sprouts.com
10682
Dear fellow stockholders,
Dear fellow stockholders,
I am extremely proud of the progress of ttthe Sprouts brand in
I am extremely proud of the progress of ttthe Sprouts brand in
2016. Despite an intensely competitive envvvironment driven by
2016. Despite an intensely competitive envvvironment driven by
the longest deflationary period in recennnt times, our team’s
the longest deflationary period in recennnt times, our team’s
commitment to helping customers embrrrace healthy living is
commitment to helping customers embrrrace healthy living is
stronger than ever.
stronger than ever.
This passion for pu�ing customers firsttt began at a simple
This passion for pu�ing customers firsttt began at a simple
produce stand, where our farmers maaarket heritage took
produce stand, where our farmers maaarket heritage took
root many decades ago. Today, our pionnneering combination
root many decades ago. Today, our pionnneering combination
of healthy products, value prices and eeexceptional customer
of healthy products, value prices and eeexceptional customer
experience is not only the engine drivinggg our growttwth, but the
experience is not only the engine drivinggg our growttwth, but the
reason customers coast to coast continue ttto say, “I love Sprouts.”
reason customers coast to coast continue ttto say, “I love Sprouts.”
It’s this recipe for success that led Sprouts to industry-leading
It’s this recipe for success that led Sprouts to industry-leading
sales growth in 2016. Net sales grew to mmmore than $4 billion,
sales growth in 2016. Net sales grew to mmmore than $4 billion,
representing 15% growth on a 52-week bbbasis, and same store
representing 15% growth on a 52-week bbbasis, and same store
sssaaallleeesss gggrrreeewww 222.777%%%. WWWeee gggeeennneeerrraaattteeeddd $$$222555444 mmmiiilllllliiiooonnn cccaaassshhh fffrrrooommm ooopppeeerrraaa-
sssaaallleeesss gggrrreeewww 222.777%%%. WWWeee gggeeennneeerrraaattteeeddd $$$222555444 mmmiiilllllliiiooonnn cccaaassshhh fffrrrooommm ooopppeeerrraaa-
tions, enabling us to self-fund our unittt growth and make
tions, enabling us to self-fund our unittt growth and make
significant investments in our business. Our strong balance
significant investments in our business. Our strong balance
sheet and operating cash flows alloweeed us to invest $167
sheet and operating cash flows alloweeed us to invest $167
million in capital expenditures and rettturn $294 million to
million in capital expenditures and rettturn $294 million to
shareholders through our share buy-backkk program.
shareholders through our share buy-backkk program.
On the new store front, we opened 36 stooores during this time,
On the new store front, we opened 36 stooores during this time,
representing 17% unit growth, and deeelivering one of the
representing 17% unit growth, and deeelivering one of the
strongest weekly sales averages since ouuur inception. We also
strongest weekly sales averages since ouuur inception. We also
greeted customers at their doorsteps with their favorite
greeted customers at their doorsteps with their favorite
Sprouts products through the expansiiion of our Amazon
Sprouts products through the expansiiion of our Amazon
Prime Now home delivery service to nine stores in four
Prime Now home delivery service to nine stores in four
markets. In 2017, we will open an additionaaal 32 stores, including
markets. In 2017, we will open an additionaaal 32 stores, including
our first openings in Florida and North CCCarolina, and expand
our first openings in Florida and North CCCarolina, and expand
home delivery to even more markets thhhrough our Amazon
home delivery to even more markets thhhrough our Amazon
Prime Now partnership.
Prime Now partnership.
Product innovation remains a toppp ppprioritttyyy in 2017, and is whyyy
Product innovation remains a toppp ppprioritttyyy in 2017, and is whyyy
Sprouts is the go-to partner in the natural and orggganic indus-
Sprouts is the go-to partner in the natural and orggganic indus-
try for vendors and manufacturers. From colorful, fresh fruits
try for vendors and manufacturers. From colorful, fresh fruits
and vegetables to barrels of wholesome grains and nuts to
and vegetables to barrels of wholesome grains and nuts to
full-service deli, meat and seafood counters, we continually
full-service deli, meat and seafood counters, we continually
evolve our merchandise assortment to refleccct customer
evolve our merchandise assortment to refleccct customer
preferences. Our trusted natural and organic ppprivate label
preferences. Our trusted natural and organic ppprivate label
program now totals more than 2,100 items featuuuring unique
program now totals more than 2,100 items featuuuring unique
flavor profiles, representing more than 10% of overrrall revenue,
flavor profiles, representing more than 10% of overrrall revenue,
and outpacing company averages in sales gggrowth and
and outpacing company averages in sales gggrowth and
same-store sales growth. Additionally, 80 storeees now offer
same-store sales growth. Additionally, 80 storeees now offer
fresh grab-and-go options, including expanded deli offer-
fresh grab-and-go options, including expanded deli offer-
ings, freshly prepared prrroteins and healthy sides, a salad bar
ings, freshly prepared prrroteins and healthy sides, a salad bar
and fresh soups and juiceees.
and fresh soups and juiceees.
Our most important invvvestment continues to be our nearly
Our most important invvvestment continues to be our nearly
25,000 team members aaacross the country. Last year, they
25,000 team members aaacross the country. Last year, they
completed more than 50000,000 training hours, which ensures
completed more than 50000,000 training hours, which ensures
they are prepared to serrrve our customers and advance their
they are prepared to serrrve our customers and advance their
careers at Sprouts. Their kkknowledgeable and engaging customer
careers at Sprouts. Their kkknowledgeable and engaging customer
service is inspired by ourrr company passion statement.
service is inspired by ourrr company passion statement.
This passion isn’t motivaaated by trend, but by that simple farm
This passion isn’t motivaaated by trend, but by that simple farm
stand that inspired ourrr growth. Today, our commitment to
stand that inspired ourrr growth. Today, our commitment to
fresh and natural exteeends throughout the entire store,
fresh and natural exteeends throughout the entire store,
including bakery, deli,,, meat and seafood, bulk, packaged
including bakery, deli,,, meat and seafood, bulk, packaged
grocery, frozen and vitaaamins/body care.
grocery, frozen and vitaaamins/body care.
In 2017, we remain focusssed on product innovation, new store
In 2017, we remain focusssed on product innovation, new store
expansion, enhancing ttthe customer experience in and out
expansion, enhancing ttthe customer experience in and out
of store and continueeed investments in technology and
of store and continueeed investments in technology and
infrastructure. We contttinue to scale for growth so we can
infrastructure. We contttinue to scale for growth so we can
bring Sprouts to even mmmore consumers looking for a shop-
bring Sprouts to even mmmore consumers looking for a shop-
ping experience that harrrkens back to simpler times.
ping experience that harrrkens back to simpler times.
The Sprouts Board of DDDirectors, Executive Leadership Team
The Sprouts Board of DDDirectors, Executive Leadership Team
and I believe we have theee right strategies and the right team to
and I believe we have theee right strategies and the right team to
drive longgg-term shareholllder value, and we thank yyyou for yyyour
drive longgg-term shareholllder value, and we thank yyyou for yyyour
continuuued support.
continuuued support.
Sincerely,
Sincerely,
Sincerely,
Sincerely,
Amin Maredia
AAAAmmmiiinnn MMMaaaarrreeeeddddiiiaaaa
AAAAmmmiiinnn MMMaaaarrreeeeddddiiiaaaa
Amin Maredia
Chief EEExecutive Officerrr
Chief EEExecutive Officerrr
OUR EXECUTIVE TEAM
OUR EXECUTIVE TEAM
ANNUAL MEETING
ANNUAL MEETING
Amin Maredia
Amin Maredia
Chief Executive Officer
Chief Executive Officer
Jim Nielsen
Jim Nielsen
President & Chief Operating Officer
President & Chief Operating Officer
Mayyy 2, 2017 - 8 am CDT
Mayyy 2, 2017 - 8 am CDT
Omnnni Dallas Hotel
Omnnni Dallas Hotel
555 SSS. Lamar St.
555 SSS. Lamar St.
Dallaaas, Texas 75202
Dallaaas, Texas 75202
Brad Lukow
Brad Lukow
Chief Financial Officer
Chief Financial Officer
Dan Sanders
Dan Sanders
Chief Operations Officer
Chief Operations Officer
Daniel Bruni
Daniel Bruni
Chief Information Officer
Chief Information Officer
Ted Frumkin
Ted Frumkin
Chief Development Officer
Chief Development Officer
Shawn Gensch
Shawn Gensch
Chief Marketing Officer
Chief Marketing Officer
Brandon Lombardi
Brandon Lombardi
Chief Human Resources and Legal Officer
Chief Human Resources and Legal Officer
STOOOCK LISTING
STOOOCK LISTING
NASSSDAQ Global Select Market: SFM
NASSSDAQ Global Select Market: SFM
TRAAARANSFER AGENT
TRAAARANSFER AGENT
Ameeerican Stock Transfer & Trust Co.
Ameeerican Stock Transfer & Trust Co.
Sharrreholder Services: 800-937-5449
Sharrreholder Services: 800-937-5449
amstttock.com
amstttock.com
INDDDEPENDENT AUDITOR
INDDDEPENDENT AUDITOR
PriceeewaterhouseCoopers LLP
PriceeewaterhouseCoopers LLP
INVVVESTOR RELATIONS
INVVVESTOR RELATIONS
invessstorrelations@sprouts.com
invessstorrelations@sprouts.com
SUPPPPORT OFFICE
SUPPPPORT OFFICE
5455 E. High Street, Suite 111
5455 E. High Street, Suite 111
Phoeeenix, AZ 85054 | 480-814-8016
Phoeeenix, AZ 85054 | 480-814-8016
OUR BOARD
OUR BOARD
Joseph Fortunato, Chairman of the Board;
Joseph Fortunato, Chairman of the Board;
Aminnn Maredia
Aminnn Maredia
Operating Partner, J.W. Childs Associates, L.P.;
Operating Partner, J.W. Childs Associates, L.P.;
Former Chairman and CEO, GNC Holdings, Inc.
Former Chairman and CEO, GNC Holdings, Inc.
Chief Executive Officer,
Chief Executive Officer,
Sprooouts Farmers Market
Sprooouts Farmers Market
KKKrrriiisssttteeennn BBBllluuummm,,, SSSeeennniiiooorrr VVViiiccceee PPPrrreeesssiiidddeeennnttt aaannnddd
KKKrrriiisssttteeennn BBBllluuummm,,, SSSeeennniiiooorrr VVViiiccceee PPPrrreeesssiiidddeeennnttt aaannnddd
Chief Information Officer, Frito-Lay
Chief Information Officer, Frito-Lay
Shon Boney, Former Chairman and
Shon Boney, Former Chairman and
Co-Founder, Sprouts Farmers Market
Co-Founder, Sprouts Farmers Market
LLLaaawwwrrrrence P. Molloy
LLLaaawwwrrrrence P. Molloy
Formmmer Chief Financial Officer,
Formmmer Chief Financial Officer,
Undeeer Armour, Inc.
Undeeer Armour, Inc.
SSSttteveeen Townsend, Consultant and
SSSttteveeen Townsend, Consultant and
Formmmer Chairman and President/CEO,
Formmmer Chairman and President/CEO,
Terri Funk Graham, Chief Marketing Officer,
Terri Funk Graham, Chief Marketing Officer,
Uniteeed Natural Foods, Inc.
Uniteeed Natural Foods, Inc.
Origin Entertainment Inc.
Origin Entertainment Inc.
This Annual Report contains “forward-looking statements” that reflect our current views about future events and
This Annual Report contains “forward-looking statements” that 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
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. For more
achievement to be materially different from those expressed or implied by the forward-looking statements. For more
information, see the section titled “Special Note Regarding Forward-Looking Statements” included in the Annual Report
information, see the section titled “Special Note Regarding Forward-Looking Statements” included in the Annual Report
on Form 10-K included herewith.
on Form 10-K included herewith.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2017
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.)
5455 East High Street, Suite 111
Phoenix, Arizona 85054
(Address of principal executive offices and zip code)
(480) 814-8016
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value
Name of Each Exchange on Which Registered
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 (cid:95) No (cid:133)
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 (cid:133) No (cid:95)
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 (cid:95) No (cid:133)
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 (cid:95) No (cid:133)
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. (cid:95)
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 (cid:95)
Non-accelerated filer
Accelerated filer
(cid:133)
Smaller reporting company (cid:133)
(cid:133) (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 (cid:133) No (cid:95)
As of July 1, 2016, 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 $3,373,682,066, based on the last reported sale price of such stock as reported on The
NASDAQ Global Select Market on such date.
As of February 22, 2017, there were outstanding 136,471,877 shares of the registrant’s common stock, $0.001 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2017 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 January 1, 2017.
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.................................................
Item 8. Financial Statements and Supplementary Data ....................................................................
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 ...............................................................................
PART IV
Page
1
12
29
30
31
31
32
36
38
59
60
97
97
97
98
98
98
98
98
Item 15. Exhibits and Financial Statement Schedules .........................................................................
Item 16. Form 10-K Summary .............................................................................................................
Signatures ............................................................................................................................................
98
101
102
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 Market, Inc. and, where
appropriate, its subsidiaries.
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 of 1933,
as amended (referred to as the “Securities Act”), and Section 21E of the Securities Exchange Act of
1934, as amended (referred to as the “Exchange Act”), including, but not limited to, statements regarding
our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue,
projected expenses, and plans and objectives of management. In some cases, you can identify forward-
looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,”
“plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the
negative of these terms, and similar expressions intended to identify forward-looking statements.
However, not all forward-looking statements contain these identifying words. These forward-looking
statements reflect our current views about future events and involve known risks, uncertainties, and other
factors that may cause our actual results, levels of activity, performance, or achievement to be materially
different from those expressed or implied by the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed in the section titled “Risk
Factors” included in this 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
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, packaged groceries, meat and
seafood, deli, baked goods, dairy products, frozen foods, body care and natural household items catering
to consumers’ growing interest in health and wellness. Since our founding in 2002, we have grown
rapidly, significantly increasing our sales, store count and profitability. With 256 stores in 14 states as of
February 23, 2017, we are one of the largest healthy grocery stores selling fresh, natural and organic
food in the United States.
At Sprouts, we believe healthy living is a journey and every meal is a choice. 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, convenient and differentiated shopping experience featuring a broad
selection of innovative healthy products, and knowledgeable team members who we believe provide best-
in-class customer engagement and product education.
Healthy Living for Less. 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 competitive prices and promote value 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 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. 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. Instead, we offer a full shopping experience featuring high-quality and innovative
healthier alternatives that emphasize our focus on fresh, natural and organic products at great values.
Customer Engagement and Education. Our commitment to “Healthy Living for Less” is shared by
our more than 24,000 team members throughout the entire organization who are dedicated to our passion
for educating and engaging with our customers with the goal of making healthy eating easier and more
accessible. We believe our well-trained and engaged team members, as well as the materials we
disseminate through our digital and social media platforms, 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 Heritage
In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding
in 2002 through January 1, 2017, we continued to open new stores while successfully rebranding 43
Henry’s Farmers Market (referred to as “Henry’s”) and 39 Sunflower Farmers Market (referred to as
“Sunflower”) stores added through acquisitions to the Sprouts banner. These three businesses all trace
their lineage back to Henry’s Farmers Market and were built with similar store formats and operations
including a strong emphasis on value, produce and service in smaller, convenient locations. The
consistency of these formats and operations was an important factor that allowed us to rapidly and
1
successfully rebrand and integrate each of these businesses under the Sprouts banner and on a common
platform.
On August 1, 2013, our common stock began trading on the NASDAQ Global Select Market and on
August 6, 2013, we closed our initial public offering (referred to as 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:120)
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, and our small box format allows for quick in-and-out
service. The below diagram shows a sample layout of our stores:
(cid:120)
(cid:120)
Customer Engagement. We are committed to providing, and believe we have, best-in-class
customer engagement, 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, as 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.
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
2
enter new markets across a variety of socio-economic areas, including markets with varying
levels of fresh, natural and organic grocer penetration.
(cid:120)
Team Members. 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. We strive to
create a strong and unified company culture and develop team members throughout the entire
organization, and we assist our store teams with our store support office and regional teams.
We have prioritized making investments in training that we believe enhances our team
members’ knowledge, particularly with respect to our expanded and evolving product offerings,
so our team members can continue to engage and assist our customers. We believe our team
members contribute to our consistently high service standards and that this helps us
successfully open and operate our stores.
Our Product Offering
We are a complete food retailer that offer a full shopping experience for our customers. We focus
and tailor our assortment to fresh, natural and organic foods and healthier options throughout all of our
departments.
Fresh, Natural and Organic Foods
Our product offerings focus on fresh, natural and organic foods. Foods are generally considered
“fresh” if they are 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:120)
(cid:120)
(cid:120)
Crop production must not use irradiation, sewage sludge, synthetic fertilizers, prohibited
pesticides, and genetically modified organisms.
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.
Multi-ingredient organic food must be comprised of 95% or more certified organic content.
Further, retailers that handle, store or sell organic products must implement measures to protect
their organic character.
3
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 ..........................................................
Non-Perishables ..................................................
50.4%
49.6%
50.8 %
49.2 %
50.8 %
49.2 %
2016
2015
2014
Departments
While we focus on providing an abundant and affordable offering of natural and organic produce,
our stores also include the following departments that enable customers to have a full grocery shopping
experience: packaged groceries, meat and seafood, deli, vitamins and supplements, dairy and dairy
alternatives, bulk items, baked goods, frozen foods, natural health and body care, and beer and wine. We
believe each of our departments provides high-quality, value-oriented offerings for our customers which
we continuously refine with our customer preferences in mind, including our ongoing fresh food and deli
expansion initiatives in select stores, comprised of freshly prepared proteins and sides, full service deli
case, salad bar, fresh juices and soup station to provide more convenient prepared food options for our
customers.
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
feature competitively priced specialty and innovative products, with great taste profiles and quality and
strict ingredient standards that we believe equal or exceed national brands. Our private label program
now accounts for over 10% of our revenue and features over 2,150 products. Our private label brands
drive value by offering our customers lower prices while still delivering generally higher margin as
compared to branded products. We believe our private label products build and enhance the Sprouts
brand and allow us to distinguish ourselves from our competitors, promoting customer loyalty and
creating a destination shopping experience.
Sourcing and Distribution
We manage the buying of, and set the standards for, the products we sell, and we source our
products from over 800 vendors and suppliers, both domestically and internationally.
We believe, based on our industry experience, that our strong relationships in the produce business
provide us a competitive advantage and enable us to offer high-quality produce at prices we believe are
significantly below those of conventional food retailers and even further below high-end natural and
organic food retailers. Given the importance of produce to our stores, we source, warehouse and
distribute all produce in-house. This ensures our produce meets our high quality standards. We are
supported by dedicated regional procurement teams that provide us flexibility to procure produce on local,
regional and national levels.
We have department and product specifications that ensure a consistently high level of quality
across product ingredients, production standards and other key measures of freshness, natural and
organic standards. These specifications are measured at both entry and exit points to our facilities. We
distribute all produce to our stores from two leased distribution facilities and two third-party operated
distribution facilities, and we manage every aspect of quality control in this department. We believe we
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currently have sufficient capacity at these facilities to support our near-term growth plans in our current
markets, but we continue to explore expansion opportunities as our needs evolve.
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.
KeHE Distributors, LLC (referred to as “KeHE”), is our primary supplier of dry grocery and frozen
food products, accounting for approximately 33%, 31% and 31% of our total purchases in fiscal 2016,
2015 and 2014, respectively. Another 4% of our total purchases in each of fiscal 2016, 2015 and 2014,
respectively, 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 Pricing, Marketing and Advertising
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 40% of our approximately 18,900 products on sale at any given time.
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 16 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 one million customers as of January 1, 2017, 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 and billboards, as well as targeted
direct mail in specific markets.
We also continue to promote and enhance our digital presence. We developed and maintain a
smartphone app on which we include mobile coupon clip, customized offers based on the user’s
preferences and in-store scan features, and our website, www.sprouts.com, on which we display our
weekly sales flyers and offer special deals. Our website also features on-line ordering for holiday meals
and catering trays. 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. We
continue to expand our social media platform. As of January 1, 2017, we had approximately 1.4 million
Facebook fans. In addition, we have partnered with Amazon Prime to offer 1-hour or 2-hour deliveries
from our stores in selected markets. We will continue to explore online ordering opportunities to further
connect with our customers.
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In addition to the weekly circulars, we offer 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 2016, we had approximately 34 department-wide promotions at each store throughout the
year, which included our Vitamin Extravaganza, Frozen Frenzy, Gluten-Free Favorites, and Incredible
Bulk Sales, in addition to our routine Double-Ad Wednesday promotion and 72-Hour Sales.
Seasonality
Our business is subject to modest seasonality. Our average weekly sales per store 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 24% of our net sales for the fiscal year ended January
1, 2017, is generally more available in the first six months of our fiscal year due to the timing of peak
growing seasons.
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 include
“trial” customers that limit their shopping to specific products or departments, such as produce. Through
department-specific promotions, in-store signage, and customer education, many 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.
Responsible Retailing
We are committed to operating our business in a way that respects social and environmental well-
being. We call this commitment “responsible retailing,” and we believe we have a unique opportunity to
positively impact the communities in which we operate.
Sprouts Sustainable Practices
Our commitment to our communities extends to operating our business in a way that minimizes our
impact on the environment and safeguards the health of our communities. As we grow, we are able to
achieve greater scale in the impact of our sustainability initiatives. Through our Food Rescue Program in
2016, we were able to divert 30 million pounds of food from landfills, including 18 million pounds of food
donated to local hunger relief agencies and food banks and 12 million pounds of food waste sent to local
farms and composting facilities. Our annual Grab’N’Give campaign funded by contributions from our
customers generated over 263,000 personal care and emergency food bags for those in need. In 2016,
we were named as a “Leadership Partner” by Feeding America for our continued support to eliminating
hunger in the United States.
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Sustainability at Sprouts also encompasses other facets of our operations, including the
construction of our stores. In 2016, we received more “GreenChill” store certifications than any other
grocery retailer. The GreenChill program is a partnership between the Environmental Protection Agency
and food retailers to reduce refrigerant emissions and decrease their impact on the ozone layer and
climate change. Our environmental stewardship is also reflected in our rigorous recycling program; during
2016, we recycled 70 million pounds of cardboard and 0.5 million pounds of plastics. We believe our
sustainable practices strengthen our relationship with customers in the communities we serve.
