7 million during 2013 compared to $5.2 million during pro
forma 2012. Store pre-opening costs for 2013 are described above. Pro forma store pre-opening costs
for 2012 include store pre-opening costs incurred by both us and Sunflower for the nine stores opened
during that period. Seven stores were opened by us and two stores were opened by Sunflower prior to
the Sunflower Transaction. Pre-opening costs recorded by Sunflower reflect higher store pre-opening
rent incurred by Sunflower prior to the Sunflower Transaction due to early commencement dates for
pre-combination leases. The increase in store pre-opening costs in 2013 is due to an increased
number of store openings and increases related to opening stores in new markets as described above,
offset by the impact of higher pre-opening costs incurred by Sunflower as described above.
Store closure and exit costs
Store closure and exit costs decreased to $2.1 million for 2013 from $2.2 million for 2012. Store
closure and exit costs for 2013 include charges related to the closure of a former Sunflower
warehouse, and adjustments to sublease estimates for stores and facilities already closed. Store
closure and exit costs for 2012 include charges related to the closure of a former Sunflower
administrative facility and one store offset by a $2.0 million favorable adjustment to our store closure
reserve resulting from sublease rents in excess of original estimates and a $1.3 million favorable
adjustment resulting from a lessor’s voluntary termination of a lease obligation previously reserved.
Comparing 2013 to pro forma 2012, store closure and exit costs decreased to $2.1 million for 2013
from $2.2 million for 2012, primarily due to the factors noted above.
Loss on extinguishment of debt
In 2013, we recorded a loss on extinguishment of debt totaling $18.7 million primarily related to the
write-off of deferred financing costs and issue discount. These write-offs included $9.0 million related to
the August 2013 pay down of debt using proceeds from our IPO, $8.2 million related to the April 2013
Refinancing and $1.0 million related to the December 2013 $40.0 million additional principal payment.
Additionally, loss on extinguishment of debt includes $0.5 million related to the renewal of a financing
lease.
We recorded a $1.0 million loss on extinguishment of debt related to the renewal of a financing
lease during 2012.
54
Interest expense
Interest expense increased to $37.2 million for 2013 from $35.5 million for 2012, primarily as a
result of increased interest expense related to capital and financing leases. These were partially offset
by a reduction in the interest rates related to the April 2013 Refinancing, the August 2013 pay down on
the Term Loan, and the May 2013 payoff of the Senior Subordinated Notes. See Note 7 “Long-Term
Debt” to our unaudited consolidated financial statements.
Comparing 2013 to pro forma 2012, interest expense decreased to $37.2 million for 2013 from
$40.3 million for 2012, primarily due to the factors noted above.
Income tax provision
Income tax provision increased to $32.7 million for 2013 from $15.3 million for 2012, primarily
related to an increase in income before income taxes. Our effective income tax rate decreased to
38.9% in 2013 from 43.9% in 2012 related to increased tax credits and charitable contributions for
2013 and the non-deductible transaction costs incurred in 2012 related to the Sunflower Transaction.
Comparing 2013 to pro forma 2012, income tax provision was $32.7 million for 2013 compared to
income tax provision of $19.9 million for 2012, primarily related to an increase in income before income
taxes. Our effective income tax rate decreased to 38.9% in 2013 from 44.8% in 2012 related to
increased tax credits and charitable contributions for 2013 and the non-deductible transaction costs
incurred in 2012 related to the Sunflower Transaction.
Net income
As reported:
Fiscal 2013
Fiscal 2012
Change
% Change
(dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . .
Percentage of sales . . . . . . . . . . . . . . . .
$51,326
$19,500
$31,826
163%
2.1%
1.1%
1.0%
Pro forma:
Net income . . . . . . . . . . . . . . . . . . . . . . .
Percentage of sales . . . . . . . . . . . . . . . .
$51,326
$24,526
$26,800
109%
2.1%
1.2%
0.9%
Net income growth was attributable to strong business performance driven by comparable store
sales and resulting operating leverage, strong performance of new stores opened, and reduced
interest expense.
Unaudited Supplemental Fiscal 2012 Pro Forma Information
The comparability of our results of operations is affected for the periods presented in this
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” by the
Transactions. To supplement the discussion of our historical results of operations for fiscal 2013 and
fiscal 2012, we have included unaudited supplemental pro forma condensed consolidated statement of
operations information for fiscal 2012.
The following unaudited pro forma condensed consolidated financial information presents the
unaudited pro forma condensed consolidated statement of operations for fiscal 2012 after giving effect
to the Transactions and adjustments as described in the accompanying notes.
55
The unaudited pro forma condensed consolidated financial information includes our historical
results of operations and the results of operations of Sunflower, after giving pro forma effect to:
(cid:129)
the Sunflower Transaction and the related financing, presented as “Pro Forma for Sunflower
Transaction” in the unaudited pro forma condensed consolidated statement of operations.
The unaudited pro forma condensed consolidated statement of operations for fiscal 2012 reflects
the Sunflower Transaction as if it occurred on January 2, 2012, the first day of fiscal 2012.
The historical financial information has been adjusted to give pro forma effect to events that are
directly attributable to the Sunflower Transaction, have an ongoing effect on our statement of
operations and are factually supportable. Our unaudited pro forma condensed consolidated financial
information and explanatory notes present how our financial statements may have appeared had the
business actually been combined and had our capital structure reflected the above transaction as of
the dates noted above. The unaudited pro forma condensed consolidated statement of operations
shows the impact on the combined statement of operations of the acquisition method of accounting
under Financial Accounting Standards Board ASC 805, Business Combinations. Under the acquisition
method of accounting, the total purchase price is allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of the acquisition date. The excess purchase price
over the amounts assigned to tangible and intangible assets acquired and liabilities assumed is
recognized as goodwill.
The unaudited pro forma condensed consolidated financial information was prepared in
accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to the
unaudited pro forma condensed consolidated financial information. The following unaudited pro forma
condensed consolidated financial information is presented for illustrative purposes only and does not
purport to reflect the results the consolidated company may achieve in future periods or the historical
results that would have been obtained had the above transaction been completed as of January 2,
2012. The unaudited pro forma condensed consolidated financial information also does not give effect
to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies
or cost savings that may result from the Sunflower Transaction. Furthermore, the unaudited pro forma
condensed consolidated statement of operations does not include certain nonrecurring charges and
the related tax effects which result directly from the Sunflower Transaction as described in the notes to
the unaudited pro forma condensed consolidated financial information.
The unaudited pro forma condensed consolidated financial information is derived from and should
be read in conjunction with our historical financial statements and related notes included elsewhere in
this Annual Report on Form 10-K.
56
SPROUTS FARMERS MARKET, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Fiscal Year Ended December 30, 2012
(in thousands, except per share amounts)
Pro Forma Adjustments for
Historical
Sprouts
Farmers
Market,
Inc.(1)
Historical
Sunflower(1)
Sunflower
Fiscal
Period
Alignment(2)
Sunflower
Transaction(2) Notes
Net sales . . . . . . . . . . . . . . . . . . . . $1,794,823
Cost of sales, buying and
$197,612
$(1,472)
$ —
Pro Forma for
Sunflower
Transaction(2)
$1,990,963
occupancy . . . . . . . . . . . . . . . .
1,264,514
138,880
(1,011)
Gross profit . . . . . . . . . . . . . .
Direct store expenses . . . . . . . . .
Selling, general and
administrative expenses . . . . .
Store pre-opening costs . . . . . . .
Store closure and exit costs . . . .
Income from operations . . . .
Interest expense . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . .
Loss on extinguishment of
530,309
368,323
58,732
35,956
(461)
(287)
86,364
2,782
2,155
70,685
(35,488)
562
13,386
2,450
59
6,881
(2,019)
88
debt . . . . . . . . . . . . . . . . . . . . . .
(992)
—
Income before income
taxes . . . . . . . . . . . . . . . . .
Income tax (provision) benefit . . .
34,767
(15,267)
4,950
(2,796)
Net income . . . . . . . . . . . . . . $
19,500
$ 2,154
$
Per Share Information:
Net income—basic . . . . . . . . . . . . $
Net income—diluted . . . . . . . . . . $
0.16
0.16
Weighted Average Shares:
Basic . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . .
119,427
121,781
(90)
(14)
—
(70)
14
(1)
—
(57)
14
(43)
775
(775)
(261)
(8,049)
—
—
7,535
(2,757)
—
—
4,778
(1,863)
$ 2,915
(2)(a)
1,403,158
(2)(b)
(2)(c)
(2)(d)
$
$
$
(2)(e)
(2)(f)
(2)(f)
(2)(f)
(2)(f)
587,805
403,731
91,611
5,218
2,214
85,031
(40,250)
649
(992)
44,438
(19,912)
24,526
0.20
0.19
125,510
127,864
The accompanying notes are an integral part of, and should be read together with, this unaudited pro
forma condensed consolidated financial information.
57
SPROUTS FARMERS MARKET, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
1. Basis of Presentation and Description of Transactions
Effective May 29, 2012, we acquired all of the outstanding common and preferred stock of
Sunflower in the Sunflower Transaction, a transaction accounted for as a business combination, which
was financed through the issuance of debt and 14.9 million of our shares. For further information about
the Sunflower Transaction, see Note 4 to our audited consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.
The historical Sprouts Farmers Market, Inc. results of operations for fiscal 2012 are derived from
our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
The historical Sunflower results of operations for the period January 1, 2012 to May 28, 2012, were
derived from the Sunflower pre-combination unaudited financial statements not included in this Annual
Report on Form 10-K. Certain amounts from the Sunflower pre-combination unaudited financial
statements have been reclassified to conform to our presentation.
2. Pro Forma for Sunflower Transaction
The historical results of operations have been adjusted to give pro forma effect to events that are
(i) directly attributable to the Sunflower Transaction, (ii) factually supportable and (iii) expected to have
a continuing impact on the combined results, as if the Sunflower Transaction occurred on the first day
of fiscal 2012 (referred to as “Pro Forma Adjustments for Sunflower Transaction”).
Unaudited Pro Forma Condensed Consolidated Statement of Operations—Fiscal 2012
Sunflower’s fiscal 2012 commenced one day earlier than our fiscal 2012. Pro forma adjustments
for Sunflower Fiscal Period Alignment reflect the pro forma impact of deducting one day from the
historical Sunflower results of operations. Additional pro forma adjustments for the Sunflower
Transaction consist of the following:
(a) Reflects pro forma adjustments attributable to the application of acquisition accounting to the
Sunflower Transaction comprised of (i) a $0.7 million increase in rent expense, resulting principally
from straight-line adjustments to rent expense as a result of the new basis in the acquired Sunflower
leases as of the acquisition date and (ii) a $0.1 million net increase in amortization expense related to
the fair value of favorable lease intangible assets and unfavorable lease liabilities recognized in the
Sunflower Transaction. Management has assumed a weighted average useful life of 11.6 years for
amortization of favorable and unfavorable leases in arriving at the pro forma amortization adjustment.
(b) Reflects pro forma adjustments to historical Sunflower depreciation related to the fair values of
acquired buildings, leasehold improvements and furniture, fixtures and equipment, which are being
amortized and depreciated over their estimated useful lives on a straight-line basis. Measurement of
these assets in acquisition accounting is based on acquisition date fair value which was lower than
Sunflower pre-acquisition carrying value, primarily due to declines in real estate values and occupancy
rates as a result of the recession and deferred maintenance associated with acquired furniture, fixtures
and equipment. We also reduced remaining useful lives of certain acquired assets, which accelerated
depreciation of those assets. The net effect of the reduction in carrying values and remaining useful
lives of the acquired assets resulted in a reduction to pro forma depreciation expense compared to
historical depreciation expense. Management has assumed weighted average useful lives of
38.4 years, 7.6 years and 4.7 years for buildings, leasehold improvements and furniture, fixtures and
equipment, respectively, in arriving at the pro forma depreciation adjustments.
58
(c) Reflects costs associated with the Sunflower Transaction, which have been excluded from pro
forma results due to the absence of a continuing effect on our business. The costs consist of
(i) $3.2 million of transaction expenses we incurred in 2012 in connection with the Sunflower
Transaction, consisting primarily of professional fees, (ii) $3.5 million of transaction expenses,
consisting primarily of professional fees, recorded in Sunflower’s historical pre-combination financial
statements, and (iii) $1.1 million of share-based compensation expense associated with a change in
control as a result of our acquisition of Sunflower recorded in Sunflower’s historical pre-combination
financial statements. Additionally, the pro forma adjustment includes (i) a $0.3 million decrease to
historical Sunflower depreciation related to the fair value of acquired furniture and fixtures used for
general and administrative purposes, which are being depreciated over their estimated useful lives on
a straight-line basis and (ii) a $0.1 million increase to historical amortization expense associated with
the Sunflower trade name. Management has assumed weighted average useful lives of 0.4 years for
the acquired furniture and fixtures and 10 years for the Sunflower trade name in arriving at the pro
forma depreciation and amortization amounts.
(d) In May 2012, we borrowed an additional $100.0 million, net of $0.5 million in financing fees and
$2.7 million of issue discount, under our Former Term Loan and received net proceeds of $35.0 million
from the issuance of our 10% Senior Subordinated Promissory Notes due 2019 (referred to as the
“Notes”) to finance the Sunflower Transaction. The pro forma adjustment represents (i) the incremental
interest expense of $4.0 million from our variable rate Former Term Loan and Notes, including
amortization of issue discount and deferred financing fees, based on an interest rate of 6% in effect for
the Former Term Loan and 10% for the Notes, (ii) the reversal of historical Sunflower interest expense
of $0.9 million, as the pre-combination Sunflower debt was paid off in connection with the Sunflower
Transaction, and (iii) a decrease in interest of $0.4 million resulting from the new basis in Sunflower
finance and capital lease obligations acquired in the Sunflower Transaction. A one-eighth percentage
change in the interest rate would increase or decrease interest expense by $0.1 million for the year
ended December 30, 2012.
(e) The pro forma adjustment to income tax (provision) benefit is derived by applying a blended
federal and state statutory tax rate of 39.0% to the above pro forma adjustments.
(f) Pro forma net income per weighted average basic and diluted shares outstanding reflects the
issuance of 14,898,136 shares to finance the Sunflower Transaction, as if the Sunflower Transaction
occurred on the first day of fiscal 2012.
Comparison of Fiscal 2012 to Fiscal 2011
Net sales
Net sales . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma net sales . . . . . . . . . . . . . . . .
Pro forma comparable store sales
growth . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2012
Fiscal 2011
Change
% Change
(dollars in thousands)
$1,794,823
1,990,963
$1,105,879
1,722,655
$688,944
268,308
62%
16%
9.7%
5.1%
Net sales increased during fiscal 2012 primarily as a result of (i) stores added through the
Sunflower Transaction in fiscal 2012 (net of closures), (ii) incremental sales from stores added through
the Henry’s Transaction in fiscal 2011 as a result of operating for a full year in fiscal 2012, (iii) new
store openings and (iv) sales growth at stores operated prior to fiscal 2011.
59
Stores added through the Transactions contributed $514.7 million, or 75%, of the increase in net
sales during fiscal 2012. Stores acquired in the Sunflower Transaction contributed $280.3 million in net
sales during fiscal 2012 and stores acquired in the Henry’s Transaction contributed an incremental
$234.4 million in net sales during fiscal 2012 compared to fiscal 2011.
New store openings during fiscal 2012 contributed $52.2 million, or 8%, of the increase in net
sales during fiscal 2012. New store openings during fiscal 2011 contributed an incremental
$49.6 million, or 7%, of the increase in net sales during fiscal 2012 compared to fiscal 2011. The
remaining $72.4 million, or 10%, of the increase in net sales during fiscal 2012 resulted from net sales
growth at stores operated prior to fiscal 2011.
On a pro forma basis, net sales increased during fiscal 2012 primarily as a result of fiscal 2012 pro
forma comparable store sales growth and new store openings during fiscal 2012. Pro forma
comparable store sales growth of 9.7% during fiscal 2012 contributed $161.7 million, or 60%, of the
increase in pro forma net sales during fiscal 2012. New store openings during fiscal 2012 contributed
$64.9 million, or 24%, of the increase in pro forma net sales during fiscal 2012. The remaining
$41.7 million, or 16%, of the increase in pro forma net sales during fiscal 2012 was attributable to new
store openings during fiscal 2011 not yet reflected in pro forma comparable store sales growth.
Cost of sales, buying and occupancy and gross profit
As reported:
Fiscal 2012
Fiscal 2011
Change
% Change
(dollars in thousands)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,794,823 $1,105,879 $688,944
469,609
Cost of sales, buying and occupancy . . . . . . . . .
Gross profit
219,335
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,264,514
530,309
794,905
310,974
28.1%
29.5%
1.4%
Pro forma:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,990,963 $1,722,655 $268,308
168,992
Cost of sales, buying and occupancy . . . . . . . . .
Gross profit
99,316
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,403,158
587,805
1,234,166
488,489
28.4%
29.5%
1.1%
62%
59%
71%
16%
14%
20%
Cost of sales, buying and occupancy increased during fiscal 2012 primarily due to the increase in
sales following the Transactions, new store openings and sales growth, as discussed above. During
fiscal 2012, gross profit increased $193.7 million as a result of increased sales volume and
$25.6 million as a result of improved gross margin. The 140 basis point increase in gross margin during
fiscal 2012 reflects (i) produce cost deflation in the first half of 2012, (ii) synergies from integration of
the Transactions, including consolidation of certain buying costs, and (iii) improved leverage of
occupancy costs, principally resulting from comparable store sales growth.
On a pro forma basis, cost of sales, buying and occupancy increased during fiscal 2012 primarily
due to the increase in pro forma net sales, driven by pro forma comparable store sales growth and new
store openings. During fiscal 2012, pro forma gross profit increased $76.1 million as a result of
increased pro forma sales volume and $23.2 million as a result of improved pro forma gross margin.
The 110 basis point increase in pro forma gross margin during fiscal 2012 reflects produce cost
deflation in the first half of fiscal 2012, synergies realized following the Transactions and improved
leverage of occupancy costs as a result of pro forma comparable store sales growth.
60
Direct store expenses
As reported:
Fiscal 2012
Fiscal 2011
Change
% Change
(dollars in thousands)
Direct store expenses . . . . . . . . . . . . .
Percentage of net sales . . . . . . . . . . . .
$368,323
$238,245
$130,078
55%
20.5%
21.5%
(1.0)%
Pro forma:
Direct store expenses . . . . . . . . . . . . .
Percentage of net sales . . . . . . . . . . . .
$403,731
$360,437
$ 43,294
12%
20.3%
20.9%
(0.6)%
Direct store expenses increased during fiscal 2012 primarily due to the additional stores we
operated during 2012 following the Transactions (net of closures) and new store openings. Direct store
expenses increased $70.5 million during fiscal 2012 as a result of the additional stores we operated
during fiscal 2012 related to the Sunflower Transaction and new store openings in 2012. The
remainder of the change relates to stores opened during or prior to 2011 and the effect of a full year of
expenses for the stores acquired in the Henry’s Transaction. This increase was partially offset by a
100 basis point improvement in direct store expenses as a percentage of net sales, primarily due to
(i) the alignment of store payroll and benefit policies following the Transactions, (ii) economies of scale
with respect to certain benefit costs and (iii) improved leverage of store payroll expenses resulting from
comparable store sales growth. These factors were partially offset by a $2.7 million loss on asset
disposals during fiscal 2012.
On a pro forma basis, direct store expenses increased during fiscal 2012 primarily due to new
store openings. Pro forma direct store expenses increased $18.5 million during fiscal 2012 as a result
of new store openings. This increase was partially offset by a 60 basis point improvement in pro forma
direct store expenses as a percentage of pro forma net sales primarily as a result of the effects of the
alignment of store payroll and benefit policies and economies of scale with respect to certain benefit
costs following the Transactions and improved leverage of store payroll expenses resulting from pro
forma comparable store sales growth.
Selling, general and administrative expenses
As reported:
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . .
Percentage of net sales . . . . . . . . . . . . .
Pro forma:
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . .
Percentage of net sales . . . . . . . . . . . . .
Fiscal 2012
Fiscal 2011
Change
% Change
(dollars in thousands)
$86,364
$58,528
$27,836
48%
4.8%
5.3%
(0.5)%
$91,611
$83,077
$ 8,534
10%
4.6%
4.8%
(0.2)%
The increase in selling, general and administrative expenses during fiscal 2012 includes (i) a
$10.1 million increase in transaction and acquisition integration costs to $20.4 million, (ii) a $2.7 million
legal settlement related to a trade name dispute, (iii) a $0.6 million loss on disposal of assets related to
the disposal of equipment purchased in the Sunflower Transaction and (iv) incremental operating
expenses following the Transactions. These factors were partially offset by synergies achieved from
integration of the Transactions.
Selling, general and administrative expenses decreased as a percentage of net sales during fiscal
2012 primarily due to improved leverage of fixed selling, general and administrative expenses,
61
primarily as a result of comparable store sales growth, new store openings and synergies achieved
from integration of the Transactions. These factors were partially offset by the $10.1 million increase in
acquisition integration costs and the $2.7 million legal settlement in fiscal 2012.
On a pro forma basis, selling, general and administrative expenses increased during fiscal 2012
primarily due to (i) a $12.5 million increase in acquisition integration costs to $17.1 million, (ii) a
$2.7 million legal settlement in fiscal 2012 and (iii) a $0.6 million loss on disposal of assets related to
the disposal of equipment purchased in the Sunflower Transaction, partially offset by synergies
achieved from integration of the Transactions and a $1.2 million write-off of capitalized software that
was recorded in fiscal 2011. Pro forma selling, general and administrative expenses decreased as a
percentage of pro forma net sales during fiscal 2012 primarily due to improved leverage of fixed selling,
general and administrative expenses as a result of pro forma comparable store sales growth and
synergies achieved from integration of the Transactions. These factors were partially offset by the
$12.5 million increase in acquisition integration costs and the $2.7 million legal settlement in fiscal
2012.
Amortization of Henry’s trade names and capitalized software
In connection with the Henry’s Transaction and planned re-branding of Henry’s stores, the
estimated useful lives of the Henry’s trade names and certain capitalized software were re-evaluated
and amortization was accelerated. Amortization of Henry’s trade names and capitalized software
totaled $32.2 million in fiscal 2011 and the assets were fully amortized by January 1, 2012.
Store pre-opening costs
As reported:
Store pre-opening costs . . . . . . . . . . . . . .
Number of openings . . . . . . . . . . . . . . . . .
Avg. pre-opening cost per store
Fiscal 2012
Fiscal 2011
Change
% Change
(dollars in thousands)
$2,782
9
$1,338
7
$1,444
108%
opened . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 309
$ 191
Pro forma:
Store pre-opening costs . . . . . . . . . . . . . .
Number of openings, as reported . . . . . .
Pre-combination openings . . . . . . . . . . . .
Pro forma openings . . . . . . . . . . . . . .
Avg. pre-opening cost per store
$5,218
9
2
11
$5,009
7
6
13
opened . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 474
$ 385
$ 209
4.2%
Store pre-opening costs increased to $2.8 million during fiscal 2012 from $1.3 million during fiscal
2011. We opened nine stores in fiscal 2012 compared to seven stores in fiscal 2011, resulting in
average store pre-opening costs of approximately $309,000 per store in fiscal 2012 compared to
$191,000 per store in fiscal 2011. Average store pre-opening costs increased in fiscal 2012 primarily
because a portion of fiscal 2011 store pre-opening costs were incurred by Sprouts Arizona prior to the
Henry’s Transaction.
On a pro forma basis, store pre-opening costs increased to $5.2 million, or $474,000 per opening,
during fiscal 2012 from $5.0 million, or $385,000 per opening, during fiscal 2011. Pro forma store pre-
opening costs for fiscal 2011 and fiscal 2012 reflect the higher store pre-opening rent incurred by
Sunflower prior to the Sunflower Transaction due to early commencement dates for pre-combination
Sunflower leases.
