Sprouts Farmers Market

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 28, 2014

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 seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘
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 È
Non-accelerated filer ‘ (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

Accelerated filer
Smaller reporting company ‘

‘

As of June 27, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the
registrant’s voting common stock held by non-affiliates of the registrant was $3,365,500,197, based on the last reported sale price of such stock as
reported on The NASDAQ Global Select Market on such date.

As of February 24, 2015, there were outstanding 152,064,393 shares of the registrant’s common stock, $0.001 par value per share.

Portions of the registrant’s definitive Proxy Statement for its 2015 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 28, 2014.

DOCUMENTS INCORPORATED BY REFERENCE

TABLE OF CONTENTS

PART I

Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial

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

Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . .
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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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 operates as a healthy grocery store that offers fresh, natural and organic food

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 198 stores in 12 states as of February 26, 2015, we are one of the
largest specialty retailers of fresh, natural and organic food in the United States.

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.

Healthy Living for Less. We offer high-quality, fresh, natural and organic products at attractive prices in

every department. Consistent with our farmers market heritage, our offering begins with fresh produce,
which we source, warehouse and distribute in-house and sell at prices we believe to be significantly below
those of other food retailers. In addition, our scale, operating structure and deep industry relationships
position us to consistently deliver “Healthy Living for Less” throughout the store. 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. 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 28,000 to 30,000 sq. ft.), our stores have a farmers market feel, with a bright, open-air atmosphere to
create a comfortable and engaging in-store experience. We strive to be our customers’ everyday healthy
grocery store. We feature fresh produce and bulk foods at the center of the store 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 fresh, 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, healthier alternatives that emphasize our focus on fresh, natural and organic products
at great values.

Customer Service and 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. We believe our well-trained and engaged team
members help 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.

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 $620 billion in 2013. Based on our industry
experience, we believe we are capturing significant market share from conventional supermarkets and
other specialty concepts in this supermarket segment.

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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 66% in 2013, 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.

We believe Sprouts offers consumers a compelling value relative to conventional supermarkets and

mass retailers and 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 $57 billion in the United States and are expected to continue to
grow to $117 billion in 2020, representing a CAGR of 11.0% 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 6.9% 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 75% 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 2014. 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 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.

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 fresh, natural and organic product offering at great value. We feature an expansive
offering of high-quality fresh, natural and organic products at compelling value. 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 that, over time, our differentiated product offering and strong value proposition converts many
trial customers into loyal, lifestyle customers who shop broader categories across the store.

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Resilient business model with strong financial performance. We achieved positive, pro forma

comparable store sales growth of 9.9%, 10.7%, 9.7%, 5.1% and 2.3% in fiscal 2014, 2013, 2012, 2011 and
2010, respectively, calculated in footnote (b) to the table titled “Supplemental Pro Forma Data—Net Sales”
in Item 6. Selected Financial Data. We believe the consistency of our performance over time, even through
the economic downturn from 2008 to 2010, and across geographies and vintages is the result of a number
of factors, including our distinctive value positioning and merchandising strategies, product innovation 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 a complete
assortment of fresh, natural and organic products.

Proven and replicable economic store model. We believe that our store model, combined with our
rigorous store selection process and a growing interest in health and wellness, contribute to our attractive
new store returns on investment. 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. Based on 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 urban, suburban and rural locations in diverse geographies, from
California to Georgia, 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 400 in states in which we currently
operate. We intend to achieve 14% annual new store growth over at least the next five years, balanced
among existing, adjacent and new markets.

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. 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 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. From our
founding in 2002 through December 28, 2014, we opened 115 new stores while successfully rebranding 43
Henry’s Farmers Market (“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 18 stores per year
from fiscal 2009 through fiscal 2014, which includes the 24 new stores we opened in fiscal 2014, to bring
our total store footprint to 191 stores as of December 28, 2014. We expect to continue to expand our store
base with 27 store openings planned in fiscal 2015, of which seven have opened as of the date of this
Annual Report on Form 10-K, and we intend to achieve 14% annual new store growth over at least the
next five years.

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The below diagram shows our store footprint, by state, as of December 28, 2014.

Continue positive comparable store sales. For 31 consecutive quarters, including throughout the
economic downturn from 2008 to 2010, stores under our management have achieved positive comparable
store sales growth. We believe we can continue to grow the number of customer transactions by
enhancing our core value proposition and distinctive customer-oriented shopping experience. 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. We believe these factors,
combined with the continued strong growth in fresh, 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.

Enhance our operating margins. We believe we can continue to enhance our operating margins
through 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, we expect to achieve economies
of scale in sourcing and distribution as we add new stores. Our new stores generally start off at a lower
operating margin and over three to four years, increase toward the company average. As such, the timing
of our openings could impact the overall operating margins in a given year.

Grow the Sprouts Farmers Market brand. We are committed to supporting our stores, product
offerings and brand through a variety of marketing programs, private label offerings and corporate
partnerships. In addition, we will continue our community outreach and charity programs to more broadly
connect with our local communities with the aim of promoting our brand and educating consumers on
healthy choices. We will also 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

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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 through 2014, we continued to open new stores and, as of December 28, 2014, had 191

stores in ten states. We are one of the largest specialty retailers of fresh, 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. 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, 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.

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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 “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 80 to 90 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.

(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 100 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.

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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 2014, we promoted
approximately 3,600 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 28,000 and 30,000 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 fresh, natural and organic
grocer penetration.

The portability of our store design enabled us to open 19 and 24 stores in fiscal 2013 and fiscal
2014, respectively. We have 27 store openings planned in fiscal 2015, of which seven have
opened as of the date of this Annual Report on Form 10-K, and we intend to achieve 14% 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. Foods are generally considered

“fresh” if it is minimally processed or in its raw state not subject to any type of preservation or freezing.
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.

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.

7

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.8% 50.1% 49.1%
Non-Perishables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.2% 49.9% 50.9%

2014

2013

2012

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 natural and organic 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 4,700 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 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 2,500
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,
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 varieties of sausages made fresh daily in-store as well as an abundant

8

selection of entrees, including gourmet burgers, pinwheels, stuffed chicken breasts, pork chops and
roasts. We believe that 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 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.

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 1,500 as of December 28, 2014. 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 850 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

9

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. (referred to as “NB”) is our primary supplier of dry grocery and frozen food

products, accounting for approximately 23%, 23% and 17% of our total purchases in fiscal 2014, 2013 and
2012, respectively. Another 4% of our total purchases in each of fiscal 2014, 2013 and 2012 were made
through our secondary supplier, United Natural Foods, Inc. (referred to as “UNFI”). 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.

We have a broad range of customers from those looking for value, to customers seeking specific
attribute products, to those seeking to eat healthier. 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.

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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 17,500
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 13 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 697,000 customers as of
December 28, 2014, 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 herein. As of
December 28, 2014, we had approximately 1,170,000 Facebook fans, up from approximately
324,000 at the end of 2013. In 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 2014, we had approximately 29 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 regular retail
pricing

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

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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 $4.9 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, 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.

(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. 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.
During 2014, we donated over eight million pounds of produce and other food to local food banks
in the markets in which we operate through our Food Rescue Program, which we launched in
August 2013.

(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 more than 17,000
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 Chief
Development Officer 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 in 2013, 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 400 of these 1,200
potential stores are located in our current markets (nine states). We intend to achieve 14% 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.

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Competition

The $620 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, specialty,
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
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 and lowest during the fourth quarter. Produce,
which contributed approximately 26% of our net sales for the fiscal year ended December 28, 2014, 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.

13

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 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.). In 2014, the FDA issued a proposed rule that would amend the
nutrition facts labeling standards on food products, which if adopted, could affect our costs through
mandatory label or signage updates to products sold in our deli department.

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.

14

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
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.

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

15

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 28, 2014, we had more than 17,000 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.

Corporate Offices

Our principal executive offices are located at 11811 N. Tatum Boulevard, Suite 2400, Phoenix, Arizona

85028, and our telephone number is (480) 814-8016. Effective March 9, 2015, our principal executive
offices will be located at 5455 E. High Street, Suite 111, Phoenix, Arizona 85054. Our website address is
www.sprouts.com. The information on or accessible through our website is not incorporated by reference
into this Annual Report on Form 10-K or in any other report or document we file with the Securities and
Exchange Commission (referred to as the “SEC”).

16

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, results of
operations, 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.

Business and Operating Risks

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 in 2013, 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 24 and 19 stores in
fiscal 2014 and 2013, respectively, and we intend to achieve 14% 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 results of operations 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.

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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:

(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)

general economic conditions;

slowing in the fresh, 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;

cycling against any year of above-average sales results;

consumer preferences, buying trends and spending levels;

product price inflation and deflation;

the number and dollar amount of customer transactions in our stores;

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.

Disruption of significant supplier relationships could negatively affect our business.

NB is our primary supplier of dry grocery and frozen food products, accounting for approximately 23%

of our total purchases in each of fiscal 2014 and 2013. We also have commitments in place with NB to
order certain amounts of our distribution-sourced organic and natural produce, 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 in each of fiscal
2014 and 2013 were made through our secondary supplier, UNFI. Our current contractual relationship with
UNFI continues through December 31, 2018. 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, labeling 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

18

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 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.

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 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.

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,

19

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.

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 and demographics 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, efficacy 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.

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. Both efficiencies from scale and competition could have a material adverse effect on
our business, financial condition and results of operations and adversely affect the price of our common
stock.

20

Real or perceived concerns that products we sell could cause unexpected side effects, illness,
injury or death 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.

As a fresh, natural and organic retailer, 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. Therefore, real or perceived quality or food safety concerns, whether or
not ultimately based on fact, and whether or not involving products sold at our stores, would cause
negative publicity and lost confidence 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 involving our company, our suppliers or the products we sell 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.

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,

21

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.

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.

Our lease obligations could adversely affect our financial performance and 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. 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.

Further, 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.

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”
below), 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.

We may be unable to generate sufficient cash flow to satisfy our debt service obligations, which
could adversely impact our business.

As of December 28, 2014, we had outstanding indebtedness of $261.3 million under our credit
agreement (referred to as the “Credit Facility”). We may incur additional indebtedness in the future,
including borrowings under our 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

22

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:

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(cid:129)

(cid:129)

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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 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.

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

23

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.

Market and Other External Risks

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.

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 26% of our net sales in both fiscal 2014 and 2013.
Although we have not experienced difficulty to date in maintaining the supply of our produce and fresh,
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.

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.

24

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.

The current geographic concentration of our stores creates an exposure to local or regional
downturns or catastrophic occurrences.

As of December 28, 2014, we operated 79 stores in California, making California our largest market
representing 41% of our total stores and 44% of our net sales in the fiscal year ended December 28, 2014.
We also have store concentration in Texas, Arizona and Colorado, operating 33, 27 and 25 stores in those
states, respectively, and representing 44% in the aggregate of our net sales in the fiscal year ended
December 28, 2014. 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.

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. Many 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.

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

25

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. Although fuel prices declined during the second half of 2014, our shipping costs also may increase
if fuel and freight prices 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.

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.

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.

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.

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.

26

Financial Reporting, Legal and Other Regulatory Risks

We, as well as our vendors, are subject to numerous laws and regulations and our compliance with
these laws and regulations 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, reputation, 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 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

27

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.

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.

28

We are also subject to laws and regulations more generally applicable to retailers. Compliance with
such laws and regulations may increase our costs, limit or eliminate our ability to sell certain
products or otherwise adversely affect our business, reputation, results of operations or financial
condition.