The Sprouts Healthy Communities Foundation
In 2015, we formed the Sprouts Healthy Communities Foundation (referred to as our “Foundation”),
a registered 501(c)(3) organization focused on giving locally in the areas of health education and nutrition,
food security and hunger relief and helping people living with disabilities and health concerns. Our
Foundation relies on donations from Sprouts, as well as our vendors and customers, to support non-profit
organizations that are stewards of health and wellness in the communities where our team members and
customers work, live and play.
Our Foundation has multi-year partnerships with three organizations that are committed to making a
meaningful difference in the lives of children, individuals and families. REAL School Gardens builds
learning gardens in low-income elementary schools that enhance student learning and provide health
nutrition education. Vitamin Angels provides access to life saving vitamins and minerals for at-risk
populations in need, particularly pregnant women, new mothers and children. Autism Speaks provides
resources for adults and children affected by autism. Collectively, our Foundation donated over $1.2
million to these three organizations in 2016.
In 2016, our Foundation began the Neighborhood Grants program to distribute donations received
from Sprouts and our customers entirely in the communities in which the donations were collected. With
grants ranging from $2,500 to $10,000, our Foundation contributed over $400,000 to local non-profit
organizations aligned with its goal to create stronger and healthier communities. Our stores and engaged
team members also contribute to healthy environments through in-kind support and volunteerism at
community events.
Growing Our Business
We believe we are well-positioned to capitalize on two powerful, long-term consumer trends—a
growing interest in health and wellness and a focus on value and 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. We have
opened 24, 27 and 36 new stores in fiscal 2014, 2015 and 2016, respectively. We expect to continue to
expand our store base with 32 store openings planned in fiscal 2017, including our initial expansion into
Florida and North Carolina, of which three new stores have opened as of the date of this Annual Report
on Form 10-K. We intend to open approximately 30 new stores annually over the near term, with
approximately 60-65% in existing markets.
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The below diagram shows our store footprint, by state, as of January 1, 2017.
NV
6
96
CA
UT
5
AZ
32
CO
30
NM
7
MO
3
KS
4
OK
10
TX
40
4
TN
AL
4
GA
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Continue positive comparable store sales. For 39 consecutive quarters, including throughout the
economic downturn from 2008 to 2010, stores under our management have achieved positive
comparable store sales growth. We believe the consistency of our performance over time 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 engagement. We believe we can continue to grow the number and size 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 private label program, our targeted and personalized marketing efforts and our in-store and
digital 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.
Grow the Sprouts Farmers Market brand. We are committed to supporting our stores, product
offerings and brand through a variety of marketing programs, expanded 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.
Train Future Leaders. We believe Sprouts is an attractive place to work with significant growth
opportunities for our more than 24,000 team members. In 2016, we promoted approximately 3,500 team
members. We regularly assess prevailing wages in the markets in which we operate and offer competitive
wages and benefits as we believe active, educated and passionate team members contribute to
consumer satisfaction. Customer engagement is critical to our culture and growth plans, and we place
great importance on recruiting candidates that share our passion for Healthy Living for Less and training
our team members on customer engagement and product knowledge to ensure there is friendly,
knowledgeable staff in every department in every store. Our team members are trained and empowered
to proactively engage with customers throughout the entire store. This includes investing time to educate
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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 engagement to be particularly important as many conventional supermarket customers
that have not shopped our stores believe that eating healthy is expensive and difficult.
New Store Development
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 that includes certain
of our executive officers. Multiple members of this committee will conduct an on-site inspection prior to
approving any new location.
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 and strong
cash flows. We have been successful across varying geographies which we believe supports the
portability of the Sprouts brand and store model into a wide range of markets. Based on our experience,
we believe 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
coast to coast, underscoring the heightened interest in eating healthy across markets.
We currently anticipate opening approximately 30 new Sprouts Farmers Market stores per year
going forward based on our new store site selection analysis. We expect to open approximately two-thirds
of our new stores in existing markets and approximately one-third in new markets, as we believe this
provides for a good balance, given that our new stores in existing markets mature more quickly than
those in new markets. This mix allows us to focus our resources on developing our new markets so they
begin with a solid foundation.
See “Properties” for additional information with respect to our store locations.
Our Competition and Industry
We operate within the intensely competitive and highly fragmented grocery store industry which
encompasses a wide array of food retailers, including large conventional independent and chain
supermarkets, warehouse clubs, small grocery and convenience stores, and natural and organic,
specialty, mass, discount and other food retail formats. According to the Progressive Grocer, U.S.
supermarket sales totaled over $649 billion in 2015. Based on our industry experience, we believe we are
capturing significant market share from conventional supermarkets and specialty concepts in this
supermarket segment.
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
approximately 65% in 2015, according to the Progressive Grocer, as customers have migrated to other
grocery retail formats. Conventional supermarket customers are attracted to unique product offerings,
formats and differentiated shopping experiences. Based on our industry experience, we also believe
consumers are increasingly focused on health and wellness and are actively seeking healthy foods in
order to improve eating habits. 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.
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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. We believe
Sprouts offers consumers a compelling value relative to conventional supermarkets and mass retailers
and will continue to benefit from increasing consumer focus on health, wellness and value, as well as
their emphasis on an enhanced shopping experience featuring a broad selection of products along with
exceptional customer engagement.
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.
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. Our recent investments have focused on solutions to enhance our team members’
productivity, including business intelligence, labor management and human resources information
systems. We also maintain modern supply chain systems allowing for operating efficiencies and
scalability to support our continued growth. All of our stores operate under one integrated information
technology platform. We are making investments to our current information technology infrastructure and
plan on continuing to invest in this area to support our growth with systems that scale with and add
efficiencies to our growing operations.
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
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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, poultry, catfish and certain egg 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”). Implementing regulations, which began to go into effect
in 2016, require food processors and handlers to design and implement effective measures to ensure
food safety. Additionally, FSMA increases the FDA’s authority to institute administrative detentions of
adulterated and misbranded foods. FSMA also requires enhanced tracking and tracing of food products
and, as a result, imposes new 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.). Additional in-store labeling requirements, requiring
disclosure of calories and other nutrient information for frequently sold items, are scheduled to go into
effect in 2017. In addition the USDA has been directed, through legislation passed in 2016, to promulgate
regulations within two years requiring the disclosure of the presence of genetically modified ingredients in
food.
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. Similarly, the
USDA’s Food Safety Inspection Service is the public health agency responsible for ensuring that the
nation’s commercial supply of meat, poultry, catfish and certain egg products is safe, wholesome and
correctly labeled and packaged.
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. DSHEA
also empowered the FDA to establish binding good manufacturing practice regulations governing key
aspects of the production of 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
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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 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 January 1, 2017, we had more than 24,000 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 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”).
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, cash flows, 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
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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.
We opened 36 and 27 stores in fiscal 2016 and 2015, respectively, and we intend to open
approximately 30 new stores annually over the near term. 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, results of operations and cash
flows may be adversely affected.
On many of our projects, we have received landlord contributions for leasehold improvements and
other build-out costs. We cannot guarantee that we will be able to continue to receive landlord
contributions at the same levels or at all. Any reductions of landlord contributions could have an adverse
impact on our new store cash-on-cash returns and our operating results.
We may be unable to maintain or increase comparable store sales, which could negatively impact
our business and stock price.
We may not be able to maintain or improve the levels of comparable store sales that we have
experienced in the past. Our comparable store sales growth could be lower than our historical average for
many reasons, including:
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general economic conditions;
product price inflation or deflation;
increased competitive activity;
price changes in response to competitive factors;
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;
cycling against any year or quarter of above-average sales results;
consumer preferences, buying trends and spending levels;
slowing in the fresh, natural and organic retail sector;
possible supply shortages or other operational disruptions;
the number and dollar amount of customer transactions in our stores;
our ability to provide product or service offerings that generate new and repeat visits to our
stores; and
the level of customer engagement that we provide in our stores.
These factors may cause our comparable store sales results to be materially lower than in recent
periods, which could harm our business and result in a decline in the price of our common stock.
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Disruption of significant supplier relationships could negatively affect our business.
KeHE is our primary supplier of dry grocery and frozen food products, accounting for approximately
33% and 31% of our total purchases in each of fiscal 2016 and 2015, respectively. We also have
commitments in place with KeHE 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 primary contractual relationship with KeHE 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 KeHE to deliver product to our stores in
quantities that meet our requirements may materially and adversely affect our operating results while we
establish alternative distribution channels. Another 4% of our total purchases in each of fiscal 2016 and
2015 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 KeHE, 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. Further, the food distribution and manufacturing industries are
dynamic. Consolidation of distributors or the manufacturers that supply them could reduce our supply
options and detrimentally impact the terms under which we purchase products. 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, results of operations and cash flows.
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 two third-party distribution centers in California and Georgia. Any significant interruption in the
operation of our distribution center infrastructure, such as disruptions due to fire, severe weather or other
catastrophic events, power outages, labor disagreements, shipping or infrastructure problems, or
contractual disputes with third-party service providers 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, results of operations and cash flows.
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, results of operations and cash flows. Labor shortages or work stoppages 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 March 2016, an email “phishing” scam
was perpetrated against one of our team members, who inadvertently disclosed 2015 W-2 statements of
our team members to an unauthorized third party purporting to be one of our executive officers. We
worked with the FBI and the IRS to investigate this crime and to determine the best ways to protect team
member tax information, and offered credit monitoring services to impacted team members. As described
under “Legal Proceedings,” we are subject to four complaints related to this scam, each on behalf of a
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purported class of our current and former team members whose personally identifiable information was
inadvertently disclosed; these matters are covered by our cyber insurance, subject to applicable
deductibles. Additionally, 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 have implemented numerous additional security protocols since these attacks in
order to further tighten security and continue to maintain a customary cyber insurance policy, 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 and growth 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 loss of
sales, transactional or other data and 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.
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:
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anticipate, identify and react to fresh, 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 and service provider relationships that provide us access to the
newest merchandise and customer engagement options 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, as well as
new and evolving methods of engaging with and delivering our products to our customers. 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, results of
operations and cash flows.
If we are unable to anticipate and satisfy consumer preferences in the regions where we operate
with respect to product offerings and customer engagement options, our sales may decrease, which
could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
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Our newly opened stores may negatively impact our financial results in the short-term, and may
not achieve sales and operating levels consistent with our more mature stores on a timely basis
or at all.
We have actively pursued new store growth and plan to continue doing so in the future. We cannot
assure you that our new store openings will be successful or reach the sales and profitability levels of our
existing stores. New store openings may negatively impact our financial results in the short-term due to
the effect of store opening costs and lower sales and contribution to overall profitability during the initial
period following opening. New stores build their sales volume and their customer base over time and, as
a result, generally have lower margins and higher operating expenses, as a percentage of net sales, than
our more mature stores. New stores may not achieve sustained sales and operating levels consistent with
our more mature store base on a timely basis or at all. This may have an adverse effect on our financial
condition and operating results.
In addition, we may not be able to successfully integrate new stores into our existing store base and
those new stores may not be as profitable as our existing stores. Further, we have experienced in the
past, and expect to experience in the future, some sales volume transfer from our existing stores to our
new stores as some of our existing customers switch to new, closer locations. If our new stores are less
profitable than our existing stores, or if we experience sales volume transfer from our existing stores, our
financial condition and operating results may be adversely affected.
We may be unable to maintain or improve our operating margins, which could adversely affect our
financial condition and ability to grow.
If we are unable to successfully manage the potential difficulties associated with store growth, we may
not be able to capture the efficiencies of scale that we expect from expansion. If we are not able to continue to
capture efficiencies of scale, improve our systems, continue our cost discipline, and maintain appropriate store
labor levels and disciplined product selection, our operating margins may stagnate or decline. In addition,
competition and pricing pressures from competitors may also adversely impact our operating margins. Both
our inability to capture the efficiencies from scale and competition could have a material adverse effect on our
business, financial condition, results of operations and cash flows and adversely affect the price of our
common stock.
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 prepare and/or sell or involving
vendors that supply us with products could result in the discontinuance of sales of these products or our
relationship with such vendors 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 prepared and/or sold at our
stores or vendors that supply us with products, 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, cash flows or financial
condition.
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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 team members, suppliers, agents or third-party service
providers, or the products we sell can erode trust and confidence, particularly if they involve our private
label products, or 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 in our stores and at our regional and store support offices 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 engagement to suffer, while increasing our wages
could cause our earnings to decrease. If we are unable to hire and retain team members capable of
meeting our business needs and expectations, our business and brand image may be impaired. Any
failure to meet our staffing needs or any material increase in turnover rates of our team members or team
member wages may adversely affect our business, results of operations, cash flows 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
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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, cash flows 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, results of operations and
cash flows” 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 January 1, 2017, we had outstanding indebtedness of $255.0 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
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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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 negative
consequences, including 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,
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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:
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incurring additional indebtedness;
making certain investments;
merging, dissolving, liquidating, consolidating, or disposing of all or substantially all of our
assets;
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 total net leverage ratio and minimum
interest coverage ratio at the end of any fiscal quarter at any time the facility is drawn. Our ability to meet
these ratios, 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.
Market and Other External Risks
General economic conditions that impact consumer spending or result in competitive responses
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, instability in
foreign markets, 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, prolonged inflation or deflation can impact our business. Food deflation across multiple
categories, particularly in produce, could reduce sales growth and earnings if our competitors react by
lowering their retail pricing and expanding their promotional activities, which can lead to retail deflation
higher than cost deflation that could reduce our sales, gross profit margins and comparable store sales.
Food inflation, when combined with reduced consumer spending, could also reduce sales, gross profit
margins and comparable store sales. As a result, our operating results and financial condition could be
materially adversely affected.
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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, as well as restaurants and home meal solution providers. These businesses compete
with us for products, customers and locations. We compete on a combination of factors, primarily product
selection and quality, customer engagement, store format, location, price and delivery options. Our
success depends on our ability to offer products and services that appeal to our customers’ preferences,
and our failure to offer such products or services 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, increasing the space allocated to perishable, prepared and specialty foods, including
fresh, natural and organic foods, and enhancing options of engaging with and delivering their products to
customers. 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 and cash flows 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 24% and 25% of our net sales in fiscal 2016 and
2015, respectively. 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, tariffs and import
regulations or restrictions on foreign-sourced products 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, pestilences and other extreme or abnormal environmental conditions. 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 fresh,
natural and organic products, which are often less available than conventional products. If our
competitors significantly increase their fresh, 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, and our sales may decrease, which could have a material
adverse effect on our business, financial condition, results of operations and cash flows. 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, results of operations and cash flows.
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 (or its successor or replacement), could cause
us to incur additional wage and benefit costs. Increased labor costs brought about by changes in
minimum wage laws, other regulations or prevailing market conditions would increase our expenses and
have an adverse impact on our profitability.
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The current geographic concentration of our stores creates an exposure to local or regional
downturns or catastrophic occurrences.
As of January 1, 2017, we operated 96 stores in California, making California our largest market
representing 38% of our total stores in fiscal 2016. We also have store concentration in Texas, Arizona
and Colorado, operating 40, 32 and 30 stores in those states, respectively, and representing 16%, 13%
and 12% of our total stores in fiscal 2016, respectively. 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, prolonged droughts or other 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, results of
operations and cash flows.
Fluctuations in commodity prices and availability may impact profitability.
Many products we sell include ingredients such as wheat, corn, oils, milk, sugar, cocoa, nuts and
other key commodities. Many commodity prices are subject to significant price fluctuations. Any increase
in prices of such key ingredients may cause our vendors to seek price increases from us, and price
decreases may result in our competitors reducing retail prices on items containing such ingredients. We
cannot assure you that we will be able to mitigate vendor efforts to increase our costs or competitive
responses to decreasing prices, 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. In addition, we may lower our retail prices in response to
lower commodity costs or competitive conditions. Our profitability may be impacted either through
increased costs to us or lower prices and loss of customers due to competitive conditions, which may
impact gross margins, or through reduced revenue as a result of a decline in the number and average
size of customer transactions.
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.
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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.
Increasing energy costs, unless offset by more efficient usage or other operational responses,
may impact our profitability.
We utilize natural gas, water, sewer and electricity in our stores and use gasoline and diesel in
trucks that deliver products to our stores. We may also be required to pay certain adjustments or other
amounts pursuant to our supply and delivery contracts in connection with increases in fuel prices.
Increases in energy costs, whether driven by increased demand, decreased or disrupted supply,
increased environmental regulations or an anticipation of any such events will increase the costs of
operating our stores. Although fuel prices declined during the second half of 2014 and persisted through
2016, 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, results of
operations and cash flows.
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, cash flows 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.
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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 FSMA, passed in January 2011, portions
of which went into effect in 2016, grant the FDA greater authority over the safety of the national food
supply, as well as increased enforcement by government agencies, and could result in additional
compliance costs and civil remedies. Such regulations mandate 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.
With respect to both food and dietary supplements, 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. 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 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
will reasonably be expected to be safe at least 75 days before introducing a new dietary ingredient into
interstate commerce. This or similar informational requirements 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.
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, results of operations and cash flows.
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,” and the FDA has requests for comment now pending on the
issue, 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 and retailers that market “natural”
products, asserting false, misleading and deceptive advertising and labeling claims, including claims
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related to genetically modified ingredients. 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,
results of operations and cash flows.
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, financial
condition or cash flows.
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 executive 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; require the reformulation of certain products or
alternative sourcing from domestic suppliers or otherwise to meet new standards, regulations or trade
restrictions; the recall or discontinuance of certain products not able to be reformulated or alternatively
sourced in compliance with new regulations or restrictions; 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, results of operations and cash flows.
Legal proceedings could materially impact our business, financial condition, results of operations
and cash flows.
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 or
24
product labeling. 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, results of operations and cash flows.
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, changes to financial accounting standards will 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
25
nine years and, as of January 1, 2017, we had undiscounted operating lease commitments of
approximately $1.5 billion, scheduled through 2035, 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 19 to our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K, but are not reflected as liabilities on our consolidated
balance sheets. During fiscal 2016, our rent expense charged under operating leases was approximately
$104.8 million.
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 the 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.
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.
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
the NASDAQ Global Select Market, the SEC, or other regulatory authorities, which could require
additional financial and management resources.
If our goodwill or other intangible assets become impaired, we may be required to record a
significant charge to earnings.
We have a significant amount of goodwill and other intangible assets. As of January 1, 2017, we
had goodwill and intangible assets of approximately $368.1 million and $197.6 million, respectively, which
represented approximately 26% and 14% of our total assets as of such date, respectively. 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 the market value 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.”
26
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
2014, 2015 and 2016, 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.
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.
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.
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:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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;
27
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
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:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
28
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.
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.
29
Item 2.
Properties
As of January 1, 2017, we had 253 stores located in thirteen states, as shown in the chart below:
Number of Stores State
State
Alabama ..........................................
Arizona ............................................
California .........................................
Colorado ..........................................
Georgia ............................................
Kansas ............................................
Missouri ...........................................
4 Nevada .............................................
32 New Mexico ......................................
96 Oklahoma .........................................
30 Tennessee ........................................
12 Texas ................................................
4 Utah ..................................................
3
Number of Stores
6
7
10
4
40
5
In fiscal 2015, we opened 27 new stores, and in fiscal 2016 we opened 36 new stores. As of
February 23, 2017, we have opened three stores in fiscal 2017, bringing our total store count to 256.
We lease all of our stores from unaffiliated third parties. A typical store lease is for an initial 10 to 15
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 2016, we remodeled eight stores
and in fiscal 2017, we plan to remodel approximately eight stores.
As of January 1, 2017, 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
Corporate Office ..............................................................
Distribution Warehouse ...................................................
Distribution Warehouse ...................................................
State
Arizona
Arizona
Texas
Square Footage*
71,000
106,000
117,000
*
Rounded to the nearest 1,000 square feet
We believe our portfolio of long-term leases is a valuable asset supporting our retail operations, but
we do not believe that any individual store property is material to our financial condition or results of
operations.
30
Item 3.
Legal Proceedings
From time to time we are a party to legal proceedings, including matters involving personnel and
employment issues, product liability, personal injury, intellectual property and other proceedings arising in
the ordinary course of business, which have not resulted in any material losses to date. Although
management does not expect that the outcome in these proceedings will have a material adverse effect
on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we
could incur judgments or enter into settlements of claims that could materially impact our results.
Securities Action
On March 4, 2016, a complaint was filed in the Superior Court for the State of Arizona against our
company and certain of our directors and officers on behalf of a purported class of purchasers of shares
of our common stock in our underwritten secondary public offering which closed on March 10, 2015 (the
“March 2015 Offering”). The complaint purports to state claims under Sections 11, 12 and 15 of the
Securities Act of 1933, as amended, based on an alleged failure by our company to disclose adequate
information about produce price deflation in the March 2015 Offering documents. The complaint seeks
damages on behalf of the purported class in an unspecified amount, rescission, and an award of
reasonable costs and attorneys’ fees. On March 24, 2016, we removed the action to federal court in the
District of Arizona. On April 18, 2016, the plaintiffs filed a motion to remand the case to state court, and
that motion is currently under consideration. We intend to defend this case vigorously, but it is not
possible at this time to reasonably estimate the outcome of, or any potential liability from, the case.
“Phishing” Scam Actions
In April 2016, four complaints were filed, two in the federal courts of California, one in the Superior
Court of California and one in the federal court in the District of Colorado, each on behalf of a purported
class of our current and former team members whose personally identifiable information (referred to as
“PII”) was inadvertently disclosed to an unauthorized third party that perpetrated an email “phishing” scam
against one of our team members. The complaints allege we failed to properly safeguard the PII in
accordance with applicable law. The complaints seek damages on behalf of the purported class in
unspecified amounts, attorneys’ fees and litigation expenses. In June 2016, a motion was filed before the
Judicial Panel on Multidistrict Litigation (referred to as “JPML”) to transfer and consolidate all four of the
cases to the federal court in the District of Arizona. The JPML granted the motion on October 6, 2016,
and the cases remained stayed pending the court’s scheduling of an initial case management conference.
We intend to defend these cases vigorously, but it is not possible at this time to reasonably estimate the
outcome of, or any potential liability from, the cases.
Item 4.
Mine Safety Disclosures
Not applicable.
31
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. 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 for fiscal years 2015 and 2016.
