To our Shareholders,
There’s no question 2021 was a challenging year, but it was also extraordinary. I never cease to be amazed by
the resolve and passion of the Sprouts team. Throughout another year of the pandemic, we were there for our
communities by being in stock with the freshest produce and most innovative product offering in all of specialty
retail. We advanced our strategy and made smart investments to position us well for the future. We still have a lot of
work to do, but I couldn’t be prouder of how Sprouts team members delivered for each other, our communities, and
for you, our shareholders.
In 2020, we laid out a strategic plan that involves winning with our target customers through product innovation and
a marketing approach that speaks directly to them in a meaningful way, shrinking our store format to deliver better
returns without sacrificing who we are, building units at a low double-digit rate, and creating a supply chain focused
on fresh and local produce.
We made great progress on our journey in 2021. We stood up two new produce distribution centers, opened 12 stores
including new format stores, increased our digital reach to over five million customers, and introduced 5,700 new
items. I witnessed a relentless focus on execution across the business, which drove exceptional results. We ended
, and cash from operations of $365 million. We used our
the year with sales of $6.1 billion, earnings per share of $2.10
strong cash flows to self-fund unit growth and return $188 million of value to shareholders through a share buyback
program.
f
Opening distribution centers in Colorado and Florida facilitates a more seasonal and local produce assortment while
taking more than three million miles off the road, lessening our impact on the environment. Shorter distances from
farm to store also improves the freshness of the product for the customer and reduces food waste.
Despite continued disruption in the global supply chain, we opened our first smaller format stores that inspire a true
farmers market feel. The product presentation, the unique layout, the local farmer stories – there is a real energy in
the stores that comes alive for customers. These new stores are performing well and I’m excited to continue growing
our footprint.
Our marketing evolved throughout the year with storytelling that communicated our value proposition in fresh
produce along with our differentiated product offering. We leveraged partnerships with leading health and wellness
experts and tested targeted calls to action that we learned from. This work drove record customer engagement with
the Sprouts app and positive traffic trends in Q4 2021, but we have a long way to go. I’m encouraged by the ideas our
marketing team is bringing to the table and look forward continuing to refine our approach.
Our talented merchant team took innovation to new heights in 2021, launching exciting new brands that can only
be found at Sprouts, designing our “Find a New Favorite” section in store that highlights exclusive and trending
products, and enhancing our reputation as the best place for entrepreneurs to bring leading-edge products and ideas
to market.
I would be remiss if I didn’t mention our progress in the environmental, social and governance (ESG) space. There
is a lot of great work to talk about here. We diverted 62 million pounds of food from landfills in 2021 and provided
26 million meals to members of our communities who are food insecure. We advanced a circular food economy by
sending 28 million pounds of food waste to animal feed programs that fed dairy cows that produce Sprouts brand
milk. The Sprouts Healthy Communities Foundation gave $3 million to local nonprofit partners focused on children’s
health and nutrition. I invite you to read our 2021 ESG report to learn more about how we “do well by doing good.”
None of these achievements would have been possible without the hard work, dedication, creativity, and resilience
of our team members. Their caliber and commitment drive our company’s success. When I walk stores and talk to
customers, I hear stories of kindness and service, of support and reliability. As we move into 2022, we will continue to
be intentional about creating a culture of caring and inclusion where team members can thrive and build meaningful
careers.
Building on the enormous progress we made in 2021, I look forward to what
we will accomplish in the year ahead as we continue executing our strategy.
It is a privilege to lead this very special Sprouts brand that provides access
to healthy food to communities across the country. I’m grateful to our
people, our customers, and all our stakeholders for the opportunity to serve.
er
Jack Sinclair,
Chief Executive 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 January 2, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TO
FOR THE TRANSITION PERIOD FROM
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
Trading Symbol(s)
SFM
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 ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☐
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 ☐
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
☒
☐
Accelerated filer
☐
Smaller reporting company ☐
Emerging growth company ☐
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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 2, 2021, 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 $2,927,524,920, based on the last reported sale price of such stock as reported on The
NASDAQ Global Select Market on such date.
As of February 22, 2022, there were 110,905,744 outstanding 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 2022 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual
Report on Form 10-K where indicated. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the
registrant’s fiscal year ended January 2, 2022.
TABLE OF CONTENTS
PART I
Item 1. Business ..............................................................................................................................................
Item 1A. Risk Factors ........................................................................................................................................
Item 1B. Unresolved Staff Comments ............................................................................................................
Item 2. Properties ............................................................................................................................................
Legal Proceedings .............................................................................................................................
Item 3.
Item 4. Mine Safety Disclosures ...................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ........................................................................................................
Item 6. Reserved .............................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................................................
Item 8. Financial Statements and Supplementary Data............................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures ..................................................................................................................
Item 9B. Other Information ...............................................................................................................................
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections ......................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance ..........................................................
Item 11. Executive Compensation ..................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters...........................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence .......................
Item 14. Principal Accountant Fees and Services........................................................................................
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Item 15. Exhibits and Financial Statement Schedules ................................................................................
Item 16. Form 10-K Summary ........................................................................................................................
Signatures ............................................................................................................................................................
97
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PART IV
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. The inclusion of our website addresses in this
Annual Report on Form 10-K does not include or incorporate by reference the information on or
accessible through our websites herein.
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 growth strategy, expectations, beliefs, intentions, 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 offers a unique grocery experience featuring an open layout with fresh
produce at the heart of the store. Sprouts inspires wellness naturally with a carefully curated assortment
of better-for-you products paired with purpose-driven people. We continue to bring the latest in
wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and
gluten-free. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store
count and profitability. Headquartered in Phoenix with 374 stores in 23 states as of January 2, 2022, we
are one of the largest and fastest growing specialty retailers of fresh, natural and organic food in the
United States.
Our Heritage
In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding
in 2002 through January 2, 2022, we have grown rapidly, significantly increasing our sales, store count
and profitability, including 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.
Our Growth Strategy
In 2020, we announced the initial steps of our new long-term growth strategy that we believe will
transform our company and drive profitable growth. We are executing on this strategy, focusing on the
following areas:
Win with Target Customers. We are focusing attention on our target customers, identified
through research as ‘health enthusiasts’ and ‘experience seekers’, where there is ample
opportunity to gain share within these customer segments. We believe our business can
continue to grow by leveraging existing strengths in a unique assortment of better-for-you,
quality products and by providing a full omnichannel offering through delivery or pickup via our
website or the Sprouts app.
Update Format and Expand in Select Markets. We are beginning to deliver unique smaller
stores with expectations of stronger returns, while maintaining the approachable, fresh-
focused farmer’s market heritage Sprouts is known for. In 2021, we opened three stores and
remodeled one store featuring our new format. Our geographic store expansion and new store
placement will intersect where our target customers live, in markets with growth potential and
supply chain support, which we believe will provide a long runway of at least 10% annual unit
growth beginning in 2023.
Create an Advantaged Fresh Supply Chain. We believe our network of fresh distribution
centers can drive efficiencies across the chain and support growth plans. To further deliver on
our fresh commitment and reputation, as well as to improve financial results, we will aspire to
ultimately position fresh distribution centers within a 250-mile radius of stores. With the
opening of two fresh distribution centers in 2021, we now have more than 85% of our stores
within 250 miles of a distribution center.
1
Refine Brand and Marketing Approach. We believe we are elevating our national brand
recognition and positioning by telling our unique brand story rooted in product innovation and
differentiation. We are investing savings from removing our print ad into increasing customer
engagement through digital and social connections, driving additional sales growth and loyalty.
Deliver on Financial Targets and Box Economics. We are measuring and reporting on the
success of this strategy against a number of long-term financial and operational targets. With
the implementation of our strategy, we have significantly improved our margin structure above
our 2019 baseline.
2
Our Stores and Operations
We believe our stores represent a blend of farmers markets, natural foods stores, and smaller
specialty markets, differentiating us from other food retailers, while also providing a broad offering for our
customers.
Store Design and Experience. Our stores are organized in a “flipped” conventional food retail
store model, positioning our produce at the center of the store surrounded by a specialty
grocery offering. Produce remains the heart of our stores, as we typically dedicate
approximately 20% 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 layouts and low
displays, intended to provide an easy-to-shop environment that invokes a farmers’ market
experience and allows our customers to view the entire store. Our small box format allows for
quick in-and-out service, and our curated assortment of responsibly and locally sourced items
offer surprise and delightful shopping experiences. The below diagram shows a sample layout
of our new smaller format 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
personal connections with our purpose-driven 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 expand mobile and digital opportunities to further engage with
our customers and provide a full omnichannel offering as many customers use both in-store
and online for their grocery needs.
Store Size. Currently, our stores are generally between 28,000 and 30,000 square feet, which
we believe is smaller than many of our peers’ average stores. Under our long-term growth
strategy, our new format stores feature a smaller box size, generally between 21,000 and
25,000 square feet, that are less expensive to build, reduce non-selling space, reduce
occupancy and operating costs and leverage the strengths of our older, highly productive
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.
3
Team Members. Our stores are typically staffed with 75 to 100 full and part-time 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 natural and organic food retailer that offers a unique shopping experience for our
customers. To offer the right assortment of healthy alternatives and good-for-you options, we curate our
product mix to differentiated fresh, natural and organic foods and healthier options throughout all of our
departments, with innovative products that feature lifestyle friendly ingredients.
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.
Product Categories
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..............................................................................
57.7%
42.3%
57.2%
42.8%
57.7%
42.3%
2021
2020
2019
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. Our
departments reflect our intentional curation of responsibly and locally sourced products. We believe each
of our departments provides high-quality, differentiated and value-oriented offerings for our customers
which we continuously refine with our customer preferences in mind.
4
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 16% of our revenue in fiscal 2021. Our private label brands drive value by
offering our customers lower prices while still delivering generally higher margin as compared to branded
products, as well as an assortment of differentiated, attribute-driven products that are only available at our
stores. 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.
Product Innovation
Our stores feature a curated selection of differentiated products that resonate with our target
customers. Since our founding, Sprouts has carried a wide selection of innovative natural and organic
brands that align with our mission to inspire healthy living for everyone. Our centralized buying strategy
has always put niche brands first, and we have nurtured and grown many once-shoestring brands that
now serve as category leaders. As we continue to grow, we are committed to growing our relationships
with niche vendors to bring their unique, quality products to the millions of shoppers who visit our stores
every week. Sprouts is on the forefront of food innovation and has paved the way for natural food trends
for two decades. We embrace product innovation, and our stores serve as an incubator for growth across
the natural foods industry, highlighting new and differentiated items in our innovation center
merchandising displays.
In 2021, we have launched more than 5,700 new and unique branded and private label products,
focused purely on innovation and taste. We feature thousands of responsibly sourced products with
certifications and attributes that are desired by our target customer base, including organic, paleo, keto,
plant-based, non-GMO, fair trade, gluten-free, vegan, grass-fed, raw and humane certified. We will
continue to lead in product innovation to bring more new, innovative offerings into every department of
our stores.
Sourcing and Distribution
We manage the buying of, and set the standards for, the products we sell, and we source our
products from hundreds of vendors and suppliers, both domestically and internationally. We are
committed to sourcing products in a manner that respects people, our communities and the environment,
and we partner with suppliers and service providers that share this commitment, as included in our
Supplier Code of Conduct.