62
Store closure and exit costs
Store closure and exit costs decreased to $2.2 million during fiscal 2012 from $6.4 million during
fiscal 2011, primarily as a result of (i) a $2.0 million favorable adjustment to our store closure reserve
resulting from sublease rents in excess of original estimates, (ii) a $1.3 million favorable adjustment
resulting from a lessor’s voluntary termination of a lease obligation previously reserved and (iii) a
reduction in closures. One store and Sunflower’s corporate office were closed following the Sunflower
Transaction in fiscal 2012 and three stores and the Henry’s corporate office were closed following the
Henry’s Transaction in fiscal 2011.
On a pro forma basis, store closure and exit costs decreased to $2.2 million during fiscal 2012
from $7.0 million during fiscal 2011, primarily for the same factors noted above, as well as a decrease
in Sunflower’s pre-combination store closure and exit costs from $627,000 in fiscal 2011 to $59,000 in
fiscal 2012.
Interest expense
Interest expense increased to $35.5 million during fiscal 2012 from $19.8 million in fiscal 2011,
primarily as a result of (i) $6.5 million of incremental interest expense resulting from the effect of a full
year of borrowings associated with the Henry’s Transaction in fiscal 2012, (ii) $6.1 million of interest on
incremental borrowings associated with the Sunflower Transaction and (iii) interest on financing leases
associated with leases acquired in the Transactions and new store openings.
In April 2011, we borrowed $310.0 million, net of $2.7 million in financing fees and $14.0 million of
issue discount under the Former Term Loan to finance the Henry’s Transaction. In May 2012, we
borrowed an additional $100.0 million, net of $0.5 million in financing fees and $2.7 million of issue
discount under the Former Term Loan, and received proceeds of $35.0 million from the issuance of 10%
Senior Subordinated Promissory Notes due 2019 (referred to as the “Notes”) to finance the Sunflower
Transaction. We also borrowed and repaid $23.0 million and $3.0 million under our Former Revolving
Credit Facility in fiscal 2011 and fiscal 2012, respectively. See “—Liquidity and Capital Resources.”
On a pro forma basis, interest expense decreased to $40.3 million during fiscal 2012 from
$40.4 million during fiscal 2011.
Loss on extinguishment of debt
We recorded a $1.0 million loss on extinguishment of debt in fiscal 2012 as a result of the
renegotiation of a store lease that was classified as a financing lease obligation.
Income tax (provision) benefit
Income tax provision was $15.3 million during fiscal 2012 compared to an income tax benefit of
$17.7 million during fiscal 2011, primarily as a result of income before tax during fiscal 2012 compared
to a loss before tax during fiscal 2011. Our effective income tax rate increased to 43.9% during fiscal
2012 from 39.2% during fiscal 2011, primarily as a result of non-deductible transaction costs during
fiscal 2012.
On a pro forma basis, income tax provision was $19.9 million during fiscal 2012 compared to a pro
forma income tax benefit of $8.2 million during fiscal 2011, primarily as a result of pro forma income
before tax during fiscal 2012 compared to a pro forma loss before tax during fiscal 2011. Our pro forma
effective income tax rate increased to 44.8% during fiscal 2012 from 20.9% in fiscal 2011, reflecting
non-deductible transaction costs incurred by us and Sunflower during fiscal 2012, and no tax benefit
resulting from pre-combination losses incurred by Sprouts Arizona during fiscal 2011 as a result of
Sprouts Arizona pass-through status prior to the Henry’s Transaction.
63
Net income (loss)
As reported:
Fiscal 2012
Fiscal 2011
Change
% Change
(dollars in thousands)
Net income (loss) . . . . . . . . . . . . . . . . . .
Percentage of sales . . . . . . . . . . . . . . . .
$19,500
$(27,445)
$46,945
171%
1.1%
(2.5)%
3.6%
Pro forma:
Net income (loss) . . . . . . . . . . . . . . . . . .
Percentage of sales . . . . . . . . . . . . . . . .
$24,526
$(30,875)
$55,401
179%
1.2%
(1.8)%
3.0%
We reported net income of $19.5 million during fiscal 2012 compared to a net loss of $27.4 million
in fiscal 2011. This improvement in net income was primarily due to (i) a $219.3 million increase in
gross profit attributable to the increased sales volumes following the Transactions, new store openings
and comparable store sales growth, as well as produce cost deflation in the first half of fiscal 2012, as
described above, (ii) $32.2 million of accelerated amortization of Henry’s trade names and capitalized
software recorded in fiscal 2011, which did not recur in fiscal 2012, and (iii) synergies achieved in the
Transactions. These factors were partially offset by (i) a $130.1 million increase in direct store
expenses, primarily as a result of the increase in our store base, (ii) a $27.8 million increase in selling,
general and administrative expenses, primarily due to acquisition and integration costs, (iii) a
$15.7 million increase in interest expense and (iv) a $33.0 million increase in income tax (provision)
benefit.
On a pro forma basis, net income increased to $24.5 million during fiscal 2012 compared to a net
loss of $30.9 million in fiscal 2011. This improvement in net income was primarily due to (i) a
$99.3 million increase in pro forma gross profit attributable to the increased sales volumes resulting
from new store openings and pro forma comparable store sales growth, as well as produce cost
deflation in the first half of fiscal 2012, as described above and (ii) $32.2 million of accelerated
amortization of Henry’s trade names and capitalized software recorded in fiscal 2011, which did not
recur in fiscal 2012. These factors were partially offset by (i) a $43.3 million increase in pro forma direct
store expenses due to new store openings, (ii) a $28.1 million increase in pro forma income tax
(provision) benefit, and (iii) an $8.5 million increase in pro forma selling, general and administrative
expenses, primarily due to acquisition integration costs, as described above.
Unaudited Supplemental Fiscal 2011 Pro Forma Information
The comparability of our results of operations is affected for the periods presented in this
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” by the
Transactions. To supplement the discussion of our historical results of operations for fiscal 2012 and
fiscal 2011, we have included unaudited supplemental pro forma condensed consolidated statement of
operations information for fiscal 2011. The unaudited supplemental pro forma condensed consolidated
statement of operations for fiscal 2011 includes our historical results of operations and the results of
operations of Sprouts Arizona and Sunflower, after giving pro forma effect to the Transactions and the
related financing obtained for the Transactions as if they had been consummated on the first day of
fiscal 2011.
The historical financial information has been adjusted to give pro forma effect to events that are
directly attributable to the Transactions, have an ongoing effect on our results of operations and are
factually supportable. The supplemental pro forma information and explanatory notes for fiscal 2011
present how our financial statements may have appeared had the businesses actually been combined
as of the date noted above. The supplemental pro forma information for fiscal 2011 shows the impact
on the combined statement of operations of the acquisition method of accounting under Financial
64
Accounting Standards Board ASC 805, Business Combinations. Under the acquisition method of
accounting, the total purchase price is allocated to the assets acquired and liabilities assumed based
on their estimated fair values as of the acquisition date. The excess purchase price over the amounts
assigned to tangible and intangible assets acquired and liabilities assumed is recognized as goodwill.
The unaudited supplemental pro forma information for fiscal 2011 was prepared in a manner
comparable to the requirements of Article 11 of Regulation S-X, but does not comply with Article 11 in
that Rule 11-02(c) of Article 11 does not allow for the presentation of pro forma condensed statements
of operations prior to the most recent year. The unaudited supplemental pro forma information for fiscal
2011 reflects the impact of the Transactions using the assumptions set forth in the notes to the
unaudited supplemental pro forma information for fiscal 2011. The following unaudited supplemental
pro forma information for fiscal 2011 is presented for illustrative purposes only and does not purport to
reflect the results the consolidated company may achieve in future periods or the historical results that
would have been obtained had the combined businesses been operating as a consolidated company
during the relevant period presented. The unaudited supplemental pro forma information for fiscal 2011
also does not give effect to the potential impact of current financial conditions, any anticipated
synergies, operating efficiencies or cost savings that may result from the Transactions. Furthermore,
the unaudited supplemental pro forma information for fiscal 2011 does not include certain nonrecurring
charges and the related tax effects which result directly from the Transactions as described in the
notes to the unaudited supplemental pro forma information for fiscal 2011.
The unaudited supplemental fiscal 2011 pro forma information is derived from and should be read
in conjunction with the historical financial statements and related notes included in our prospectus
dated November 25, 2013, filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on
November 27, 2013 (referred to as the “November 2013 Prospectus”).
65
SPROUTS FARMERS MARKET, INC.
UNAUDITED SUPPLEMENTAL PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
FOR FISCAL 2011
(in thousands)
Historical
Sprouts
Farmers
Market,
Inc.(1)
Historical
Sprouts
Arizona(1)
Historical
Sunflower(1)
Pro Forma
Adjustments
for Fiscal
Period
Alignment(2)
Pro Forma
Adjustments
for the
Transactions(2) Notes
Net sales . . . . . . . . . . . . . . . . $1,105,879 $220,913
Cost of sales, buying and
$406,710
$(10,847)
$
—
Supplemental
Pro Forma
Sprouts
Farmers
Market,
Inc.
$1,722,655
occupancy . . . . . . . . . . . . .
794,905
153,123
292,730
310,974
238,245
67,790
45,165
113,980
79,570
(7,868)
(2,979)
(2,232)
1,276
(1,276)
(311)
(2)(a) 1,234,166
(2)(b)
488,489
360,437
Gross profit
. . . . . . . . . .
Direct store expenses . . . . . .
Selling, general and
administrative
expenses . . . . . . . . . . . . . .
Amortization of Henry’s trade
names and capitalized
software . . . . . . . . . . . . . . .
Store pre-opening costs . . . .
Store closure and exit
58,528
46,207
21,844
(1,024)
(42,478)
(2)(c)
83,077
32,202
1,338
—
730
—
—
2,997
627
costs . . . . . . . . . . . . . . . . . .
6,382
Income (loss) from
operations . . . . . . . . . .
Interest expense . . . . . . . . . .
Other income . . . . . . . . . . . . .
(25,721)
(19,813)
358
(24,312)
(3,823)
49
8,942
(5,101)
238
Income (loss) before
income taxes . . . . . . .
(45,176)
(28,086)
4,079
Income tax (provision)
benefit . . . . . . . . . . . . . . . . .
17,731
(70)
2,148
—
(56)
—
333
144
(2)
475
14
—
—
—
41,513
(11,843)
—
29,670
32,202
5,009
7,009
755
(40,436)
643
(39,038)
(2)(d)
(11,660)
(2)(e)
8,163
Net income (loss)
. . . . . $ (27,445) $ (28,156)
$
6,227
$
489
$ 18,010
$ (30,875)
66
SPROUTS FARMERS MARKET, INC.
NOTES TO UNAUDITED SUPPLEMENTAL PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
1. Basis of Presentation and Description of Transactions
On April 19, 2011, we completed the Henry’s Transaction, in which we issued debt and
110.0 million of our shares to finance the merger of Sprouts Arizona and Henry’s in which Henry’s was
the accounting acquirer. Effective May 29, 2012, we completed the Sunflower Transaction, in which we
acquired the outstanding common and preferred stock of Sunflower in a transaction financed through
the issuance of debt and 14.9 million of our shares. For further information about the Transactions,
which were accounted for as business combinations, see Note 4 to our audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K.
The historical Sprouts Farmers Market, Inc. results of operations for fiscal 2011 are derived from
our audited consolidated financial statements included in the November 2013 Prospectus. The
historical Sprouts Arizona results of operations for the period from December 27, 2010 to April 18,
2011, were derived from the Sprouts Arizona pre-combination audited financial statements included in
the November 2013 Prospectus. The historical Sunflower results of operations for fiscal 2011 were
derived from the Sunflower pre-combination audited financial statements included in the November
2013 Prospectus.
The unaudited supplemental pro forma information for fiscal 2011 was prepared in a manner
comparable to the requirements of Article 11 of Regulation S-X, but does not comply with Article 11 in
that Rule 11-02(c) of Article 11 does not allow for the presentation of pro forma condensed statements
of operations prior to the most recent year.
Certain amounts from the Sunflower pre-combination audited financial statements have been
reclassified to conform to our presentation.
2. Supplemental Pro Forma Sprouts Farmers Market, Inc.
The historical financial information has been adjusted to give pro forma effect to events that are
(i) directly attributable to the Transactions, (ii) factually supportable and (iii) expected to have a
continuing impact on the combined results, as if the Transactions occurred on the first day of fiscal
2011 (referred to as “Pro Forma Adjustments for the Transactions”).
Sprouts Arizona’s fiscal 2011 commenced five days earlier than our fiscal 2011. Pro forma
adjustments for Fiscal Period Alignment reflect the estimated pro forma impacts to align the starting
date of the historical Sprouts Arizona results of operations to our starting date for fiscal 2011.
Additional pro forma adjustments for the Transactions consist of the following:
(a) Reflects pro forma adjustments attributable to the application of acquisition accounting to the
Transactions comprised of (i) a $2.0 million increase in rent expense, resulting principally from straight-
line adjustments to rent expense as a result of the new basis in the acquired leases as of the
acquisition date and (ii) a $0.7 million net decrease in amortization expense related to the fair value of
favorable lease intangible assets and unfavorable lease liabilities recognized in the Transactions.
Management has assumed a weighted average useful life of 12.2 years for favorable and unfavorable
leases in arriving at the pro forma amortization adjustment.
(b) Reflects pro forma adjustments to historical Sprouts Arizona and Sunflower depreciation related
to the fair value of acquired buildings, leasehold improvements and furniture, fixtures and equipment,
which are being amortized and depreciated over their estimated useful lives on a straight-line basis.
67
Management has assumed weighted average useful lives of 37.4 years, 8.0 years and 5.0 years for
buildings, leasehold improvements and furniture, fixtures and equipment, respectively, in arriving at the
pro forma depreciation adjustments.
(c) Reflects costs associated with the Transactions, which have been excluded from pro forma
results due to the absence of a continuing effect on our business. These costs consist of (i) $5.9 million
of transaction expenses we incurred in 2011 in connection with the Henry’s Transaction, consisting
primarily of professional fees, (ii) a $24.6 million termination fee and $1.4 million of fees paid by
Sprouts Arizona to its previous manager prior to the Henry’s Transaction and recorded in Sprouts
Arizona’s pre-combination financial statements, (iii) $6.9 million of transaction costs, consisting
primarily of professional fees, recorded in Sprouts Arizona’s pre-combination financial statements, and
(iv) $3.3 million of payments and equity-based compensation expense associated with a change in
control recorded in Sprouts Arizona’s historical pre-combination financial statements. The pro forma
adjustment also includes (i) a decrease of $0.6 million to historical depreciation related to the fair value
of acquired furniture and fixtures used for general and administrative purposes, which are being
depreciated over their estimated useful lives on a straight-line basis, and (ii) an increase of $0.2 million
to historical amortization expense associated with the Sunflower trade name. Management has
assumed weighted average useful lives of 3.9 years for the acquired furniture and fixtures and ten
years for the Sunflower trade name in arriving at the pro forma depreciation and amortization amount.
(d) In April 2011, we borrowed $310.0 million, net of $2.7 million in financing fees and $14.0 million
of issue discount under the Former Term Loan to finance the Henry’s Transaction. In May 2012, we
borrowed an additional $100.0 million, net of $0.5 million in financing fees and $2.7 million of issue
discount under the Former Term Loan, and received net proceeds of $35.0 million from the issuance of
the Notes to finance the Sunflower Transaction. The pro forma adjustment represents (i) the
incremental interest expense of $15.9 million from our Former Term Loan and the Notes, including
amortization of issue discount and deferred financing fees of $1.2 million, based on an interest rate of
6.0% in effect for our Former Term Loan, (ii) the reversal of historical Sprouts Arizona and Sunflower
interest expense of $3.4 million, as the pre-combination Sprouts Arizona and Sunflower debt was paid
off in connection with the Transactions, and (iii) a decrease in interest expense of $0.7 million resulting
from the new basis in the Sprouts Arizona and Sunflower finance and capital lease obligations
acquired in the Transactions. A one-eighth percentage increase (decrease) in the interest rate on our
Former Term Loan would increase (decrease) interest expense by $0.5 million for fiscal 2011.
(e) The pro forma adjustment to income tax (provision) benefit is derived by applying a blended
federal and state statutory tax rate of 39.3% to the above pro forma adjustments.
Quarterly Financial Data
The following table sets forth certain of our unaudited consolidated statements of operations data
for each of the fiscal quarters in the fiscal years 2013 and 2012.
April 1,
2012(1)
July 1,
2012(2)
September 30,
2012(3)
December 30,
2012(4)
March 31,
2013(5)
June 30,
2013(6)
September 29,
2013(7)
December 29,
2013(8)
Thirteen weeks ended
Net sales . . . . . . . . . . . $375,720 $430,112
. . . . . . . . . $116,787 $130,731
Gross profit
Income from
$510,050
$146,409
$478,941
$136,382
$573,694 $622,367
$173,920 $187,027
$633,614
$190,105
$608,236
$174,215
operations . . . . . . . . $ 24,233 $ 17,652
5,306
9,546 $
Net income . . . . . . . . . $
Net income per share:
$ 13,295
1,307
$
$ 15,505
3,341
$
$ 40,046 $ 40,078
$ 18,117 $ 12,468
$ 36,681
$ 11,461
$ 22,699
9,280
$
Basic . . . . . . . . . . $
Diluted . . . . . . . . . $
0.09 $
0.09 $
0.05
0.05
$
$
0.01
0.01
$
$
0.03
0.03
$
$
0.14 $
0.14 $
0.10
0.10
$
$
0.08
0.08
$
$
0.06
0.06
68
(1) Period does not include results of operations for Sunflower stores acquired in May 2012.
(2) Period includes results of operations of Sunflower stores commencing on May 29, 2012. The period also included
$7.6 million of acquisition and integration costs related to the Sunflower Transaction.
(3) Period includes $5.6 million of acquisition and integration costs related to the Sunflower Transaction, $2.3 million of
store closure and exit costs for reserve for one store closed during period, $1.0 million for loss on extinguishment of
debt related to renewal of a financing lease and $0.6 million loss on disposal of used assets.
(4) Period includes $4.1 million of expense for integration costs related to the Sunflower Transaction and a benefit to
store closure and exit costs of $1.4 million for a landlord’s voluntary release of a liability related to a previously
closed store.
(5) Period includes $0.8 million of store closure and exit costs primarily related to the closure of the former Sunflower
warehouse.
(6) Period includes $8.2 million of loss on extinguishment of debt related to our April 2013 Refinancing and $0.9 million
of store closure and exit costs related to changes in assumptions about sublease income for previously closed
locations.
(7) Period included $9.5 million of loss on extinguishment of debt related to the $340.0 million paydown on the Term
Loan using proceeds from the IPO and $3.2 million for team member IPO bonuses paid.
(8) Period includes $2.0 million of expense related to the secondary offering, including payroll taxes on options
exercises and $1.0 million of loss on extinguishment of debt related to the $40.0 million additional principal payment
made during the period.
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 and cash equivalents at the end of each period:
Cash and cash equivalents at end of period . . . . . $ 77,652 $ 67,211 $ 14,542
Cash provided by operating activities . . . . . . . . . . $160,588 $ 84,431 $ 52,384
Cash used in investing activities . . . . . . . . . . . . . . $ (86,291) $(166,703) $(260,505)
Cash provided by (used in) financing activities . . . $ (63,856) $ 134,941 $ 217,745
Fiscal 2013 Fiscal 2012
Fiscal 2011
Since inception, we have financed our operations primarily through cash generated from our
operations, private placements of our equity, our IPO and borrowings under our current and former
credit facilities. Our primary uses of cash are for purchases of inventory, operating expenses, capital
expenditures primarily for opening new stores, and debt service. We also used cash for the
Transactions in 2012 and 2011. In 2013, we generated $160.6 million in operating cash flows, ended
2013 with $77.7 million of cash and cash equivalents and had no amounts drawn under our Revolving
Credit Facility.
We believe that our existing cash and cash equivalents and cash anticipated to be generated by
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 new store openings, maintenance capital
expenditures at existing stores, store initiatives and other corporate capital expenditures and activities.
Operating Activities
Net cash provided by operating activities increased $76.2 million to $160.6 million for 2013
compared to $84.4 million for 2012, primarily related to our increased scale of operations following the
Sunflower Transaction and new store openings. Between these fiscal periods, we opened 19 stores.
Additionally, 2013 includes the full impact of the acquired Sunflower stores. In addition to the increase
in the number of stores we operate, we leveraged fixed direct store expenses through comparable
store sales growth and a decrease in acquisition and integration costs of $19.5 million for the
comparative periods. These increases were partially offset by a $5.7 million increase in interest
payments.
69
For 2012, net cash provided by operating activities increased $32.0 million to $84.4 million,
compared to $52.4 million during 2011, primarily as a result of our increased scale of operations
following the Transactions and new store openings. During 2012, we opened nine stores, acquired
37 stores in the Sunflower Transaction and closed one store. In addition to an increase in the number
of stores we operate, during 2012 we improved our gross margin, leveraged fixed direct store
expenses through comparable store sales growth and leveraged corporate expenses through store
growth, comparable store sales growth and synergies achieved from integration of the Transactions.
These factors were partially offset by an $18.5 million increase in interest payments and a $10.1 million
increase in acquisition and integration costs during 2012 compared to 2011.
Investing Activities
Net cash used in investing activities decreased to $86.2 million for 2013 compared to $166.7
million for 2012. The decrease in cash used for investing activities is primarily related to the $130.2
million cash impact of the Sunflower acquisition in 2012, offset by capital expenditures for increased
new store openings, store remodels and an increase in maintenance capital expenditures related to the
increased scale of operations following the Sunflower Transaction and a decrease in proceeds from
the disposal of property and equipment of $8.7 million.
For 2012, net cash used in investing activities decreased $93.8 million to $166.7 million, compared
to $260.5 million during 2011, primarily as a result of a $103.0 million decrease in payments for
business combinations. We made $129.9 million of payments during 2012 in connection with the
Sunflower Transaction compared to $232.9 million of cash payments during 2011 in connection with
the Henry’s Transaction. Additionally, we generated $9.7 million in proceeds from disposal of property
and equipment during 2012. These factors were partially offset by an $18.9 million increase in capital
expenditures during 2012 compared to 2011, primarily as a result of an increase in new store openings
and an increase in maintenance capital expenditures as a result of store growth.
Capital expenditures consist primarily of investments in new stores, including leasehold
improvements and store equipment, the re-branding of Henry’s and Sunflower stores following the
Transactions, annual maintenance capital expenditures to maintain the appearance of our stores, sales
enhancing initiatives and other corporate investments.
We expect capital expenditures of $110 million to $120 million in 2014, net of estimated landlord
tenant improvement, to fund investments in new stores to be opened in 2014 and early 2015,
remodels, maintenance capital expenditures and corporate capital expenditures. We expect to fund our
capital expenditures with cash on hand, cash generated from operating activities and, if required,
borrowings under our Credit Facility.
Financing Activities
Net cash used in financing activities was $63.9 million for 2013 as compared to cash provided by
financing activities of $134.9 million for 2012. The increase in cash used in financing activities of
$198.8 million is related to the $295.9 million of dividend and anti-dilution payments made to
stockholders and option holders, an increase on payments of debt, net of new debt issued in 2013, of
$263.4 million and $4.2 million in IPO expenses. These outflows were partially offset by inflows for an
increase of $346.6 million for stock issued, including stock issued in the IPO and stock option
exercises, and an increase of $17.7 million of excess tax benefit from stock option exercises and
antidilution payments.
For 2012, net cash provided by financing activities decreased $82.8 million to $134.9 million
compared to $217.7 million during 2011, primarily as a result of a reduction in borrowings and
70
proceeds from the issuance of equity. We received net proceeds of $131.8 million from borrowings
under our Former Term Loan and issuance of the Notes to finance the Sunflower Transaction during
fiscal 2012 (net of financing fees and issue discount). During 2011, we received net proceeds of
$293.0 million under our Former Term Loan (net of financing fees and issue discount), proceeds of
$206.0 million from the issuance of shares and an $8.0 million equity contribution from the Apollo
Funds, to finance the Henry’s Transaction, partially offset by a $274.6 million cash distribution to the
former parent of Henry’s. Other financing activities also included $5.5 million in proceeds for the
issuance of shares during 2012, and $12.7 million of net transactions between Henry’s and Henry’s
former parent during fiscal 2011 that did not recur during 2012 following the Henry’s Transaction.