2015(cid:3)
First quarter ........................................................... $
Second quarter ..................................................... $
Third quarter ......................................................... $
Fourth quarter ....................................................... $
2016
First quarter ........................................................... $
Second quarter ..................................................... $
Third quarter ......................................................... $
Fourth quarter ....................................................... $
High
Low
38.45 $
36.13 $
27.77 $
27.34 $
32.56
26.98
16.41
19.75
High
Low
30.00 $
29.37 $
24.52 $
22.63 $
21.18
21.10
18.70
18.88
The closing price of our common stock as of February 21, 2017 was $19.32 per share, and the
number of stockholders of record of our common stock as of February 21, 2017 was 66. 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.
32
Issuer Purchases of Equity Securities
The following tables provide information about our share repurchase activity for each share
repurchase program.
2015 Common Stock Share Repurchase Program
Period (1)
Total number
of shares
purchased
Average
price paid
per share
Total number of
shares purchased
as part of publicly
announced plans
or programs (2)
Approximate dollar
value of shares
that may yet be
purchased under
the plans or
programs (2)
2015
Fourth quarter ....................... 1,068,279 $ 24.09
2016
First quarter .......................... 2,431,721 $ 24.39
Second quarter ..................... 2,547,971 $ 25.49
Total...................................... 6,047,971 $ 24.80
1,068,279 $
124,265,253
2,431,721 $
2,547,971 $
6,047,971 $
64,956,714
-
-
2016 Common Stock Share Repurchase Program
Period (3)
Total number
of shares
purchased
Average
price paid
per share
Total number of
shares purchased
as part of publicly
announced plans
or programs (4)
Approximate dollar
value of shares
that may yet be
purchased under
the plans or
programs (4)
2016
Third quarter ......................... 3,189,818 $ 19.93
Fourth quarter ....................... 5,072,973 $ 20.98
Total...................................... 8,262,791 $ 20.57
3,189,818 $
5,072,973 $
8,262,791 $
186,428,090
80,000,000
80,000,000
(1) Periodic information is presented by reference to our quarterly periods during fiscal years 2015 and
2016.
(2) On November 4, 2015, our Board of Directors authorized a $150 million common stock share
repurchase program. The shares may be purchased from time to time over a two year period,
subject to general business and market conditions and other investment opportunities, through open
market purchases, privately negotiated transactions or other means, including through Rule 10b5-1
trading plans. The purchase program may be commenced, suspended or discontinued at any time.
(3) Periodic information is presented by reference to our quarterly periods during fiscal year 2016.
(4) On September 6, 2016, our board of directors authorized a $250 million share repurchase program
of our common stock. The shares may be purchased on a discretionary basis from time to time
through December 31, 2017, subject to general business and market conditions and other
investment opportunities, through open market purchases, privately negotiated transactions, or
other means, including through Rule 10b5-1 trading plans.
33
Share repurchase activity during the fourth fiscal quarter of 2016 was as follows:
Period (1)
Total number
of shares
purchased
Average
price paid
per share
Total number of
shares purchased
as part of publicly
announced plans
or programs
Approximate dollar
value of shares
that may yet be
purchased under
the plans or
programs
Oct. 3, 2016 –
Oct. 30, 2016 ..................... 2,744,798 $ 21.22
Oct.31, 2016 –
Nov. 27, 2016 .................... 1,349,565 $ 20.88
Nov. 28, 2016 –
978,610 $ 20.44
Jan. 1, 2017 .......................
Total...................................... 5,072,973 $ 20.98
2,744,798 $
128,175,720
1,349,565 $
100,000,000
978,610 $
5,072,973 $
80,000,000
80,000,000
(1) Periodic information is presented by reference to our fiscal periods during the fourth quarter of 2016.
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
January 1, 2017, with the cumulative total return of (i) the Nasdaq Composite Index and (ii) the S&P Food
Retail Index, over the same period.
The comparison assumes that $100.00 was invested in our common stock, the Nasdaq Composite
Index and the S&P Food Retail Index, and assumes reinvestment of dividends, if any. The graph
assumes the initial value of our common stock on August 1, 2013 was the closing sale price on that day
of $40.11 per share and not the initial offering price to the public of $18.00 per share. The performance
shown on the graph below is based on historical results and is not intended to suggest future
performance.
34
COMPARISON OF 41 MONTH CUMULATIVE TOTAL RETURN*
Among Sprouts Farmers Market Inc., the NASDAQ Composite Index
and the S&P Food Retail Index
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
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© 2017 Standard & Poor's, a division of S&P Global. 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.
35
Item 6.
Selected Financial Data
Fiscal
2016(5)
Fiscal
2015(4)
Fiscal
2014(3)
(dollars in thousands, except per share data)
Fiscal
2013(2)
Fiscal
2012(1)
Statements of Operations Data:
Net sales .................................................. $4,046,385 $3,593,031 $2,967,424 $ 2,437,911 $ 1,794,823
Cost of sales, buying and occupancy ....... 2,864,379 2,541,403 2,082,221 1,712,644 1,264,514
885,203 725,267 530,309
581,621 496,183 368,323
Gross profit .......................................... 1,182,006
828,943
1,051,628
706,044
126,929
12,974
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 ................................
81,795
5,734
2,051
199,711 139,504
(37,203 )
(25,063)
596
487
(18,721 )
(1,138)
84,067
174,106
(32,741 )
(66,414)
51,326 $
Net income .......................................... $ 124,306 $ 128,991 $ 107,692 $
106,412
8,616
1,802
228,754
(17,723)
443
(5,481)
205,993
(77,002)
228
212,932
(14,794)
454
—
198,592
(74,286)
95,397
7,749
725
86,364
2,782
2,155
70,685
(35,488)
562
(992)
34,767
(15,267)
19,500
Per Share Data:
Net income per share—basic ................... $
Net income per share—diluted ................. $
Weighted average shares outstanding—
basic ......................................................
Weighted average shares outstanding—
diluted ....................................................
0.84 $
0.83 $
0.84 $
0.83 $
0.72 $
0.70 $
0.38 $
0.37 $
0.16
0.16
147,311
153,099
149,751 134,622 119,427
149,653
155,877
154,328 139,765 121,781
Fiscal
2016
Fiscal
2015
Fiscal
2014 (3)
Fiscal
2013(2)
Fiscal
2012(1)
5.8%
217
2.7%
253
Comparable store sales growth ...............
Stores at end of period ...............................
Other Operating Data:
103
Stores at beginning of period .....................
9
36
Opened .......................................................
—
37
Acquired .....................................................
—
(1)
Closed ........................................................
148
253
Stores at end of period(7) ...........................
Gross square feet at end of period ............. 7,070,248 5,976,780 5,252,851 4,582,743 4,064,888
Average store size at end of period
(gross square feet) ..................................
167
24
—
—
191
10.7 % 9.7% (6)
148
167
148
19
—
—
167
27
—
(1)
217
9.9%
191
27,502
27,442
27,946
27,572
27,465
191
217
January 1,
2017
January 3,
2016
As of
December 28,
2014
December 29,
2013(2)
December 30,
2012(1)
Balance Sheet Data
67,211
Cash and cash equivalents ......................... $
Total assets ................................................. 1,439,893 1,426,364 1,368,407 1,171,450 1,101,749
Total capital and finance lease obligations,
including current portion ...........................
Total long-term debt, including current
portion .......................................................
Total stockholders’ equity ...........................
255,691
685,389
310,286
513,771
12,465 $ 136,069 $
160,000
822,992
255,000
672,909
425,057
386,755
130,513 $
150,698
119,572
130,472
129,736
77,652 $
107,639
36
(1) 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. Fiscal 2012 includes
52 weeks.
(2) Fiscal 2013 selling, general and administrative expense included $3.2 million for IPO related
bonuses and $2.0 million for expenses related to our November 2013 secondary offering. Fiscal
2013 includes 52 weeks.
(3) 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. Fiscal 2014 includes
52 weeks.
(4) Fiscal 2015 includes 53 weeks.
(5) Fiscal 2016 includes 52 weeks.
(6) Comparable store sales growth for 2012 reflects comparable store sales growth calculated including
$196.1 million of sales for Sunflower stores. 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.
(7) During each of fiscal 2014 and 2016, we also relocated one store.
37
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, packaged groceries, meat and
seafood, deli, baked goods, dairy products, frozen foods, body care and natural household items catering
to consumers’ growing interest in health and wellness. Since our founding in 2002, we have grown
rapidly, significantly increasing our sales, store count and profitability. With 253 stores in 13 states as of
January 1, 2017, we are one of the largest specialty retailers of fresh, natural and organic food in the
United States. As of February 23, 2017, we have grown to 256 stores in 14 states.
At Sprouts, we believe healthy living is a journey and every meal is a choice. 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 featuring a broad selection of
innovative healthy products, and knowledgeable team members who we believe provide best-in-class
customer engagement and product education.
Our History
In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding
in 2002 through January 1, 2017, we continued to open new stores while successfully rebranding 43
Henry’s Farmers Market and 39 Sunflower Farmers Market stores added through acquisitions to the
Sprouts banner (referred to as the “Transactions”). These three businesses all trace their lineage back to
Henry’s Farmers Market and were built with similar store formats and operations including a strong
emphasis on value, produce and service in smaller, convenient locations. The consistency of these
formats and operations was an important factor that allowed us to rapidly and successfully rebrand and
integrate each of these businesses under the Sprouts banner and on a common platform.
Outlook
We are pursuing a number of strategies designed to continue our growth, including expansion of our
store base, continuing positive comparable store sales 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 open 32 new
stores in 2017, of which three have opened through February 23, 2017, and approximately 30 new stores
per year for the near term.
We also believe we can continue to deliver positive comparable store sales growth by enhancing
our core value proposition and distinctive customer-oriented shopping experience, as well as through
expanding and refining our fresh, natural and organic product offerings, our targeted and personalized
marketing efforts and our in-store education. We are committed to growing the Sprouts brand by
38
supporting our stores, product offerings and corporate partnerships, including the expansion of innovative
marketing and promotional strategies through print, digital and social media platforms.
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 2016 was a 52-week year ending on January 1, 2017. Fiscal
2015 was a 53-week year ending on January 3, 2016 and fiscal 2014 was a 52-week year ending on
December 28, 2014. In the discussion below, we discuss the impact of the 53rd week of fiscal 2015 on our
financial results.
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. In 2015, we determined that we had
sufficient data to estimate gift card breakage. 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. 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 on the day of closure. This practice may
differ from the methods that other retailers use to calculate similar measures. We use comparable store
sales to calculate pro forma comparable store sales growth, when applicable, as referenced in footnote
(6) to Item 6. Selected Financial Data.
Our net sales have increased as a result of new store openings and comparable store sales growth.
Factors that influence comparable store sales growth and other sales trends include:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
general economic conditions and trends, including levels of disposable income and consumer
confidence;
product price inflation or deflation;
our competition, including competitive store openings in the vicinity of our stores and
competitor pricing and merchandising strategies;
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; and
advertising, in-store merchandising and other marketing activities.
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
39
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 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.
40
Factors Affecting Comparability of Results of Operations
Additional Week in 2015
Fiscal 2015 consisted of 53 weeks. The 53rd week resulted in additional sales and expenses as
further discussed in “—Comparison of Fiscal 2016 to Fiscal 2015” below.
April 2015 Refinancing
In April 2015, we completed a transaction in which we refinanced our debt (referred to as the “April
2015 Refinancing”), as further discussed in “—Liquidity and Capital Resources” below. The April 2015
Refinancing resulted in an decrease in borrowings, a reduction in interest rate and the recording of a loss
on extinguishment of debt.
41
Results of Operations for Fiscal 2016, 2015 and 2014
The following tables set forth our results of operations and other operating data for the periods
presented. The period-to-period comparison of financial results is not necessarily indicative of financial
results to be achieved in future periods. Fiscal 2015 consisted of 53 weeks, while each of fiscal 2016 and
fiscal 2014 consisted of 52 weeks.
Fiscal 2016
Fiscal 2015 Fiscal 2014
(in thousands, except per share data)
828,943
Consolidated Statement of Operations
Data:
Net sales ......................................................... $4,046,385 $3,593,031 $ 2,967,424
Cost of sales, buying and occupancy .............. 2,864,379 2,541,403 2,082,221
Gross profit ................................................. 1,182,006 1,051,628 885,203
706,044 581,621
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 .......................................
95,397
7,749
725
228,754 199,711
(25,063 )
(17,723 )
596
443
(1,138 )
(5,481 )
205,993 174,106
(66,414 )
(77,002 )
Net income ................................................. $ 124,306 $ 128,991 $ 107,692
126,929
12,974
228
212,932
(14,794)
454
—
198,592
(74,286)
106,412
8,616
1,802
Weighted average shares outstanding .......
Dilutive effect of equity-based awards .......
147,311
2,342
153,099 149,751
4,577
2,778
Weighted average shares and
equivalent shares outstanding ...........
Diluted net income per share ................ $
149,653
0.83 $
155,877 154,328
0.70
0.83 $
Fiscal
2016
Fiscal
2015
Fiscal
2014
Other Operating Data:
Comparable store sales growth ..........................
Stores at beginning of period ..............................
Opened ...........................................................
Closed ............................................................
Stores at end of period ........................................
2.7%
217
36
—
253
5.8 %
191
27
(1 )
217
9.9 %
167
24
—
191
42
Comparison of Fiscal 2016 to Fiscal 2015
Net sales
Fiscal 2016
Fiscal 2015
(dollars in thousands)
Change
% Change
Net sales ......................................................... $4,046,385 $3,593,031 $453,354
Comparable store sales growth ......................
2.7%
5.8%
13%
Net sales during 2016 totaled $4.0 billion, increasing 13% over the prior fiscal year. Sales growth
was primarily driven by solid performance in new stores opened. Comparable stores contributed
approximately 88% of total sales for 2016 and approximately 85% for the prior fiscal year. Sales growth
was negatively impacted by the benefit of the 53rd week in the prior year.
Cost of sales, buying and occupancy and gross profit
Fiscal 2016
Fiscal 2015
(dollars in thousands)
Change
% Change
Net sales .................................................... $4,046,385 $3,593,031 $453,354
Cost of sales, buying and occupancy ........ 2,864,379 2,541,403 322,976
Gross profit ................................................ 1,182,006 1,051,628 130,378
Gross margin .............................................
29.3%
29.2%
(0.1 )%
13%
13%
12%
Gross profit increased during 2016 compared to 2015 by $130.4 million, of which $132.7 million was
as a result of increased sales volume, partially offset by $2.3 million related to decreased margin. The
gross margin decrease primarily reflects cycling both the positive impact in 2015 from the 53rd week of
approximately 20 basis points and higher margins due to deflation in the prior year without the
corresponding promotional environment, as well as higher occupancy costs.
Direct store expenses
Fiscal 2016 (cid:3) Fiscal 2015
Change
(dollars in thousands)
% Change (cid:3)
Direct store expenses ....................................... $828,943 $706,044 $122,899
0.8 %
Percentage of net sales ....................................
20.5%
19.7%
17%
Direct store expenses increased $122.9 million, including $80.3 million related to stores opened
since 2015, and $42.6 million related to stores operated prior to 2016. Direct store expenses, as a
percentage of net sales, increased 80 basis points, reflecting deleverage of fixed costs associated with
lower comparable store sales growth, higher payroll expense from planned increases in wages and
training costs implemented at the beginning of the year and cycling the positive impact in 2015 from the
53rd week.
Selling, general and administrative expenses
Fiscal 2016
Fiscal 2015
(dollars in thousands)
Change
% Change
Selling, general and administrative expenses ... $126,929 $106,412 $ 20,517
0.1 %
Percentage of net sales .....................................
3.0%
3.1%
19%
The increase in selling, general and administrative expenses included $3.0 million for payments
associated with the Executive Chairman of the Board’s retirement and $4.9 million for increases in stock
43
compensation costs, primarily related to executive changes. Excluding these items, the increase in
selling, general and administrative expense was $12.6 million or 11.8%.
Store pre-opening costs
Fiscal 2016 (cid:3) Fiscal 2015 Change
% Change (cid:3)
(dollars in thousands)
— $
Attributable to 2015 store openings .................. $
11,859
Attributable to 2016 store openings ..................
Attributable to planned 2017 store openings ....
1,115
Total store pre-opening costs ........................... $ 12,974 $
0.3%
Percentage of net sales ....................................
7,166 $ (7,166 )
1,450 10,409
— 1,115
8,616 $ 4,358
0.1 %
0.2%
(100)%
718%
100%
51%
Store pre-opening costs in 2016 included $11.9 million related to opening 36 stores during 2016 and
$1.1 million associated with stores expected to open subsequent to year end. Store pre-opening costs in
2015 included $7.2 million related to opening 27 stores during that period and $1.4 million associated with
stores opened after 2015.
Store closure and exit costs
Store closure and exit costs were $0.2 million for 2016 and $1.8 million for 2015. Store closure and
exit costs for 2015 included $1.1 million for the relocation of our support office and adjustments for prior
reserves.
Loss on extinguishment of debt
In 2015, we recorded a loss on extinguishment of debt totaling $5.5 million related to the write-off of
deferred financing costs and issue discount in the April 2015 Refinancing.
Interest expense
Fiscal 2016 Fiscal 2015 Change
(dollars in thousands)
% Change (cid:3)
Capital and financing leases ............................. $ 10,423 $ 10,912 $
Long-term debt..................................................
5,542
Deferred financing costs / Original issuance
(279 )
discount ..........................................................
Other .................................................................
(87 )
Total Interest Expense ...................................... $ 14,794 $ 17,723 $ (2,929 )
(489 )
(2,074 )
742
527
463
440
3,468
(4)%
(37)%
(38)%
(17)%
(17)%
The decrease in interest expense is due to the lower principal balances on both the current Credit
Facility and former revolving credit facility combined with the lower interest rate on our Credit Facility after
the April 2015 Refinancing.
Income tax provision
Income tax provision decreased to $74.3 million for 2016 from $77.0 million for 2015, primarily
related to a decrease in income before income taxes. Our effective income tax rate increased to 37.41%
in 2016 from 37.38% in 2015 primarily due to a slight decrease in tax credits and enhanced charitable
food contribution deduction.
44
Net income
Fiscal 2016
Fiscal 2015
(dollars in thousands)
Change
% Change
Net income ........................................................ $124,306 $128,991 $ (4,685 )
Percentage of net sales ....................................
3.6%
3.1%
(0.5 )%
(4)%
Net income growth was attributable to growth in net sales driven by comparable store sales,
performance of new stores opened, loss on extinguishment of debt in the prior year and reduced interest
expense. Net income growth was negatively impacted by the $4.1 million benefit of the 53rd week in 2015.
Excluding the 53rd week, net income remained flat from prior year.
Diluted earnings per share
Fiscal 2016 Fiscal 2015 Change
(shares in thousands)
% Change
Diluted earnings per share ................................. $
Diluted weighted average shares
outstanding ..................................................... 149,653
0.83 $
155,877
(6,224 )
0.83 $
—
—
Earnings per share for 2016 included a benefit of $0.03 per share related to the share repurchase
program.
45
Comparison of Fiscal 2015 to Fiscal 2014
Net sales
Fiscal 2015
Fiscal 2014
Change
% Change
(dollars in thousands)
Net sales ......................................................... $3,593,031 $2,967,424 $625,607
Comparable store sales growth ......................
5.8%
9.9%
21%
Net sales increased during 2015 as compared to 2014, primarily as a result of (i) sales growth at
stores operated prior to 2015, (ii) new store openings and (iii) the 53rd week included in 2015.
Net sales growth at stores operated prior to December 28, 2014 contributed $376.2 million, or 60%
of the increase in net sales for 2015. New store openings during 2015 contributed $249.4 million, or 40%,
of the increase in net sales during 2014. Included in those increases were a total of $68.1 million of net
sales attributable to the 53rd week in 2015.
Cost of sales, buying and occupancy and gross profit
Fiscal 2015
Fiscal 2014
(dollars in thousands)
Change
% Change
Net sales .................................................... $3,593,031 $2,967,424 $625,607
Cost of sales, buying and occupancy ........ 2,541,403 2,082,221 459,182
Gross profit ................................................ 1,051,628
885,203 166,425
29.3%
Gross margin .............................................
29.8%
(0.5 )%
21%
22%
19%
Cost of sales, buying and occupancy increased during 2015 compared to 2014, primarily due to the
increase in sales from comparable store sales growth, new store openings and the 53rd week in 2015.
Gross profit increased $186.6 million as a result of increased sales volume, offset by a decrease of $20.2
million related to decreased margin. The gross margin decrease was primarily driven by continued price
investments in certain categories and produce tightness due to adverse weather conditions and West
Coast port strikes that limited product availability, compared to a very strong produce season in the prior
year. The impact of the 53rd week on gross margin was insignificant.
Direct store expenses
Fiscal 2015
Fiscal 2014
Change
(dollars in thousands)
% Change
Direct store expenses ....................................... $706,044 $581,621 $124,423
0.1 %
Percentage of net sales ....................................
19.7%
19.6%
21%
Direct store expenses increased $124.4 million, including a $64.1 million increase in direct store
expenses associated with stores operated prior to 2015 and $60.3 million of direct store expenses related
to stores opened during 2015. Included in that increase was approximately $12.7 million of direct store
expenses attributable to the 53rd week in 2015. Direct store expenses, as a percentage of net sales, was
relatively flat year over year. Lower bonus expense was offset by increased training and by higher payroll
costs due to an extra holiday in the year. The impact of the 53rd week on direct store expenses was
insignificant as a percentage of net sales.
46
Selling, general and administrative expenses
Fiscal 2015
Fiscal 2014
(dollars in thousands)
Change
% Change
Selling, general and administrative
expenses ........................................................ $106,412 $ 95,397 $ 11,015
Percentage of net sales ....................................
3.2%
3.0%
(0.2 )%
12%
The increase in selling, general and administrative expenses included $5.9 million for advertising
expense to support growth into new markets, $4.0 million for corporate payroll to support growth and
internalize outsourced functions, $2.4 million of increased share-based compensation expense related to
changes in the executive team, $1.8 million for regional payroll and benefits to support additional store
count and growth into new regions, $0.7 million for regional expenses to support growth and $1.6 million
increase in depreciation and occupancy expense for our new corporate headquarters. In addition, selling,
general and administrative expenses were impacted by the 53rd week of 2015 by approximately $0.6
million. These increases were partially offset by $2.2 million less in offering expenses in 2015, a $1.9
million decrease in bonus expense due to lower expected attainment and 2015 benefit from lower than
expected actual payments for the prior fiscal year and a $1.6 million decrease in expense related to
internalizing outsourced functions. Selling, general and administrative expenses decreased as a percent
of net sales primarily driven by lower bonus expense in 2015. The impact of the 53rd week on selling,
general and administrative expenses was insignificant.