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. For an overview of
our product sourcing policies and programs, please visit: about.sprouts.com/product-sourcing/.
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. Our centralized buyers are supported by dedicated regional procurement teams
that provide us flexibility to procure produce on local, regional and national levels. Our regional produce
buying teams allow us to form meaningful relationships with farmers, and our flexibility allows us to
purchase produce in smaller quantities than larger chains to help us bring new and innovative products to
our customers before they become commoditized. These products become treasure hunt items found at
our stores.
5
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 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 manage every aspect of quality control in our
produce distribution centers.
As a pillar of our long-term growth strategy, we expect to create an advantaged supply chain and
aspire to locate our distribution centers within 250 miles of the majority of our stores. With the opening of
two new distribution centers in 2021, we currently have seven distribution centers, with two located in
California and one located in each of Arizona, Texas, Georgia, Colorado and Florida. The increased
proximity of our distribution centers to our stores has allowed us to deliver on our fresh commitment to our
customers, by sourcing more from products from local farmers and improving efficiencies in our
distribution process.
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 frequently 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 44%, 42% and 40% of our total purchases in fiscal 2021, 2020, and 2019,
respectively. Another 3% of our total purchases in each of fiscal 2021, 2020 and 2019 were made through
our secondary supplier, United Natural Foods, Inc. (“UNFI”). Our primary supplier of meat and seafood
accounted for approximately 13% of our total purchases in each of fiscal 2021, 2020 and 2019. See “Risk
Factors—Disruption of significant supplier relationships could negatively affect our business.”
Our Pricing, Marketing and Advertising
Pricing
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 that drive traffic and trial.
Marketing and Advertising
During 2020 as part of our long-term growth strategy to refine our brand and marketing approach,
we launched our new branding campaign: Sprouts, Where Goodness Grows. This campaign, which
launched on television, social, digital and radio media, is meant to drive home our farmers market
experience by highlighting produce, the heart of our stores, and inspire our target customers to engage
with our brand by focusing on our differentiation and innovation. In 2021, we executed on this strategy
and expanded Sprouts’ marketing reach through digital channels and new partnerships sharing our brand
and differentiated selection of innovative products and fresh produce to a growing audience.
6
We believe the launch of our new brand will reach more customers through our story telling on
television and digital media than our prior approach of reaching customers by paper flyers, which we
largely discontinued in 2020. During 2021, we garnered more than 215 million weekly digital flyer
impressions, demonstrating that our leverage of digital media to reach customers and share what is new
and unique at Sprouts resonates with the habits of today’s shoppers. We experienced a 76% increase in
SMS subscribers and a 26% increase in email subscribers in 2021. Additionally, digital, TV and radio ads
reached shoppers with 5.7 billion impressions, and we ended the year with 2.1 million followers across all
social platforms. Leveraging digital communications targeted to specific geographic areas also provides
us with greater flexibility to offer different promotions and respond to local competitive activity and allows
us to make our customers aware of what is new and different in our stores in real time.
Sprouts continues to educate and reach shoppers through social partnerships, special content and
sponsorships. Among our 2021 highlights:
We worked with 350 social influencers from coast-to-coast last year who shared what they
love about Sprouts in their own words to their unique followers.
In October, we hosted our first-ever virtual wellness panel, and it gained the interest of
shoppers with more than 19,000 RSVPs and addressed anxiety, inflammation and immune
health with tips and words from experts.
Sprouts announced its first ever back-of-jersey sponsorship with the Angel City Football Club,
Los Angeles’ first-ever National Women’s Soccer League team. A portion of the partnership
funds are being allocated to support local causes that provide fresh food access and further
children’s nutrition education throughout Los Angeles.
Sprouts also partnered with MyFitnessPal as the online platform’s first retail sponsor. Through
healthy recipes and articles, more than 21 million users interacted with the sponsored content,
and over 79,000 users participated in a 30-day healthy eating challenge.
In conjunction with the Arizona State University athletic department, Sprouts developed two
unique nutrition centers that support the health of more than 600 student athletes across 26
sports.
We developed and maintain the Sprouts app on which we include digital coupons 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 app also feature online ordering for delivery
and pickup. We offer home deliveries from our stores through partner services in all of our markets
nationwide, as well as “click and collect” pickup service at all of our stores. We will continue to explore
mobile and digital opportunities to further connect with our customers and leverage data for better
customer insights.
Our Customers
We have employed deep research to understand our target customer, what occasions drive
purchases, what they buy and where they buy it. Our research yielded a better understanding that our
target customer is comprised of two specific groups: health enthusiasts and experience seekers, and we
are focusing on these groups in our long-term growth strategy.
Our target customer seeks better-for-you grocery options and innovative, quality products to support
their healthy lifestyle. We believe they are engaged and connected to what they eat – how it makes them
feel, where it comes from and the role it can play in their lives. Our target customer covers a wide range
of incomes and age demographics – from Baby Boomers to Generation Z – and seek a variety of healthy
and organic options in addition to a great store experience. We believe we only serve a small portion of
these target customers at present and have an opportunity to gain a larger proportion of their market
share of food-at-home purchases by targeting and identifying those innovative, attribute-driven, quality
products and providing the in-store experience and support in living a healthy lifestyle that they are
seeking.
7
Environmental, Social and Governance
Central to our identity is a genuine commitment to social and environmental responsibility. We care
deeply about the health and well-being of our customers, team members, communities and our planet.
We work collaboratively with our supply chain partners, community organizations, and industry experts to
understand our material impacts and prioritize where we direct our environmental, social and governance
("ESG") efforts to maximize our influence. Through this materiality review with internal and external
stakeholders, we intend to focus our efforts on sustainable and responsible sourcing, plastics and
packaging reduction and carbon emission reduction.
Our 2021 ESG highlights included:
Achieved 24% of total sales from organic products;
Adopted standards aligned with the Better Chicken Commitment to improve broiler chicken
welfare meaningfully and measurably;
Sourced all shell and liquid eggs sold in our stores from cage-free, organic, or free-range
farms as of December 2021;
Recovered 78% of food waste, and donated the equivalent of 26 million meals;
Recycled more than 500 tons of plastic from customer returned bags and in-store use;
Reduced carbon emissions by 10% per square foot from 2019; and
Engaged a third-party consultant to assist with setting a science-based target for greenhouse
gas emission reduction.
Based on our ESG accomplishments, we received a rating of AAA in the 2021 MSCI ESG Ratings
assessment. The AAA rating represents the highest on the scale and signifies a company leading its
industry in managing the most significant ESG risks and opportunities. For more information on our ESG
efforts and reporting, including our most recent ESG reports, please visit
about.sprouts.com/sustainability/. The information contained on or accessible through our website and in
our ESG reports is not incorporated by reference into this Annual Report on Form 10-K.
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 increasing access to
fresh, nutritious food in communities where Sprouts operates. Since the Foundation’s inception, it has
awarded $15 million in donations to more than 380 non-profit organizations and hosted an estimated 200
volunteer service projects. Sprouts fully funds the Foundation’s programs directly. For more information
on our Foundation, please visit about.sprouts.com/sprouts-foundation/.
Human Capital Management
At Sprouts, we are proud of our “People Powered, Purpose Driven” culture focused on improving
the health of the communities we serve. Customer engagement is critical to our culture and growth plans,
and we place great importance on recruiting candidates and retaining team members that have a love of
food, pride themselves on service excellence, and share our purpose driven culture. We build on our
targeted recruitment efforts with robust training on customer engagement and product knowledge to
ensure there is friendly, knowledgeable staff in every store. As of January 2, 2022, we had approximately
31,000 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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2021 Highlights. Despite the ongoing challenges that occurred during 2021 related to the COVID-19
pandemic, we are proud of the following achievements during the year:
We finalized three core values that will intentionally shape our culture and act as a lens to
guide the decisions we make. The values will inform our behaviors and actions to create a
sense of inclusion and belonging.
As one of the fastest growing specialty retailers of fresh, natural and organic food in the
country, we created 1,300 new jobs in 2021 through new store openings.
Additionally, we promoted 6,900 team members and filled 79% of store manager positions with
internal candidates.
Team members saved approximately $17.4 million through store discounts.
We awarded 75 scholarships to team members and dependents, equating to more than $1.5
million in scholarships since our scholarship program began.
Total Rewards. We are proud to offer our team members competitive pay, store discounts, and
opportunities for professional growth. We regularly assess prevailing wages in the markets in which we
operate and offer competitive wages and benefits as we believe engaged team members contribute to
consumer satisfaction. Our total rewards program features the following:
We have a quarterly bonus plan for which all store team members are eligible.
We offer a paid sick time policy for all team members and offer generous leave programs.
Beginning in 2021, all hourly team members are eligible for semi-annual reviews and merit
increases.
We offer team members the opportunity to participate in the Western Association of Food
Chains’ Retail Management Certificate Program that provides the core skills and knowledge to
move into a management role in the retail industry. During 2021, 129 Sprouts team members
enrolled in this program, and 13 team members graduated from the program.
We offer The Henry Boney Memorial Scholarship, which is designed to offer team members or
their dependents a $2,000 scholarship to achieve their college dreams.
All team members over 18 can enroll in our 401(k) plan the first of the month following three
months of service, and we offer a contribution matching program.
We offer a variety of medical plans to allow team members the ability to choose the best plan
for them and their families.
We offer a well-being program dedicated to the mental, physical, emotional and financial well-
being of our team members.
All Sprouts team members can save at our stores, with a 15% Work Perk Discount that can
increase to 20% with a simple annual wellness check.
We are offering our team members up to two hours of paid time off to receive each dose of the
COVID-19 vaccine and enhanced our paid sick time off to support our team members during
the pandemic.
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Education, Training and Safety. We believe Sprouts is an attractive place to work with significant
growth opportunities for our approximately 31,000 team members. To grow the next generation of leaders
at Sprouts, we have developed a Leadership Training Model for high-potential internal team members to
take their careers to the next level, and to on-board store managers new to Sprouts. In 2021, we had 17
Leadership graduates totaling more than 4,000 hours in training. We have also partnered with an
industry-leading virtual reality technology firm to implement cutting-edge virtual reality training in all of our
stores in 2021. Our store team members completed over 585,000 hours of in-store training in 2021, and
due to the COVID-19 pandemic, certain traditional training programs transitioned to webinars and
learning modules.
We are committed to maintaining a safe environment for our team members and customers. Our
stores implement various programs to reduce and eliminate hazards, resulting in a safer workplace and
improved shopping experience. In 2021, our stores reported a 22% reduction in non-COVID worker
compensation claims over the prior year.
Diversity and Inclusion. We pride ourselves on supporting an inclusive, respectful, and caring
culture throughout our organization. In 2021, approximately 51% of our team members were female and
approximately 48% of our team members were ethnically diverse, which we believe to be in-line or slightly
better than our grocery peers. Further, of our promotions across all store roles, 54% were awarded to
female team members and 49% were awarded to ethnically diverse team members. We conduct formal
talent review and succession planning to identify top talent and intentionally make hiring and promotional
decisions that consider inclusion of team members from underrepresented backgrounds. In 2021, Sprouts
launched its first team member resource group "Inspiring Women at Sprouts" to continue to build a culture
of inclusion and belonging.
