2018 HIGHLIGHTS
Inspiring Healthy Living Coast to Coast
Extending the Sprouts Experience Beyond the Store
Building Loyalty and Differentiation with Private Label
Investing in Our Team Members
sprouts.com
From day one, Sprouts has believed that being different
is a good thing.
This philosophy—combined with our passion to inspire, educate and
empower every person to eat healthier and live a be�er life—has made
Sprouts a trusted and differentiated authority across the natural and
organic food industry, reaching more than 200 million guests annually.
As we expand beyond our 313 stores and 19 states, we are evolving
thoughtfully through strategic initiatives focused on guest experience
and engagement, product assortment, team member development, and
operational efficiencies. These initiatives resulted in net sales of $5.2
billion in 2018, a 12% net sales growth for the year, and comparable
store sales growth of 2.1%.
‘ 1 4 - ’ 1 8 C A G R :
1 5 %
$4,046
$5,207
$4,665
$2,967
$3,593
2014
2015
2016
2017
2018
($ in MM)
$111
2014
$0.72
50%
Adjusted
Diluted
EPS (1)
Diluted
EPS
Growth
ADJUSTED NET INCOME
(1)
’ 1 8 C A G R :
1 1 %
‘ 1 4 -
$135
2015(2)
$0.86
19%
$124
2016
$0.83
-3%
$140
2017
$1.01
22%
$168
2018
$1.29
28%
¹ See the Company’s SEC filings for a reconciliation of net income to adjusted net income, as well as a reconciliation of diluted EPS to
adjusted diluted EPS . For 2016, adjustments to net income and diluted EPS were immaterial, thus only net income and diluted EPS are
presented.
² 2015 is presented on a 52-week basis.
The Sprouts brand and differentiated model continue to resonate well in
communities from coast to coast and, in 2018, we introduced an enhanced
store layout designed to facilitate guest engagement and showcase our
unique product assortment. We’ll open more stores with this layout in
2019 and further expand our deli offerings to provide more fresh and
healthy prepared meals for on-the-go and convenience shoppers. Last
year, we expanded our home delivery offering to more than 200 stores and
launched a new functional, user-friendly website and app, making it easy
to interact with our guests wherever they are. Engagement across all of
our digital platforms continues to grow as we add meaningful and
relevant content, as well as exclusive offers.
For nearly two decades, Sprouts has helped make healthy food affordable
and mainstream. Today, we’re pushing innovation in natural and organic
food by deepening our assortment of Sprouts private label products that
are developed with quality, taste, and value in mind. In 2018, we grew our
private label business to 13% of total company sales. Guest baskets
containing these products are valued 50% higher than the average basket,
and we believe we can grow this category to 16-18% of total sales over the
next several years. We’ll achieve this by bringing to life unique and
on-trend products with a�ributes like keto, Whole30®, paleo, and
plant-based that are relevant to our guests' diverse needs.
Our more than 30,000 purpose-driven team members are Sprouts’ most
important brand ambassadors, and we continue to make investments in
wages, benefits, recognition programs, and training, including $10 million
in wage and benefit investments implemented throughout 2018. Because
of these ongoing initiatives, we were able to increase team member
retention and promote 28% of our store team members last year. We also
introduced a robust career pathing program designed to further career
growth at Sprouts.
Finally, as a rapidly growing retailer, we make conscious investments to
ensure the scalability of our business each year. We are currently
expanding a store-wide system launched in 2018 that assists with
optimal production planning, order quantities and, eventually, production
scheduling. This system will help us achieve consistency in shrink and
sales across the organization.
Competition across the industry is steadily growing, but we remain
focused on the values that have made Sprouts different since day one and
continue to set us apart. Our strategic initiatives have strengthened our
business, paving the way for long-term growth and creating further
shareholder value. We thank you for your confidence and shared belief
that healthy living can, and should, be enjoyed by everyone.
Sincerely,
Jim Nielsen, Interim Co-Chief Executive Officer, President and Chief Operating Officer
Brad Lukow, Interim Co-Chief Executive Officer and Chief Financial Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2018
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 ⌧ No (cid:4)
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:4) No ⌧
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 ⌧ No (cid:4)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such
files). Yes ⌧ No (cid:4)
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. ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company (cid:4)
⌧
(cid:4)
Accelerated filer
(cid:4)
Smaller reporting company (cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:4) No ⌧
As of June 29, 2018, 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 $2,815,472,482, based on the last reported sale price of such stock as
reported on The NASDAQ Global Select Market on such date.
As of February 18, 2019, there were outstanding 124,123,213 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 2019 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual
Report on Form 10-K where indicated. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the
registrant’s fiscal year ended December 30, 2018.
TABLE OF CONTENTS
PART I
Page
Item 1. Business ...................................................................................................................................
1
Item 1A. Risk Factors .............................................................................................................................. 13
Item 1B. Unresolved Staff Comments ..................................................................................................... 31
Item 2. Properties.................................................................................................................................. 31
Item 3. Legal Proceedings .................................................................................................................... 32
Item 4. Mine Safety Disclosures ........................................................................................................... 33
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
34
of Equity Securities...............................................................................................................
36
Item 6. Selected Financial Data............................................................................................................
38
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ....
58
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................................
Item 8. Financial Statements and Supplementary Data .......................................................................
59
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ... 105
Item 9A. Controls and Procedures .......................................................................................................... 105
Item 9B. Other Information...................................................................................................................... 105
PART III
Item 10. Directors, Executive Officers and Corporate Governance ........................................................ 106
Item 11. Executive Compensation .......................................................................................................... 106
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters .............................................................................................................. 106
Item 13. Certain Relationships and Related Transactions, and Director Independence......................... 106
Item 14. Principal Accountant Fees and Services................................................................................... 106
PART IV
Item 15. Exhibits and Financial Statement Schedules ............................................................................ 106
Item 16. Form 10-K Summary ............................................................................................................... 109
Signatures ............................................................................................................................................... 110
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., a Delaware
corporation, 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 specializes in fresh, natural and
organic products at prices that appeal to everyday grocery shoppers. Based on the belief that healthy
food should be affordable, Sprouts’ welcoming environment and knowledgeable team members continue
to drive its growth. Sprouts offers a complete grocery shopping experience that includes an array of fresh
produce in the heart of the store, a deli with prepared entrees and side dishes, The Butcher Shop, The
Fish Market, an expansive vitamins and supplements department and more. Since our founding in 2002,
we have grown rapidly, significantly increasing our sales, store count and profitability. With 313 stores in
19 states as of December 30, 2018, we are one of the largest specialty retailers of fresh, natural and
organic food in the United States. As of February 18, 2019, we have grown to 318 stores in 19 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 Heritage
In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding
in 2002 through December 30, 2018, we have continued to open new stores while successfully
rebranding to the Sprouts banner 43 Henry’s Farmers Market and 39 Sunflower Farmers Market stores
added in 2011 and 2012, respectively, through acquisitions. 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.
1
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.
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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:
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. In
addition, we continue to explore mobile and digital opportunities to further engage with our
customers.
Store Size. Our stores are generally between 28,000 and 30,000 square feet, which we
believe is smaller than many of our peers’ average stores. Our stores are located in a variety
of mid-sized and larger shopping centers, lifestyle centers and in certain cases, independent
single-unit, stand-alone developments. The size of our stores and our real estate strategy
provide us flexibility in site selection, including entering into new developments or existing sites
formerly operated by other retailers, including other grocery banners, office supply stores,
electronics retailers and other second generation space. Further, we believe our value
positioning allows us to serve a diverse customer base and provides us significant flexibility to
enter new markets across a variety of socio-economic areas, including markets with varying
levels of fresh, natural and organic grocer penetration.
2
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Team Members. Our stores are typically staffed with 80 to 100 full and part-time team
members including a store manager, two assistant store managers, eight department
managers, eight to ten 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 offers 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
We focus our product offerings on fresh, natural and organic foods. Foods are generally considered
“fresh” if they are minimally processed or in their 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.
Further, retailers that handle, store or sell organic products must implement measures to protect their
organic character.
Products
We categorize the varieties of products we sell as perishable and non-perishable. Perishable
product categories include produce, meat, seafood, deli, bakery, floral and dairy and dairy alternatives.
Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foods,
beer and wine, and natural health and body care. The following is a breakdown of our perishable and
non-perishable sales mix:
Perishables..............................................................................
Non-Perishables......................................................................
57.5%
42.5%
58.0%
42.0%
58.1%
41.9%
2018
2017
2016
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.
3
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
accounted for approximately 13% of our revenue in 2018 and features approximately 2,400 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 780 vendors and suppliers, both domestically and internationally. We work closely
with our supply chain partners to improve animal welfare standards, sustainable seafood sourcing,
support for organic agriculture and the ethical treatment of people.
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 self-
distribute nearly all produce. 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 centers and three third-party operated
distribution centers, and we manage every aspect of quality control in this department. We believe we
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 supply chain 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 (“KeHE”), is our primary supplier of dry grocery and frozen food products,
accounting for approximately 34%, 34% and 33% of our total purchases in fiscal 2018, 2017 and 2016,
respectively. Another 4% of our total purchases in each of fiscal 2018, 2017 and 2016, respectively, were
made through our secondary supplier, United Natural Foods, Inc. (“UNFI”). See “Risk Factors—Disruption
of significant supplier relationships could negatively affect our business.”
4
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 31% of our approximately 20,100 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 19 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 two million customers as of December 30, 2018, 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, television 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 coupons, 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, highlight our product offerings and offer special deals. Our website and smartphone app also
feature on-line ordering for delivery. 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 December 30, 2018, we had
approximately 1.6 million social media followers, primarily on Facebook and Instagram. In addition, we
offer home deliveries from our stores through partner services in many of our markets, and we intend to
expand our home delivery to our major markets nationwide. We will continue to explore mobile and digital
opportunities to further connect with our customers.
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 2018, we had more than 30 major promotional events throughout the year, which included
our Vitamin Extravaganza, Frozen Frenzy, Gluten-Free Favorites, and Incredible Bulk Sales, in addition to
our 72-Hour Sales.
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.
5
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. Through department-
specific promotions, in-store signage, digital engagement and customer education, many customers
begin to 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
customers will shop with greater frequency throughout the entire store.
Sustainability and Social Responsibility
Central to our identity is a genuine commitment to sustainability and social responsibility. We care
deeply about the health and well-being of our customers, team members, communities and our world.
We are committed to operating our business in a way that respects social and environmental welfare.
Hunger Relief and Waste Management
In the United States, approximately 40% of all food grown goes uneaten and ends up in landfills,
while one in seven Americans is food insecure at some point throughout a given year. We are committed
to eliminating food waste and fighting hunger in the communities we serve. We have taken great strides
to ensure that each of our stores and distribution centers has a food recovery program in place. In 2018,
Sprouts rescued and repurposed nearly 64 million pounds of food.
Every day, Sprouts team members gather product that may no longer be in retail condition, but
remains wholesome to consume, through our Food Rescue Program. In 2018, Sprouts stores and
distribution centers donated over 27 million pounds of food, the equivalent of 23 million meals to hunger
relief agencies. Our annual Grab’N’Give campaign funded by contributions from our customers
generated over 487,000 personal care and emergency food bags for those in need. Sprouts was proud to
once again be named a Leadership Partner by Feeding America in 2018 for our commitment to help
those facing hunger in our communities.
Food that did not meet our Food Rescue Program donation guidelines was sent to local farms
through our Food Waste to Farms Program. In 2018, our stores diverted more than 37 million pounds of
food waste to these farms to provide a low-cost feed source for local farmers. As part of our further effort
to combat waste, during 2018 we recycled more than 91 million pounds of cardboard. These waste
reduction initiatives reduce our environmental footprint and waste management expenditures and take
Sprouts closer to our commitment to “zero waste.”
Refrigeration and Energy Management
Sprouts has a robust refrigeration and energy management plan in place to reduce fugitive
refrigeration emissions and reduce energy consumption in our stores. In 2017, we conducted our first
annual greenhouse gas emissions inventory and identified areas of opportunity within our operations and
supply chain, and the Environmental Protection Agency (“EPA”) recognized 76 Sprouts stores with
“GreenChill” certifications; the GreenChill program is a partnership between the EPA and food retailers to
reduce refrigerant emissions and decrease their impact on the ozone layer and climate change.
6
To further reduce energy consumption in our stores, Sprouts implemented a program engaging our
approximately 30,000 team members to “Save Green”. The Save Green program is a team member
engagement tool aimed at reducing energy consumption and costs through best practices. Sprouts also
embeds green building practices into our new stores and remodels that lead to long-term reduced energy
consumption and cost. Some examples include daylight harvesting, LED lighting and energy
management systems to control refrigeration and HVAC.
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 promoting nutrition education and fresh food access in
local communities where Sprouts operates. Our Foundation relies on donations from Sprouts, as well as
our vendors and customers, to support non-profit organizations that fulfill its mission. Sprouts covers
100% of the Foundation’s operational expenses ensuring that every dollar raised benefits the
Foundation’s programs. Since the Foundation’s inception, it has provided over $7 million in donations to
more than 250 non-profit organizations.
Our Foundation has multi-year partnerships with seven organizations that are committed to making
a meaningful difference in the lives of children, individuals and families.
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Out Teach (formerly REAL School Gardens) builds learning gardens in low-income elementary
schools that enhance student learning and provide health nutrition education.
Denver Urban Gardens funds community gardens and school-based nutrition education in
neighborhoods with limited resources in Denver, Colorado.
Soil Born Farms provides school-based gardening, teacher training and nutrition education for
low-income schools in Sacramento County, California.
Spaces of Opportunity South Phoenix Urban Farm is an 18-acre community garden that will
broaden access to healthy, nutritious foods in the heart of South Phoenix, Arizona.
TX Sprouts, operated by the College of Natural Sciences at University of Texas at Austin,
combats childhood obesity through school-based gardening, cooking and nutrition education
programs in low-income schools throughout Austin, Texas.
Vitamin Angels provides access to life saving vitamins and minerals for at-risk populations in
need, particularly pregnant women, new mothers and children.
Valley of the Sun United Way Roosevelt Community Project supports community-based health
and nutrition programs for children, individuals and families in South Phoenix, Arizona.
The Foundation began the Neighborhood Grants program in 2017 to distribute donations received
from Sprouts and our customers entirely in the communities in which the donations were collected. In
2018, with Neighborhood Grants ranging from $2,500 to $10,000, our Foundation contributed $550,000 to
85 local non-profit organizations aligned with its goal to create stronger and healthier communities. Our
Foundation and stores also contributed financial and in-kind donations to those impacted by natural
disasters during 2018 in North Carolina and California. On November 3, 2018 we hosted our first
company-wide Day of Service, uniting 500 team members for 28 community service projects across the
country.
7
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 30, 32 and 36 new stores in fiscal 2018, 2017 and 2016, respectively. We expect to continue to
expand our store base with approximately 28 store openings and one relocation planned for fiscal 2019,
of which five new stores have opened as of February 18, 2019. In the near term we expect to open
approximately 30 new stores annually, with approximately 50% in existing markets.
The below diagram shows our store footprint, by state, as of December 30, 2018.
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Continue positive comparable store sales. For 47 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 customers into core 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 approximately 30,000 team members. In 2018, we promoted more than 6,000 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
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.
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We currently expect to open approximately 30 new Sprouts Farmers Market stores per year over
the near term based on our new store site selection analysis. We expect to open approximately 50% of
our new stores in existing markets and approximately 50% 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 and online formats. According to the Progressive Grocer,
U.S. supermarket sales totaled $683 billion in 2017. 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 63% in 2017, 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.
Our competitors include conventional supermarkets such as Kroger, Albertsons and Safeway, and
other food retailers such as Whole Foods, Natural Grocers by Vitamin Cottage and Trader Joe’s, as well
as mass or discount retailers, warehouse membership clubs, online retailers such as Amazon, specialty
stores, restaurants, and home delivery and meal solution companies. We believe Sprouts offers
consumers a compelling value relative to our competitors 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.
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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 and business
systems, including point-of-sale, data warehouse, labor management, purchasing, inventory control,
demand forecasting, financial and reporting systems. Our recent investments have focused on solutions
to enhance our operational productivity, optimize our labor, maintain our in-stock positions and forecast
our customer demand, while maintaining our high quality and value proposition. All of our stores operate
under one integrated information technology platform which allows for our current and future store growth.
We will continue making investments in our current information technology infrastructure and invest in
systems that scale to support our growth 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
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 (“FDA”), the Federal Trade Commission (“FTC”), the U.S. Department of Agriculture
(“USDA”), the Consumer Product Safety Commission (“CPSC”) and the EPA.
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 under the
Federal Food, Drug, and Cosmetic Act (“FDCA”). 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 under the
Federal Meat Inspection Act and the Poultry Products Inspection Act.
Congress amended the FDCA in 2011 through passage of the Food Safety Modernization Act
(“FSMA”), which greatly expanded FDA’s regulatory obligations over all actors in the supply chain.
Industry actors continue to determine the best pathways to implement FSMA’s regulatory mandates and
FDA’s promulgating regulations throughout supply chains, as most requirements are now in effect. 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.
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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 standards of identity, net quantity, nutrition facts labeling, ingredient statement, allergen disclosures.
FDA also regulates the use of structure/function claims, health claims and nutrient content claims.
Additional in-store labeling requirements, such as disclosure of calories and other nutrient information for
frequently sold items are scheduled to go into effect in 2018. In addition, compliance dates on various
nutrition initiatives that will impact many actors in our supply chain, such as in relation to partially
hydrogenated oils and new nutritional labeling guidelines, are scheduled to go into effect beginning 2018
and scheduled into 2021.
USDA’s Agricultural Marketing Service (“AMS”) oversees compliance with the National Organic
Standards Program and related labeling activity. In addition, AMS has responsibility for newly enacted
requirements surrounding the disclosure of the presence of bioengineered ingredients in food, scheduled
to go into effect beginning in 2020.
Dietary Supplements. The FDA has comprehensive authority to regulate the safety of dietary
supplements, dietary ingredients, labeling and current good manufacturing practices. Congress amended
the FDCA in 1994 through passage of the Dietary Supplement Health and Education Act (“DSHEA”),
which greatly expanded FDA’s regulatory authority over dietary supplements. Through DSHEA, dietary
supplements became its own regulated commodity while also allowing structure/function claims on
products. However, no statement on a dietary supplement may expressly or implicitly represent that it will
diagnose, cure, mitigate, treat or prevent a disease.
Food and Dietary Supplement Advertising. The FTC exercises jurisdiction over the advertising of
foods and dietary supplements. The FTC has the power to institute monetary sanctions and the
imposition of consent decrees and penalties that can severely limit a company’s business practices. In
recent years, the FTC has instituted numerous enforcement actions against dietary supplement
companies for failure to have adequate substantiation for claims made in advertising or for the use of
false or misleading advertising claims.
Compliance. As is common in our industry, we rely on our suppliers and contract manufacturers to
ensure that the products they manufacture and sell to us comply with all applicable regulatory and
legislative requirements. In general, we seek certifications of compliance, representations and warranties,
indemnification and/or insurance from our suppliers and contract manufacturers. However, even with
adequate insurance and indemnification, any claims of non-compliance could significantly damage our
reputation and consumer confidence in products we sell. In addition, the failure of such products to
comply with applicable regulatory and legislative requirements could prevent us from marketing the
products or require us to recall or remove such products from our stores. In order to comply with
applicable statutes and regulations, our suppliers and contract manufacturers have from time to time
reformulated, eliminated or relabeled certain of their products and we have revised certain provisions of
our sales and marketing program.
Employees
As of December 30, 2018, we had approximately 30,000 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.
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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 (“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.
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.
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 team members; promote and market new stores; and address competitive
merchandising, distribution and other challenges encountered in connection with expansion into new
geographic areas and markets. Although we plan to expand our store base primarily through new store
openings, we may grow through strategic acquisitions. Our ability to grow through strategic acquisitions
will depend upon our ability to identify suitable targets and negotiate acceptable terms and conditions for
their acquisition, as well as our ability to obtain financing for such acquisitions, integrate the acquired
stores into our existing store base and retain the customers of such stores. If we are ineffective in
performing these activities, then our efforts to open and operate new stores may be unsuccessful or
unprofitable, and we may be unable to execute our growth strategy.