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, and such costs may exceed our environmental
liability insurance coverage.

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. 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.

29

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 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 28, 2014, we had undiscounted operating lease
commitments of approximately $1,149 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

30

included elsewhere in this Annual Report on Form 10-K, but are not reflected as liabilities on our
consolidated balance sheets. During fiscal 2014, our rent expense charged under operating leases was
approximately $72.9 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. 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.

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.

31

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. Pursuant to

Section 404 of the Sarbanes-Oxley Act, we are required to file a report by management on the
effectiveness of our internal control over financial reporting, and our independent registered public
accounting firm is required to attest to the effectiveness of our internal control over financial reporting.

In connection with management’s assessment of the effectiveness of our disclosure controls and
procedures for the year ended December 29, 2013, we concluded a material weakness existed related to
our internal controls with respect to the costing of non-perishable inventories. During the fiscal year ended
December 28, 2014, we implemented additional controls and procedures to address this material
weakness and management determined that this material weakness was remediated as of December 28,
2014.

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, 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 28, 2014, we had goodwill of approximately

$368.1 million, which represented 27% 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.”

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
2012, 2013 and 2014, 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.

32

Common Stock Ownership Risks

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.

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.

33

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.

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.

34

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

None.

Item 2.

Properties

As of December 28, 2014, we had 191 stores located in ten states, as shown in the chart below:

State

Number of Stores State

Number of Stores

Arizona . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . .
Colorado . . . . . . . . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . . . . . . . . . .
Kansas . . . . . . . . . . . . . . . . . . . . . . .

27
79
25
4
2

Nevada . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . .
Oklahoma . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . .

5
6
6
33
4

In fiscal 2013, we opened 19 new stores, and in fiscal 2014 we opened 24 new stores. As of
February 26, 2015, we have opened seven stores in fiscal 2015, bringing our total store count to 198.

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. In fiscal 2014, we remodeled 15 stores, relocated one
store and in fiscal 2015, we plan to remodel approximately six stores.

As of December 28, 2014, we leased our two distribution warehouses, as well as our current corporate

office in Phoenix, Arizona, from unaffiliated third parties. Information about such facilities is set forth in the
table below:

Facility

State

Square Footage*

Corporate Office(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution Warehouse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution Warehouse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Arizona
Arizona
Texas

43,000
106,000
117,000

*
(1)

Rounded to the nearest 1,000 square feet
In July 2014, we entered into a 14-year lease for a new approximately 71,000 square foot corporate
office in Phoenix, Arizona to commence in March 2015, at which time we will relocate to this location.

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

35

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.

36

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.

High

Low

2013

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$46.31
$49.45

$33.00
$35.58

2014

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$40.09
$38.35
$33.18
$32.94

$33.92
$25.73
$29.10
$27.17

High

Low

The closing price of our common stock as of February 24, 2015 was $36.64 per share, and the
number of stockholders of record of our common stock as of February 24, 2015 was 146. 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.

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 28, 2014, with the cumulative total return of (i) the Nasdaq Composite Index and (ii) the S&P
Food Retail Index, over the same period.

37

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 17 MONTH CUMULATIVE TOTAL RETURN*
Among Sprouts Farmers Market Inc., the NASDAQ Composite Index, and the S&P Food Retail Index

$160

$140

$120

$100

$80

$60

$40

$20

$0

8/1/13

8/13

9/13 10/13 11/13 12/13 1/14

2/14

3/14

4/14

5/14

6/14

7/14

8/14

9/14 10/14 11/14 12/14

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© 2015 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.

38

Item 6.

Selected Financial Data

Fiscal
2014(4)

Fiscal
2013(3)

Fiscal
2012(2)

Fiscal
2011(1)

Fiscal
2010(1)

(dollars in thousands, except per share data)

Statements of Operations Data:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,967,424 $2,437,911 $1,794,823 $1,105,879 $516,816
366,947
2,082,221
Cost of sales, buying and occupancy . . . . . . .

1,264,514

1,712,644

794,905

Gross profit

. . . . . . . . . . . . . . . . . . . . . . . .
Direct store expenses . . . . . . . . . . . . . . . . . . .
Selling, general and administrative

885,203
581,621

725,267
496,183

530,309
368,323

310,974
238,245

149,869
114,463

expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

95,397

81,795

86,364

58,528

23,277

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 . . . . . . . . . . . . .

—
7,749
725

199,711
(25,063)
596
(1,138)

174,106
(66,414)

—
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
—

8,181
(3,320)

Net income (loss) . . . . . . . . . . . . . . . . . . . $ 107,692 $

51,326 $

19,500 $ (27,445) $ 4,861

Per Share Data:
Net income (loss) per share—basic . . . . . . . . $
Net income (loss) per share—diluted . . . . . . . $
Weighted average shares

0.72 $
0.70 $

0.38 $
0.37 $

0.16 $
0.16 $

(0.28) $
(0.28) $

0.08
0.08

outstanding—basic . . . . . . . . . . . . . . . . . . . .

149,751

134,622

119,427

96,954

64,350

Weighted average shares outstanding—

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

154,328

139,765

121,781

96,954

64,350

Pro forma comparable store sales

growth(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma stores at end of period . . . . . . . . .

9.9%
191

10.7%
167

9.7%
148

5.1%
138

2.3%
129

Fiscal
2014

Fiscal
2013

Fiscal
2012(2)

Fiscal
2011(1)

Fiscal
2010(1)

Other Operating Data:
Stores at beginning of period . . . . . . . . . . . . . .
Opened . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Closed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
Stores at end of period(6) . . . . . . . . . . . . . . . . .
Gross square feet at end of period . . . . . . . . . . 5,252,851 4,582,743 4,064,888 2,721,430 1,035,841
Average store size at end of period (gross

103
9
37
(1)
148

43
7
56
(3)
103

148
19
—
—
167

167
24
—
—
191

40
3

square feet)

. . . . . . . . . . . . . . . . . . . . . . . . . .

27,502

27,442

27,465

26,422

24,089

39

December 28,
2014

December 29,
2013

December 30,
2012(2)

January 1,
2012(1)

January 2,
2011(1)

As of

Balance Sheet Data
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 130,513 $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,369,073
Total capital and finance lease obligations,

77,652 $

1,172,404

67,211 $ 14,542 $ 4,918
1,103,236 761,646 232,636

including current portion . . . . . . . . . . . . . . . . . .
Total long-term debt, including current portion . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . .

150,698
256,357
685,389

119,572
311,240
513,771

107,639
75,409
426,544 294,764
386,755 267,453 156,660

8,248
—

(1) 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) Fiscal 2014 selling, general and administrative expense included $2.6 million for expenses related to

our April 2014 secondary offering and our August 2014 secondary offering.

(5) 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.

(6) During Fiscal 2014, we also relocated one store.

Supplemental Pro Forma Data—Net Sales

Fiscal
2014

Fiscal
2013

Fiscal
2012

Fiscal
2011

Fiscal
2010

(dollars in thousands)

Net sales—actual . . . . . . . . . . . . . . . $2,967,424 $2,437,911 $1,794,823 $1,105,879 $ 516,816
973,543
Pro forma adjustments(a) . . . . . . . .

616,776

196,140

—

—

Pro forma net sales . . . . . . . . . . . . . $2,967,424 $2,437,911 $1,990,963 $1,722,655 $1,490,359

Pro forma comparable store sales

growth(b)

. . . . . . . . . . . . . . . . . . .

9.9%

10.7%

9.7%

5.1%

2.3%

(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.

40

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 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 operates as a healthy grocery store that offers fresh, natural and organic food

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 191 stores in ten states as of December 28, 2014, we are one of
the largest specialty retailers of fresh, natural and organic food in the United States. As of February 26,
2015, we have grown to 198 stores in 12 states (including our first stores in Missouri and Alabama).

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 in the Henry’s Transaction. 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 in the Sunflower Transaction and extended our footprint into New
Mexico, Nevada, Oklahoma and Utah. We refer to the Henry’s Transaction and the Sunflower Transaction
as the “Transactions”. On August 1, 2013, our common stock began trading on the NASDAQ Global Select
Market.

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 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 14% annual new store growth for at least the next five years, including 27 planned new
store openings in 2015, of which seven have opened as February 26, 2015.

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

41

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 2014, 2013 and 2012 were 52-week years ending on
December 28, 2014, December 29, 2013, and December 30, 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 comparable store sales growth to evaluate and identify trends in our sales

performance. Pro forma comparable store sales growth reflects comparable store sales growth on a pro
forma basis 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 the table titled “Supplemental Pro Forma
Data—Net Sales” in Item 6. Selected Financial Data.

Our net sales have increased as a result of new store openings, comparable store sales growth and

the full integration of Sunflower stores. Factors that influence comparable store sales growth and other
sales trends include:

(cid:129)

(cid:129)

(cid:129)

(cid:129)

(cid:129)

(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;

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.

42

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.

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.

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 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 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.

43

Provision for income taxes

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 adopted the regulations for the tax year beginning
December 30, 2013. We have analyzed the impacts of the tangible property regulations and have
determined we are in compliance with the regulations.

44

Factors Affecting Comparability of Results of Operations

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 effect of the Sunflower Transaction had 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 with a comparative discussion of our historical results of operations on a pro
forma basis for fiscal. 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.

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.

45

Results of Operations for Fiscal 2014, 2013 and 2012

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.

Fiscal 2014

Fiscal 2013

Fiscal 2012

(in thousands)

Consolidated Statement of Operations Data:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,967,424 $2,437,911 $1,794,823
1,264,514
Cost of sales, buying and occupancy . . . . . . . . . .

2,082,221

1,712,644

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 debt . . . . . . . . . . . . . . .

Income before income taxes . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . .

885,203
581,621
95,397
7,749
725

199,711
(25,063)
596
(1,138)

174,106
(66,414)

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
2,782
2,155

70,685
(35,488)
562
(992)

34,767
(15,267)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 107,692 $

51,326 $

19,500

Unaudited Supplemental Pro Forma Information(1):
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales, buying and occupancy . . . . . . . . . . . . . . . . . . . . . .

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 debt . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income tax (provision) benefit

Fiscal 2012

(in thousands)

$1,990,963
1,403,158

587,805
403,731
91,611
5,218
2,214

85,031
(40,250)
649
(992)

44,438
(19,912)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

24,526

(1) 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.”

46

Fiscal 2014

Fiscal 2013

Fiscal 2012

Other Operating Data:
Pro forma comparable store sales growth . . . . . . .
Stores at beginning of period . . . . . . . . . . . . . . . . .
Opened . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stores at end of period . . . . . . . . . . . . . . . . . . . . . .

9.9%
167
24
—
—
191

10.7%
148
19
—
—
167

9.7%
103
9
37
(1)
148

Comparison of Fiscal 2014 to Fiscal 2013

Net sales

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comparable store sales growth . . . . . . . . . .

Fiscal 2014

Fiscal 2013

Change

% Change

$2,967,424

$2,437,911

$529,513

22%

(dollars in thousands)

9.9%

10.7%

Net sales increased during 2014 as compared to 2013, primarily as a result of (i) sales growth at

stores operated prior to 2014 and (iii) new store openings.

Net sales growth at stores operated prior to December 29, 2013 contributed $343.0 million, or 65% of
the increase in net sales for 2014. New store openings during 2014 contributed $186.5 million, or 35%, of
the increase in net sales during 2014.