Store pre-opening costs
Store pre-opening costs were $8.6 million for 2015 and $7.7 million for 2014. Store pre-opening
costs during 2015 included $7.2 million related to opening 27 stores during that period and $1.4 million
associated with stores opening after 2015. 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 closure and exit costs
Store closure and exit costs for 2015 included $1.1 million for the relocation of our support office
and adjustments for prior reserves. 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.
Loss on extinguishment of debt
In 2015, we recorded a loss on extinguishment of debt totaling $5.5 million related to the write-off of
deferred financing costs and issue discount in the April 2015 Refinancing.
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.
Interest expense
Interest expense decreased to $17.7 million for 2015 from $25.1 million for 2014. The decrease in
interest expense is due to the lower principal balances on both the current Credit Facility and former
revolving credit facility combined with the lower interest rate on our Credit Facility after the April 2015
Refinancing.
47
Income tax provision
Income tax provision increased to $77.0 million for 2015 from $66.4 million for 2014, primarily
related to an increase in income before income taxes. Our effective income tax rate decreased to 37.38%
in 2015 from 38.15% in 2014 primarily due to an increase in tax credits and the enhanced charitable food
contribution deduction.
Net income
Fiscal 2015
Fiscal 2014
(dollars in thousands)
Change
% Change
Net income ......................................................... $128,991 $107,692 $ 21,299
—
Percentage of sales ...........................................
3.6%
3.6%
20%
Net income growth was attributable to strong business performance driven by comparable store
sales, strong performance of new stores opened, change in loss on extinguishment of debt, reduced
interest expense and lower effective tax rate. Net income growth included the benefit of the 53rd week in
2015.
Quarterly Financial Data
The following table sets forth certain of our unaudited consolidated statements of operations data for
each of the fiscal quarters in 2016 and 2015.
January 1,(cid:3)
2017
(cid:3)
October 2,(cid:3)
2016
July 3,
2016
April 3,
2016
January 3,
2016(*)
September 27,
2015
June 28,
2015(1)
March 29,
2015
(dollars in thousands, except per share amounts)
Fiscal Quarter Ended
Net sales ........... $ 985,700 $ 1,035,801 $1,031,643 $993,241 $930,303 $
Gross profit ........ $ 278,178 $ 291,513 $ 305,802 $306,513 $268,739 $
Income from
operations ....... $ 30,187 $
Net income ........ $ 17,005 $
Net income per
share:
63,462 $ 77,836 $ 47,734 $
37,209 $ 46,207 $ 28,216 $
41,447 $
23,885 $
903,069 $ 902,153 $857,506
261,457 $ 263,639 $257,793
54,400 $ 60,046 $ 66,574
31,986 $ 31,322 $ 37,467
Basic ............. $
Diluted .......... $
0.12 $
0.12 $
0.16 $
0.16 $
0.25 $
0.25 $
0.31 $
0.30 $
0.18 $
0.18 $
0.21 $
0.21 $
0.20 $
0.20 $
0.25
0.24
The fiscal quarter ended January 3, 2016 consisted of fourteen weeks.
*
(1) Period includes $5.5 million pre-tax loss on extinguishment of debt related to our April 2015
Refinancing.
Return on Invested Capital
In addition to reporting financial results in accordance with generally accepted accounting principles,
or GAAP, we provide information regarding Return on Invested Capital (referred to as “ROIC”) as
additional information about our operating results. ROIC is a non-GAAP financial measure and should not
be reviewed in isolation or considered as a substitute for our financial results as reported in accordance
with GAAP. ROIC is an important measure used by management to evaluate our investment returns on
capital and provides a meaningful measure of the effectiveness of our capital allocation over time.
We define ROIC as net operating profit after tax (referred to as “NOPAT”), including the effect of
capitalized operating leases, divided by average invested capital. Operating leases are capitalized as part
48
of the ROIC calculation to control for differences in capital structure between us and our competitors.
Capitalized operating lease interest represents this adjustment to NOPAT and is calculated by the
hypothetical capitalization of our operating leases, using eight times our trailing twelve months rent
expense and an interest rate factor of seven percent. Operating leases are determined as the trailing
twelve months’ rent expense times a factor of eight. Invested capital reflects a trailing twelve-month
average.
As numerous methods exist for calculating ROIC, our method may differ from methods used by
other companies to calculate their ROIC. It is important to understand the methods and the differences in
those methods used by other companies to calculate their ROIC before comparing our ROIC to that of
other companies.
Our calculation of ROIC for the fiscal years indicated was as follows:
2016
2015 (1)
(dollars in thousands)
2014
Net income .................................................................................. $ 124,306 $ 128,991 $ 107,692
16,364
Interest expense, net of tax (2) ................................................................
Net operating profit after tax (NOPAT) ................................... $ 134,182 $ 140,287 $ 124,056
11,296
9,876
Total rent expense, net of tax (2) ............................................................
Estimated depreciation on capitalized operating leases, net of
tax (2) ...........................................................................................................
Estimated interest on capitalized operating leases, net of
tax (2) (3) ......................................................................................................
65,886
55,250
45,386
(28,990)
(24,310 )
(19,970)
25,416
NOPAT, including effect of capitalized operating leases ....... $ 171,078 $ 171,227 $ 149,472
30,940
36,896
Average working capital ..............................................................
Average property and equipment ................................................
Average other assets ..................................................................
Average other liabilities ...............................................................
148,368 109,590
472,189 398,330
583,943 589,337
(73,761)
(103,714 )
Average invested capital ........................................................ $1,087,146 $1,100,786 $ 1,023,496
77,273
546,652
584,945
(121,724)
Average estimated asset base of capitalized operating leases ..
Average invested capital, including the effect of capitalized
operating leases .................................................................. $1,925,346 $1,805,588 $ 1,606,412
704,802 582,916
838,200
ROIC .......................................................................................
ROIC, including the effect of capitalized operating leases .....
12.3%
8.9%
12.7 %
9.5 %
12.1%
9.3%
(1) Fiscal 2015 includes 53 weeks.
(2) Net of tax amounts are calculated using the effective tax rate for the period presented.
(3)
Interest on capitalized leases is calculated as the trailing four quarters’ rent expense multiplied by
eight and by a seven percent interest rate factor.
49
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 (in thousands):
Fiscal 2015 Fiscal 2014
Cash and cash equivalents at end of period ....... $ 12,465 $ 136,069 $ 130,513
Cash provided by operating activities ................. $ 254,351 $ 239,898 $ 181,218
Cash used in investing activities ......................... $(180,803) $(128,312 ) $ (126,671 )
(1,686 )
Cash used in financing activities ......................... $(197,152) $(106,030 ) $
Fiscal 2016
We have generally financed our operations principally through cash generated from operations and
borrowings under our credit facilities. Our primary uses of cash are for purchases of inventory, operating
expenses, capital expenditures primarily for opening new stores, remodels and maintenance,
repurchases of our common stock and debt service. We believe that our existing cash and cash
equivalents, and cash anticipated to be generated from operations will be sufficient to meet our
anticipated cash needs for at least the next 12 months, and we may continue to use borrowings under our
Credit Facility to fund our share repurchase programs. 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.
Operating Activities
Cash flows from operating activities increased $14.5 million to $254.4 million for 2016 compared to
$239.9 million for 2015. The cash flows from operating activities came from net income adjusted primarily
for non-cash expenses of depreciation and amortization, deferred income taxes, equity-based
compensation and changes in working capital.
Cash flows from operating activities increased $58.7 million to $239.9 million for 2015 compared to
$181.2 million for 2014. The cash flows from operating activities came from net income, including the
effect of the 53rd week in 2015, adjusted primarily for non-cash expenses of depreciation and
amortization, deferred income taxes, equity-based compensation and changes in working capital.
Cash flows provided by/ (used in) operating activities from changes in working capital was $14.4
million in 2016, compared to $10.1 million in 2015 and ($13.1) million in 2014. The increase in cash flows
from operating activities for changes in working capital in 2016, compared to 2015 was primarily due to
the return of insurance deposits, replaced with letters of credit, and a smaller increase in prepaid rent,
offset by an increase in cash used for inventory. The increase in cash flows from operating activities for
changes in working capital in 2015, compared to 2014 was primarily due to cash provided by an increase
in accounts payable and landlord incentives, partially offset by insurance deposits issued in 2015.
Investing Activities
Cash flows used in investing activities were $180.8 million, $128.3 million, and $126.7 million for
2016, 2015, and 2014, respectively. The increase in cash flows used in investing activities from 2015 to
2016 is primarily due to additional purchases of property and equipment, due to higher number of stores.
The increase in cash flows used in investing activities from 2014 to 2015 is primarily related to the
acquisition of four leases. Cash flows used in investing activities consist primarily of capital expenditures
in new stores, including leasehold improvements and store equipment, capital expenditures to maintain
the appearance of our stores, sales enhancing initiatives and other corporate investments.
We expect capital expenditures to be in the range of $155 - $165 million in 2017, including
expenditures incurred to date, net of estimated landlord tenant improvement allowances, primarily to fund
50
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
Cash flows used in financing activities were $197.2 million for 2016 compared to $106.0 million for
2015. During 2016, cash flows used in financing activities consisted of $294.3 million for stock
repurchases, $10.0 million in payments on our Credit Facility, $4.4 million cash paid for capital and
financing lease obligations, partially offset by $105 million of borrowings on the Credit Facility, $3.7 million
of excess tax benefits from the exercise of stock options and $2.7 million in proceeds from the exercise of
stock options.
During 2015, cash flows used in financing activities consisted of $261.3 million cash paid on our
term loan, $100.0 million repayment on our Credit Facility, $25.7 million for stock repurchases, $4.1
million cash paid for capital and financing lease obligations and $1.9 million payments of deferred
financing costs, partially offset by $260 million of borrowings on our Credit Facility, $20.0 million of excess
tax benefits from the exercise of stock options, $6.6 million in proceeds from the exercise of stock options
and $0.4 million from cash received from landlords related to finance lease obligations.
Cash flows used in financing activities were $1.7 million for 2014. During 2014, cash flows used in
financing activities consisted of $57.0 million cash paid on our former term loan, $3.6 million cash paid for
capital and financing lease obligations, partially offset by $47.3 million of excess tax benefits from the
exercise of stock options, $11.1 million in proceeds from the exercise of stock options and $0.6 million
from cash received from landlords related to finance lease obligations.
Long-term Debt and Credit Facilities
Long-term debt increased $95.0 million to $255.0 million as of January 1, 2017, compared to
January 3, 2016. The increase in 2016, compared to 2015, resulted primarily from $95.0 million of net
borrowings under our Credit Facility used in our share repurchase programs.
Long-term debt decreased $88.6 million to $160.0 million as of January 3, 2016, compared to
December 28, 2014. The decrease in 2015, compared to 2014, resulted primarily from the April 2015
Refinancing, in which we repaid our $257.8 million Former Credit Facility offset by $160.0 million in net
borrowings under our Credit Facility.
See Note 12 “Long-Term Debt” of our audited consolidated financial statements for a description of
our Credit Facility and our Former Credit Facility (as defined therein).
Share Repurchase Program
On November 4, 2015, our board of directors authorized a $150 million common stock share
repurchase program, which was fully utilized by the second quarter of 2016. On September 6, 2016, our
board of directors authorized a new $250 million share repurchase program for our common stock. The
following table outlines the share repurchase programs authorized by the Board, and the related
repurchase activity and available authorization as of January 1, 2017.
Amount
authorized
Cost of
repurchases
(in thousands)
$ 150,000 $ 150,000 $
250,000 170,000
Authorization
available
—
80,000
Effective date
Expiration date
November 4, 2015
September 6, 2016
November 4, 2017
December 31, 2017
51
The shares under the repurchase programs may be purchased on a discretionary basis from time to
time prior to the applicable expiration date, subject to general business and market conditions and other
investment opportunities, through open market purchases, privately negotiated transactions, or other
means, including through Rule 10b5-1 trading plans. The board’s authorization of the share repurchase
programs does not obligate us to acquire any particular amount of common stock, and the repurchase
programs may be commenced, suspended, or discontinued at any time. We have used borrowings under
our Credit Facility to assist with the repurchase program authorized on September 6, 2016. See Note 12
“Long-Term Debt” of our audited consolidated financial statements, contained elsewhere in this Annual
Report on Form 10-K, for more details.
Share repurchase activity under our repurchase programs for the periods indicated was as follows:
Number of common shares acquired ............................... 13,242,483 1,068,279
24.09
Average price per common share acquired ..................... $
25,735
Total cost of common shares acquired (in thousands) .... $
22.22 $
294,265 $
Shares purchased under our repurchase programs were subsequently retired.
Year Ended
January 1,
2017
January 3,
2016
Subsequent to January 1, 2017 and through February 10, 2017, we repurchased an additional 4.1
million shares of common stock for a total investment of $80 million year-to-date, fully utilizing our $250
million share repurchase authorization.
Factors Affecting Liquidity
We can currently borrow under our Credit Facility, up to an initial aggregate commitment of $450.0
million, which may be increased from time to time pursuant to an expansion set forth in the Credit
Agreement. We are currently utilizing borrowings under our Credit Facility to fund our share repurchase
program described above. The interest rate we pay on our borrowings increases as our leverage ratio
increases.
The Credit Agreement contains financial, affirmative and negative covenants. The negative
covenants include, among other things, limitations on our ability to:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
incur additional indebtedness;
grant additional liens;
enter into sale-leaseback transactions;
make loans or investments;
merge, consolidate or enter into acquisitions;
pay dividends or distributions;
enter into transactions with affiliates;
enter into new lines of business;
modify the terms of debt or other material agreements; and
change our fiscal year.
Each of these covenants is subject to customary and other agreed-upon exceptions.
In addition, the Credit Agreement requires that we and our subsidiaries maintain a maximum total
net leverage ratio not to exceed 3.00 to 1.00 and minimum interest coverage ratio not to be less than 1.75
52
to 1.00. Each of these covenants is tested on the last day of each fiscal quarter, starting with the fiscal
quarter ended June 28, 2015.
We were in compliance with all applicable covenants under the Credit Agreement as of January 1,
2017.
Our Credit Agreement is defined and more fully described in Note 12 “Long-Term Debt” of our
audited consolidated financial statements contained elsewhere in this Annual Report on Form 10-K.
Contractual Obligations
The following table summarizes our contractual obligations as of January 1, 2017, and the effect
such obligations are expected to have on our liquidity and cash flow in future periods:
Payments Due by Period
Total
Less Than
1 Year
1-3 Years 4-5 Years
More Than
5 Years
(in thousands)
$450.0 million Credit Facility (1) ........................ $ 255,000 $
Interest payments on $450 million Credit
—
Facility (2) .......................................................
Capital and financing lease obligations(3) ........
134,578 15,618 31,174 29,619 58,167
Operating lease obligations(3) .......................... 1,450,490 126,899 271,488 258,288 793,815
—
Purchase commitments(4) ................................
Totals(5) ....................................................... $1,943,944 $177,908 $357,871 $ 556,183 $851,982
85,980 29,961 44,350 11,669
5,430 10,859
— $ 255,000 $
17,896
1,607
— $
—
(1) The Credit Facility is scheduled to mature and the commitments thereunder will terminate on April
17, 2020, subject to extensions as set forth in the Credit Agreement. These borrowings are reflected
in the “4-5 Years” column and discussed in the financing activities section above. See Note 12
“Long-Term Debt” to our audited consolidated financial statements contained elsewhere in this
Annual Report on Form 10-K.
(2) Represents estimated interest payments through maturity date of April 17, 2020 on our Credit
Facility based on the outstanding amounts as of January 1, 2017 and based on LIBOR rates in
effect at the time of this report.
(3) Represents estimated payments for capital and financing and operating leases. 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, $2.1 million for years one to three, $1.6 million for years four to five,
and $1.6 million for the period beyond five years.
(4) Consists primarily of purchase commitments under noncancelable service and supply contracts.
(5) As of January 1, 2017, we had recorded $41.6 million of liabilities related to our 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.
53
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 and Deflation
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.
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, as well as our competitors’ responses. Although we may experience periodic
effects on sales, gross profit, gross margins and cash flows as a result of changing prices, we do not
expect the effect of 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 per store slightly fluctuate
throughout the year and are typically highest in the first half of the fiscal year. Produce, which contributed
approximately 24% of our net sales for 2016, 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, lease assumptions, self-insurance reserves, sublease assumptions
for closed stores, goodwill and intangible assets, impairment of long-lived assets, fair values of equity-
based awards and income taxes. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. Actual results may differ from
these estimates. To the extent that there are material differences between these estimates and our actual
results, our future financial statements will be affected.
We believe that of our significant accounting policies, which are described in Note 3 to the audited
consolidated financial statements included in this Annual Report on Form 10-K, the following accounting
policies involve a greater degree of judgment and complexity. Accordingly, we believe these are the most
critical to fully understand and evaluate our financial condition and results of operations.
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).
54
The Company’s non-perishable inventory is valued at the lower of cost or market using weighted
averaging, the use of which approximates the FIFO method.
The Company believes that all inventories are saleable and no allowances or reserves for
obsolescence were recorded as of January 1, 2017 and January 3, 2016.
Equity-Based Compensation
Grants of options to purchase our shares under the Sprouts Farmers Markets, LLC Option Plan
(referred to as the “2011 Option 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 Sprouts Farmers
Market, Inc. 2013 Incentive Plan (referred to as 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.
Valuation. We have used the Black-Scholes option pricing model to calculate the fair value of our
equity-based compensation awards at grant date.
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 22 to our audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K for further discussion of these inputs.
In addition to assumptions used in the Black-Scholes option pricing model, we must also estimate a
forfeiture rate to calculate the equity-based compensation cost for our awards. Our forfeiture rate is based
on an analysis of our actual forfeitures of grants made under the 2011 Option Plan 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.
55
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. 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 “Property and equipment, net of accumulated
depreciation” 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 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
56
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 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 2016, 2015
or 2014 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 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 2016, 2015 or 2014.
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
57
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 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.
58
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
We have a Credit Facility that bears interest at a rate based in part on LIBOR. Accordingly, we are
exposed to fluctuations in interest rates. Based on the $255.0 million principal outstanding under our
Credit Facility as of January 1, 2017, each hundred basis point change in LIBOR would result in a change
in interest expense by $2.6 million annually. See Note 12 to our accompanying audited consolidated
financial statements contained elsewhere in this Annual Report on Form 10-K for details on our Credit
Facility.
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.
59
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 ...................................................................
Consolidated Balance Sheets as of January 1, 2017 and January 3, 2016 ..........................................
Consolidated Statements of Operations for the fiscal years ended January 1, 2017, January 3,
2016 and December 28, 2014 ...........................................................................................................
Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 1, 2017,
January 3, 2016 and December 28, 2014 .........................................................................................
Consolidated Statements of Cash Flows for the fiscal years ended January 1, 2017, January 3,
2016 and December 28, 2014 ...........................................................................................................
Notes to Consolidated Financial Statements .........................................................................................
61
62
63
64
65
66
60
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 January 1, 2017 and January 3, 2016, and
the results of their operations and their cash flows for each of the three years in the period ended
January 1, 2017 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 January 1, 2017, based on criteria established in Internal Control -
Integrated Framework (2013) 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
integrated audits. 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, Arizona
February 23, 2017
61
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
January 1,
2017
January 3,
2016
ASSETS
Current assets:
Cash and cash equivalents ....................................................................... $
Accounts receivable, net ...........................................................................
Inventories .................................................................................................
Prepaid expenses and other current assets..............................................
Total current assets ........................................................................................
Property and equipment, net of accumulated depreciation............................
Intangible assets, net of accumulated amortization .......................................
Goodwill ..........................................................................................................
Other assets ...................................................................................................
Deferred income tax asset .............................................................................
136,069
20,424
165,434
23,288
345,215
494,067
198,601
368,078
19,003
1,400
Total assets ............................................................................................... $ 1,439,893 $ 1,426,364
12,465 $
25,228
204,464
21,869
264,026
604,660
197,608
368,078
5,521
—
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ...................................................................................... $
Accrued salaries and benefits ...................................................................
Other accrued liabilities .............................................................................
Current portion of capital and financing lease obligations ........................
Total current liabilities.....................................................................................
Long-term capital and financing lease obligations .........................................
Long-term debt ...............................................................................................
Other long-term liabilities ...............................................................................
Deferred income tax liability ...........................................................................
Total liabilities ............................................................................................
157,550 $
32,859
56,376
12,370
259,155
117,366
255,000
116,200
19,263
766,984
134,480
30,717
50,253
14,972
230,422
115,500
160,000
97,450
—
603,372
Commitments and contingencies (Note 19)
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,
140,256,313 shares issued and outstanding, January 1, 2017;
152,577,884 shares issued and outstanding, January 3, 2016 .............
Additional paid-in capital ...........................................................................
Retained earnings .....................................................................................
Total stockholders’ equity ..............................................................................
153
577,393
245,446
822,992
Total liabilities and stockholders’ equity .................................................... $ 1,439,893 $ 1,426,364
140
597,269
75,500
672,909
—
—
The accompanying notes are an integral part of these consolidated financial statements.
62
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
January 1,
2017
Year Ended
January 3,
2016
December 28,
2014
Net sales ........................................................................................ $4,046,385 $ 3,593,031 $ 2,967,424
Cost of sales, buying and occupancy ............................................. 2,864,379 2,541,403 2,082,221
885,203
581,621
95,397
7,749
725
199,711
(25,063)
596
(1,138)
174,106
(66,414)
Net income ................................................................................ $ 124,306 $ 128,991 $ 107,692
Gross profit ................................................................................ 1,182,006 1,051,628
706,044
106,412
8,616
1,802
228,754
(17,723 )
443
(5,481 )
205,993
(77,002 )
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 ......................................................................
828,943
126,929
12,974
228
212,932
(14,794)
454
—
198,592
(74,286)
Net income per share:
Basic .......................................................................................... $
Diluted ....................................................................................... $
0.84 $
0.83 $
0.84 $
0.83 $
0.72
0.70
Weighted average shares outstanding:
Basic ..........................................................................................
Diluted .......................................................................................
147,311
149,653
153,099
155,877
149,751
154,328
The accompanying notes are an integral part of these consolidated financial statements.