We opened 30 and 32 stores in fiscal 2018 and 2017, respectively, and we currently expect 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.
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We may be unable to maintain or increase comparable store sales, which could negatively impact
our business and stock price.
We may not be able to maintain or improve the levels of comparable store sales that we have
experienced in the past. Our comparable store sales growth could be lower than our historical average for
many reasons, including:
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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.
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
34% of our total purchases in each of fiscal 2018 and 2017. Our current primary contractual relationship
with KeHE continues through July 18, 2025 and provides that KeHE will be our primary supplier for all of
our stores. 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 supply chain channels. Another 4% of our total purchases in each of fiscal 2018 and
2017 were made through our secondary supplier, UNFI. Our current contractual relationship with UNFI
continues through September 30, 2021. 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.
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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 three third-party distribution centers, with two located in California and one located in 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 shortages or disagreements,
shipping or infrastructure problems, food safety concerns 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, as well as increased costs from third-party
service providers. 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, work stoppages or wage
increases in the transportation or other industries, 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 or increased costs 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 or team member
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 a number of complaints related to this scam,
each on behalf of a 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. We have implemented numerous additional security protocols 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 implementing new systems, adapting these systems to changing technologies or
expanding them to meet the future needs and growth of our business. If our systems are improperly
implemented, breached, damaged or cease to function properly, we may have to make significant
investments to fix or replace them; suffer interruptions in our operations; experience data loss; incur
liability to our customers, team members and others; face costly litigation, enforcement actions and
penalties; 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 security breach or other material interruption in the information technology systems we
rely on may have a material adverse effect on our business, operating results and financial condition.
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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, convenient options, natural and organic products, meal solutions,
ingredient transparency and sustainability, 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 or sustainability 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.
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.
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.
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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 or provide us with services 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 severe damage to our reputation and 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 or provide us with services, 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.
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.
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If we do not successfully manage the transition associated with the resignation of our former
chief executive officer and the appointment of a new chief executive officer, it could have an
adverse impact on our business.
Amin Maredia resigned from his position as our company’s chief executive officer (“CEO”) and
resigned from our board of directors to pursue other interests, effective December 30, 2018. Our board
appointed Brad Lukow, our chief financial officer, and Jim Nielsen, our president and chief operating
officer, as interim co-chief executive officers until a permanent successor has been named. Our board
has an active search process underway to select the next CEO from internal and external candidates.
Although our board is confident in the interim leadership of Messrs. Lukow and Nielsen, leadership
transitions can be inherently difficult to manage, and an inadequate transition to a permanent CEO may
cause disruption to our business. In addition, if we are unable to attract and retain a qualified candidate to
become our permanent CEO in a timely manner, our ability to meet our financial and operational goals
and strategic plans may be adversely impacted, as well as our financial performance. This may also make
it more difficult for us to retain and hire key management and other team members.
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.
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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, as well as increased contractual costs associated with our
service providers. 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.
Our lease obligations could adversely affect our financial performance and may require us to
continue paying rent for store locations that we no longer operate.
We are subject to risks associated with our current and future store, distribution center and
administrative office real estate leases. Our high level of fixed lease obligations will require us to use a
portion of cash generated by our operations to satisfy these obligations, and could adversely impact our
ability to obtain future financing, if required, to support our growth or other operational investments. We
will require substantial cash flows from operations to make our payments under our operating leases, all
of which provide for periodic increases in rent. If we are not able to make the required payments under
the leases, the lenders or owners of the relevant stores, distribution centers or administrative offices may,
among other things, repossess those assets, which could adversely affect our ability to conduct our
operations. In addition, our failure to make payments under our operating leases could trigger defaults
under other leases or under agreements governing our indebtedness, which could cause the
counterparties under those agreements to accelerate the obligations due thereunder.
Further, we generally cannot cancel our leases, so if we decide to close or relocate a location, we
may nonetheless be committed to perform our obligations under the applicable lease, including paying
the base rent for the remaining lease term. In addition, as our leases expire, we may fail to negotiate
renewals, either on commercially acceptable terms or any terms at all, which could materially adversely
affect our business, results of operations, 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 December 30, 2018, we had outstanding indebtedness of $453.0 million under our credit
agreement (referred to as the “Amended and Restated Credit Agreement”). We may incur additional
indebtedness in the future, including borrowings under our Amended and Restated Credit Agreement.
Our indebtedness, any additional indebtedness we may incur, or any hedging arrangements related to
such indebtedness 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.
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The fact that a substantial portion of our cash flow from operations could be needed to make
payments on this indebtedness could have important consequences, including the following:
(cid:129)
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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,
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 Amended and
Restated Credit Agreement 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.
Our Amended and Restated Credit Agreement contains usual and customary restrictive covenants
relating to our management and the operation of our business, including the following:
(cid:129)
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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 Amended and Restated Credit Agreement 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 Amended and Restated Credit Agreement 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.
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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, tariffs
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.
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 delivery 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, quality, convenience, 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 or platforms
intensifies or competitors open stores or expand delivery options 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.
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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 23% of our net sales in both fiscal 2018 and 2017.
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, wildfires, 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 supply chain 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.
The current geographic concentration of our stores creates an exposure to local or regional
downturns or catastrophic occurrences.
As of December 30, 2018, we operated 114 stores in California, making California our largest
market representing 36% of our total stores in fiscal 2018. We also have store concentration in Texas,
Arizona and Colorado, operating 43, 39 and 32 stores in those states, respectively, and representing
14%, 12% and 10% of our total stores in fiscal 2018, 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; floods, prolonged droughts or other
severe weather conditions; and other catastrophic occurrences, such as wildfires. 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.
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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 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.
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.
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Increasing energy costs, unless offset by more efficient usage or other operational responses,
may impact our profitability.
We utilize natural gas, water, sewer and electricity in our stores and use gasoline and diesel in
trucks that deliver products to our stores. We may also be required to pay certain adjustments or other
amounts pursuant to our supply and delivery contracts in connection with increases in fuel prices.
Increases in energy costs, whether driven by increased demand, decreased or disrupted supply,
increased environmental regulations or an anticipation of any such events will increase the costs of
operating our stores. Our shipping costs 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.
Enforcement. Both FDA and USDA have broad authority to enforce their applicable provisions
relating 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 food 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.
Dietary Supplement Risks. As a retailer of dietary supplements our sales of dietary supplements are
regulated by FDA. However, other public and private actors are increasingly targeting dietary supplement
retailers and manufacturers for selling products that fail to adhere to requirements under FDCA, as
amended by DSHEA. While FDCA provides FDA with the authority to remove products from the market
that are adulterated or misbranded, state actors, such as the New York Attorney General, and the
Plaintiffs’ Bar have been targeting retailers and manufacturers of dietary supplements for failing to adhere
to current good manufacturing practices and for false or misleading product statements.
Advertising and Product Claims Risks. 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.
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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” or
similarly labeled products, asserting false, misleading and deceptive advertising and labeling claims,
including claims 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.
Organic and GMO Claims. 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. Additionally, the USDA has been directed, through legislation passed in July 2016,
to promulgate regulations within two years requiring the disclosure of the presence of genetically modified
ingredients in food. While it is uncertain whether USDA will meet the July 2018 statutory deadline, we
along with our suppliers, will likely have one to three years to implement promulgating regulations.
FSMA Implementation Costs. FSMA directed an historic shift at FDA from the Agency reacting to
and solving problems in the food supply chain to preventing contamination of food before it occurs. FSMA
accomplished this goal by overhauling FDA’s current food safety program by requiring all actors in the
food supply chain to expand their safety programs and record keeping processes. We predict that
FSMA’s continued implementation and FDA’s own development in understanding effective ways to
enforce FSMA provisions could delay the supply of certain products or result in certain products being
unavailable to us for sale in our stores.
Third-Party Risks. 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 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.
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We are also subject to laws and regulations more generally applicable to retailers. Compliance
with or changes to 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 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 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; result in our unintended misinterpretation or
noncompliance; expose us to litigation; require the reformulation of certain products or alternative
sourcing from domestic suppliers or otherwise to meet new standards, regulations or trade restrictions;
require the recall or discontinuance of certain products not able to be reformulated or alternatively
sourced in compliance with new regulations or restrictions; impose additional recordkeeping; expand
documentation of the properties of certain products; necessitate 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, and other legal actions in the
ordinary course of our business, including litigation arising from food-related illness or product labeling. In
addition, our team members may, from time to time, bring lawsuits against us regarding injury, hostile
work environment, discrimination, wage and hour disputes, sexual harassment, or other employment
issues. In recent years, there has been an increase in the number of discrimination and harassment
claims across the United States generally. 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 or perceptions of 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.
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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 intellectual property, 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 leases, inventories, goodwill and intangible assets, store closures, insurance, income
taxes, share-based compensation and accounting for mergers and acquisitions and other special items,
are complex and involve subjective judgments. Changes in these rules or their interpretation may
necessitate changes to our financial statement presentation and 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. For example, our adoption of ASC 842, Leases, effective in fiscal 2019 will impact
our financial statement presentation and financial results in future periods.
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.
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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 December 30, 2018, we
had goodwill and intangible assets of approximately $368.1 million and $194.8 million, respectively, which
represented approximately 22% and 12% 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.”
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
2016, 2017 and 2018, 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 or misconstrued by our
customers as medical advice. 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 or litigation 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.
28
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:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
actual or anticipated fluctuations in our quarterly or annual financial results;
the financial guidance we may provide to the public, any changes in such guidance, or our
failure to meet such guidance;
failure of industry or securities analysts to maintain coverage of our company, changes in
financial estimates by any industry or securities analysts that follow our company, or our failure
to meet such estimates;
various market factors or perceived market factors, including rumors, whether or not correct,
involving us or our competitors;
fluctuations in stock market prices and trading volumes of securities of similar companies;
sales, or anticipated sales, of large blocks of our stock;
short selling of our common stock by investors;
additions or departures of key personnel;
new store openings or entry into new markets by us or by our competitors;
regulatory or political developments;
changes in accounting principles or methodologies;
litigation and governmental investigations;
acquisitions by us or by our competitors;
actions taken by activist stockholders; 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.
29
Anti-takeover provisions could impair a takeover attempt and adversely affect existing
stockholders.
Certain provisions of our certificate of incorporation and bylaws and applicable provisions of
Delaware law may have the effect of rendering more difficult, delaying, or preventing an acquisition of our
company, even when this would be in the best interest of our stockholders. Our corporate governance
documents include the following provisions:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
creating a classified board of directors (referred to as the “Board”) whose members serve
staggered three-year terms;
authorizing “blank check” preferred stock, which could be issued by the board 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 the board;
controlling the procedures for the conduct and scheduling of board and stockholder meetings;
providing the board 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 the board to be filled only by a majority of our remaining directors,
even if less than a quorum is then in office, or by a sole remaining director; and
providing that our board of directors is expressly authorized to make, repeal, alter, or amend
our bylaws.
In addition, Delaware law imposes conditions on the voting of “control shares” and on certain
business combination transactions with “interested stockholders.”
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control
or changes in our management. Any provision of our certificate of incorporation or bylaws or Delaware
law that has the effect of delaying or deterring a change in control could limit the opportunity for our
stockholders to receive a premium for their shares of our common stock, and could also affect the price
that some investors are willing to pay for our common stock.
If securities or industry analysts cease publishing research or reports about us, our business, or
our market, or if they adversely change their recommendations regarding our stock, our stock
price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or
securities analysts may publish about us, our business, our market or our competitors. If we do not
maintain adequate research coverage, or if any of the analysts who may cover us downgrade our stock or
publish inaccurate or unfavorable research about our business or provide relatively more favorable
recommendations about our competitors, our stock price could decline. If any analyst who may cover us
were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in
the financial markets, which in turn could cause our stock price or trading volume to decline.
30
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
Amended and Restated Credit Agreement 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.
Our business could be impacted as a result of actions by activist stockholders or others.
We may be subject, from time to time, to legal and business challenges in the operation of our
company due to actions instituted by activist shareholders or others. Responding to such actions, which
may include private engagement, publicity campaigns, proxy contests, efforts to force transactions not
supported by our board of directors, and litigation, could be costly and time-consuming, may not align with
our strategic plan and could divert the time and attention of our board of directors and management from
our business. Perceived uncertainties as to our future direction as a result of stockholder activism may
lead to the perception of a change in the direction of the business or other instability and may affect our
stock price, relationships with vendors, customers, prospective and current team members and others.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
As of December 30, 2018, we had 313 stores located in nineteen states, as shown in the chart
below:
Number of Stores State
State
Alabama ........................................
Arizona ..........................................
California .......................................
Colorado ........................................
Florida............................................
Georgia..........................................
Kansas...........................................
Maryland........................................
Missouri .........................................
Nevada ..........................................
3 New Mexico......................................
39 North Carolina ..................................
114 Oklahoma .........................................
32 Pennsylvania ....................................
6 South Carolina..................................
16 Tennessee........................................
5 Texas................................................
2 Utah..................................................
3 Washington ......................................
Number of Stores
9
4
11
1
1
6
43
5
1
12
In fiscal 2017 we opened 32 new stores. In fiscal 2018, we opened 30 new stores and closed two
underperforming stores. Through February 18, 2019, we have opened five stores in fiscal 2019, bringing
our total store count to 318.
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.
31
As of December 30, 2018, we utilized five distribution centers. Information about such facilities, as
well as our current corporate office in Phoenix, Arizona, is set forth in the table below:
State
Facility
Arizona
Corporate Office..............................................................
Arizona
Distribution Center ..........................................................
Distribution Center .......................................................... California
Distribution Center .......................................................... California
Georgia
Distribution Center ..........................................................
Texas
Distribution Center ..........................................................
Square Footage*
96,000
129,000
123,000
110,000
100,000
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.
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. After removal to federal court, the plaintiff sought remand, which
the court granted in March 2017. On May 25, 2017, our company filed a Motion to Dismiss in the
Superior Court for the State of Arizona, which the court granted in part and denied in part by order
entered August 30, 2017. On August 4, 2018, we reached an agreement in principle to settle these
claims. The parties’ settlement agreement was granted preliminary approval by the court on January 30,
2019, with a hearing for final approval scheduled for May 31, 2019. If approved by the court, the
settlement will be funded from our directors and officers liability insurance policy and will not have a
material impact on our consolidated financial statements.
32
“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 (“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 (“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. On May 24, 2017, the
JPML granted our motion to stay proceedings in the case pending a U.S. Supreme Court ruling on the
question of whether arbitration agreements like those signed by each of the named plaintiffs are
enforceable. On May 21, 2018, the Supreme Court issued its opinion in Epic Systems Corp. v. Lewis and
upheld enforceability of arbitration agreements containing class action waivers, like the ones the named
plaintiffs signed in this matter. We are currently working with plaintiffs’ counsel and the District of Arizona
on a plan to remand three of the four filed cases back to their original courts. We also expect plaintiffs’
counsel to file an amended complaint in February 2019. Following receipt of the amended complaint, we
will file a motion to compel arbitration of the matters. 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.
Proposition 65 Coffee Action
On April 13, 2010, an organization named Council for Education and Research on Toxics (“CERT”)
filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against nearly 80
defendants who manufacture, package, distribute or sell brewed coffee, including Sprouts. CERT alleges
that the defendants failed to provide warnings for their coffee products of exposure to the chemical
acrylamide as required under California Health and Safety Code section 25249.5, the California Safe
Drinking Water and Toxic Enforcement Act of 1986, better known as Proposition 65. CERT seeks
equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties.
Our company, as part of a joint defense group, asserted multiple defenses against the lawsuit. On
May 7, 2018, the trial court issued a ruling adverse to defendants on these defenses to liability. On June
15, 2018, before the court tried damages, remedies and attorneys' fees, California’s Office of
Environmental Health Hazard Assessment (“OEHHA”) published a proposal to amend Proposition 65’s
implementing regulations by adding a stand-alone sentence that reads as follows: “Exposures to listed
chemicals in coffee created by and inherent in the processes of roasting coffee beans or brewing coffee
do not pose a significant risk of cancer.” OEHHA submitted the proposed regulation to California’s Office
of Administrative Law, and expects that the proposed regulation, if finalized, could be effective as early as
April 2019. The joint defense group sought a stay of the lawsuit pending resolution of OEHHA’s
rulemaking, and a temporary stay order was granted by the Court of Appeal of the State of California on
October 12, 2018 and continued on January 31, 2019, until further order.
At this stage of the proceedings, prior to a trial on the remedies issues, Sprouts is unable to predict
or reasonably estimate the potential loss or effect on our company or our operations. Accordingly, no loss
contingency was recorded for this matter. If the proposed regulation is not adopted, or the court
determines that it does not apply to this case, the trial court has discretion to impose zero penalties
against our company or to impose significant statutory penalties. Significant labeling or warning
requirements that could potentially be imposed by the trial court may increase our costs and adversely
affect sales of our coffee products. Furthermore, a future appellate court decision could reverse the trial
court rulings. The outcome and the financial impact of settlement or the trial or appellate court rulings of
the case to our company, if any, cannot be predicted.
Item 4.
Mine Safety Disclosures
Not applicable.
33
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 number of stockholders of record of our common stock as of February 18, 2019 was
38. 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 Amended and Restated Credit Agreement contains
covenants that would restrict our ability to pay cash dividends.
Issuer Purchases of Equity Securities
Share repurchase activity during the fourth fiscal quarter of 2018 was as follows:
Total number
of shares
purchased
Total number of
shares purchased
as part of publicly
announced plans
or programs (2)
Average
price paid
per share
Approximate dollar
value of shares
that may yet be
purchased under
the plans or
programs (2)
Period (1)
Oct. 1, 2018 - Oct. 28,
2018 ....................................
Oct. 29, 2018 - Nov. 25,
2018 ....................................
Nov. 26, 2018 - Dec. 30,
2018 .................................... 2,620,312 $
Total ....................................... 2,685,020
64,708 $
—
—
— $ 283,293,000
26.28
64,708 $ 281,600,000
24.16
2,620,312 $ 218,293,000
2,685,020
(1) Periodic information is presented by reference to our fiscal periods during the fourth quarter of 2018.
(2) On February 20, 2018, our board of directors authorized a new $350 million share repurchase
program of our common stock. The shares may be purchased on a discretionary basis from time to
time through December 31, 2019, 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.
Subsequent to the end of the year and through February 18, 2019, the Company has repurchased
0.9 million shares of common stock for a total investment of $20.3 million.
34
Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock
between December 29, 2013 and December 30, 2018, 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 December 29, 2013 was the closing sale price on that
day of $38.19 per share. The performance shown on the graph below is based on historical results and is
not intended to suggest future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Sprouts Farmers Market Inc., the NASDAQ Composite Index
and the S&P Food Retail Index
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/29/13
12/28/14
1/3/16
1/1/17
12/31/17
12/30/18
Sprouts Farmers Market Inc.
NASDAQ Composite
S&P Food Retail
*$100 invested on 12/29/13 in stock or 12/31/13 in index, including reinvestment of dividends.
Indexes calculated on month-end basis.
Copyright© 2019 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
Set out below is selected financial data for and as of the end of fiscal 2014 through fiscal 2018. In
the fourth quarter of fiscal 2018, we made a voluntary change in our accounting policy for the
classification of certain expenses. Historically, we have presented occupancy costs and buying costs in
cost of sales. Under the new policy, we are presenting these expenses within selling, general and
administrative expenses (“SG&A”). In addition, we reclassified depreciation and amortization (exclusive of
supply chain-related depreciation included in cost of sales) from direct store expenses (“DSE”) and SG&A
to a separate financial statement line item and combined DSE and store pre-opening costs with SG&A.
These reclassifications had no impact on sales, income from operations, net income or earnings per
share. In addition, there was no cumulative effect to retained earnings, equity, or net assets. We have
applied these changes in presentation retrospectively to our consolidated statements of income for all
periods presented in the table below (and elsewhere in this Annual Report). See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Components of Operating
Results” and Note 3, “Significant Accounting Policies”, to our Consolidated Financial Statements for more
information.