Cost of sales, buying and occupancy and gross profit

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales, buying and occupancy . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fiscal 2014

Fiscal 2013

Change

% Change

$2,967,424
2,082,221
885,203

(dollars in thousands)
$2,437,911
1,712,644
725,267

$529,513
369,577
159,936

29.8%

29.7%

0.1%

22%
22%
22%

Cost of sales, buying and occupancy increased during 2014 compared to 2013, primarily due to the
increase in sales from new store openings and comparable store sales growth, as discussed above. Gross
profit increased $157.0 million as a result of increased sales volume and $2.9 million as a result of
increased margin. The 10 basis point increase in gross margin during 2014 was primarily driven by
leverage in occupancy, utilities and buying costs partially offset by lower merchandise margins from higher
inflation in certain categories and increased promotional activities.

Direct store expenses

Direct store expenses . . . . . . . . . . . . . . . . . . . . . .
Percentage of net sales . . . . . . . . . . . . . . . . . . . .

Fiscal 2014

Fiscal 2013

Change

% Change

$581,621

(dollars in thousands)
$496,183

$85,438

17%

19.6%

20.4%

(0.8)%

Direct store expenses increased $85.4 million, primarily due to a $43.2 million increase for stores

operated prior to 2014. The remaining $42.2 million increase in direct store expenses is associated with
stores opened during 2014. Direct store expenses, as a percentage of net sales, decreased 80 basis
points, primarily due to leverage in payroll, lower utilization of medical benefits, leverage in depreciation
and store level expenses.

47

Selling, general and administrative expenses

Selling, general and administrative expenses . . . . . .
Percentage of net sales . . . . . . . . . . . . . . . . . . . . . . . .

Fiscal 2014

Fiscal 2013

Change % Change

$95,397

(dollars in thousands)
$13,602
$81,795

17%

3.2%

3.4%

(0.2)%

The increase in selling, general and administrative expenses included $4.6 million of advertising expense

due to additional new stores and new markets, $4.2 million of corporate payroll and benefits to support
growth, $2.6 million of corporate bonus due to goal attainment, $1.8 million of regional expenses due to
increased store count and expansion into new regions, $1.3 million increase in IT maintenance due to growth.
$0.9 million increase in depreciation primarily due to accelerated depreciation for corporate office move, $0.5
million increase in secondary offering expenses including related payroll taxes and other less significant
increases. These increases were partially offset by a $3.2 million IPO bonus expense in the prior year, a $1.4
million decrease in accounting fees related to the insourcing of certain functions, and $1.1 million decrease in
share based compensation expense due to vesting of historical grants. Selling, general and administrative
expenses decreased as a percentage of net sales due to leverage in corporate expenses.

Store pre-opening costs

Store pre-opening costs were $7.7 million for 2014 and $5.7 million for 2013. Store pre-opening costs
during 2014 included $7.0 million related to opening 24 stores and relocating one store during that period
and $0.7 million associated with stores opening after 2014. Store pre-opening costs in 2013 included $5.3
million related to opening 19 stores during that period and $0.4 million for stores opened after 2013.

Store closure and exit costs

Store closure and exit costs for 2014 included costs related to the relocation of one store and a $1.2

million favorable adjustment to reserves for settlement with landlord, offset by changes in reserves for
stores and facilities already closed and ongoing expenses related to prior closures. Additionally, we
determined that we should have been recording accretion expense for store closure reserves and made a
correcting entry of $0.9 million to adjust the liability for closed stores to include such accretion for prior
periods. Such accretion was not material to any prior period. Store closure and exit costs for 2013
consisted primarily of costs to close a former Sunflower warehouse and adjustments to sublease estimates
for stores and facilities already closed.

Loss on extinguishment of debt

In 2014, we made a voluntary principal payment of $50.0 million and wrote-off $1.1 million of deferred

financing costs and original issue discount related to that portion of the Term Loan.

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 additional principal payment of $40.0 million.
Additionally, loss on extinguishment of debt includes $0.5 million related to the renewal of a financing
lease.

Interest expense

Interest expense decreased to $25.1 million for 2014 from $37.2 million for 2013, primarily due to a

reduction in the interest rates related to the April 2013 Refinancing, the August 2013 pay down on the
Term Loan, the $40.0 million voluntary principal payment in December 2013, the $50.0 million voluntary
principal payment made in August 2014 and the May 2013 payoff of the Senior Subordinated Notes. These
decreases were partially offset by an increase in interest related to additional capital and financial leases.
See Note 13 “Long-Term Debt” to our audited consolidated financial statements.

48

Income tax provision

Income tax provision increased to $66.4 million for 2014 from $32.7 million for 2013, primarily related
to an increase in income before income taxes. Our effective income tax rate decreased to 38.1% in 2014
from 38.9% in 2013 due to an increase in the enhanced charitable food contribution.

Net income

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of sales . . . . . . . . . . . . . . . . . . . . . . .

Fiscal 2014

Fiscal 2013

Change

% Change

$107,692

(dollars in thousands)
$51,326

$56,366

110%

3.6%

2.1%

1.5%

Net income growth was attributable to strong business performance driven by comparable store sales

and resulting operating leverage, strong performance of new stores opened, change in loss on
extinguishment of debt and reduced interest expense.

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%

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.

49

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 . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
194,958
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.

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.

50

Selling, general and administrative expenses

Fiscal 2013

Fiscal 2012

Change % Change

(dollars in thousands)

As reported:

Selling, general and administrative expenses . . . . $81,795
Percentage of net sales . . . . . . . . . . . . . . . . . . . . .

3.4%

$86,364

$(4,569)

-5%

4.8%

(1.4)%

Pro forma:

Selling, general and administrative expenses . . . . $81,795
Percentage of net sales . . . . . . . . . . . . . . . . . . . . .

3.4%

$91,611

$(9,816)

-11%

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, $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 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. These items were offset by
the items discussed 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 opened 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.

51

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 additional principal payment of $40.0 million.
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.

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 13 “Long-Term Debt” to
our audited consolidated financial statements.

Comparing 2013 to pro forma for 2012, interest expense decreased to $37.2 million for 2013 from

$40.3 million 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.

52

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
Sunflower Transaction. 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 our historical

results of operations and the results of operations of Sunflower for fiscal 2012 after giving effect to the
Transaction and related financing as well as other adjustments as described in the accompanying notes, as
if the Sunflower Transaction 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.

53

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)

$ —

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 debt . . . . .

Income before income taxes . . . .
. . . . . .

Income tax (provision) benefit

530,309
368,323

86,364
2,782
2,155

70,685
(35,488)
562
(992)

34,767
(15,267)

58,732
35,956

13,386
2,450
59

6,881
(2,019)
88
—

4,950
(2,796)

Net income . . . . . . . . . . . . . . . . . . $

19,500

$ 2,154

$

(461)
(287)

(90)
(14)
—

(70)
14
(1)

—

(57)
14

(43)

775

(775)
(261)

(8,049)
—
—

7,535
(2,757)
—
—

4,778
(1,863)

$ 2,915

Per Share Information:
Net income—basic . . . . . . . . . . . . . . . $
Net income—diluted . . . . . . . . . . . . . . $

0.16
0.16

Weighted Average Shares:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . .

119,427
121,781

Pro Forma for
Sunflower
Transaction(2)

$1,990,963

(2)(a)

1,403,158

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

$

$
$

(2)(b)

(2)(c)

(2)(d)

(2)(e)

(2)(f)
(2)(f)

(2)(f)
(2)(f)

The accompanying notes are an integral part of, and should be read together with, this unaudited pro
forma condensed consolidated financial information.

54

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.

(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

55

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.

Quarterly Financial Data

The following table sets forth certain of our unaudited consolidated statements of operations data for

each of the fiscal quarters in fiscal 2014 and fiscal 2013.

Thirteen weeks ended

December 28,
2014

September 28,
2014(1)

June 29,
2014

March 30,
2014(2)

December 29,
2013(3)

September 29,
2013(4)

June 30,
2013(5)

March 31,
2013

$734,593
$211,248
$ 32,813
$ 17,743

$766,415
$226,048
$ 49,656
$ 26,065

$743,810 $722,606
$224,048 $223,859
$ 55,573 $ 61,669
$ 30,151 $ 33,733

$608,236
$174,215
$ 22,699
9,280
$

$633,614
$190,105
$ 36,681
$ 11,461

$622,367 $573,694
$187,027 $173,920
$ 40,078 $ 40,046
$ 12,468 $ 18,117

Net sales . . . . . . . . . . . . . . .
Gross profit
. . . . . . . . . . . . .
Income from operations . . .
Net income . . . . . . . . . . . . .
Net income per share:

Basic . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . .

$
$

0.12
0.11

$
$

0.17
0.17

$
$

0.20 $
0.20 $

0.23
0.22

$
$

0.06
0.06

$
$

0.08
0.08

$
$

0.10 $
0.10 $

0.14
0.14

(1) Period includes $0.9 million of expense related to our August 2014 secondary offering and $1.1 million of loss on

extinguishment of debt related to the $50.0 million additional principal payment made during the period.

(2) Period includes $1.4 million of pre-tax expense related to our April 2014 secondary offering, including payroll taxes on

options exercises.

(3) Period includes $2.0 million of pre-tax expense related to our November 2013 secondary offering, including payroll taxes
on option exercises and $1.0 million of pre-tax loss on extinguishment of debt related to our $40.0 million additional
principal payment made during the period.

56

(4) Period includes $9.5 million of pre-tax 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 pre-tax for team member IPO bonuses paid.

(5) Period includes $8.2 million of pre-tax loss on extinguishment of debt related to our April 2013 Refinancing.

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 . . . . . . . . $ 130,513 $ 77,652 $ 67,211
Cash provided by operating activities . . . . . . . . . . . . . $ 181,218 $160,588 $ 84,431
Cash used in investing activities . . . . . . . . . . . . . . . . . . $(126,671) $ (86,291) $(166,703)
Cash provided by (used in) financing activities . . . . . . $ (1,686) $ (63,856) $ 134,941

Fiscal 2014 Fiscal 2013 Fiscal 2012

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 Sunflower
Transaction in 2012 and 2011. In 2014, we generated $181.2 million in operating cash flows, ended 2014
with $130.5 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, remodel and maintenance
capital expenditures at existing stores, store initiatives and other corporate capital expenditures and
activities. Our cash and cash equivalents position benefits from the fact that we generally collect cash from
sales to customers the same day or, in the case of credit or debit card transactions, within days from the
related sale. In the event that additional financing is required from outside sources, we may not be able to
raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our
business, results of operations and financial condition would be adversely affected.

Operating Activities

Net cash provided by operating activities increased $20.6 million to $181.2 million for 2014 compared

to $160.6 million for 2013. The increase in 2014 includes the impact of stores opened since 2013. In
addition to the increase in the number of stores we operate, we leveraged occupancy, buying, utilities and
fixed direct store expenses with comparable store sales growth. We also experienced a decrease in
interest expense due to reductions in balances from a payoff made with IPO proceeds and other voluntary
repayments and lower interest rate, including a 0.5% lower rate due to our IPO.

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.

Investing Activities

Net cash used in investing activities was $126.7 million for 2014 compared to $86.3 million for 2013.

The increase in cash used for investing activities is primarily related to timing of payments on capital
expenditures for new store openings, store remodels and maintenance capital expenditures.