Growing Our Business
As part of our long-term growth plan, we plan to expand our store base with at least 10% annual unit
growth beginning in 2023. Our geographic store expansion and new store placement will intersect where
our target customers live, in markets with growth potential and supply chain support, providing a long
runway for us to achieve our growth target.
We intend to continue to focus our growth on areas where we have a large concentration of stores,
such as California and Texas, while building out our newer markets, such as Florida and the Mid-Atlantic
region, to achieve a larger concentration of stores. We have opened 12, 22 and 28 new stores in fiscal
2021, 2020 and 2019, respectively. We expect to continue to expand our store base with approximately
15 to 20 store openings planned for fiscal 2022. Beyond 2022, we expect to begin targeting at least 10%
annual unit growth, subject to the impact of supply chain disruptions which delayed a number of our new
store openings in 2021.
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The below diagram shows our store footprint, by state, as of January 2, 2022.
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New Store Development
We have an extensive 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 often conduct an on-site inspection prior to
approving any new location.
We have been successful across a variety of urban, suburban and rural locations in diverse
geographies, from coast to coast, which we believe supports the portability of the Sprouts brand and store
model into a wide range of markets. As we implement our long-term growth strategy, our future stores will
feature a smaller box size than our recent vintages, generally between 21,000 and 25,000 square feet. By
reducing our store square footage, we expect that our newer stores will have a lower cost to build and
decreased occupancy and operating costs, while reducing non-selling space that will result in generally
flat sales compared to our larger stores. We expect these cost reductions will allow us to deliver strong
returns and continue to accelerate our growth.
See “Item 2. Properties” for additional information with respect to our store locations.
Our business is subject to modest seasonality. Our average weekly sales per store fluctuate
throughout the year and are typically highest in the first half of the fiscal year and lowest during the fourth
quarter.
Seasonality
COVID-19 Pandemic
As COVID-19 has spread throughout the country, the situation has continued to evolve, including,
more recently, the surge of variants resulting in record numbers of cases and evolving governmental
requirements on vaccination and testing for employers. As we cycled periods of 2020 where our results
benefited from the initial onset of the pandemic, we have reported declines in year over year net sales,
comparable store sales growth and customer traffic. We have seen varying levels of inflation and
experienced obstacles sourcing in certain categories resulting from product supply disruptions
complicated by the pandemic. In addition, due to continued difficulties in obtaining necessary equipment
from third parties due to supply chain delays complicated by the COVID-19 pandemic, seven of our
planned new store-openings in the fourth quarter of 2021 were delayed until 2022. In addition, the
possible implementation of governmental vaccine mandates and testing requirements may cause
additional costs and disruptions in workforce availability. The ultimate impact of the COVID-19 pandemic
on our results of operations for future periods will depend on the length, severity and potential resurgence
of the pandemic, vaccine efficacy, adoption and mandates, the emergence and severity of COVID-19
variants and governmental, team member and consumer actions taken in response, which we cannot
predict. These uncertainties make it challenging for our management to estimate our future business
performance. See “Risk Factors—The coronavirus (COVID-19) pandemic has disrupted our business and
could negatively impact our financial condition.” for additional information.
Our Competition and Industry
We operate within the 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. Based on our industry experience, we
believe our new stores capture market share from conventional supermarkets and specialty concepts in
the supermarket segment.
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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 and differentiated products 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 attribute-driven products along with
exceptional customer engagement.
Insurance and Risk Management
We use a combination of insurance and self-insurance to provide for potential liability for workers’
compensation, general liability, product liability, director and officers’ liability, team member healthcare
benefits, and other casualty and property risks. Changes in legal trends and interpretations, variability in
inflation rates, changes in the nature and method of claims settlement, benefit level changes due to
changes in applicable laws, insolvency of insurance carriers, and changes in discount rates could all
affect ultimate settlements of claims. We evaluate our insurance requirements on an ongoing basis to
ensure we maintain adequate levels of coverage.
Trademarks and Other Intellectual Property
We believe that our intellectual property has substantial value and has contributed to the success of
our business. In particular, our trademarks, including our registered SPROUTS FARMERS MARKET®
and SPROUTS® 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.
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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, and 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. In
addition, we continue our focused efforts on limiting risk of a cyber-breach by investing in IT security
technology tools, resources, penetration assessments, third-party security audits and employee training.
Regulatory Compliance
Our stores and online retail operations are subject to various local, state and federal laws,
regulations and administrative practices affecting our business. We must comply with provisions
regulating health, sanitation and food safety standards, food labeling, equal employment, minimum
wages, data privacy, environmental protection, licensing for the manufacture, preparation and 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 by us and our
vendors 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 Environmental Protection Agency (“EPA”).
Food. The FDA has comprehensive authority to regulate the manufacture, labeling, distribution,
sale, marketing and 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 (“FSIS”) 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 participation in USDA's Hazard Analysis and Critical Control Points (“HACCP”)
program or FDA's Hazard Analysis and Risk-Based Prevention Controls (“HARPC”) program, as
applicable, which require 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 and FSIS also exercise 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, and allergen
disclosures. The agencies also regulate 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 now in effect. In addition, various nutrition initiatives that will
impact many actors in our supply chain, such as the elimination of certain partially hydrogenated oils and
the adoption of a new nutritional labeling format, began to go into effect in 2020.
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 become mandatory in 2022.
AMS also enforces the Perishable Agricultural Commodities Act (PACA) which imposes fair
business practices on parties engaged in the sale of perishable fruits, vegetables and some nuts. Entities
that buy and sell perishable commodities require a PACA license and disputes about sales of produce are
subject to rules and regulations under PACA.
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 a separately defined FDA-regulated product that is also subject to the general food
regulations. Dietary supplements are allowed to carry structure/function claims which relate to support of
healthy functioning. However, no statement on a dietary supplement may expressly or implicitly represent
that it will diagnose, cure, mitigate, treat or prevent a disease.
Cosmetics. The FDA has comprehensive authority to regulate cosmetics under the FDCA and the
Fair Packaging and Labeling Act (“FPLA”). No cosmetic product labeling or marketing may advertise any
therapeutic use, such as treating or preventing disease, or claim to affect the structure or function of the
body.
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Homeopathic Products. The FDA has the authority to regulate homeopathic products. Under the
FDCA, homeopathic products are subject to the same requirements related to approval, adulteration and
misbranding as other drug products. There are no FDA-approved products labeled as homeopathic. any
product labeled as homeopathic is being marketed in the U.S. without FDA evaluation for safety or
effectiveness.
Food, Cosmetics, Homeopathic Product and Dietary Supplement Advertising. The FTC exercises
jurisdiction over the advertising of foods, cosmetics, homeopathic products 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 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.
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”).
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
and all amendments to those reports, and the Proxy Statement for our Annual Meeting of Stockholders
are made available, free of charge, on our investor relations website at http://investors.sprouts.com/, as
soon as reasonably practicable after such reports have been filed with or furnished to the SEC.
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Item 1A. Risk Factors
Certain factors may have a material adverse effect on our business, financial condition and results
of operations. You should carefully consider the risks and uncertainties described below, together with all
of the other information in this Annual Report on Form 10-K, including our consolidated financial
statements and related notes. Any of the following risks could materially and adversely affect our
business, results of operations, cash flows, financial condition, or prospects and cause the value of our
common stock to decline.
Market and Other External Risks
The coronavirus (COVID-19) pandemic has disrupted our business and could negatively impact
our financial condition.
The unprecedented global outbreak of the novel coronavirus (COVID-19) that began in the first
quarter of 2020 has disrupted our business and could continue to do so for the foreseeable future until the
impact of the pandemic subsides.
Our operations have generally stabilized since the onset of the crisis; however, the COVID-19
pandemic has strained our entire supply chain, store operations and merchandising functions. We have
encountered varying degrees of difficulties and delays in obtaining certain products from our distributors,
delivering products to our stores and adequately staffing our stores and distribution centers. If we are
unable to continue to source, transport and stock products in our stores or to maintain adequate staffing
levels in our stores and distribution centers due to disruptions caused by the COVID-19 crisis, we will be
unable to maintain inventory levels and continue to operate our stores at levels to meet customer
demand. Further, if we do not identify and source appropriate products in response to our customers’
evolving needs as the COVID-19 crisis evolves, we may lose existing customers and fail to attract new
customers, which could cause our sales to decrease, resulting in a material adverse effect on our
business, financial condition, results of operations and cash flows.
We have incurred, and expect to continue to incur, significant costs to support our front-line store
team members, including expenses for added labor, store bonuses, government-mandated wage
increases, enhanced benefits and safety measures. If, as a result of the impact of the COVID-19
pandemic, we are unable to continue to provide our team members with appropriate compensation and
protective measures, we may be unable to retain current or attract new team members to perform
necessary functions within our stores and engage with our customers. There is no assurance we will be
able to hire sufficient numbers of individuals to meet our needs. In addition, nearly all of our store support
team members remain in a remote work environment in an effort to mitigate the spread of COVID-19. Our
failure to provide appropriate technological resources and maintain adequate safeguards around our
remote work environment could result in loss of productivity and usage errors by our team members or
the loss or compromise of confidential customer, team member or company data. In addition, the remote
work environment may increase certain risks to our business, including phishing and other cybersecurity
attacks.
We have experienced instances of our team members contracting COVID-19 that have generally
tracked national trends, and in response, we follow CDC and other health authority guidelines to report
positive test results and reduce further transmission. Any widespread transmission of COVID-19 among
our team members within a particular store or geographical area might necessitate that we temporarily
close impacted stores, which may negatively affect our business and financial condition, as well as the
perception of our company. Further, if individuals believe they have contracted COVID-19 in our stores or
believe that we have not taken appropriate precautionary measures to reduce the transmission of COVID-
19, we may be subject to costly and time-consuming litigation.
Measures taken by governmental authorities to reduce the transmission of COVID-19, including
vaccine and testing mandates, may cause additional costs and disruptions in workforce availability. In
addition, the COVID-19 pandemic has required and may continue to require us to make controversial
decisions and recommendations about precautionary measures such as facial coverings, vaccinations
and testing that could impact our results, including by impacting our brand, team member retention and
satisfaction, and the willingness of customers to visit our stores.
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Although our grocery store operations are generally deemed “essential” operations by federal, state
and local authorities, any reimplementation of reduced operating hours and restrictions on the number of
customers allowed in our stores at a given time to promote social distancing could negatively impact store
traffic. Failure to comply with any governmental regulations promulgated in response to the COVID-19
crisis could result in costly litigation, enforcement actions and penalties. Store traffic may further decline
as customers shop less frequently, choose other retail or online outlets to minimize potential exposure to
COVID-19 or return to restaurants and other outlets to purchase and consume food as state economies
have reopened. We have incurred incremental ecommerce fees from pre-pandemic levels as more
customers adopt our digital solutions.
The full extent to which the COVID-19 pandemic impacts our business and financial condition will
largely depend on future developments, which are highly uncertain and cannot be predicted, including
new information which may emerge concerning the severity of the pandemic, emergence of variants and
the actions necessary to contain COVID-19 or treat its impact.
Supply chain disruptions have delayed our store growth plans.