Fiscal
2018(2)
Fiscal
2017(2)
Fiscal
2016(2)
(dollars in thousands, except per share data)
Fiscal
2015(3)
Fiscal
2014(1)(2)
Statements of Income Data:
Net sales.................................................. $5,207,336 $4,664,612 $4,046,385 $3,593,031 $2,967,424
Cost of sales............................................ 3,459,861 3,097,582 2,682,937 2,388,140 1,952,054
Gross profit ......................................... 1,747,475 1,567,030 1,363,448 1,204,891 1,015,370
Selling, general and administrative
expenses .............................................. 1,404,443 1,245,640 1,071,995
Depreciation and amortization (exclusive
of depreciation included in
cost of sales) ........................................
Store closure and other costs (4) ............
Income from operations......................
Interest expense, net ...............................
Other income ...........................................
Loss on extinguishment of debt...............
Income before income taxes ..............
Income tax provision (5) ..........................
59,204
725
199,711
(25,063)
596
(1,138)
174,106
(66,414)
Net income ......................................... $ 158,536 $ 158,440 $ 124,306 $ 128,991 $ 107,692
67,994
1,802
228,754
(17,723)
443
(5,481)
205,993
(77,002)
94,194
1,126
226,070
(21,177)
625
—
205,518
(47,078)
108,045
12,076
222,911
(27,435)
320
—
195,796
(37,260)
78,293
228
212,932
(14,794)
454
—
198,592
(74,286)
906,341
755,730
Per Share Data:
Net income per share—basic .................. $
Net income per share—diluted ................ $
Weighted average shares outstanding—
basic .....................................................
Weighted average shares outstanding—
diluted ...................................................
1.23 $
1.22 $
1.17 $
1.15 $
0.84 $
0.83 $
0.84 $
0.83 $
0.72
0.70
128,827
135,169
147,311
153,099
149,751
129,776
137,884
149,653
155,877
154,328
36
Fiscal
2018
Fiscal
2017
Fiscal
2016
Fiscal
2015
Fiscal
2014 (1)
2.9%
285
2.7%
253
5.8%
217
9.9%
191
2.1%
313
Comparable store sales growth ...........
Stores at end of period .........................
Other Operating Data:
Stores at beginning of period ..................
Opened(6) ...............................................
Closed .....................................................
313
Stores at end of period ............................
Gross square feet at end of period .......... 9,029,768
Average store size at end of period
(gross square feet) ...............................
28,849
285
30
(2)
253
32
—
285
8,054,720
217
36
—
253
7,070,248
191
27
(1)
167
24
—
191
5,252,851
217
5,976,780
28,262
27,946
27,572
27,502
(1)
(2)
(3)
(4)
(5)
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, 2016, 2017 and 2018 includes 52 weeks.
Fiscal 2015 includes 53 weeks.
Fiscal 2018 store closure and other costs includes $8 million in non-cash one-time charges
associated with lease termination obligations and asset disposals for two closed stores, as well as a
one-time severance expense of $3.6 million associated with the resignation of our former CEO.
Fiscal 2018 income tax provision included a $2.6 million discrete tax benefit due to a tax calculation
method change that resulted in the accelerated deduction or deferral of certain items and a $12.4
million benefit related to excess tax benefits on share-based compensation. Fiscal 2017 income tax
provision included an $18.7 million benefit related to the implementation of the Tax Cuts and Jobs
Act in the fourth quarter and a $9.9 million benefit related to excess tax benefits on share-based
compensation.
(6) Stores opened is exclusive of one store relocation during fiscal 2014 and 2016.
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 specializes in fresh, natural and
organic products at prices that appeal to everyday grocery shoppers. Based on the belief that healthy
food should be affordable, Sprouts’ welcoming environment and knowledgeable team members continue
to drive its growth. Sprouts offers a complete grocery shopping experience that includes an array of fresh
produce in the heart of the store, a deli with prepared entrees and side dishes, The Butcher Shop, The
Fish Market, an expansive vitamins and supplements department and more. Since our founding in 2002,
we have grown rapidly, significantly increasing our sales, store count and profitability. With 313 stores in
19 states as of December 30, 2018, we are one of the largest specialty retailers of fresh, natural and
organic food in the United States. As of February 18, 2019, we have grown to 318 stores in 19 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 Heritage
In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding
in 2002 through December 30, 2018, we have continued to open new stores while successfully
rebranding 43 Henry’s Farmers Market and 39 Sunflower Farmers Market stores added in 2011 and
2012, respectively, through acquisitions to the Sprouts banner. These three businesses all trace their
lineage back to Henry’s Farmers Market and were built with similar store formats and operations including
a strong emphasis on value, produce and service in smaller, convenient locations. The consistency of
these formats and operations was an important factor that allowed us to rapidly and successfully rebrand
and integrate each of these businesses under the Sprouts banner and on a common platform.
Outlook
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 expect to open
approximately 30 new stores per year for the near term, and in 2019, we have opened five new stores
through February 18, 2019.
38
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 and digital customer engagement. We are committed to growing the
Sprouts brand by supporting our stores, product offerings and corporate partnerships, including the
expansion of innovative marketing and promotional strategies through print, digital and social media
platforms.
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 2018 was a 52-week year ending on December 30, 2018. Fiscal
2017 was a 52-week year ending on December 31, 2017 and fiscal 2016 was a 52-week year ending on
January 1, 2017.
In the fourth quarter of fiscal 2018, we made a voluntary change in our accounting policy for the
classification of certain expenses. Historically, we have presented occupancy costs and buying costs in
cost of goods sold. Under the new policy, we are presenting these expenses within SG&A. In addition,
we reclassified depreciation and amortization (exclusive of supply chain-related depreciation included in
cost of sales) from DSE and SG&A to a separate financial statement line item and combined DSE and
store pre-opening costs with SG&A. These reclassifications had no impact on sales, income from
operations, net income or earnings per share. In addition, there was no cumulative effect to retained
earnings, equity, or net assets. We made this voluntary change in accounting policy to better reflect the
direct costs of acquiring products and making them available to our customers in cost of sales. Store
occupancy costs and buying costs, which are largely sales and marketing driven, are more appropriately
reflected in SG&A. The new presentation of operating expenses now largely disaggregates cash from
non-cash operating expenses, which we believe provides better information to our financial statement
users. We believe these changes are preferable because they enhance the comparability of our financial
statements with those of many of our industry peers and aligns with how we internally manage and review
costs and margin. As required by U.S. GAAP, we have applied these changes in presentation
retrospectively to our consolidated statements of income for all periods presented in this Annual Report.
See Note 3, “Significant Accounting Policies” to our Consolidated Financial Statements for more
information.
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. 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.
39
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:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
general economic conditions and trends, including levels of disposable income and consumer
confidence;
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 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 and
supplies. Cost of sales also includes depreciation and amortization expense for distribution centers and
supply chain-related assets. Merchandise incentives received from vendors, which are reflected in the
carrying value of inventory when earned or as progress is made toward earning the rebate or allowance,
and are reflected as a component of cost of sales as the inventory is sold. Inflation and deflation in the
prices of food and other products we sell may periodically affect our gross profit and gross margin. The
short-term impact of inflation and deflation is largely dependent on whether or not we pass the effects
through to our customers, which will depend upon competitive market conditions.
Our cost of sales 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.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) primarily consist of salaries, wages and
benefits costs, share-based compensation, store occupancy costs (including rent, property taxes, utilities,
common area maintenance and insurance), advertising costs, buying cost, pre-opening and other
administrative costs.
Depreciation and Amortization
Depreciation and amortization (exclusive of depreciation included in cost of sales) primarily consists
of depreciation and amortization for buildings, store leasehold improvements, and equipment.
40
Store closure and other 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 closed store reserve estimates are classified as store closure and other costs in the
consolidated statements of operations. See Note 16, “Closed Store Reserves and Other Costs” for
additional information.
Factors Affecting Comparability of Results of Operations
March 2018 Refinancing
In March 2018, we completed a transaction in which we refinanced our debt (referred to as the
“March 2018 Refinancing”), as further discussed in “—Liquidity and Capital Resources” below. The March
2018 Refinancing resulted in increase in borrowings, a reduction in interest rate and the recording of a
loss on early extinguishment of debt (see Note 12, “Long-Term Debt”).
Adoption of ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718)”
As a result of the adoption, we recognized excess tax benefits related to the exercise of stock
options in our income tax provision during fiscal 2017 (see Note 17, “Income Taxes”). Prior to the
adoption, these items were recorded in Additional Paid-in Capital. During 2017, excess tax benefits were
classified as an operating activity in the consolidated statement of cash flows, along with other income tax
cash flows. Prior to adoption, excess tax benefits were classified as a financing activity. We have made a
policy election to account for forfeitures as they occur. This election was adopted using a modified
retrospective approach resulting in no cumulative effect on retained earnings at the beginning of the
period. Prior to the adoption, forfeitures were accounted for using an estimated forfeiture rate.
2017 Tax Cuts and Jobs Act
On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax
Act”) was enacted into law, which changes various corporate income tax provisions within the existing
Internal Revenue Code. Substantially all the provisions of the Tax Act are effective for taxable years
beginning after December 31, 2017. The most significant changes that impact our company are the
reduction in the corporate federal income tax rate from 35% to 21% and 100% bonus depreciation for
qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.
In a manner consistent with Accounting Standards Codification (“ASC”) 740-10-25-47, the effect of a
change in tax law or rates shall be recognized at the date of enactment, accordingly, we accounted for
the corporate federal income tax rate reduction in the fourth quarter of 2017 (see Note 17, “Income
Taxes”).
41
Results of Operations for Fiscal 2018, 2017 and 2016
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.
Consolidated Statement of Income
Data:
Net sales..................................................
Cost of sales ............................................
Gross profit .........................................
Selling, general and administrative
expenses ..............................................
Depreciation and amortization (exclusive
of depreciation included in cost
of sales) ................................................
Store closure and other costs ..................
Income from operations ......................
Interest expense ......................................
Other income ...........................................
Income before income taxes...............
Income tax provision................................
Net income..........................................
Fiscal 2018 (1) Fiscal 2017 (1) Fiscal 2016 (1)
(in thousands, except per share data)
$ 5,207,336 $ 4,664,612 $ 4,046,385
3,459,861 3,097,582 2,682,937
1,747,475 1,567,030 1,363,448
1,404,443 1,245,640 1,071,995
108,045
12,076
222,911
(27,435)
320
195,796
(37,260)
158,536 $
94,194
1,126
226,070
(21,177)
625
205,518
(47,078)
158,440 $
78,293
228
212,932
(14,794)
454
198,592
(74,286)
124,306
$
Fiscal 2018
Fiscal 2017
Fiscal 2016
Other Operating Data:
Comparable store sales growth......................
Stores at beginning of period .........................
Opened......................................................
Closed .......................................................
Stores at end of period ...................................
2.1%
285
30
(2)
313
2.9%
253
32
—
285
2.7%
217
36
—
253
(1) Effective in the fourth quarter of fiscal 2018, we made a change in accounting principle to change
the classification of certain expenses on our consolidated statements of income. The change is
applied retrospectively to all periods presented. See Note 3, “Significant Accounting Policies” for
further information.
42
Comparison of Fiscal 2018 to Fiscal 2017
Net sales
Net sales ....................................................... $5,207,336
Comparable store sales growth ....................
2.1%
2.9%
Fiscal 2018
Change
Fiscal 2017
(dollars in thousands)
$4,664,612
$542,724
% Change
12%
Net sales during 2018 totaled $5.2 billion, increasing 12% over the prior fiscal year. Sales growth
was primarily driven by solid performance in new stores opened in the last twelve months. Comparable
stores contributed approximately 89% of total sales for 2018 and approximately 87% for the prior fiscal
year.
Cost of sales and gross profit
Fiscal 2018
Fiscal 2017
Change
% Change
Net sales.................................................... $5,207,336
Cost of sales .............................................. 3,459,861
Gross profit ................................................ 1,747,475
Gross margin .............................................
33.6%
(dollars in thousands)
$4,664,612
3,097,582
1,567,030
$542,724
362,279
180,445
12%
12%
12%
33.6%
0.0%
Gross profit increased during 2018 compared to 2017 by $180.4 million to $1.7 billion, primarily
driven by increased sales volume and strong performance in new stores opened.
Selling, general and administrative expenses
Selling, general and administrative
expenses ................................................
Percentage of net sales .............................
$1,404,443
$1,245,640
$158,803
13%
27.0%
26.7%
0.3%
Fiscal 2018
Fiscal 2017
(dollars in thousands)
Change
% Change
Selling, general, and administrative expenses increased $158.8 million or 13% as compared to
2017. This increase is primarily related to the 30 new stores which opened during 2018, as well as costs
associated with a full year of operations for 2017 store openings. As a percentage of net sales, selling,
general and administrative expenses increased slightly reflecting our planned investments in team
member wages, benefits and training as well as higher store occupancy costs, which was partially offset
by a reduction in workers compensation and general liability insurance costs due to improved claims
experience and lower payroll taxes as a result of the State of California repaying its federal
unemployment insurance loan.
Depreciation and amortization
Fiscal 2018
Fiscal 2017
Change
% Change
Depreciation and amortization ......................... $108,045
Percentage of net sales ...................................
2.1%
(dollars in thousands)
$ 94,194
$ 13,851
15%
2.0%
0.1%
43
Depreciation and amortization expenses (exclusive of depreciation included in cost of sales)
increased $13.9 million primarily related to new store growth as well as remodel initiatives in older
vintages.
Store closure and other costs
Store closure and other costs .......................... $ 12,076
Percentage of net sales ...................................
Fiscal 2018
Fiscal 2017 Change
(dollars in thousands)
$
0.2%
1,126 $ 10,950
—
0.2%
% Change
972%
Store closure and other costs in 2018 of $12.1 million includes non-cash charges of $8.0 million
primarily related to lease termination obligations and asset disposals associated with the closure of two
underperforming stores during the fourth quarter of 2018, as well as one-time severance expense of $3.6
million associated with the resignation of our former Chief Executive Officer. See Note 16, “Closed Store
Reserves and Other Costs.”
Interest expense, net
Fiscal 2018 Fiscal 2017 Change % Change
(dollars in thousands)
Long-term debt .................................................
Capital and financing leases ............................
Deferred financing costs ..................................
Interest rate hedge and other...........................
Total Interest Expense, net ..............................
$ 14,920 $
11,855
799
(139)
8,438 $
11,660
463
616
$ 27,435 $ 21,177 $
6,482
195
336
(755)
6,258
77%
2%
73%
(123)%
30%
The increase in interest expense is primarily related to the higher average balance outstanding
under the Amended and Restated Credit Agreement primarily related to the Company’s share repurchase
program. See Note 12, “Long-Term Debt” and Note 20, “Capital Stock.”
Income tax provision
Fiscal 2018
Fiscal 2017
Change
% Change
Income tax provision .............................. $37,260
Impact of Tax Act ................................... 2,573
Income tax provision excluding
impact of Tax Act ................................ $39,833
Income tax rate ......................................
19.0%
(dollars in thousands)
19.0% $47,078
1.3% 18,693
22.9% $ (9,818)
9.1% (16,120)
20.3% $65,771
32.0% $(25,938)
(21)%
(86)%
(39)%
22.9%
(3.9)%
The effective tax rate declined to 19.0% in 2018 primarily reflecting the reduction in the corporate
federal income tax rate from 35% to 21% as a result of the enactment of the Tax Act, as well as $12.4
million in excess tax benefits primarily associated with the exercise of expiring pre-IPO options and a $2.6
million discrete benefit associated with a tax method change in conjunction with the Tax Act.
44
The effective tax rate in 2017 of 22.9% reflects a one-time tax benefit of $18.7 million related to the
remeasurement of our net deferred tax liabilities as a result of the enactment of the Tax Act, combined
with the $9.9 million in excess tax benefits related to the exercise or vesting of share-based awards. See
Note 3, “Significant Account Policies” and Note 17, “Income Taxes.”
Net income
Net income ......................................................
Percentage of net sales ..................................
Fiscal 2018
Fiscal 2017
Change
% Change
(dollars in thousands)
$ 158,536
$ 158,440
$
3.4%
96
(0.4)%
0%
3.0%
Net income in 2018 of $158.4 million includes $11.6 million (pre-tax) for one-time store closure and
other costs discussed above, which nearly offset the favorable impact of new store growth.
Diluted earnings per share
Diluted earnings per share ...............................
Diluted weighted average shares
outstanding....................................................
Fiscal 2018 Fiscal 2017 Change % Change
(shares in thousands)
$
1.22 $
1.15 $
0.07
6%
129,776 137,884
(8,108)
Earnings per share included a benefit of $0.06 per share for 2018 and $0.04 per share for 2017
related to the share repurchase program.
Earnings per share included a benefit of $0.14 per share for 2017 for the effect of the Tax Act.
45
Comparison of Fiscal 2017 to Fiscal 2016
Net sales
Net sales ......................................................
Comparable store sales growth ...................
Fiscal 2017
$4,664,612
Fiscal 2016
(dollars in thousands)
$4,046,385
2.9%
2.7%
Change % Change
$618,227
15%
Net sales during 2017 totaled $4.7 billion, increasing 15% over the prior fiscal year. Sales growth
was primarily driven by solid performance in new stores opened in the last twelve months. Comparable
stores contributed approximately 87% of total sales for 2017 and approximately 88% for the prior fiscal
year.
Cost of sales and gross profit
Fiscal 2017
Fiscal 2016
Change
% Change
Net sales................................................... $4,664,612
Cost of sales ............................................. 3,097,582
Gross profit ............................................... 1,567,030
Gross margin ............................................
33.6%
(dollars in thousands)
$4,046,385
2,682,937
1,363,448
$618,227
414,645
203,582
15%
15%
15%
33.7%
(0.1)%
Gross profit increased during 2017 compared to 2016 by $203.6 million, to $1.6 billion, primarily
driven by increased sales volume. Gross margin decreased slightly due to the competitive environment in
the first half of 2017.
Selling, general and administrative expenses
Selling, general and administrative
expenses ...............................................
Percentage of net sales............................
$1,245,640
$1,071,995
$173,645
16%
26.7%
26.5%
0.2%
Fiscal 2017
Fiscal 2016
Change
% Change
(dollars in thousands)
Selling, general and administrative expenses increased $173.6 million, or 16% as compared to
2017. This is primarily related to 32 new stores which opened during 2017, as well as costs associated
with a full year of operations for our 2016 store openings. Selling, general and administrative expenses
increased slightly to 26.7% of net sales, reflecting higher compensation, advertising and other corporate
expenses commensurate with store growth and improved company performance. These increases were
partially offset by $3.0 million in one-time costs associated with the Executive Chairman of the Board’s
retirement in the prior year.
Depreciation and amortization
Depreciation and amortization.........................
Percentage of net sales...................................
Fiscal 2017
$ 94,194
Change
Fiscal 2016
(dollars in thousands)
$ 78,293
$ 15,901
% Change
20%
2.0%
1.9%
0.1%
46
Depreciation and amortization expense (exclusive of depreciation included in cost of sales)
increased $15.9 million due primarily to new store growth with the opening of 32 new stores in 2017.
Store closure and other costs
Store closure and other costs were $1.1 million for 2017 and $0.2 million for 2016.
During the third quarter of 2017, 14 of our stores were affected by hurricanes in three states.
Although physical damage was minimal, the stores experienced loss of business due to temporary
closures, inventory loss and additional expenses to clean up and power the stores. These costs, net of
insurance recovery, totaled $0.7 million.
Interest expense, net
Fiscal 2017 Fiscal 2016 Change % Change
(dollars in thousands)
Capital and financing leases ............................
Long-term debt .................................................
Deferred financing costs ..................................
Interest rate hedge and other...........................
Total Interest Expense, net ..............................
$ 11,660 $ 10,423 $
3,468
463
440
$ 21,177 $ 14,794 $
8,438
463
616
1,237
4,970
—
176
6,383
12%
143%
0%
40%
43%
The increase in interest expense, net is due to higher principal balances on the Former Credit
Facility and additional capital and financing leases recorded during 2017.
Income tax provision
Income tax provision .............................
Impact of Tax Act ..................................
Income tax provision excluding
impact of Tax Act................................
Income tax rate......................................