57

Net cash used in investing activities decreased to $86.3 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.

Capital expenditures consist primarily of investments in new stores, including leasehold improvements

and store equipment, annual maintenance capital expenditures to maintain the appearance of our stores,
sales enhancing initiatives and other corporate investments.

We expect capital expenditures of approximately $100 to 110 million in fiscal 2015, net of $18 million

of estimated landlord tenant improvement allowances, primarily to fund investments in new stores,
remodels, maintenance capital expenditures and corporate capital expenditures. We expect to fund our
capital expenditures with cash on hand, cash generated from operating activities and, if required,
borrowings under our Credit Facility.

Financing Activities

Net cash used in financing activities was $1.7 million for 2014 compared to cash used in financing
activities of $63.9 million for 2013. The decrease in cash used in financing activities of $62.2 million is
related to $295.9 million of payments to stockholders and optionholders in 2013, a $76.7 million decrease
in payments on debt instruments, a $29.4 million increase of excess tax benefits from the exercise of stock
options and payments to optionholders, a $7.2 million increase in proceeds from the exercise of stock
options, a $4.2 million payment of IPO costs in 2013 and a $1.4 million payment of deferred financing costs
in 2013. These decreases in cash used by financing activities were offset by $348.5 million of proceeds
from the issuance of shares in 2013 and a decrease of $4.0 million in cash from landlords related to
financing lease obligations.

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 from 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.

Long-term Debt and Former Credit Facilities

April 2013 Refinancing

Effective 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 existing term loan and revolving
credit indebtedness 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.

58

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 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 28,

2014.

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,

59

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 Payments On August 14, 2014, we made an additional principal payment of $50.0
million on the Term Loan. Such repayment resulted in $1.1 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 2014. 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.

The following table summarizes our contractual obligations as of December 28, 2014, and the effect

such obligations are expected to have on our liquidity and cash flow in future periods:

Contractual Obligations

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) . . . . . . . . . . . . . . . . . . . . . . . . $ 261,250 $
Interest payments on long-term debt(2) . . . . . . . . . . . . . . . . . . . . . . . .
Capital and financing lease obligations(3) . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase commitments(4)

51,624
152,360
1,149,344
377,110

8,750 $ 14,000 $ 12,250 $226,250
2,320
76,054
655,780
—

18,790
30,419
201,916
897

19,926
30,736
204,511
266,931

10,588
15,151
87,137
109,282

Totals(5)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,991,688 $230,908 $536,104 $264,272 $960,404

(1) 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 additional principal
payments of $40.0 million and $50.0 million in December 2013 and August 2014, respectively. 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 28,
2014, repayment terms and contractual interest rates expected to apply through maturity. We estimated LIBOR based on
LIBOR in effect at December 28, 2014 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 28, 2014.

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 $1.4 million for the period of less than one year,
$2.7 million for years one to three, $1.7 million for years four to five, and $1.9 million for the period beyond five years.
Amounts do not include $25.0 million of financing lease obligations related to an administrative facility and classified as
current at December 28, 2014. This financing lease obligation and the related asset are expected to be removed from the
balance sheet in the first quarter of fiscal 2015 as there will be no continuing involvement provisions at the end of the
construction period.

60

(4) Consists primarily of open purchase orders and commitments under noncancelable service and supply contracts as of

December 28, 2014.

(5) As of December 28, 2014, the Company had recorded $27.1 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 2014, is generally more available in the first six months of our fiscal year due to the timing
of peak growing seasons.

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.

61

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.

At December 28, 2014, options to acquire 6,884,997 shares were outstanding, and a total of
6,852,340 options were vested or expected to vest. Equity-based compensation expense totaled
$5.4 million, $5.8 million and $4.7 million in 2014, 2013 and 2012, respectively. The weighted average fair
value of options granted to purchase shares was $10.39, $4.27 and $1.99 in 2014, 2013 and 2012,
respectively. Unrecognized compensation cost relating to outstanding awards was $3.7 million at
December 28, 2014, with a weighted average remaining recognition period of 1.3 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 2014, 2013 and 2011 was estimated using the following assumptions:

Fiscal 2014

Fiscal 2013

Fiscal 2012

Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . 31.19% to 32.19% 31.03% to 37.38% 32.36% to 38.59%
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . 1.20% to 1.33% 0.56% to 1.36% 0.40% to 0.77%
Expected life (in years) . . . . . . . . . . . . . . . . . . . . .

4.00 to 5.00

3.75 to 5.00

0.00%

0.00%

0.00%

4.31

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 audited consolidated financial statements included
elsewhere in this Annual Report on Form 10-K for further discussion of these inputs.

62

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 and 2013 Incentive
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 were based on the trading value of our common stock.

We granted options between May 2, 2011 and December 28, 2014, 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 . . . . . . . . .
March 4, 2014 . . . . . . . . . .
May 19, 2014 . . . . . . . . . .

Number of Options
Granted

Fair Value of
Equity Per
Share/Exercise
Price

9,368,040
772,200
2,141,700
209,000
258,500
66,000
143,000
407,112
320,041
37,047

$ 3.33
$ 3.33
$ 6.01
$ 6.01
$ 9.15
$ 9.15
$ 9.15
$18.00
$39.01
$28.50

Option
Fair Value

Aggregate
Fair Value

$1.07 to $1.19
$1.03 to $1.15
$1.68 to $2.00
$1.66 to $1.88
$2.40 to $3.09
$2.36 to $3.10
$2.33 to $3.06
$4.65 to $5.92
$10.66
$8.07

$10,557,850
$
849,303
$ 4,032,117
391,243
$
727,423
$
180,812
$
$
381,547
$ 2,070,471
$ 3,411,637
298,969
$

We granted RSUs between May 2, 2011 and December 28, 2014, as follows:

Grant Date

Number of RSUs
Granted

Fair Value of
Equity Per
Share

RSU
Fair Value

Aggregate
Fair Value

March 4, 2014 . . . . . . . . . . . . . . . . . . . .
May 19, 2014 . . . . . . . . . . . . . . . . . . . . .

108,980
2,174

$39.01
$28.50

$39.01
$28.50

$4,251,310
61,959
$

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.

63

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 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).

64

The Company’s non-perishable inventory is valued at the lower of cost or market using weighted

averaging and other estimation techniques, the use of which approximates the FIFO method.

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 28, 2014, December 29, 2013 and
December 30, 2012.

Lease Assumptions

The most significant estimates used by management in accounting for leases and the impact of those

estimates are as follows:

Expected lease term—Our expected lease term includes both contractual lease periods and

cancelable option periods where failure to exercise such options would result in an economic penalty. The
expected lease term is used in determining whether the lease is accounted for as an operating lease or a
capital lease. The expected lease term is also used in determining the useful life of the related assets. An
increase in the expected lease term will increase the probability that a lease will be considered a capital
lease and will generally result in higher interest and depreciation expense for a leased property recorded
on our balance sheets.

Incremental borrowing rate—The incremental borrowing rate is primarily used in determining whether

the lease is accounted for as an operating lease or a capital lease. An increase in the incremental
borrowing rate decreases the net present value of the minimum lease payments and reduces the
probability that a lease will be considered a capital lease. For leases which are recorded on our balance
sheets with a related capital lease, the incremental borrowing rate is also used in allocating our rental
payments between interest expense and a reduction of the outstanding obligation.

Fair market value of the leased asset—The fair market value of leased retail property is generally
estimated based on comparable market data provided by third-party sources and evaluated using the
experience of our development staff. Fair market value is used in determining whether the lease is
accounted for as an operating lease or a capital lease.

Accounting owner—With certain leases, we are involved in the construction of the building (or certain

significant changes to an existing building) and we are considered owner of the building for accounting
purposes. We capitalize the amount of the total project costs incurred during the construction period. At the
completion of the construction project, we evaluate whether the transfer to the landlord meets the
requirements for sale-leaseback accounting treatment. A sale and leaseback of the asset is deemed to
occur when construction of the asset is complete and the lease term begins and the relevant sale-
leaseback accounting criteria are met. If we do not pass the criteria for sale-leaseback accounting, we
record a financing lease asset, which is included with “Buildings” and a corresponding financing obligation
in “Capital and financing lease obligations” in our Consolidated Balance Sheets. We allocate each lease
payment between a reduction of the lease obligation and interest expense using the effective interest
method.

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

65

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. When doing a quantitative assessment, 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. As further discussed in Note 3 “Significant Accounting
Policies” to our audited financial statements, 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 2014, 2013,

or 2012 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 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

66

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 2014, 2013 or, 2012.

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 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

67

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.

68

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

As described above under “Management’s Discussion 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
$261.3 million principal outstanding under our Term Loan as of December 28, 2014, 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 $2.6 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.

69

Item 8.

Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

Consolidated Financial Statements for
Sprouts Farmers Market, Inc. and Subsidiaries:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Consolidated Balance Sheets as of December 28, 2014 and December 29, 2013 . . . . . . . . . . . . . . . . . . 72
Consolidated Statements of Operations for the fiscal years ended December 28, 2014, December 29,

2013 and December 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 28, 2014,

December 29, 2013 and December 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Consolidated Statements of Cash Flows for the fiscal years ended December 28, 2014, December 29,

2013 and December 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

70

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 28, 2014 and December 29, 2013, and
the results of their operations and their cash flows for each of the three years in the period ended
December 28, 2014 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 28, 2014, based on criteria established in Internal Control—
Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for these financial
statements, for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in Management’s Annual Report on
Internal Control Over Financial Reporting, appearing under Item 9A of this Form 10-K. Our responsibility is
to express opinions on these financial statements and on the Company’s internal control over financial
reporting based on our audits (which was an integrated audit in 2014). We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included
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. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Phoenix, AZ
February 26, 2015

71

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

December 28,
2014

December 29,
2013

ASSETS
Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,513
14,091
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net
142,793
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,152
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . .
35,580
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

334,129
454,889
194,176
368,078
17,801

—

77,652
9,524
118,256
8,049
18,146

231,627
348,830
195,467
368,078
13,135
15,267

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,369,073

$1,172,404

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,877
29,687
Accrued salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,394
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,136
Current portion of capital and financing lease obligations . . . . . . . . . . . . . . .
7,746
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt

$ 111,159
22,287
32,958
3,395
5,822

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term capital and financing lease obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

220,840
121,562
248,611
74,071
18,600

683,684

175,621
116,177
305,418
61,417

—

658,633

Commitments and contingencies (Note 20)
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,

151,833,334 shares issued and outstanding, December 28, 2014;
147,616,560 shares issued and outstanding, December 29, 2013 . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

152
543,048
142,189

685,389

147
479,127
34,497

513,771

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,369,073

$1,172,404

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

72

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Year Ended

December 28,
2014

December 29,
2013

December 30,
2012

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,967,424
2,082,221
Cost of sales, buying and occupancy . . . . . . . . . . . . . . . . . . . . . . .