63
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Shares
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Total
Stockholders’
Equity
—
4,216,774
Balances at December 29, 2013 ...... 147,616,560 $
—
Net income .........................................
Issuance of shares under stock
plans ...............................................
Excess tax benefit for exercise of
options ............................................
Tax effect of forfeiture of vested
options in equity ..............................
—
—
Equity-based compensation ...............
Balances at December 28, 2014 ...... 151,833,334 $
—
Net income .........................................
Issuance of shares under stock
plans ...............................................
Repurchase and retirement of
common stock .................................
Excess tax benefit for exercise of
options ............................................
—
—
Equity-based compensation ...............
Balances at January 3, 2016 ........... 152,577,884 $
—
Net income .........................................
Issuance of shares under stock
plans ...............................................
Repurchase and retirement of
common stock ................................. (13,242,483 )
Excess tax benefit for exercise of
options ............................................
—
—
Equity-based compensation ...............
Balances at January 1, 2017 ........... 140,002,242 $
(1,068,279 )
1,812,829
666,841
147 $
—
479,127 $
—
34,497 $
107,692
513,771
107,692
5
11,307
—
11,312
—
47,261
—
47,261
—
—
152 $
—
(2)
5,355
543,048 $
—
—
—
142,189 $
128,991
(2)
5,355
685,389
128,991
2
6,318
—
6,320
(1)
—
(25,734 )
(25,735)
—
—
153 $
—
20,009
8,018
577,393 $
—
—
—
245,446 $
124,306
20,009
8,018
822,992
124,306
—
2,740
—
2,740
(13)
—
(294,252 )
(294,265)
—
—
140 $
3,737
13,399
597,269 $
—
—
75,500 $
3,737
13,399
672,909
The accompanying notes are an integral part of these consolidated financial statements.
64
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 .............................................................................
Loss on extinguishment of debt........................................................................
Deferred income taxes .....................................................................................
Changes in operating assets and liabilities:
Accounts receivable ...................................................................................
Inventories .................................................................................................
Prepaid expenses and other current assets ...............................................
Other assets ..............................................................................................
Accounts payable ......................................................................................
Accrued salaries and benefits ....................................................................
Other accrued liabilities ..............................................................................
Other long-term liabilities ...........................................................................
Cash flows from operating activities .....................................................
Cash flows from investing activities
Purchases of property and equipment ....................................................................
Proceeds from sale of property and equipment ......................................................
Proceeds from sale of intangible assets .................................................................
Purchase of leasehold interests .............................................................................
Cash flows used in investing activities .................................................
Cash flows from financing activities
Proceeds from revolving credit facility ....................................................................
Payments on revolving credit facility ......................................................................
Payments on term loan ..........................................................................................
Payments on capital lease obligations ...................................................................
Payments on financing lease obligations ...............................................................
Payments of deferred financing costs ....................................................................
Cash from landlord related to financing lease obligations .......................................
Excess tax benefit for exercise of stock options .....................................................
Proceeds from exercise of stock options ................................................................
Repurchase of common stock ................................................................................
Cash flows used in financing activities .................................................
(Decrease) / Increase in cash and cash equivalents ............................
Cash and cash equivalents at beginning of the period ...........................................
Cash and cash equivalents at the end of the period ............................................... $
Supplemental disclosure of cash flow information
Cash paid for interest ............................................................................................. $
Cash paid for income taxes ....................................................................................
Supplemental disclosure of non-cash investing and financing activities
Property and equipment in accounts payable ......................................................... $
Property acquired through capital and financing lease obligations .........................
January 1,
2017
Year Ended
January 3,
2016
December 28,
2014
124,306 $
128,991 $
107,692
80,414
309
463
439
—
13,399
—
20,663
(4,803)
(39,030)
1,419
13,018
16,015
2,142
6,103
19,494
254,351
69,169
344
742
1,512
—
8,018
5,481
15,581
(5,622 )
(22,641 )
(12,042 )
(481 )
19,387
1,030
7,395
23,034
239,898
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
181,218
(181,018)
706
—
(491)
(180,803)
(125,313 )
2,708
—
(5,707 )
(128,312 )
(127,065)
294
100
—
(126,671)
105,000
(10,000)
—
(714)
(3,650)
—
—
3,737
2,740
(294,265)
(197,152)
(123,604)
136,069
12,465 $
260,000
(100,000 )
(261,250 )
(662 )
(3,480 )
(1,896 )
419
20,009
6,565
(25,735 )
(106,030 )
5,556
130,513
136,069 $
—
—
(57,000)
(585)
(3,006)
—
577
47,261
11,067
—
(1,686)
52,861
77,652
130,513
14,537 $
46,083
17,455 $
40,656
23,768
8,250
23,228 $
4,332
16,196 $
10,125
13,993
34,140
The accompanying notes are an integral part of these consolidated financial statements.
65
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Sprouts Farmers Market, Inc., a Delaware corporation, through its subsidiaries, operates as a
healthy grocery store that offers fresh, natural and organic food through a complete shopping experience
that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and
seafood, baked goods, dairy products, frozen foods, beer and wine, natural body care and household
items catering to consumers’ growing interest in health and wellness. As of January 1, 2017, the
Company operated 253 stores in 13 states. 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.
2. Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). All material intercompany accounts and transactions have been eliminated in consolidation.
The Company has one reportable and one operating segment, healthy grocery stores.
The Company categorizes its products as perishable and non-perishable. Perishable product
categories include produce, meat and seafood, deli and baked goods. Non-perishable product categories
include packaged groceries, vitamins and supplements, bulk foods, dairy products, frozen foods, beer
and wine, and natural body care and household items.
The following is a breakdown of the Company’s perishable and non-perishable sales mix:
Perishables ..........................................................
Non-Perishables ..................................................
50.4%
49.6%
50.8 %
49.2 %
50.8 %
49.2 %
2016
2015
2014
All dollar amounts are in thousands, unless otherwise indicated.
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 year 2016 ended on January 1, 2017 and included 52-weeks.
Fiscal year 2015 ended on January 3, 2016 and included 53-weeks, while fiscal year 2014 ended on
December 28, 2014 and included 52-weeks. Fiscal years 2016, 2015, and 2014 are referred to as 2016,
2015, and 2014.
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 include, 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.
66
Cash and Cash Equivalents
The Company considers all highly liquid instruments 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. 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:
Due from banks for debit and credit card
transactions ................................................................... $
43,015 $
51,309
As Of
January 1,
2017
January 3,
2016
Accounts Receivable
Accounts receivable generally represent billings to vendors for earned rebates, advertising 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, the use of which approximates the FIFO method.
The Company believes that all inventories are saleable and no allowances or reserves for
obsolescence were recorded as of January 1, 2017 and January 3, 2016.
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 certain of our asset classes:
3 years
Software ...............................................................
5 years
Computer hardware ..............................................
Furniture, fixtures and equipment ........................
7 years
Leasehold improvements ..................................... up to 15 years(cid:3)
40 years
Buildings ...............................................................
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
67
improvements and are amortized over the remaining lease term of the successful sites with which they
are associated.
Asset Retirement Obligations
The Company’s asset retirement obligations (“ARO”) are related to the Company’s commitment to
return leased facilities to the landlord in an agreed-upon condition. This may require actions ranging from
cleaning to removal of leasehold improvements. The obligation is recorded as a liability with an offsetting
capital asset at the inception of the lease term based upon the estimated fair market value of costs to
meet the commitment. The liability, included in other long-term liabilities in the consolidated balance
sheets, is accreted over time to the projected future value of the obligation. The ARO asset, included in
property and equipment in the consolidated balance sheets, is depreciated using the same useful life as
the related property.
A reconciliation of the ARO liability is as follows:
As Of
January 1,
2017
January 3,
2016
Beginning balance ............................................................ $
Additions for new facilities ................................................
Accretion expense ............................................................
Adjustments ......................................................................
Ending balance ................................................................. $
3,214 $
233
201
(21)
3,627 $
2,952
245
169
(152 )
3,214
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
accompanying 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. Amounts expected to be recovered from insurance companies is included in the liability,
with a corresponding amount recorded in accounts receivable.
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
68
lives, consisting of favorable and unfavorable leasehold interests and the “Sunflower Farmers Market”
trade name.
Goodwill is evaluated for impairment on an annual basis on the first day of the fourth fiscal quarter
or more frequently if events or changes in circumstances indicate that the asset might be impaired. The
Company’s impairment evaluation of goodwill consists of a qualitative assessment to determine if it is
more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company’s
qualitative assessment indicates it is more likely than not that the estimated fair value of a reporting unit
exceeds its carrying value, no further analysis is required and goodwill is not impaired. Otherwise, the
Company follows a two-step quantitative goodwill impairment test to determine if goodwill is impaired. The
first step of the quantitative goodwill impairment test compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the fair value of the Company’s reporting unit exceeds its carrying
value, no further analysis or impairment of goodwill is required. If the carrying value of the Company’s
reporting unit exceeds its fair value, the fair value of the reporting unit would be allocated to the reporting
unit’s assets and liabilities based on the relative fair value, with goodwill written down to its implied fair
value, if necessary.
Indefinite-lived assets are evaluated for impairment on an annual basis on the first day of the fourth
fiscal quarter or more frequently if events or changes in circumstances indicate that the asset might be
impaired. The Company’s impairment evaluation for its indefinite-lived intangible assets consists of a
qualitative assessment similar to that for goodwill. If the Company’s qualitative assessment indicates it is
more likely than not that the estimated fair value of an indefinite-lived intangible asset exceeds its carrying
value, no further analysis is required and the asset is not impaired. Otherwise, the Company compares
the estimated fair value of the asset to its carrying amount with an impairment loss recognized for the
amount, if any, by which carrying value exceeds estimated fair value.
The Company can elect to bypass the qualitative assessments approach for goodwill and indefinite-
lived intangible assets and proceed directly to the quantitative assessments for goodwill or any indefinite-
lived intangible assets in any period.
The Company has determined its business consists of a single reporting unit, healthy grocery
stores. 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 2016, 2015 and 2014 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 7, “Intangible Assets” and Note 8, “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
69
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 2016, 2015 and 2014.
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 Credit Facility and Former Credit Facility (as defined in Note 12, “Long-Term
Debt”), 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 accompanying consolidated balance sheets.
Operating Leases
The Company leases certain 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 expensed $1.8 million, $1.8 million and $1.6 million for the years
ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively, for contingent rent.
Financing Lease Obligations
The Company has recorded financing lease obligations for 43 and 38 store building leases at
January 1, 2017 and January 3, 2016, respectively. In each case, the Company was deemed to be the
owner during the construction period under lease accounting guidance. Further, each lease contains
provisions indicating continuing involvement with the property at the end of the construction period, which
include either an affiliate guaranty or contingent collateral. As a result, in accordance with applicable
accounting guidance, buildings and related assets subject to the leases are reflected on the Company’s
balance sheets and depreciated over their remaining useful lives. The present value of the lease
payments associated with these buildings is recorded as financing lease obligations.
At January 1, 2017, the Company also recorded current financing lease obligations and related
construction in progress for two stores under the lease accounting guidance noted above. The Company,
however, 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 the corresponding financing lease
obligations at the end of the construction periods for the stores during 2017.
70
Monthly lease payments are allocated between the land element of the lease (which is accounted
for as an operating lease) and the financing obligation. The financing obligation is amortized using the
effective interest method and the interest rate is determined in accordance with the requirements of sale-
leaseback accounting. Lease payments less the portion allocated to the land element of the lease and
that portion considered to be interest expense decrease the financing liability. At the end of the initial
lease term, should the Company decide not to renew the lease, the net book value of the asset and the
corresponding financing obligation would be reversed.
The outflows from the construction of the buildings are classified as investing activities, and the
outflows associated with the financing obligations principal payments and inflows from the associated
financing proceeds are classified as financing activities in the accompanying consolidated statements of
cash flows.
Fair Value Measurements
The Company records its financial assets and liabilities in accordance with the framework for
measuring fair value in accordance with GAAP. This framework establishes a fair value hierarchy that
prioritizes the inputs used to measure fair value:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or
significant value drivers are unobservable.
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the
impairment analysis of goodwill, intangible assets, and 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, the
fair value of the long-term debt approximated carrying value as of January 1, 2017 and January 3, 2016.
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.
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 based on an analysis of our
actual forfeitures of grants made under our 2011 Option Plan and 2013 Incentive Plan (each as defined in
Note 22, “Equity-Based Compensation”). The actual forfeiture rate could differ from these estimates. The
71
Company uses the Black-Scholes option-pricing model to determine the grant date fair value for each
option grant. The Black-Scholes option-pricing model requires extensive use of subjective assumptions.
See Note 22, “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 (“RSUs”),
performance share awards (“PSAs”), and restricted stock awards (“RSAs”) 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. During 2015, the Company obtained
sufficient historical redemption data for its gift card program to make a reasonable estimate of the ultimate
redemption patterns and breakage rate.
Cost of Sales, Buying and Occupancy
Cost of sales, buying and occupancy 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 33%, 31% and 31% of total purchases during
2016, 2015, and 2014, respectively.
Direct Store Expenses
Direct store expenses consist of store-level expenses such as salaries and benefits, related equity-
based compensation, supplies, depreciation and amortization for buildings and store leasehold
improvements, equipment and other store specific costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of salaries and benefits costs, related
equity-based compensation, advertising, acquisition-related costs and corporate overhead.
The Company charges third-parties to place advertisements in the Company’s in-store guide and
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, net of rebates, was $37.0 million, $32.0 million and $26.1 million for 2016, 2015 and 2014,
respectively.
72
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
The Company recognizes loss on extinguishment of debt when debt is refinanced and the new debt
is either with a new lender or lenders and/or the cash flows associated with the refinanced debt and the
original debt differ by greater than 10 percent. The loss on extinguishment of debt represents the
amounts of deferred financing costs and/or issue discount associated with the extinguished portion of the
debt.
No loss on extinguishment of debt was recorded during 2016. In 2015, the Company recorded a
loss on extinguishment of debt totaling $5.5 million related to the April 2015 Refinancing as defined in
Note 12.
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
component of its Former Credit Facility, as defined in Note 12.
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.
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.
Share Repurchases
The Company has elected to retire shares repurchased to date. Shares retired become part of the
pool of authorized but unissued shares. The Company has elected to record purchase price of the retired
shares in excess of par value directly as a reduction of retained earnings.
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, PSAs and RSUs.
73
Comprehensive Income
Comprehensive income equals net income for all periods presented.
Recently Issued Accounting Pronouncements
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. Subsequent to the initial standards, the FASB has also issued several ASUs to
clarify specific revenue recognition topics. This guidance will be effective for the Company for its fiscal
year 2018, with early adoption permitted. The Company is currently evaluating the potential impact of this
guidance and does not expect this ASU to materially impact the Company’s 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 was effective for the Company for its fiscal
year 2016. Adoption of this guidance took place prospectively in 2016, and the adoption did not have a
material effect on the Company’s consolidated financial statements or disclosures.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance
Costs.” ASU No. 2015-03 requires an entity to present debt issuance costs in the balance sheet as a
direct deduction from the related debt liability rather than as an asset. Amortization of the costs will
continue to be reported as interest expense. This guidance was effective for the Company for its fiscal
year 2016. The new guidance has been applied retrospectively to each prior period presented, and the
adoption did not have a material effect on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, “Customer's Accounting for Fees Paid in a Cloud
Computing Arrangement.” ASU No. 2015-05 provides guidance to customers about whether a cloud
computing arrangement includes a software license. If a cloud computing arrangement includes a
software license, the customer should account for the software license element of the arrangement
consistent with the acquisition of other software licenses. If the arrangement does not include a software
license, the customer should account for a cloud computing arrangement as a service contract. This
guidance was effective for the Company for its fiscal year 2016. The Company adopted this ASU
prospectively, and the adoption did not have a material effect on its consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” ASU
No. 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of
cost and net realizable value. Net realizable value is defined as the estimated selling prices in the
ordinary course of business; less reasonably predictable costs of completion, disposal and transportation.
This guidance will be effective for the Company for its fiscal year 2017. The Company does not expect
this ASU to materially impact the Company’s consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-15, “Interest – Imputation of Interest: Presentation
and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
(Subtopic 835-30).” ASU No. 2015-15 provides additional guidance on the presentation and subsequent
measurement of debt issuance costs associated with line-of-credit arrangements. Early adoption is
permitted. This guidance was effective for the Company for its fiscal year 2016. Adoption of this guidance
took place prospectively in 2016, and the adoption did not have a material effect on the Company’s
consolidated financial statements.
74
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations: Simplifying the
Accounting For Measurement Period Adjustments.” ASU No. 2015-16 requires that an acquirer recognize
adjustments to provisional amounts that are identified during the measurement period in the reporting
period in which the adjustment amounts are determined. This guidance was effective for the Company for
its fiscal year 2016. The Company adopted this guidance prospectively in 2016, and the adoption did not
have a material effect on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (ASC 842).” ASU No. 2016-02
requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with
terms greater than twelve months. Recognition, measurement and presentation of expenses will depend
on classification as a finance or operating lease. The new guidance also requires certain additional
quantitative and qualitative disclosures. This guidance will be effective for the Company for its fiscal year
2019, with early adoption permitted. The adoption of this ASU is expected to result in a material increase
to the Company’s consolidated balance sheets for right-of-use assets and lease liabilities. The Company
is currently evaluating the potential impact of this guidance.
In March 2016, the FASB issued ASU No. 2016-04, “Liabilities-Extinguishments of Liabilities
(Subtopic 405-20): Recognition of breakage for certain prepaid stored-value products.” ASU No. 2016-04
provides a narrow scope exception to the guidance in Subtopic 405-20 to require that stored-value
breakage be accounted for consistently with the breakage guidance in Topic 606. The amendments in
this update contain specific guidance for derecognition of prepaid stored-value product liabilities, thereby
eliminating the current and potential future diversity. This guidance will be effective for the Company for
its fiscal year 2018, with early adoption permitted. The Company does not expect this ASU to materially
impact the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic
718).” This update involves several aspects of the accounting for share-based transactions, including the
income tax consequences, classification of awards as either equity or liabilities, how to account for
forfeitures, and classification on the statement of cash flows. The amendments in this update are effective
for the Company for its fiscal year 2017, with early adoption permitted. The adoption of the guidance is
expected to result in a material change to the Company’s consolidated financial statements as the tax
impact of option exercises previously recorded to additional paid in capital will be reflected in the
provision for income taxes.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments”. This update provides clarifications on the
cash flow classification for eight specific cash flow issues: debt prepayment or debt extinguishment costs;
settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments
made after a business combination; proceeds from the settlement of insurance claims; proceeds from the
settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance
policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization
transactions; and separately identifiable cash flows and application of the predominance principle. The
guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The
Company is currently evaluating the potential impact of this guidance.
75
4. Accounts Receivable
A summary of accounts receivable is as follows:
As Of
Vendor .............................................................................. $
Landlord receivable ..........................................................
Insurance receivable ........................................................
Other.................................................................................
Total.................................................................................. $
January 1,
2017
January 3,
2016
11,649
4,143
770
3,862
20,424
14,107 $
2,583
3,535
5,003
25,228 $
The Company had recorded allowances for certain vendor receivables of $0.1 million at both
January 1, 2017 and January 3, 2016.
5. Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets is as follows:
As Of
Prepaid expenses ............................................................. $
Income tax receivable ......................................................
Other current assets .........................................................
Total.................................................................................. $
6. Property and Equipment
A summary of property and equipment, net is as follows:
January 1,
2017
January 3,
2016
16,974
5,852
462
23,288
19,259 $
2,148
462
21,869 $
As Of
January 1,
2017
January 3,
2016
Buildings ........................................................................... $ 130,821 $ 115,925
317,015
Furniture, fixtures and equipment ....................................
260,039
Leasehold improvements .................................................
38,627
Construction in progress ..................................................
731,606
Total property and equipment .....................................
(237,539 )
Accumulated depreciation and amortization ....................
Property and equipment, net ....................................... $ 604,660 $ 494,067
400,724
321,730
49,263
902,538
(297,878)
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A summary of leased property and equipment under capital and financing lease obligations is as
follows:
As Of
January 1,
2017
January 3,
2016
Capital Leases—Buildings
Gross asset balance .................................................... $
Accumulated depreciation ...........................................
Net .......................................................................... $
11,338 $
(3,133)
8,205 $
11,338
(2,249 )
9,089
Financing Leases
Gross asset balance ....................................................
Accumulated depreciation ...........................................
Net .......................................................................... $
135,946
(14,681)
121,265 $
117,197
(11,819 )
105,378
Depreciation expense was $80.2 million, $69.1 million and $60.5 million for 2016, 2015 and 2014,
respectively. Depreciation expense is primarily reflected in direct store expenses on the consolidated
statements of operations.
7. Intangible Assets
A summary of the activity and balances in intangible assets is as follows:
Balance at
December 28,
2014
Additions
(1)
Other
Balance at
January 3,
2016
Gross Intangible Assets
Indefinite-lived trade names ...............................
Indefinite-lived liquor licenses ............................
Finite-lived trade names ....................................
Leasehold interests ............................................
$
Total intangible assets .................................. $
Accumulated Amortization
Finite-lived trade names .................................... $
Leasehold interests ............................................
Total accumulated amortization .................... $
182,937 $
2,023
1,800
12,574
199,334 $
— $
—
—
5,726
5,726 $
— $ 182,937
—
2,023
—
1,800
— 18,300
— $ 205,060
(465) $
(180) $
(4,693)
(5,158) $ (1,301) $
(1,121)
— $
(645)
—
(5,814)
— $ (6,459)
77
Balance at
January 3,
2016
Additions
(2)
Other
Balance at
January 1,
2017
Gross Intangible Assets
Indefinite-lived trade names ............................... $ 182,937 $
2,023
Indefinite-lived liquor licenses ............................
Finite-lived trade names ....................................
1,800
Leasehold interests ............................................ 18,300
Total intangible assets .................................. $ 205,060 $
— $
—
—
473
473 $
Accumulated Amortization
Finite-lived trade names .................................... $
Leasehold interests ............................................
(180) $
(1,286)
Total accumulated amortization .................... $ (6,459) $ (1,466) $
(645) $
(5,814)
— $ 182,937
—
2,023
—
1,800
— 18,773
— $ 205,533
— $
—
— $
(825)
(7,100)
(7,925)
(1) Additions during 2015 represent the amount paid for four leases acquired.