Long-term Debt and Former Credit Facilities
April 2013 Refinancing
Effective as of April 23, 2013 (referred to as the “April 2013 Refinancing Closing Date”), a
subsidiary of the Company (referred to as “Intermediate Holdings”), as borrower, refinanced the
Former Revolving Credit Facility and the Former Term Loan by entering into the Credit Facility. The
Credit Facility provides for a $700.0 million Term Loan and a $60.0 million senior secured Revolving
Credit Facility. The terms of the Credit Facility allow us, subject to certain conditions, to increase the
amount of the term loans and revolving commitments thereunder by an aggregate incremental amount
of up to $160.0 million, plus an additional amount, so long as after giving effect to such increase, (i) in
the case of incremental loans that rank pari passu with the initial term loans, the net first lien leverage
ratio does not exceed 4.00 to 1.00, and (ii) in the case of incremental loans that rank junior to the initial
Term Loan, the total leverage ratio does not exceed 5.25 to 1.00. No incremental loans have been
committed to by any lender. In addition, $7.4 million of letters of credit were issued in order to
backstop, replace or roll-over existing letters of credit under the Former Revolving Credit Facility.
The proceeds of the Term Loan were used to repay in full the outstanding balance of
$403.1 million (as of April 23, 2013) under our Former Credit Facilities. Such repayment resulted in
$8.2 million of loss on extinguishment of debt due to the write-off of deferred financing costs and
original issue discount. The remaining proceeds of the term loans, together with cash on hand, were
used to make a $282 million distribution to our equity holders, to make payments of $13.9 million to
vested option holders and to pay transaction fees and expenses.
Obligations under the Credit Facility are guaranteed by us and all of our current and future wholly
owned material domestic subsidiaries. Our borrowings under the Credit Facility are secured by (i) a
pledge by Sprouts of its equity interests in Intermediate Holdings and (ii) first-priority liens on
substantially all assets of Intermediate Holdings and the subsidiary guarantors, in each case, subject to
permitted liens and certain exceptions.
The issue price for the Credit Facility was 99.5% of the principal amount thereof, which original
issue discount or upfront fee will be amortized over the life of the Credit Facility
Interest and Applicable Margin. All amounts outstanding under the Credit Facility bear interest, at
our option, at a rate per annum equal to LIBOR (with a 1.00% floor with respect to Eurodollar
borrowings under the Term Loan), adjusted for statutory reserves, plus a margin equal to 3.00%, or an
alternate base rate, plus a margin equal to 2.00%, as set forth in the Credit Facility.
Payments and Prepayments. Subject to exceptions set forth therein, the Credit Facility requires
mandatory prepayments, in amounts equal to (i) 50% (reduced to 25% if net first lien leverage is less
than 3.00 to 1.00 but greater than 2.50 to 1.00 and 0% if net first lien leverage is less than 2.50 to 1.00)
of excess cash flow (as defined in the Credit Facility) at the end of each fiscal year, (ii) 100% of the net
71
cash proceeds from certain non-ordinary course asset sales by Sprouts or any subsidiary guarantor
(subject to certain exceptions and reinvestment provisions) and (iii) 100% of the net cash proceeds
from the issuance or incurrence after the April 2013 Refinancing Closing Date of debt by Sprouts or
any of its subsidiaries not permitted under the Credit Facility.
Voluntary prepayments of borrowings under the Credit Facility are permitted at any time, in
agreed-upon minimum principal amounts. There is a prepayment fee equal to 1.00% of the principal
amount of the Term Loan under the Credit Facility optionally prepaid in connection with any “repricing
transaction” on or prior to the first anniversary of the closing date. Prepayments made thereafter will
not be subject to premium or penalty (except LIBOR breakage costs, if applicable).
The Term Loan will mature on the seventh anniversary of the April 2013 Refinancing Closing Date
and will amortize at a rate per annum, in four equal quarterly installments, in an aggregate amount
equal to 1.00% of the April 2013 Refinancing Closing Date principal amount of the term loans, with the
balance due on the maturity date. The Revolving Credit Facility will mature on the fifth anniversary of
the April 2013 Refinancing Closing Date.
Covenants. The Credit Facility contains financial, affirmative and negative covenants that we
believe are usual and customary for a senior secured credit agreement. In addition, if we have any
amounts outstanding under the Revolving Credit Facility as of the last day of any fiscal quarter, the
Revolving Credit Facility requires us to maintain a ratio of Revolving Facility Credit exposure to
consolidated trailing 12-month EBITDA (as defined in the Credit Facility) of no more than 0.75 to
1.00 as of the end of each such fiscal quarter.
We were in compliance with all applicable covenants under the Credit Facility as of December 29,
2013.
Events of Default. The Credit Facility contains customary events of default included in financing
transactions, including failure to make payments when due, default under other material indebtedness,
breach of covenants, breach of representations and warranties, involuntary or voluntary bankruptcy,
and material monetary judgments. During the continuation of a payment default, we will be required to
pay interest at a default rate unless waived.
Debt Repayment in Connection with IPO. On August 6, 2013, we used $340.0 million of the net
proceeds from our IPO to make a partial repayment of the Term Loan. Such repayment resulted in
$9.0 million of loss on extinguishment of debt due to the write-off of deferred financing costs and
original issue discount for the portion of the debt repaid. This loss on extinguishment of debt is
reflected in our statement of operations for 2013. As a result of our IPO and the concurrent repayment
of a portion of the Term Loan, under the terms of the Credit Facility, the interest rate margins were
reduced by 50 basis points to 3.00% in the case of LIBOR borrowings and 2.00% in the case of
alternate base rate borrowings, effective August 2, 2013.
Voluntary Principal Payment. On December 27, 2013, we made an additional principal payment of
$40.0 million on the Term Loan. Such repayment resulted in $1.0 million of loss on extinguishment of
debt due to the write-off of deferred financing costs and original issue discount for the portion of the
debt repaid. This loss on extinguishment of debt is reflected in our statement of operations for 2013.
Former Credit Facilities
On April 18, 2011, we entered into a revolving credit facility (referred to as the “Former Revolving
Credit Facility”) and a term loan facility (referred to as the “Former Term Loan” and, together with the
Former Revolving Credit Facility, the “Former Credit Facilities”). The borrower under such Former
Credit Facilities was Intermediate Holdings.
72
Our Former Credit Facilities provided for (i) the $50.0 million Former Revolving Credit Facility,
including a letter of credit subfacility (up to the unused amount of the Former Revolving Credit Facility)
and a $5.0 million swingline loan subfacility, and (ii) the $310.0 million Former Term Loan facility,
maturing on April 18, 2018.
During April 2011, we borrowed $310.0 million, net of financing fee and issue discount, and used
the proceeds to effectuate the Henry’s Transaction. During April 2012, we amended the original
agreement and used the incremental commitments provision of the Former Credit Facilities to borrow
an additional $100.0 million, net of financing fees and issue discount, and used the proceeds to
effectuate the Sunflower Transaction.
On April 23, 2013, as described under “—April 2013 Refinancing” above, we repaid in full the
Former Credit Facilities with the proceeds of the Term Loan under the Credit Facility and terminated
the Former Credit Facilities. We were in compliance with all applicable covenants under our Former
Credit Facilities as of the April 2013 Refinancing Closing Date.
See Note 13 to our audited consolidated financial statements contained elsewhere in this Annual
Report on Form 10-K for additional information about our Former Credit Facilities.
The Notes
In May 2012, we received net proceeds of $35.0 million from the issuance of the Notes. Interest on
the Notes was scheduled to accrue at 10% annually for the first three years, increasing by 1.0% each
year thereafter through maturity, reaching a maximum rate of 14.0%. During 2013 until repayment,
$1.0 million of the Notes were outstanding to certain members of our senior management. In May
2013, we made payments totaling $35.3 million (inclusive of accrued interest) to noteholders in full
repayment of the Notes.
Contractual Obligations
The following table summarizes our contractual obligations as of December 29, 2013, 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 4-5 Years
More Than
5 Years
(in thousands)
Term Loan, including current portion(1) . . . . . . . . . . . . . . . . . . . . $ 318,250 $
Interest payments on long-term debt(2) . . . . . . . . . . . . . . . . . . . .
Capital and financing lease obligations(3) . . . . . . . . . . . . . . . . . .
Operating lease obligations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase commitments(4)
75,565
149,327
915,498
43,907
7,000 $ 15,750 $ 12,250 $283,250
14,768
79,933
512,390
—
24,742
28,115
166,843
20,493
23,360
28,039
163,339
2,411
12,695
13,240
72,926
21,003
Totals(5)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,502,547 $126,864 $255,943 $229,399 $890,341
(1)
In connection with the April 2013 Refinancing, we refinanced amounts due under our former credit facilities. The
Term Loan will mature in April 2020 and will amortize at a rate of 1.0% per annum of the original amount of the Term
Loan, in four equal installments, with the balance due on the maturity date. We made a partial repayment of the
Term Loan in August 2013 using $340.0 million in proceeds from shares sold in our IPO. We also made an
additional principal payment of $40.0 million in December 2013. These payments are reflected as a reduction to the
Term Loan, including current portion, in the “More Than 5 Years” column. See Note 13 “Long-Term Debt” to our
audited consolidated financial statements contained elsewhere in this Annual Report on Form 10-K.
(2) Represents estimated interest payments on our Term Loan based on principal amounts outstanding as of
December 29, 2013, repayment terms and contractual interest rates expected to apply through maturity. We
73
estimated LIBOR based on LIBOR in effect at December 29, 2013 to derive the contractual interest rate expected to
apply to our Term Loan.
(3) Represents estimated payments for capital and financing and operating lease obligations as of December 29, 2013.
Capital and financing lease obligations and operating lease obligations are presented gross without offset for
subtenant rentals. We have subtenant agreements under which we will receive $0.5 million for the period of less
than one year, $1.0 million for years one to three, $2.0 million for years four to five, and $4.0 million for the period
beyond five years.
(4) Consists primarily of open purchase orders and commitments under noncancelable service contracts as of
December 29, 2013.
(5) As of December 29, 2013, the Company had recorded $23.1 million of liabilities related to its self-insurance
program. Self-insurance liabilities are not included in the table above because the payments are not contractual in
nature and the timing of the payments is uncertain.
The contractual commitment amounts in the table above are associated with agreements that are
enforceable and legally binding. Obligations under contracts that we can cancel without a significant
penalty are not included in the table above.
We periodically make other commitments and become subject to other contractual obligations that
we believe to be routine in nature and incidental to the operation of the business. Management
believes that such routine commitments and contractual obligations do not have a material impact on
our business, financial condition or results of operations.
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 Inflation
Inflation and deflation in the prices of food and other products we sell may periodically affect our
sales, gross profit and gross margin. The short-term impact of inflation and deflation is largely
dependent on whether or not the effects are passed through to our customers, which is subject to
competitive market conditions. In the first half of fiscal 2012, we experienced produce price deflation,
which contributed to higher gross margins in our business during that period and the full fiscal year.
Food inflation and deflation is affected by a variety of factors and our determination of whether to
pass on the effects of inflation or deflation to our customers is made in conjunction with our overall
pricing and marketing strategies. Although we may experience periodic effects on sales, gross profit
and gross margins as a result of changing prices, we do not expect the effect of inflation or deflation to
have a material impact on our ability to execute our long-term business strategy.
Seasonality
Our business is subject to modest seasonality. Our average weekly sales fluctuate throughout the
year and are typically highest in the first half of the fiscal year. Produce, which contributed
approximately 26% of our net sales for 2013, is generally more available in the first six months of our
fiscal year due to the timing of peak growing seasons.
74
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 estimates
include, but are not limited to, those related to inventory, valuations, lease assumptions, self-insurance
reserves, sublease assumptions for closed stores, goodwill and intangible assets, impairment of long-
lived assets, fair values of equity-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.
We believe that of our significant accounting policies, which are described in Note 3 to the audited
consolidated financial statements included in this Annual Report on Form 10-K, the following
accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe
these are the most critical to fully understand and evaluate our financial condition and results of
operations.
Equity-Based Compensation
Following the Henry’s Transaction, we adopted the 2011 Option Plan in May 2011. Grants of
options to purchase our shares under this plan have been for equity instruments exchanged for
employee services. We account for equity-based compensation in accordance with Financial
Accounting Standards Board Accounting Standard Codification Topic 718, Compensation—Stock
Compensation (referred to as “ASC 718”). Compensation expense associated with equity incentive
grants requires management judgment to calculate the estimated fair value of awards, which typically
vest over multi-year periods and for which the ultimate amount of compensation is not known on the
date of grant. Time vested options generally vest ratably over a period of 12 quarters (three years) and
performance-based options vest over a period of three years based on financial performance targets
for each year. In the event of a change in control as defined in the 2011 Option Plan, all options
become immediately vested and exercisable.
Our board of directors has adopted, and our equity holders have approved, the 2013 Incentive
Plan. The 2013 Incentive Plan became effective on July 31, 2013 and replaced the 2011 Option Plan
(except with respect to outstanding options under the 2011 Option Plan). The 2013 Incentive Plan
enables us to formulate and implement a compensation program that will attract, motivate and retain
experienced, highly-qualified team members who will contribute to our financial success, and aligns the
interests of our team members with those of our stockholders through the ability to grant a variety of
stock-based and cash-based awards. The 2013 Incentive Plan serves as the umbrella plan for our
stock-based and cash-based incentive compensation programs for our directors, officers and other
team members.
Under the provisions of ASC 718, equity-based compensation expense is measured at the grant
date, based on the fair value of the award. As required under this guidance, we estimate forfeitures for
options granted which are not expected to vest. Changes in these inputs and assumptions can
materially affect the measurement of the estimated fair value of our equity-based compensation
expense.
75
At December 29, 2013, options to acquire 10,852,670 shares were outstanding, and a total of
10,754,773 options were vested or expected to vest. Equity-based compensation expense totaled
$5.8 million, $4.7 million and $3.8 million in 2013, 2012 and 2011, respectively. The weighted average
fair value of options granted to purchase shares was $4.27, $1.99 and $1.12 in 2013, 2012 and 2011,
respectively. Unrecognized compensation cost relating to outstanding awards was $4.3 million at
December 29, 2013, with a weighted average remaining recognition period of 1.1 years.
Valuation. We have used the Black-Scholes option pricing model to calculate the fair value of our
equity-based compensation awards at grant date. For accounting purposes, the fair value of each grant
during 2013, 2012 and 2011 was estimated using the following assumptions:
Fiscal 2013
Fiscal 2012
Fiscal 2011
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . 31.03% to 37.38% 32.36% to 38.59% 38.58% to 41.18%
Risk-free interest rate . . . . . . . . . . . . . . . . . . 0.56% to 1.36% 0.40% to 0.77% 0.57% to 1.88%
Expected life (in years) . . . . . . . . . . . . . . . . .
3.75 to 5.00
4.00 to 5.00
3.63 to 4.83
0.00%
0.00%
0.00%
The Black-Scholes model requires the use of highly subjective and complex assumptions to
determine the fair value of equity-based compensation awards, including the option’s expected term
and the price volatility of the underlying stock. Refer to Note 23 to our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K for further discussion of these
inputs.
In addition to assumptions used in the Black-Scholes option pricing model, we must also estimate
a forfeiture rate to calculate the equity-based compensation cost for our awards. Our forfeiture rate is
based on an analysis of our actual forfeitures of grants made under the 2011 Option Plan. We routinely
evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of
team member turnover and expectations of future option exercise behavior.
We will continue to use judgment in evaluating the assumptions related to our equity-based
compensation on a prospective basis. If any of the assumptions used in the Black-Scholes model
change significantly or estimated forfeiture rates change, equity-based compensation for future awards
may differ materially compared with the awards granted previously.
We are also required to estimate the fair value of the common stock underlying our equity-based
awards when performing the fair value calculations with the Black-Scholes option-pricing model. Due to
the prior absence of a market for our common stock, the fair values were determined by our board of
directors, with input from management. Additionally, a majority of awards granted were issued in
proximity to transactions with third parties in which we issued equity at arm’s-length negotiated values.
Grants subsequent to our IPO will be based on the trading value of our common stock.
76
We granted equity awards between May 2, 2011 and December 29, 2013, as follows:
Grant Date
May 2, 2011 . . . . . . . .
September 25,
2011 . . . . . . . . . . . .
July-August 2012 . . . .
October 31, 2012 . . . .
December 21,
2012 . . . . . . . . . . . .
January-March
2013 . . . . . . . . . . . .
April-June 2013 . . . . .
August 1, 2013 . . . . . .
Number of Options
Granted
Fair Value of
Equity Per
Share/Exercise
Price
Option
Fair Value
Aggregate
Fair Value
9,368,040
$ 3.33
$1.07 to $1.19
$10,557,850
772,200
2,141,700
209,000
$ 3.33
$ 6.01
$ 6.01
$1.03 to $1.15
$1.68 to $2.00
$1.66 to $1.88
$
849,303
$ 4,032,117
391,243
$
258,500
$ 9.15
$2.40 to $3.09
$
727,423
66,000
143,000
407,112
$ 9.15
$ 9.15
$18.00
$2.36 to $3.10
$2.33 to $3.06
$4.65 to $5.92
180,812
$
$
381,547
$ 2,070,471
The following factors were considered in our determination of the fair value of the common shares
underlying our equity awards at each grant date:
May 2, 2011: We issued options to team members on May 2, 2011 and based the equity value on
the equity value determined by an arm’s-length third-party negotiation in the Henry’s Transaction,
which closed April 18, 2011. This valuation reflects the proximity of the grant date to the Henry’s
Transaction and lack of synergies achieved to date resulting from the combination or other significant
changes in our business that would cause an increase in the fair value of our equity.
September 25, 2011: We determined there was no change in the fair value of our equity from
April 17, 2011 using the same factors described above for the May 2, 2011 grant.
July-August 2012: This valuation of the equity underlying these awards reflects the synergies
achieved following the combination of Henry’s and Sprouts Arizona and our growth. Additionally, this
valuation also is consistent with the equity value reached in an arm’s length third-party negotiation in
the Sunflower Transaction, which closed May 29, 2012.
October 31, 2012: We based the value of our equity underlying these awards using the same
factors described above for the July-August 2012 grants.
December 21, 2012: We granted 258,500 options to team members on December 21, 2012.
Significant factors in determining the fair value of our common equity underlying these awards were the
following:
(cid:129)
(cid:129)
(cid:129)
Successful re-branding and integration of Henry’s, Sprouts Arizona and Sunflower operations
achieved by the end of fiscal 2012;
Our operating and financial performance and forecasts as a combined company;
New store openings and planned openings;
(cid:129) Market valuations of comparable publicly traded grocers;
(cid:129)
(cid:129)
(cid:129)
The applicability of a discount to reflect a lack of marketability for our equity;
General capital market conditions in the U.S.; and
Our view that an initial public offering was feasible by the end of fiscal 2013.
As a result of these factors, we determined an increase in the valuation of our common equity was
justified. In order to estimate the fair value of our common equity underlying the December 21, 2012
77
option grants prior to our IPO, we estimated the business enterprise value (referred to as “BEV”) using
the market approach, which we believe is most reflective of our BEV after taking into account our
successful integrations of Henry’s, Sprouts Arizona and Sunflower.
Under the market approach, we estimated our BEV by deriving multiples of equity or invested
capital to EBITDA for selected publicly traded comparable companies. We also estimated our BEV
using the income approach as a benchmark to assess the BEV derived under the market approach
and determined the two methods yielded similar BEV conclusions.
When selecting comparable companies, consideration was given to industry similarities, product
offerings and market positioning, financial data availability and capital structure. In applying the market
approach, we also estimated a discount for lack of marketability, primarily by reference to the discounts
applied to equity values in the Transactions.
January-March 2013: We based the value of our equity underlying these awards using the same
factors described above for the December 21, 2012 grants.
April-June 2013: We based the value of our equity underlying these awards using the same
factors described above for the December 21, 2012 grants.
August 1, 2013: We based the value of our equity underlying these awards on our IPO pricing of
$18.00 as the awards issued during this period were issued concurrent with the IPO.
There are significant estimates and judgments inherent in the determination of these valuations.
These judgments and estimates include assumptions about our future performance, including the
growth in the number of our stores, as well as the determination of the appropriate valuation methods
at each valuation date. If we had made different assumptions, our equity-based compensation expense
could have been different. We have not used the foregoing valuation methods since our IPO. Following
our IPO, we base our equity valuations on the trading price of our common stock.
Inventories
Inventories consist of merchandise purchased for resale, which are stated at the lower of cost or
market. The cost method is used for warehouse perishable and store perishable department
inventories by assigning costs to each of these items based on a first-in, first-out (referred to as
“FIFO”) basis (net of vendor discounts).
Effective January 3, 2011, we changed our accounting policy for non-perishable inventories from
the lower of cost or market using the retail inventory method (referred to as “RIM”) to the lower of cost
or market using weighted average costs. Our valuation of our non-perishable inventory using weighted
average costs includes statistical and other estimation methods which we believe provide a reasonable
basis to estimate our inventory values at the end of the respective periods.
Physical inventory counts for non-perishable inventories are performed in our stores during each
fiscal quarter end by a third- party inventory counting service. As inventory is adjusted at each period
end for the physical inventory results, we believe that all inventories are saleable and no allowances or
reserves for shrinkage or obsolescence were recorded as of December 29, 2013, December 30, 2012
and January 1, 2012.
78
Goodwill and Intangible Assets
Goodwill represents the cost of acquired businesses in excess of the fair value of assets and
liabilities acquired. Our indefinite-lived intangible assets consist of trade names related to “Sprouts
Farmers Market” and liquor licenses. We also hold intangible assets with finite useful lives, consisting
of favorable and unfavorable leasehold interests and the “Sunflower Farmers Market” trade name.
Goodwill and indefinite-lived intangible assets are evaluated for impairment on an annual basis
during the fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that
the asset might be impaired. Our impairment evaluation of goodwill consists of a qualitative
assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. If this qualitative assessment indicates it is more likely than not the estimated fair
value of a reporting unit exceeds its carrying value, no further analysis is required and goodwill is not
impaired. Otherwise, we follow a two-step quantitative goodwill impairment test to determine if goodwill
is impaired. The first step of the goodwill impairment test compares the fair value of a reporting unit
with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying
value no further analysis or impairment of goodwill is required. If the carrying value of a reporting unit
exceeds its fair value, the fair value of the reporting unit would be allocated to the reporting unit’s
assets and liabilities based on the relative fair value, with goodwill written down to its implied fair value,
if necessary. Our qualitative assessment considered factors including changes in the competitive
market, budget-to-actual performance, trends in market capitalization for us and our peers, lack of
turnover in key management personnel and overall changes in macroeconomic environment.
Our impairment evaluation for our indefinite-lived intangible assets consists of a qualitative
assessment similar to that for goodwill. If our qualitative assessment indicates it is more likely than not
that the estimated fair value of an indefinite-lived intangible asset exceeds its carrying value, no further
analysis is required and the asset is not impaired. Otherwise, we compare the estimated fair value of
the asset to its carrying amount with an impairment loss recognized for the amount, if any, by which
carrying value exceeds estimated fair value.
We can elect to bypass the qualitative assessments for goodwill and indefinite-lived intangible
assets and proceed directly to the quantitative assessments for goodwill or any indefinite-lived
intangible assets in any period. We can resume the qualitative assessment approach in future periods.
We have determined we consist of a single reporting unit. We determine the fair value of the
reporting unit and indefinite-lived intangible assets using the income approach methodology of
valuation that includes the discounted cash flow method as well as other generally accepted valuation
methodologies. Significant estimates and assumptions are made in connection with the estimated
reporting unit fair value, including projected cash flows, the timing of projected cash flows and
applicable discount rates. These estimates and assumptions are generally Level 3 inputs because they
are not observable. In the event actual results vary from our estimates and assumptions, or if we
change our estimates and assumptions, we may be required to record a goodwill impairment charge.
No impairment of goodwill or indefinite-lived intangible assets was recorded during fiscal 2013,
2012, or 2011 because the fair value of those assets was substantially above carrying value.