Due to continued difficulties in obtaining necessary equipment from third parties due to supply chain
delays complicated by the COVID-19 pandemic, seven of our planned new store-openings in the fourth
quarter of 2021 were delayed until 2022. We may continue to experience delays in our new store
openings until disruptions to the global supply chain have been resolved, the timing of which is uncertain.
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. In addition to the
impact of the COVID-19 pandemic, 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 macroeconomic factors that affect consumer
spending and confidence or buying habits may materially adversely affect the demand for products we
sell in our stores. As a result, consumers may be more cautious and could shift their spending to lower-
priced competition, such as warehouse membership clubs, dollar stores, online retailers 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 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.
Food deflation across multiple categories, particularly in produce and proteins, could also 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.
Our failure to compete successfully in our competitive industry may adversely affect our revenues
and profitability.
We operate in the 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 differentiated product selection, quality, convenience, customer engagement, store format,
location, price and delivery options. Our failure to offer products or services that appeal to our customers’
preferences could lead to a decrease in our sales. To the extent that our competitors offer lower prices or
similar products, 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
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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 customer traffic and market share, reduction
in margin from competitive price changes or greater operating costs.
We rely heavily on sales of fresh produce and quality natural and organic products, and product
supply disruptions may have an adverse effect on our profitability and operating results.
We have a significant focus on perishable products, including fresh produce and natural and organic
products. Sales of produce accounted for approximately 21% and 22% of our net sales in fiscal 2021 and
2020, respectively. Despite temporary challenges related to the COVID-19 pandemic, we have generally
not experienced significant difficulty to date in maintaining the supply of our produce and fresh, natural
and organic products that meet our quality standards. However, 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
(including the potential effects of climate change), any of which can lower crop yields and reduce crop
size and quality. This 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 stores or 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 January 2, 2022, we operated 128 stores in California, making California our largest market
representing 34% of our total stores in fiscal 2021. We also have store concentration in Texas, Arizona
and Colorado, operating 47, 43 and 32 stores in those states, respectively, and representing 13%, 11%
and 9% of our total stores in fiscal 2021, respectively. As we execute our long-term growth strategy, we
may become even more concentrated in these markets. 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;
regulation; wage increases; changes in economic conditions; floods, prolonged droughts, windstorms
such as tornados, cyclones, hurricanes and tropical storms, winter storms or other severe weather
conditions (whether or not caused by climate change); and other catastrophic occurrences, such as
pandemics, earthquakes or wildfires. Such conditions may result in reduced customer traffic and
spending in our stores, physical damage to our stores, full or partial loss of power in 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 whether from self or third-party distribution, delays in the delivery of
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goods to our stores and a reduction in the availability of products in our stores. Any of these factors may
disrupt our business and materially adversely affect our financial condition, results of operations and cash
flows.
Fluctuations in commodity prices and availability may impact profitability.
Many products we sell include ingredients such as wheat, corn, oils, milk, sugar, cocoa, nuts and
other key commodities. Many commodity prices are subject to significant fluctuations and may be
impacted by tariffs and inflation. 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. If we are unable to mitigate these fluctuations, 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.
A widespread health epidemic or other incidents beyond our control could materially impact our
business.
As evidenced by the ongoing COVID-19 pandemic, our business could be severely impacted by
other widespread regional, national or global health epidemics or other incidents beyond our control such
as terrorism, riots, acts of violence and other crimes. Such events may cause customers to avoid public
gathering places such as our stores or otherwise change their shopping behaviors. Additionally, these
occurrences could 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 growth strategy, we must have sufficient capital to continue to make significant
investments in our new and existing stores and advertising. 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. 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 strategy may require us to delay, scale back or eliminate some or
all of our operations or the expansion of our business, which may have a material adverse effect on our
business, operating results, financial condition or prospects.
Increasing energy costs, unless offset by more efficient usage or other operational responses,
may impact our profitability.
We utilize natural gas, water, sewer and electricity in our stores and our transportation providers 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 or otherwise, will
increase the costs of operating our stores and distribution centers. 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.
Business and Operating Risks
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Our continued growth largely 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 our long-term growth 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; successfully execute
and gain customer acceptance of our new store format; and address competitive merchandising,
distribution, operational 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 12 and 22 stores in fiscal 2021 and 2020, respectively, and we currently expect to open
approximately 15 to 20 new stores in 2022. Beyond 2022, we expect to achieve 10% annual unit growth,
including penetration of new markets with a greater concentration of new stores. However, we may not
achieve this expected level of new store growth due to supply chain disruptions or otherwise. 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.
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 achieve 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 general economic conditions, competition, cycling prior year performance and
the other matters discussed in these Risk Factors. 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
44% and 42% of our total purchases in fiscal 2021 and 2020, respectively. 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. Our primary supplier of meat and seafood products accounted for
approximately 13% of our total purchases in both fiscal 2021 and 2020, respectively. Due to this
concentration of purchases from a small number of third-party suppliers, the cancellation of our
distribution arrangements or the disruption, delay or inability of our suppliers to deliver product to our
stores in quantities or within service parameters that meet our requirements may materially and adversely
affect our operating results while we establish alternative supply chain channels. Another 3% of our total
purchases in both fiscal 2021 and 2020, respectively, were made through our secondary supplier of dry
grocery and frozen food products, UNFI. Our current contractual relationship with UNFI continues through
September 30, 2022. 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 may not be able to find replacement suppliers
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on commercially reasonable terms, which would have a material adverse effect on our financial condition,
results of operations and cash flows.
Any significant interruption in the operations of our distribution centers or supply chain network
could disrupt our ability to deliver our produce and other products in a timely manner.
We self-distribute our produce through seven distribution centers located in Arizona, Texas,
northern California, southern California, Georgia, Colorado and Florida. As we further expand our
geographic footprint, we may require additional distribution centers. Any unanticipated or unusual
expenses or significant interruption or failure 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, integration of new distribution
centers into our supply chain network, inability of our new distribution centers to perform as expected or
contractual disputes with third-party service providers could result in increased expenses and adversely
impact our ability to distribute produce and other products 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 or transportation network were interrupted for any reason, causing delays in shipment
of product 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 distribution and 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, security breaches or non-compliance involving, our information technology
systems could harm our ability to run our business and expose us to potential liability and loss of
revenues.
We rely extensively on information technology systems for point-of-sale processing in our stores,
supply chain, financial reporting, human resources, store operations 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
tampering with hardware and breaches of our transaction processing or other systems that could result in
the compromise of confidential customer or team member data, ransomware attacks, catastrophic events,
and usage errors by our team members. Phishing attacks have emerged as particularly pervasive,
including as a means for ransomware attacks, which have increased both in frequency and breadth. In
response, we have implemented numerous security protocols in order to strengthen security, and we
maintain a customary cyber insurance policy, but there can be no assurance breaches will not occur in
the future, be detected in a timely manner or be covered by our insurance policy. Significant expenditures
could be required to remedy future cybersecurity problems and protect against future breaches.
Additionally, compliance with current and future applicable U.S. privacy, cybersecurity and related laws,
including for example the California Privacy Act of 2018 (“CCPA”) and the California Privacy Rights Act
(“CPRA”), can be costly and time-consuming. These costs could have a material adverse effect on our
business, and our efforts may not meaningfully limit the success of future attempts to breach our
information technology systems.
Our information technology systems may also fail to perform as we anticipate, and we may
encounter difficulties or significant expenses in implementing new systems, adapting these systems to
changing technologies or legal requirements or expanding them to meet the future needs and growth of
our business. If our systems are improperly implemented, breached, damaged, cease to function
properly, or are perceived to have failed, 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 brand and
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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.
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 provide us with products or 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, product liability or negligence lawsuits or government enforcement actions. 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 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:
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, innovative, 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 on-trend 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, product attributes, 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 with respect to product offerings
and customer engagement options, our sales may decrease, which could have a material adverse effect
on our business, financial condition, results of operations and cash flows.
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Our newly opened stores may negatively impact our financial results in the short-term, and may
not achieve sales and operating levels consistent with our more mature stores on a timely basis
or at all.
We have actively pursued new store growth and plan to continue doing so in the future. Our new
store openings may not be as 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. 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.
On many of our projects, we have received landlord contributions for leasehold improvements and
other build-out costs. We cannot guarantee that we will be able to continue to receive landlord
contributions at the same levels or at all. Any reductions of landlord contributions could have an adverse
impact on our new store cash-on-cash returns and our operating results.
We may be unable to maintain or 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
capture efficiencies of scale, improve our systems, sustain cost discipline, optimize promotional activity
and maintain appropriate store labor levels and disciplined product selection, our customer traffic and
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.
If we fail to maintain our reputation and the value of our brand, our sales may decline.
We believe our continued success depends on our ability to maintain and grow the value of the
Sprouts brand. Maintaining, promoting and positioning our brand and reputation will depend largely on the
success of our marketing and merchandising efforts and our ability to provide a consistent, high-quality
customer experience. Brand value is based in large part on perceptions of subjective qualities, and even
isolated incidents involving our company, our team members, suppliers, agents or third-party service
providers, or the products we sell can erode trust and confidence, particularly if they involve our private
label products, or result in adverse publicity, governmental investigations or litigation. Our brand could be
adversely affected if we fail to achieve these objectives, or if our public image or reputation were to be
tarnished by negative publicity.
The loss of key management could negatively affect our business.
We are dependent upon a number of key management and other team members. If we were to lose
the services of a key member of our management team or 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
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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. Due to concerns around
COVID-19 and other factors, we have experienced, and could continue to experience, a shortage of labor
for store positions. Such labor shortages could be further exacerbated by expanded COVID-19
vaccination or testing requirements. 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.
Higher wage and benefit costs could adversely affect our business.
Changes in federal and state minimum wage laws and other laws relating to employee
compensation and benefits 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 potential liabilities,
including for workers’ compensation, general liability (including, in connection with legal proceedings
described under “—Legal proceedings could materially impact our business, financial condition, results of
25
operations and cash flows” below), property insurance, director and officers’ liability insurance, vehicle
liability and team member health-care benefits. Liabilities associated with the risks that are retained by us
are estimated, in part, by considering historical claims experience, demographic factors, severity factors
and other actuarial assumptions. Our results could be materially impacted by claims and other expenses
related to such plans if future occurrences and claims differ from these assumptions and historical trends.
We may be unable to generate sufficient cash flow to satisfy our debt service obligations, which
could adversely impact our business.
As of January 2, 2022, we had outstanding indebtedness of $250.0 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.
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 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.
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, 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, distribution and promotion of foods, cosmetics,
homeopathic and dietary supplements, including powers to issue a public warning letter to a company,
publicize information about adulterated or misbranded products, institute an administrative detention of
products, 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.
Dietary Supplement, CBD and Homeopathic Product Risks. 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, 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. As a retailer of certain topical or ingestible cannabidiol (“CBD”)
products, the FDA also has the authority to remove from the market any CBD product if it is adulterated,
its labeling is false or misleading, it is otherwise misbranded, or if it violates any other FDCA or FDA
requirement or regulation. This enforcement authority extends to states that have legalized and regulated
the distribution of CBD products. The FDCA also provides FDA with the authority to remove homeopathic
products from the market that are adulterated or misbranded or contain improper or excessive amounts of
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active ingredients. Further marketing homeopathic products with quality issues have also been targets for
litigation.