(2) Additions during 2016 represent leasehold interests as a result of adjustments to the leases
acquired in 2015 and a lease acquired in 2016.
Amortization expense was $1.5 million, $1.3 million and $1.3 million for 2016, 2015 and 2014,
respectively. Future amortization associated with the net carrying amount of finite-lived intangible assets
is as follows:
2017....................................................................................................
2018....................................................................................................
2019....................................................................................................
2020....................................................................................................
2021....................................................................................................
Thereafter ...........................................................................................
Total amortization ............................................................................... $
1,402
1,402
1,386
1,375
1,339
5,744
12,648
The remaining weighted-average amortization period of leasehold interests acquired total 10.8
years. The remaining amortization period of the finite-lived trade name is 5.4 years.
8. Goodwill
The balance of our goodwill was $368.1 million as of January 1, 2017, January 3, 2016 and
December 28, 2014. As of January 1, 2017, January 3, 2016 and December 28, 2014, the Company had
no accumulated goodwill impairment losses. The goodwill was related to the acquisition of Sunflower
Farmers Market stores and Henry’s Farmers Market stores.
9. Other Assets
A summary of other assets is as follows:
Insurance deposits ................................................ $
Other .....................................................................
Total ...................................................................... $
— $ 15,319
3,684
5,521
5,521 $ 19,003
As Of
January 1,
2017
January 3,
2016
78
As of January 1, 2017, the Company received a return of cash collateral deposits related to
insurance policies. In place of the deposits, the Company has issued letters of credit.
10. Accrued Salaries and Benefits
A summary of accrued salaries and benefits is as follows:
As Of
January 1,
2017
January 3,
2016
Accrued payroll ..................................................... $ 12,972 $ 10,988
9,728
Bonuses ................................................................
8,916
Vacation ................................................................
Other .....................................................................
1,085
Total ...................................................................... $ 32,859 $ 30,717
8,168
10,633
1,086
11. Other Accrued Liabilities
A summary of other accrued liabilities is as follows:
As Of
January 1,
2017
January 3,
2016
Workers’ compensation / general liability
reserves ............................................................. $ 12,406 $ 11,295
10,616
Gift cards ...............................................................
7,038
Sales and use tax liabilities ...................................
6,064
Medical insurance claim reserves .........................
5,190
Unamortized lease incentives ...............................
Accrued occupancy related (CAM, property
4,689
taxes, etc.) .........................................................
Other .....................................................................
5,361
Total ...................................................................... $ 56,376 $ 50,253
12,264
8,752
6,754
6,233
5,851
4,116
12. Long-Term Debt
A summary of long-term debt is as follows:
Facility
Senior secured debt
Maturity
Interest Rate
As Of
January 1,
2017
January 3,
2016
$450.0 million Credit Facility ......................... April 17, 2020 Variable $255,000 $ 160,000
255,000 160,000
$255,000 $ 160,000
Total debt ................................................................
Long-term debt ......................................................
Senior Secured Revolving Credit Facility
April 2015 Refinancing
On April 17, 2015, the Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC
(“Intermediate Holdings”), as borrower, entered into a credit agreement (the “Credit Agreement”) to
replace the Former Credit Facility (as defined below). The Credit Agreement provides for a revolving
79
credit facility with an initial aggregate commitment of $450.0 million (the “Credit Facility”), which may be
increased from time to time pursuant to an expansion feature set forth in the Credit Agreement.
Concurrently with the closing of the Credit Agreement, the Company borrowed $260.0 million to pay
off its existing $257.8 million former term loan (the “April 2015 Refinancing”), to terminate all commitments
under its existing senior secured credit facility, dated April 23, 2013 (the “Former Credit Facility”) and to
pay transaction costs related to the April 2015 Refinancing. Such repayment resulted in a $5.5 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 $60.0 million secured revolving credit facility component of the
Former Credit Facility on April 17, 2015. The remaining proceeds of loans made under the Credit Facility
were used for general corporate purposes.
The Company capitalized debt issuance costs of $2.3 million related to the Credit Facility, which are
being amortized on a straight-line basis to interest expense over the five-year term of the Credit Facility.
The Credit Agreement also provides for a letter of credit subfacility and a $15.0 million swingline
facility. Letters of credit issued under the Credit Agreement reduce the borrowing capacity of the Credit
Facility. Letters of credit totaling $24.8 million have been issued as of January 1, 2017, primarily to
support the Company’s insurance programs.
Guarantees
Obligations under the Credit Facility are guaranteed by the Company and all of its current and future
wholly-owned material domestic subsidiaries, and are secured by first-priority security interests in
substantially all of the assets of the Company and its subsidiary guarantors, including, without limitation, a
pledge by the Company of its equity interest in Intermediate Holdings.
Interest and Fees
Loans under the Credit Facility bear interest, at the Company’s option, either at adjusted LIBOR
plus 1.25% per annum, or a base rate plus 0.25% per annum. The interest rate margins are subject to
adjustment pursuant to a pricing grid based on the Company’s total gross leverage ratio, as defined in the
Credit Agreement. Under the terms of the Credit Agreement, the Company is obligated to pay a
commitment fee on the available unused amount of the Credit Facility commitments equal to 0.15% per
annum.
Outstanding letters of credit under the Credit Facility are subject to a participation fee of 1.25% per
annum and an issuance fee of 0.125% per annum.
Payments and Borrowings
The Credit Facility is scheduled to mature, and the commitments thereunder will terminate on April
17, 2020, subject to extensions as set forth in the Credit Agreement.
The Company may repay loans and reduce commitments under the Credit Agreement at any time in
agreed-upon minimum principal amounts, without premium or penalty (except LIBOR breakage costs, if
applicable).
Following the closing of the Credit Facility and the initial borrowing of $260.0 million in 2015, the
Company made a total of $100.0 million of principal payments on the Credit Facility. During 2016, the
Company borrowed an additional $105.0 million to be used in connection with the Company’s $250.0
million share repurchase program (see Note 20) and made a total of $10.0 million of principal payments;
resulting in total outstanding debt under the Credit Facility of $255.0 million at January 1, 2017.
80
Covenants
The Credit Agreement contains financial, affirmative and negative covenants. The negative
covenants include, among other things, limitations on the Company’s ability to:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
incur additional indebtedness;
grant additional liens;
enter into sale-leaseback transactions;
make loans or investments;
merge, consolidate or enter into acquisitions;
pay dividends or distributions;
enter into transactions with affiliates;
enter into new lines of business;
modify the terms of debt or other material agreements; and
change its fiscal year
Each of these covenants is subject to customary and other agreed-upon exceptions.
In addition, the Credit Agreement requires that the Company and its subsidiaries maintain a
maximum total net leverage ratio not to exceed 3.00 to 1.00 and minimum interest coverage ratio not to
be less than 1.75 to 1.00. Each of these covenants is tested on the last day of each fiscal quarter, starting
with the fiscal quarter ended June 28, 2015.
The Company was in compliance with all applicable covenants under the Credit Agreement as of
January 1, 2017 and January 3, 2016.
13. Other Long-Term Liabilities
A summary of other long-term liabilities is as follows:
As Of
January 1,
2017
January 3,
2016
Unamortized lease incentives ............................... $ 54,176 $ 47,005
19,686
Deferred rent .........................................................
Workers’ compensation / general liability
15,489
reserves .............................................................
10,178
Unfavorable lease liability .....................................
3,214
ARO liability ..........................................................
1,123
Closed store reserves ...........................................
Other .....................................................................
755
Total ...................................................................... $ 116,200 $ 97,450
22,399
8,954
3,627
767
1,696
24,581
Unfavorable leasehold interests of $16.7 million were recognized in connection with previous
business combinations in 2011 and 2012 and are being amortized on a straight-line basis over the term of
the underlying leases.
81
14. 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. The Company had
recorded a $5.8 million and a $0.8 million receivable from its insurance carrier for payments expected to
be made in excess of self-insured retentions at January 1, 2017 and January 3, 2016, respectively. The
Company expects to receive payment of $3.5 million of the 2016 receivable during 2017. See Note 11,
“Other Accrued Liabilities,” and Note 13, “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. The
Company had recorded a $0.3 million and $0.6 million receivable from its medical insurance carrier for
payments expected to be made in excess of stop-loss limits at January 1, 2017 and January 3, 2016,
respectively. The Company expects to receive payment for the 2016 receivable during 2017.
15. 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 the Plan:
January 1,
2017
Year Ended
January 3,
2016
December 28,
2014
$
3,354 $
2,656 $
1,980
16. Closed Store Reserves
A summary of closed store reserve activity is as follows:
As Of
January 1,
2017
January 3,
2016
Beginning balance ................................................ $
Additions ...............................................................
Usage ....................................................................
Adjustments ..........................................................
Ending balance ..................................................... $
2,017 $
—
(998)
64
1,083 $
1,785
1,144
(1,332 )
420
2,017
82
Usage during 2016 primarily related to lease payments made during the period for closed stores.
Additions made during 2015 include remaining lease payments for the corporate support office relocation,
and usage during 2015 primarily related to lease payments made during the period for closed stores.
17. Income Taxes
Income Tax Provision
The income tax provision consists of the following:
January 1,
2017
Year Ended
January 3,
2016
U.S. Federal—current ........................................ $ (44,588) $ (51,322) $
U.S. Federal—deferred ...................................... (19,293) (15,155)
U.S. Federal—total ............................................. (63,881) (66,477)
State—current ....................................................
(9,619)
State—deferred ..................................................
(906)
State—total ......................................................... (10,405) (10,525)
Total provision .................................................... $ (74,286) $ (77,002) $
(9,036)
(1,369)
December 28,
2014
(41,217 )
(17,007 )
(58,224 )
(7,815 )
(375 )
(8,190 )
(66,414 )
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:
Year Ended
Federal statutory rate ........................................
Increase in income taxes resulting from:
State income taxes, net of federal benefit ....
Other, net .....................................................
Effective tax rate ................................................
3.73
(1.32)
37.41%
3.82
(1.44)
37.38%
35.00 %
3.78
(0.63 )
38.15 %
January 1,
2017
35.00%
January 3,
2016
35.00%
(cid:3)
December 28,
2014
The effective income tax rate increased to 37.41% in 2016 from 37.38% in 2015 as a result of a
slight decrease in tax credits and enhanced charitable food contribution deductions for 2016. The
effective income tax rate decreased to 37.38% in 2015 from 38.15% in 2014 as a result of increased tax
credits and enhanced charitable food contribution deductions for 2015.
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 $3.7 million, $20.0 million and $47.3 million in 2016, 2015 and 2014. The
income tax benefit for 2015 included $0.1 million of income tax benefits related to stock award activity in
2013. The income tax benefit for 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.
83
Deferred Taxes
Significant components of the Company’s deferred tax assets and deferred tax liabilities are as
follows:
As Of
January 1,
2017
January 3,
2016
Deferred tax assets
Employee benefits ....................................................... $
Tax credits ...................................................................
Lease related ...............................................................
Other accrued liabilities ...............................................
Charitable contribution carryforward ...........................
Inventories and other ...................................................
Total gross deferred tax assets ..............................
26,650 $
408
84,744
9,986
15,928
2,087
139,803
20,298
409
80,172
8,070
14,574
1,202
124,725
Deferred tax liabilities
Depreciation and amortization ....................................
Intangible assets .........................................................
Other ............................................................................
Total gross deferred tax liabilities ...........................
Net deferred tax (liability) / asset ............................ $
(137,230)
(21,021)
(815)
(159,066)
(19,263) $
(111,402 )
(11,377 )
(546 )
(123,325 )
1,400
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.
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
January 1, 2017 and January 3, 2016.
At December 28, 2014, the Company had approximately $4.4 million of federal net operating loss
carryforwards that were fully utilized in 2015. The Company had net operating loss carryforwards for state
income tax purposes of $4.2 million as of December 28, 2014 that were fully utilized in 2015. The
Company had alternative minimum tax credits of $0.9 million as of December 28, 2014 that were fully
utilized in 2015. The Company had general business credits of $1.5 million as of December 28, 2014 that
were fully utilized in 2015. The Company has state income tax credits of $0.4 million which are available
to offset future state income taxes. These credits have no expiration date.
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.
84
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
January 1,
2017
As Of
January 3,
2016
December 28,
2014
Beginning balance ............................................... $
Additions based on tax positions related to the
current year ......................................................
Reductions for tax positions for prior years .........
Ending balance .................................................... $
737 $
626 $
104
(22)
819 $
114
(3 )
737 $
410
216
—
626
At January 1, 2017 and January 3, 2016, the Company had unrecognized tax benefits of $0.8
million and $0.7 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 for income tax examinations remains open for federal tax returns for tax years
2013 through 2015 and state tax returns for the tax years 2012 through 2015.
The Company early adopted the guidance under ASU No. 2015-17 during 2015. The guidance
requires that deferred tax assets and deferred tax liabilities be classified as noncurrent on the
consolidated balance sheets. The Company elected the prospective method of adoption, and therefore
did not reclassify deferred tax balances for prior years.
18. Related-Party Transactions
A member of the Company’s board of directors is an investor in a company that is a supplier of
coffee to the Company for resale. During 2016, 2015 and 2014, purchases from this company were $9.8
million, $9.7 million and $8.3 million, respectively. As of January 1, 2017, January 3, 2016 and
December 28, 2014, the Company had no receivable recorded from this vendor. As of January 1, 2017,
January 3, 2016 and December 28, 2014, the Company had recorded accounts payable due to this
vendor of $0.7 million, $0.7 million and $0.5 million, respectively.
On November 3, 2015, the Company entered into an agreement to purchase an airplane from this
board member for $7.5 million. The transaction closed on December 17, 2015.
Apollo Global Securities, LLC, an affiliate of Apollo Global Management, LLC (together with its
consolidated subsidiaries, “Apollo”) was an underwriter of our secondary stock offerings that closed on
August 18, 2014 and April 2, 2014 and received fees of approximately $0.9 million and $1.3 million,
respectively. Certain funds and co-investment vehicles managed by Apollo were significant stockholders
of the Company at such times.
The Company’s former Executive Chairman of the Board has been the chief executive officer, an
equity investor, and lender to a technology supplier to the Company. During 2016, 2015 and 2014,
purchases from this supplier and its predecessors were $7.9 million, $6.5 million and $5.9 million,
respectively. As of January 1, 2017, January 3, 2016 and December 28, 2014, the Company had no
receivable recorded from this vendor. As of January 1, 2017, January 3, 2016 and December 28, 2014,
the Company had recorded accounts payable due to the supplier of $0.3 million, $0.4 million and $0.7
million, respectively. This Executive Chairman of the Board retired from our Board effective February 20,
2017.
85
19. 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 January 1, 2017.
Rent expense charged to operations under operating leases in 2016, 2015 and 2014 totaled $104.8
million, $88.1 million and $72.9 million, respectively.
Future minimum lease obligations for operating leases with initial terms in excess of one year at
January 1, 2017 are as follows:
2017 ......................................................................... $ 126,899
137,105
2018 .........................................................................
134,383
2019 .........................................................................
131,279
2020 .........................................................................
127,009
2021 .........................................................................
Thereafter ................................................................
793,815
Total payments ........................................................ $1,450,490
The Company has subtenant agreements under which it will receive rent as follows:
2017 ......................................................................... $
2018 .........................................................................
2019 .........................................................................
2020 .........................................................................
2021 .........................................................................
Thereafter ................................................................
Total subtenant rent ................................................ $
1,436
1,230
911
864
682
1,620
6,743
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 2017 to
2032.
86
As of January 1, 2017, future minimum lease payments required by all capital and financing leases
during the initial lease term are as follows:
Fiscal Year
2017 ...................................................................... $
2018 ......................................................................
2019 ......................................................................
2020 ......................................................................
2021 ......................................................................
Thereafter .............................................................
Total .................................................................
Plus balloon payment (financing leases) ..............
Less amount representing interest .......................
Net present value of capital and financing
lease obligations ...........................................
Less current portion ..............................................
Total long-term ...................................................... $
Capital
Leases
Financing
Leases
1,451 $ 14,167
14,447
1,451
13,982
1,294
13,990
1,194
13,241
1,194
50,457
7,710
14,294 120,284
86,397
(93,892 )
—
(4,473)
9,821 112,789
(4,321 )
9,050 $ 108,468
(771)
The table above does not include $7.2 million of current financing lease obligations expected to
pass sale-leaseback accounting during 2017. 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.
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 14, “Self-Insurance Programs” for more information.
In addition to our lease obligations, the Company maintains certain purchase commitments with
various vendors to ensure its operational needs are fulfilled. As of January 1, 2017, such future purchase
commitments consisted of $86.0 million.
Commitments related to the Company’s business operations cover varying periods of time and are
not individually significant. These commitments are expected to be fulfilled with no adverse
consequences to the Company’s operations or financial conditions.
Securities Action
On March 4, 2016, a complaint was filed in the Superior Court for the State of Arizona against the
Company and certain of its directors and officers on behalf of a purported class of purchasers of shares of
the Company’s common stock in the Company’s underwritten secondary public offering which closed on
March 10, 2015 (the “March 2015 Offering”). The complaint purports to state claims under Sections 11,
12 and 15 of the Securities Act of 1933, as amended, based on an alleged failure by the Company to
disclose adequate information about produce price deflation in the March 2015 Offering documents. The
complaint seeks damages on behalf of the purported class in an unspecified amount, rescission, and an
award of reasonable costs and attorneys’ fees. On March 24, 2016, the Company removed the action to
federal court in the District of Arizona. On April 18, 2016, the Company filed a motion to remand the case
to state court, and that motion is currently under consideration. The Company intends to defend this case
87
vigorously, but it is not possible at this time to reasonably estimate the outcome of, or any potential
liability from, the case.
20. Capital Stock
Common stock
As of January 1, 2017, 140,256,313 shares of the Company’s common stock were issued and
outstanding, including 254,071 restricted shares, after the repurchase and retirement of 13,242,483
shares during 2016 and the repurchase and retirement of 1,068,279 shares during 2015, as described
below. As of January 1, 2017, 6,299,069 shares of common stock are reserved for issuance under the
2013 Incentive Plan (see Note 22, “Equity-Based Compensation”). The following table outlines the
options exercised in exchange for the issuance of shares of common stock during 2016, 2015, and 2014.
Options exercised ...........
565,568
January 1,
2017
Year Ended
January 3,
2016
1,773,518
December 28,
2014 (1)
4,216,774
(1) The total options exercised in 2014 includes a total of 2,340,639 options exercised in connection
with the sale of the underlying shares of common stock in our April and August 2014 secondary
stock offerings.
Share Repurchases
On November 4, 2015, the Company’s board of directors authorized a $150 million common stock
share repurchase program, which was completed during the second quarter of 2016. On September 6,
2016, the Company’s board of directors authorized a new $250 million share repurchase program for its
common stock. The following table outlines the share repurchase programs authorized by the Board, and
the related repurchase activity and available authorization as of January 1, 2017.
Effective date
Expiration date
Amount
authorized
Cost of
repurchases
(in thousands)
Authorization
available
November 4, 2015
September 6, 2016
November 4, 2017
December 31, 2017
$
150,000 $
250,000
150,000 $
170,000
—
80,000
The shares under the Company’s repurchase programs may be purchased on a discretionary basis
from time to time prior to the applicable expiration date, subject to general business and market
conditions and other investment opportunities, through open market purchases, privately negotiated
transactions, or other means, including through Rule 10b5-1 trading plans. The board’s authorization of
the share repurchase programs does not obligate the Company to acquire any particular amount of
common stock, and the repurchase programs may be commenced, suspended, or discontinued at any
time. The Company has used borrowings under its Credit Facility to assist with the repurchase program
authorized on September 6, 2016 (see Note 12).
Share repurchase activity under the Company’s repurchase programs for the periods indicated was
as follows:
Number of common shares acquired ............................... 13,242,483 1,068,279
24.09
Average price per common share acquired ..................... $
25,735
Total cost of common shares acquired (in thousands) .... $
22.22 $
294,265 $
Year Ended
January 1,
2017
January 3,
2016
88
Shares purchased under the Company’s repurchase programs were subsequently retired.
Preferred Stock
The Company’s board of directors is authorized, subject to limitations prescribed by Delaware law,
to issue up to 10,000,000 shares of the Company’s preferred stock in one or more series, to establish
from time to time the number of shares to be included in each series, to fix the designation, powers,
preferences, and rights of the shares of each series and any of its qualifications, limitations, or
restrictions, in each case without further action by the Company’s stockholders. The Company’s board of
directors can also increase or decrease the number of shares of any series of preferred stock, but not
below the number of shares of that series then outstanding. The Company’s board of directors may
authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the
voting power or other rights of the holders of the common stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other corporate purposes, could, among
other things, have the effect of delaying, deferring, or preventing a change in control of the Company and
might adversely affect the market price of the Company’s common stock and the voting and other rights
of the holders of the Company’s common stock. The Company has no current plan to issue any shares of
preferred stock.
21. 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):
Basic net income per share:
January 1,
2017
Year Ended
January 3,
2016
December 28,
2014
Net income ..................................................... $ 124,306 $ 128,991 $ 107,692
149,751
Weighted average shares outstanding ........... 147,311 153,099
0.72
0.84 $
Basic net income per share ....................... $
0.84 $
Diluted net income per share:
Net income ..................................................... $ 124,306 $ 128,991 $ 107,692
Weighted average shares outstanding ........... 147,311 153,099
149,751
Dilutive effect of equity-based awards:
Assumed exercise of options to purchase
shares ..........................................................
Restricted Stock Units ....................................
Restricted Stock Awards ................................
Performance Share Awards ...........................
Weighted average shares and equivalent
shares outstanding ................................. 149,653 155,877
0.83 $
Diluted net income per share .................... $
2,737
37
—
4
2,232
58
17
35
4,570
7
—
—
154,328
0.70
0.83 $
The computation of diluted earnings per share for 2016 does not include 1,762,903 options, 14,404
RSUs, and 92,942 PSAs as those awards were antidilutive. The computation of diluted earnings per
89
share for 2015 does not include 514,377 options as those options were antidilutive. The computation of
diluted earnings per share for 2014 does not include 546,567 options as those options were antidilutive.
22. 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 initial public offering and replaced the 2011 Option Plan
(as defined below) (except with respect to outstanding options under the 2011 Option Plan). The 2013
Incentive Plan serves as the umbrella plan for the Company’s stock-based and cash-based incentive
compensation programs for its directors, officers and other team members.