Fiscal 2017
Fiscal 2016
Change
% Change
(dollars in thousands)
$47,078
18,693
22.9% $74,286
—
9.1%
37.4% $(27,208)
0.0% 18,693
(37)%
n/m
$65,771
32.0% $74,286
37.4% $ (8,515)
(11)%
22.9%
37.4%
(14.5)%
Income tax provision decreased to $47.1 million for 2017 from $74.3 million for 2016 and our
effective income tax rate decreased to 22.9% in 2017 from 37.4% in 2016. The decrease in the income
tax provision and effective income tax rate are primarily related to a one-time tax benefit of $18.7 million
associated with the reduction in the corporate federal income tax rate from 35% to 21% as a result of the
enactment of the Tax Act, combined with the recognition of $9.9 million excess tax benefits related to the
exercise or vesting of share-based awards in the income tax provision resulting from the adoption of ASU
2016-09. See Note 3, “Significant Accounting Policies” and Note 17, “Income Taxes.”
Net income
Net income ......................................................
Percentage of net sales ..................................
Fiscal 2017
$ 158,440
Change
Fiscal 2016
(dollars in thousands)
$ 124,306
$ 34,134
% Change
27%
3.4%
3.1%
0.3%
Net income increased $34.1 million as a result of higher sales and gross profit, combined with a
lower income tax provision discussed above, partially offset by higher selling, general and administrative
expense and depreciation expense commensurate with store growth. Net income as a percentage of net
47
sales increased due to the lower effective tax rate, partially offset by lower gross margin and higher
compensation and benefits costs.
Diluted earnings per share
Diluted earnings per share ................................. $
0.83 $
Diluted weighted average shares outstanding ... 137,884 149,653
1.15 $
0.32
(11,769)
Fiscal 2017 Fiscal 2016 Change
(shares in thousands)
Earnings per share for 2017 included a benefit of $0.14 per share for the 2017 effect of the Tax Act.
Earnings per share included a benefit of $0.04 per share for 2017 and $0.03 per share for 2016
related to the share repurchase program.
The following table sets forth certain of our unaudited consolidated statements of operations data for
each of the fiscal quarters in 2018 and 2017.
Quarterly Financial Data
December 30,
2018 (2)
September 30,
2018
July 1,
2018
April 1,
2018
December 31,
2017
October 1,
2017
July 2,
2017
April 2,
2017
(dollars in thousands, except per share amounts)
Fiscal Quarter Ended
420,969 $
Net sales......... $ 1,269,338 $ 1,329,109 $ 1,321,693 $ 1,287,196 $ 1,143,933 $ 1,206,059 $ 1,183,975 $1,130,645
Gross
profit(1) ........ $
Income from
operations .... $
Net income...... $
Net income
per share:
443,416 $ 438,481 $ 444,609 $ 381,117 $ 402,364 $ 394,952 $ 388,597
28,752 $
12,703 $
79,680 $
66,624 $
52,778 $
37,500 $
61,701 $
41,709 $
53,004 $
31,486 $
37,084 $
39,699 $
63,471 $
40,968 $
72,511
46,287
Basic ......... $
Diluted ....... $
0.10 $
0.10 $
0.30 $
0.29 $
0.32 $
0.32 $
0.50 $
0.50 $
0.30 $
0.29 $
0.23 $
0.23 $
0.30 $
0.29 $
0.34
0.33
(1) Effective in the fourth quarter of fiscal 2018, we made a change in accounting principle to change
the classification of certain expenses on our consolidated statements of income. The change is
applied retrospectively to all periods presented. See Note 3, “Significant Accounting Policies” for
further information.
The following table sets forth previously reported gross profit for each of the fiscal quarters in 2018
and 2017.
September 30,
2018
July 1,
2018
April 1,
2018
December 31,
2017
October 1,
2017
July 2,
2017
April 2,
2017
(dollars in thousands, except per share amounts)
Fiscal Quarter Ended
Gross profit ..........
$
382,375 $380,412 $387,052 $ 324,444 $346,409 $341,986 $337,286
(2) During the fourth quarter of fiscal 2018, income from operations includes $8 million in non-cash one-
time charges associated with lease termination obligations and asset disposals for two closed
stores, as well as a one-time severance expense of $3.6 million associated with the resignation of
the former CEO.
48
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 (“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 (“NOPAT”), including the effect of capitalized
operating leases, divided by average invested capital. Operating leases are capitalized as part 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:
2018
Net income ................................................................................. $ 158,536
Income Tax Adjustment from Tax Act (1) ..................................
Special items, net of tax (2) .......................................................
Interest expense, net of tax (3) ..................................................
(2,573)
11,573
22,178
Net operating profit after-tax (NOPAT).................................. $ 189,714
—
14,373
$ 154,120
2017
(dollars in thousands)
$ 158,440
(18,693)
2016
$ 124,306
—
—
9,876
$ 134,182
Total rent expense, net of tax (3) ...............................................
Estimated depreciation on capitalized operating leases, net of
tax (3) ......................................................................................
Estimated interest on capitalized operating leases, net of
tax (3) (4) ................................................................................
62,385
NOPAT, including effect of capitalized operating leases ...... $ 252,099
111,401
82,285
65,886
(49,016)
(36,205)
(28,990)
46,080
$ 200,200
36,896
$ 171,078
Average working capital.............................................................
Average property and equipment...............................................
Average other assets .................................................................
Average other liabilities..............................................................
26,877
754,380
574,968
(199,233)
5,652
668,576
570,859
(158,193)
Average invested capital ....................................................... $1,156,992
$1,086,894
77,273
546,652
584,945
(121,724)
$1,087,146
Average estimated asset base of capitalized operating
leases...................................................................................... 1,103,128
Average invested capital, including the effect of capitalized
operating leases................................................................. $2,260,120
968,201
838,200
$2,055,095
$1,925,346
ROIC .....................................................................................
ROIC, including the effect of capitalized operating
leases.................................................................................
16.4%
14.2%
12.3%
11.2%
9.7%
8.9%
49
(1)
$18.7 million income tax credit related to the Tax Act enacted in December 2017 and $2.6 million
income tax benefit related to tax calculation method changes recognized in the third quarter of 2018;
see Note 17, “Income Taxes.”
(2) Special items included $5.9 million (after-tax) related to store closures and $5.7 million (after-tax)
related to executive severance; see Note 16, “Closed Store Reserves and Other Costs.”
(3) Net of tax amounts are calculated using the effective tax rate for the period presented.
(4)
Interest on capitalized leases is calculated as the trailing four quarters’ rent expense multiplied by
eight and by a seven percent interest rate factor.
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash for each of the periods set forth
below, as well as our cash, cash equivalents and restricted cash at the end of each period (in thousands):
Cash, cash equivalents and restricted cash at
end of period.................................................... $
2,248 $ 19,479 $ 12,465
Cash from operating activities ............................ $ 294,379 $ 309,567 $ 254,351
Cash used in investing activities......................... $(177,082) $(198,594) $(180,803)
Cash used in financing activities ........................ $(134,528) $(103,959) $(197,152)
Fiscal 2018 Fiscal 2017 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, cash equivalents
and restricted cash, and cash anticipated to be generated from operations will be sufficient to meet our
anticipated cash needs for at least the next 12 months, and we may continue to use borrowings under our
Amended and Restated Credit Agreement as discussed in Note 12, “Long-Term Debt” 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, cash equivalents and restricted cash position
benefits from the fact that we generally collect cash from sales to customers the same day or, in the case
of credit or debit card transactions, within days from the related sale.
Operating Activities
Cash flows from operating activities decreased $15.2 million to $294.4 million in 2018 compared to
$309.6 million in 2017. The decrease in cash flows from operating activities is primarily a result of
changes in working capital, partially offset by higher non-cash depreciation and amortization.
Cash flows from operating activities increased $55.2 million to $309.6 million for 2017 compared to
$254.4 million for 2016. The increase in cash flows from operating primarily relates to working capital
improvements and higher non-cash expense depreciation and amortization expenses, partially offset by
lower net income in 2017.
Cash flows from/ (used in) operating activities from changes in working capital was ($38.0) million in
2018, compared to $19.3 million in 2017 and ($18.2) million in 2016. The decrease in cash flows from
operating activities for changes in working capital in 2018, compared to 2017 was primarily due to a net
decrease in accounts payable and accrued liabilities.
50
Investing Activities
Cash flows used in investing activities consist primarily of capital expenditures in new stores,
including leasehold improvements and store equipment, capital expenditures to maintain the appearance
of our stores, sales enhancing initiatives and other corporate investments. Cash flows used in investing
activities were $177.1 million, $198.6 million, and $180.8 million for 2018, 2017, and 2016, respectively.
The decrease in cash flows used in investing activities is primarily due to fewer stores under construction
in 2018 as compared to 2017.
We expect capital expenditures to be in the range of $170 - $175 million in 2019, including
expenditures incurred to date, net of estimated landlord tenant improvement allowances, primarily to fund
investments in new stores, remodels, maintenance capital expenditures and corporate capital
expenditures. We expect to fund our capital expenditures with cash on hand, cash generated from
operating activities and, if required, borrowings under our Amended and Restated Credit Agreement.
Financing Activities
Cash flows used in financing activities were $134.5 million for 2018 compared to $104.0 million for
2017. During 2018, cash flows used in financing activities consisted of $258.3 million for stock
repurchases, $4.5 million cash paid for capital and financing lease obligations, partially offset by $105
million of net borrowings on the Amended and Restated Credit Agreement, $21.8 million in proceeds from
the exercise of stock options and $3.6 million from cash received from landlords related to finance lease
obligations.
During 2017, cash flows used in financing activities consisted of $203.4 million for stock
repurchases, $4.2 million cash paid for capital and financing lease obligations, partially offset by $93
million of net borrowings on the Former Credit Facility, $9.3 million in proceeds from the exercise of stock
options and $1.3 million from cash received from landlords related to finance lease obligations.
During 2016, cash flows used in financing activities consisted of $294.3 million for stock
repurchases, $4.4 million cash paid for capital and financing lease obligations, partially offset by $95
million of net borrowings on the Former 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.
Long-term Debt and Credit Facilities
Long-term debt increased $105.0 million to $453.0 million as of December 30, 2018, compared to
December 31, 2017. The increase in 2018, compared to 2017, resulted primarily from $105.0 million of
net borrowings under our Amended and Restated Credit Agreement used to fund our share repurchase
programs.
Long-term debt increased $93.0 million to $348.0 million as of December 31, 2017, compared to
January 1, 2017. The increase in 2017, compared to 2016, resulted primarily from $93.0 million of net
borrowings under our Former Credit Facility used to fund our share repurchase programs.
See Note 12, “Long-Term Debt” of our audited consolidated financial statements for a description of
our Amended and Restated Credit Agreement and our Former Credit Facility (as defined therein).
51
Share Repurchase Program
On November 4, 2015, our 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,
our board of directors authorized a $250 million common stock share repurchase program, which was
completed during the first quarter of 2017. On February 20, 2017, our board of directors authorized a
$250 million common stock share repurchase program, which was completed during the second quarter
of 2018. On February 20, 2018, our board of directors authorized a new $350 million common stock share
repurchase program, of which $218.3 million remained available as of December 30, 2018. The following
table outlines the share repurchase programs authorized by our board, and the related repurchase
activity and available authorization as of December 30, 2018 (in thousands):
Effective date
November 4, 2015
September 6, 2016
February 20, 2017
February 20, 2018
Expiration date
November 4, 2017
December 31, 2017
December 31, 2018
December 31, 2019
Amount
Cost of
authorized
repurchases
Authorization
available
$
$
$
$
150,000 $
250,000 $
250,000 $
350,000 $
150,000 $
250,000 $
250,000 $
131,707 $
—
—
—
218,293
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 our company 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 Former Credit Facility and Amended and Restated Credit
Agreement to assist with the repurchase programs. 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
(total cost in thousands):
Number of common shares acquired ............................... 11,096,595 9,696,819
Average price per common share acquired ..................... $
20.98
258,307 $ 203,392
Total cost of common shares acquired ............................ $
23.28 $
Year Ended
December 30,
2018
December 31,
2017
Shares purchased under our repurchase programs were subsequently retired.
Subsequent to December 30, 2018 and through February 18, 2019, we repurchased an additional
0.9 million shares of common stock for a total investment of $20.3 million year-to-date.
Factors Affecting Liquidity
We can currently borrow under our Amended and Restated Credit Agreement, up to an initial
aggregate commitment of $700.0 million, which may be increased from time to time pursuant to an
expansion feature set forth in the Amended and Restated Credit Agreement. We are currently utilizing
borrowings under our Amended and Restated Credit Agreement to fund our share repurchase program
described above. The interest rate we pay on our borrowings increases as our leverage ratio increases.
52
The Amended and Restated Credit Agreement contains financial, affirmative and negative
covenants. The negative covenants include, among other things, limitations on our ability to:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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 Amended and Restated Credit Agreement requires that we and our subsidiaries
maintain a maximum total net leverage ratio not to exceed 3.25 to 1.00 and minimum interest coverage
ratio not to be less than 1.75 to 1.00. Each of these covenants is tested on the last day of each fiscal
quarter, starting with the fiscal quarter ended April 1, 2018.
We were in compliance with all applicable covenants under the Amended and Restated Credit
Agreement as of December 30, 2018.
Our Amended and Restated 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 December 30, 2018, and the effect
such obligations are expected to have on our liquidity and cash flow in future periods:
Payments Due by Period
Total
Less Than
1 Year
1-3 Years 3-5 Years
More Than
5 Years
(in thousands)
$700.0 million Credit Agreement (1) ................ $ 453,000 $
Interest payments on $700.0 million Credit
Agreement (2) ...............................................
—
123,134 16,573 32,249 26,841 47,471
Capital and financing lease obligations (3) ......
Operating lease obligations (3) ........................ 1,744,337 167,595 357,780 325,688 893,274
—
Purchase commitments (4) ..............................
Totals (5) ..................................................... $2,420,308 $211,317 $436,612 $831,634 $940,745
78,243 17,952 37,120 23,171
— $453,000 $
21,594
2,934
9,463
9,197
— $
—
(1)
The Amended and Restated Credit Agreement is scheduled to mature and the commitments
thereunder will terminate on March 27, 2023, subject to extensions as set forth therein. These
borrowings are reflected in the “3-5 Years” column and discussed in the financing activities section
above. See Note 12, “Long-Term Debt” to our unaudited consolidated financial statements located
elsewhere in this Annual Report on Form 10-K.
53
(2) Represents estimated interest payments through the March 27, 2023 maturity date of our Amended
and Restated Credit Agreement based on the outstanding amounts as of December 30, 2018 and
based on LIBOR rates in effect at the time of this report, net of interest rate swaps.
(3) Represents estimated payments for capital and financing and operating lease obligations as of
December 30, 2018. 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 $1.5 million for the period of less than one year, $3.0 million for years one to three,
$2.5 million for years four to five, and $3.2 million for the period beyond five years.
(4) Consists primarily of purchase commitments under noncancelable service and supply contracts.
(5) As of December 30, 2018, we had recorded $47.6 million of liabilities related to our self-insurance
programs. Self-insurance liabilities are not included in the table above because the payments are
not contractual in nature and the timing of the payments is uncertain.
The contractual commitment amounts in the table above are associated with agreements that are
enforceable and legally binding. Obligations under contracts that we can cancel without a significant
penalty are not included in the table above.
We periodically make other commitments and become subject to other contractual obligations that
we believe to be routine in nature and incidental to the operation of the business. Management believes
that such routine commitments and contractual obligations do not have a material impact on our
business, financial condition or results of operations.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities, nor do we have any interest in
entities referred to as variable interest entities.
Impact of Deflation and Inflation
Deflation and inflation in the prices of food and other products we sell may periodically affect our
sales, gross profit and gross margin. Food deflation across multiple categories, particularly in produce,
could reduce sales growth and earnings if our competitors react by lowering their retail pricing and
expanding their promotional activities, which can lead to retail deflation higher than cost deflation that
could reduce our sales, gross profit margins and comparable store sales. Food inflation, when combined
with reduced consumer spending, could also reduce sales, gross profit margins and comparable store
sales. The short-term impact of deflation and inflation is largely dependent on whether or not the effects
are passed through to our customers, which is subject to competitive market conditions.
Food deflation and inflation is affected by a variety of factors and our determination of whether to
pass on the effects of deflation or inflation to our customers is made in conjunction with our overall pricing
and marketing strategies, as well as our competitors’ responses. Although we may experience periodic
effects on sales, gross profit, gross margins and cash flows as a result of changing prices, we do not
expect the effect of deflation or inflation to have a material impact on our ability to execute our long-term
business strategy.
54
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 share-
based awards and derivatives, 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, “Significant
Accounting Policies” 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 net
realizable value. The cost method is used for distribution center perishable and store perishable
department inventories by assigning costs to each of these items based on a first-in, first-out (“FIFO”)
basis (net of vendor discounts).
The Company’s non-perishable inventory is valued at the lower of cost or net realizable value 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 December 30, 2018 and December 31, 2017.
Share-Based Compensation
Under the provisions of ASC 718, share-based compensation expense is measured at the grant
date, based on the fair value of the award. Changes in these inputs and assumptions can materially affect
the measurement of the estimated fair value of our share-based compensation expense.
We will continue to use judgment in evaluating the assumptions related to our share-based
compensation on a prospective basis. If any of the assumptions used in the Black-Scholes model for
options valuation change significantly, share-based compensation for future awards may differ materially
compared with the awards granted previously. Refer to Note 26, “Share-Based Compensation” to our
audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for
further discussion of these assumptions.
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. Our qualitative
assessment considered factors including changes in the competitive market, budget-to-actual
performance, trends in market capitalization for us and our peers, lack of turnover in key management
personnel and overall changes in macroeconomic environment.
56
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.
Significant estimates and assumptions are made in connection with the estimated reporting unit and
intangible asset fair values, including projected cash flows, the timing of projected cash flows and
applicable discount rates. 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 or intangible assets
impairment charge.
No impairment of goodwill or indefinite-lived intangible assets was recorded during fiscal 2018, 2017
or 2016 because the fair value of those assets was substantially above carrying value.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment annually or whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable. This evaluation is performed at
the lowest level of identifiable cash flows independent of other assets. An impairment loss would be
recognized when estimated undiscounted future cash flows from the operation and/or disposition of the
assets are less than their carrying amount. Measurement of an impairment loss would be based on the
excess of the carrying amount of the asset group over its fair value. Fair value is measured using
discounted cash flows or independent opinions of value, as appropriate. We recorded an impairment loss
during 2018, primarily related to asset write-offs in connection with the closure of two underperforming
stores in the fourth quarter of 2018 (See Note 16, “Closed Store Reserves and Other Costs”). No
impairment was recorded during fiscal 2017 or 2016.
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. 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.
57
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
As described in Note 12, “Long-Term Debt” to our accompanying audited consolidated financial
statements located elsewhere in this Annual Report on Form 10-K, we have an Amended and Restated
Credit Agreement that bears interest at a rate based in part on LIBOR. Accordingly, we are exposed to
fluctuations in interest rates. Based on the $453.0 million principal outstanding under our Amended and
Restated Credit Agreement as of December 30, 2018, each hundred basis point change in LIBOR would
result in a change in interest expense by $4.5 million annually. We have entered into an interest rate
swap agreement in December 2017 to manage our cash flow associated with variable interest rates. The
notional dollar amount of the five outstanding swaps at December 30, 2018 and December 31, 2017 was
$250.0 million under which we pay a fixed rate and receive a variable rate of interest (cash flow swap).
Taking into account the interest rate swaps, based on the $453.0 million principal outstanding under our
Amended and Restated Credit Agreement as of December 30, 2018, each hundred basis point change in
LIBOR would result in a change in interest expense by $2.0 million annually.
This sensitivity analysis assumes our mix of financial instruments and all other variables will remain
constant in future periods. These assumptions are made in order to facilitate the analysis and are not
necessarily indicative of our future intentions.
We do not enter into derivative financial instruments for trading purposes (see Note 22, “Derivative
Financial Instruments”).
58
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 December 30, 2018 and December 31, 2017 ...............................