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 oversight of the FTC and pursuant to 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 costly litigation, and impede our ability to deliver
merchandise in sufficient quantities or quality to our stores, which could result in a material adverse effect
on our business, financial condition, results of operations and cash flows.
Our reputation could also suffer from real or perceived issues involving the labeling or marketing of
products we sell as “natural.” Although the FDA and the USDA have each issued statements regarding
the appropriate use of the word “natural,” 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 promulgated regulations that require disclosure of
whether food offered for sale contains bioengineered (GMO) ingredients. Implementation began in
January 2022.
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 to require all actors in the food
supply chain to expand their safety programs and record keeping processes. 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.
Ecommerce Platform and Third-Party Risks. Our online order ecommerce platform is subject to the
same laws and regulations as our retail operations. Product statements made on our website must be in
accordance with labeling requirements. 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 legal 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
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reformulated, eliminated or relabeled certain of their products and we have revised certain provisions of
our sales and marketing program.
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, data privacy, consumer protection and alcoholic beverage sales. Due to the
COVID-19 pandemic, we are subject to additional governmental regulations and health guidelines, as well
as other voluntary safety protocols. 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 permits, 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; or require us to discontinue certain operations. 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 data collection
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, data
security and privacy, accessibility and other legal actions in the ordinary course of our business, including
litigation arising from the COVID-19 pandemic, 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
28
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.
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® and SPROUTS®, 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 impacted
our financial statement presentation and financial results.
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. If we are
unable to maintain effective internal control over financial reporting, if we identify any material
29
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, 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, 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 Stock Market, the SEC,
or other regulatory authorities, which could require additional financial and management resources.
If our goodwill or other intangible assets become impaired, we may be required to record a
significant charge to earnings.
We have a significant amount of goodwill and other intangible assets. As of January 2, 2022, we
had goodwill and intangible assets of approximately $368.9 million and $185.0 million, respectively, which
represented approximately 13% and 6% 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, an immediate
charge to earnings would be recorded for the amount by which the reporting unit's carrying amount
exceeds its fair value, not to exceed the carrying amount of the goodwill, which would adversely affect our
operating results.
Our nutrition-oriented educational activities may be impacted by government regulation or our
inability to secure adequate liability insurance.
We provide nutrition-oriented information 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.
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. 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.
30
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. These include, without
limitation, the following provisions:
a classified board of directors (referred to as the “Board”) whose members serve staggered
three-year terms;
“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;
inability of our stockholders to call 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 action, including the removal of directors; and
required 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.
Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of
delaying or deterring a change in control could limit the opportunity for our stockholders to receive a
premium for their shares of our common stock, and could also affect the price that some investors are
willing to pay for our common stock.
If securities or industry analysts cease publishing research or reports about us, our business, or
our market, or if they adversely change their recommendations regarding our stock, our stock
price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or
securities analysts may publish about us, our business, our market or our competitors. If we do not
maintain adequate research coverage, or if any of the analysts who may cover us downgrade our stock or
publish inaccurate or unfavorable research about our business or provide relatively more favorable
recommendations about our competitors, our stock price could decline. If any analyst who may cover us
were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in
the financial markets, which in turn could cause our stock price or trading volume to decline.
Since we do not expect to pay any cash dividends in the near future, investors may be forced to
sell their stock in order to obtain a return on their investment.
Although we regularly evaluate our capital structure and opportunities to create value for our
investors, we do not anticipate declaring or paying in the near 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 we must satisfy in order 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, 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 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.
31
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We seek to select sites for our store locations in markets with growth potential where our target
customers and supply chain capabilities intersect. As of January 2, 2022, we had 374 stores located in 23
states, as shown in the chart below:
State
Alabama .............................................
Arizona ...............................................
California ............................................
Colorado.............................................
Delaware ............................................
Florida.................................................
Georgia...............................................
Kansas................................................
Louisiana............................................
Maryland.............................................
Missouri ..............................................
Nevada ...............................................
Number of Stores
State
3 New Jersey
43 New Mexico
128 North Carolina
32 Oklahoma
1 Pennsylvania
29 South Carolina
18 Tennessee
5 Texas
1 Utah
5 Virginia
3 Washington
14
Number of Stores
1
9
5
11
2
1
6
47
5
1
4
In fiscal 2021, we opened 12 new stores. In fiscal 2020, we opened 22 new stores.
We lease all of our stores from unaffiliated third parties. A typical store lease is for an initial 10 to 15
year term with three or 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. See “Business – New Store
Development” for additional information with respect to our store site selection process.
As of January 2, 2022, we utilized seven distribution centers. Information about such facilities, as
well as our current corporate office in Phoenix, Arizona, is set forth in the table below:
Facility
Corporate Office................................................................................................
Distribution Center ............................................................................................
Distribution Center ............................................................................................
Distribution Center ............................................................................................
Distribution Center ............................................................................................
Distribution Center ............................................................................................
Distribution Center ............................................................................................
Distribution Center ............................................................................................
State
Arizona
Arizona
California
California
Colorado
Florida
Georgia
Texas
Square Footage*
96,000
129,000
123,000
110,000
134,000
134,000
100,000
117,000
* Rounded to the nearest 1,000 square feet
We lease our corporate office and our distribution centers in Arizona, Colorado, Florida and Texas
from unaffiliated third parties; our remaining three distribution centers are leased or owned by our third-
party logistics providers. See “Business – Sourcing and Distribution” for additional information with
respect to our distribution centers.
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 or distribution center is material to our financial
condition or results of operations.
32
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 our
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.
See Note 18, “Commitments and Contingencies” to our Consolidated Financial Statements for
information regarding certain legal proceedings in which we are involved.
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 22, 2022 was
26. This number excludes stockholders whose stock is held in nominee or street name by brokers.
Dividend Policy
Although we regularly evaluate our capital structure and opportunities to create value for our
stockholders, 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 near 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 we must satisfy in order to pay cash dividends.
Issuer Purchases of Equity Securities
The following table provides information about our share repurchase activity during the thirteen
weeks ended January 2, 2022.
Period (1)
Oct 4, 2021 - Oct 31, 2021 .....................
Nov 1, 2021 - Nov 28, 2021 ...................
Nov 29, 2021 - Jan 2, 2022 ....................
Total ...........................................................
Total number
of shares
purchased
Average
price paid
per share
896,851 $
284,907 $
874,562 $
2,056,320
22.30
25.24
27.06
Total number of
shares purchas
ed
as part of public
ly
announced plan
s
or programs (2)
896,851 $
284,907 $
874,562 $
2,056,320
Approximate dollar
value of shares
that may be
purchased under
the plans or
programs (2)
142,516,000
135,324,000
111,657,000
(1)
(2)
Periodic information is presented by reference to our fiscal periods during the fourth quarter
of fiscal year 2021.
On March 3, 2021, our board of directors authorized a $300 million share repurchase
program of our common stock. The shares may be purchased on a discretionary basis from
time to time through March 3, 2024, subject to general business and market conditions and
other investment opportunities, through open market purchases, privately negotiated
transactions, or other means, including through Rule 10b5-1 trading plans.
34
Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock
between January 1, 2017 and January 2, 2022, 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 January 1, 2017 was the closing sale price on that day
of $18.92 per share. The performance shown on the graph below is based on historical results and is not
intended to suggest future performance.
(cid:38)(cid:50)(cid:48)(cid:51)(cid:36)(cid:53)(cid:44)(cid:54)(cid:50)(cid:49)(cid:3)(cid:50)(cid:41)(cid:3)(cid:24)(cid:3)(cid:60)(cid:40)(cid:36)(cid:53)(cid:3)(cid:38)(cid:56)(cid:48)(cid:56)(cid:47)(cid:36)(cid:55)(cid:44)(cid:57)(cid:40)(cid:3)(cid:55)(cid:50)(cid:55)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:55)(cid:56)(cid:53)(cid:49)(cid:13)
(cid:36)(cid:80)(cid:82)(cid:81)(cid:74)(cid:3)(cid:54)(cid:83)(cid:85)(cid:82)(cid:88)(cid:87)(cid:86)(cid:3)(cid:41)(cid:68)(cid:85)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:36)(cid:54)(cid:39)(cid:36)(cid:52)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:72)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:91)(cid:3)
(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:9)(cid:51)(cid:3)(cid:41)(cid:82)(cid:82)(cid:71)(cid:3)(cid:53)(cid:72)(cid:87)(cid:68)(cid:76)(cid:79)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:91)
(cid:7)(cid:22)(cid:24)(cid:19)
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(cid:49)(cid:36)(cid:54)(cid:39)(cid:36)(cid:52)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:72)
(cid:54)(cid:9)(cid:51)(cid:3)(cid:41)(cid:82)(cid:82)(cid:71)(cid:3)(cid:53)(cid:72)(cid:87)(cid:68)(cid:76)(cid:79)
(cid:13)(cid:7)(cid:20)(cid:19)(cid:19)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:20)(cid:18)(cid:20)(cid:18)(cid:20)(cid:26)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:85)(cid:3)(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:20)(cid:25)(cid:3)(cid:76)(cid:81)(cid:3)(cid:76)(cid:81)(cid:71)(cid:72)(cid:91)(cid:15)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:17)
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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. [Reserved]
36
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 as well as "Part II—Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K
for the fiscal year ended January 3, 2021 filed with the SEC on February 25, 2021, which provides
comparisons of fiscal 2020 and fiscal 2019, and which is incorporated by reference herein. 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 offers a unique grocery experience featuring an open layout with fresh
produce at the heart of the store. Sprouts inspires wellness naturally with a carefully curated assortment
of better-for-you products paired with purpose-driven people. We continue to bring the latest in
wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and
gluten-free. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store
count and profitability. Headquartered in Phoenix with 374 stores in 23 states as of January 2, 2022, we
are one of the largest and fastest growing specialty retailers of fresh, natural and organic food in the
United States.
Our Heritage
In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding
in 2002 through January 2, 2022, we have grown rapidly, significantly increasing our sales, store count
and profitability, including successfully rebranding 43 Henry’s Farmers Market and 39 Sunflower Farmers
Market stores added in 2011 and 2012, respectively, through acquisitions to the Sprouts banner. These
three businesses all trace their lineage back to Henry’s Farmers Market and were built with similar store
formats and operations including a strong emphasis on value, produce and service in smaller, convenient
locations.
37
In 2020, we announced the initial steps of our new long-term growth strategy that we believe will
transform our company and drive profitable growth. We are executing on this strategy, focusing on the
following areas:
Outlook
Win with Target Customers. We are focusing attention on our target customers, identified
through research as ‘health enthusiasts’ and ‘experience seekers’, where there is ample
opportunity to gain share within these customer segments. We believe our business can
continue to grow by leveraging existing strengths in a unique assortment of better-for-you,
quality products and by providing a full omnichannel offering through delivery or pickup via our
website or the Sprouts app.
Update Format and Expand in Select Markets. We are beginning to deliver unique smaller
stores with expectations of stronger returns, while maintaining the approachable, fresh-
focused farmer’s market heritage Sprouts is known for. In 2021, we opened three stores and
remodeled one store featuring our new format. Our geographic store expansion and new store
placement will intersect where our target customers live, in markets with growth potential and
supply chain support, which we believe will provide a long runway of at least 10% annual unit
growth beginning in 2023.