The Company granted to certain officers and team members the following awards during 2014,
under the 2013 Incentive Plan:
Grant Date
Award Type
March 4, 2014 ......... Options
RSUs
May 19, 2014 ........... Options
RSUs
Shares of
common
stock
Exercise
Price
320,041 $
108,980
37,047 $
2,174
Grant date
fair value
10.66
39.01
8.07
28.50
39.01 $
— $
28.50 $
— $
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.
The Company granted to certain officers and team members the following awards during 2015,
under the 2013 Incentive Plan:
Grant Date
Award Type
March 11, 2015 ....... Options
RSUs
PSAs
May 21, 2015 ........... Options
RSUs
August 11, 2015 ...... Options
RSUs
November 10,
2015 ..................... Options
RSUs
Shares of
common
stock
Exercise
Price
277,833 $
87,394
71,753
14,492 $
3,896
2,138,899 $
5,660
Grant date
fair value
9.42
34.33
34.33
8.28
30.30
5.79
20.98
34.33 $
— $
— $
30.30 $
— $
20.98 $
— $
4,431 $
1,370
23.26 $
— $
6.77
23.26
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. The PSAs are described below.
90
The Company granted to certain officers and team members the following awards during 2016,
under the 2013 Incentive Plan:
Grant Date
Award Type
March 4, 2016 .......... Options
RSUs
PSAs
April 11, 2016 ........... Options
RSUs
May 9, 2016 .............. RSUs
May 23, 2016 ............ Options
RSAs
August 18, 2016 ....... RSUs
Shares of
common
stock
318,156 $
213,767
92,942
4,627 $
1,335
14,404
419,935 $
217,852
7,499
Exercise
Price
Grant date
fair value
28.21 $
— $
— $
27.69 $
— $
— $
24.48 $
— $
— $
8.59
28.21
28.21
8.32
27.69
26.65
6.54
24.48
22.44
The options vest ratably one-third each year for three years and the RSUs vest either one-third each
year for three years or one-half each year for two years for team members. RSUs granted to independent
members of its board of directors cliff vest in one year. The options expire seven years from grant date.
The PSAs and RSAs are described below.
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 January 1,
2017, 6,299,069 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.
Stock Options
In the event of a change in control as defined in the award agreements issued under the 2013
Incentive Plan and in the 2011 Option Plan, all options and awards issued prior to 2015 become
immediately vested and exercisable. For grants issued in and subsequent to 2015, the options and
awards only become immediately vested in the event of a change in control (as defined in the applicable
team member award agreement) if the grants are not continued or assumed by the acquirer on a
substantially equivalent basis. If the options and awards continue or are assumed on a substantially
equivalent basis, but employment is terminated by the Company or an acquirer without cause or by the
team member for good reason (as such terms are defined in the applicable team member award
agreement) within 24 months following the change in control, such options or awards will become
immediately vested upon such termination. Under all other scenarios, the awards continue to vest per the
schedule outlined in the applicable team member award agreement.
Shares issued for option exercises are newly issued shares.
91
The estimated fair values of options granted during 2016, 2015 and 2014 range from $5.79 to
$10.66, and were calculated using the following assumptions:
2016
2015
2014
0.00%
Dividend yield ...........
0.00 %
Expected volatility ..... 33.92% to 34.18% 30.61% to 32.51% 31.19% to 32.19%
Risk free interest
rate ........................ 1.18% to 1.32%
Expected term, in
years ......................
1.44% to 1.67%
1.20% to 1.33%
3.53 to 4.50
0.00%
4.31
4.31
The grant date weighted average fair value of the 1.2 million options issued but not vested as of
January 1, 2017 was $7.02. The grant date weighted average fair value of the 2.1 million options issued
but not vested as of January 3, 2016 was $6.32. 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 following table summarizes grant date weighted average fair value of options granted and
options forfeited:
January 1,
2017
Year Ended
January 3,
2016
December 28,
2014
Grant date weighted average fair value of
options granted ................................................. $
Grant date weighted average fair value of
options forfeited ................................................ $
7.43 $
6.22 $
10.39
8.60 $
5.36 $
6.79
Expected volatility is calculated based upon historical volatility data from a group of comparable
companies and the Company 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 total intrinsic value of options exercised was
$12.3 million, $53.4 million, and $161.7 million for 2016, 2015, and 2014, respectively.
The following table summarizes option activity during 2016:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (In Years)
Aggregate
Intrinsic
Value
Number of
Options (1)
Outstanding at January 3, 2016......................... 6,636,031 $
742,718
Granted ..............................................................
(55,823)
Forfeited .............................................................
Exercised ...........................................................
(565,568)
Outstanding at January 1, 2017......................... 6,757,358
Exercisable—January 1, 2017 ........................... 5,552,033
Vested/Expected to vest—January 1, 2017 ...... 6,736,965 $
10.55
26.10
30.70
4.84
12.57
9.88
12.53
$ 12,258
3.20 $ 60,589
2.65 $ 60,589
3.19 $ 60,589
(1) Outstanding balance at January 3, 2016 presented above does not coincide with outstanding
balance at January 3, 2016 presented in the 2015 10-K filing due to the nullity of certain equity
awards granted in connection with the appointments of the Company’s Chief Executive Officer
and President & Chief Operating Officer in August 2015 with respect to 733,439 and 33,439
shares, respectively, as discussed further below.
92
RSUs
In the event of a change in control as defined in the award agreements issued under the 2013
Incentive Plan, all RSUs granted prior to 2015 become immediately vested. RSUs granted in and
subsequent to 2015 only become immediately vested in the event of a change in control (as defined in
the applicable team member award agreement) if the awards are not continued or assumed by the
acquirer on a substantially equivalent basis. If the awards continue or are assumed on a substantially
equivalent basis, but employment is terminated by the Company or an acquirer without cause or by the
team member for good reason (as such terms are defined in the applicable team member award
agreement) within 24 months following the change in control, such awards will become immediately
vested upon such termination. Under all other scenarios, the awards continue to vest per the schedule
outlined in the applicable team member award agreement.
Shares issued for RSU vesting are newly issued shares.
The estimated fair value of RSUs granted during 2016 and 2015 range from $20.98 to $34.33, and
were calculated based on the closing price on the grant date.
The following table summarizes the weighted average grant date fair value of RSUs awarded during
2016, 2015, and 2014:
RSUs awarded .................................................... $
27.93 $
33.25 $
38.80
January 1,
2017
Year Ended
January 3,
2016
December 28,
2014
The following table summarizes RSU activity during 2016:
Outstanding at January 3, 2016 ............................ 142,783 $
Awarded ................................................................ 237,005
(70,522)
Released ...............................................................
Forfeited ................................................................
(34,878)
Outstanding at January 1, 2017 ............................ 274,388 $
Number of
RSUs
Weighted
Average
Grant Date
Fair Value
35.26
27.93
36.29
28.93
29.47
PSAs
PSAs granted in March 2015 were earned based on the Company’s achievement of certain
earnings per share performance targets during 2015. Such PSAs vest 50% on the second anniversary of
the grant date (2017), and 50% on the third anniversary of the grant date (2018).
PSAs granted in March 2016 are subject to the Company achieving certain earnings before interest
and taxes (“EBIT”) performance targets on an annual and cumulative basis over a three-year
performance period, as well as additional time-vesting conditions. The EBIT target for each of the three
years during the performance period is based on a percentage increase over the previous year’s actual
EBIT, with each annual performance tranche measured independently of the previous and next tranche.
Cumulative performance is based on the aggregate annual performance and is measured against a
cumulative performance target. Payout of the performance shares will either be 0% or range from 50% to
150% of the target number of shares granted, depending upon goal achievement. If the performance
conditions are met, the applicable number of performance shares is subject to cliff vesting on the third
anniversary of the grant date (March 2019).
93
The PSAs only become immediately vested in the event of a change in control (as defined in the
applicable team member award agreement) if the awards are not continued or assumed by the acquirer
on a substantially equivalent basis. If the awards continue or are assumed on a substantially equivalent
basis, but employment is terminated by the Company or an acquirer without cause or by the team
member for good reason (as such terms are defined in the applicable team member award agreement)
within 24 months following the change in control, such awards will become immediately vested upon such
termination. Under all other scenarios, the awards continue to vest per the schedule outlined in the
applicable team member award agreement.
Shares issued for PSA vesting are newly issued shares.
The estimated fair value of each performance share granted pursuant to PSAs during 2016 is
$28.21, and was calculated based on the closing price on the grant date.
The total grant date fair value of PSAs granted during 2016 was $2.6 million. There were no PSAs
released during 2016. The total grant date fair value of performance shares forfeited during 2016 was
$0.1 million. The total grant date fair value of the 0.1 million PSAs issued but not released as of January
1, 2017 was $2.6 million. During 2016, the Company’s board of directors determined that the
performance targets for the 2016 tranche were not met and 30,981 performance shares were not earned.
The total grant date fair value of PSAs granted during 2015 was $2.5 million. There were no PSAs
released during 2015. The total grant date fair value of PSAs forfeited during 2015 was $0.1 million. The
total grant date fair value of the 0.1 million PSAs issued but not released as of January 3, 2016 was $2.4
million. Subsequent to January 3, 2016, the Company’s board of directors determined that the
performance targets were met and 0.1 million performance shares were earned and remained subject to
time-vesting restrictions.
The following table summarizes PSA activity during 2016:
Number of
PSAs
70,139
Outstanding at January 3, 2016 ............................
92,942
Awarded ................................................................
—
Released ...............................................................
Forfeited ................................................................
(4,145)
Outstanding at January 1, 2017 ............................ 158,936
Weighted
Average
Grant Date
Fair Value
34.33
28.21
—
34.33
30.75
RSAs
The fair value of RSAs is based on the closing price of the Company’s common stock on the grant
date. RSAs either vest ratably over a seven quarter period, beginning on December 31, 2016 or cliff vest
on June 30, 2018.
The RSAs only become immediately vested in the event of a change in control (as defined in the
applicable team member award agreement) if the awards are not continued. If the awards continue, but
employment is terminated by the Company or an acquirer without cause or by the team member for good
reason (as such terms are defined in the applicable team member award agreement) within 24 months
following the change in control, such awards will become immediately vested upon such termination.
Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable team
member award agreement.
Shares issued for RSA vesting are newly issued shares.
94
The estimated fair values of RSAs granted during 2016 is $24.48 per share of restricted stock, and
was calculated based on the closing price on the grant date.
The total grant date fair value of RSAs granted during 2016 was $5.3 million. The total grant date
fair value of shares of restricted stock released upon vesting during 2016 was $0.8 million. There were no
RSAs forfeited during 2016. The total grant date fair value of the 187,101 shares of restricted stock
issued but not released as of January 1, 2017 was $4.6 million.
The following table summarizes RSA activity during 2016:
—
Outstanding at January 3, 2016 ............................
Awarded ................................................................ 217,852 $
(30,751)
Released ...............................................................
—
Forfeited ................................................................
Outstanding at January 1, 2017 ............................ 187,101 $
Number of
RSAs
Weighted
Average
Grant Date
Fair Value
—
24.48
24.48
—
24.48
Equity-Based Compensation Expense
Equity-based compensation expense was as follows:
January 1,
2017
Year Ended
January 3,
2016
December 28,
2014
965 $
Cost of sales, buying and occupancy .................. $
Direct store expenses..........................................
1,345
Selling, general and administrative expenses ..... 11,089
Total equity-based compensation expense ........ $ 13,399 $
681 $
1,103
6,234
8,018 $
695
788
3,872
5,355
The Company recognized income tax benefits of $5.2 million, $3.1 million and $2.1 million for 2016,
2015, and 2014, respectively.
As of January 1, 2017, total unrecognized compensation expense related to outstanding equity-
based awards was as follows:
As of
January 1,
2017
Options .................................................................... $
RSUs .......................................................................
PSAs ........................................................................
RSAs .......................................................................
Total unrecognized compensation expense............ $
7,377
4,569
548
3,764
16,258
95
As of January 1, 2017, the total remaining weighted average recognition period related to
outstanding equity-based awards was as follows:
As of
January 1,
2017
Options ....................................................................
RSUs .......................................................................
PSAs ........................................................................
RSAs .......................................................................
1.63
1.43
1.56
1.49
During 2016, 2015 and 2014, the Company received $2.7 million, $6.6 million and $11.1 million in
cash proceeds from the exercise of options, respectively.
During 2016, 2015 and 2014, the Company recorded $3.7 million, $20.0 million and $47.3 million of
excess tax benefits from the exercise of options, respectively.
Equity Award Restructuring
In connection with the appointments of the Company’s Chief Executive Officer and President &
Chief Operating Officer in August 2015, the Compensation Committee of the Company’s Board of
Directors approved a grant of stock options to purchase 1,200,000 and 500,000 shares of the Company’s
common stock at an exercise price of $20.98 per share to these officers, respectively (the “August 2015
Options”) pursuant to the 2013 Incentive Plan. The August 2015 Options, taken together with other
options granted under the 2013 Incentive Plan to such officers during 2015, exceeded the limit of 500,000
shares which may be granted pursuant to stock options and stock appreciation rights per calendar year to
each participant under the 2013 Incentive Plan by 733,439 shares in the case of the Company’s Chief
Executive Officer and 33,439 shares in the case of the Company’s President & Chief Operating Officer
(the “Excess Options”). Accordingly, the Company has determined, and these officers have
acknowledged, that the grants of the Excess Options were null and void.
In order to satisfy the original intent with respect to these individuals’ compensation, on May 23,
2016, the Compensation Committee granted to the Company’s Chief Executive Officer and President &
Chief Operating Officer under the 2013 Incentive Plan options to purchase 386,496 and 33,439 shares of
the Company’s common stock at an exercise price of $24.48 per share, respectively, and 215,251 and
2,601 RSAs, respectively. The Company recognized compensation expense of $1.9 million during the
year ended January 1, 2017 related to the options and RSAs granted.
23. Subsequent Events
Subsequent to January 1, 2017, and through February 10, 2017, the Company repurchased an
additional 4.1 million shares of common stock for $80.0 million. The Company borrowed an additional
$60.0 million under its Credit Facility that was utilized in these repurchases, and made a $10.0 million
principal payment, resulting in total outstanding debt under the Credit Facility of $305 million as of
February 22, 2017.
On February 20, 2017, the Company’s board of directors authorized a new $250 million share
repurchase program for its common stock. The shares may be purchased on a discretionary basis from
time to time through December 31, 2018, subject to general business and market conditions and other
investment opportunities, through open market purchases, privately negotiated transactions, or other
means, including through Rule 10b5-1 trading plans.
96
Item 9.
Changes In and Disagreements with Accountants on Accounting 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
January 1, 2017, 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 January 1, 2017,
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 January 1, 2017, 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 January 1, 2017.
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.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the
quarterly period ended January 1, 2017 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information
None.
97
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 2017 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
January 1, 2017, 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://investors.sprouts.com/Cache/1001200324.PDF?O=PDF&T=&Y=&D=&FID=1001200324&iid=40963
86.
We will provide disclosure of future updates, amendments or waivers from the Code by posting
them to our investor relations website located at 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.
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.
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.
2.
3.
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.”
Financial Statement Schedules: No schedules are required.
Exhibits: See Item 15(b) below.
98
(b) Exhibits:
Exhibit
Number
Description
Plan of Conversion of Sprouts Farmers Markets, LLC (1)
2.1
Certificate of Incorporation of Sprouts Farmers Market, Inc. (1)
3.1
Amended and Restated Bylaws of Sprouts Farmers Market, Inc. (2)
3.2
Sprouts Farmers Markets, LLC 2011 Option Plan (3)
10.1
Form of Stock Option Agreement under Sprouts Farmers Markets, LLC 2011 Option Plan (3)
10.2
10.3
Sprouts Farmers Market, Inc. 2013 Incentive Plan, amended as of May 1, 2015 (4)
10.3.1(a) Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (5)
10.3.1(b) 2015 Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive
Plan (6)
10.3.1(c) Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan for
May 23, 2016 Grant (7)
10.3.2(a) Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013 Incentive
Plan (5)
10.3.2(b) 2015 Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013
Incentive Plan (6)
10.3.3(a) 2015 Form of Performance Share Award Agreement under Sprouts Farmers Market, Inc.
2013 Incentive Plan (6)
10.3.3(b) 2016 Form of Performance Share Award Agreement under Sprouts Farmers Market, Inc.
2013 Incentive Plan (8)
10.3.4
10.4
10.4.1
10.4.2
10.4.3
10.5
10.5.1
10.5.2
10.5.3
10.6
Form of Restricted Share Award Agreement under Sprouts Farmers Market, Inc. 2013
Incentive Plan for May 23, 2016 Grant (7)
Employment Agreement, dated April 18, 2011, by and between Sprouts Farmers Markets,
LLC and Doug Sanders (3)
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 (3)
Amendment No. 2, dated April 29, 2015, to the Employment Agreement, dated April 18, 2011,
as amended on August 23, 2012, by and between Sprouts Farmers Market, Inc. and Doug
Sanders (4)
Letter Agreement, dated August 6, 2015, by and between Sprouts Farmers Market, Inc. and
Doug Sanders (9)
Employment Agreement, dated July 15, 2011, by and between Sprouts Farmers Markets,
LLC and Amin N. Maredia (3)
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 (10)
Amendment No. 2, dated April 29, 2015, to the Employment Agreement, dated July 15, 2011,
as amended on April 18, 2013, by and between Sprouts Farmers Market, Inc. and Amin
Maredia (4)
Amended and Restated Employment Agreement, dated August 6, 2015, by and between
Sprouts Farmers Market, Inc. and Amin N. Maredia (9)
Employment Agreement, dated April 18, 2011, by and between Sprouts Farmers Markets,
LLC and Jim Nielsen (3)
99
10.6.1
10.6.2
10.7
10.7.1
10.7.2
10.8†
10.9
10.10
10.11
10.12
10.13
10.14
10.15†
21.1
23.1
31.1
31.2
32.1
32.2
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 (11)
Amendment No. 2, dated August 6, 2015, to the Employment Agreement, dated April 18,
2011 by and between Sprouts Farmers Markets, LLC and Jim Nielsen (9)
Employment Agreement, dated January 23, 2012, by and between Sprouts Farmers Markets,
LLC and Brandon Lombardi (3)
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 (3)
Amendment No. 2, dated April 29, 2015, to the Employment Agreement, dated January 23,
2012, as amended on November 15, 2012, by and between Sprouts Farmers Market, Inc.
and Brandon Lombardi (4)
Amended and Restated Nature’s Best Distribution Agreement, dated as of August 13,
2014 (12)
Form of Indemnification Agreement by and between Sprouts Farmers Market, Inc. and its
directors and officers (3)
Credit Agreement, dated as of April 17, 2015, among Sprouts Farmers Market, Inc., Sprouts
Farmers Markets Holdings, LLC, the lenders from time to time party thereto, JPMorgan Chase
Bank, N.A., as administrative agent, Bank of America, N.A., BMO Harris Bank, N.A. and BBVA
Compass Bank, as co-syndication agents, and Coöperatieve Centrale Raiffeisen-
Boerenleenbank B.A., “Rabobank Nederland”, New York Branch, as documentation agent (13)
Form of Confidentiality, Non-Competition, and Non-Solicitation Agreement (14)
Executive Severance and Change in Control Plan (15)
Aircraft Purchase Agreement, dated November 3, 2015, by and between Sprouts Farmers
Markets Holdings, LLC and CJ Leasing Services LLC (15)
Offer Letter from Sprouts Farmers Market, Inc. to Brad Lukow, dated February 25, 2016 (16)
Deli, Cheese, and Bakery Distribution Agreement, dated as of February 12, 2016, by and
between SFM, LLC dba Sprouts Farmers Market and KeHE Distributors, LLC (17)
List of subsidiaries
Consent of PricewaterhouseCoopers LLP, independent registered accounting firm
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
XBRL Instance Document
101.INS
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
100
†
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 Current Report on Form 8-K filed with the SEC on January 30,
2017, and incorporated herein by reference.
(3) 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.
(4) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on May 5,
2015, and incorporated herein by reference.
(5) 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.
(6) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 7,
2015, and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on May 25,
2016, and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 5,
2016, and incorporated herein by reference.
(9) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on August 10,
2015, and incorporated herein by reference.
(10) 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.
(11) 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.
(12) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on
November 6, 2014, and incorporated herein by reference.
(13) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on April 17,
2015, and incorporated herein by reference.
(14) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August
6, 2015, and incorporated herein by reference.
(15) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on
November 5, 2015, and incorporated herein by reference.
(16) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on February
25, 2016, and incorporated herein by reference.
(17) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August
4, 2016, and incorporated herein by reference.
Item 16.
Form 10-K Summary
None.
101
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.
Date: February 23, 2017
SPROUTS FARMERS MARKET, INC.
/s/ Bradley S. Lukow
By:
Name:Bradley S. Lukow
Title: Chief Financial 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/ Amin N. Maredia
Director and Chief Executive Officer
February 23, 2017
Amin N. Maredia
(Principal Executive Officer)
/s/ Bradley S. Lukow
Chief Financial Officer
February 23, 2017
Bradley S. Lukow
(Principal Financial and
Accounting Officer)
/s/ Joseph Fortunato
Chairman of the Board
February 23, 2017
Joseph Fortunato
/s/ Kristen E. Blum
Kristen E. Blum
/s/ Shon A. Boney
Shon A. Boney
Director
Director
February 23, 2017
February 23, 2017
/s/ Terri Funk Graham
Director
February 23, 2017
Terri Funk Graham
/s/ Lawrence P. Molloy
Director
February 23, 2017
Lawrence P. Molloy
/s/ Steven H. Townsend
Director
February 23, 2017
Steven H. Townsend
102
EXHIBIT INDEX
Exhibit
Number
2.1
Description
Plan of Conversion of Sprouts Farmers Markets, LLC (1)
Certificate of Incorporation of Sprouts Farmers Market, Inc. (1)
3.1
Amended and Restated Bylaws of Sprouts Farmers Market, Inc. (2)
3.2
Sprouts Farmers Markets, LLC 2011 Option Plan (3)
10.1
Form of Stock Option Agreement under Sprouts Farmers Markets, LLC 2011 Option Plan (4)
10.2
10.3
Sprouts Farmers Market, Inc. 2013 Incentive Plan, amended as of May 1, 2015 (4)
10.3.1(a) Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (5)
10.3.1(b) 2015 Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive
Plan (6)
10.3.1(c) Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan for
May 23, 2016 Grant (7)
10.3.2(a) Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013 Incentive
Plan (5)
10.3.2(b) 2015 Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013
Incentive Plan (6)
10.3.3(a) 2015 Form of Performance Share Award Agreement under Sprouts Farmers Market, Inc.