Impairment of Long-Lived Assets
We assess our long-lived assets, including property and finite-lived equipment and intangible
assets, for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset group may not be recoverable. We group and evaluate long-lived assets for impairment at
the individual store level, which is the lowest level at which independent identifiable cash flows are
available. Factors for impairment include a significant underperformance relative to expected historical
79
or projected future operating results or a significant negative industry or economic trend. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the asset. If impairment is indicated, a
loss is recognized for any excess of the carrying value over the estimated fair value of the asset group.
The fair value is estimated based on discounted future cash flows or comparable market values, if
available.
When assessing the recoverability of our long-lived assets, we make assumptions regarding
estimated future cash flows from the use and eventual disposition of the asset groups. We base our
estimates on historical experience and projections, and consider recent economic and competitive
trends. In the event that our estimates or assumptions change in the future, we may be required to
record a long-lived asset impairment charge. We did not record any impairment loss during fiscal 2013,
2012 or, 2011.
Income Taxes
Until the closing date of the Henry’s Transaction, Henry’s was not a separate tax-paying entity.
Henry’s was included in its parent’s consolidated federal and certain state income tax groups for
income tax reporting purposes. For the period through such closing date, the consolidated financial
statements have been prepared on the basis as if Henry’s prepared its tax returns and accounted for
income taxes on a separate-company basis. As a result of the Henry’s Transaction, for tax purposes,
Henry’s was acquired in a taxable asset acquisition. The purchase price was allocated to Henry’s
identifiable assets and liabilities with the residual assigned to tax deductible goodwill. The resulting
basis differences between the new tax values and historical book amounts resulted in a deferred tax
asset of $47.6 million being recorded through stockholders’ equity.
In May 2012, we completed the acquisition of a 100% ownership interest in Sunflower. The
acquisition was structured to be a tax-free reorganization. The tax basis of the property acquired in
reorganization is equal to the basis in the property recorded by Sunflower just prior to the acquisition.
The resulting basis difference between the historical tax amounts and the values resulted in net
deferred tax assets of $1.9 million being recorded through goodwill.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date. We
recognize the effect of income tax positions only if those positions are more likely than not of being
sustained. Recognized income tax positions are measured at the largest amount that is greater than
50% likely of being realized. Changes in recognition or measurement are reflected in the period in
which the change in judgment occurs. We record interest and penalties related to unrecognized tax
benefits as part of income tax expense.
During the ordinary course of business, there are many transactions and calculations for which the
ultimate tax settlement is uncertain. Under applicable accounting guidance, we are required to evaluate
the realizability of our deferred tax assets. The realization of our deferred tax assets is dependent on
future earnings. Applicable accounting guidance requires that a valuation allowance be recognized
when, based on available evidence, it is more likely than not that all or a portion of deferred tax assets
will not be realized due to the inability to generate sufficient taxable income in future periods. In
circumstances where there is significant negative evidence, establishment of a valuation allowance
80
must be considered. A pattern of sustained profitability is considered significant positive evidence when
evaluating a decision to reverse a valuation allowance. Further, in those cases where a pattern of
sustained profitability exists, projected future taxable income may also represent positive evidence, to
the extent that such projections are determined to be reliable given the current economic environment.
Accordingly, our assessment of our valuation allowances requires considerable judgment and could
have a significant negative or positive impact on our current and future earnings.
Self-Insurance Reserves
We use a combination of insurance and self-insurance programs to provide reserves for potential
liabilities associated with general liability, workers’ compensation and team member health benefits.
Liabilities for self-insurance reserves are estimated through consideration of various factors, which
include historical claims experience, demographic factors, security factors and other actuarial
assumptions. We believe our assumptions are reasonable, but the estimated reserves for these
liabilities could be affected materially by future events or claims experiences that differ from historical
trends and assumptions.
Closed Store Reserve
We recognize a reserve for future operating lease payments associated with facilities that are no
longer being utilized in our current operations. The reserve is recorded based on the present value of
the remaining noncancelable lease payments after the cease use date less an estimate of subtenant
income. If subtenant income is expected to be higher than the lease payments, no accrual is recorded.
Lease payments included in the closed store reserve are expected to be paid over the remaining terms
of the respective leases. Our assumptions about subtenant income are based on our experience and
knowledge of the area in which the closed property is located, guidance received from local brokers
and agents and existing economic conditions. Adjustments to the closed store reserve relate primarily
to changes in actual or estimated subtenant income and changes in actual lease payments from
original estimates. Adjustments are made for changes in estimate in the period in which the change
becomes known, considering timing of new information regarding market, subleases or other lease
updates. Adjustments in the closed store reserves are recorded in store closure and exit costs in the
consolidated statements of operations.
Recently Issued Accounting Pronouncements
See Note 3 to our accompanying audited consolidated financial statements contained elsewhere
in this Annual Report on Form 10-K.
We have determined that all other recently issued accounting standards will not have a material
impact on our financial statements, or do not apply to our operations.
81
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
As described above under “Management’s Discusssion and Analysis—Liquidity and Capital
Resources—Long-Term Debt and Credit Facilities,” we have a Term Loan that bears interest at a rate
based in part on LIBOR, the Federal Funds Rate, the Eurodollar Rate or the prime rate, depending on
our consolidated leverage ratio. Accordingly, we are exposed to fluctuations in interest rates. Based on
the $318.3 million principal outstanding under our Term Loan as of December 29, 2013, each hundred
basis point change in LIBOR, once LIBOR exceeds the LIBOR floor under our loan of 1.00%, would
result in a change in interest expense by $3.2 million annually.
This sensitivity analysis assumes our mix of financial instruments and all other variables will
remain constant in future periods. These assumptions are made in order to facilitate the analysis and
are not necessarily indicative of our future intentions.
82
Item 8.
Financial Statements and Supplementary Data
83
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements for
Sprouts Farmers Market, Inc. and Subsidiaries:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Consolidated Balance Sheets as of December 29, 2013 and December 30, 2012 . . . . . . . . . . . . . . 86
Consolidated Statements of Operations for the fiscal years ended December 29,
2013, December 30, 2012 and January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 29,
2013, December 30, 2012 and January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Consolidated Statements of Cash Flows for the fiscal years ended December 29,
2013, December 30, 2012 and January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of Sprouts Farmers Market, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, stockholders’ equity and cash flows present fairly, in all material respects,
the financial position of Sprouts Farmers Market, Inc. and its subsidiaries at December 29, 2013 and
December 30, 2012, and the results of their operations and their cash flows for each of the three years
in the period ended December 29, 2013 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
February 27, 2014
85
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 29,
2013
December 30,
2012
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax asset
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net of accumulated depreciation . . . . . . . . . . . . . .
Intangible assets, net of accumulated amortization . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax asset
77,652
9,524
118,256
8,049
18,146
231,627
348,830
195,467
368,078
13,135
15,267
$
67,211
8,415
98,382
4,521
24,592
203,121
303,166
196,772
368,078
9,521
22,578
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,172,404
$1,103,236
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 111,159
22,287
Accrued salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,958
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,395
Current portion of capital and financing lease obligations . . . . . . . . . . .
5,822
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term capital and financing lease obligations . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
175,621
116,177
305,418
61,417
658,633
82,721
21,397
27,561
3,379
1,788
136,846
104,260
424,756
50,619
716,481
Commitments and contingencies
Stockholders’ equity:
Undesignated preferred stock; $0.001 par value; 10,000,000 shares
authorized, no shares issued and outstanding . . . . . . . . . . . . . . . . . .
—
—
Common stock, $0.001 par value; 200,000,000 shares authorized,
147,616,560 shares issued and outstanding, December 29, 2013;
125,956,721 shares issued and outstanding, December 30, 2012 . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147
479,127
34,497
513,771
126
395,480
(8,851)
386,755
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . $1,172,404
$1,103,236
The accompanying notes are an integral part of these consolidated financial statements.
86
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended
December 29,
2013
December 30,
2012
January 1,
2012
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,437,911
1,712,644
Cost of sales, buying and occupancy . . . . . . . . . . . . . . . . . . . .
$1,794,823 $1,105,879
794,905
1,264,514
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct store expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . .
Amortization of Henry’s trade names and capitalized
software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Store pre-opening costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Store closure and exit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . .
Income tax (provision) benefit . . . . . . . . . . . . . . . . . . . . . . . . . .
725,267
496,183
81,795
—
5,734
2,051
139,504
(37,203)
487
(18,721)
84,067
(32,741)
530,309
368,323
86,364
310,974
238,245
58,528
—
2,782
2,155
70,685
(35,488)
562
(992)
34,767
(15,267)
32,202
1,338
6,382
(25,721)
(19,813)
358
—
(45,176)
17,731
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
51,326
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.38
0.37
Weighted average shares outstanding:
$
$
$
19,500 $ (27,445)
0.16 $
0.16 $
(0.28)
(0.28)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134,622
119,427
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139,765
121,781
96,954
96,954
The accompanying notes are an integral part of these consolidated financial statements.
87
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common
Stock
Additional
Paid-in
Capital
Shares
(Accumulated
Deficit) /
Retained
Earnings
S&F
Equity
Total
Stockholders’
Equity
$
—
—
—
—
$ —
—
—
—
$ 156,660
(12,732)
906
14,105
$ 156,660
(12,732)
906
14,105
Balances at January 2, 2011 . . . . . . .
Net transactions with S&F . . . . . . . . . .
Net income prior to Close Date . . . . . .
Contribution of net assets from S&F . .
Capitalization as a result of
Transaction . . . . . . . . . . . . . . . . . . . .
Issuance of shares to Apollo . . . . . . . .
Issuance of shares to Liquidating
Trust
. . . . . . . . . . . . . . . . . . . . . . . . . .
Equity contribution by Apollo . . . . . . . .
Distribution to S&F as a result of the
Transaction . . . . . . . . . . . . . . . . . . . .
Deferred tax asset resulting from the
Transaction . . . . . . . . . . . . . . . . . . . .
Net loss following the Close Date . . . .
Equity-based compensation . . . . . . . . .
—
—
—
—
—
64,350,000
45,650,000
—
—
—
—
—
Balances at January 1, 2012 . . . . . . . 110,000,000
Net income . . . . . . . . . . . . . . . . . . . . . . .
—
Issuance of shares to stockholders . . .
831,314
Issuance of shares related to
Sunflower acquisition . . . . . . . . . . . .
Issuance of shares . . . . . . . . . . . . . . . .
Issuance of shares under Option Plan,
net of shares withheld . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . .
Excess tax benefit for exercise of
options . . . . . . . . . . . . . . . . . . . . . . . .
Equity-based compensation . . . . . . . . .
14,898,136
62,271
189,585
(24,585)
—
—
Balances at December 30, 2012 . . . . 125,956,721
—
Net income . . . . . . . . . . . . . . . . . . . . . . .
Issuance of shares under Option
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,194,999
Issuance of shares in IPO, net of
issuance costs . . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . .
Dividend paid to stockholders . . . . . . .
Antidilution payments made to option
holders . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit for exercise of
options . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit of antidilution payments
made to optionholders . . . . . . . . . . . .
Tax effect of forfeiture of vested
options in equity . . . . . . . . . . . . . . . . .
Equity-based compensation . . . . . . . . .
20,477,215
(12,375)
—
—
—
—
—
—
—
—
—
—
—
64
46
—
—
—
—
—
110
—
1
15
—
—
—
—
—
126
—
1
20
—
—
—
—
—
—
—
158,939
205,936
146,091
8,000
(274,635)
47,589
—
3,774
295,694
—
4,999
89,590
—
549
(148)
143
4,653
395,480
—
—
—
—
—
—
—
(28,351)
—
(28,351)
19,500
—
—
—
—
—
—
—
(8,851)
51,326
3,820
—
344,304
(113)
(274,051)
(13,892)
13,424
4,402
(27)
5,780
—
—
(7,978)
—
—
—
—
—
(158,939)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
206,000
146,137
8,000
(274,635)
47,589
(28,351)
3,774
267,453
19,500
5,000
89,605
—
549
(148)
143
4,653
386,755
51,326
3,821
344,324
(113)
(282,029)
(13,892)
13,424
4,402
(27)
5,780
$ 513,771
Balances at December 29, 2013 . . . . 147,616,560
$147
$ 479,127
$ 34,497
$
The accompanying notes are an integral part of these consolidated financial statements.
88
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Cash flows from operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of asset retirement obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of financing fees and debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash loss on extinguishment of debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from exercise of stock options and antidilution payment to
optionholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposal of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for business combinations, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities
Borrowings on line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings on term loan, net of financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings on Senior Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on Senior Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on financing lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of shares to Apollo Funds in Henry’s Transaction . . . . . . . . . . . .
Equity contribution by Apollo Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution to S&F as a result of the Henry’s Transaction . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transactions with S&F . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of IPO costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash from landlord related to financing lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment to stockholders and optionholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit for exercise of options and antidilution payment to optionholders . . . .
Proceeds from the issuance of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at the end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 29,
2013
December 30,
2012
January 1,
2012
$ 51,326
$ 19,500
$ (27,445)
47,217
322
2,482
449
(19)
5,780
18,513
(17,826)
25,176
(1,521)
(19,875)
2,643
(4,114)
31,996
890
5,397
11,752
160,588
(87,463)
1,000
172
—
(86,291)
—
—
—
688,127
(786,850)
(35,000)
(412)
(2,868)
(1,370)
—
—
—
—
(4,212)
4,581
(295,921)
17,826
348,536
3,820
(113)
(63,856)
10,441
67,211
$ 77,652
35,773
237
2,590
2,704
(134)
4,653
992
(143)
13,996
(2,861)
(1,442)
3,337
(4,586)
(4,673)
2,956
1,533
9,999
84,431
(46,485)
9,657
—
(129,875)
(166,703)
3,000
(3,000)
97,247
(2,575)
35,000
—
(439)
(2,377)
(401)
—
—
—
—
—
2,942
—
143
5,549
—
(148)
134,941
52,669
14,542
$ 67,211
54,645
36
1,546
—
—
3,774
—
—
(19,753)
1,559
1,837
(794)
224
15,175
1,556
7,318
12,706
52,384
(27,594)
—
—
(232,911)
(260,505)
23,000
(23,000)
296,050
(2,325)
—
—
(272)
(1,204)
(3,023)
206,000
8,000
(274,635)
(12,732)
—
1,886
—
—
—
—
—
217,745
9,624
4,918
$ 14,542
Supplemental disclosure of cash flow information
Cash paid for interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 38,091
1,276
$ 32,395
1,626
$ 13,863
3,421
Supplemental disclosure of non-cash investing and financing activities
Property and equipment in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property acquired through capital and financing lease obligations . . . . . . . . . . . . . . . . . . .
Issuance of shares to business combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contribution of net assets from S&F . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset resulting from the business combinations . . . . . . . . . . . . . . . . . . . . . . .
$
7,873
10,660
—
—
—
$
8,679
10,686
89,605
—
1,896
$
2,137
1,479
146,137
14,105
47,589
The accompanying notes are an integral part of these consolidated financial statements.
89
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Sprouts Farmers Market, Inc., a Delaware corporation is the parent company of Sprouts Farmers
Markets Holdings, LLC (“Intermediate Holdings”) which, through its subsidiaries, operates as a
specialty retailer of natural and organic food, offering a complete shopping experience that includes
fresh produce, bulk foods, vitamins and supplements, grocery, meat and seafood, bakery, dairy, frozen
foods, body care and natural household items catering to consumers’ growing interest in eating and
living healthier. As of December 29, 2013, the Company operated 167 stores in Arizona, California,
Colorado, New Mexico, Nevada, Oklahoma, Texas and Utah. For convenience, the “Company” is used
to refer collectively to Sprouts Farmers Market, Inc. and, unless the context requires otherwise, its
subsidiaries. The Company’s store operations are conducted by its subsidiaries.
Our certificate of incorporation and bylaws provide for a classified board of directors with
staggered three-year terms, consisting of three classes.
The Henry’s Transaction
In 2002, Sprouts Farmers Markets, LLC, an Arizona limited liability company (“Sprouts Arizona”)
opened the first Sprouts Farmers Market store in Chandler, Arizona. In 2011, as part of a transaction
led by investment funds affiliated with, and co-investment vehicles managed by, Apollo
Management VI, L.P. (the “Apollo Funds”), Sprouts Arizona combined with Henry’s Holdings LLC
(“Henry’s”), which operated 35 Henry’s stores in California and eight stores in Texas under the Sun
Harvest Market banner. In a series of integrated transactions referred to as the “Henry’s Transaction,”
(1) Sprouts Arizona entered into a Membership Interest Purchase Agreement to acquire all of the
outstanding membership interests of Henry’s (the “Henry’s Transaction”) from Henry’s former parent,
Smart & Final (“S&F”), (2) prior to the consummation of the Henry’s Transaction, Sprouts Arizona
assigned the Membership Interest Purchase Agreement, including the right to purchase Henry’s, to
Intermediate Holdings (a wholly-owned subsidiary of the Company), (3) the Company (through its
wholly-owned subsidiary, Intermediate Holdings) paid $274.6 million to S&F for the membership
interests of Henry’s pursuant to the terms of the Membership Interest Purchase Agreement,
(4) Sprouts Arizona contributed substantially all of the assets and liabilities relating to the Sprouts
Farmers Market business to its wholly-owned subsidiary, SFM LLC (“SFM”), (5) Sprouts Arizona
contributed SFM to Intermediate Holdings, and (6) the Company issued (a) 64,350,000 shares
(representing a 58.5% ownership interest in the Company) to the Apollo Funds for a combined equity
contribution of $214.0 million and (b) 45,650,000 shares (representing a 41.5% ownership interest in
the Company) to Sprouts Arizona, which subsequently transferred such shares to a newly formed trust
for the benefit of the members of Sprouts Arizona (referred to as the “Liquidating Trust”). The Apollo
Funds are affiliates of Apollo Global Management, LLC (together with its subsidiaries, “Apollo”).
Apollo held a controlling interest in S&F, Henry’s former parent, prior to the Henry’s Transaction
and continued to hold a controlling interest in the Company afterwards. Due to Apollo’s continued
controlling interest, the Henry’s Transaction resulted in Henry’s financial statements becoming the
financial statements of the Company, followed immediately by the acquisition by the Company of the
Sprouts Farmers Market business. As a result, the Company was determined to be the accounting
acquirer, effective April 18, 2011. Accordingly, the consolidated financial statements for the period from
January 3, 2011 through April 17, 2011 include the assets, liabilities, revenues and expenses directly
attributable to Henry’s operations and allocations of certain corporate expenses from S&F. See Note 2
below, “Basis of Presentation,” for further discussion. Commencing on April 18, 2011, the consolidated
financial statements also include the financial position, results of operations and cash flows of Sprouts
Arizona.
90
Sunflower Transaction
In May 2012, the Company acquired Sunflower Farmers Markets, Inc., a Delaware corporation
(the “Sunflower Transaction”) that operated 37 Sunflower Farmers Market stores (referred to as
“Sunflower”), which increased the Company’s total store count to 143 and extended the Company’s
footprint into New Mexico, Nevada, Oklahoma and Utah. The Company’s consolidated financial
statements include the financial position, results of operations and cash flows of Sunflower
commencing on May 29, 2012.
See Note 4, “Business Combinations,” for additional information about the Henry’s and Sunflower
Transactions.
Corporate Conversion
On July 29, 2013, Sprouts Farmers Markets, LLC, a Delaware limited liability company, converted
into Sprouts Farmers Market, Inc., a Delaware corporation (the “Corporate Conversion”). As a result of
the corporate conversion, the members holding interests in Class A and Class B units of Sprouts
Farmers Markets, LLC became holders of common stock of Sprouts Farmers Market, Inc., and options
to purchase Class B units of Sprouts Farmers Markets, LLC were converted to options to purchase
shares of common stock of Sprouts Farmers Market, Inc. The conversion of units and options to
purchase units was on an 11 for 1 basis. The Company refers to this transaction as the “Corporate
Conversion.” All equity related disclosures, including share, per share, and option disclosures, have
been revised to reflect the effects of the Corporate Conversion, including the 11 for 1 exchange.
The purpose of the Corporate Conversion was to reorganize the corporate structure so that the
top-tier entity in the corporate structure, the entity that offered common stock to the public in the
Company’s initial public offering (“IPO”), is a corporation rather than a limited liability company and so
that the existing investors would own the Company’s common stock rather than equity interests in a
limited liability company.
Initial Public Offering
On August 6, 2013, the Company completed its IPO of 21,275,000 shares of common stock at a
price of $18.00 per share. The Company sold 20,477,215 shares of common stock, and certain
stockholders sold the remaining 797,785 shares. The Company received net proceeds from the IPO of
$344.1 million, after deducting underwriting discounts and offering expenses.
2. Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries in accordance with accounting principles generally accepted in the United States of
America (“GAAP”). All material intercompany accounts and transactions have been eliminated in
consolidation.
The consolidated financial statements through April 17, 2011 include assets, liabilities, revenues
and expenses directly attributable to the Henry’s operations and allocations of certain corporate
expenses from S&F. These expenses were allocated to Henry’s on a basis that was considered to
reflect fairly or reasonably the utilization of the services provided to, or the benefit obtained by, Henry’s.
Historical financial statements do not reflect the debt or interest expense Henry’s might have incurred if
it had been a stand-alone entity. As a result, the historical financial statements do not necessarily
reflect what the financial position or results of operations would have been if Henry’s had been
operated as a stand-alone entity during the periods presented, and may not be indicative of the
Company’s future results of operations and financial position.
91
At April 18, 2011, certain assets and liabilities, including certain property and equipment, liabilities
and deferred taxes, of Henry’s were contributed from S&F, which is reflected as a net contribution
through equity, totaling $14.1 million.
The Company’s consolidated financial statements include the financial position, results of
operations and cash flows of Sunflower commencing on May 29, 2012.
The Company has one reportable and one operating segment. The Company’s Chief Executive
Officer is the Chief Operating Decision Maker (“CODM”). The CODM bears ultimate responsibility for,
and is actively engaged in, the allocation of resources and the evaluation of the Company’s operating
and financial results.
The Company categorizes its products as perishable and non-perishable. Perishable product
categories include produce, meat, seafood, deli and bakery. Non-perishable product categories include
grocery, vitamins and supplements, bulk items, dairy and dairy alternatives, frozen foods, beer and
wine, and natural health and body care. The following is a breakdown of the Company’s perishable and
non-perishable sales mix:
Perishables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Perishables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50.1% 49.1% 49.2%
49.9% 50.9% 50.8%
2013
2012
2011
All dollar amounts are in thousands, unless otherwise noted.
3. Significant Accounting Policies
Fiscal Years
The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the
Sunday closest to December 31. Fiscal years 2013, 2012, and 2011 ended on December 29, 2013,
December 30, 2012 and January 1, 2012, respectively, and included 52-weeks. Fiscal years 2013,
2012, and 2011 are referred to as 2013, 2012, and 2011.
Significant Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The
Company’s critical estimates included, but are not limited to: inventory valuations, lease assumptions,
sublease assumptions for closed stores, self-insurance reserves, goodwill and intangible assets,
impairment of long-lived assets, fair values of equity-based awards and income taxes. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three
months or less to be cash equivalents. The Company’s cash and cash equivalents are maintained at
financial institutions in the United States of America. Deposits in these financial institutions may, from
time to time, exceed the Federal Deposit Insurance Corporation’s (“FDIC”) federally insured limits. All
92
credit and debit card transactions are also classified as cash and cash equivalents. The amounts due
from banks for these transactions at each reporting date were as follows:
Due from banks for debit and credit card
transactions . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,463
$18,092
As Of
December 29,
2013
December 30,
2012
Accounts Receivable
Accounts receivable generally represent billings to vendors for earned rebates and allowances
and other items. When a specific account is determined uncollectible, the net recognized receivable is
written off.
Inventories
Inventories consist of merchandise purchased for resale, which are stated at the lower of cost or
market. The cost method is used for warehouse perishable and store perishable department
inventories by assigning costs to each of these items based on a first-in, first-out (FIFO) basis (net of
vendor discounts).
The Company’s valuation of its non-perishable inventory using weighted average costs includes
statistical and other estimation methods which the Company believes provide a reasonable basis to
estimate its inventory values at the end of the respective periods.