Create an Advantaged Fresh Supply Chain. We believe our network of fresh distribution
centers can drive efficiencies across the chain and support growth plans. To further deliver on
our fresh commitment and reputation, as well as to improve financial results, we will aspire to
ultimately position fresh distribution centers within a 250-mile radius of stores. With the
opening of two fresh distribution centers in 2021, we now have more than 85% of our stores
within 250 miles of a distribution center.
Refine Brand and Marketing Approach. We believe we are elevating our national brand
recognition and positioning by telling our unique brand story rooted in product innovation and
differentiation. We are investing savings from removing our print ad into increasing customer
engagement through digital and social connections, driving additional sales growth and loyalty.
Deliver on Financial Targets and Box Economics. We are measuring and reporting on the
success of this strategy against a number of long-term financial and operational targets. With
the implementation of our strategy, we have significantly improved our margin structure above
our 2019 baseline.
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 2021 was a 52-week year ending on January 2, 2022. Fiscal
2020 was a 53-week year ending on January 3, 2021. Fiscal 2019 was a 52-week year ending on
December 29, 2019.
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. See Note 3, “Significant Accounting
Policies” for additional information on revenue recognition related to gift cards. We do not include sales
taxes in net sales.
38
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. To account for the 53rd week in fiscal 2020, when computing
comparable store sales growth, we shifted each week back one week, thereby ignoring the first week of
fiscal 2020 to better align holidays for comparable purposes.
Historically, our net sales have increased as a result of new store openings and comparable store
sales growth. However, as we cycled periods of 2020 where our results benefitted from the initial onset of
the COVID-19 pandemic, we reported declines in 2021 year over year net sales and comparable store
sales growth. Additional factors that influence comparable store sales growth and other sales trends
include:
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 factors beyond our control, such as inflation,
deflation and tariffs;
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 largely 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 and promotional strategies, inventory shrinkage
and leverage of fixed costs of sales.
Selling, general and administrative expenses
Selling, general and administrative expenses 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 costs, pre-opening and other administrative costs.
39
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.
Store closure and other costs, net
Store closure and other costs, net primarily reflects costs incurred related to store closures,
including impairment charges of long-lived assets, severance and any exit costs associated with closing a
store. One-time disaster recovery and executive severance costs are also included here.
Factors Affecting Comparability of Results of Operations
COVID-19 Pandemic
Our results of operations for the year ended January 3, 2021 were impacted by increased demand
from our customers initially stockpiling groceries and wellness products at the onset of the COVID-19
pandemic and continuing to consume more food at home throughout the year as restaurants were not
fully reopened to pre-pandemic levels, and we in turn made significant investments in compensation,
benefits and personal protective equipment for our front-line store team members, as well as enhanced
store sanitation procedures. We also incurred increased ecommerce fees as consumers increasingly
used online shopping alternatives to purchase our products during the pandemic. Conversely, as we
cycled periods of 2020 where our results benefited from the initial onset of the COVID-19 pandemic, our
results of operations for the year ended January 2, 2022 reflect declines in year over year net sales and
comparable store sales growth as stockpiling behaviors declined and state economies reopened to pre-
pandemic levels throughout the country during the year.
Additional Week in 2020
Fiscal 2020 consisted of 53 weeks. The 53rd week resulted in additional sales and expenses as
further discussed in “—Comparison of Fiscal 2021 to Fiscal 2020” below.
Results of Operations for Fiscal 2021, 2020 and 2019
The following tables set forth our results of operations and other operating data for the periods
presented. The period-to-period comparison of financial results is not necessarily indicative of financial
results to be achieved in future periods. Fiscal 2021 and Fiscal 2019 consisted of 52 weeks, while Fiscal
2020 consisted of 53 weeks.
Fiscal 2021
Fiscal 2020
(in thousands, except per share data)
Fiscal 2019
Consolidated Statement of Income Data:
Net sales .......................................................................................... $ 6,099,869 $ 6,468,759 $ 5,634,835
3,740,017
Cost of sales ...................................................................................
1,894,818
Gross profit ................................................................................
4,089,470
2,379,289
3,890,657
2,209,212
Selling, general and administrative
expenses ......................................................................................
1,748,205
1,863,869
1,549,707
Depreciation and amortization (exclusive
of depreciation included in cost of sales) ................................
Store closure and other costs, net...............................................
Income from operations ...........................................................
Interest expense, net .....................................................................
Income before income taxes...................................................
Income tax provision ......................................................................
Net income................................................................................. $
122,258
4,673
334,076
11,684
322,392
78,235
244,157 $
124,124
(369)
391,665
14,787
376,878
89,428
287,450 $
120,491
7,260
217,360
21,192
196,168
46,539
149,629
40
Other Operating Data:
Comparable store sales growth.................................................
Stores at beginning of period .....................................................
Opened (1) ................................................................................
Closed ......................................................................................
Stores at end of period................................................................
Fiscal 2021
Fiscal 2020
Fiscal 2019
(6.7)%
362
12
—
374
6.9%
340
22
—
362
1.1%
313
28
(1)
340
(1)
Stores opened is exclusive of one store relocation during fiscal 2021 and 2019.
41
Comparison of Fiscal 2021 to Fiscal 2020
Net sales
Net sales ................................................................... $6,099,869
Comparable store sales growth ............................
(6.7)%
Fiscal 2021
Fiscal 2020
(dollars in thousands)
Change
% Change
$6,468,759
$ (368,890)
(6)%
6.9%
Net sales during 2021 totaled $6.1 billion, decreasing 6% over the prior fiscal year. The sales
decrease was primarily due to a 6.7% decrease in comparable store sales as a result of cycling the
elevated demand driven by the COVID-19 pandemic in the prior year, as well as the 53rd week in 2020.
These decreases were partially offset by sales from new stores. Comparable stores contributed
approximately 97% of total sales for 2021 and approximately 92% for the prior fiscal year.
Cost of sales and gross profit
Net sales.................................................................. $6,099,869
Cost of sales ........................................................... 3,890,657
Gross profit.............................................................. 2,209,212
Gross margin ..........................................................
36.2%
(dollars in thousands)
$6,468,759
4,089,470
2,379,289
$(368,890)
(198,813)
(170,077)
36.8%
(0.6)%
(6)%
(5)%
(7)%
Fiscal 2021
Fiscal 2020
Change
% Change
Gross profit decreased during 2021 compared to 2020 by $170.1 million to $2.2 billion. Gross
margin decreased by 0.6% to 36.2%, compared to 36.8%. The decreases were primarily driven by the
decreased sales volume resulting from cycling elevated demand in the prior year period due to the
COVID-19 pandemic. The impact of the 53rd week in the prior year on gross margin was insignificant.
Selling, general and administrative expenses
Selling, general and administrative
expenses .......................................................... $1,748,205
$1,863,869
$ (115,664)
(6)%
Percentage of net sales.....................................
28.7%
28.8%
(0.1)%
Fiscal 2021
Fiscal 2020
Change
% Change
(dollars in thousands)
Selling, general, and administrative expenses decreased $115.7 million or 6% as compared to 2020
due to lower compensation and other COVID-19 driven costs in the current year and reduced costs from
the 53rd week in 2020, partially offset by new stores opened since the comparable period in the prior
year.
42
Depreciation and amortization
Depreciation and amortization.................................... $ 122,258
Percentage of net sales...............................................
2.0%
Fiscal 2021
Fiscal 2020
Change
(dollars in thousands)
$ 124,124
$ (1,866)
1.9%
0.1%
% Change
(2)%
Depreciation and amortization expenses (exclusive of depreciation included in cost of sales)
primarily consists of depreciation and amortization for buildings, store leasehold improvements, and
equipment for new stores as well as remodel initiatives in older stores. As a percentage of net sales,
depreciation and amortization expenses (exclusive of depreciation included in cost of sales) increased
slightly to 2.0% from 1.9% as a result of sales deleverage. The impact of the 53rd week in 2020 on
depreciation and amortization was insignificant.
Store closure and other costs, net
Store closure and other costs, net................................. $
Percentage of net sales ..................................................
4,673
$
0.1%
(369) $
—
5,042
0.1%
Fiscal 2021
Fiscal 2020
Change
(dollars in thousands)
% Change
1366%
Store closure and other costs, net in 2021 of $4.7 million includes $4.8 million of impairment losses
related to the write-down of leasehold improvements and right-of-use assets. Store closure and other
costs, net in 2020 primarily represented a recognized gain on the assignment of the lease for one of our
closed locations in the first quarter of 2020, partially offset by ongoing activity associated with our closed
store locations.
Interest expense, net
Long-term debt ................................................................ $
Capital and financing leases..........................................
Deferred financing costs ................................................
Interest rate hedge and other ........................................
Total interest expense, net ............................................ $
4,601 $
906
564
5,613
11,684 $
8,864 $
970
575
4,378
14,787 $
(4,263)
(64)
(11)
1,235
(3,103)
(48)%
(7)%
(2)%
28%
(21)%
Fiscal 2021
Fiscal 2020
Change
% Change
(dollars in thousands)
The decrease in interest expense, net was primarily due to the decrease in the average balance
outstanding under the Amended and Restated Credit Agreement. This was partially offset by the interest
expense paid as a result of an unfavorable interest rate swap. See Note 13, “Long-Term Debt and
Finance Lease Liabilities” and Note 21, “Derivative Financial Instruments.”
Income tax provision
Income tax provision ............................................ $
Effective tax rate ...................................................
78,235
$
24.3%
(dollars in thousands)
89,428
(11,193)
23.7%
0.6%
(13)%
Fiscal 2021
Fiscal 2020
Change
% Change
Income tax provision decreased by $11.2 million to $78.2 million for 2021 from $89.4 million for
2020, primarily related to a decrease in income before income taxes. The effective income tax rate
increased to 24.3% in 2021 from 23.7% in 2020 primarily due to benefits recognized from amended
returns in 2020, partially offset by increased charitable contribution deductions in 2021.
43
Net income
Net income.............................................................. $ 244,157
Percentage of net sales........................................
4.0%
(dollars in thousands)
$ 287,450
$ (43,293)
4.4%
(0.4)%
(15)%
Fiscal 2021
Fiscal 2020
Change
% Change
Net income decreased $43.3 million primarily due to decreased net sales and unfavorable margin
impact, partially offset by lower selling, general and administrative expenses. Net income growth was also
negatively impacted by the benefit of the 53rd week in 2020.
Diluted earnings per share
Diluted earnings per share............................................ $
Diluted weighted average shares outstanding...........
2.10 $
2.43 $
116,077
118,224
(0.33)
(2,147)
(13)%
Fiscal 2021
Fiscal 2020
Change
(shares in thousands)
% Change
The decrease in diluted earnings per share of $0.33 was driven by lower net income, partially offset
by fewer diluted shares outstanding compared to the prior year, due primarily to the share repurchase
program.
44
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 operating leases,
divided by average invested capital. Operating lease interest represents the add-back to operating
income driven by the hypothetical interest expense we would incur if the property under our operating
leases were owned or accounted for as a finance lease (capital lease prior to adoption of ASC 842). The
assumed ownership and associated interest expense are calculated using the discount rate for each
lease as recorded as a component of rent expense within selling, general and administrative expenses.
Invested capital reflects a trailing twelve-month average.