$2,437,911
1,712,644

$1,794,823
1,264,514

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 debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

885,203
581,621
95,397
7,749
725

199,711
(25,063)
596
(1,138)

174,106
(66,414)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 107,692

Net income per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

0.72
0.70

Weighted average shares outstanding:

725,267
496,183
81,795
5,734
2,051

139,504
(37,203)
487
(18,721)

84,067
(32,741)

51,326

0.38
0.37

$

$
$

530,309
368,323
86,364
2,782
2,155

70,685
(35,488)
562
(992)

34,767
(15,267)

19,500

0.16
0.16

$

$
$

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

149,751

134,622

119,427

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

154,328

139,765

121,781

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

73

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Shares

Common
Stock

Balances at January 1, 2012 . . . . . . . . . . . . . . . . . . . . . 110,000,000
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
831,314
Issuance of shares to stockholders . . . . . . . . . . . . . . . . .
14,898,136
Issuance of shares related to Sunflower acquisition . . .
Issuance of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,271
Issuance of shares under option plans, net of shares

withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit for exercise of options . . . . . . . . . . . .
Equity-based compensation . . . . . . . . . . . . . . . . . . . . . . .

189,585
(24,585)

—
—

Balances at December 30, 2012 . . . . . . . . . . . . . . . . . . 125,956,721
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
1,194,999
Issuance of shares under option plans . . . . . . . . . . . . . .
20,477,215
Issuance of shares in IPO, net of issuance costs . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,375)
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 . . . . . . . . . . . . . . . . . . . . . . .

—
—
—

Balances at December 29, 2013 . . . . . . . . . . . . . . . . . . 147,616,560
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
4,216,774
Issuance of shares under option plans . . . . . . . . . . . . . .
—
Excess tax benefit for exercise of options . . . . . . . . . . . .
—
Tax effect of forfeiture of vested options in equity . . . . .
—
Equity-based compensation . . . . . . . . . . . . . . . . . . . . . . .

$110
—
1
15
—

—
—
—
—

126
—
1
20
—
—
—
—

—
—
—

147
—
5
—
—
—

Additional
Paid-in
Capital

$ 295,694
—
4,999
89,590
—

(Accumulated
Deficit) /
Retained
Earnings

Total
Stockholders’
Equity

$ (28,351)
19,500
—
—
—

$ 267,453
19,500
5,000
89,605
—

549
(148)
143
4,653

395,480
—
3,820
344,304
(113)
(274,051)
(13,892)
13,424

4,402
(27)
5,780

479,127
—
11,307
47,261
(2)
5,355

—
—
—
—

(8,851)
51,326
—
—
—
(7,978)
—
—

—
—
—

34,497
107,692
—
—
—
—

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
107,692
11,312
47,261
(2)
5,355

Balances at December 28, 2014 . . . . . . . . . . . . . . . . . . 151,833,334

$152

$ 543,048

$142,189

$ 685,389

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

74

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of asset retirement obligation and closed store reserve . . . . . . . . . . . . . . . . .
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
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended

December 28,
2014

December 29,
2013

December 30,
2012

$ 107,692

$ 51,326

$ 19,500

60,362
844
1,494
1,087
(100)
5,355
1,138
16,432

(4,424)
(24,537)
(3,127)
(5,157)
(4,721)
7,400
8,426
13,054

47,217
322
2,482
449
(19)
5,780
18,513
13,731

(1,521)
(19,875)
(3,738)
(4,114)
31,996
890
5,397
11,752

35,773
237
2,590
2,704
(134)
4,653
992
13,853

(2,861)
(1,442)
3,337
(4,586)
(4,673)
2,956
1,533
9,999

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

181,218

160,588

84,431

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 . . . . . . . . . . . . . . . . . . . . . . . .

(127,065)
294
100
—

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(126,671)

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . .

Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
—

(57,000)

—
—
(585)
(3,006)
—
—
577
—

47,261

—

11,067

—

(1,686)

52,861
77,652

(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)

(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
5,000
549
(148)

(63,856)

134,941

10,441
67,211

52,669
14,542

Cash and cash equivalents at the end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 130,513

$ 77,652

$ 67,211

Supplemental disclosure of cash flow information
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 23,768
8,250

$ 38,091
1,276

$ 32,395
1,626

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 in business combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset resulting from the business combinations . . . . . . . . . . . . . . . . . . . . . .

$ 13,993
34,140

$

7,873
10,660

—
—

—
—

$

8,679
10,686
89,605
1,896

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

75

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 28, 2014, the Company operated 191 stores in Arizona, California, Colorado, Georgia, Kansas,
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.

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 Sunflower Transaction.

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, 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 initial public offering (“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.

76

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50.8% 50.1% 49.1%
49.2% 49.9% 50.9%

2014

2013

2012

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 2014, 2013, and 2012 ended on December 28, 2014,
December 29, 2013 and December 30, 2012, respectively, and included 52-weeks. Fiscal years 2014,
2013, and 2012 are referred to as 2014, 2013, and 2012.

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
accounting 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 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:

As Of

December 28,
2014

December 29,
2013

Due from banks for debit and credit card

transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$31,750

$20,463

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Accounts Receivable

Accounts receivable generally represent billings to vendors for earned rebates and other items and
landlords for tenant allowances. 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 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 non-perishable inventory is valued at the lower of cost or market using weighted

averaging and other estimation techniques, the use of which approximates the FIFO method.

The Company believes that all inventories are saleable and no allowances or reserves for shrinkage or

obsolescence were recorded as of December 28, 2014 and December 29, 2013.

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

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.

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A reconciliation of the ARO liability is as follows:

As Of

December 28,
2014

December 29,
2013

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for new facilities . . . . . . . . . . . . . . . . . . .
Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,575
551
136
(310)

$2,952

$2,362
54
322
(163)

$2,575

Closed Store Reserve

The Company recognizes a reserve for future operating lease payments and other occupancy costs

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 and estimates of other
occupancy costs 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 and other
occupancy costs 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 and other occupancy costs 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 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.

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.

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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 2014, 2013 and 2012 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.

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 2014, 2013 and 2012.

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 loss on extinguishment of debt.
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.

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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. The Company accrued $1.6 million, $1.4 million and $0.9 million for the years
ended December 28, 2014, December 29, 2013 and December 30, 2012, respectively for contingent rent.

Financing Lease Obligations

The Company has recorded financing lease obligations for 38 store building leases at both

December 28, 2014 and December 29, 2013. 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.

At December 28, 2014 the Company has also recorded a current financing lease obligation and
related construction in progress totaling $25.0 million for one of its administrative facilities under the lease
accounting guidance noted above. However, the Company expects that there will be no continuing
involvement provisions in effect at the end of the construction period and therefore will be able to remove
the asset and corresponding financing lease obligation at the end of the construction period in the first
quarter of fiscal 2015.

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.

81

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 is based upon Level 3 inputs. Closed store reserves are
recorded at net present value to approximate fair value which is classified as Level 3 in the hierarchy. The
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 is 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
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 28, 2014 and December 29, 2013. The
Company’s estimates of the fair value of long-term debt (including current maturities) 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 related to the Sunflower Transaction
in 2012 totaled $3.2 million and are classified as selling, general and administrative expenses in the
consolidated statements of operations.

See Note 4, “Business Combinations” for further discussion.

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

82

model requires extensive use of subjective assumptions. See Note 23, “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 grant date
fair value of restricted stock units (“RSU“s) is based on the closing price per share of the Company’s stock
on the grant date. The Company recognizes compensation expense 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 and are

recorded as net sales.

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% of total purchases, expressed as a percentage

of our cost of sales, buying and occupancy expense, during both 2014 and 2013.

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 28,
2014

December 29,
2013

December 30,
2012

Advertising expense . . . . . . . . . . . . . . . . . . .
Vendor rebates . . . . . . . . . . . . . . . . . . . . . . .

$ 39,763
(13,614)

$ 34,075
(12,530)

Advertising expense, net of rebates . . . . . .

$ 26,149

$ 21,545

$29,238
(9,905)

$19,333

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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 2014, the Company made a voluntary principal payment of $50.0 million and wrote-off $1.1 million

of deferred financing costs and original issue discount related to that portion of the Term Loan.

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.

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 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.

In May 2012, the Company completed the acquisition of a 100% ownership interest in Sunflower. The

acquisition was structured as 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 per Share

Basic net income per share is calculated by dividing net income by the weighted average number of

shares outstanding during the fiscal period.

Diluted net income 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 and RSUs.

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Comprehensive Income

Comprehensive income equals net income for all periods presented.

Recently Issued Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards

Update (“ASU”) No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for
Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB
Emerging Issues Task Force),” which amends Accounting Standards Codification (“ASC”) 405, “Liabilities.”
The amendments provide guidance on the recognition, measurement, and disclosure of obligations
resulting from joint and several liability arrangements, including debt arrangements, other contractual
obligations, and settled litigation and judicial rulings, for which the total amount of the obligation is fixed at
the reporting date. The amendments are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2013 and should be applied retrospectively. The provisions were effective
from the Company’s first quarter of 2014. The adoption of this guidance did not have a material effect on
the Company’s consolidated financial statements.

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 are 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 provisions were effective from the Company’s first quarter
of 2014. The adoption of this guidance did not have a material effect on the Company’s consolidated
financial statements.

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205)

and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity.” ASU No. 2014-08 amends previous guidance related to the criteria
for reporting a disposal as a discontinued operation by elevating the threshold for qualification for
discontinued operations treatment to a disposal that represents a strategic shift that has a major effect on
an organization’s operations or financial results. This guidance also requires expanded disclosures for
transactions that qualify as a discontinued operation and requires disclosure of individually significant
components that are disposed of or held for sale but do not qualify for discontinued operations reporting.
This guidance is effective prospectively for all disposals or components initially classified as held for sale in
periods beginning on or after December 15, 2014, with early adoption permitted. The Company does not
expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU
No. 2014-09 provides guidance for revenue recognition. The standard’s core principle is that a company
will recognize revenue when it transfers promised goods or services to customers in an amount that
reflects the consideration to which the company expects to be entitled in exchange for those goods or
services. In doing so, companies will need to use more judgment and make more estimates than under
current guidance. These may include identifying performance obligations in the contract, and estimating
the amount of variable consideration to include in the transaction price attributable to each separate
performance obligation. This guidance will be effective for the Company for its fiscal year 2017. The
Company is currently evaluating the potential impact of this guidance.

In June 2014, the FASB issued ASU Update No. 2014-12, “Compensation—Stock Compensation (Topic

718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance

85

Target Could be Achieved after the Requisite Service Period.” The standard requires that a performance
target that affects vesting, and that could be achieved after the requisite service period, be treated as a
performance condition. As such, the performance target should not be reflected in estimating the grant date
fair value of the award. This update further clarifies that compensation cost should be recognized in the
period in which it becomes probable that the performance target will be achieved and should represent the
compensation cost attributable to the period(s) for which the requisite service has already been rendered.
This guidance will be effective for the Company for its fiscal year 2017. The Company does not expect the
adoption of this guidance will have a material impact on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern.” ASU No. 2014-15 requires management to evaluate whether
there is substantial doubt about an entity’s ability to continue as a going concern and to provide related
footnote disclosures in certain circumstances. This guidance will be effective for the Company for its fiscal
year 2016, with early adoption permitted. The Company does not expect the adoption of this guidance to
have a material effect on its consolidated financial statements.

4. Business Combinations

As discussed in Note 1, “Organization and Description of Business” the Company completed the
Sunflower Transaction in May 2012. This transaction was accounted for as a business combination. The
primary reason for this transaction was 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.

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 cash

Fair Value of
Consideration
Transferred

$108,517
89,605

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.

86

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
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 average
useful life) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,800
1,070

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 Sunflower Transaction. 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 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.