Consolidated Statements of Income for the fiscal years ended December 30, 2018, December 31,
2017 and January 1, 2017 .................................................................................................................
Consolidated Statements of Comprehensive Income for the fiscal years ended December 30, 2018,
December 31, 2017 and January 1, 2017 .........................................................................................
Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 30, 2018,
60
62
63
64
December 31, 2017 and January 1, 2017 .........................................................................................
65
Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2018, December
31, 2017 and January 1, 2017 ...........................................................................................................
Notes to Consolidated Financial Statements .........................................................................................
66
67
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Sprouts Farmers Market, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Sprouts Farmers Market, Inc. and its
subsidiaries (the “Company”) as of December 30, 2018 and December 31, 2017, and the related
consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each
of the three years in the period ended December 30, 2018, including the related notes (collectively
referred to as the “consolidated financial statements”). We also have audited the Company's internal
control over financial reporting as of December 30, 2018, based on criteria established in Internal Control
- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 30, 2018 and December 31, 2017, and
the results of its operations and its cash flows for each of the three years in the period ended December
30, 2018 in conformity with accounting principles generally accepted in the United States of America. Also
in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 30, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in
which it accounts for certain store occupancy, buying costs, depreciation and amortization expense, direct
store expenses and store pre-opening costs.
Basis for Opinions
The Company's management is responsible for these consolidated 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 the Company’s consolidated financial statements and on the Company's internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. 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
60
performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
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 21, 2019
We have served as the Company’s auditor since 2011.
61
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 30,
2018
December 31,
2017
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...................................................................................................
19,479
25,893
229,542
24,593
299,507
713,031
196,205
368,078
4,782
Total assets............................................................................................... $ 1,675,614 $ 1,581,603
1,588 $
40,564
264,366
27,323
333,841
766,429
194,803
368,078
12,463
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities ......................................... $
Accrued salaries and benefits...................................................................
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...........................................................................
253,969 $
48,603
7,428
310,000
119,642
453,000
153,377
50,399
Total liabilities ........................................................................................... 1,086,418
244,853
45,623
9,238
299,714
125,489
348,000
130,640
27,066
930,909
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,
124,975,691 shares issued and outstanding, December 30, 2018;
132,823,981 shares issued and outstanding, December 31, 2017;.......
Additional paid-in capital ...........................................................................
Accumulated other comprehensive income (loss) ....................................
(Accumulated deficit) retained earnings....................................................
Total stockholders’ equity ..............................................................................
132
620,788
(784)
30,558
650,694
Total liabilities and stockholders’ equity ................................................... $ 1,675,614 $ 1,581,603
124
657,140
1,134
(69,202)
589,196
—
—
The accompanying notes are an integral part of these consolidated financial statements.
62
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ......................................................................................
Cost of sales ................................................................................
Gross profit..............................................................................
Selling, general and administrative expenses..............................
Depreciation and amortization (exclusive of depreciation included
in cost of sales) .........................................................................
Store closure and other costs ......................................................
Income from operations ..........................................................
Interest expense...........................................................................
Other income................................................................................
Income before income taxes ...................................................
Income tax provision ....................................................................
Net income ..............................................................................
Net income per share:
Basic .......................................................................................
Diluted .....................................................................................
Weighted average shares outstanding:
December 30,
2018 (1)
Year Ended
December 31,
2017 (1)
$ 5,207,336 $ 4,664,612 $4,046,385
3,459,861 3,097,582 2,682,937
1,747,475 1,567,030 1,363,448
1,404,443 1,245,640 1,071,995
January 1,
2017 (1)
108,045
12,076
222,911
(27,435)
320
195,796
(37,260)
158,536 $
94,194
78,293
1,126
228
226,070
212,932
(21,177)
(14,794)
625
454
205,518
198,592
(74,286)
(47,078)
158,440 $ 124,306
1.23 $
1.22 $
1.17 $
1.15 $
0.84
0.83
$
$
$
Basic .......................................................................................
Diluted .....................................................................................
128,827
129,776
135,169
137,884
147,311
149,653
(1) Effective in the fourth quarter of fiscal 2018, the Company made a change in accounting principle to
change the classification of certain expenses on its consolidated statements of income. The change
is applied retrospectively to all periods presented. See Note 3, “Significant Accounting Policies” for
further information.
The accompanying notes are an integral part of these consolidated financial statements.
63
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
Net income ...................................................................
Other comprehensive income (loss), net of tax
Unrealized gain (losses) on cash flow hedging
activities, net of income tax of $663, ($271),
and $0........................................................................
Total other comprehensive income (loss)................
Comprehensive income................................................
December 30,
2018
158,536
$
Year Ended
December 31,
2017
158,440
$
January 1,
2017
124,306
$
1,918
1,918
160,454
$
$
$
$
(784)
(784)
157,656
$
$
—
—
124,306
The accompanying notes are an integral part of these consolidated financial statements.
64
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balances at January 3,
2016........................................
Net income ................................
Issuance of shares under stock
plans .......................................
Repurchase and retirement of
common stock ........................
Excess tax benefit for exercise
of options ................................
Share-based compensation.......
Balances at January 1,
2017........................................
Net income ................................
Other comprehensive income
(loss).......................................
Issuance of shares under stock
plans .......................................
Repurchase and retirement of
common stock ........................
Share-based compensation.......
Balances at December 31,
2017........................................
Net income ................................
Other comprehensive income
(loss).......................................
Issuance of shares under stock
plans .......................................
Repurchase and retirement of
common stock ........................
Share-based compensation.......
Balances at December 30,
2018........................................
Shares
Common
Stock
Additional
Paid-in
Capital
(Accumulated
Deficit)
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Total
Stockholders’
Equity
152,577,884 $
—
153 $
—
577,393 $
—
245,446 $
124,306
— $
—
822,992
124,306
666,841
—
2,740
—
—
2,740
(13,242,483)
(13)
—
(294,252)
—
(294,265)
—
—
—
—
3,737
13,399
—
—
—
—
3,737
13,399
140,002,242 $
—
140 $
—
597,269 $
—
75,500 $
158,440
— $
—
672,909
158,440
—
—
—
2,144,669
2
9,298
—
—
(784)
(784)
—
9,300
(9,696,819)
—
(10)
—
—
14,221
(203,382)
—
—
—
(203,392)
14,221
132,450,092 $
—
132 $
—
620,788 $
—
30,558
158,536
(784) $
—
650,694
158,536
—
—
—
3,227,693
3
21,840
—
—
1,918
1,918
—
21,843
(11,096,595)
—
(11)
—
—
14,512
(258,296)
—
—
—
(258,307)
14,512
124,581,190 $
124 $
657,140 $
(69,202) $
1,134 $
589,196
The accompanying notes are an integral part of these consolidated financial statements.
65
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 ..........................................................
Amortization of financing fees and debt issuance costs..................................
Loss on disposal of property and equipment...................................................
Store closure and other costs..........................................................................
Share-based compensation ............................................................................
Deferred income taxes ....................................................................................
Changes in operating assets and liabilities:
Accounts receivable ..................................................................................
Inventories.................................................................................................
Prepaid expenses and other current assets..............................................
Other assets ..............................................................................................
Accounts payable and other accrued liabilities .........................................
Accrued salaries and benefits ...................................................................
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.....................................................
Purchase of leasehold interests ............................................................................
Cash flows used in investing activities ................................................
Cash flows from financing activities
Proceeds from revolving credit facilities ................................................................
Payments on revolving credit facilities...................................................................
Payments on capital and financing lease obligations ............................................
Payments of deferred financing costs ...................................................................
Cash from landlord related to capital and financing lease obligations...................
Repurchase of common stock ...............................................................................
Proceeds from exercise of stock options...............................................................
Excess tax benefit for exercise of stock options....................................................
Other......................................................................................................................
Cash flows used in financing activities................................................
(Decrease) increase in cash, cash equivalents, and restricted
cash..................................................................................................
Cash, cash equivalents, and restricted cash at beginning of the period ...............
Cash, cash equivalents, and restricted cash 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 .......................
December 30,
2018
Year Ended
December 31,
2017
January 1,
2017
$
158,536 $
158,440 $
124,306
110,749
799
683
4,115
14,512
23,333
(7,666)
(34,824)
(2,908)
(5,086)
4,366
3,039
24,731
294,379
(177,083)
1
—
(177,082)
233,000
(128,000)
(4,517)
(2,131)
3,643
(258,307)
21,843
—
(59)
(134,528)
96,987
463
1,623
—
14,221
7,803
(4,920)
(25,079)
(2,733)
(114)
39,244
12,764
10,868
309,567
(198,624)
30
—
(198,594)
153,000
(60,000)
(4,192)
—
1,325
(203,392)
9,300
—
—
(103,959)
80,723
463
439
—
13,399
20,663
(4,803)
(39,030)
1,419
13,018
22,118
2,142
19,494
254,351
(181,018)
706
(491)
(180,803)
105,000
(10,000)
(4,364)
—
—
(294,265)
2,740
3,737
—
(197,152)
(17,231)
19,479
2,248 $
7,014
12,465
19,479 $
(123,604)
136,069
12,465
27,086 $
15,527
20,759 $
33,475
14,537
46,083
12,001 $
9,081
17,869 $
23,882
23,228
4,332
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
66
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 December 30, 2018, the
Company operated 313 stores in 19 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 the varieties of products it sells as perishable and non-perishable.
Perishable product categories include produce, meat, seafood, deli, bakery, floral and dairy and dairy
alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items,
frozen foods, beer and wine, and natural health and body care.
The following is a breakdown of the Company’s perishable and non-perishable sales mix:
Perishables.........................................................
Non-Perishables .................................................
57.5%
42.5%
58.0%
42.0%
58.1%
41.9%
2018
2017
2016
All dollar amounts are in thousands, unless otherwise indicated.
Certain prior period amounts have been reclassified, such as those relating to store occupancy,
buying, direct store expenses, pre-opening expenses and depreciation and amortization (exclusive of
depreciation included in cost of sales), due to the Company’s change in accounting principle in fiscal
2018. See Note 3, “Significant Accounting Policies” for further information.
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 2018 ended on December 30, 2018 and included 52-weeks.
Fiscal year 2017 ended on December 31, 2017 and included 52-weeks, fiscal year 2016 ended on
January 1, 2017 and included 52-weeks. Fiscal years 2018, 2017, and 2016 are referred to as 2018,
2017, and 2016, respectively.
67
Change in Accounting Principle
In the fourth quarter of fiscal 2018, the Company made a voluntary change in its accounting policy
for the classification of certain expenses. Historically, the Company has presented store occupancy costs
and buying costs in cost of goods sold. Under the new policy, the Company is presenting these
expenses within selling, general and administrative expenses (“SG&A”). In addition, the Company
changed the classification of depreciation and amortization (exclusive of supply chain-related depreciation
included in cost of sales) from direct store expenses (“DSE”) and SG&A to a separate financial statement
line item and combined DSE and store pre-opening costs into SG&A. These reclassifications had no
impact on sales, income from operations, net income or earnings per share. In addition, there was no
cumulative effect to retained earnings, equity, or net assets.
The Company made this voluntary change in accounting policy in order to better reflect the direct
costs of acquiring products and making them available to its customers in cost of sales. Store occupancy
costs and buying costs, which are largely sales and marketing driven, are more appropriately reflected in
SG&A. The new presentation of operating expenses now largely disaggregates cash from non-cash
operating expenses, which the Company believes provides better information to its financial statement
users. The Company believes these changes are preferable because they enhance the comparability of
its financial statements with those of many of its industry peers and align with how the Company internally
manages and reviews costs and margin. These changes in presentation have been retrospectively
applied to all prior periods. Refer to the tables below for the impact to the years currently presented:
Cost of sales ..................................................
Gross profit.....................................................
Direct store expenses ....................................
Selling, general and administrative
expenses.....................................................
Depreciation and amortization (exclusive of
depreciation included in cost of sales) ...........
Store pre-opening costs .................................
Year Ended December 31, 2017
Change in
Accounting
Unadjusted
As Adjusted
Principle
$3,314,487 $ (216,905) $3,097,582
216,905 1,567,030
1,350,125
—
(962,894)
962,894
148,408 1,097,232 1,245,640
—
11,627
94,194
(11,627)
94,194
—
Year Ended January 1, 2017
Change in
Accounting
Unadjusted
Principle As Adjusted
Cost of sales..................................................... $2,864,379 $(181,442) $2,682,937
Gross profit....................................................... 1,182,006 181,442 1,363,448
Direct store expenses.......................................
—
Selling, general and administrative
expenses .......................................................
Depreciation and amortization (exclusive of
depreciation included in cost of sales) .............
Store pre-opening costs ...................................
126,929 945,066 1,071,995
78,293
(12,974)
828,943 (828,943)
—
12,974
78,293
—
68
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 share-based awards and derivatives, and income taxes. Actual results
could differ from those estimates.
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. Deposits in transit includes sales through the end of the period, the
majority of which were paid with credit and debit cards and settle within a few days of the sales
transactions. The amounts due from banks for these transactions at each reporting date were as follows:
Due from banks for debit and credit card
transactions ................................................................... $
52,896 $
51,825
As Of
December 30,
2018
December 31,
2017
Restricted Cash
Restricted cash relates to the Company’s defined benefit plan forfeitures and the Company’s
healthcare plan benefits of approximately $0.7 million and $0.0 million as of December 30, 2018 and
December 31, 2017, respectively, and is included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets.
Accounts Receivable
Accounts receivable primarily represents billings to vendors for scan, advertising and other rebates,
and landlords for tenant allowances. Accounts receivable also includes receivables from the Company’s
insurance carrier for payments expected to be made in excess of self-insured retentions. The Company
provides an allowance for doubtful accounts when a specific account is determined uncollectible.
Inventories
Inventories consist of merchandise purchased for resale, which are stated at the lower of cost or net
realizable value. The cost method is used for distribution center 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 net realizable value 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 December 30, 2018 and December 31, 2017.
69
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 income. 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 the Company’s asset classes:
3 to 5 years
Computer hardware and software ......................................................
Furniture, fixtures and equipment.......................................................
7 to 20 years
Leasehold improvements ................................................................... up to 15 years
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
improvements and are amortized over the remaining lease term of the successful sites with which they
are associated.
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 other costs” in the
accompanying consolidated statements of income. See Note 16, “Closed Store Reserves and Other
Costs.”
Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance programs to provide for costs
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 are included in the liability, with a corresponding
amount recorded in accounts receivable.
70
Goodwill and Intangible Assets
Goodwill represents the cost of acquired businesses in excess of the fair value of assets and
liabilities acquired. The Company’s indefinite-lived intangible assets consist of trade names related to
“Sprouts Farmers Market” and liquor licenses. The Company also holds intangible assets with finite useful
lives, consisting of favorable and unfavorable leasehold interests and the “Sunflower Farmers Market”
trade name.
Goodwill is evaluated for impairment on an annual basis 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 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 has had no goodwill impairment charges for the past three fiscal years. 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.
71
Impairment of Long-Lived Assets
The Company assesses its long-lived assets, including property and equipment and finite-lived
intangible assets, for potential impairment each quarter based on whether certain triggering events have
occurred or changes in circumstances indicate that the carrying amount of an asset group may not be
recoverable. These events include current period losses combined with a history of losses or a projection
of continuing losses, a significant decrease in the market value of an asset or a significant negative
industry or economic trend. 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.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an
asset to the future undiscounted cash flows expected to be generated by that asset. If impairment is
indicated, a loss is recognized for any excess of the carrying value over the estimated fair value of the
asset group. The fair value is estimated based on the discounted future cash flows or comparable market
values, if available. The Company recorded an impairment loss during 2018 related to the write-off of
leasehold improvements, furniture, fixtures and equipment due to the two stores closed in the period; see
Note 16, “Closed Store Reserves and Other Costs”. No impairment was recognized in 2017 or 2016.
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 Amended and Restated Credit Agreement 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.
Lease Classification
The Company leases certain stores, distribution centers and administrative offices under operating
leases. The most significant estimates used by management in accounting for leases as operating or
capital is the incremental borrowing rate, the fair market value of the leased asset, and expected lease
term. The expected lease term includes both contractual lease periods and cancelable option periods
where failure to exercise such options would result in an economic penalty.
With certain leases, the Company is involved in the construction of the building (or certain significant
changes to an existing building), and the Company is considered owner of the building for accounting
purposes. As a result, the Company capitalizes the amount of the lessor’s total project costs incurred
during the construction period with a corresponding financing obligation. At the completion of the
construction project, the Company evaluates whether the transfer to the landlord meets the requirements
for sale-leaseback accounting treatment to determine if these assets and related financing obligation can
be derecognized. If the Company does not pass the criteria for sale-leaseback accounting, the leased
asset and financing obligation remain on its consolidated balance sheets, which are included with
“Property and equipment, net of accumulated depreciation” and “Capital and financing lease obligations”.
The Company allocates each lease payment between a reduction of the lease obligation and interest
expense using the effective interest method.
72
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 $1.9 million, $1.9 million and $1.8 million for the years
ended December 30, 2018, December 31, 2017 and January 1, 2017, respectively, for contingent rent.
Financing Lease Obligations
Financing lease obligations are recorded for store building leases in which the Company was
deemed to be the owner during the construction period under lease accounting guidance. Further, each
lease contains provisions indicating continuing involvement with the property at the end of the
construction period, which include either an affiliate guaranty or contingent collateral. As a result, in
accordance with applicable accounting guidance, buildings and related assets subject to the leases are
reflected on the Company’s balance sheets and depreciated over their remaining useful lives. The
present value of the lease payments associated with these buildings is recorded as financing lease
obligations.
Monthly lease payments are allocated between the land element of the lease (which is accounted
for as an operating lease) and the financing obligation. The financing obligation is amortized using the
effective interest method and the interest rate is determined in accordance with the requirements of sale-
leaseback accounting. Lease payments less the portion allocated to the land element of the lease and
that portion considered to be interest expense decrease the financing liability. At the end of the initial
lease term, should the Company decide not to renew the lease, the net book value of the asset and the
corresponding financing obligation would be reversed.
The outflows from the construction of the buildings are classified as investing activities, and the
outflows associated with the financing obligations principal payments and inflows from the associated
financing proceeds are classified as financing activities in the accompanying consolidated statements of
cash flows. See “Recently Issued Accounting Pronouncements Not Yet Adopted” below.
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.
73
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the
valuation of derivative instruments, impairment analysis of goodwill, intangible assets, and long-lived
assets.
Cash, cash equivalents and restricted cash, 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.
Derivative Financial Instruments
The Company records derivatives at fair value. The designation of a derivative instrument as a
hedge and its ability to meet the hedge accounting criteria determine how the Company reflects the
change in fair value of the derivative instrument in its financial statements. A derivative qualifies for hedge
accounting if, at inception, the derivative is expected to be highly effective in offsetting the underlying
hedged cash flows, and the Company fulfills the hedge documentation standards at the time it enters into
the derivative contract. The Company designates its hedge based on the exposure it is hedging. For
qualifying cash flow hedges, the Company records changes in fair value in other comprehensive income
(“OCI”). The Company releases the derivative’s gain or loss from OCI to match the timing of the
underlying hedged item’s effect on earnings.
The Company reviews the effectiveness of its hedging instruments quarterly. The Company
recognizes changes in the fair value for derivatives not designated as hedges or those not qualifying for
hedge accounting in current period earnings. The Company discontinues hedge accounting for any hedge
that is no longer evaluated to be highly effective.
The Company does not enter into derivative financial instruments for trading or speculative
purposes, and it monitors the financial stability and credit standing of its counterparties in these
transactions.
Share-Based Compensation
The Company measures share-based compensation cost at the grant date based on the fair value
of the award and recognizes share-based compensation cost as expense over the vesting period. As
share-based compensation expense recognized in the consolidated statements of income is based on
awards ultimately expected to vest, the amount of expense has been reduced for actual forfeitures as
they occur. The Company uses the Black-Scholes option-pricing model to determine the grant date fair
value for each option grant. The Black-Scholes option-pricing model requires extensive use of subjective
assumptions. See Note 26, “Share-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 share-based compensation and, consequently, the related amounts recognized in the
accompanying consolidated statements of income. 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
The Company adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts
with Customers” in the first quarter of fiscal year 2018, with a date of initial application of January 1, 2018,
using the modified retrospective approach. Comparative information presented has not been adjusted
and continues to be reported under ASC 605.