The Company believes that all inventories are saleable and no allowances or reserves for
shrinkage or obsolescence were recorded as of December 29, 2013 and December 30, 2012.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization.
Expenditures for major additions and improvements to facilities are capitalized, while maintenance and
repairs are charged to expense as incurred. When property is retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in the consolidated statements of operations. Depreciation expense, which includes
the amortization of assets recorded under capital and financing leases, is computed using the straight-
line method over the estimated useful lives of the individual assets. Leasehold improvements and
assets under capital and financing leases are amortized over the shorter of the lease term to which
they relate, or the estimated useful life of the asset. Terms of leases used in the determination of
estimated useful lives may include renewal options if the exercise of the renewal option is determined
to be reasonably assured.
The following table includes the estimated useful lives of asset classes:
Software and used equipment . . . . . . . . . . . . . . . .
Computer hardware . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 years
5 years
7 years
up to 15 years
40 years
93
Store development costs, which include costs associated with the selection and procurement of
real estate sites, are also included in property and equipment. These costs are included in leasehold
improvements and are amortized over the remaining lease term of the successful sites with which they
are associated. Certain project costs, including general site selection costs that cannot be identified
with a specific store location, are charged to direct store expenses in the accompanying consolidated
statements of operations.
Asset Retirement Obligations
The Company’s asset retirement obligations (“ARO”) are related to the Company’s commitment to
return leased facilities to the landlord in an agreed upon condition. This may require actions ranging
from cleaning to removal of leasehold improvements. The obligation is recorded as a liability with an
offsetting capital asset at the inception of the lease term based upon the estimated fair market value of
costs to meet the commitment. The liability, included in other long-term liabilities in the consolidated
balance sheets, is accreted over time to the projected future value of the obligation. The ARO asset,
included in property and equipment in the consolidated balance sheets, is depreciated using the same
useful life as the related property.
A reconciliation of the ARO liability is as follows:
As Of
December 29,
2013
December 30,
2012
Beginning balance . . . . . . . . . . . . . . . . . . . . . .
Additions for new facilities . . . . . . . . . . . . . . . .
ARO liability from business combination . . . .
Accretion expense . . . . . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . .
$2,362
54
—
322
(163)
$2,575
$1,236
132
784
237
(27)
$2,362
Closed Store Reserve
The Company recognizes a reserve for future operating lease payments associated with facilities
that are no longer being utilized in its current operations. The reserve is recorded based on the present
value of the remaining noncancelable lease payments after the cease use date less an estimate of
subtenant income. If subtenant income is expected to be higher than the lease payments, no accrual is
recorded. Lease payments included in the closed store reserve are expected to be paid over the
remaining terms of the respective leases. Adjustments to the closed store reserve relate primarily to
changes in actual or estimated subtenant income and actual lease payments from original estimates.
Adjustments are made for changes in estimate in the period in which the change becomes known
considering timing of new information regarding the market, subleases or other lease updates.
Adjustments in the closed store reserves are recorded in “store closure and exit costs” in the
consolidated statements of operations.
Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance programs to provide reserves
for potential liabilities associated with general liability, workers’ compensation and team member health
benefits. Liabilities for self-insurance reserves are estimated through consideration of various factors,
which include historical claims experience, demographic factors, severity factors and other actuarial
assumptions.
94
Goodwill and Intangible Assets
Goodwill represents the cost of acquired businesses in excess of the fair value of assets and
liabilities acquired. The Company’s indefinite-lived intangible assets consist of trade names related to
“Sprouts Farmers Market” and liquor licenses. The Company also holds intangible assets with finite
useful lives, consisting of favorable and unfavorable leasehold interests and the “Sunflower Farmers
Market” trade name.
Goodwill is evaluated for impairment on an annual basis on the first day of the fourth fiscal quarter
or more frequently if events or changes in circumstances indicate that the asset might be impaired. The
Company’s impairment evaluation of goodwill consists of a qualitative assessment to determine if it is
more likely than not that the fair value of a reporting unit is less than its carrying amount. If the
Company’s qualitative assessment indicates it is more likely than not that the estimated fair value of a
reporting unit exceeds its carrying value, no further analysis is required and goodwill is not impaired.
Otherwise, the Company follows a two-step quantitative goodwill impairment test to determine if
goodwill is impaired. The first step of the quantitative goodwill impairment test compares the fair value
of a reporting unit with its carrying amount, including goodwill. If the fair value of the Company’s
reporting unit exceeds its carrying value, no further analysis or impairment of goodwill is required. If the
carrying value of the Company’s reporting unit exceeds its fair value, the fair value of the reporting unit
would be allocated to the reporting unit’s assets and liabilities based on the relative fair value, with
goodwill written down to its implied fair value, if necessary.
Indefinite-lived assets are evaluated for impairment on an annual basis on the first day of the
fourth fiscal quarter or more frequently if events or changes in circumstances indicate that the asset
might be impaired. The Company’s impairment evaluation for its indefinite-lived intangible assets
consists of a qualitative assessment similar to that for goodwill. If the Company’s qualitative
assessment indicates it is more likely than not that the estimated fair value of an indefinite-lived
intangible asset exceeds its carrying value, no further analysis is required and the asset is not
impaired. Otherwise, the Company compares the estimated fair value of the asset to its carrying
amount with an impairment loss recognized for the amount, if any, by which carrying value exceeds
estimated fair value.
The Company can elect to bypass the qualitative assessments approach for goodwill and
indefinite-lived intangible assets and proceed directly to the quantitative assessments for goodwill or
any indefinite-lived intangible assets in any period. The Company can resume the qualitative
assessment approach in future periods.
The Company has determined its business consists of a single reporting unit. When applying the
quantitative test, the Company determines the fair value of its reporting unit using the income approach
methodology of valuation that includes the discounted cash flow method as well as other generally
accepted valuation methodologies.
The Company completed its goodwill and indefinite-lived intangible asset impairment evaluations
as of the first day of the fourth quarter and concluded during 2013, 2012 and 2011 that there was no
impairment. The Company also concluded that events and circumstances continued to support
classifying its indefinite-lived intangible assets as such. See Note 8, “Intangible Assets” and Note 9,
“Goodwill” for further discussion.
Prior to the Henry’s Transaction, the trade names related to “Henry’s Farmers Markets” were
accounted for as finite-lived intangible assets and amortized on a straight-line basis over an estimated
useful life of 20 years. As a result of the rebranding of the “Henry’s Farmers Markets” locations as
“Sprouts Farmers Market” locations following the Henry’s Transaction, the estimated remaining useful
lives of these trade names were re-evaluated and amortization was accelerated through the end of
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their respective useful life in fiscal 2011, when it was subsequently written-off. See Note 8, “Intangible
Assets” for further discussion. The trade name related to “Sunflower Farmers Market” meets the
definition of a defensive intangible asset and is amortized on a straight line basis over an estimated
useful life of 10 years from the date of its acquisition by the Company. Favorable and unfavorable
leasehold interests are amortized on a straight-line basis over the lease term.
Impairment of Long-Lived Assets
The Company assesses its long-lived assets, including property and equipment and finite-lived
intangible assets, for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset group may not be recoverable. The Company groups and evaluates long-
lived assets for impairment at the individual store level, which is the lowest level at which independent
identifiable cash flows are available. Factors which may indicate potential impairment include a
significant underperformance relative to the historical or projected future operating results of the store
or a significant negative industry or economic trend. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows
expected to be generated by that asset. If impairment is indicated, a loss is recognized for any excess
of the carrying value over the estimated fair value of the asset group. The fair value is estimated based
on the discounted future cash flows or comparable market values, if available. The Company did not
record any impairment loss during 2013, 2012 and 2011.
Deferred Financing Costs
The Company capitalizes certain fees and costs incurred in connection with the issuance of debt.
Deferred financing costs are amortized to interest expense over the term of the debt using the effective
interest method. For the Revolving Credit Facility, deferred financing costs are amortized on a straight
line basis over the term of the facility. Upon prepayment, redemption or conversion of debt, the
Company accelerates the recognition of an appropriate amount of financing costs as additional interest
expense. The current and noncurrent portions of deferred financing costs are included in Prepaid
expenses and other current assets and Other assets, respectively, in the consolidated balance sheets.
Operating Leases
The Company leases stores, warehouse facilities and administrative offices under operating
leases.
Incentives received from lessors are deferred and recorded as a reduction of rental expense over
the lease term using the straight-line method. The current portion of unamortized lease incentives is
included in other accrued liabilities and the noncurrent portion is included in other long-term liabilities in
the accompanying consolidated balance sheets.
Store lease agreements generally include rent abatements and rent escalation provisions and may
include contingent rent provisions based on a percentage of sales in excess of specified levels. The
Company recognizes escalations of minimum rents and/or abatements as deferred rent and amortizes
these balances on a straight-line basis over the term of the lease.
For lease agreements that require the payment of contingent rents based on a percentage of sales
above stipulated minimums, the Company begins accruing an estimate for contingent rent when it is
determined that it is probable the specified levels of sales in excess of the stipulated minimums will be
reached during the year.
96
Financing Lease Obligations
The Company has recorded financing lease obligations for 38 and 31 store building leases as of
December 29, 2013 and December 30, 2012, respectively. In each case, the Company was deemed to
be the owner during the construction period under lease accounting guidance. Further, each lease
contains provisions indicating continuing involvement with the property at the end of the construction
period, which include either an affiliate guaranty or contingent collateral. As a result, in accordance with
applicable accounting guidance, buildings and related assets subject to the leases are reflected on the
Company’s balance sheets and depreciated over their remaining useful lives. The present value of the
lease payments associated with these buildings is recorded as financing lease obligations.
Monthly lease payments are allocated between the land element of the lease (which is accounted
for as an operating lease) and the financing obligation. The financing obligation is amortized using the
effective interest method and the interest rate is determined in accordance with the requirements of
sale-leaseback accounting. Lease payments less the portion allocated to the land element of the lease
and that portion considered to be interest expense decrease the financing liability. At the end of the
initial lease term, should the Company decide not to renew the lease, the net book value of the asset
and the corresponding financing obligation would be reversed.
The outflows from the construction of the buildings are classified as investing activities, and the
outflows associated with the financing obligations principal payments and inflows from the associated
financing proceeds are classified as financing activities in the accompanying consolidated statements
of cash flows.
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 impairment analysis of goodwill, intangible assets, long-lived assets and in the valuation of store
closure and exit costs.
The determination of fair values of certain tangible and intangible assets for purposes of our
goodwill impairment evaluation as described above was 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 estimated fair value of the closed store reserve is calculated based on the present
value of the remaining lease payments and other charges using a weighted average cost of capital,
reduced by estimated sublease rentals. The weighted average cost of capital was estimated using
information from comparable companies and management’s judgment related to the risk associated
with the operations of the stores.
Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets,
accounts payable, accrued salaries and benefits and other accrued liabilities approximate fair value
97
because of the short maturity of those instruments. Based on comparable open market transactions of
the Term Loan (as defined in Note 13, “Long-Term Debt”), the fair value of the long-term debt,
including current maturities, approximates carrying value as of December 29, 2013 and December 30,
2012. The carrying amount of the Senior Subordinated Promissory Notes (as defined in Note 13,
“Long-Term Debt”) approximated fair value as their terms were consistent with current market rates as
of December 30, 2012. The Company’s estimates of the fair value of long-term debt (including current
maturities) and the Senior Subordinated Promissory Notes were classified as Level 2 in the fair value
hierarchy.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting, which
requires that the purchase price paid for an acquisition be allocated to the assets and liabilities
acquired based on their estimated fair values as of the effective date of the acquisition, with the excess
of the purchase price over the net assets being recorded as goodwill. Acquisition-related costs are
considered separate transactions and are expensed as incurred. Acquisition-related costs are
classified as selling, general and administrative expenses and consist of costs associated with the
Henry’s Transaction in 2011 and costs associated with the Sunflower Transaction in 2012, as follows:
Acquisition-related costs . . . . . . . . . . . . . . . . . . . .
$3,229
$5,900
See Note 4, “Business Combinations” for further discussion.
Year Ended
December 30,
2012
January 1,
2012
Equity-Based Compensation
The Company measures equity-based compensation cost at the grant date based on the fair value
of the award and recognizes equity-based compensation cost as expense over the vesting period. As
equity-based compensation expense recognized in the consolidated statements of operations is based
on awards ultimately expected to vest, the amount of expense has been reduced for estimated
forfeitures and trued up for actual forfeitures. The Company’s forfeiture rate is estimated primarily
based on historical data. The actual forfeiture rate could differ from these estimates. The Company
uses the Black-Scholes option-pricing model to determine the grant date fair value for each option
grant. The Black-Scholes option-pricing model requires extensive use of subjective assumptions. See
Note 24, “Equity-Based Compensation” for a discussion of assumptions used in the calculation of fair
values. Application of alternative assumptions could produce different estimates of the fair value of
equity-based compensation and, consequently, the related amounts recognized in the accompanying
consolidated statements of operations. The Company recognizes compensation cost for time-based
awards on a straight-line basis and for performance-based awards on the graded-vesting method over
the vesting period of the awards.
Revenue Recognition
Revenue is recognized at the point of sale. Discounts provided to customers at the time of sale are
recognized as a reduction in sales as the discounted products are sold. Sales taxes are not included in
revenue. Proceeds from the sale of gift cards are recorded as a liability at the time of sale, and
recognized as sales when they are redeemed by the customer. The Company has not applied a gift
card breakage rate.
Licensing fees are generated from license agreements related to two former Henry’s stores.
98
Cost of Sales, Buying and Occupancy
Cost of sales includes the cost of inventory sold during the period, including the direct costs of
purchased merchandise (net of discounts and allowances), distribution and supply chain costs, buying
costs and supplies. Occupancy costs include store rental, property taxes, utilities, common area
maintenance, amortization of favorable or unfavorable leasehold interests and property insurance. The
Company recognizes vendor allowances and merchandise volume related rebate allowances as a
reduction of inventories during the period when earned and reflects the allowances as a component of
cost of sales, buying and occupancy as the inventory is sold.
Our largest supplier accounted for approximately 23% and 17% of total purchases, expressed as a
percentage of our cost of sales, buying and occupancy expense, during 2013 and 2012, respectively.
Direct Store Expenses
Direct store expenses consist of store-level expenses such as salaries and benefits, related
equity-based compensation, supplies, depreciation and amortization for buildings and store leasehold
improvements, equipment and other store specific costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of salaries and benefits costs,
related equity-based compensation, advertising, acquisition-related costs and corporate overhead.
The Company charges third-parties to place advertisements in the Company’s in-store guide and
newspaper circulars. The Company records rebates received from vendors in connection with
cooperative advertising programs as a reduction to advertising costs when the allowance represents a
reimbursement of a specific incremental and identifiable cost. Advertising costs are expensed as
incurred. Advertising expense was as follows:
Year Ended
December 29,
2013
December 30,
2012
January 1,
2012
Advertising expense . . . . . . . . . . . . . . . . . .
Vendor rebates . . . . . . . . . . . . . . . . . . . . . .
$ 34,075
(12,530)
$29,238
(9,905)
$22,344
(5,745)
Advertising expense, net of rebates . . . . .
$ 21,545
$19,333
$16,599
Store Pre-Opening Costs
Store pre-opening costs include rent expense during construction of new stores and costs related
to new store openings, including costs associated with hiring and training personnel and other
miscellaneous costs. Store pre-opening costs are expensed as incurred.
Loss on Extinguishment of Debt
In 2013, the Company recorded a loss on extinguishment of debt totaling $18.2 million primarily
related to the write-off of deferred financing costs and issue discount. These write-offs included $1.0
million related to a partial repayment of our Term Loan, $9.0 million related to the August 2013 pay
down of debt using proceeds from our IPO and $8.2 million related to the April 2013 Refinancing as
defined in Note 13. Additionally, loss on extinguishment of debt for 2013 includes $0.5 million related to
the renewal of a financing lease.
99
The Company recorded a $1.0 million loss on extinguishment of debt in 2012 as a result of the
renegotiation of a store lease that was classified as a financing lease obligation.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date. The
Company’s deferred tax assets are subject to periodic recoverability assessments. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the amount that more
likely than not will be realized. Realization of the deferred tax assets is principally dependent upon
achievement of projected future taxable income offset by deferred tax liabilities. Changes in recognition
or measurement are reflected in the period in which the judgment occurs. Since becoming a taxable
corporation in April 2011, the Company has not recorded any valuation allowances to date on the
Company’s deferred income tax assets.
The Company recognizes the effect of uncertain income tax positions only if those positions are
more likely than not of being sustained. Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs. The Company records interest and
penalties related to unrecognized tax benefits as part of income tax expense.
From a tax perspective, in April 2011, the Company acquired Henry’s. Until April 18, 2011, Henry’s
was not a separate tax-paying entity. Henry’s was included in the S&F consolidated federal and certain
state income tax groups for income tax reporting purposes. For the period through April 17, 2011, the
consolidated financial statements have been prepared on the basis as if Henry’s prepared its tax
returns and accounted for income taxes on a separate-company basis. As a result of the Henry’s
Transaction, for tax purposes, Henry’s was acquired in a taxable asset acquisition. The purchase price
was allocated to all identifiable assets with the residual assigned to tax deductible goodwill. The
resulting basis differences between the new tax values and historical amounts resulted in a deferred
tax asset of $47.6 million being recorded through membership equity. See Note 18, “Income Taxes” for
a discussion of the tax deductibility of goodwill.
In May 2012, the Company completed the acquisition of a 100% ownership interest in Sunflower.
The acquisition was structured to be a tax-free reorganization. The tax basis of the property acquired in
reorganization is equal to the basis in the property recorded by Sunflower just prior to the acquisition.
The resulting basis difference between the historical tax amounts and the fair values resulted in net
deferred tax assets of $1.9 million being recorded through goodwill.
Net Income (Loss) per Share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted
average number of shares outstanding during the fiscal period.
Diluted net income (loss) per share is based on the weighted average number of shares
outstanding, plus, where applicable, shares that would have been outstanding related to dilutive
options.
100
Comprehensive Income (Loss)
Comprehensive income (loss) equals net income (loss) for all periods presented.
Recently Issued Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit
When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,”
which amends ASC 740, “Income Taxes.” ASU No. 2013-11 requires that unrecognized tax benefits be
classified as an offset to deferred tax assets to the extent of any net operating loss carryforwards,
similar tax loss carryforwards, or tax credit carryforwards available at the reporting date in the
applicable tax jurisdiction to settle any additional income taxes that would result from the disallowance
of a tax position. An exception would apply if the tax law of the tax jurisdiction does not require the
Company to use, and it does not intend to use, the deferred tax asset for such purpose. This guidance
is effective for reporting periods beginning after December 15, 2013. The Company does not expect
the adoption of this guidance to have a material effect on the consolidated financial statements.
4. Business Combinations
As discussed in Note 1, “Organization and Description of Business” the Company completed the
Henry’s and Sunflower Transactions in April 2011 and May 2012, respectively. Each of these
transactions were accounted for as a business combination. The primary reasons for these
transactions were to build a larger portfolio of stores under the Sprouts Farmers Market banner and to
derive synergies from the combined operations of the companies.
In a business combination, the purchase price is allocated to assets acquired and liabilities
assumed based on their fair values, with any excess of purchase price over fair value recognized as
goodwill. In addition to reviews of acquired company balance sheets, the Company reviews supply
contracts, leases, financial instruments, employment agreements and other significant agreements to
identify potential assets or liabilities that require recognition in connection with the application of
acquisition accounting under ASC 805. Intangible assets are recognized apart from goodwill when the
asset arises from contractual or other legal rights, or is separable from the acquired entity such that it
may be sold, transferred, licensed, rented or exchanged either on a standalone basis or in combination
with a related contract, asset or liability.
Henry’s Transaction
Pursuant to the terms of the agreements governing the Henry’s Transaction, on April 18, 2011:
(cid:129) The Company (through its wholly-owned subsidiary, Intermediate Holdings) purchased all of
the outstanding membership interests of Henry’s for a cash payment of $274.6 million;
(cid:129) Sprouts Arizona contributed substantially all of its assets and liabilities to SFM, LLC and the
former owners of Sprouts Arizona received 45,650,000 shares (representing a 41.5%
ownership interest in the Company), which were subsequently transferred to the Liquidating
Trust;
(cid:129) Cash distribution of $199.1 million was paid to the Liquidating Trust; and
(cid:129) Sprouts Arizona pre-combination debt was extinguished and preferred equity was redeemed.
The $274.6 million payment was accounted for as a distribution to S&F in the Company’s
consolidated statements of stockholders’ equity.
101
Collectively, the consummation of the Henry’s Transaction was financed through issuance of debt
by Intermediate Holdings (see Note 13, “Long-Term Debt”), and the issuance of 64,350,000 shares
(representing a 58.5% ownership in the Company) to the Apollo Funds for a combined contribution of
$214.0 million.
Consideration transferred was determined as follows:
Cash paid to Liquidating Trust . . . . . . . . . . . . . . . . .
Fair value of Company’s shares issued . . . . . . . . .
Cash paid to extinguish Sprouts Arizona debt (net
of cash acquired) . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid to redeem Sprouts Arizona preferred
Fair Value of
Consideration
Transferred
$199,146
146,137
32,085
membership units . . . . . . . . . . . . . . . . . . . . . . . . .
1,680
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . .
$379,048
The fair value of our shares issued in connection with the Henry’s Transaction was determined to
be $3.33 per share, the fair value as determined as of the acquisition measurement date, which is the
date the Henry’s Transaction closed.
The Company’s allocation of purchase price in the Henry’s Transaction was as follows:
Net assets acquired:
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 35,105
4,092
130,219
188,613
1,412
Liabilities assumed:
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . .
Financing lease obligations . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
(36,519)
(3,990)
(63,162)
(13,570)
(7,756)
144,604
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . .
$379,048
Goodwill was attributed to the assembled workforce of Sprouts Arizona and synergies expected to
be achieved from the combined operations of Henry’s and Sprouts Arizona, primarily related to buying
and distribution costs, economies of scale for certain direct store expenses and savings on marketing-
related selling costs and corporate overhead. Goodwill recorded in the Henry’s Transaction is expected
to be deductible for tax purposes.
102
Identifiable intangible assets acquired consist of the following (in thousands):
Trade names (indefinite-lived) . . . . . . . . . . . . . . . . . . . .
Liquor licenses (indefinite-lived) . . . . . . . . . . . . . . . . . .
Favorable leasehold interests (13.5 years weighted
$182,937
247
average useful life) . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,429
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$188,613
Sales and net loss of SFM totaling $556.0 million and $44.5 million, respectively, are included in
the consolidated results of operations for the year ended January 1, 2012.
Sunflower Transaction
As described in Note 1, “Organization and Description of Business,” effective May 29, 2012 the
Company acquired all of the outstanding common and preferred stock of Sunflower in a transaction
financed through issuance of debt by Intermediate Holdings (see Note 13, “Long-Term Debt), and the
issuance of 14,898,136 shares. Consideration transferred was determined as follows:
. . . . . . . . . . . . . . . . . . . . . .
Cash paid to Sunflower
Fair value of Company’s shares issued . . . . . . . . .
Cash paid to extinguish Sunflower’s debt, net of
Fair Value of
Consideration
Transferred
$108,517
89,605
cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,358
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . .
$219,480
The fair value of our shares issued in connection with the Sunflower Transaction was determined
to be $6.01 per share, the fair value as determined as of the acquisition measurement date, which is
the date the Sunflower Transaction closed.
The Company’s allocation of purchase price in the Sunflower Transaction is as follows:
Net assets acquired:
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 33,321
2,308
3,859
67,347
7,416
1,246
Liabilities assumed:
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing lease obligations . . . . . . . . . . . . . . . . . .
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
(36,534)
(22,616)
(412)
(6,103)
169,648
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . .
$219,480
Goodwill was attributed to the assembled workforce of Sunflower and synergies expected to be
achieved from the combined operations of the Company and Sunflower, primarily related to buying and
103
distribution costs, economies of scale for certain direct store expenses and savings on marketing-
related selling costs and corporate overhead. Goodwill recorded in the Sunflower Transaction is not
expected to be deductible for tax purposes.