87

Unaudited supplemental pro forma information

The following table presents unaudited supplemental pro forma consolidated results of operations
information for 2012. 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 interest expense resulting from
changes in consolidated debt, as if the Sunflower Transaction occurred at the beginning of 2011:

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,990,963
20,672
$

Year Ended
December 30,
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 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 Sunflower Transaction. 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.

5. Accounts Receivable

A summary of accounts receivable is as follows:

As Of

December 28,
2014

December 29,
2013

Vendor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Landlord receivable . . . . . . . . . . . . . . . . . . . . . . . . .
Medical insurance receivable . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,246
1,993
—
3,852

$14,091

$5,183
1,034
1,089
2,218

$9,524

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.

Landlord receivable relates to amounts receivable from landlords for lease incentives.

As of December 28, 2014 and December 29, 2013, the Company had recorded an allowance of $0.3

million and $0.3 million, respectively, for certain receivables.

6. Prepaid Expenses and Other Current Assets

A summary of prepaid expenses and other current assets is as follows:

As Of

December 28,
2014

December 29,
2013

Income tax receivable . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,015
4,769
368

$11,152

$1,427
6,209
413

$8,049

Other current assets consist primarily of current portion of deferred financing costs.

88

7. Property and Equipment

A summary of property and equipment, net is as follows:

As Of

December 28,
2014

December 29,
2013

Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment
. . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . .

$ 115,925
246,830
216,068
58,719

$ 106,580
188,074
167,530
14,060

Total property and equipment . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . .

637,542
(182,653)

476,244
(127,414)

Property and equipment, net

. . . . . . . . . . . . .

$ 454,889

$ 348,830

A summary of leased property and equipment under capital and financing lease obligations is as

follows:

As of

December 28,
2014

December 29,
2013

Capital Leases—Buildings

Gross asset balance . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . .

$ 11,338
(1,364)

$ 2,225
(742)

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,974

$ 1,483

Capital Leases—Equipment

Gross asset balance . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . .

498
(488)

842
(657)

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

10

$

185

Financing Leases

Gross asset balance . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . .

129,614
(9,012)

104,355
(6,204)

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$120,602

$ 98,151

Depreciation expense was $60.5 million, $47.2 million and $34.7 million for 2014, 2013 and 2012,

respectively.

During the fourth quarter of 2014, the Company determined that certain store level equipment was not
being depreciated over the proper useful lives. The Company made an entry resulting in an additional $4.4
million of depreciation expense which was recorded as Direct store expense in the Consolidated
Statements of Operations. This error correction was not material to any prior period. Also during the fourth
quarter of 2014, the Company determined that qualified store development costs were not being properly
deferred as Construction in progress until the time of store opening. This error correction, which was not
material to any prior period, resulted in an increase in Construction in progress and a reduction of Direct
store expense of $3.6 million in the Consolidated Statements of Operations.

89

8. Intangible Assets

A summary of the activity and balances in intangible assets is as follows:

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)

Balance at
December 29,
2013

$ —
—
—
—

$ —

$—

(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)

$—
—

$—

Gross Intangible Assets
Indefinite-lived trade names . . . . . . . . . . . . . . .
Indefinite-lived liquor licenses . . . . . . . . . . . . . .
Finite-lived trade names . . . . . . . . . . . . . . . . . . .
Finite-lived leasehold interests . . . . . . . . . . . . .

Balance at
December 29,
2013

$182,937
2,023
1,800
12,574

Total intangible assets . . . . . . . . . . . . . . . .

$199,334

Additions

Other

$ —
—
—
—

$ —

$—
—
—
—

$—

$

(285)
(3,582)

$ (3,867)

Balance at
December 28,
2014

$182,937
2,023
1,800
12,574

$199,334

Accumulated Amortization
Finite-lived trade names . . . . . . . . . . . . . . . . . . .
Finite-lived leasehold interests . . . . . . . . . . . . .

$

(285)
(3,582)

$ (180)

$—
(1,111) —

$

(465)
(4,693)

Total accumulated amortization . . . . . . . . .

$ (3,867)

$(1,291)

$—

$ (5,158)

a) The Company sold one liquor license obtained in the Sunflower Transaction in 2013.

Amortization expense was $1.3 million, $1.3 million and $1.1 million for 2014, 2013 and 2012,

respectively. Future amortization associated with the net carrying amount of finite-lived intangible assets is
as follows:

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter

$1,292
1,044
967
967
950
3,996

Total amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$9,216

The remaining weighted-average amortization period of leasehold interests acquired total 10.7 years.

The remaining amortization period of the finite-lived trade name is 7.4 years.

90

9. Goodwill

The balance of our goodwill has been $368.1 million as of December 28, 2014, December 29, 2013

and December 30, 2012. As of December 28, 2014, December 29, 2013 and December 30, 2012, the
Company had no accumulated goodwill impairment losses.

10. Other Assets

A summary of other assets is as follows:

As Of

December 28,
2014

December 29,
2013

Insurance deposits . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,726
3,075

$17,801

$ 9,850
3,285

$13,135

11. Accrued Salaries and Benefits

A summary of accrued salaries and benefits is as follows:

As Of

December 28,
2014

December 29,
2013

Bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,138
9,196
7,476
877

$29,687

$ 8,393
6,904
6,634
356

$22,287

12. Other Accrued Liabilities

A summary of other accrued liabilities is as follows:

Gift cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Workers’ compensation / general liability

reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and use tax liabilities . . . . . . . . . . . . . . . . . .
Medical insurance claim reserves . . . . . . . . . . . . .
Unamortized lease incentives . . . . . . . . . . . . . . . .
Accrued occupancy related (CAM, property

taxes, etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closed store reserves . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

As Of

December 28,
2014

December 29,
2013

$ 9,836

$ 7,629

9,308
6,345
5,008
3,407

3,119
1,143
433
2,795

5,575
5,723
4,167
1,660

2,646
1,321
1,413
2,824

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$41,394

$32,958

91

13. Long-Term Debt

A summary of long-term debt is as follows:

Facility

Senior Secured

Term Loan, net of original issue

Maturity

Interest Rate

December 28,
2014

December 29,
2013

As Of

discount

. . . . . . . . . . . . . . . . . . . .

April 2020

Variable

$256,357

$311,240

$60.0 million Revolving Credit

Facility . . . . . . . . . . . . . . . . . . . . .

April 2018

Variable

—

Total Debt . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . .

Long-term debt, net of current

portion . . . . . . . . . . . . . . . . . . . . . . . .

256,357
(7,746)

—

311,240
(5,822)

$248,611

$305,418

Current portion of long-term debt is presented net of issue discount of $1.0 million and $1.2 million at

December 28, 2014 and December 29, 2013, respectively. The noncurrent portion of long-term debt is
presented net of issue discount of $3.9 million and $5.8 million at December 28, 2014 and December 29,
2013, respectively.

Debt Maturities

Aggregate annual maturities on long-term debt as of December 28, 2014 for each of the years are as

follows:

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter

$ 8,750
7,000
7,000
5,250
7,000
226,250

Gross principal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

261,250
(4,893)

Total debt at December 28, 2014 . . . . . . . . . . . . . . . . . . . .

$256,357

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 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.

92

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.

Voluntary Prepayments on Term Loan

On August 14, 2014, the Company made a $50.0 million voluntary principal payment on the Term

Loan. Such payment resulted in a $1.1 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 statements of operations for the year ended
December 28, 2014.

On December 27, 2013, the Company made a $40.0 million voluntary principal payment on 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 28, 2014, the outstanding balance of the Term Loan was $256.4 million, net of issue

discount of $4.9 million. Financing fees and issue discount are being amortized to interest expense over
the term of the Term Loan.

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.

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 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.

93

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 and are not 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 28, 2014. Letters of credit totaling $7.4 million
have been issued as of December 28, 2014 primarily to support the Company’s insurance programs.
Amounts available under the Revolving Credit Facility at December 28, 2014 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;

(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.

94

The Company was in compliance with all applicable covenants under the Credit Facility as of

December 28, 2014.

Former Term Loan and Revolving Credit Facility

On April 18, 2011, the Company, through a subsidiary, entered into senior secured credit facilities
(“Former Senior Secured Credit Facilities”). The Former Senior Secured Credit Facilities included a $310.0
million term loan (“Former Term Loan”) and a $50.0 million revolving credit facility (“Former Revolving
Credit Facility”).

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.

Between 2011 and 2012, the Company capitalized $1.8 million of debt issuance costs (financing fees),

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.

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 . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Workers’ compensation / general liability

reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unfavorable lease liability . . . . . . . . . . . . . . . . . . . .
ARO liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closed store reserves . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

As Of

December 28,
2014

December 29,
2013

$31,282
14,176

$18,248
10,762

12,738
11,408
2,952
1,352
163

13,219
12,884
2,575
3,300
429

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$74,071

$61,417

Unfavorable leasehold interests of $16.7 million were recognized in connection with previous business

combinations and are being amortized on a straight-line basis over the term of the underlying leases.

95

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.

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,
the Company had recorded a $1.1 million receivable from its medical insurance carrier for payments made
in excess of aggregate stop-loss limits. The Company received payment for the 2013 receivable during
2014. No receivable was recorded as of December 28, 2014 as the aggregate stop-loss limit was not
exceeded.

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.

Total expense recorded for the matching under all defined contribution plans:

December 28,
2014

$1,980

Year Ended

December 29,
2013

$1,583

December 30,
2012

$1,128

17. Closed Store Reserves

A summary of closed store reserve activity is as follows:

As Of

December 28,
2014

December 29,
2013

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,713
688
(3,204)
(412)

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,785

$ 5,243
363
(1,728)
835

$ 4,713

96

Additions made during 2014 relate to the closure and relocation of one store and to the closure and

relocation of the Texas warehouse, and usage during 2014 relates to lease payments made during the
period for closed stores. Adjustments made during 2014 include a $0.4 million favorable reserve
adjustment due to a sublease for the Sunflower administrative office and a $1.2 million favorable reserve
adjustment for one store due to settlement with the landlord. Also during 2014, the Company determined
that it should have been recording accretion expense for store closure reserves and made a correcting
entry of $0.9 million to adjust the liability for closed stores to include such accretion for prior periods. The
effect of this error on the Company’s financial statements was not material to any prior period. 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.

18. Income Taxes

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

The income tax provision consists of the following:

Year Ended

December 28,
2014

December 29,
2013

December 30,
2012

U.S. Federal—current . . . . . . . . . . . . . . . . . .
U.S. Federal—deferred . . . . . . . . . . . . . . . .

$(41,217)
(17,007)

$(15,684)
(12,203)

$

(309)
(12,687)

U.S. Federal—total . . . . . . . . . . . . . . . . . . . .
State—current . . . . . . . . . . . . . . . . . . . . . . . .
State—deferred . . . . . . . . . . . . . . . . . . . . . . .

State—total . . . . . . . . . . . . . . . . . . . . . . . . . .

(58,224)
(7,815)
(375)

(8,190)

(27,887)
(3,299)
(1,555)

(4,854)

(12,996)
(1,105)
(1,166)

(2,271)

Total provision . . . . . . . . . . . . . . . . . . . . . . . .

$(66,414)

$(32,741)

$(15,267)

Tax Rate Reconciliation

Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate

to pretax income as a result of the following:

Federal statutory rate . . . . . . . . . . . . . . . . . .
Increase in income taxes resulting from:

State income taxes, net of federal

benefit . . . . . . . . . . . . . . . . . . . . . . . . .
Nondeductible transaction costs . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended

December 28,
2014

December 29,
2013

December 30,
2012

35.00%

35.00%

35.00%

3.78
—
(0.63)

5.18
—
(1.23)

5.17
3.38
0.36

Effective tax rate . . . . . . . . . . . . . . . . . . . . . .