As numerous methods exist for calculating ROIC, our method may differ from methods used by
other companies to calculate their ROIC.
those methods used by other companies to calculate their ROIC before comparing our ROIC to that of
other companies.
It is important to understand the methods and the differences in
Our calculation of ROIC for the fiscal years indicated was as follows:
Net income (2) ....................................................................................... $
Special items, net of tax (3), (4)...............................................................
Interest expense, net of tax (4)..............................................................
Net operating profit after-tax (NOPAT) ........................................... $
2019
2021
2020(1)
(dollars in thousands)
$ 287,450
6,565
11,272
$ 305,287
244,157
—
8,848
253,005
$ 149,629
377
16,214
$ 166,220
Total rent expense, net of tax (4)...........................................................
Estimated depreciation on operating leases, net of tax (4) ...................
Estimated interest on operating leases, net of tax (4), (5) .......................
NOPAT, including effect of operating leases.................................. $
150,047
(88,015)
62,032
315,037
146,630
(80,944)
65,686
$ 370,973
129,748
(61,898)
67,850
$ 234,070
Average working capital .......................................................................
Average property and equipment.........................................................
Average other assets ...........................................................................
Average other liabilities ........................................................................
193,900
712,496
568,744
(101,339)
Average invested capital ................................................................ $ 1,373,801
101,622
735,651
567,188
(100,531)
$1,303,930
37,505
737,851
567,554
(120,521)
$1,222,389
Average operating leases (6) ................................................................
1,222,513
Average invested capital, including operating leases..................... $ 2,596,314
1,196,822
$2,500,752
1,185,080
$2,407,469
ROIC, including operating leases ...................................................
12.1%
14.8%
9.7%
45
(1)
Fiscal 2020 includes 53 weeks.
(2) Net income amounts represent total net income for the past four trailing quarters.
(3)
2020 special items include professional fees related to our strategic initiatives. 2019 special items
include the direct costs associated with store closure.
(4) Net of tax amounts are calculated using the normalized effective tax rate for the periods presented.
(5)
(6)
2021, 2020 and 2019 estimated interest on operating leases is calculated by multiplying operating
leases by the 6.7%, 7.2% and 7.5% discount rate, respectively, for each lease recorded as rent
expense within direct store expense.
2021 and 2020 average operating leases represents the average net present value of outstanding
lease obligations over the trailing four quarters. 2019 average operating leases represents the net
present value of outstanding operating lease obligations.
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
Fiscal 2021
Fiscal 2020
Fiscal 2019
86,785
end of period................................................................................. $
Cash from operating activities....................................................... $
355,210
Cash used in investing activities................................................... $ (102,378) $ (121,968) $ (183,232)
(87,441)
Cash used in financing activities................................................... $ (186,858) $ (287,411) $
171,441 $
494,035 $
247,004 $
364,799 $
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. Our principal contractual obligations and
commitments consist of obligations under our Amended and Restated Credit Agreement, interest on our
Amended and Restated Credit Agreement, operating and finance leases, purchase commitments and
self-insurance liabilities. We believe that our existing cash, cash equivalents and restricted cash, and
cash anticipated to be generated from operations will be sufficient to meet our anticipated cash needs for
at least the next 12 months. Our future capital requirements will depend on many factors, including 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 $129.2 million to $364.8 million in 2021 compared to
$494.0 million in 2020. The decrease in cash flows from operating activities is primarily a result of
changes in working capital in addition to a decrease in net income. The decrease in net income is
primarily due to decreased net sales and unfavorable margin impact related to COVID-19, as well as the
benefit of the 53rd week in the prior year.
Cash flows (used in)/ from operating activities from changes in working capital were ($13.2 million)
in 2021, compared to $83.4 million in 2020. The decrease was primarily driven by the payout of incentive
compensation amounts earned in the prior year and inventory stock recovery in the current year after
levels were depleted during the height of the pandemic in the prior year.
46
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 $102.4 million and $122.0 million for 2021 and 2020, respectively. The decrease in cash
flows used in investing activities is primarily due to fewer stores under construction in 2021 as compared
to 2020.
We expect capital expenditures to be in the range of $150 - $170 million in 2022, including
expenditures incurred to date, net of estimated landlord tenant improvement allowances, primarily to fund
investments in new stores, remodels, maintenance capital expenditures and corporate capital
expenditures. We expect to fund our capital expenditures with cash on hand and cash generated from
operating activities. We do not have any material contractual commitments for future capital expenditures
as of January 2, 2022.
Financing Activities
Cash flows used in financing activities were $186.9 million for 2021 compared to $287.4 million for
2020. During 2021, cash flows used in financing activities primarily consisted of $188.3 million for share
repurchases. During 2020, cash flows used in financing activities primarily consisted of $288.0 million of
payments on the Amended and Restated Credit Agreement.
Long-term Debt and Credit Facilities
Long-term debt outstanding was $250.0 million as of January 2, 2022 and January 3, 2021.
See Note 13, “Long-Term Debt and Finance Lease Liabilities” for a description of our Amended and
Restated Credit Agreement and our Former Credit Facility (as defined therein).
Share Repurchase Program
On March 3, 2021, the Company’s board of directors authorized a $300 million share repurchase
program for its common stock.
The shares under the Company’s repurchase program may be purchased on a discretionary basis
from time to time through March 3, 2024, subject to general business and market conditions and other
investment opportunities, through open market purchases, privately negotiated transactions, or other
means, including through Rule 10b5-1 trading plans. 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 13, “Long-Term Debt and Finance Lease Liabilities” 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............................................................
Average price per common share acquired................................................. $
Total cost of common shares acquired......................................................... $
Year Ended
January 2,
2022
7,416,357
25.40 $
188,343 $
January 3,
2021
—
—
—
47
Shares purchased under our repurchase programs were subsequently retired and the excess of the
repurchase price over par value was charged to retained earnings.
Subsequent to January 2, 2022 and through February 24, 2022, we repurchased an additional 0.2
million shares of common stock for $5.7 million.
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 have previously utilized
borrowings under our Amended and Restated Credit Agreement to fund our share repurchase program
as described above. The interest rate we pay on our borrowings increases as our leverage ratio
increases.
The Amended and Restated Credit Agreement contains financial, affirmative and negative
covenants. The negative covenants include, among other things, limitations on our ability to:
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 January 2, 2022.
Our Amended and Restated Credit Agreement is defined and more fully described in Note 13,
“Long-Term Debt and Finance Lease Liabilities” of our audited consolidated financial statements
contained elsewhere in this Annual Report on Form 10-K.
48
Contractual Obligations
Our principal contractual obligations and commitments consist of obligations under our Amended
and Restated Credit Agreement, interest on our Amended and Restated Credit Agreement, operating and
finance leases, purchase commitments and self-insurance liabilities. See Note 13, “Long-Term Debt and
Finance Lease Liabilities,” Note 7, "Leases," Note 18, "Commitments and Contingencies" and Note 15,
"Self-Insurance Programs" to our consolidated financial statements located elsewhere in this Annual
Report on Form 10-K for more information on the nature and timing of these obligations.
The future amount and timing of interest payments are expected to vary with the outstanding
amounts and then prevailing contractual interest rates, net of interest rate swaps. Interest payments
through the March 27, 2023 maturity date of our Amended and Restated Credit Agreement based on the
outstanding amounts as of January 2, 2022 and LIBOR rates in effect at the time of this filing, are
estimated to be approximately $12.0 million. These payments are $10.3 million in 2022 and
approximately $1.7 million thereafter.
Real estate obligations, including legally binding minimum lease payments for leases executed but
not yet commenced, were $451.5 million as of January 2, 2022. These obligations are $4.1 million in
2022 and $447.4 million thereafter.
Our purchase commitments under noncancelable service and supply contracts that are enforceable
and legally binding totaled $14.3 million as of January 2, 2022. These commitments are $7.9 million in
2022 and $6.4 million thereafter. Obligations under contracts that we can cancel without a significant
penalty are not included in purchase commitments.
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.
Impact of Inflation and Deflation
Inflation and deflation in the prices of food and other products we sell may periodically affect our
sales, gross profit and gross margin. Food inflation, when combined with reduced consumer spending,
could also reduce sales, gross profit margins and comparable store sales. 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.
The short-term impact of inflation and deflation is largely dependent on whether or not the effects are
passed through to our customers, which is subject to competitive market conditions.
Food inflation and deflation is affected by a variety of factors and our determination of whether to
pass on the effects of inflation or deflation to our customers is made in conjunction with our overall pricing
and marketing strategies, as well as our competitors’ responses. Although we may experience periodic
effects on sales, gross profit, gross margins and cash flows as a result of changing prices, including most
recently from inflationary pressures due primarily to supply chain disruptions complicated by the COVID-
19 pandemic, we do not expect the effect of inflation or deflation to have a material impact on our ability
to execute our long-term business strategy.
49
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. 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 the most difficult, complex or subjective judgements:
inventories, lease assumptions, self-insurance reserves, goodwill and intangible assets, impairment of
long-lived assets, and income taxes. Accordingly, we believe these are the most critical to fully
understand and evaluate our financial condition and results of operations.
Inventories
We value our inventory at the lower of cost or net realizable value. The significant estimate used in
inventory valuation is the estimate of inventory shrinkage.
Shrink expense is accrued as a percentage of sales based on historical shrink trends. We perform
physical inventories regularly, and our shrink accrual represents the loss estimate since the last physical
inventory date through the reporting date. Actual physical inventory losses could vary significantly from
our estimates due to changes in market conditions and other internal or external factors.
We believe that all inventories are saleable and no allowances or reserves for obsolescence were
recorded as of January 2, 2022 and January 3, 2021.
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 option
periods that are determined to be reasonably certain. The expected lease term is used in determining
whether the lease is accounted for as an operating lease or a finance lease. An increase in the expected
lease term will increase the probability that a lease will be considered a finance 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 finance 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 finance lease. For finance leases, 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 finance lease.
50
Self-Insurance Reserves
We are self-insured for costs related to workers’ compensation, general liability and employee
health benefits up to certain stop-loss limits. As of January 2, 2022, the consolidated self-insurance
reserve balance was $50.5 million, of which a majority of the balance related to workers' compensation
and general liability reserves. Liabilities for self-insurance reserves are estimated based on independent
actuarial estimates, which are based on historical information and assumptions about future events. We
utilize various techniques, including analysis of historical trends and actuarial valuation methods, to
estimate the cost to settle reported claims and claims incurred but not yet reported as of the balance
sheet date. The actuarial valuation methods consider loss development factors, which include the
development time frame and expected claim reporting and settlement patterns, and expected loss costs,
which include the expected frequency and severity of claim activity. We believe our assumptions are
reasonable, but the estimated reserves for these liabilities could be affected materially by future events or
claims experiences that differ from historical trends and assumptions.
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.
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 considers factors including changes in the competitive market, budget-to-actual
performance, trends in market capitalization for us and our peers, turnover in key management personnel
and overall changes in macroeconomic environment.
Our impairment evaluation for our indefinite-lived intangible assets consists of a qualitative
assessment similar to that for goodwill. If our qualitative assessment indicates it is more likely than not
that the estimated fair value of an indefinite-lived intangible asset exceeds its carrying value, no further
analysis is required and the asset is not impaired.