Identifiable intangible assets consist of the following:
Trade name (10 year useful life) . . . . . . . . . . . . . . . . . . . .
Liquor licenses (indefinite-lived)
. . . . . . . . . . . . . . . . . . . .
Favorable leasehold interests (12.3 years weighted
$1,800
1,070
average useful life) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,546
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,416
Sales and net income of Sunflower totaling $297.8 million and $8.6 million respectively are
included in the consolidated results of operations for the year ended December 30, 2012.
Valuations
The Company engaged an independent valuation firm to assist management with the valuations of
acquired inventory, personal property, real estate, favorable and unfavorable leasehold interests and
intangible assets for the Henry’s and Sunflower Transactions. Acquired inventory was recorded at net
realizable value, with significant estimates relating to the time expected to dispose of inventory,
disposal costs and commensurate profit. Personal property, consisting primarily of leasehold
improvements and furniture, fixtures and equipment, were valued using the cost method, which
requires significant estimates related to replacement costs of acquired personal property, as well as
estimates of physical deterioration. Real estate was valued through a combination of income and
market approaches and significant estimates underlying these valuations include market comparable
pricing and capitalization rates, which the independent valuation firm assisted management in
determining.
The value of the Sprouts trade name and trademarks was determined using an income approach,
utilizing a relief from royalty method in conjunction with a profit split methodology. The relief from
royalty method estimates the theoretical royalty savings resulting from ownership of the Sprouts trade
name and trademarks. Significant estimates used in this valuation method include discount rate,
royalty rates, growth rates and sales projections. The discount rate used was the Company’s weighted
average cost of capital, the royalty rate was a base rate determined by reference to comparable market
royalty rate agreements and growth rates and projected sales were determined using forecasts
prepared by management.
The Sunflower trade name was accounted for as a “defensive intangible asset” with an estimated
useful life of 10 years from the date of the Sunflower Transaction. Acquired liquor licenses were valued
using a cost approach.
Unaudited supplemental pro forma information
The following table presents unaudited supplemental pro forma consolidated results of operations
information for 2012 and 2011. The unaudited supplemental pro forma consolidated results of
operations information gives effect to certain adjustments, including depreciation and amortization of
the assets acquired and liabilities assumed based on their estimated fair values and changes in
104
interest expense resulting from changes in consolidated debt, as if the Henry’s Transaction occurred at
the beginning of 2010 and the Sunflower Transaction occurred at the beginning of 2011:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)
$1,990,963
20,672
$
$1,722,655
$ (54,112)
Year Ended
December 30,
2012
January 1,
2012
The unaudited supplemental pro forma consolidated results of operations information is provided
for illustrative purposes only and does not purport to present what the actual results of operations
would have been had the Henry’s Transaction and Sunflower Transaction actually occurred on the
dates indicated, nor does it purport to represent results of operations for any future period. The
unaudited supplemental pro forma information includes certain non-recurring costs incurred as a result
of the Transactions, such as acquisition-related costs and expenses due to change in control and
Sprouts Arizona manager termination fees. The information does not reflect any cost savings or other
benefits that may be obtained through synergies among the operations of the Company, except to the
extent realized in 2012 and 2011.
5. Accounts Receivable
A summary of accounts receivable is as follows:
As Of
December 29,
2013
December 30,
2012
Vendor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical insurance receivable . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,183
1,089
3,252
$9,524
$5,602
1,287
1,526
$8,415
Medical insurance receivables relate to amounts receivable from the Company’s health insurance
carrier for claims in excess of stop-loss limits. See Note 15, “Self-Insurance Programs” for more
information.
As of December 29, 2013 and December 30, 2012, the Company had recorded an allowance of
$0.3 million and $0.3 million, respectively, for certain receivables.
Other receivables relate primarily to payments receivable from landlords for lease incentives.
6. Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets is as follows:
As Of
December 29,
2013
December 30,
2012
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,209
1,840
$8,049
$2,460
2,061
$4,521
105
Other current assets consists primarily of income taxes receivable and current portion of deferred
financing costs.
7. Property and Equipment
A summary of property and equipment, net is as follows:
As Of
December 29,
2013
December 30,
2012
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . .
$ 106,580
188,074
167,530
14,060
$ 73,830
146,206
145,291
21,873
Total property and equipment
. . . . . . . . .
476,244
387,200
Accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . . . . .
(127,414)
(84,034)
Property and equipment, net . . . . . . . . . .
$ 348,830
$303,166
A summary of leased property and equipment under capital and financing lease obligations is as
follows:
As of
December 29,
2013
December 30,
2012
Capital Leases—Buildings
Gross asset balance . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . .
$ 2,225
(742)
Net
. . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,483
$ 2,796
(703)
$ 2,093
Capital Leases—Equipment
Gross asset balance . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . .
842
(657)
857
(420)
Net
. . . . . . . . . . . . . . . . . . . . . . . . . . .
$
185
$
437
Financing Leases
Gross asset balance . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . .
104,355
(6,204)
71,034
(3,674)
Net
. . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 98,151
$67,360
Depreciation expense was $47.2 million, $34.7 million and $22.3 million for 2013, 2012 and 2011,
respectively.
106
$
(105)
(2,470)
$ (2,575)
Balance at
December 29,
2013
8. Intangible Assets
A summary of the activity and balances in intangible assets is as follows:
Balance at
January 1,
2012
Additions
Other(a)
Balance at
December 30,
2012
Gross Intangible Assets
Indefinite-lived trade names . . . . . . . . . . . . .
Indefinite-lived liquor licenses . . . . . . . . . . .
Finite-lived trade names . . . . . . . . . . . . . . . .
Finite-lived leasehold interests . . . . . . . . . .
$182,937
971
—
8,028
$ —
1,070
1,800
4,546
$—
(5)
—
—
$182,937
2,036
1,800
12,574
Total intangible assets . . . . . . . . . . . . .
$191,936
$ 7,416
$ (5)
$199,347
Accumulated Amortization
Finite-lived trade names . . . . . . . . . . . . . . . .
Finite-lived leasehold interests . . . . . . . . . .
$
—
(1,513)
$ (105)
(957)
Total accumulated amortization . . . . . .
$ (1,513)
$(1,062)
$—
—
$—
Gross Intangible Assets
Indefinite-lived trade names . . . . . . . . . . .
Indefinite-lived liquor licenses . . . . . . . . . .
Finite-lived trade names . . . . . . . . . . . . . .
Finite-lived leasehold interests . . . . . . . . .
Balance at
December 30,
2012
$182,937
2,036
1,800
12,574
Total intangible assets . . . . . . . . . . . .
$199,347
Additions
Other(a)
$ —
—
—
—
$ —
$—
(13)
—
—
$182,937
2,023
1,800
12,574
$(13)
$199,334
Accumulated Amortization
Finite-lived trade names . . . . . . . . . . . . . .
Finite-lived leasehold interests . . . . . . . . .
$
(105)
(2,470)
$ (180)
(1,112)
Total accumulated amortization . . . .
$ (2,575)
$(1,292)
$—
—
$—
$
(285)
(3,582)
$ (3,867)
a) The Company sold one liquor license obtained in the Sunflower Transaction in 2013 and two
licenses in 2012.
Amortization expense was $1.3 million, $1.1 million and $32.7 million for 2013, 2012 and 2011,
respectively.
Amortization expense for 2011 includes $32.2 million of amortization expense for the amortization
of the Henry’s trade name and capitalized software including acceleration. In connection with the
Henry’s Transaction, the Henry’s stores were rebranded as Sprouts Farmers Market. The estimated
useful lives related to the Henry’s trade names and capitalized software were reevaluated and it was
determined that amortization of these assets should be accelerated over their estimated remaining
useful lives through January 1, 2012. The accelerated amortization was recorded in the statements of
operations as Amortization of Henry’s trade names and capitalized software. The net book values of
these assets were zero as of January 1, 2012 which were written off.
107
Future amortization associated with the net carrying amount of finite-lived intangible assets is
estimated to be as follows:
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,292
1,292
1,044
967
967
4,945
Total amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,507
The weighted-average amortization period of leasehold interests acquired total 12.3 years. The
amortization period of the finite-lived trade name is 9.5 years.
9. Goodwill
A summary of the activity and balances in goodwill is as follows:
Balance at January 1, 2012 . . . . . . . . . . . . . . . . . . . . . .
Adjustments to prior year allocation . . . . . . . . . . . . . . .
Additions from acquisitions . . . . . . . . . . . . . . . . . . . . . .
$199,399
(969)
169,648
Balance at December 30, 2012 . . . . . . . . . . . . . . . . . . .
368,078
Balance at December 29, 2013 . . . . . . . . . . . . . . . . . . .
$368,078
As of December 29, 2013, December 30, 2012 and January 1, 2012, the Company had no
accumulated goodwill impairment losses. There were no adjustments to goodwill subsequent to
December 30, 2012.
10. Other Assets
A summary of other assets is as follows:
As Of
December 29,
2013
December 30,
2012
Insurance deposits . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,850
3,285
$13,135
$5,350
4,171
$9,521
108
11. Accrued Salaries and Benefits
A summary of accrued salaries and benefits is as follows:
As Of
December 29,
2013
December 30,
2012
Bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll . . . . . . . . . . . . . . . . . . . . . . . . .
Vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,393
6,904
6,634
65
291
$22,287
$ 6,253
5,626
6,747
2,528
243
$21,397
12. Other Accrued Liabilities
A summary of other accrued liabilities is as follows:
Gift cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and use tax liabilities . . . . . . . . . . . . . . .
Workers’ compensation / general liability
reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical insurance claim reserves . . . . . . . . . .
Accrued occupancy related (CAM, property
taxes, etc.)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized lease incentives . . . . . . . . . . . . .
Closed store reserves . . . . . . . . . . . . . . . . . . .
Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As Of
December 29,
2013
December 30,
2012
$ 7,629
5,723
$ 5,423
4,852
5,575
4,167
2,646
1,660
1,413
1,321
2,824
3,093
2,738
2,456
1,308
1,349
4,690
1,652
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$32,958
$27,561
109
13. Long-Term Debt
A summary of long-term debt is as follows:
Maturity
Interest Rate
December 29,
2013
December 30,
2012
As Of
April 2020
Variable
$311,240
$
Facility
Senior Secured
$700.0 million Term Loan, net
of original issue discount
$60.0 million Revolving Credit
. . .
Facility . . . . . . . . . . . . . . . . . .
April 2018
Variable
$410.0 million Term Loan, net
of original issue discount
$50.0 million Revolving Credit
. . .
April 2018
Variable
Facility . . . . . . . . . . . . . . . . . .
April 2016
Variable
Senior Subordinated Notes
$35.0 million Senior
Subordinated Promissory
Notes . . . . . . . . . . . . . . . . . . .
Total Debt . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . .
Long-term debt, net of current
portion . . . . . . . . . . . . . . . . . . . . .
July 2019
10%-14%
—
—
391,544
—
35,000
426,544
(1,788)
—
—
—
—
311,240
(5,822)
$305,418
$424,756
Current portion of long-term debt is presented net of issue discount of $1.2 million and $2.3 million
at December 29, 2013 and December 30, 2012, respectively. The noncurrent portion of long-term debt
is presented net of issue discount of $5.8 million and $11.3 million at December 29, 2013 and
December 30, 2012, respectively.
Debt Maturities
Aggregate annual maturities on long-term debt as of December 29, 2013 for each of the years are
as follows:
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,000
8,750
7,000
7,000
5,250
283,250
Gross principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
318,250
(7,010)
Total debt at December 29, 2013 . . . . . . . . . . . . . . . . .
$311,240
Senior Secured Credit Facilities
April 2013 Refinancing
On April 23, 2013, the Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC
(“Intermediate Holdings”), as borrower, refinanced (the “April 2013 Refinancing”) the Former Revolving
110
Credit Facility and the Former Term Loan (each, as defined below), by entering into a new credit facility
(the “Credit Facility”). The Credit Facility provides for a $700.0 million term loan (the “Term Loan”) and
a $60.0 million senior secured revolving credit facility (the “Revolving Credit Facility”).
The proceeds of the Term Loan were used to repay in full the outstanding Former Term Loan
balance of $403.1 million. Such repayment resulted in an $8.2 million loss on extinguishment of debt
due to the write-off of deferred financing costs and original issue discount. No amounts were
outstanding under the Former Revolving Credit Facility. The remaining proceeds from the Term Loan,
together with cash on hand, were used to make a $282.0 million distribution to the Company’s equity
holders, to make payments of $13.9 million to vested option holders and to pay transaction fees and
expenses related to the refinancing.
The terms of the Credit Facility allow the Company, subject to certain conditions, to increase the
amount of the term loans and revolving commitments thereunder by an aggregate incremental amount
of up to $160.0 million, plus an additional amount, so long as after giving effect to such increase, (i) in
the case of incremental loans that rank pari passu with the initial term loans, the net first lien leverage
ratio does not exceed 4.00 to 1.00, and (ii) in the case of incremental loans that rank junior to the initial
Term Loan, the total leverage ratio does not exceed 5.25 to 1.00.
Guarantees
Obligations under the Credit Facility are guaranteed by the Company and all of its current and
future wholly owned material domestic subsidiaries. Borrowings under the Credit Facility are secured
by (i) a pledge by Sprouts of its equity interests in Intermediate Holdings and (ii) first-priority liens on
substantially all assets of Intermediate Holdings and the subsidiary guarantors, in each case, subject to
permitted liens and certain exceptions.
Term Loan and Partial Repayment in IPO
On August 6, 2013, the Company used $340.0 million of the net proceeds from its IPO to make a
partial repayment of the Term Loan. Such repayment resulted in a $9.0 million loss on extinguishment
of debt due to the write-off of deferred financing costs and original issue discount for the portion of the
debt repaid. This loss on extinguishment of debt is reflected in the Company’s statement of operations
for the year ended December 29, 2013.
Voluntary Prepayment on Term Loan
On December 27, 2013, the Company made a $40.0 million partial repayment of the Term Loan.
Such repayment resulted in a $1.0 million loss on extinguishment of debt due to the write-off of
deferred financing costs and original issue discount for the portion of the debt repaid. This loss on
extinguishment of debt is reflected in the Company’s statement of operations for the year ended
December 29, 2013.
As of December 29, 2013, the outstanding balance of the Term Loan was $311.2 million, net of
issue discount of $7.0 million. Financing fees and issue discount are being amortized to interest
expense over the term of the Term Loan.
Interest and Applicable Margin
All amounts outstanding under the Credit Facility will bear interest, at the Company’s option, at a
rate per annum equal to LIBOR (with a 1.00% floor with respect to Eurodollar borrowings under the
111
Term Loan), adjusted for statutory reserves, plus a margin equal to 3.00%, or an alternate base rate,
plus a margin equal to 2.00%, as set forth in the Credit Facility. These interest margins were reduced
to their current levels (from 3.50% and 2.50%, respectively) effective August 2, 2013, as a result of
(i) the consummation of the Company’s IPO, and (ii) the Company achieving a reduction in the net first
lien leverage ratio to less than or equal to 2.75 to 1.00.
Payments and Prepayments
The Term Loan will mature in April 2020 and will amortize at a rate per annum, in four equal
quarterly installments, in an aggregate amount equal to 1.00% of the original principal balance, with the
balance due on the maturity date.
Subject to exceptions set forth therein, the Credit Facility requires mandatory prepayments in
amounts equal to (i) 50% (reduced to 25% if net first lien leverage is less than 3.00 to 1.00 but greater
than 2.50 to 1.00 and 0% if net first lien leverage is less than 2.50 to 1.00) of excess cash flow (as
defined in the Credit Facility) at the end of each fiscal year, (ii) 100% of the net cash proceeds from
certain non-ordinary course asset sales by the Company or any subsidiary guarantor (subject to certain
exceptions and reinvestment provisions) and (iii) 100% of the net cash proceeds from the issuance or
incurrence of debt by the Company or any of its subsidiaries not permitted under the Credit Facility.
Voluntary prepayments of borrowings under the Credit Facility are permitted at any time, in
agreed-upon minimum principal amounts. There is a prepayment fee equal to 1.00% of the principal
amount of the Term Loan under the Credit Facility optionally prepaid in connection with any “repricing
transaction” on or prior to April 23, 2014, the first anniversary of the closing date. Prepayments made
thereafter will not be subject to premium or penalty (except LIBOR breakage costs, if applicable).
Revolving Credit Facility
The Credit Facility includes a $60.0 million Revolving Credit Facility which matures in April 2018.
The Revolving Credit Facility includes letter of credit and $5.0 million swingline loan subfacilities.
Letters of credit issued under the facility reduce the borrowing capacity on the total facility. There are
no amounts outstanding on the Revolving Credit Facility at December 29, 2013. Letters of credit
totaling $7.4 million have been issued as of December 29, 2013 primarily to support the Company’s
insurance programs. Amounts available under the Revolving Credit Facility at December 29, 2013
totaled $52.6 million.
Interest terms on the Revolving Credit Facility are the same as the Term Loan.
The Company capitalized debt issuance costs of $1.1 million related to the Revolving Credit
Facility, which are being amortized to interest expense over the term of the Revolving Credit Facility.
Under the terms of the Credit Facility, the Company is obligated to pay a commitment fee on the
available unused amount of the Revolving Credit Facility commitments equal to 0.50% per annum.
Covenants
The Credit Facility contains financial, affirmative and negative covenants. The negative covenants
include, among other things, limitations on the Company’s ability to:
(cid:129)
(cid:129)
(cid:129)
incur additional indebtedness;
grant additional liens;
enter into sale-leaseback transactions;
112
(cid:129) make loans or investments;
(cid:129) merge, consolidate or enter into acquisitions;
(cid:129)
(cid:129)
(cid:129)
pay dividends or distributions;
enter into transactions with affiliates;
enter into new lines of business;
(cid:129) modify the terms of subordinated debt or other material agreements; and
(cid:129)
change its fiscal year
Each of these covenants is subject to customary or agreed-upon exceptions, baskets and
thresholds.
In addition, if the Company has any amounts outstanding under the Revolving Credit Facility as of
the last day of any fiscal quarter, the Revolving Credit Facility requires the borrower to maintain a ratio
of Revolving Facility Credit exposure to consolidated trailing 12-month EBITDA (as defined in the
Credit Facility) of no more than 0.75 to 1.00 as of the end of each such fiscal quarter.
The Company was in compliance with all applicable covenants under the Credit Facility as of
December 29, 2013.
Former Term Loan and Revolving Credit Facility
On April 18, 2011, the Company, through Intermediate Holdings, entered into senior secured
credit facilities (“Former Senior Secured Credit Facilities”). During April 2012, the Company amended
the Former Senior Secured Credit Facilities as described below.
The Former Senior Secured Credit Facilities provided for a $50.0 million revolving credit facility
(“Former Revolving Credit Facility”), which included a letter of credit subfacility (up to the unused
amount of the Former Revolving Credit Facility) and a $5.0 million swingline loan subfacility.
During April 2011, the Company borrowed $310.0 million (“Former Term Loan”), net of financing
fees of $1.3 million and issue discount of $14.1 million, under the Former Term Loan and used the
proceeds to effectuate the 2011 combination of Sprouts with Henry’s.
During April 2012, the Company amended the Former Senior Secured Credit Facilities and used
the incremental commitments provision to borrow an additional $100.0 million, net of financing fees of
$0.5 million and issue discount of $2.7 million, and used the proceeds to effectuate the Sunflower
Transaction in May 2012.
In connection with the April 2013 Refinancing, the Company repaid the Former Term Loan in its
entirety and recorded a related $8.2 million loss on extinguishment of debt as reflected in the
consolidated statement of operations for the year ended December 29, 2013.
The Former Term Loan required quarterly principal payments, totaling 1.00% per annum, with the
balance payable on the final maturity date.
The Company capitalized total debt issuance costs (financing fees) between 2011 and 2012 of
$1.8 million related to the Former Term Loan, which were being amortized to interest expense over the
term of the loan. Additionally, $16.7 million of lender fees were reflected as a discount on the Former
Term Loan and were being charged to interest expense over the term of the Former Term Loan.
113
Interest terms on the Former Revolving Credit Facility were the same as the Former Term Loan.
The Company capitalized debt issuance costs of $1.8 million related to the Former Revolving
Credit Facility, which were being amortized to interest expense over the term of the facility.
There were no amounts outstanding on the Former Revolving Credit Facility at December 30,
2012. Letters of credit totaling $8.4 million had been issued as of December 30, 2012.
Senior Subordinated Promissory Notes
In May 2012, the Company issued $35.0 million aggregate principal amount of 10.0% senior
subordinated promissory notes (“Senior Subordinated Promissory Notes”). Interest accrued at 10.0%
annually for the first three years, increasing by 1.0% each year thereafter.
On May 31, 2013, the Company repaid the entire balance of $35.0 million of outstanding Senior
Subordinated Promissory Notes and paid $0.3 million of interest accrued to date.
14. Other Long-Term Liabilities
A summary of other long-term liabilities is as follows:
Unamortized lease incentives . . . . . . . . . . . . .
Workers’ compensation / general liability
reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unfavorable lease liability . . . . . . . . . . . . . . . .
Deferred rent
. . . . . . . . . . . . . . . . . . . . . . . . . .
Closed store reserves . . . . . . . . . . . . . . . . . . .
ARO liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As Of
December 29,
2013
December 30,
2012
$18,248
$12,498
13,219
12,884
10,762
3,300
2,575
429
9,476
14,159
8,038
3,864
2,362
222
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$61,417
$50,619
Unfavorable leasehold interests of $3.9 million and $12.8 million were recognized in connection
with the Sunflower Transaction and Henry’s Transaction, respectively, and are being amortized on a
straight-line basis over the term of the underlying lease.
15. Self-Insurance Programs
General Liability and Workers’ Compensation
The Company carries insurance policies for general liability and workers’ compensation to
minimize the risk of loss due to accident, injury and commercial liability claims resulting from its
operations, and to comply with certain legal and contractual requirements.
The Company retains certain levels of exposure in its self-insurance programs and purchases
coverage from third-party insurers for exposures in excess of those levels. In addition to expensing
premiums and other costs relating to excess coverage, the Company establishes reserves for claims,
both reported and incurred but not reported (“IBNR”). IBNR claims are estimated using historical claim
information, demographic factors, severity factors and other actuarial assumptions. See Note 12,
“Other Accrued Liabilities,” and Note 14, “Other Long-Term Liabilities” for amounts recorded for
general liability and workers’ compensation liabilities.
114
Prior to the Henry’s transaction, S&F purchased third-party insurance for general liability under
which Henry’s was covered.
Medical
The Company is self-insured for medical claims up to certain stop-loss limits. Such costs are
accrued based on known claims and an estimate of IBNR claims. IBNR claims are estimated using
historical claim information, demographic factors, severity factors and other actuarial assumptions. At
December 29, 2013 and December 30, 2012, the Company had recorded a receivable for stop-loss
payments from its medical insurance carriers of $1.1 million and $1.3 million, respectively, relating to
the portion of the recorded liability that is expected to be recovered through those payments. The
Company received payment for the 2012 receivable during 2013.
The estimated accruals for the self-insurance liabilities could be significantly affected if future
occurrences and claims differ from historical trends.
16. Defined Contribution Plan
The Company maintains the Sprouts Farmers Market, Inc. Employee 401(k) Savings Plan (the
“Plan”), which is a defined contribution plan covering all eligible team members. Under the provisions
of the Plan, participants may direct the Company to defer a portion of their compensation to the Plan,
subject to the Internal Revenue Code limitations. The Company provides for an employer matching
contribution equal to 50% of each dollar contributed by the participants up to 6% of their eligible
compensation.
During 2011, prior to the Henry’s Transaction, Henry’s employees participated in the Markets
Retirement 401(k) Savings Plan (“Henry’s 401(k) Plan”), which allowed participants to contribute up to
95% of their eligible compensation, subject to certain maximums. In 2011 the Company matched 50%
of each dollar contributed up to the first 4% of the participant’s eligible compensation and then matched
25% of each dollar contributed up to an additional 2% of the participant’s eligible compensation.