The Company applied ASC 606 to all of its contracts with customers. As a result of the adoption,
there is no impact to any financial statement line item, and the Company has recorded no impact to
opening retained earnings as of January 1, 2018.
74
The Company does not have any material contract assets or receivables from contracts with
customers, any revenue recognized in the current period from performance obligations satisfied in
previous periods, any contract performance obligations, or any material costs to obtain or fulfill a contract
as of December 30, 2018. The Company had a net gift card liability balance of $14.6 million as of
December 30, 2018 and $13.1 million as of December 31, 2017, of which $9.5 million was recognized as
revenue during the year ended December 30, 2018.
Revenue is recognized at the point of sale. The Company’s performance obligations are satisfied
upon the transfer of goods to the customer, at the point of sale, and payment from customers is also due
at the time of sale. 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 and the performance obligation is satisfied
by the Company.
The nature of goods the Company transfers to customers at the point of sale are inventories,
consisting of merchandise purchased for resale.
Cost of Sales
Cost of sales includes the cost of inventory sold during the period, including the direct costs of
purchased merchandise (net of discounts and allowances), distribution and supply chain costs, supplies
and depreciation and amortization for distribution centers and supply chain related assets. 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 as
the inventory is sold.
The Company’s largest supplier accounted for approximately 34%, 34% and 33% of total purchases
during 2018, 2017, and 2016, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of salaries, wages and benefits costs,
share-based compensation, occupancy costs (including rent, property taxes, utilities, common area
maintenance and insurance), advertising costs, buying cost, pre-opening and other administrative costs.
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 $50.2 million, $42.3 million and $37.0 million for 2018, 2017 and 2016,
respectively.
Depreciation and amortization
Depreciation and amortization expense (exclusive of depreciation included in cost of sales) primarily
consists of depreciation and amortization for buildings, store leasehold improvements, and equipment.
75
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 basis 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, RSAs, and
RSUs.
Comprehensive Income
Comprehensive income consists of net income and the unrealized gains or losses on derivative
instruments that qualify for and have been designated as cash flow hedges, for all periods presented.
Recently Adopted Accounting Pronouncements
Revenue
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“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. The Company adopted ASC 606 effective January 1, 2018 using the modified
retrospective approach. As noted above, there is no impact to any financial statement line item as a result
of the adoption, and the Company has recorded no impact to opening retained earnings as of January 1,
2018. The Company has added additional disclosures of disaggregated revenue by type in Note 25,
“Segments.”
76
Liabilities – Extinguishments of Liabilities
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. The guidance was effective for the Company for its
fiscal year 2018. The Company adopted this guidance using the modified retrospective approach. There
is no impact to any financial statement line item as a result of the adoption, and the Company recorded
no impact to opening retained earnings as of January 1, 2018.
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments
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.
Adoption of this guidance took place during the first quarter of fiscal year 2018, using the retrospective
transition method, and the adoption had no impact on the Company’s consolidated financial statements or
disclosures.
Statement of Cash Flows – Restricted Cash
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230):
Restricted Cash.” The amendments in this update require that a statement of cash flows explain the
change during the period in the total of cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Adoption of
this guidance took place retrospectively during the first quarter of 2018, and the adoption did not have a
material impact on the Company’s consolidated financial statements or disclosures.
Stock Compensation – Scope of Modification Accounting
In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic
718): Scope of Modification Accounting.” The amendments in this update provide guidance about which
changes to the terms or conditions of a share-based award require an entity to apply modification
accounting in Topic 718. Adoption of this guidance took place prospectively during the first quarter 2018,
and the adoption did not have an impact on the Company’s consolidated financial statements or
disclosures.
Intangibles – Internal-Use Software
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles —Goodwill and Other —Internal-
Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract.” The amendments in this update align the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-
use software (and hosting arrangements that include internal-use software license). The amendments
require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic
350-40 to determine which service contract implementation costs to capitalize as an asset and which
costs to expense. The amendments also require the entity to expense the capitalized implementation
costs of a hosting arrangement that is a service contract over the term of the hosting arrangements,
77
which includes reasonably certain renewals. The Company adopted this guidance during the third quarter
2018 using the prospective transition approach. Adoption of the guidance did not have a material impact
to the Company's financial statements and resulted in capitalization of implementation costs associated
with various technology initiatives which are included in other assets in the accompanying consolidated
balance sheet as of December 30, 2018.
Recently Issued Accounting Pronouncements Not Yet Adopted
Leases
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. Certain additional quantitative and qualitative disclosures
will also be required.
The Company adopted the standard as of December 31, 2018, the first day of fiscal 2019. The
Company will elect the package of practical expedients permitted under the transition guidance within the
new standard, which among other things, permits companies not to reassess prior conclusions about
lease identification, lease classification and initial direct costs. The Company did not elect the hindsight
practical expedient.
The adoption of the standard will result in the recognition of operating lease assets and liabilities of
approximately $1.0 billion to $1.2 billion based on the lease portfolio as of December 31, 2018, including
recognition of operating lease assets and liabilities for certain third party operated distribution center
locations. In addition, all leases that were accounted for as financing leases will be classified as
operating leases in accordance with the new standard as of the transition date, resulting in the
derecognition of approximately $115 million of existing financing lease obligations and related assets.
This reclassification will also result in the recognition of rent expense which was previously reported as
interest expense under the former failed sale-leaseback guidance. The adoption of this standard is not
expected to have a material impact on the Company’s liquidity or cash flows.
Intangibles – Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment.” The amendments in this update eliminate the second step
of the goodwill impairment test and provide that an entity will apply a one-step quantitative test and record
the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value,
not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not
amend the optional qualitative assessment of goodwill impairment. The guidance will be effective for the
Company for its fiscal year 2020, with early adoption permitted. The Company does not expect this ASU
to materially impact the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation —Retirement Benefits —
Defined Benefit Plans —General (Subtopic 715-20) —Disclosure Framework —Changes to the
Disclosure Requirements for Defined Benefit Plans.” The amendments in this update remove disclosures
that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add
disclosure requirements identified as relevant. The guidance will be effective for the Company for its fiscal
year 2020, with early adoption permitted. The Company does not expect this ASU to materially impact
the Company’s disclosures.
No other new accounting pronouncements issued or effective during fiscal 2018 had, or are
expected to have, a material impact on the Company’s consolidated financial statements.
78
4. Accounts Receivable
A summary of accounts receivable is as follows:
As Of
December 30,
2018
December 31,
2017
Vendors ........................................................................... $
Insurance.........................................................................
Landlords.........................................................................
Supply rebates.................................................................
Other................................................................................
Total................................................................................. $
20,589 $
11,320
5,031
1,400
2,224
40,564 $
17,500
1,137
4,290
17
2,949
25,893
The Company had recorded allowances for certain vendor receivables of $0.4 million and $0.1
million at December 30, 2018 and December 31, 2017, respectively.
5. Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets is as follows:
As Of
Prepaid rent ..................................................................... $
Prepaid expenses............................................................
Fair value of hedge..........................................................
Restricted cash................................................................
Income tax receivable......................................................
Other current assets ........................................................
Total................................................................................. $
December 30,
2018
16,935 $
7,806
944
660
414
564
27,323 $
December 31,
2017
14,785
9,354
—
—
—
454
24,593
6. Property and Equipment
A summary of property and equipment, net is as follows:
As Of
Land and buildings .......................................................... $
Furniture, fixtures and equipment....................................
Leasehold improvements ................................................
Construction in progress..................................................
December 31,
2017
151,309
491,990
401,237
52,100
Total property and equipment..................................... 1,249,298 1,096,636
(383,605)
713,031
Accumulated depreciation and amortization....................
Property and equipment, net ...................................... $
December 30,
2018
162,084 $
579,673
473,728
33,813
(482,869)
766,429 $
79
A summary of leased property and equipment under capital and financing lease obligations is as
follows:
As Of
December 30,
2018
December 31,
2017
Capital leases—buildings
Gross asset balance.................................................
Accumulated depreciation ........................................
Net .......................................................................
$
$
16,745 $
(5,502)
11,243 $
16,745
(4,257)
12,488
Financing leases
Gross asset balance.................................................
Accumulated depreciation ........................................
Net .......................................................................
146,385
(21,685)
151,599
(17,941)
$ 124,700 $ 133,658
Depreciation expense was $110.3 million, $96.6 million and $80.2 million for 2018, 2017 and 2016,
respectively. Depreciation expense is primarily reflected in depreciation and amortization on the
consolidated statements of income.
7. Intangible Assets
A summary of the activity and balances in intangible assets is as follows:
Gross Intangible Assets
Indefinite-lived trade names .............................
Indefinite-lived liquor licenses ..........................
Finite-lived trade names ...................................
Leasehold interests ..........................................
Total intangible assets.................................
Accumulated Amortization
Finite-lived trade names ...................................
Leasehold interests ..........................................
Total accumulated amortization ..................
Balance at
January 1,
2017
Additions
Balance at
December 31,
2017
$ 182,937 $
2,023
1,800
18,773
$ 205,533 $
— $
—
—
—
— $
182,937
2,023
1,800
18,773
205,533
$
(825) $
(7,100)
(180) $
(1,223)
$ (7,925) $ (1,403) $
(1,005)
(8,323)
(9,328)
Balance at
December 31,
2017
Balance at
December 30,
2018
Additions
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
18,773
205,533 $
— $
—
—
—
— $
182,937
2,023
1,800
18,773
205,533
(180) $
(1,005) $
(8,323)
(1,222)
(9,328) $ (1,402) $
(1,185)
(9,545)
(10,730)
80
Amortization expense was $1.4 million, $1.4 million and $1.5 million for 2018, 2017 and 2016,
respectively. Future amortization associated with the net carrying amount of finite-lived intangible assets
is as follows:
2019 ...................................................................................................
2020 ...................................................................................................
2021 ...................................................................................................
2022 ...................................................................................................
2023 ...................................................................................................
Thereafter ...........................................................................................
Total amortization ............................................................................... $
1,386
1,375
1,339
1,189
1,040
3,514
9,843
The remaining weighted-average amortization period of leasehold interests acquired total 9.2 years.
The remaining amortization period of the finite-lived trade name is 3.4 years.
8. Goodwill
The Company’s goodwill balance was $368.1 million as of December 30, 2018, December 31, 2017
and January 1, 2017. As of December 30, 2018, December 31, 2017 and January 1, 2017, 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:
As Of
Other assets .................................................................... $
Total................................................................................. $
December 30,
2018
12,463 $
12,463 $
December 31,
2017
4,782
4,782
As of December 30, 2018, other assets primarily consist of deferred software as a service, deferred
financing costs, sublease deferred rent and miscellaneous other assets. As of December 31, 2017, the
balance primarily consists of claim amounts in excess of self-insurance retentions to be paid by the
Company’s insurance provider (see Note 14, “Self-Insurance Programs”), sublease deferred rent and
miscellaneous other assets.
10. Accounts Payable and Other Accrued Liabilities
A summary of accounts payable and other accrued liabilities is as follows:
As Of
Trade accounts payable...................................................... $
Accrued occupancy related (CAM, property taxes, etc.) ....
Self-insurance reserves ......................................................
Gift cards, net of breakage..................................................
Capital expenditures............................................................
Other....................................................................................
Total..................................................................................... $
December 30,
2018
120,265 $
27,062
23,818
14,629
7,241
60,954
253,969 $
December 31,
2017
119,034
21,766
19,714
13,099
16,409
54,831
244,853
81
11. Accrued Salaries and Benefits
A summary of accrued salaries and benefits is as follows:
As Of
December 30,
2018
December 31,
2017
Bonuses ....................................
Payroll .......................................
Vacation ....................................
Severance and other.................
Total .......................................... $
17,333
14,078
11,679
5,513
48,603 $
16,957
14,906
12,281
1,479
45,623
12. Long-Term Debt
A summary of long-term debt is as follows:
Facility
Senior secured debt
Maturity
Interest Rate
As Of
December 30,
2018
December 31,
2017
$700.0 million Credit Agreement .............. March 27, 2023
Former Credit Facility ............................... April 17, 2020
Variable $
Variable
Total debt......................................................
Long-term debt ............................................
$
453,000 $
—
453,000
453,000 $
—
348,000
348,000
348,000
Senior Secured Revolving Credit Facility
March 2018 Refinancing
On March 27, 2018, the Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC
(“Intermediate Holdings”), as borrower, entered into an amended and restated credit agreement (the
“Amended and Restated Credit Agreement”) to amend and restate the Company’s existing senior
secured credit facility, dated April 17, 2015 (the “Former Credit Facility”). The Amended and Restated
Credit Agreement provides for a revolving credit facility with an initial aggregate commitment of $700.0
million, an increase from $450.0 million from the Former Credit Facility, which may be increased from time
to time pursuant to an expansion feature set forth in the Amended and Restated Credit Agreement.
Concurrently with the closing of the Amended and Restated Credit Agreement, all commitments
under the Former Credit Facility were terminated, resulting in a $0.3 million loss on early extinguishment
of debt, recorded in interest expense during the first quarter of fiscal year 2018. The loss was due to the
write-off of a proportional amount of deferred financing costs associated with the Former Credit Facility as
the result of certain banks exiting the Amended and Restated Credit Agreement in connection with the
refinancing. No amounts were outstanding under the Former Credit Facility as of December 30, 2018.
The Company capitalized debt issuance costs of $2.1 million related to the refinancing which
combined with the remaining $0.7 million debt issuance costs for the Former Credit Facility, are being
amortized on a straight-line basis to interest expense over the five-year term of the Amended and
Restated Credit Agreement.
82
The Amended and Restated Credit Agreement also provides for a letter of credit subfacility and a
$15.0 million swingline facility. Letters of credit issued under the Amended and Restated Credit
Agreement reduce its borrowing capacity. Letters of credit totaling $27.0 million have been issued as of
December 30, 2018, primarily to support the Company’s insurance programs.
Guarantees
Obligations under the Amended and Restated Credit Agreement are guaranteed by the Company
and all of its current and future wholly-owned material domestic subsidiaries (other than the borrower),
and are secured by first-priority security interests in substantially all of the assets of the Company and its
subsidiary guarantors, including, without limitation, a pledge by the Company of its equity interest in
Intermediate Holdings.
Interest and Fees
Loans under the Amended and Restated Credit Agreement initially bear interest at LIBOR plus
1.50% per annum. The interest rate margins are subject to adjustment pursuant to a pricing grid based on
the Company’s total net leverage ratio, as set forth in the Amended and Restated Credit Agreement.
Under the terms of the Amended and Restated Credit Agreement, the Company is obligated to pay a
commitment fee on the available unused amount of the commitments between 0.15% to 0.30% per
annum, also pursuant to a pricing grid based on the Company’s total net leverage ratio.
The interest rate on approximately 55% of outstanding debt under the Amended and Restated
Credit Agreement is fixed, reflecting the effects of floating to fixed interest rate swaps (see Note 22,
“Derivative Financial Instruments”).
Outstanding letters of credit under the Amended and Restated Credit Agreement are subject to a
participation fee of 1.50% per annum and an issuance fee of 0.125% per annum.
Payments and Borrowings
The Amended and Restated Credit Agreement is scheduled to mature, and the commitments
thereunder will terminate on March 27, 2023, subject to extensions as set forth therein.
The Company may prepay loans and permanently reduce commitments under the Amended and
Restated Credit Agreement at any time in agreed-upon minimum principal amounts, without premium or
penalty (except LIBOR breakage costs, if applicable).
During fiscal year 2017, the Company borrowed $153.0 million under the Former Credit Facility to
be used in connection with the Company’s $250.0 million share repurchase program (see Note 20,
“Capital Stock”) and made a total of $60.0 million of principal payments; resulting in total outstanding debt
under the Former Credit Facility of $348.0 million at December 31, 2017. During 2018, the Company
borrowed an additional $233.0 million primarily for share repurchases and made a total of $128.0 million
of principal payments; resulting in total outstanding debt under the Amended and Restated Credit
Agreement of $453.0 million as of December 30, 2018.
Covenants
The Amended and Restated Credit Agreement contains financial, affirmative and negative
covenants. The negative covenants include, among other things, limitations on the Company’s ability to:
(cid:129)
(cid:129)
(cid:129)
incur additional indebtedness;
grant additional liens;
enter into sale-leaseback transactions;
83
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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 Amended and Restated Credit Agreement requires that the Company and its
subsidiaries maintain a maximum total net leverage ratio not to exceed 3.25 to 1.00 and minimum interest
coverage ratio not to be less than 1.75 to 1.00. Each of these covenants is tested on the last day of each
fiscal quarter, starting with the fiscal quarter ended April 1, 2018.
The Company was in compliance with all applicable covenants under the Amended and Restated
Credit Agreement as of December 30, 2018.
Former Credit Facility
On April 17, 2015, Intermediate Holdings, as borrower, entered into the Former Credit Facility that
provided for a revolving credit facility with an initial aggregate commitment of $450.0 million, subject to an
expansion feature set forth therein. The Former Credit Facility also provided for a letter of credit subfacility
and a $15.0 million swingline facility.
The Former Credit Facility was scheduled to mature, and the commitments thereunder were
scheduled to terminate, on April 17, 2020.
Loans under the Former Credit Facility bore interest, at the Company’s option, either at adjusted
LIBOR plus 1.50% per annum, or a base rate plus 0.50% per annum. The interest rate margins were
subject to adjustment pursuant to a pricing grid based on the Company’s total gross leverage ratio, as
defined in the Former Credit Facility. Under the terms of the Former Credit Facility, the Company was
obligated to pay a commitment fee on the available unused amount of the commitments equal to 0.20%
per annum.
13. Other Long-Term Liabilities
A summary of other long-term liabilities is as follows:
Unamortized lease incentives.......................................... $
Other................................................................................
Total................................................................................. $
73,709 $
79,668
153,377 $
60,942
69,698
130,640
As Of
December 30,
2018
December 31,
2017
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.
84
14. Self-Insurance Programs
The Company is self-insured for costs related to workers’ compensation, general liability and
employee health benefits up to certain stop-loss limits. The Company establishes reserves for the
ultimate obligation of reported and incurred but not reported (“IBNR”) claims. IBNR claims are estimated
using historical claim information, demographic factors, severity factors and other actuarial assumptions.
The Company purchases coverage from third-party insurers for exposures in excess of certain stop-
loss limits and recorded receivables of $2.6 million and a $2.6 million from its insurance carriers for
payments expected to be made in excess of self-insured retentions at December 30, 2018 and December
31, 2017, respectively. The Company recorded amounts for general liability and worker’s compensation
liabilities of $47.6 million and $42.5 million at December 30, 2018 and December 31, 2017, respectively.
See Note 10, “Accounts Payable and Other Accrued Liabilities” for current amounts recorded for general
liability and workers’ compensation liabilities.
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:
December 30,
2018
Year Ended
December 31,
2017
January 1,
2017
$
4,981 $
4,067 $
3,354
16. Closed Store Reserves and Other Costs
Closed Stores
The Company reviews the operating performance of individual stores on a regular basis. During the
fourth quarter of 2018, the Company decided to close two stores, one in Alabama and one in Georgia,
primarily due to store performance and geographic reasons. These two stores were subsequently closed
during December 2018.
As a result, in 2018 the Company has recorded a $3.4 million closed store reserve for future
operating lease payments and other occupancy costs associated with these two stores that are no longer
being utilized in the Company’s 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. The Company also recorded a $4.6 million impairment
charge primarily related to the write-off and disposal of the two stores’ long-lived assets, primarily
consisting of leasehold improvements, furniture, fixtures and equipment. These expenses are presented
in store closure and other costs on the Company’s consolidated statements of income.
85
A summary of closed store reserve activity is as follows:
As Of
December 30,
2018
December 31,
2017
Beginning balance.........................................................
Additions........................................................................
Usage ............................................................................
Adjustments...................................................................
Ending balance..............................................................