2013 Incentive Plan (6)
10.3.3(b) 2016 Form of Performance Share Award Agreement under Sprouts Farmers Market, Inc.
2013 Incentive Plan (8)
10.3.4
10.4
10.4.1
10.4.2
10.4.3
10.5
10.5.1
10.5.2
10.5.3
10.6
Form of Restricted Share Award Agreement under Sprouts Farmers Market, Inc. 2013
Incentive Plan for May 23, 2016 Grant (7)
Employment Agreement, dated April 18, 2011, by and between Sprouts Farmers Markets,
LLC and Doug Sanders (3)
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 (3)
Amendment No. 2, dated April 29, 2015, to the Employment Agreement, dated April 18, 2011,
as amended on August 23, 2012, by and between Sprouts Farmers Market, Inc. and Doug
Sanders (4)
Letter Agreement, dated August 6, 2015, by and between Sprouts Farmers Market, Inc. and
Doug Sanders (9)
Employment Agreement, dated July 15, 2011, by and between Sprouts Farmers Markets,
LLC and Amin N. Maredia (3)
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 (10)
Amendment No. 2, dated April 29, 2015, to the Employment Agreement, dated July 15, 2011,
as amended on April 18, 2013, by and between Sprouts Farmers Market, Inc. and Amin
Maredia (4)
Amended and Restated Employment Agreement, dated August 6, 2015, by and between
Sprouts Farmers Market, Inc. and Amin N. Maredia (10)
Employment Agreement, dated April 18, 2011, by and between Sprouts Farmers Markets,
LLC and Jim Nielsen (3)
10.6.1
10.6.2
10.7
10.7.1
10.7.2
10.8†
10.9
10.10
10.11
10.12
10.13
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 (11)
Amendment No. 2, dated August 6, 2015, to the Employment Agreement, dated April 18,
2011 by and between Sprouts Farmers Markets, LLC and Jim Nielsen (9)
Employment Agreement, dated January 23, 2012, by and between Sprouts Farmers Markets,
LLC and Brandon Lombardi (3)
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 (3)
Amendment No. 2, dated April 29, 2015, to the Employment Agreement, dated January 23,
2012, as amended on November 15, 2012, by and between Sprouts Farmers Market, Inc.
and Brandon Lombardi (4)
Amended and Restated Nature’s Best Distribution Agreement, dated as of August 13,
2014 (12)
Form of Indemnification Agreement by and between Sprouts Farmers Market, Inc. and its
directors and officers (3)
Credit Agreement, dated as of April 17, 2015, among Sprouts Farmers Market, Inc., Sprouts
Farmers Markets Holdings, LLC, the lenders from time to time party thereto, JPMorgan
Chase Bank, N.A., as administrative agent, Bank of America, N.A., BMO Harris Bank, N.A.
and BBVA Compass Bank, as co-syndication agents, and Coöperatieve Centrale Raiffeisen-
Boerenleenbank B.A., “Rabobank Nederland”, New York Branch, as documentation agent
(13)
Form of Confidentiality, Non-Competition, and Non-Solicitation Agreement (14)
Executive Severance and Change in Control Plan (15)
Aircraft Purchase Agreement, dated November 3, 2015, by and between Sprouts Farmers
Markets Holdings, LLC and CJ Leasing Services LLC (15)
10.14
Offer Letter from Sprouts Farmers Market, Inc. to Brad Lukow, dated February 25, 2016 (16)
10.15†
Deli, Cheese, and Bakery Distribution Agreement, dated as of February 12, 2016, by and
between SFM, LLC dba Sprouts Farmers Market and KeHE Distributors, LLC (17)
21.1
23.1
31.1
31.2
32.1
32.2
List of subsidiaries
Consent of PricewaterhouseCoopers LLP, independent registered accounting firm
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
XBRL Instance Document
101.INS
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 Current Report on Form 8-K filed with the SEC on January 30,
2017, and incorporated herein by reference.
(3) 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.
(4) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on May 5,
2015, and incorporated herein by reference.
(5) 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.
(6) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 7,
2015, and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on May 25,
2016, and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 5,
2016, and incorporated herein by reference.
(9) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on August 10,
2015, and incorporated herein by reference.
(10) 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.
(11) 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.
(12) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on
November 6, 2014, and incorporated herein by reference.
(13) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on April 17,
2015, and incorporated herein by reference.
(14) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August
6, 2015, and incorporated herein by reference.
(15) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on
November 5, 2015, and incorporated herein by reference.
(16) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on February
25, 2016, and incorporated herein by reference.
(17) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August
4, 2016, and incorporated herein by reference.
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
Dear fellow stockholders,
Dear fellow stockholders,
Dear fellow stockholders,
I am extremely proud of the progress of ttthe Sprouts brand in
I am extremely proud of the progress of ttthe Sprouts brand in
I am extremely proud of the progress of ttthe Sprouts brand in
fresh grab-and-go options, including expanded deli offer-
fresh grab-and-go options, including expanded deli offer-
fresh grab-and-go options, including expanded deli offer-
2016. Despite an intensely competitive envvvironment driven by
2016. Despite an intensely competitive envvvironment driven by
2016. Despite an intensely competitive envvvironment driven by
ings, freshly prepared prrroteins and healthy sides, a salad bar
ings, freshly prepared prrroteins and healthy sides, a salad bar
ings, freshly prepared prrroteins and healthy sides, a salad bar
the longest deflationary period in recennnt times, our team’s
the longest deflationary period in recennnt times, our team’s
the longest deflationary period in recennnt times, our team’s
and fresh soups and juiceees.
and fresh soups and juiceees.
and fresh soups and juiceees.
commitment to helping customers embrrrace healthy living is
commitment to helping customers embrrrace healthy living is
commitment to helping customers embrrrace healthy living is
stronger than ever.
stronger than ever.
stronger than ever.
Our most important invvvestment continues to be our nearly
Our most important invvvestment continues to be our nearly
Our most important invvvestment continues to be our nearly
25,000 team members aaacross the country. Last year, they
25,000 team members aaacross the country. Last year, they
25,000 team members aaacross the country. Last year, they
This passion for pu�ing customers firsttt began at a simple
This passion for pu�ing customers firsttt began at a simple
This passion for pu�ing customers firsttt began at a simple
completed more than 50000,000 training hours, which ensures
completed more than 50000,000 training hours, which ensures
completed more than 50000,000 training hours, which ensures
produce stand, where our farmers maaarket heritage took
produce stand, where our farmers maaarket heritage took
produce stand, where our farmers maaarket heritage took
they are prepared to serrrve our customers and advance their
they are prepared to serrrve our customers and advance their
they are prepared to serrrve our customers and advance their
root many decades ago. Today, our pionnneering combination
root many decades ago. Today, our pionnneering combination
root many decades ago. Today, our pionnneering combination
careers at Sprouts. Their kkknowledgeable and engaging customer
careers at Sprouts. Their kkknowledgeable and engaging customer
careers at Sprouts. Their kkknowledgeable and engaging customer
of healthy products, value prices and eeexceptional customer
of healthy products, value prices and eeexceptional customer
of healthy products, value prices and eeexceptional customer
service is inspired by ourrr company passion statement.
service is inspired by ourrr company passion statement.
service is inspired by ourrr company passion statement.
experience is not only the engine drivinggg our growttwth, but the
experience is not only the engine drivinggg our growttwth, but the
experience is not only the engine drivinggg our growttwth, but the
reason customers coast to coast continue ttto say, “I love Sprouts.”
reason customers coast to coast continue ttto say, “I love Sprouts.”
reason customers coast to coast continue ttto say, “I love Sprouts.”
It’s this recipe for success that led Sprouts to industry-leading
It’s this recipe for success that led Sprouts to industry-leading
It’s this recipe for success that led Sprouts to industry-leading
sales growth in 2016. Net sales grew to mmmore than $4 billion,
sales growth in 2016. Net sales grew to mmmore than $4 billion,
sales growth in 2016. Net sales grew to mmmore than $4 billion,
representing 15% growth on a 52-week bbbasis, and same store
representing 15% growth on a 52-week bbbasis, and same store
representing 15% growth on a 52-week bbbasis, and same store
sssaaallleeesss gggrrreeewww 222.777%%%. WWWeee gggeeennneeerrraaattteeeddd $$$222555444 mmmiiilllllliiiooonnn cccaaassshhh fffrrrooommm ooopppeeerrraaa-
sssaaallleeesss gggrrreeewww 222.777%%%. WWWeee gggeeennneeerrraaattteeeddd $$$222555444 mmmiiilllllliiiooonnn cccaaassshhh fffrrrooommm ooopppeeerrraaa-
sssaaallleeesss gggrrreeewww 222.777%%%. WWWeee gggeeennneeerrraaattteeeddd $$$222555444 mmmiiilllllliiiooonnn cccaaassshhh fffrrrooommm ooopppeeerrraaa-
tions, enabling us to self-fund our unittt growth and make
tions, enabling us to self-fund our unittt growth and make
tions, enabling us to self-fund our unittt growth and make
significant investments in our business. Our strong balance
significant investments in our business. Our strong balance
significant investments in our business. Our strong balance
sheet and operating cash flows alloweeed us to invest $167
sheet and operating cash flows alloweeed us to invest $167
sheet and operating cash flows alloweeed us to invest $167
This passion isn’t motivaaated by trend, but by that simple farm
This passion isn’t motivaaated by trend, but by that simple farm
This passion isn’t motivaaated by trend, but by that simple farm
million in capital expenditures and rettturn $294 million to
million in capital expenditures and rettturn $294 million to
million in capital expenditures and rettturn $294 million to
stand that inspired ourrr growth. Today, our commitment to
stand that inspired ourrr growth. Today, our commitment to
stand that inspired ourrr growth. Today, our commitment to
shareholders through our share buy-backkk program.
shareholders through our share buy-backkk program.
shareholders through our share buy-backkk program.
fresh and natural exteeends throughout the entire store,
fresh and natural exteeends throughout the entire store,
fresh and natural exteeends throughout the entire store,
including bakery, deli,,, meat and seafood, bulk, packaged
including bakery, deli,,, meat and seafood, bulk, packaged
including bakery, deli,,, meat and seafood, bulk, packaged
On the new store front, we opened 36 stooores during this time,
On the new store front, we opened 36 stooores during this time,
On the new store front, we opened 36 stooores during this time,
grocery, frozen and vitaaamins/body care.
grocery, frozen and vitaaamins/body care.
grocery, frozen and vitaaamins/body care.
representing 17% unit growth, and deeelivering one of the
representing 17% unit growth, and deeelivering one of the
representing 17% unit growth, and deeelivering one of the
strongest weekly sales averages since ouuur inception. We also
strongest weekly sales averages since ouuur inception. We also
strongest weekly sales averages since ouuur inception. We also
In 2017, we remain focusssed on product innovation, new store
In 2017, we remain focusssed on product innovation, new store
In 2017, we remain focusssed on product innovation, new store
greeted customers at their doorsteps with their favorite
greeted customers at their doorsteps with their favorite
greeted customers at their doorsteps with their favorite
expansion, enhancing ttthe customer experience in and out
expansion, enhancing ttthe customer experience in and out
expansion, enhancing ttthe customer experience in and out
Sprouts products through the expansiiion of our Amazon
Sprouts products through the expansiiion of our Amazon
Sprouts products through the expansiiion of our Amazon
of store and continueeed investments in technology and
of store and continueeed investments in technology and
of store and continueeed investments in technology and
Prime Now home delivery service to nine stores in four
Prime Now home delivery service to nine stores in four
Prime Now home delivery service to nine stores in four
infrastructure. We contttinue to scale for growth so we can
infrastructure. We contttinue to scale for growth so we can
infrastructure. We contttinue to scale for growth so we can
markets. In 2017, we will open an additionaaal 32 stores, including
markets. In 2017, we will open an additionaaal 32 stores, including
markets. In 2017, we will open an additionaaal 32 stores, including
bring Sprouts to even mmmore consumers looking for a shop-
bring Sprouts to even mmmore consumers looking for a shop-
bring Sprouts to even mmmore consumers looking for a shop-
our first openings in Florida and North CCCarolina, and expand
our first openings in Florida and North CCCarolina, and expand
our first openings in Florida and North CCCarolina, and expand
ping experience that harrrkens back to simpler times.
ping experience that harrrkens back to simpler times.
ping experience that harrrkens back to simpler times.
home delivery to even more markets thhhrough our Amazon
home delivery to even more markets thhhrough our Amazon
home delivery to even more markets thhhrough our Amazon
Prime Now partnership.
Prime Now partnership.
Prime Now partnership.
The Sprouts Board of DDDirectors, Executive Leadership Team
The Sprouts Board of DDDirectors, Executive Leadership Team
The Sprouts Board of DDDirectors, Executive Leadership Team
and I believe we have theee right strategies and the right team to
and I believe we have theee right strategies and the right team to
and I believe we have theee right strategies and the right team to
Product innovation remains a toppp ppprioritttyyy in 2017, and is whyyy
Product innovation remains a toppp ppprioritttyyy in 2017, and is whyyy
Product innovation remains a toppp ppprioritttyyy in 2017, and is whyyy
drive longgg-term shareholllder value, and we thank yyyou for yyyour
drive longgg-term shareholllder value, and we thank yyyou for yyyour
drive longgg-term shareholllder value, and we thank yyyou for yyyour
Sprouts is the go-to partner in the natural and orggganic indus-
Sprouts is the go-to partner in the natural and orggganic indus-
Sprouts is the go-to partner in the natural and orggganic indus-
continuuued support.
continuuued support.
continuuued support.
try for vendors and manufacturers. From colorful, fresh fruits
try for vendors and manufacturers. From colorful, fresh fruits
try for vendors and manufacturers. From colorful, fresh fruits
and vegetables to barrels of wholesome grains and nuts to
and vegetables to barrels of wholesome grains and nuts to
and vegetables to barrels of wholesome grains and nuts to
full-service deli, meat and seafood counters, we continually
full-service deli, meat and seafood counters, we continually
full-service deli, meat and seafood counters, we continually
evolve our merchandise assortment to refleccct customer
evolve our merchandise assortment to refleccct customer
evolve our merchandise assortment to refleccct customer
preferences. Our trusted natural and organic ppprivate label
preferences. Our trusted natural and organic ppprivate label
preferences. Our trusted natural and organic ppprivate label
program now totals more than 2,100 items featuuuring unique
program now totals more than 2,100 items featuuuring unique
program now totals more than 2,100 items featuuuring unique
flavor profiles, representing more than 10% of overrrall revenue,
flavor profiles, representing more than 10% of overrrall revenue,
flavor profiles, representing more than 10% of overrrall revenue,
Sincerely,
Sincerely,
Sincerely,
Sincerely,
Sincerely,
Sincerely,
AAAAmmmiiinnn MMMaaaarrreeeeddddiiiaaaa
Amin Maredia
AAAAmmmiiinnn MMMaaaarrreeeeddddiiiaaaa
Amin Maredia
AAAAmmmiiinnn MMMaaaarrreeeeddddiiiaaaa
Amin Maredia
and outpacing company averages in sales gggrowth and
and outpacing company averages in sales gggrowth and
and outpacing company averages in sales gggrowth and
Chief EEExecutive Officerrr
Chief EEExecutive Officerrr
Chief EEExecutive Officerrr
same-store sales growth. Additionally, 80 storeees now offer
same-store sales growth. Additionally, 80 storeees now offer
same-store sales growth. Additionally, 80 storeees now offer
OUR EXECUTIVE TEAM
OUR EXECUTIVE TEAM
OUR EXECUTIVE TEAM
Amin Maredia
Amin Maredia
Amin Maredia
Chief Executive Officer
Chief Executive Officer
Chief Executive Officer
Jim Nielsen
Jim Nielsen
Jim Nielsen
President & Chief Operating Officer
President & Chief Operating Officer
President & Chief Operating Officer
ANNUAL MEETING
ANNUAL MEETING
ANNUAL MEETING
Mayyy 2, 2017 - 8 am CDT
Mayyy 2, 2017 - 8 am CDT
Mayyy 2, 2017 - 8 am CDT
Omnnni Dallas Hotel
Omnnni Dallas Hotel
Omnnni Dallas Hotel
555 SSS. Lamar St.
555 SSS. Lamar St.
555 SSS. Lamar St.
Dallaaas, Texas 75202
Dallaaas, Texas 75202
Dallaaas, Texas 75202
Brad Lukow
Brad Lukow
Brad Lukow
Chief Financial Officer
Chief Financial Officer
Chief Financial Officer
Dan Sanders
Dan Sanders
Dan Sanders
Chief Operations Officer
Chief Operations Officer
Chief Operations Officer
Daniel Bruni
Daniel Bruni
Daniel Bruni
Chief Information Officer
Chief Information Officer
Chief Information Officer
Ted Frumkin
Ted Frumkin
Ted Frumkin
Chief Development Officer
Chief Development Officer
Chief Development Officer
Shawn Gensch
Shawn Gensch
Shawn Gensch
Chief Marketing Officer
Chief Marketing Officer
Chief Marketing Officer
Brandon Lombardi
Brandon Lombardi
Brandon Lombardi
Chief Human Resources and Legal Officer
Chief Human Resources and Legal Officer
Chief Human Resources and Legal Officer
STOOOCK LISTING
STOOOCK LISTING
STOOOCK LISTING
NASSSDAQ Global Select Market: SFM
NASSSDAQ Global Select Market: SFM
NASSSDAQ Global Select Market: SFM
TRAAARANSFER AGENT
TRAAARANSFER AGENT
TRAAARANSFER AGENT
Ameeerican Stock Transfer & Trust Co.
Ameeerican Stock Transfer & Trust Co.
Ameeerican Stock Transfer & Trust Co.
Sharrreholder Services: 800-937-5449
Sharrreholder Services: 800-937-5449
Sharrreholder Services: 800-937-5449
amstttock.com
amstttock.com
amstttock.com
INDDDEPENDENT AUDITOR
INDDDEPENDENT AUDITOR
INDDDEPENDENT AUDITOR
PriceeewaterhouseCoopers LLP
PriceeewaterhouseCoopers LLP
PriceeewaterhouseCoopers LLP
INVVVESTOR RELATIONS
INVVVESTOR RELATIONS
INVVVESTOR RELATIONS
invessstorrelations@sprouts.com
invessstorrelations@sprouts.com
invessstorrelations@sprouts.com
SUPPPPORT OFFICE
SUPPPPORT OFFICE
SUPPPPORT OFFICE
5455 E. High Street, Suite 111
5455 E. High Street, Suite 111
5455 E. High Street, Suite 111
Phoeeenix, AZ 85054 | 480-814-8016
Phoeeenix, AZ 85054 | 480-814-8016
Phoeeenix, AZ 85054 | 480-814-8016
OUR BOARD
OUR BOARD
OUR BOARD
Joseph Fortunato, Chairman of the Board;
Joseph Fortunato, Chairman of the Board;
Joseph Fortunato, Chairman of the Board;
Operating Partner, J.W. Childs Associates, L.P.;
Operating Partner, J.W. Childs Associates, L.P.;
Operating Partner, J.W. Childs Associates, L.P.;
Former Chairman and CEO, GNC Holdings, Inc.
Former Chairman and CEO, GNC Holdings, Inc.
Former Chairman and CEO, GNC Holdings, Inc.
Aminnn Maredia
Aminnn Maredia
Aminnn Maredia
Chief Executive Officer,
Chief Executive Officer,
Chief Executive Officer,
Sprooouts Farmers Market
Sprooouts Farmers Market
Sprooouts Farmers Market
KKKrrriiisssttteeennn BBBllluuummm,,, SSSeeennniiiooorrr VVViiiccceee PPPrrreeesssiiidddeeennnttt aaannnddd
KKKrrriiisssttteeennn BBBllluuummm,,, SSSeeennniiiooorrr VVViiiccceee PPPrrreeesssiiidddeeennnttt aaannnddd
KKKrrriiisssttteeennn BBBllluuummm,,, SSSeeennniiiooorrr VVViiiccceee PPPrrreeesssiiidddeeennnttt aaannnddd
Chief Information Officer, Frito-Lay
Chief Information Officer, Frito-Lay
Chief Information Officer, Frito-Lay
Shon Boney, Former Chairman and
Shon Boney, Former Chairman and
Shon Boney, Former Chairman and
Co-Founder, Sprouts Farmers Market
Co-Founder, Sprouts Farmers Market
Co-Founder, Sprouts Farmers Market
Terri Funk Graham, Chief Marketing Officer,
Terri Funk Graham, Chief Marketing Officer,
Terri Funk Graham, Chief Marketing Officer,
Origin Entertainment Inc.
Origin Entertainment Inc.
Origin Entertainment Inc.
LLLaaawwwrrrrence P. Molloy
LLLaaawwwrrrrence P. Molloy
LLLaaawwwrrrrence P. Molloy
Formmmer Chief Financial Officer,
Formmmer Chief Financial Officer,
Formmmer Chief Financial Officer,
Undeeer Armour, Inc.
Undeeer Armour, Inc.
Undeeer Armour, Inc.
SSSttteveeen Townsend, Consultant and
SSSttteveeen Townsend, Consultant and
SSSttteveeen Townsend, Consultant and
Formmmer Chairman and President/CEO,
Formmmer Chairman and President/CEO,
Formmmer Chairman and President/CEO,
Uniteeed Natural Foods, Inc.
Uniteeed Natural Foods, Inc.
Uniteeed Natural Foods, Inc.
This Annual Report contains “forward-looking statements” that reflect our current views about future events and
This Annual Report contains “forward-looking statements” that reflect our current views about future events and
This Annual Report contains “forward-looking statements” that 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
involve known risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or
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. For more
achievement to be materially different from those expressed or implied by the forward-looking statements. For more
achievement to be materially different from those expressed or implied by the forward-looking statements. For more
information, see the section titled “Special Note Regarding Forward-Looking Statements” included in the Annual Report
information, see the section titled “Special Note Regarding Forward-Looking Statements” included in the Annual Report
information, see the section titled “Special Note Regarding Forward-Looking Statements” included in the Annual Report
on Form 10-K included herewith.
on Form 10-K included herewith.
on Form 10-K included herewith.
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