In conjunction with the Henry’s Transaction, the Company acquired the Henry’s 401(k) Plan, which
was merged into the Plan effective January 1, 2012. Participants in the Henry’s 401(k) Plan are eligible
for the same employer matching contribution as those under the Plan effective January 1, 2012.
Total expense recorded for the matching under all defined contribution plans:
December 29,
2013
$1,583
Year Ended
December 30,
2012
$1,128
January 1,
2012
$723
115
17. Closed Store Reserves
A summary of closed store reserve activity is as follows:
As Of
December 29,
2013
December 30,
2012
Beginning balance . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,243
363
(1,728)
835
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,713
$ 5,427
4,343
(1,645)
(2,882)
$ 5,243
Store closure and exit costs for 2013 include charges related to the closure of a former Sunflower
warehouse, and adjustments to sublease estimates for stores and facilities already closed. Store
closure and exit costs for 2012 include charges related to the closure of a former Sunflower
administrative facility and one store offset by a $2.0 million favorable adjustment to the store closure
reserve resulting from sublease rents in excess of original estimates and a $1.3 million favorable
adjustment resulting from a lessor’s voluntary termination of a lease obligation previously reserved.
18. Income Taxes
Through the April 17, 2011, the Company’s consolidated financial statements reflect a charge for
federal and state income taxes as if Henry’s had been subject to tax on a separate company basis
during the periods presented. Subsequent to April 17, 2011, the Company’s (provision) benefit for
income taxes is based on the new tax return filing group.
In July 2013, in connection with the IPO, the Company converted from a limited liability company
to a C-corporation. During the period from April 17, 2011 until the corporate conversion, the Company
had elected to be taxed as a corporation for income tax purposes.
Income Tax (Provision) Benefit
Income tax (provision) benefit consists of the following:
Year Ended
December 29,
2013
December 30,
2012
January 1,
2012
U.S. Federal—current . . . . . . . . . . . . . . . . .
U.S. Federal—deferred . . . . . . . . . . . . . . .
$(15,684)
(12,203)
$
(309)
(12,687)
$ (1,433)
17,496
U.S. Federal—total . . . . . . . . . . . . . . . . . . .
State—current . . . . . . . . . . . . . . . . . . . . . . .
State—deferred . . . . . . . . . . . . . . . . . . . . . .
State—total . . . . . . . . . . . . . . . . . . . . . . . . .
(27,887)
(3,299)
(1,555)
(4,854)
(12,996)
(1,105)
(1,166)
(2,271)
16,063
(588)
2,256
1,668
Total (provision) benefit
. . . . . . . . . . . . . . .
$(32,741)
$(15,267)
$17,731
116
Tax Rate Reconciliation
Income tax (provision) benefit differed from the amounts computed by applying the U.S. federal
income tax rate to pretax income as a result of the following:
Federal statutory rate . . . . . . . . . . . . . . . . .
Increase in income taxes resulting from:
State income taxes, net of federal
benefit . . . . . . . . . . . . . . . . . . . . . . . .
Nondeductible transaction costs . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . .
December 29,
2013
Year Ended
December 30,
2012
January 1,
2012
35.00%
35.00%
35.00%
5.18
—
(1.23)
5.17
3.38
0.36
4.03
—
0.22
Effective tax rate . . . . . . . . . . . . . . . . . . . . .
38.95%
43.91%
39.25%
The effective income tax rate decreased to 38.95% in 2013 from 43.91% in 2012 as a result of
increased tax credits and charitable contributions for 2013 and the non-deductible transaction costs
incurred in 2012 related to the Sunflower Transaction. The effective income tax rate increased to
43.91% in 2012 from 39.25% in 2011 as a result of the non-deductible transaction costs incurred in
2012 related to the Sunflower Transaction.
Excess tax benefits associated with stock option exercises and antidilution payments made to
optionholders are credited to stockholders’ equity. The Company uses the tax law ordering approach of
intraperiod allocation to allocate the benefit of windfall tax benefits based on provisions in the tax law
that identify the sequence in which those amounts are utilized for tax purposes. The income tax
benefits resulting from stock awards that were credited to stockholders’ equity were $17.8 million,
$0.1 million and $0.0 for the years ended December 29, 2013, December 30, 2012 and January 1,
2012, respectively.
Deferred Taxes
Significant components of the Company’s deferred tax assets and deferred tax liabilities are as
follows:
Deferred tax assets
Employee benefits . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards and tax
credits . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease related . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . .
Charitable contribution carryforward . . . .
Inventories and other . . . . . . . . . . . . . . . .
As Of
December 29,
2013
December 30,
2012
$ 14,677
$ 13,731
13,263
63,512
6,714
6,496
2,204
538
10,945
54,798
5,048
17,917
—
1,401
Total gross deferred tax assets . . . .
107,404
103,840
Deferred tax liabilities
Depreciation and amortization . . . . . . . . .
Total gross deferred tax liabilities . . .
(73,991)
(73,991)
(56,670)
(56,670)
Net deferred tax asset
. . . . . . . . . . .
$ 33,413
$ 47,170
117
A valuation allowance is established for deferred tax assets if it is more likely than not that these
items will either expire before the Company is able to realize their benefits, or that the realization of
future deductions is uncertain.
If realized, $3.6 million of net operating loss carry forwards will be recognized as a benefit through
additional paid-in capital. Management performs an assessment over future taxable income to analyze
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. The Company has
evaluated all available positive and negative evidence and believes it is probable that the deferred tax
assets will be realized and has not recorded a valuation allowance against the Company’s deferred tax
assets as of December 29, 2013 and December 30, 2012.
At December 29, 2013 and December 30, 2012, the Company has approximately $36.6 million and
$28.4 million of federal net operating loss carryforwards, respectively, which are available to offset future
federal taxable income from 2028 through 2033. The Company has net operating loss carryforwards for
state income tax purposes of $8.4 million and $7.8 million as of December 29, 2013 and December 30,
2012, respectively, which are available to offset future state taxable income from 2014 through 2033. The
utilization of certain of the Company’s net operating loss carryforwards may be limited in a given year.
The Company has alternative minimum tax credits of $0.4 million which are available to offset future
income taxes. These credits have no expiration date. The Company has general business credits of $1.0
million which are available to offset future income taxes until 2032 through 2033.
Federal tax laws impose restrictions on the utilization of net operating loss carryforwards and tax
credit carryforwards in the event of an “ownership change,” as defined by federal income tax code. Such
an ownership change occurred on May 29, 2012, concurrent with the acquisition of Sunflower. The
Company’s ability to utilize net operating loss carryforwards and tax credit carryforwards is subject to
restrictions pursuant to these provisions. Utilization of the federal net operating loss and tax credits will be
limited annually and any unused limitation in a given year may be carried forward to the next year.
In September 2013 the Internal Revenue Service issued final regulations related to tangible property,
which govern when a taxpayer must capitalize or deduct expenses for acquiring, maintaining, repairing
and replacing tangible property. The regulations are effective for tax years beginning January 1, 2014,
however early adoption is permitted. The Company has analyzed the impacts of the tangible property
regulations, and has determined we are in compliance with the regulations. The adoption of the
regulations will not have a significant effect on the Company’s consolidated financial statements.
The Company applies the authoritative accounting guidance under ASC 740 for the recognition,
measurement, classification and disclosure of uncertain tax positions taken or expected to be taken in
a tax return.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
As Of
December 29,
2013
December 30,
2012
January 1,
2012
Beginning balance . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related
$150
to the current year . . . . . . . . . . . . . . . . . .
260
Reductions for tax positions of prior
years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset (liability) . . . . . . . . .
—
$410
$ —
150
—
$150
$ 307
—
(307)
$ —
118
At December 29, 2013 and December 30, 2012 the Company had unrecognized tax benefits of
$0.4 million and $0.2 million (tax effected) that would impact the effective tax rate if recognized.
The Company’s policy is to recognize accrued interest and penalties as a component of income
tax expense.
The Company anticipates an increase in the total amount of unrecognized tax benefits during the
next twelve months related to depreciation for transaction cost allocation in the amount of $0.2 million.
The Company files income tax returns with federal and state tax authorities within the United
States. The statute of limitations remains open for federal and state income tax examinations for the
tax years 2011 and 2012. The statute of limitations remains open for Sunflower’s pre-merger federal
tax returns for 2010 through 2012 and state tax returns for 2008 through 2012.
19. Related-Party Transactions
Transactions with S&F
Prior to April 18, 2011, transactions between Henry’s and S&F and its wholly owned subsidiaries
commonly occurred in the normal course of business. These transactions included allocation of
corporate costs, Henry’s participation in S&F’s centralized cash management system, self-insurance
and share-based compensation plans as described further below.
Corporate Allocations
S&F and its wholly owned subsidiaries provided corporate and other services to Henry’s in the
normal course of business. The financial statements for 2011 through April 17, 2011 include charges
from S&F to Henry’s for corporate expenses relating to these transactions and services, using the
following methodologies:
Direct Costs—costs incurred by S&F and its wholly owned subsidiaries on behalf of Henry’s
were charged directly to the Company. Direct costs relate to store lease payments, common area
maintenance charges, utilities, store design and construction costs, distribution service charges
and other specifically identifiable costs. These specific costs are included within individual line
items in the accompanying consolidated statements of operations.
Allocated Corporate Expenses—corporate overhead costs not specifically charged to Henry’s
were generally allocated based on Henry’s sales, number of stores, case volume shipped or
number of employees in relation to totals for S&F. Allocated corporate costs relate to real estate
management, store design and construction, distribution services and general corporate services.
Costs amounting to $2.6 million allocated to Henry’s for the year ended January 1, 2012, are
included in the accompanying consolidated statements of operations. Those costs were previously
presented as “allocated corporate costs”, but have been reclassified to costs of sales, buying and
occupancy, direct store expenses and selling, general and administrative expenses as appropriate
for the character of each cost item.
Management believes the allocation methodology described above is a fair and reasonable
reflection of the utilization of the services provided to, or the benefit received by, Henry’s during the
periods presented. The allocations may not, however, reflect the expense Henry’s would have incurred
as an independent company for the periods presented. Actual costs that may have been incurred if
Henry’s had been a stand-alone company would depend on a number of factors, including the chosen
organization structure, what functions were outsourced or performed by employees, and strategic
decisions made in the areas such as information technology and infrastructure.
119
Henry’s operated a 241,000 square-foot leased facility primarily dedicated to produce fulfillment
which served both Henry’s and S&F. The operations of the facility have been included in the
accompanying consolidated financial statements of the Company through April 17, 2011 and costs of
the facility have been allocated to Smart & Final Stores based on case volume shipped. On April 18,
2011, S&F kept the operations and assets and liabilities of the warehouse facility and the distribution of
these assets and liabilities to S&F is netted with other assets and liabilities contributed to Henry’s and
reflected as a contribution by S&F in equity, discussed in Note 2, “Basis of Presentation.”
S&F also operated under a Management Services Agreement with an Apollo affiliate, Apollo
Management VI, L.P. whereby the Apollo affiliate provided certain investment banking, management,
consulting and financial planning services to S&F. The Management Services Agreement was for a
ten-year term starting in 2007 and S&F was obligated to pay the Apollo affiliate an annual fee of $1.5
million, payable on a quarterly basis. The management fees allocated to Henry’s as part of the
allocated corporate expenses by S&F were $0.1 million during 2011.
S&F Centralized Cash Management
Henry’s participated in S&F’s centralized cash management system through April 17, 2011. The
majority of cash received from the Henry’s operations was transferred to S&F’s centralized cash
accounts and cash disbursements of Henry’s were funded from the centralized cash accounts on a
daily basis as needed. The cash and cash equivalents held by S&F at the corporate level were not
allocated to Henry’s for any of the periods presented. Transfers of cash to and from S&F’s cash
management system were reflected as S&F equity on the accompanying consolidated statements of
stockholders’ equity. No interest was charged or earned on the cash management account. Under this
system, Henry’s had no external sources of financing, such as available lines of credit, as may be
necessary to operate as a stand-alone entity.
Up to April 17, 2011, all significant intercompany transactions between Henry’s and S&F and its
other subsidiaries have been included in the accompanying consolidated financial statements and
were considered to be effectively settled for cash at the time the transaction was recorded. The total
net effect of the settlement of these intercompany transactions is reflected in the accompanying
consolidated statements of cash flows as a financing activity and in the accompanying consolidated
balance sheets as stockholders’ equity. After April 17, 2011, all transactions between the Company
and S&F were settled in cash.
S&F Share-Based Compensation
S&F granted stock options to employees under the S&F Stock Incentive Plan in which some of the
Henry’s employees participated. Accounting guidance requires all share-based payments to be
recognized in the statement of operations as compensation expense based on their fair values over the
requisite service period of the award, taking into consideration estimated forfeiture rates.
The fair value of the options was estimated on the date of the grant using the Black-Scholes-
Merton option-pricing model. S&F recognized the related compensation expense (the estimated fair
value of the stock options) over the vesting period using the accelerated recognition method.
Compensation expense allocated to Henry’s for employees participating in the S&F Stock
Incentive Plan amounted to $0.0 million for 2011.
S&F Equity
Prior to April 18, 2011, equity refers to the consolidated net assets of Henry’s which reflects S&F’s
consolidated investment in Henry’s. Equity was impacted by capital contributions, cumulative net
120
earnings of Henry’s, certain operational billings and payments/receipts between Henry’s and S&F,
centralized cash management by S&F and general corporate and tax allocations from S&F.
A summary of the activity in the “Net transactions with S&F” in the equity account is as follows:
Transactions with related parties . . . . . . . . . . . . . . . . .
Centralized cash management . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
January 1,
2012
$(54,057)
40,111
1,214
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(12,732)
A summary of the related party transactions between Henry’s and S&F and its subsidiaries
included in the table above is as follows:
Cost of product shipped to affiliate . . . . . . . . . . . . . . . . .
Distribution costs associated with product shipped to
affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of product received from affiliate . . . . . . . . . . . . . .
Distribution costs associated with product received
As of
January 1,
2012
$(62,683)
(4,266)
1,893
from affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,999
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(54,057)
Pursuant to the Transaction, S&F entered into a Transition Services Agreement (“TSA”), under
which S&F received compensation for providing certain post-transaction support services to the
Company for a period up to 180 days after the closing of the Henry’s Transaction. These services
include warehousing and distribution, information technology support, human resources and payroll
support as well as various other administrative support services. Total expenses incurred in connection
with the TSA during 2011 amounted to $4.7 million.
Transactions with Other Related Parties
The Company incurred costs related to its use of a private aircraft owned by a member of senior
management. During 2012 and 2011, fees paid in connection with the use of the aircraft were $0.6
million and $0.4 million, respectively. During 2012, the Company purchased the aircraft for $3.2 million.
Two stockholders are investors in a company that is a supplier of coffee to the Company. During
2013, 2012 and 2011, purchases from this company were $7.9 million, $5.6 million and $3.4 million,
respectively. As of December 29, 2013, the Company had no receivable recorded from this vendor. As
of December 30, 2012, the Company had recorded $0.4 million of accounts receivable due from this
vendor related to vendor rebates. As of December 29, 2013 and December 30, 2012, the Company
had recorded accounts payable due to this vendor of $0.7 million and $0.4 million, respectively.
On August 30, 2007, Sprouts Arizona entered into a services agreement with an outsourced
service provider who is a stockholder of the Company, to perform substantially all of the Company’s
bookkeeping services, including among other matters, general ledger maintenance, payroll processing,
accounts payable processing, accounts receivable processing, and management reporting. The initial
121
term of the services agreement was September 1, 2007 through September 1, 2009 with automatic
renewal for successive one-year terms unless either party provides six months’ termination notice.
During 2013, 2012 and 2011, fees and other expenses paid to the service under the terms of the
Services Agreement were $2.4 million, $2.7 million and $2.2 million, respectively. The Company has
an option to terminate the agreement early for a termination fee of $100,000. During 2013, the scope of
services provided by the outsourced service provider was reduced. Subsequent to December 29,
2013, the Company gave notice to the service provider that it intends to not renew the services
agreement.
As of December 30, 2012, $1.0 million of the Senior Subordinated Promissory Notes were held by
certain members of senior management of the Company. These amounts were subsequently repaid
and no amounts remain outstanding as of December 29, 2013.
In connection with our Credit Facility, we paid an arrangement fee of $0.8 million to an affiliate of
Apollo. Apollo Global Securities, LLC, another affiliate of Apollo, was an underwriter of our IPO and
secondary offering that closed on December 2, 2013, and received fees of approximately $0.9 million
and $1.0 million, respectively.
20. Commitments and Contingencies
Operating Lease Commitments
The Company’s leases include stores, office and warehouse buildings and delivery equipment.
These leases had an average remaining lease term of approximately 9 years as of December 29,
2013.
Rent expense charged to operations under operating leases in 2013, 2012 and 2011 totaled $64.7
million, $54.2 million and $41.1 million, respectively. Rent expense includes $1.4 million, $0.9 million
and $0.6 million of contingent rent for 2013, 2012 and 2011, respectively.
Future minimum lease obligations for operating leases with initial terms in excess of one year at
December 29, 2013 are as follows:
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 72,926
82,405
84,438
82,643
80,696
512,390
Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$915,498
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 2013 to
2032.
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As of December 29, 2013, future minimum lease payments required by all capital and financing
leases during the initial lease term are as follows:
Fiscal Year
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus balloon payment (financing leases)
Less amount representing interest
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . .
. . . . . . . . . . . . . . .
Net present value of capital and financing lease
obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital
Leases
$ 540
538
538
538
538
954
3,646
—
(978)
2,668
(315)
Financing
Leases
$ 12,700
13,440
13,599
13,411
13,552
78,979
145,681
68,053
(96,830)
116,904
(3,080)
Total long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,353
$113,824
The final payment under the financing lease obligations is a noncash 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.
In connection with the acquisition of Sunflower, the Company recorded a purchase price allocation
of $22.6 million for financing lease obligations. In connection with the Henry’s Transaction, the
Company recorded a purchase price allocation of $4.0 million and $63.2 million for the capital and
financing lease obligations, respectively. The Company has recorded these liabilities at their estimated
fair values at date of acquisition.
Other 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 insurance and
self-insurance obligations. Estimation of insurance and self-insurance liabilities require significant
judgments, and actual claim settlements and associated expenses may differ from the Company’s
current provisions for loss. See Note 15, “Self-Insurance Programs” for more information.
During 2012, the Company settled a trademark dispute for $2.7 million.
21. Capital stock
Common stock
On August 6, 2013, the Company completed its initial public offering of 21,275,000 shares of
common stock of Sprouts Farmers Market, Inc., including 2,775,000 shares of common stock issued
as a result of the exercise in full of the underwriters’ option to purchase additional shares, at a price of
$18.00 per share. The Company sold 20,477,215 shares of common stock, including the additional
shares, and certain stockholders sold the remaining 797,785 shares.
The Company received net proceeds from the IPO of approximately $344.1 million, after deducting
underwriting discounts and offering expenses.
On April 24, 2013, the Company paid a total distribution of $282.0 million to stockholders.
Additionally, pursuant to the anti-dilution provisions of the 2011 Option Plan (as defined in Note 23
“Equity-Based Compensation” below), the Company paid $13.9 million to certain vested option holders
and reduced the exercise price on unvested and certain vested options.
123
The payment was made first from retained earnings to date as of the payment date, and payment
in excess of retained earnings was made from additional paid-in capital.
As of December 29, 2013, 147,616,560 shares of common stock have been issued by the
Company, 38.2% of which is held by the Apollo Funds. As of December 29, 2013, 9,681,960 shares of
common stock are reserved for issuance under the Sprouts Farmers Market, Inc. 2013 Incentive Plan
(see Note 23, “Equity-Based Compensation”). During 2013, options were exercised in exchange for the
issuance of 1,194,999 shares of common stock and the Company repurchased 12,375 of the shares of
common stock issued in one exercise. During 2012, options were exercised in exchange for the
issuance of 189,585 shares of common stock and subsequently, the Company repurchased 24,585 of
the shares of common stock.
Equity prior to April 18, 2011 represents the consolidated net assets of Henry’s, which reflected
S&F’s consolidated investment in Henry’s. Activity in the consolidated statement of stockholders’ equity
prior to April 18, 2011 is summarized in Note 19, “Related-Party Transactions.”
Weighted average shares outstanding for periods prior to the Henry’s Transaction assume the
same shares outstanding as immediately after the transaction per accounting guidance.
During 2012, 62,271 of the Company’s shares that were previously held in escrow pursuant to
indemnification arrangements set forth in agreements entered into in connection with the Sunflower
Transaction were forfeited pursuant to the terms of such agreements and redistributed to certain
Company equity holders in accordance with the terms of such agreements and the Company’s LLC
Agreement.
During 2013, the Company received $0.2 million from certain officers as the return of deemed
profits on the purchase of stock in our IPO and the subsequent sale of our stock within six months.
These proceeds are included in “Issuance of shares in IPO, net of issuance costs” in the consolidated
statements of stockholders’ equity and in “Proceeds from the issuance of shares” in the consolidated
statements of cash flows.
Preferred Stock
The Company’s board of directors is authorized, subject to limitations prescribed by Delaware law,
to issue up to 10,000,000 shares of the Company’s preferred stock in one or more series, to establish
from time to time the number of shares to be included in each series, to fix the designation, powers,
preferences, and rights of the shares of each series and any of its qualifications, limitations, or
restrictions, in each case without further action by the Company’s stockholders. The Company’s board
of directors can also increase or decrease the number of shares of any series of preferred stock, but
not below the number of shares of that series then outstanding. The Company’s board of directors may
authorize the issuance of preferred stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of the common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring, or preventing a change in control of the
Company and might adversely affect the market price of the Company’s common stock and the voting
and other rights of the holders of the Company’s common stock. The Company has no current plan to
issue any shares of preferred stock.
22. Net Income (Loss) per Share
The computation of net income (loss) per share is based on the number of weighted average
shares outstanding during the period. The computation of diluted net income (loss) per share includes
the dilutive effect of share equivalents consisting of incremental shares deemed outstanding from the
assumed exercise of options.
124
A reconciliation of the numerators and denominators of the basic and diluted net income (loss) per
share calculations is as follows (in thousands, except per share amounts):
Year Ended
December 29,
2013
December 30,
2012
January 1,
2012
Basic net income per share:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . .
$ 51,326
$ 19,500
$(27,445)
Weighted average shares outstanding . . . .
134,622
119,427
96,954
Basic net income (loss) per share . . . .
$
0.38
$
0.16
$ (0.28)
Diluted net income per share:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . .
$ 51,326
$ 19,500
$(27,445)
Weighted average shares outstanding . . . .
134,622
119,427
96,954
Effect of dilutive options:
Assumed exercise of options to purchase
shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,143
2,354
—
Weighted average shares and
equivalent shares outstanding . . . . .
139,765
121,781
96,954
Diluted net income (loss) per share . . .
$
0.37
$
0.16
$ (0.28)
Weighted average shares outstanding for periods prior to the Henry’s Transaction assume the
same shares outstanding as immediately after the transaction per accounting guidance.
The computation of diluted earnings per share for the year ended December 29, 2013 includes all
options as no options were antidilutive. The computation of diluted earnings per share for the year
ended December 30, 2012 does not include 1,674,112 options as those options would have been
antidilutive. For the year ended January 1, 2012 the computation of diluted loss per share does not
include 6,366,932 options as there was a net loss per share.
23. Equity-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 IPO and replaced the 2011 Option Plan (except with
respect to outstanding options under the 2011 Option Plan). The 2013 Incentive Plan serves as the
umbrella plan for the Company’s stock-based and cash-based incentive compensation programs for its
directors, officers and other team members.
Under the 2013 Incentive Plan, effective July 31, 2013 upon the pricing of the Company’s IPO, the
Company granted to certain officers and team members options to purchase 396,000 shares of
common stock at an exercise price of $18.00 per share, with grant date fair values of $4.65 to $5.92.
The Company also granted to independent directors options to purchase 11,112 shares of common
stock at an exercise price of $18.00 per share, with a grant date fair value of $4.65.
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
125
not issued will not be treated as having been issued for purposes of the share limitation. As of
December 29, 2013, 9,681,960 shares of common stock are reserved 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 (“options”). 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.