38.15%

38.95%

43.91%

The effective income tax rate decreased to 38.15% in 2014 from 38.95% in 2013 as a result of
increased enhanced charitable food contribution deductions for 2014. 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.

97

Excess tax benefits associated with stock option exercises 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 $47.3 million, $17.8 million and $0.1 million for the years ended December 28,
2014, December 29, 2013 and December 30, 2012, respectively. The income tax benefit for the year
ended December 28, 2014 included $1.4 million of income tax benefits related to stock award activity in
2013. The excess tax benefits are not credited to stockholders’ equity until the deduction reduces income
taxes payable.

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 28,
2014

December 29,
2013

$ 17,930

$ 14,677

3,282
81,014
7,028
—
8,889
1,073

13,263
63,512
6,714
6,496
2,204
538

Total gross deferred tax assets . . . . . . . .

119,216

107,404

Deferred tax liabilities

Depreciation and amortization . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(97,731)
(4,020)
(485)

(73,991)

—
—

Total gross deferred tax liabilities . . . . . .

102,236

(73,991)

Net deferred tax asset . . . . . . . . . . . . . . .

$ 16,980

$ 33,413

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, $0.1 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 28, 2014 and December 29, 2013.

At December 28, 2014 and December 29, 2013, the Company has approximately $4.6 million and

$36.6 million of federal net operating loss carryforwards, respectively, which are available to offset future
federal taxable income from 2029 through 2033. The Company has net operating loss carryforwards for
state income tax purposes of $3.9 million and $8.4 million as of December 28, 2014 and December 29,
2013, respectively, which are available to offset future state taxable income from 2017 through 2034. The

98

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 $0.9 million which are available to offset future income
taxes. These credits have no expiration date. The Company has general business credits of $0.8 million
which are available to offset future income taxes until 2031 through 2034 and state income tax credits of
$0.3 million which are available to offset future state income taxes until 2020 through 2025.

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 adopted the regulations for the tax year beginning
December 30, 2013. The Company has analyzed the impacts of the tangible property regulations and has
determined they are in compliance with the regulations.

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 28,
2014

December 29,
2013

December 30,
2012

Beginning balance . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to

the current year . . . . . . . . . . . . . . . . . . . . .

Net deferred tax asset (liability) . . . . . . . . . .

$410

216

$626

$150

260

$410

$ —

150

$150

At December 28, 2014 and December 29, 2013, the Company had unrecognized tax benefits of $0.6

million and $0.4 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 $0.1 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, 2012 and 2013. 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

The Company incurred costs related to its use of a private aircraft owned by a member of senior
management. During 2012, fees paid in connection with the use of the aircraft were $0.6 million. During
2012, the Company purchased the aircraft for $3.2 million.

99

Two stockholders are investors in a company that is a supplier of coffee to the Company. During 2014,
2013 and 2012, purchases from this company were $8.3 million, $7.9 million and $5.6 million, respectively.
As of December 28, 2014 and 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 28, 2014, December 29, 2013 and
December 30, 2012, the Company had recorded accounts payable due to this vendor of $0.5 million, $0.7
million and $0.4 million, respectively.

In connection with our Credit Facility, we paid an arrangement fee of $0.8 million to an affiliate of
Apollo Global Management, LLC (together with its subsidiaries and the investment funds affiliated with, and
co-investment vehicles (the “Apollo Funds”) managed by, Apollo Management VI, L.P., (“Apollo”). Apollo
Global Securities, LLC, another affiliate of Apollo, was an underwriter of our IPO and secondary offerings
that closed on August 18, 2014, April 2, 2014, and December 2, 2013, and received fees of approximately
$0.9 million, $1.3 million, $0.8 million and $1.0 million, respectively.

One of our senior executives purchased stock in a technology supplier to the Company in January
2015. During 2014, 2013 and 2012, purchases from this company were $5.2 million, $3.6 million and $1.1
million, respectively. As of December 28, 2014, December 29, 2013 and December 30, 2012, the
Company had no receivable recorded from this vendor. As of December 28, 2014 and December 29, 2013,
the Company had recorded accounts payable due to this vendor of $0.6 million and $0.4 million,
respectively. There was no accounts payable recorded for this vendor as of December 30, 2012.

20. Commitments and Contingencies

Operating Lease Commitments

The Company’s leases include stores, office and warehouse buildings. These leases had an average

remaining lease term of approximately nine years as of December 28, 2014.

Rent expense charged to operations under operating leases in 2014, 2013 and 2012 totaled $72.9

million, $64.7 million and $54.2 million, respectively.

Future minimum lease obligations for operating leases with initial terms in excess of one year at

December 28, 2014 are as follows:

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

87,137
99,926
104,585
102,986
98,930
655,780

Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,149,344

The Company has subtenant agreements under which it will receive rent as follows:

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter

$1,404
1,462
1,240
1,005
683
1,936

Total subtenant rent

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,730

100

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 2015 to 2032.

As of December 28, 2014, future minimum lease payments required by all capital and financing leases

during the initial lease term are as follows:

Fiscal Year

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Capital
Leases

$ 1,452
1,451
1,451
1,451
1,294
10,097

Financing
Leases

$ 13,700
13,882
13,952
14,084
13,591
65,956

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus balloon payment (financing leases) . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Less amount representing interest

17,196

—
(6,000)

135,165
67,998
(88,688)

Net present value of capital and financing lease

obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,196
(662)

114,475
(3,447)

Total long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,534

$111,028

(1) At December 28, 2014 the Company has also recorded a current financing lease obligation and

related construction in progress totaling $25.0 million for one of its administrative facilities as it was
deemed the owner during the construction period under lease accounting guidance. However, the
Company expects that there will be no continuing involvement provisions in effect at the end of the
construction period and therefore will be able to remove the asset and corresponding financing lease
obligation at the end of the construction period in the first quarter of fiscal 2015 and therefore has not
included the lease obligation in the future lease payment schedule above.

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. 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.

In addition to our lease obligations, the Company maintains certain purchase commitments with

various vendors to ensure its operational needs are fulfilled. As of December 28, 2014, such future
purchase commitments consisted of $377.1 million.

101

One individual purchase commitment which is in effect from October 1, 2014 through December 31,

2017 for certain goods requires the Company to purchase approximately $76.3 million, $101.0 million and
$133.8 million for fiscal years 2015, 2016 and 2017, respectively. Purchase commitments under this
agreement are based on volumes and commodities prices in effect at the time of purchase. The amounts
above were calculated based on current commodities prices. From October 1, 2014 through December 28,
2014, the Company purchased $15.7 million under this agreement.

Other commitments related to the Company’s business operations cover varying periods of time and
are not significant. These commitments are expected to be fulfilled with no adverse consequences to the
Company’s operations or financial conditions.

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.

As of December 28, 2014, 151,833,334 shares of common stock have been issued by the Company,

10.4% of which are held by the Apollo Funds. As of December 28, 2014, 9,232,525 shares of common
stock are reserved for issuance under the Sprouts Farmers Market, Inc. 2013 Incentive Plan (see Note 23,
“Equity-Based Compensation”). During 2014, options were exercised in exchange for the issuance of
4,216,774 shares of common stock, including a total of 2,340,639 options exercised and the stock sold in
our April and August secondary offerings. 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.

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.

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.

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

102

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 per Share

The computation of net income per share is based on the number of weighted average shares

outstanding during the period. The computation of diluted net income per share includes the dilutive effect
of share equivalents consisting of incremental shares deemed outstanding from the assumed exercise of
options.

A reconciliation of the numerators and denominators of the basic and diluted net income per share

calculations is as follows (in thousands, except per share amounts):

Year Ended

December 28,
2014

December 29,
2013

December 30,
2012

Basic net income per share:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$107,692

$ 51,326

$ 19,500

Weighted average shares outstanding . . . . .

149,751

134,622

119,427

Basic net income per share . . . . . . . . . . .

$

0.72

$

0.38

$

0.16

Diluted net income per share:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$107,692

$ 51,326

$ 19,500

Weighted average shares outstanding . . . . .
Dilutive effect of equity-based awards:
Assumed exercise of options to purchase

shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted Stock Units (“RSU”) . . . . . . . . . . . .

Weighted average shares and

149,751

134,622

119,427

4,570
7

5,143
—

2,354
—

equivalent shares outstanding . . . . . . .

154,328

139,765

121,781

Diluted net income per share . . . . . . . . .

$

0.70

$

0.37

$

0.16

The computation of diluted earnings per share for the year ended December 28, 2014 does not
include 546,567 options as those options were antidilutive. 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.

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 (as defined below)
(except with respect to outstanding options under the 2011 Option Plan). The 2013 Incentive Plan serves

103

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 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.
The options expire seven years from grant date.

On March 4, 2014, under the 2013 Incentive Plan, the Company granted to certain officers and team

members time-based options to purchase an aggregate of 320,041 shares of common stock at an exercise
price of $39.01 per share, with a grant date fair value of $10.66 per share. The Company also granted an
aggregate of 108,980 RSUs with a grant date fair value of $39.01. The options vest ratably over a period of
12 quarters (three years) and the RSUs vest either one-third each year for three years or one-half each
year for two years. The options expire seven years from grant date.

On May 19, 2014, under the 2013 Incentive Plan, the Company granted to a team member and to
independent members of the Company’s board of directors time-based options to purchase an aggregate
of 37,047 shares of common stock at an exercise price of $28.50 per share, with a grant date fair value of
$8.07. The Company also granted to this team member 2,174 RSUs with a grant date fair value of $28.50
per share. The options vest ratably over a period of 12 quarters (three years) and the RSUs vest either
one-third each year for three years. The options expire seven years from grant date.

The aggregate number of shares of common stock that may be issued to team members and directors

under the 2013 Incentive Plan may not exceed 10,089,072. Shares subject to awards granted under the
2013 Incentive Plan which are subsequently forfeited, expire unexercised or are otherwise not issued will
not be treated as having been issued for purposes of the share limitation. As of December 28, 2014,
9,232,525 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. 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.

104

The estimated fair values of options granted during 2014, 2013 and 2012 range from $1.12 to $10.66,

and were calculated using the following assumptions:

2014

2013

2012

Dividend yield . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . .
Risk free interest rate . . . . . . . . .
Expected term, in years . . . . . . .

0.00%

0.00%
31.19% to 32.19% 31.03% to 37.38% 32.36% to 38.59%
0.40% to 0.77%
3.75 to 5.00

0.56% to 1.36%
4.00 to 5.00

1.20% to 1.33%
4.31

0.00%

The grant date weighted average fair value of the 0.9 million options issued but not vested as of
December 28, 2014 was $5.42. 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 following table summarizes grant date weighted average fair value of options granted and options

forfeited:

Year Ended

December 28,
2014

December 29,
2013

December 30,
2012

Grant date weighted average fair value of

options granted . . . . . . . . . . . . . . . . . . . . .

$10.39

Grant date weighted average fair value of

options forfeited . . . . . . . . . . . . . . . . . . . . .

$ 6.79

$4.27

$1.85

$1.99

$1.17

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 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—December 30,

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

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,533,489

3.98

5.65

$59,639

105

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—December 29,

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

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,754,773

3.52

4.81

$372,822

Outstanding at December 29, 2013 . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of
Options

10,852,673
357,088
(107,990)
(4,216,774)

Outstanding at December 28, 2014 . . . . . . .