$
$
811 $
3,428
(426)
1,094
4,907 $
1,083
—
(492)
220
811
Executive Severance
During the year ended December 30, 2018, the Company recorded $3.6 million of severance
expense related to the separation of the former Chief Executive Officer. This expense was comprised of
$3.4 million of severance and $0.2 million associated with the modification of certain stock options and
awards, net of expense reversals related to the forfeited options and awards. See Note 26,” Share-Based
Compensation” for further information regarding the modifications.
17. Income Taxes
On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax
Act”) was enacted into law, which changes various corporate income tax provisions within the existing
Internal Revenue Code. Substantially all the provisions of the Tax Act are effective for taxable years
beginning after December 31, 2017. The most significant changes that impact the Company are the
reduction in the corporate federal income tax rate from 35% to 21% and 100% bonus depreciation for
qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.
In a manner consistent with ASC 740-10-25-47, the effect of a change in tax law or rates shall be
recognized at the date of enactment, accordingly, the Company accounted for the corporate federal
income tax rate reduction in the fourth quarter of 2017.
Under the guidance set forth in the SEC's Staff Accounting Bulletin No. 118 (“SAB 118”), the
Company may record provisional amounts for the impact of the Tax Act. As of the third quarter of 2018,
the Company had finalized its 2017 federal income tax return and as such, completed the accounting for
the income tax effects of the 2017 Tax Act. Any future adjustments required due to additional guidance or
changes in the interpretations of the Tax Act will be recorded as discrete adjustments to income tax
expense in the period when such changes occur.
The Company reduced its net deferred tax liability, resulting in a non-cash income tax benefit of
approximately $18.7 million in the fourth quarter of 2017. The Company realized an additional $2.6 million
non-cash income tax benefit in the third quarter of 2018 in the filing of the 2017 return related to the
reduction of federal corporate income tax rate. The Company changed its method of tax accounting on
certain items resulting in the acceleration of deductions into prior periods subject to a higher 35%
corporate income tax rate. The Company anticipates the issuance of guidance and regulations for various
provisions in the Tax Act which may have an impact on the amounts reflected in the 2017 and 2018
financial statements.
86
Income Tax Provision
The income tax provision consists of the following:
December 30,
2018
U.S. Federal—current .....................................
U.S. Federal—deferred ...................................
U.S. Federal—total..........................................
State—current .................................................
State—deferred...............................................
State—total .....................................................
Total provision.................................................
$
$
January 1,
2017
Year Ended
December 31,
2017
(31,667) $(44,588)
(6,551) (19,293)
(38,218) (63,881)
(9,036)
(7,337)
(1,523)
(1,369)
(8,860) (10,405)
(47,078) $(74,286)
(9,319) $
(19,441)
(28,760)
(5,271)
(3,229)
(8,500)
(37,260) $
Tax Rate Reconciliation
Income tax provision differed from the amounts computed by applying the U.S. federal income tax
rate to pre-tax income as a result of the following:
December
30, 2018
Year Ended
December
31, 2017
January
1, 2017
Federal statutory rate .........................................
Increase (decrease) in income taxes resulting
from:
State income taxes, net of federal benefit .....
Tax Act benefit...............................................
Excess tax benefits from share based
payments ....................................................
Tax calculation method change.....................
Unrecognized tax benefits .............................
Other, net.......................................................
Effective tax rate.................................................
21.00%
35.00%
35.00%
3.78
—
3.20
(9.10)
3.73
—
(5.17)
(1.31)
1.46
(0.73)
19.03%
(4.33)
—
(0.01)
(1.85)
22.91%
—
—
0.04
(1.36)
37.41%
The effective income tax rate decreased to 19.03% in 2018 from 22.91% in 2017 primarily due to
the recognition of excess tax benefits related to the exercise or vesting of share-based awards in the
income tax provision resulting from the adoption of ASU 2016-09 and the realization of a benefit
associated with accelerating deductions into prior periods subject to the higher 35% federal corporate
income tax rate. This decrease is offset by an increase in the Company’s accrual for unrecognized tax
benefits as discussed below. The effective income tax rate decreased to 22.91% in 2017 from 37.41% in
2016 primarily due to the enactment of the Tax Act as disclosed above and the recognition of excess tax
benefits related to the exercise or vesting of share-based awards in the income tax provision resulting
from the adoption of ASU 2016-09.
Excess tax benefits associated with share-based payment awards are recognized as income tax
expense or benefit in the income statement. The tax effects of exercised or vested awards are treated as
discrete items in the reporting period in which they occur. The income tax benefits resulting from share-
based awards were $12.4 million and $9.9 million for 2018 and 2017 and are reflected as a reduction to
the respective 2018 and 2017 income tax provision. The income tax benefits resulting from share-based
awards were $3.7 million for 2016 and were recorded in Additional Paid-in Capital under prior accounting
guidance.
87
Deferred Taxes
Significant components of the Company’s deferred tax assets and deferred tax liabilities are as
follows:
As Of
December 30,
2018
December 31,
2017
Deferred tax assets
Employee benefits....................................................
Tax credits................................................................
Lease related............................................................
Other accrued liabilities ............................................
Charitable contribution carryforward ........................
Inventories and other................................................
Total gross deferred tax assets ...........................
$
17,879 $
413
65,141
4,456
10,799
1,333
100,021
20,332
410
61,489
5,605
12,800
1,844
102,480
Deferred tax liabilities
Depreciation and amortization..................................
Intangible assets ......................................................
Total gross deferred tax liabilities ........................
Net deferred tax (liability) / asset .........................
$
(123,543)
(26,877)
(150,420)
(50,399) $
(109,245)
(20,301)
(129,546)
(27,066)
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
December 30, 2018 and December 31, 2017.
The Company applies the authoritative accounting guidance under ASC 740 for the recognition,
measurement, classification and disclosure of uncertain tax positions taken or expected to be taken in a
tax return.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
As Of
December 30,
2018
December 31,
2017
January 1,
2017
Beginning balance............................................ $
Additions based on tax positions related to the
current year ...................................................
Reductions for tax positions for prior years ......
Ending balance................................................. $
794 $
819 $
737
2,864
3,658 $
95
(120)
794 $
104
(22)
819
The Company had unrecognized tax benefits (tax effected) of $3.7 million and $0.8 million as of
December 30, 2018 and December 31, 2017, respectively. These would impact the effective tax rate if
recognized.
88
The Company’s policy is to recognize accrued interest and penalties as a component of income tax
expense.
The Company anticipates a decrease in the total amount of unrecognized tax benefits during the
next twelve months related to depreciation for transaction cost allocation in the amount of $0.4 million.
The Company files income tax returns with federal and state tax authorities within the United States.
The general statute of limitations for income tax examinations remains open for federal tax returns for tax
years 2015 through 2017 and state tax returns for the tax years 2014 through 2017.
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 2018, 2017 and 2016, purchases from this company were $2.6
million, $10.9 million and $9.8 million, respectively. As of December 30, 2018, December 31, 2017 and
January 1, 2017, the Company had recorded accounts payable due to this vendor of $0.0 million, $0.7
million and $0.7 million, respectively. Effective January 1, 2019, this director no longer held an ownership
interest in the supplier.
The Company’s former Executive Chairman of the Board, who retired from this position in February
2017, has been the chief executive officer, an equity investor, and lender to a technology supplier to the
Company. During 2018, 2017 and 2016, purchases from this supplier and its predecessors were $6.7
million, $6.3 million and $7.9 million, respectively. As of December 30, 2018, December 31,
2017, January 1, 2017, the Company had recorded accounts payable due to the supplier of $0.6 million,
$0.1 million and $0.3 million, respectively.
19. Commitments and Contingencies
Operating Lease Commitments
The Company’s leases include stores, office and distribution centers. These leases had an average
remaining lease term of approximately nine years as of December 30, 2018.
Rent expense in 2018, 2017 and 2016 totaled $137.5 million, $120.5 million and $104.8 million,
respectively.
Future minimum lease obligations for operating leases with initial terms in excess of one year at
December 30, 2018 are as follows:
2019 ................................................................................................... $
2020 ...................................................................................................
2021 ...................................................................................................
2022 ...................................................................................................
2023 ...................................................................................................
Thereafter ...........................................................................................
Total payments ................................................................................... $
167,595
179,058
178,722
170,515
155,173
893,274
1,744,337
89
The Company has subtenant agreements under which it will receive rent as follows:
2019 ........................................................................ $
2020 ........................................................................
2021 ........................................................................
2022 ........................................................................
2023 ........................................................................
Thereafter................................................................
Total subtenant rent ................................................ $
1,544
1,623
1,384
1,290
1,190
3,158
10,189
Capital and Financing Lease Commitments
The Company is committed under certain capital and financing leases for rental of buildings and
equipment. These leases expire or become subject to renewal clauses at various dates from 2019 to
2034.
As of December 30, 2018, future minimum lease payments required by all capital and financing
leases during the initial lease term are as follows:
Fiscal Year
2019.................................................................................. $
2020..................................................................................
2021..................................................................................
2022..................................................................................
2023..................................................................................
Thereafter .........................................................................
Total .............................................................................
Plus balloon payment (financing leases) ..........................
Less amount representing interest ...................................
Net present value of capital and financing
lease obligations .......................................................
Less current potion ...........................................................
Total long-term.................................................................. $
Capital
Leases
Financing
Leases
1,692 $
1,591
1,591
1,662
1,697
12,202
20,435
—
(7,655)
14,881
14,865
14,202
12,538
10,944
35,269
102,699
93,629
(84,227)
12,780
(683)
112,101
(4,556)
12,097 $ 107,545
The table above does not include $2.2 million of current financing lease obligations expected to
pass sale-leaseback accounting during 2019. The final payment under the financing lease obligations is a
non-cash payment which represents the conveyance of the property to the buyer-lessor at the end of the
lease term, described as balloon payment in the table above.
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 self-insurance
obligations and litigation matters. 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 December 30, 2018, such future
purchase commitments consisted of $21.6 million.
90
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. After removal to federal court, the plaintiff sought remand,
which the court granted in March 2017. On May 25, 2017, the Company filed a Motion to Dismiss in the
Superior Court for the State of Arizona, which the court granted in part and denied in part by order
entered August 30, 2017. On August 4, 2018, the Company reached an agreement in principle to settle
these claims. The parties’ settlement agreement was granted preliminary approval by the court on
January 30, 2019, with a hearing for final approval scheduled for May 31, 2019. If approved by the court,
the settlement will be funded from the Company’s directors and officers liability insurance policy and will
not have a material impact on the Company’s consolidated financial statements.
20. Capital Stock
Common stock
As of December 30, 2018, 124,975,691 shares of the Company’s common stock were issued and
outstanding, including 394,501 restricted shares, after the repurchase and retirement of 11,096,595
shares during 2018 and the repurchase and retirement of 9,696,819 shares during 2017, as described
below. As of December 30, 2018, 5,390,634 shares of common stock are reserved for issuance under the
2013 Incentive Plan (see Note 26, “Share-Based Compensation”). The following table outlines the options
exercised in exchange for the issuance of shares of common stock during 2018, 2017, and 2016.
Options exercised...........
December 30,
2018
2,824,460
Year Ended
December 31,
2017
1,863,059
January 1,
2017
565,568
91
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 $250 million common stock share repurchase
program, which was completed during the first quarter of 2017. On February 20, 2017, the Company’s
board of directors authorized a $250 million common stock share repurchase program, which was
completed during the second quarter of 2018. On February 20, 2018, the Company’s board of directors
authorized a new $350 million common stock share repurchase program, of which $218.3 million
remained available as of December 30, 2018. The following table outlines the share repurchase programs
authorized by the board, and the related repurchase activity and available authorization as of December
30, 2018:
Effective date
November 4, 2015
September 6, 2016
February 20, 2017
February 20, 2018
Expiration date
November 4, 2017
December 31, 2017
December 31, 2018
December 31, 2019
Amount
Cost of
authorized
repurchases
Authorization
available
$
$
$
$
150,000 $
250,000 $
250,000 $
350,000 $
150,000 $
250,000 $
250,000 $
131,707 $
—
—
—
218,293
The shares under the Company’s repurchase programs may be purchased on a discretionary basis
from time to time prior to the applicable expiration date, subject to general business and market
conditions and other investment opportunities, through open market purchases, privately negotiated
transactions, or other means, including through Rule 10b5-1 trading plans. The board’s authorization of
the share repurchase programs does not obligate the Company to acquire any particular amount of
common stock, and the repurchase programs may be commenced, suspended, or discontinued at any
time. The Company has used borrowings under its Former Credit Facility and Amended and Restated
Credit Agreement to assist with the repurchase programs (see Note 12, “Long-Term Debt”).
Share repurchase activity under the Company’s repurchase programs for the periods indicated was
as follows (total cost in thousands):
Number of common shares acquired ............................... 11,096,595 9,696,819
20.98
Average price per common share acquired ..................... $
258,307 $ 203,392
Total cost of common shares acquired ............................ $
23.28 $
Shares purchased under the Company’s repurchase programs were subsequently retired.
Year Ended
December 30,
2018
December 31,
2017
92
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:
Net income ..................................................
Weighted average shares outstanding........
Basic net income per share ....................
Diluted net income per share:
Net income ..................................................
Weighted average shares outstanding........
Dilutive effect of share-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 ..............................
Diluted net income per share..................
December 30,
2018
Year Ended
December 31,
2017
January 1,
2017
$
$
$
158,536 $
128,827
1.23 $
158,440 $ 124,306
135,169 147,311
0.84
1.17 $
158,536 $
128,827
158,440 $ 124,306
135,169 147,311
429
220
136
164
2,378
142
119
76
2,232
58
17
35
129,776
1.22 $
137,884 149,653
0.83
1.15 $
$
The computation of diluted earnings per share for 2018 does not include 1,105,334 options and
128,854 PSAs as those awards were antidilutive. The computation of diluted earnings per share for 2017
does not include 1,908,262 options, 10,364 RSUs, and 148,944 PSAs as those awards were antidilutive.
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.
93
22. Derivative Financial Instruments
The Company entered into an interest rate swap agreement in December 2017 to manage its cash
flow associated with variable interest rates. This forward contract has been designated and qualifies as a
cash flow hedge, and its change in fair value is recorded as a component of other comprehensive income
and reclassified into earnings in the same period or periods in which the forecasted transaction occurs.
The forward contract consists of five cash flow hedges. To qualify as a hedge, the Company needs to
formally document, designate and assess the effectiveness of the transactions that receive hedge
accounting.
The notional dollar amount of the four outstanding swaps was $250.0 million at December 30, 2018,
under which the Company pays a fixed rate and receives a variable rate of interest (cash flow swap). The
cash flow swaps hedge the change in interest rates on debt related to fluctuations in interest rates and
each have a length of one year and mature annually from 2019 to 2022. These interest rate swaps have
been designated and qualify as cash flow hedges and have met the requirements to assume zero
ineffectiveness. The Company reviews the effectiveness of its hedging instruments on a quarterly basis.
The counterparties to these derivative financial instruments are major financial institutions. The
Company evaluates the credit ratings of the financial institutions and believes that credit risk is at an
acceptable level.
The following table summarizes the fair value of the Company’s derivative instruments:
As of
December 30, 2018
As of
December 31, 2017
Balance Sheet Location
Fair
Value
Balance Sheet Location
Fair
Value
Derivatives designated as
hedging instruments
Interest rate swaps ........
Other Current Assets
and Other Assets
$ 1,522
Other Accrued Liabilities
and Long-term Liabilities $ 1,064
The gain or loss on these derivative instruments is recognized in other comprehensive income, net
of tax, with the portion related to current period interest payments reclassified to interest expense on the
consolidated statement of income. The following table summarizes these gains and losses for 2018 and
2017:
Consolidated Statements of
Income Classification
Interest income (expense), net................ $
396 $
(9)
Year Ended
December 30, 2018 December 31, 2017
94
23. Comprehensive Income
The following table presents the changes in accumulated other comprehensive income for the year
ended December 30, 2018:
Balance at January 1, 2017............................................................. $
Other comprehensive loss, net of tax
Unrealized loss on cash flow hedging activities, net of
income tax of ($271).......................................................................
Total other comprehensive loss ...................................................
Balance at December 31, 2017 ....................................................... $
Other comprehensive income, net of tax
Unrealized gain on cash flow hedging activities, net of
income tax of $663 .........................................................................
Total other comprehensive income ..............................................
Balance at December 30, 2018 ....................................................... $
Cash Flow
Hedges
—
(784)
(784)
(784)
1,918
1,918
1,134
Amounts reclassified from accumulated other comprehensive income (loss) are included within
interest expense on the consolidated statement of income.
24. Fair Value Measurements
The Company records its financial assets and liabilities in accordance with the framework for
measuring fair value in accordance with GAAP. This framework establishes a fair value hierarchy that
prioritizes the inputs used to measure fair value:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or
significant value drivers are unobservable.
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the
valuation of derivative instruments, impairment analysis of goodwill, intangible assets, and long-lived
assets.
The following tables present the Company’s fair value hierarchy for the Company’s financial assets
and liabilities measured at fair value on a recurring basis as of December 30, 2018 and December 31,
2017:
December 30, 2018
Level 1
Level 2
Level 3
Long-term debt ................................... $
Total liabilities................................... $
— $
— $
453,000 $
453,000 $
Interest rate swap asset...................... $
Total assets ...................................... $
— $
— $
1,522 $
1,522 $
— $
— $
— $
— $
Total
453,000
453,000
1,522
1,522
95
December 31, 2017
Level 1
Level 2
Level 3
Long-term debt ................................... $
Interest rate swap liability ...................
Total liabilities................................... $
— $
—
— $
348,000 $
1,064
349,064 $
— $
—
— $
Total
348,000
1,064
349,064
The Company’s interest rate swaps are considered Level 2 in the hierarchy and are valued using an
income approach. Expected future cash flows are converted to a present value amount based on market
expectations of the yield curve on floating interest rates, which is readily available on public markets.
The determination of fair values of certain tangible and intangible assets for purposes of the
Company’s goodwill impairment evaluation as described above is based upon Level 3 inputs. Closed
store reserves are recorded at net present value to approximate fair value which is classified as Level 3 in
the hierarchy. The 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, cash equivalents, and restricted cash, accounts receivable, prepaid expenses and other
current assets, accounts payable and other accrued liabilities and, accrued salaries and benefits
approximate fair value because of the short maturity of those instruments. Based on comparable open
market transactions, the fair value of the long-term debt approximated carrying value as of December 30,
2018 and December 31, 2017.
25. Segments
The Company has one reportable and one operating segment, healthy grocery stores.
In accordance with ASC 606, the following table represents a disaggregation of revenue for fiscal
2018 and 2017.
Perishables ............................................ $2,995,650 57.5% $2,703,197 58.0%
Non-Perishables..................................... 2,211,686 42.5% 1,961,415 42.0%
Net Sales........................................... $5,207,336 100.0% $4,664,612 100.0%
December 30, 2018
December 31, 2017
Year Ended
The Company categorizes the varieties of products it sells as perishable and non-perishable.
Perishable product categories include produce, meat, seafood, deli, bakery, floral and dairy and dairy
alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items,
frozen foods, beer and wine, and natural health and body care.
96
26. Share-Based Compensation
2013 Incentive Plan
The Company’s board of directors adopted, and its shareholders approved, the Sprouts Farmers
Market, Inc. 2013 Incentive Plan (the “2013 Incentive Plan”). The 2013 Incentive Plan became effective
July 31, 2013 in connection with the Company’s initial public offering and replaced the 2011 Option Plan
(as defined below) (except with respect to outstanding options under the 2011 Option Plan). The 2013
Incentive Plan serves as the umbrella plan for the Company’s share-based and cash-based incentive
compensation programs for its directors, officers and other team members. On May 1, 2015, the
Company’s stockholders approved the material terms of the performance goals under the 2013 Incentive
Plan for purposes of Section 162(m) of the Internal Revenue Code.
The Company granted to certain officers, directors 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
8.59
28.21
28.21
8.32
27.69
26.65
6.54
24.48
22.44
28.21 $
— $
— $
27.69 $
— $
— $
24.48 $
— $
— $
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 the Company’s board of directors cliff vest in one year. The options expire seven years from
grant date. The PSAs and RSAs are described below.