During 2013, the Company awarded 209,000 options to team members under the 2011 Option
Plan at exercise prices of $9.15 and grant date fair values of $2.33 to $3.10.
Prior to the IPO options were granted to certain team members at a price determined by the Board
in its sole discretion. The maximum contractual term for such options was seven years. The options
vest in accordance with the terms set forth in the grant letter and vary depending on if they are time-
based or performance-based. Time-based options generally vest ratably over a period of 12 quarters
(three years) and performance-based options vest over a period of three years based on financial
performance targets set for each year. Vesting schedules of future grants may differ. In the event of a
change in control as defined in the 2013 Incentive Plan and 2011 Option Plan, all options become
immediately vested and exercisable.
Shares issued for option exercises are newly issued shares.
The estimated fair values of options granted during 2013, 2012 and 2011 range from $1.07 to
$5.92, and were calculated using the following assumptions:
2013
2012
2011
Dividend yield . . . . . . . . . . . .
Expected volatility . . . . . . . .
Risk free interest rate . . . . .
Expected term, in years . . .
0.00%
0.00%
31.03% to 37.38% 32.36% to 38.59% 38.58% to 41.18%
0.57% to 1.88%
3.63 to 4.83
0.40% to 0.77%
3.75 to 5.00
0.56% to 1.36%
4.00 to 5.00
0.00%
The grant date weighted average fair value of the 2.7 million options issued but not vested as of
December 29, 2013 was $2.09. The grant date weighted average fair value of the 5.8 million options
issued but not vested as of December 30, 2012 was $1.45. The grant date weighted average fair value
of the 6.9 million options issued but not vested as of January 1, 2012 was $1.14.
The following table summarizes grant date weighted average fair value of options granted and
options forfeited:
Year Ended
December 29,
2013
December 30,
2012
January 1,
2012
Grant date weighted average fair value of
options granted . . . . . . . . . . . . . . . . . . . .
Grant date weighted average fair value of
options forfeited . . . . . . . . . . . . . . . . . . . .
$4.27
$1.85
$1.99
$1.17
$1.12
$ —
126
Expected volatility is calculated based upon historical volatility data from a group of comparable
companies over a timeframe consistent with the expected life of the awards. The expected term is
estimated based on the expected period that the options are anticipated to be outstanding after initial
grant until exercise or expiration based upon various factors including the contractual terms of the
awards and vesting schedules. The expected risk-free rate is based on the U.S. Treasury yield curve
rates in effect at the time of the grant using the term most consistent with the expected life of the
award. Dividend yield was estimated at zero as the Company does not anticipate making regular future
distributions to stockholders.
The following table summarizes option activity:
Outstanding at January 2, 2011 . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . .
10,140,240
(558,228)
Outstanding at January 1, 2012 . . . . . .
9,582,012
Exercisable—January 1, 2012 . . . . . . .
2,400,486
Vested/Expected to vest—January 1,
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (In Years)
Aggregate
Intrinsic
Value
Number of
Options
—
$ —
3.33
3.33
3.33
3.33
6.35
$ 6,455
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,582,012
3.33
6.35
$25,767
Outstanding at January 1, 2012 . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Options
9,582,012
2,609,200
(398,222)
(220,000)
Outstanding at December 30, 2012 . . .
11,572,990
Exercisable—December 30, 2012 . . . .
5,743,320
Vested/Expected to vest—
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (In Years)
Aggregate
Intrinsic
Value
$3.33
6.32
3.97
3.33
3.99
3.61
5.65
5.45
$
592
$59,688
$31,849
December 30, 2012 . . . . . . . . . . . . . .
11,533,489
3.98
5.65
$59,639
Outstanding at December 30, 2012 . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Options
11,572,990
616,112
(141,441)
(1,194,999)
Outstanding at December 29, 2013 . . .
10,852,662
Exercisable—December 29, 2013 . . . .
8,120,756
Vested/Expected to vest—
Weighted
Average
Exercise
Price
$ 3.99
14.24
5.24
3.20
3.56
3.16
Weighted
Average
Remaining
Contractual
Life (In Years)
Aggregate
Intrinsic
Value
4.82
4.65
$ 38,628
$375,866
$284,476
December 29, 2013 . . . . . . . . . . . . . .
10,754,773
3.52
4.81
$372,822
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Equity-based compensation expense was as follows:
Year Ended
December 29,
2013
December 30,
2012
January 1,
2012
Cost of sales, buying and occupancy . . . . . . . . . . . .
Direct store expenses . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . .
Total equity-based compensation expense . . . . . . .
$ 672
104
5,004
$5,780
$ 502
127
4,024
$4,653
$ 269
134
3,371
$3,774
Total equity-based compensation expense for 2013 included additional expense of $0.5 million
related to anti-dilution provision payments made to certain option holders. See Note 21, “Stockholders’
Equity” for more information.
The Company recognized income tax benefits of $2.3 million, $1.9 million and $1.5 million for
2013, 2012, and 2011, respectively.
As of December 29, 2013, total unrecognized compensation expense related to outstanding
options was $4.3 million, which, if the service and performance conditions are fully met, is expected to
be recognized over the next 1.1 years on a weighted-average basis.
During the years ended December 29, 2013 and December 30, 2012, the Company received $3.8
million and $0.5 million in cash proceeds from the exercise of options, respectively.
During the years ended December 29, 2013 and December 30, 2012, the Company recorded
$13.4 million and $0.1 million of tax benefits from the exercise of options, respectively.
128
Item 9. Changes In and Disagreements with Accountants on Auditing and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e)) designed to ensure that the information required to be disclosed by us in the reports that we
file or submit under the Exchange Act, is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our
management, including our Chief Executive Officer (our principal executive officer) and our Chief
Financial Officer (our principal financial officer), as appropriate, to allow timely decisions regarding
required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures under the Exchange Act as
of December 29, 2013, the end of the period covered by this Annual Report on Form 10-K. Based on
such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of
such date, our disclosure controls and procedures were not effective because, as of December 29,
2013, we continued to have a material weakness related to our internal controls with respect to costing
of non-perishable inventories.
Management’s Annual Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment
regarding internal control over financial reporting or an attestation report of our registered public
accounting firm due to a transition period established by the rules of the SEC for newly public
companies.
Changes in Internal Control Over Financial Reporting
During the quarterly period ended December 29, 2013, we further refined internal control
procedures to address the previously identified material weakness related to our internal controls with
respect to costing of non-perishable inventories. These internal control changes include the continued
development and implementation of a system to automate the calculation of weighted-average cost on
a per unit basis that is designed to replace our statistical sampling method in the future. We will
continue to use statistical sampling and other estimation methods until we believe that the automated
solution is in place for a sufficient period of time and can be relied upon.
Except for the items described above, during the quarterly period ended December 29, 2013,
there were no changes in our internal control over financial reporting that materially affected, or were
reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
Apollo Global Management, LLC (referred to as “Apollo”) has provided notice to us that, as of
October 24, 2013, certain investment funds managed by affiliates of Apollo beneficially owned
approximately 22% of the limited liability company interests of CEVA Holdings, LLC (“CEVA”). Under
the limited liability company agreement governing CEVA, certain investment funds managed by
129
affiliates of Apollo hold a majority of the voting power of CEVA and have the right to elect a majority of
the board of CEVA. CEVA may be deemed to be under common control with us, but this statement is
not meant to be an admission that common control exists. As a result, it appears that we are required
to provide disclosures as set forth below pursuant to Section 219 of the Iran Threat Reduction and
Syria Human Rights Act of 2012 (“ITRA”) and Section 13(r) of the Exchange Act.
Apollo has informed us that CEVA has provided it with the information below relevant to
Section 13(r) of the Exchange Act. The disclosure below does not relate to any activities conducted by
us and does not involve us or our management. The disclosure relates solely to activities conducted by
CEVA and its consolidated subsidiaries. We have not independently verified or participated in the
preparation of the disclosure below.
“Through an internal review of its global operations, CEVA has identified the following transactions
in an Initial Notice of Voluntary Self-Disclosure that CEVA filed with the U.S. Treasury Department
Office of Foreign Assets Control (“OFAC”) on October 28, 2013. CEVA’s review is ongoing. CEVA will
file a further report with OFAC after completing its review.
The internal review indicates that, in February 2013, CEVA Freight Holdings (Malaysia) SDN BHD
(“CEVA Malaysia”) provided customs brokerage for export and local haulage services for a shipment of
polyethylene resin to Iran shipped on a vessel owned and/or operated by HDS Lines, also an SDN.
The revenues and net profits for these services were approximately $779.54 USD and $311.13 USD,
respectively. In September 2013, CEVA Malaysia provided customs brokerage services for the import
into Malaysia of fruit juice from Alifard Co. in Iran via HDS Lines. The revenues and net profits for these
services were approximately $227.41 USD and $89.29 USD, respectively.
These transactions violate the terms of internal CEVA compliance policies, which prohibit
transactions involving Iran. Upon discovering these transactions, CEVA promptly launched an internal
investigation, and is taking action to block and prevent such transactions in the future. CEVA intends to
cooperate with OFAC in its review of this matter.”
130
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be contained in our definitive Proxy Statement to be filed
with the SEC in connection with our 2014 Annual Meeting of Stockholders (referred to as the “Proxy
Statement”), which is expected to be filed not later than 120 days after the end of our fiscal year ended
December 29, 2013, and is incorporated herein by reference.
We have adopted a Code of Ethics – Principal Executive Officer and Senior Financial Officers
(referred to as the “Code”) that applies to our principal executive officer, principal financial officer and
principal accounting officer and controller. The Code is publicly available on our website at http://
files.shareholder.com/downloads/AMDA-1TN20F/2628473425x0x680152/b0033be9-9cd0-4c06-88cc-
94f992ed6584/Code_of_Ethics_-_Principal_Executive_Officer_and_Senior_Financial_Officers.pdf and
we will provide disclosure of future updates, amendments or waivers from the Code by posting them to
our investor relations website located at http://investors.sprouts.com. The information contained on our
website is not incorporated by reference into this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required by this Item will be set forth in the Proxy Statement and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
The information required by this Item will be set forth in the Proxy Statement and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be set forth in the Proxy Statement and is incorporated
herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item will be set forth in the Proxy Statement and is incorporated
herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
PART IV
1. Financial Statements: The information concerning our financial statements and Report of
Independent Registered Public Accounting Firm required by this Item is incorporated by
reference herein to the section of this Annual Report on Form 10-K in Item 8, titled
“Financial Statements and Supplementary Data.”
2. Financial Statement Schedules: No schedules are required.
3. Exhibits: See Item 15(b) below.
131
(b) Exhibits:
Exhibit
Number
Description
2.1
3.1
3.2
10.1
10.2
10.3
10.4
10.4.1
10.5
10.5.1
10.6
10.7
10.7.1
10.8
10.8.1
10.9
10.10
Plan of Conversion of Sprouts Farmers Markets, LLC (1)
Certificate of Incorporation of Sprouts Farmers Market, Inc. (1)
Bylaws of Sprouts Farmers Market, Inc. (1)
Sprouts Farmers Markets, LLC 2011 Option Plan (2)
Form of Stock Option Agreement under Sprouts Farmers Markets, LLC 2011 Option
Plan (2)
Sprouts Farmers Market, Inc. 2013 Incentive Plan (3)
Employment Agreement, dated April 18, 2011, by and between Sprouts Farmers Markets,
LLC and Doug Sanders (2)
Amendment No. 1, dated August 23, 2012, to the Employment Agreement, dated
April 18, 2011, by and between Sprouts Farmers Markets, LLC and Doug Sanders (2)
Employment Agreement, dated July 15, 2011, by and between Sprouts Farmers Markets,
LLC and Amin N. Maredia (2)
Amendment No. 1, dated April 18, 2013, to the Employment Agreement, dated July 25,
2011 by and between Sprouts Farmers Markets, LLC and Amin N. Maredia (3)
Employment Agreement, dated April 18, 2011, by and between Sprouts Farmers Markets,
LLC and Jim Nielsen (2)
Employment Agreement, dated January 23, 2012, by and between Sprouts Farmers
Markets, LLC and Brandon Lombardi (2)
Amendment No. 1, dated November 15, 2012, to the Employment Agreement, dated
January 23, 2012, by and between Sprouts Farmers Markets, LLC and Brandon
Lombardi (2)
Merger Agreement, dated as of March 9, 2012, by and among Sprouts Farmers Markets,
LLC, Sprouts Farmers Markets Holdings, LLC, Centennial Interim Merger Sub, Inc.,
Centennial Post-Closing Merger Sub, LLC, Sunflower Farmers Markets, Inc. and KMCP
Grocery Investors, LLC, as Representative (2)
First Amendment to Merger Agreement, dated as of May 8, 2012, by and among Sprouts
Farmers Markets, LLC, Sprouts Farmers Markets Holdings, LLC, Centennial Interim
Merger Sub, Inc., Centennial Post-Closing Merger Sub, LLC, Sunflower Farmers Markets,
Inc. and KMCP Grocery Investors, LLC, as Representative (2)
Credit Agreement, dated as of April 23, 2013, among Sprouts Farmers Markets, LLC,
Sprouts Farmers Markets Holdings, LLC, the several lenders from time to time parties
thereto, Credit Suisse AG, Cayman Islands Branch, as Administrative Agent and
Collateral Agent, Goldman Sachs Bank USA, as Syndication Agent et al. (2)
Guarantee and Collateral Agreement, dated as of April 23, 2013, among Sprouts Farmers
Markets, LLC, Sprouts Farmers Markets Holdings, LLC, the subsidiaries party thereto and
Credit Suisse AG, Cayman Islands Branch, as Collateral Agent (2)
10.11†
Nature’s Best Distribution Agreement dated as of April 14, 2010 (4)
10.11.1†
First Amendment, dated as of May 31, 2011, to Nature’s Best Distribution Agreement (4)
10.11.2†
Second Amendment, dated as of February 17, 2012, to Nature’s Best Distribution
Agreement (4)
132
10.11.3†
Third Amendment, dated as of July 6, 2012, to Nature’s Best Distribution Agreement (4)
10.12
10.13
10.14
21.1
23.1
23.2
31.1
31.2
32.1
32.2
Stockholders Agreement dated as of July 29, 2013 (1)
Form of Indemnification Agreement by and between Sprouts Farmers Market, Inc. and
its directors and officers (2)
Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive
Plan (5)
List of subsidiaries
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm
Consent of Buxton Company
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
†
*
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for
confidential treatment submitted separately to the SEC pursuant to Rule 406 under the Securities
Act.
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part
of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of
1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, and otherwise are not subject to liability under those sections.
(1) Filed as an exhibit to Amendment No. 4 to the Registrant’s Registration Statement on Form S-1
(File No. 333-188493) filed with the SEC on July 29, 2013, and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-188493)
filed with the SEC on May 9, 2013, and incorporated herein by reference.
(3) Filed as an exhibit to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1
(File No. 333-188493) filed with the SEC on July 22, 2013, and incorporated herein by reference.
(4) Filed as an exhibit to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
(File No. 333-188493) filed with the SEC on June 17, 2013, and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-192165)
filed with the SEC on November 7, 2013, and incorporated herein by reference.
133
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPROUTS FARMERS MARKET, INC.
Date: February 27, 2014
/s/ J. Douglas Sanders
By:
Name: J. Douglas Sanders
Title:
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ J. Douglas Sanders
President and Chief Executive Officer
February 27, 2014
J. Douglas Sanders
/s/ Amin N. Maredia
Amin N. Maredia
/s/ Donna Berlinski
Donna Berlinski
(Principal Executive Officer)
Chief Financial Officer (Principal
February 27, 2014
Financial Officer)
Vice President and Controller
(Principal Accounting Officer)
February 27, 2014
/s/ Andrew S. Jhawar
Chairman of the Board
February 27, 2014
Andrew S. Jhawar
/s/ Shon Boney
Shon Boney
Director
February 27, 2014
/s/ Joseph Fortunato
Director
February 27, 2014
Joseph Fortunato
/s/ George G. Golleher
George G. Golleher
Director
February 27, 2014
/s/ Terri Funk Graham
Director
February 27, 2014
Terri Funk Graham
/s/ Lawrence P. Molloy
Director
February 27, 2014
Lawrence P. Molloy
/s/ Steven H. Townsend
Steven H. Townsend
Director
February 27, 2014
134
Exhibit
Number
Description
EXHIBIT INDEX
2.1
3.1
3.2
10.1
10.2
10.3
10.4
10.4.1
10.5
10.5.1
10.6
10.7
10.7.1
10.8
10.8.1
10.9
10.10
Plan of Conversion of Sprouts Farmers Markets, LLC (1)
Certificate of Incorporation of Sprouts Farmers Market, Inc. (1)
Bylaws of Sprouts Farmers Market, Inc. (1)
Sprouts Farmers Markets, LLC 2011 Option Plan (2)
Form of Stock Option Agreement under Sprouts Farmers Markets, LLC 2011 Option
Plan (2)
Sprouts Farmers Market, Inc. 2013 Incentive Plan (3)
Employment Agreement, dated April 18, 2011, by and between Sprouts Farmers Markets,
LLC and Doug Sanders (2)
Amendment No. 1, dated August 23, 2012, to the Employment Agreement, dated
April 18, 2011, by and between Sprouts Farmers Markets, LLC and Doug Sanders (2)
Employment Agreement, dated July 15, 2011, by and between Sprouts Farmers Markets,
LLC and Amin N. Maredia (2)
Amendment No. 1, dated April 18, 2013, to the Employment Agreement, dated July 25,
2011 by and between Sprouts Farmers Markets, LLC and Amin N. Maredia (3)
Employment Agreement, dated April 18, 2011, by and between Sprouts Farmers Markets,
LLC and Jim Nielsen (2)
Employment Agreement, dated January 23, 2012, by and between Sprouts Farmers
Markets, LLC and Brandon Lombardi (2)
Amendment No. 1, dated November 15, 2012, to the Employment Agreement, dated
January 23, 2012, by and between Sprouts Farmers Markets, LLC and Brandon
Lombardi (2)
Merger Agreement, dated as of March 9, 2012, by and among Sprouts Farmers Markets,
LLC, Sprouts Farmers Markets Holdings, LLC, Centennial Interim Merger Sub, Inc.,
Centennial Post-Closing Merger Sub, LLC, Sunflower Farmers Markets, Inc. and KMCP
Grocery Investors, LLC, as Representative (2)
First Amendment to Merger Agreement, dated as of May 8, 2012, by and among Sprouts
Farmers Markets, LLC, Sprouts Farmers Markets Holdings, LLC, Centennial Interim
Merger Sub, Inc., Centennial Post-Closing Merger Sub, LLC, Sunflower Farmers Markets,
Inc. and KMCP Grocery Investors, LLC, as Representative (2)
Credit Agreement, dated as of April 23, 2013, among Sprouts Farmers Markets, LLC,
Sprouts Farmers Markets Holdings, LLC, the several lenders from time to time parties
thereto, Credit Suisse AG, Cayman Islands Branch, as Administrative Agent and
Collateral Agent, Goldman Sachs Bank USA, as Syndication Agent et al. (2)
Guarantee and Collateral Agreement, dated as of April 23, 2013, among Sprouts Farmers
Markets, LLC, Sprouts Farmers Markets Holdings, LLC, the subsidiaries party thereto and
Credit Suisse AG, Cayman Islands Branch, as Collateral Agent (2)
10.11†
Nature’s Best Distribution Agreement dated as of April 14, 2010 (4)
10.11.1†
First Amendment, dated as of May 31, 2011, to Nature’s Best Distribution Agreement (4)
10.11.2†
Second Amendment, dated as of February 17, 2012, to Nature’s Best Distribution
Agreement (4)
10.11.3†
Third Amendment, dated as of July 6, 2012, to Nature’s Best Distribution Agreement (4)
10.12
10.13
10.14
21.1
23.1
23.2
31.1
31.2
32.1
32.2
Stockholders Agreement dated as of July 29, 2013 (1)
Form of Indemnification Agreement by and between Sprouts Farmers Market, Inc. and
its directors and officers (2)
Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive
Plan (5)
List of subsidiaries
Consent of PricewaterhouseCoopers LLP, independent registered accounting firm
Consent of Buxton Company
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
†
*
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for
confidential treatment submitted separately to the SEC pursuant to Rule 406 under the Securities
Act.
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part
of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of
1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, and otherwise are not subject to liability under those sections.
(1) Filed as an exhibit to Amendment No. 4 to the Registrant’s Registration Statement on Form S-1
(File No. 333-188493) filed with the SEC on July 29, 2013, and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-188493)
filed with the SEC on May 9, 2013, and incorporated herein by reference.
(3) Filed as an exhibit to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1
(File No. 333-188493) filed with the SEC on July 22, 2013, and incorporated herein by reference.
(4) Filed as an exhibit to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
(File No. 333-188493) filed with the SEC on June 17, 2013, and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-192165)
filed with the SEC on November 7, 2013, and incorporated herein by reference.
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
2 0 1 3 a n n u a l r e p o r t
Corporate
Information
e x e c u t i v e o f f i c e r s
Doug Sanders
President and
Chief Executive Officer
Amin Maredia
Chief Financial Officer
Jim Nielsen
Chief Operating Officer
Brandon Lombardi
Chief Legal Officer and
Corporate Secretary
Steve Black
Chief Information and
Marketing Officer
Ted Frumkin
Senior Vice President of
Business Development
b o a r d o f d i r e c t o r s
Andrew Jhawar
Chairman of the Board
Senior Partner,
Apollo Management, L.P.
Shon Boney
Director
Former Chairman and Co-Founder,
Sprouts Farmers Market
Joseph Fortunato
Director
Chairman of the Board,
Chief Executive Officer and
President, GNC Holdings, Inc.
Terri Funk Graham
Director
Chief Marketing Officer,
RedEnvelope, Inc.
George Golleher
Director
Former Executive Chairman
and Chief Executive Officer,
Smart & Final Inc.
Lawrence P. Molloy
Director
Former Executive Vice President
and Chief Financial Officer,
PetSmart, Inc.
Steven Townsend
Director
Former Chairman and
Chief Executive Officer,
United Natural Foods Inc.
c o r p o r at e h e a d q u a r t e r s
11811 N. Tatum Blvd.
Suite 2400
Phoenix, Arizona 85028
(480) 814-8016
www.sprouts.com
i n v e s t o r r e l at i o n s
11811 N. Tatum Blvd.
Suite 2400
Phoenix, Arizona 85028
(602) 682-3584
investorrelations@sprouts.com
t r a n s f e r a g e n t
American Stock Transfer
& Trust Company
Shareholder Services
(800) 937-5449
www.amstock.com
a n n u a l m e e t i n g
May 15, 2014—9 a.m. PDT
Westin Kierland Hotel
6902 E. Greenway Parkway
Scottsdale, Arizona 85254
i n d e p e n d e n t a u d i t o r
PricewaterhouseCoopers, LLP
s t o c k l i s t i n g
Sprouts Farmers Market’s common
stock is listed on the NASDAQ
Global Select Market under the
symbol “SFM.”
The information contained herein, together with our Form 10-K for the fiscal year ended December 29, 2013,
constitutes our 2013 Annual Report to Stockholders.
s p e c i a l n o t e r e g a r d i n g f o r w a r d - l o o k i n g s tat e m e n t s
Certain statements in this report are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Any statements contained herein
(including, but not limited to, statements to the effect that Sprouts Farmers Market or its management “anticipates,” “plans,” “estimates,” “expects,”
“ believes,” or the negative of these terms and other similar expressions) that are not statements of historical fact should be considered forward-looking
statements. These statements involve certain risks and uncertainties that may cause actual results to differ materially from expectations as of the date of this
annual report. These risks and uncertainties include, without limitation, risks associated with the Company’s ability to successfully compete in its intensely
competitive industry; the Company’s ability to successfully open new stores; the Company’s ability to manage its rapid growth; the Company’s ability to
maintain or improve its operating margins; the Company’s ability to identify and react to trends in consumer preferences; product supply disruptions;
general economic conditions; and other factors as set forth from time to time in the Company’s Securities and Exchange Commission filings. The Company
intends these forward-looking statements to speak only as of the time of this annual report and does not undertake to update or revise them as more
information becomes available, except as required by law.
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