6,884,997

Exercisable—December 28, 2014 . . . . . . . .

6,026,945

Vested/Expected to vest—December 28,

Weighted
Average
Exercise
Price

$ 3.56
37.92
6.79
2.68

5.82

4.11

Weighted
Average
Remaining
Contractual
Life (In Years)

Aggregate
Intrinsic
Value

3.85

3.65

$161,688

$187,196

$186,757

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,852,340

5.75

3.84

$172,957

RSUs

The fair value of RSUs is based on the closing price of the Company’s common stock on the grant
date. RSUs generally vest annually over a period of two or three years. The estimated fair values of RSUs
granted during 2014 range from $28.50 to $39.01.

The following table summarizes RSU activity:

Outstanding at December 29, 2013 . . . . . . . .
Awarded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Released . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of
RSUs

—

111,154

—
(8,215)

Outstanding at December 28, 2014 . . . . . . . .

102,939

Expected to vest—December 28, 2014 . . . . .

97,922

Weighted
Average
Grant Date
Fair Value

Weighted
Average
Remaining
Contractual
Life (In Years)

Aggregate
Intrinsic
Value

—
38.80
—
39.01

38.79

38.79

0.99

0.96

$3,369

$3,205

106

Equity-based compensation expense was as follows:

Year Ended

December 28,
2014

December 29,
2013

December 30,
2012

Cost of sales, buying and occupancy . . . . . . . . . . . . .
Direct store expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . .

Total equity-based compensation expense . . . . . . . .

$ 695
788
3,872

$5,355

$ 672
104
5,004

$5,780

$ 502
127
4,024

$4,653

The Company recognized income tax benefits of $2.1 million, $2.3 million and $1.9 million for 2014,

2013, and 2012, respectively.

As of December 28, 2014, total unrecognized compensation expense related to outstanding options

was $3.7 million, which, if the service and performance conditions are fully met, is expected to be
recognized over the next 1.3 years on a weighted-average basis.

As of December 28, 2014, total unrecognized compensation expense related to outstanding RSUs

was $2.7 million, which, if the service and performance conditions are fully met, is expected to be
recognized over the next 1.8 years on a weighted-average basis.

During the years ended December 28, 2014, December 29, 2013, and December 30, 2012, the
Company received $11.1 million, $3.8 million and $0.5 million in cash proceeds from the exercise of
options, respectively.

During the years ended December 28, 2014, December 29, 2013 and December 30, 2012, the

Company recorded $47.3 million, $13.4 million and $0.1 million of excess tax benefits from the exercise of
options, respectively.

During the years ended December 28, 2014, the Company capitalized $0.6 million of equity-based
compensation expense related to new store development as Property and Equipment. No equity-based
compensation was capitalized during the years ended December 29, 2013 and December 30, 2012.

107

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) under the Exchange Act) 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 Securities and Exchange
Commission, 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 28, 2014, the end of the period covered by this Annual Report on Form 10-K. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 28,
2014, our disclosure controls and procedures are effective.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over

financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect

misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial
reporting as of December 28, 2014, using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013
Framework). Based on this assessment, our management has concluded that our internal control over
financial reporting was effective as of December 28, 2014.

PricewaterhouseCoopers LLP, our independent registered public accounting firm, assessed the
effectiveness of our internal control over financial reporting, as stated in the firm’s report which is included
with the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

Remediation of Prior Material Weakness in Internal Control Over Financial Reporting

As previously disclosed in our Annual Report on Form 10-K for the year ended December 29, 2013

and each of the interim periods ending March 30, 2014, June 29, 2014 and September 28, 2014 on Form
10-Q, in connection with management’s assessment of the effectiveness of our disclosure controls and
procedures, we determined that we had a material weakness related to our internal controls with respect to
costing of non-perishable inventories.

108

During the fiscal year ended December 28, 2014, we implemented additional controls and procedures

to address this material weakness. These controls and procedures included the implementation of an
automated system to calculate the cost of non-perishable inventory on a per unit basis.

We have completed the documentation and testing of these new controls and procedures surrounding

the costing of non-perishable inventories and the controls have been operating for a sufficient period of
time that management has concluded that the previously disclosed material weakness related to the
costing of non-perishable inventories has been remediated as of December 28, 2014.

Changes in Internal Control Over Financial Reporting

Other than the remediation of the previously reported material weakness relating to inventory

discussed above, there were no changes in our internal control over financial reporting that occurred during
the quarterly period ended December 28, 2014 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

109

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 2015 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 28, 2014, 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. Except
for such Code, the information contained on or accessible through our website is not incorporated by
reference into this Annual Report on Form 10-K.

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 or
accessible through 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

Stockholder 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.

110

(b) Exhibits:

Exhibit
Number

Description

2.1

3.1

3.2

10.1

10.2

10.3

10.3.1

10.3.2

10.4

10.4.1

10.5

10.5.1

10.6

10.6.1

10.7

10.7.1

10.8

10.8.1

10.9

10.10

10.11†

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)

Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (4)

Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013 Incentive
Plan (4)

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)

Amendment No. 1, dated March 12, 2014, to the Employment Agreement, dated April 18,
2011 by and between Sprouts Farmers Markets, LLC and Jim Nielsen (5)

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)

Amended and Restated Nature’s Best Distribution Agreement, dated as of August 13,
2014 (6)

111

10.12

10.13

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)

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 confidential treatment
order granted pursuant to a request submitted separately to the SEC pursuant to Rule 406 under the
Securities Act.

(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 the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 7,

2014, and incorporated herein by reference.

(5) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on March 12,

2014, and incorporated herein by reference.

(6) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on November 6,

2014, and incorporated herein by reference.

112

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 26, 2015

/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

J. Douglas Sanders

Director, President and Chief Executive
Officer (Principal Executive Officer)

February 26, 2015

/s/ Amin N. Maredia

Amin N. Maredia

/s/ Donna Berlinski

Donna Berlinski

Chief Financial Officer (Principal Financial

February 26, 2015

Officer)

Vice President and Controller (Principal

February 26, 2015

Accounting Officer)

/s/ Andrew S. Jhawar

Chairman of the Board

February 26, 2015

Andrew S. Jhawar

/s/ Shon Boney

Shon Boney

Director

February 26, 2015

/s/ Joseph Fortunato

Director

February 26, 2015

Joseph Fortunato

/s/ Terri Funk Graham

Director

February 26, 2015

Terri Funk Graham

/s/ Lawrence P. Molloy

Director

February 26, 2015

Lawrence P. Molloy

/s/ Steven H. Townsend

Director

February 26, 2015

Steven H. Townsend

113

Exhibit
Number

Description

EXHIBIT INDEX

2.1

3.1

3.2

10.1

10.2

10.3

10.3.1

10.3.2

10.4

10.4.1

10.5

10.5.1

10.6

10.6.1

10.7

10.7.1

10.8

10.8.1

10.9

10.10

10.11†

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)

Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (4)

Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013 Incentive
Plan (4)

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)

Amendment No. 1, dated March 12, 2014, to the Employment Agreement, dated April 18,
2011 by and between Sprouts Farmers Markets, LLC and Jim Nielsen (5)

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)

Amended and Restated Nature’s Best Distribution Agreement, dated as of August 13,
2014 (6)

10.12

10.13

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)

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 confidential treatment
order granted pursuant to a request submitted separately to the SEC pursuant to Rule 406 under the
Securities Act.

(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 the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 7,

2014, and incorporated herein by reference.

(5) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on March 12,

2014, and incorporated herein by reference.

(6) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on November 6,

2014, and incorporated herein by reference.

Exhibit 21.1

Subsidiaries of Sprouts Farmers Market, Inc.

Subsidiary

Jurisdiction of
Organization

Control by

Registrant

Subsidiary

Sprouts Farmers Markets Holdings, LLC . . . . . .
Sunflower Farmers Markets, LLC . . . . . . . . . . . .
SFM, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SFM Logistics, LLC . . . . . . . . . . . . . . . . . . . . . . .
SFM Manager, LLC . . . . . . . . . . . . . . . . . . . . . . .
SF Market Texas, LLC . . . . . . . . . . . . . . . . . . . . .
Henry’s Holdings LLC . . . . . . . . . . . . . . . . . . . . . .
Sprouts Farmers Market Texas, LP . . . . . . . . . .
SH Markets, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
SFM Beverages, Inc.

Delaware
Delaware
Delaware
Arizona
Texas
Delaware
Delaware
Texas
Texas
Texas

100%

100%
100%
100%
100%
100%
100%
100%
100%
100%

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.

333-190920) of Sprouts Farmers Market, Inc. of our report dated February 26, 2015 relating to the financial
statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-
K.

Exhibit 23.1

/s/ PricewaterhouseCoopers LLP

Phoenix, Arizona
February 26, 2015

CONSENT OF BUXTON COMPANY

Exhibit 23.2

We hereby consent to the use of our name and other references to us and our reports by Sprouts Farmers
Market, Inc. in its filings with the Securities and Exchange Commission during or relating to 2015.

BUXTON COMPANY

/s/ David Glover

By
Name: David Glover
Title:
Date:

Chief Financial Officer
2/17/2015

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, J. Douglas Sanders, certify that:

1. I have reviewed this Annual Report on Form 10-K of Sprouts Farmers Market, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit

to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this

report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over

financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation

of internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: February 26, 2015

/s/ J. Douglas Sanders
J. Douglas Sanders
President and Chief Executive Officer
(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Amin N. Maredia, certify that:

1. I have reviewed this Annual Report on Form 10-K of Sprouts Farmers Market, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit

to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this

report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over

financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation

of internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: February 26, 2015

/s/ Amin N. Maredia
Amin N. Maredia
Chief Financial Officer
(Principal Financial Officer)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

Exhibit 32.1

In connection with the annual report of Sprouts Farmers Market, Inc., (the “Company”) on Form 10-K

for the fiscal year ended December 28, 2014 as filed with the Securities and Exchange Commission on the
date hereof (the “Report”), I, J. Douglas Sanders, President and Chief Executive Officer of the Company,
certify, based on my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities

Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial

condition and results of operations of the Company.

Date: February 26, 2015

/s/ J. Douglas Sanders

J. Douglas Sanders
President and Chief Executive Officer
(Principal Executive Officer)

This certification accompanies the Report to which it relates, is not deemed filed with the Securities and
Exchange Commission and is not to be incorporated by reference into any filing of the Company under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made
before or after the date of the Form 10-K), irrespective of any general incorporation language contained in
such filing.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

Exhibit 32.2

In connection with the annual report of Sprouts Farmers Market, Inc., (the “Company”) on Form 10-K

for the fiscal year ended December 28, 2014 as filed with the Securities and Exchange Commission on the
date hereof (the “Report”), I, Amin N. Maredia, Chief Financial Officer of the Company, certify, based on
my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities

Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial

condition and results of operations of the Company.

Date: February 26, 2015

/s/ Amin N. Maredia

Amin N. Maredia
Chief Financial Officer
(Principal Financial Officer)

This certification accompanies the Report to which it relates, is not deemed filed with the Securities and
Exchange Commission and is not to be incorporated by reference into any filing of the Company under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made
before or after the date of the Form 10-K), irrespective of any general incorporation language contained in
such filing.