The Company granted to certain officers, directors and team members the following awards during
2017, under the 2013 Incentive Plan:
Grant Date
Award Type
March 3, 2017 .......... RSUs
RSAs
PSAs
March 27, 2017 ........ RSUs
May 12, 2017............ RSUs
August 11, 2017 ....... RSUs
November 10,
2017 ...................... RSUs
Shares of
common
stock
323,687
288,746
148,944
1,719
21,820
10,630
Exercise
Price
—
—
—
—
—
—
Grant date
fair value
18.11
18.11
18.11
22.54
23.89
24.14
$
$
$
$
$
$
2,586
—
$
20.80
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 the Company’s board of directors cliff vest in
one year. The PSAs and RSAs are described below.
97
The Company granted to certain officers, directors and team members the following awards during
2018, under the 2013 Incentive Plan:
Grant Date
Award Type
March 5, 2018 .......... RSUs
PSAs
March 12, 2018 ........ RSUs
May 14, 2018 ........... RSUs
May 29, 2018 ........... RSUs
PSAs
August 13, 2018....... RSUs
December 26,
2018 ...................... Options
Shares of
common
stock
447,594
126,098
4,357
33,077
21,836
2,756
8,732
Exercise
Price
Grant date
fair value
25.18
25.18
25.14
22.14
21.57
21.57
23.48
— $
— $
— $
— $
— $
— $
— $
40,000 $
23.21 $
7.80
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 the Company’s board of directors cliff vest in
one year. The options expire seven years from grant date. The PSAs 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 December 30,
2018, there were 2,807,046 stock awards outstanding and 5,390,634 shares remaining available for
issuance under the 2013 Incentive Plan.
2011 Option Plan
In May 2011, the Company adopted the Sprouts Farmers Markets, LLC Option Plan (the “2011
Option Plan”) to provide team members or directors of the Company with options to acquire shares of the
Company. The Company had authorized 12,100,000 shares for issuance under the 2011 Option Plan.
Options may no longer be issued under the 2011 Option Plan. As of December 30, 2018, there were
106,810 options outstanding 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 award agreement.
Shares issued for option exercises are newly issued shares.
98
The estimated fair value of options granted during 2018 is $7.80 and the estimated fair values of
options granted during 2016 range from $6.54 to $8.59, and were calculated using the following
assumptions in the table below. No options were granted during 2017.
Dividend yield.................................................
Expected volatility ..........................................
Risk free interest rate .....................................
Expected term, in years .................................
2018
2017
0.00% —
35.20% —
2016
0.00%
33.92% to 34.18
%
2.76% — 1.18% to 1.32%
4.50
3.53 to 4.50
—
The grant date weighted average fair value of the 0.1 million options issued but not vested as of
December 30, 2018 was $8.35. The grant date weighted average fair value of the 0.5 million options
issued but not vested as of December 31, 2017 was $7.25. 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 following table summarizes grant date weighted average fair value of options granted and
options forfeited:
December 30,
2018
Year Ended
December 31,
2017
January 1,
2017
Grant date weighted average fair value of
options granted..............................................
Grant date weighted average fair value of
options forfeited.............................................
$
$
7.80 $
— $
7.43
9.32 $
9.66 $
8.60
Beginning in 2018, expected volatility for option grants and modifications was calculated based
upon the Company’s historical volatility data over a time frame consistent with the expected life of the
awards. Prior to 2018, due to the lack of historical company trading data, expected volatility was
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 $53.3 million, $31.6 million, and $12.3 million for 2018,
2017, and 2016, respectively.
The following table summarizes option activity during 2018:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (In Years)
Aggregate
Intrinsic
Value
Number of
Options
Outstanding at December 31, 2017 ................. 4,689,942 $ 14.60
23.21
40,000
Granted ............................................................
32.83
Forfeited ...........................................................
(27,531)
7.73
Exercised ......................................................... (2,824,460)
24.84
Outstanding at December 30, 2018 ................. 1,877,951
Exercisable—December 30, 2018 ................... 1,742,394
24.69
Vested/Expected to vest—December 30,
2018 .............................................................. 1,877,951 $ 24.84
$ 53,334
3,507
3,507
3.35 $
3.22 $
3.35 $
3,507
99
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 award agreement.
Shares issued for RSU vesting are newly issued shares.
The estimated fair value of RSUs granted during 2018 and 2017 range from $18.11 to $25.18, 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
2018, 2017, and 2016:
RSUs awarded .................................................
$
24.80 $
18.68 $
27.93
December 30,
2018
Year Ended
December 31,
2017
January 1,
2017
The following table summarizes RSU activity during 2018:
Outstanding at December 31, 2017.................................
Awarded ..........................................................................
Released .........................................................................
Forfeited ..........................................................................
Outstanding at December 30, 2018.................................
Number of
RSUs
448,283 $
515,596
(224,592)
(126,906)
612,381 $
Weighted
Average
Grant Date
Fair Value
21.31
24.80
22.61
23.53
23.32
PSAs
PSAs granted in fiscal year 2015 are restricted shares that were subject to the Company achieving
certain earnings per share performance targets, as well as additional time-vesting conditions. The fair
value of PSAs is based on the closing price of the Company’s common stock on the grant date. The
performance conditions with respect to 2015 earnings per share targets were deemed to have been met,
and all PSAs have vested. During 2018, 20,595 of the 2015 PSAs were vested, and during 2017, 21,050
of the 2015 PSAs were vested.
100
PSAs granted in fiscal year 2016 are restricted shares that 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), however, neither the annual nor
cumulative performance conditions were deemed to have been met.
PSAs granted in March 2017 were subject to the Company achieving certain earnings per share
performance targets during 2017. The criteria is based on a range of performance targets in which
grantees may earn between 10% and 150% of the base number of awards granted. The performance
conditions with respect to 2017 earnings per share were deemed to have been met, and the PSAs will
vest 50% on the second anniversary of the grant date (March 2019) and 50% on the third anniversary of
the grant date (March 2020).
PSAs granted in March 2018 are subject to the Company achieving certain EBIT performance
targets for the 2020 fiscal year. The criteria is based on a range of performance targets in which grantees
may earn 0% to 200% of the base number of awards granted. If performance conditions are met, the
applicable number of performance shares will vest on the third anniversary of the grant date (March
2021).
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 2018 ranges
from $21.57 to $25.18 and was calculated based on the closing price on the grant date.
The total grant date fair value of PSAs granted during 2018 was $3.2 million. The total grant date
fair value of PSAs vested during 2018 was $0.7 million. The total grant date fair value of performance
shares forfeited during 2018 was $3.5 million. The total grant date fair value of the 0.3 million PSAs
issued but not released as of December 30, 2018 was $5.5 million.
The total grant date fair value of PSAs granted during 2017 was $2.7 million. The total grant date
fair value of PSAs vested during 2017 was $0.7 million. The total grant date fair value of performance
shares forfeited during 2017 was $0.8 million. The total grant date fair value of the 0.2 million PSAs
issued but not released as of December 31, 2017 was $5.2 million. During February 2018, the Company’s
board of directors determined that the maximum level of the 2017 performance target was met, and
accordingly, 150% of the performance shares were granted.
101
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 2017 and 2018, the Company’s board of directors determined that the
performance targets for the 2016 and 2017 tranche were not met and 30,984 performance shares and
30,980 performance shares were not earned, respectively. Subsequent to December 30, 2018, the
Company’s board of directors determined that the performance targets for the 2018 and cumulative
tranches were not met and the remaining 29,297 performance shares were not earned.
The following table summarizes PSA activity during 2018:
Outstanding at December 31, 2017 ..................................
Awarded ............................................................................
Released ...........................................................................
Forfeited ............................................................................
PSA earned.......................................................................
PSAs not earned ...............................................................
Outstanding at December 30, 2018 ..................................
Number of
PSAs
231,497
128,854
(20,595)
(120,144)
74,470
(30,980)
263,102
Weighted
Average
Grant Date
Fair Value
22.26
25.10
34.33
21.77
18.11
28.21
21.05
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 or vest annually over three years.
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.
The estimated fair values of RSAs granted during 2017 is $18.11 per share of restricted stock, and
was calculated based on the closing price on the grant date.
There were no RSAs granted during 2018. The total grant date fair value of shares of restricted
stock released upon vesting during 2018 was $3.3 million. The total grant date fair value of shares of
restricted stock forfeited during 2018 was $0.6 million. The total grant date fair value of the 160,491
shares of restricted stock issued but not released as of December 30, 2018 was $2.9 million.
102
The following table summarizes RSA activity during 2018:
Number of
RSAs
Outstanding at December 31, 2017...................... 352,847 $
Awarded ...............................................................
—
Released .............................................................. (160,355)
Forfeited ...............................................................
(32,001)
Outstanding at December 30, 2018...................... 160,491 $
Weighted
Average
Grant Date
Fair Value
19.27
—
20.66
18.11
18.11
Share-Based Compensation Expense
The Company presents share-based compensation expense in selling, general and administrative
expenses on the Company’s consolidated statements of income. The amount recognized was as follows:
Total share-based compensation expense ......
$
14,512 $
14,221 $ 13,399
December 30,
2018
Year Ended
December 31,
2017
January 1,
2017
The Company recognized income tax benefits related to share-based compensation of $3.4 million,
$5.6 million and $5.2 million for 2018, 2017, and 2016, respectively.
As of December 30, 2018, total unrecognized compensation expense and remaining weighted
average recognition period related to outstanding share-based awards were as follows:
Options ..............................................................................
RSUs .................................................................................
PSAs..................................................................................
RSAs .................................................................................
Total unrecognized compensation expense
at December 30, 2018 ....................................................
Unrecognized
compensation
expense
Remaining
weighted
average
recognition
period
$
456
8,412
1,839
1,547
1.0
1.5
0.9
1.2
$
12,254
During 2018, 2017 and 2016, the Company received $21.8 million, $9.3 million and $2.7 million in
cash proceeds from the exercise of options, respectively.
During 2018, 2017 and 2016, the Company recorded $12.4 million, $9.9 million and $3.7 million of
excess tax benefits from the exercise of options, respectively.
103
Share Award Restructuring
During the year ended December 30, 2018, certain stock options were modified pursuant to a
separation agreement with the Company’s former Chief Executive Officer. A total of 995,937 vested
options were modified such that their remaining exercise period was increased from three months to six
months after the separation date. Additionally, a total of 125,241 options and awards (RSUs, PSAs, and
RSAs) were modified such that they will be permitted to vest in March 2019, which is subsequent to the
former Chief Executive Officer’s separation date. These options and awards will expire three months after
vesting, consistent with the other modified options. These modifications resulted in an incremental
expense, net of $2.5 million of stock compensation reversals, of $0.2 million during the year ended
December 30, 2018. All other unvested options and awards were forfeited. This expense was presented
in store closure and other costs on the Company’s consolidated statements of income.
During the year ended January 1, 2017, 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 December 30, 2018 related to the options and RSAs granted.
27. Subsequent Events
Subsequent to December 30, 2018, and through February 18, 2019, the Company repurchased an
additional 0.9 million shares of common stock for $20.3 million. The Company borrowed an additional
$24.7 million under its Amended and Restated Credit Agreement that was utilized in these repurchases
and made a $37.7 million principal payment, resulting in total outstanding debt under the Amended and
Restated Credit Agreement of $440 million as of February 18, 2019.
104
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 Interim Co-Chief Executive Officers (one of whom is
also our Chief Financial Officer), has evaluated the effectiveness of our disclosure controls and
procedures under the Exchange Act as of December 30, 2018, the end of the period covered by this
Annual Report on Form 10-K. Based upon that evaluation, our Interim Co-Chief Executive Officers (one of
whom is also our Chief Financial Officer) concluded that, as of December 30, 2018, 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 Interim Co-Chief
Executive Officers (one of whom is also our Chief Financial Officer), we assessed the effectiveness of our
internal control over financial reporting as of December 30, 2018, using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—
Integrated Framework (2013 Framework). Based on this assessment, our management has concluded
that our internal control over financial reporting was effective as of December 30, 2018.
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 December 30, 2018 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B.
Other Information
None.
105
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 2019 Annual Meeting of Stockholders (referred to as the “Proxy
Statement”), which is expected to be filed not later than 120 days after the end of our fiscal year ended
December 30, 2018, 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/governance-information.
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.
106
(b) Exhibits:
Exhibit
Description
Number
2.1
Plan of Conversion of Sprouts Farmers Markets, LLC (1)
3.1
Certificate of Incorporation of Sprouts Farmers Market, Inc. (1)
3.2
Amended and Restated Bylaws of Sprouts Farmers Market, Inc. (2)
10.1
Sprouts Farmers Markets, LLC 2011 Option Plan (3)
10.2
Form of Stock Option Agreement under Sprouts Farmers Markets, LLC 2011 Option Plan (3)
Sprouts Farmers Market, Inc. 2013 Incentive Plan, amended as of May 1, 2015 (4)
10.3
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)
10.3.3(c) 2018 Form of Performance Share Award Agreement under Sprouts Farmers Market, Inc.
2013 Incentive Plan (9)
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
10.5.4
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 (10)
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 (11)
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)
Letter Agreement, dated November 29, 2018, by and between Sprouts Farmers Market, Inc.
and Amin N. Maredia (12)
107
10.6
10.6.1
10.6.2
10.7
10.7.1
10.7.2
10.8†
10.9
10.10
10.11
10.12
Employment Agreement, dated April 18, 2011, by and between Sprouts Farmers Markets,
LLC and Jim Nielsen (3)
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 (13)
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 (10)
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)
Distribution Agreement, dated as of July 18, 2018, by and between SFM, LLC dba Sprouts
Farmers Market and KeHE Distributors, LLC (14)
Form of Indemnification Agreement by and between Sprouts Farmers Market, Inc. and its
directors and officers (3)
Amended and Restated Credit Agreement, dated as of March 27, 2018, among Sprouts
Farmers Market, Inc., Sprouts Farmers Markets Holdings, LLC, the lenders party thereto,
JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as Syndication
Agent, and BMO Harris Bank N.A., Coöperatieve Centrale Raiffeisen – Boerenleenbank, B.A.
“Rabobank Nederland,” New York Branch, Wells Fargo Bank, N.A., and SunTrust Bank, as
Documentation Agents (15)
Form of Confidentiality, Non-Competition, and Non-Solicitation Agreement (16)
Amended and Restated Executive Severance and Change in Control Plan (17)
10.13
Offer Letter from Sprouts Farmers Market, Inc. to Brad Lukow, dated February 25, 2016 (18)
10.14†
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 (19)
18.1
21.1
23.1
31.1
31.2
32.1
32.2
Letter from PricewaterhouseCoopers LLP related to change in preferable accounting
principles dated February 21, 2019
List of subsidiaries
Consent of PricewaterhouseCoopers LLP, independent registered accounting firm
Certification of Interim co-Chief Executive Officers 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 Interim co-Chief Executive Officers 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
108
†
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for
confidential treatment previously submitted separately to the SEC.
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.
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.
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.
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.
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.
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.
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.
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.
Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 3,
2018, and incorporated herein by reference.
(10) 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.
(11) 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.
(12) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on December
4, 2018, 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 March 12,
2014, 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
November 1, 2018, and incorporated herein by reference.
(15) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on March 27,
2018, and incorporated herein by reference.
(16) 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.
(17) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on December
26, 2018, and incorporated herein by reference.
(18) 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.
(19) 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
Not applicable.
109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPROUTS FARMERS MARKET, INC.
Date: February 21, 2019
/s/ Bradley S. Lukow
By:
Name:Bradley S. Lukow
Title:
Interim Co-Chief Executive Officer
and 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/ Bradley S. Lukow
Interim Co-Chief Executive Officer
February 21, 2019
Bradley S. Lukow
/s/ James L. Nielsen
James L. Nielsen
and Chief Financial Officer
(Co-Principal Executive Officer
and Principal Financial and
Accounting Officer)
Interim Co-Chief Executive Officer,
President and Chief Operating
Officer (Co-Principal Executive
Officer)
February 21, 2019
/s/ Joseph Fortunato
Chairman of the Board
February 21, 2019
Joseph Fortunato
/s/ Kristen E. Blum
Kristen E. Blum
/s/ Shon A. Boney
Shon A. Boney
Director
Director
February 21, 2019
February 21, 2019
/s/ Terri Funk Graham
Director
February 21, 2019
Terri Funk Graham
/s/ Lawrence P. Molloy
Director
February 21, 2019
Lawrence P. Molloy
/s/ Joseph O’Leary
Joseph O’Leary
Director
February 21, 2019
/s/ Steven H. Townsend
Director
February 21, 2019
Steven H. Townsend
110
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CREATING LASTING CHANGE
THE SPROUTS HEALTHY COMMUNITIES FOUNDATION
promotes nutrition education and access to healthy foods, and
has donated more than $7 million to 260 nonprofit organizations
since its establishment in 2015. Through the creation of school
nutrition curricula, and community-based garden and farming
programs, the Foundation aims to empower the next generation to
live a healthier life. Sprouts covers 100% of the Foundation’s operating
expenses, ensuring every dollar raised goes directly to programs.
2018 highlights include:
• $2 million in nonprofit donations
• 85 local community grants awarded to support
children’s nutrition education
• 2.6MM at-risk children and mothers helped through the
distribution of life saving nutrients with Vitamin Angels
• 2K volunteer hours of service in our communities
during our Annual Day of Service
SPROUTS STORES AND TEAM MEMBERS SUPPORTED MORE THAN 850
COMMUNITY EVENTS REACHING MORE THAN 2MM NEIGHBORS
RESPONSIBLE SOURCING In 2018, Sprouts conducted compre-
hensive animal welfare and supplier transparency assessments,
and encouraged all vendors to meet or exceed industry best
practices for ethical and sustainable methods.
SUSTAINABLE SEAFOOD In an effort to preserve and protect
the health of our marine and freshwater ecosystems and the
wellbeing of fishery-dependent communities, Sprouts outlined
strict seafood sourcing guidelines to only purchase from responsible
vendors that are either certified sustainable, participating in a
Fishery or Aquaculture Improvement Program, or are well-managed
fisheries with robust regulatory oversight by 2020.
OUR EXECUTIVE TEAM
OUR BOARD
Jim Nielsen
Interim Co-Chief Executive Officer, President
and Chief Operating Officer
Joseph Fortunato, Chairman of the Board;
Operating Partner, J.W. Childs Associates, L.P.; Former Chairman
and Chief Executive Officer, GNC Holdings, Inc.
Brad Lukow
Interim Co-Chief Executive Officer,
Chief Financial Officer
Dan Sanders
Chief Operations Officer
Dave McGlinchey
Chief Merchandising Officer
Kristen Blum, Senior Vice President and Chief Information Officer,
PepsiCo, Inc.-Latin America
Shon Boney, Former Chairman and Co-Founder, Sprouts
Farmers Market
Terri Funk Graham, Branding Strategy Consultant; Former
Senior Vice President and Chief Marketing Officer, Jack in the
Box, Inc.
Brandon Lombardi
Chief Human Resources and Legal Officer
Lawrence P. Molloy, Former Chief Financial Officer, Under
Armour, Inc.
Shawn Gensch
Chief Customer Officer
Ted Frumkin
Chief Development Officer
Joseph O’Leary, Former President and Chief Operating Officer,
PetSmart, Inc.
Steven Townsend, Consultant and Former Chairman and
President/Chief Executive Officer, United Natural Foods, Inc.
ANNUAL MEETING
April 30, 2019 - 8 a.m. PDT
Sprouts Farmers Market Support Office
5455 E. High Street, Suite 111, Phoenix, AZ 85054
STOCK LISTING
NASDAQ Global Select Market: SFM
TRANSFER AGENT
American Stock Transfer & Trust Co.
Shareholder Services: 800-937-5449
astfinancial.com
INDEPENDENT AUDITOR
PricewaterhouseCoopers LLP
INVESTOR RELATIONS
investorrelations@sprouts.com
SUPPORT OFFICE
5455 E. High Street, Suite 111, Phoenix, AZ 85054
480-814-8016
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 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 on Form 10-K included herewith.
2018 HIGHLIGHTS
Inspiring Healthy Living Coast to Coast
Extending the Sprouts Experience Beyond the Store
Building Loyalty and Differentiation with Private Label
Investing in Our Team Members
sprouts.com