If our qualitative assessments indicate that it is more likely than not that the estimated fair value is
less than carrying value, we compare the estimated fair value of the reporting unit or asset to its carrying
amount with an impairment loss recognized for the amount, if any, by which carrying value exceeds
estimated fair value. There are significant judgments and estimates in determining the estimated fair
value of the reporting unit or asset; it is therefore possible that materially different amounts could be
recorded if we used different assumptions or if the underlying circumstances were to change.
As of January 2, 2022, our consolidated goodwill balance was $368.9 million, and our consolidated
indefinite-lived intangible assets balance was $185.0 million. No impairment of goodwill or indefinite-lived
intangible assets was recorded during fiscal 2021, 2020 or 2019 because the fair value of those assets
was substantially above carrying value.
51
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment 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. Our estimates of cash flows used to assess impairment
involve significant judgment and are based upon assumptions on variables such as sales growth rate,
gross margin, payroll and other controllable expenses. Application of alternative assumptions and
definitions could produce significantly different results.
We recorded an impairment loss of $4.8 million and $4.1 million in 2021 and 2019, respectively,
during the normal course of business. No impairment was recorded in 2020. See Note 3, “Significant
Accounting Policies” and Note 6, “Property and Equipment”.
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.
52
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
As described in Note 13, “Long-Term Debt and Finance Lease Liabilities” 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 could be exposed to fluctuations in interest rates. Based solely on the $250.0 million
principal outstanding under our Amended and Restated Credit Agreement as of January 2, 2022, each
hundred basis point change in LIBOR would result in a change in interest expense by $2.5 million
annually. We 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 one outstanding swap at
January 2, 2022 and the two outstanding swaps at January 3, 2021 was $250.0 million, respectively,
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 $250.0 million principal outstanding under our Amended
and Restated Credit Agreement as of January 2, 2022, each hundred basis point change in LIBOR would
result in no change in interest expense 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 21, “Derivative
Financial Instruments”).
53
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 (PCAOB ID 238) ...........................................
Consolidated Balance Sheets as of January 2, 2022 and January 3, 2021 ..............................................
Consolidated Statements of Income for the fiscal years ended January 2, 2022, January 3, 2021,
and December 29, 2019 .....................................................................................................................................
Consolidated Statements of Comprehensive Income for the fiscal years ended January 2, 2022,
January 3, 2021, and December 29, 2019 ......................................................................................................
Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 2, 2022,
January 3, 2021, and December 29, 2019 ......................................................................................................
Consolidated Statements of Cash Flows for the fiscal years ended January 2, 2022, January 3,
2021, and December 29, 2019..........................................................................................................................
Notes to Consolidated Financial Statements ..................................................................................................
55
58
59
60
61
62
63
54
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 January 2, 2022 and January 3, 2021, and the related consolidated
statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the
three years in the period ended January 2, 2022, 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 January 2, 2022, 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 January 2, 2022 and January 3, 2021, and the
results of its operations and its cash flows for each of the three years in the period ended January 2, 2022
in conformity with accounting principles generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of January 2, 2022, 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 leases in 2019.
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. 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
performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
55
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the
consolidated financial statements that was communicated or required to be communicated to the audit
committee and that (i) relates to accounts or disclosures that are material to the consolidated financial
statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing
a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Self-insurance Reserves
As described in Notes 3 and 15 to the consolidated financial statements, the Company is self-insured for
costs related to workers’ compensation, general liability and employee health benefits up to certain stop-
loss limits. As of January 2, 2022, the Company’s recorded amounts for general liability, workers’
compensation and team member health benefit liabilities was $50.5 million, with the most significant
portion of the reserve balance related to workers’ compensation and general liability self-insurance
reserves. Management estimates the self-insurance reserves based on independent actuarial estimates,
which are based on historical information and assumptions about future events. Management utilizes
various techniques, including analysis of historical trends and actuarial valuation methods, to estimate the
cost to settle reported claims and claims incurred but not yet reported as of the balance sheet date. When
estimating the self-insurance reserves, several factors are considered by management, including (i) loss
development factors, which include the development time frame and expected claim reporting and
settlement patterns, and (ii) expected loss costs, which include the expected frequency and severity of
claim activity.
The principal considerations for our determination that performing procedures relating to the valuation of
self-insurance reserves is a critical audit matter are (i) the significant judgment by management when
estimating the self-insurance reserves due to the use of various techniques to estimate the cost to settle
reported claims and claims incurred but not yet reported; (ii) the high degree of auditor judgment,
subjectivity and effort in performing procedures and evaluating audit evidence related to the loss
development factors and expected loss costs; and (iii) the audit effort involved the use of professionals
with specialized skill and knowledge.
56
Addressing the matter involved performing procedures and evaluating audit evidence in connection with
forming our overall opinion on the consolidated financial statements. These procedures included testing
the effectiveness of controls relating to the valuation of self-insurance reserves, including controls over
the historical information and assumptions about future events used in the actuarial valuation methods.
These procedures also included, among others (i) evaluating management’s self-insurance program
agreements and (ii) testing the completeness and accuracy of the underlying historical claims data used
in management’s assessment. Professionals with specialized skill and knowledge were used to assist in
testing management’s process for estimating the valuation of the self-insurance reserves, including
evaluating (i) the appropriateness of the actuarial valuation methods and (ii) the reasonableness of
significant assumptions related to loss development factors and expected loss costs by considering (i)
current and past claim and settlement activity and (ii) whether the assumptions were consistent with
evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
February 24, 2022
We have served as the Company’s auditor since 2011.
57
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
January 2,
2022
January 3,
2021
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...............................
Operating lease assets, net ...................................................................................
Intangible assets, net of accumulated amortization ...........................................
Goodwill.....................................................................................................................
Other assets .............................................................................................................
245,287
21,574
265,387
35,468
567,716
716,029
1,072,019
184,960
368,878
13,513
Total assets ......................................................................................................... $ 2,923,115
$
169,697
14,815
254,224
27,224
465,960
726,500
1,045,408
184,960
368,878
14,698
$ 2,806,404
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ............................................................................................... $
Accrued liabilities................................................................................................
Accrued salaries and benefits ..........................................................................
Current portion of operating lease liabilities...................................................
Current portion of finance lease liabilities.......................................................
Total current liabilities .............................................................................................
Long-term operating lease liabilities .....................................................................
Long-term debt and finance lease liabilities ........................................................
Other long-term liabilities ........................................................................................
Deferred income tax liability ...................................................................................
Total liabilities .....................................................................................................
145,901
155,996
58,743
151,755
1,078
513,473
1,095,909
259,656
36,306
57,895
1,963,239
$
139,337
143,402
76,695
135,739
959
496,132
1,069,535
260,459
40,912
58,073
1,925,111
Commitments and contingencies (Note 18)
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,
111,114,374 shares issued and outstanding, January 2, 2022;
117,953,435 shares issued and outstanding, January 3, 2021 ..................
Additional paid-in capital ...................................................................................
Accumulated other comprehensive loss.........................................................
Retained earnings ..............................................................................................
Total stockholders’ equity .......................................................................................
111
704,701
(3,758)
258,822
959,876
Total liabilities and stockholders’ equity ......................................................... $ 2,923,115
118
686,648
(8,474)
203,001
881,293
$ 2,806,404
The accompanying notes are an integral part of these consolidated financial statements.
58
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
January 2,
2022
Year Ended
January 3,
2021
December 29,
2019
Net sales ............................................................................................. $ 6,099,869 $ 6,468,759 $ 5,634,835
3,740,017
Cost of sales.......................................................................................
1,894,818
Gross profit....................................................................................
1,549,707
Selling, general and administrative expenses...............................
120,491
Depreciation and amortization (exclusive of depreciation
included in cost of sales) ..................................................................
Store closure and other costs, net ..................................................
Income from operations ..............................................................
Interest expense, net.........................................................................
Income before income taxes ......................................................
Income tax provision .........................................................................
4,089,470
2,379,289
1,863,869
124,124
3,890,657
2,209,212
1,748,205
122,258
4,673
334,076
11,684
322,392
78,235
244,157 $
(369)
391,665
14,787
376,878
89,428
287,450 $
7,260
217,360
21,192
196,168
46,539
149,629
Net income .................................................................................... $
Net income per share:
Basic............................................................................................... $
Diluted............................................................................................ $
Weighted average shares outstanding:
Basic...............................................................................................
Diluted............................................................................................
2.12 $
2.10 $
-
115,377
116,077
2.44 $
2.43 $
1.25
1.25
117,821
118,224
119,368
119,742
The accompanying notes are an integral part of these consolidated financial statements.
59
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
Net income .............................................................................. $
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on cash flow hedging
activities, net of income tax of $3,116, ($205), and
($2,078)....................................................................................
Reclassification of net gains (losses) on cash flow
hedges to net income, net of income tax of ($1,485),
($1,107),
January 2,
2022
244,157
Year Ended
January 3,
2021
287,450
$
December 29,
2019
149,629
$
9,009
(592)
(6,006)
and $66.................................................................................
Total other comprehensive income (loss)..................... $
(4,293)
4,716
Comprehensive income ........................................................ $
248,873
(3,200)
(3,792)
283,658
$
$
190
(5,816)
143,813
$
$
The accompanying notes are an integral part of these consolidated financial statements.
60
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T
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Operating activities
Net income..................................................................................... $
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense .........................................
Operating lease asset amortization ...............................................
Store closure and other costs, net .................................................
Share-based compensation..........................................................
Deferred income taxes.................................................................
Other non-cash items ..................................................................
Changes in operating assets and liabilities:
Accounts receivable ................................................................
Inventories .............................................................................
Prepaid expenses and other current assets................................
Other assets...........................................................................
Accounts payable ...................................................................
Accrued liabilities ....................................................................
Accrued salaries and benefits...................................................
Accrued income tax.................................................................
Operating lease liabilities .........................................................
Other long-term liabilities .........................................................
Cash flows from operating activities ......................................
Investing activities
Purchases of property and equipment ...............................................
Cash flows used in investing activities ...................................
Financing activities
Proceeds from revolving credit facilities .............................................
Payments on revolving credit facilities ...............................................
Payments on finance lease liabilities .................................................
Repurchase of common stock ..........................................................
Proceeds from exercise of stock options ............................................
Other.............................................................................................
Cash flows used in financing activities ...................................
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 ..............................................................
Leased assets obtained in exchange for new operating lease liabilities..
Supplemental disclosure of non-cash investing and financing
activities
Property and equipment in accounts payable and accrued liabilities ...... $
January 2,
2022
Year Ended
January 3,
2021
December 29,
2019
244,157
$
287,450
$
149,629
125,541
108,517
4,762
15,883
(178)
1,167
16,928
(11,417)
(5,879)
(1,782)
4,523
610
(17,951)
—
(120,483)
401
364,799
(102,378)
(102,378)
—
—
(685)
(188,343)
2,170
—
(186,858)
75,563
171,441
247,004
11,431
82,888
139,349
$
$
126,507
99,276
(321)
14,339
3,717
3,683
25,977
21,754
(14,970)
(5,461)
20,184
4,296
28,116
(2,005)
(120,085)
1,578
494,035
(121,968)
(121,968)
—
(288,000)
(754)
—
1,343
—
(287,411)
84,656
86,785
171,441
14,786
94,767
118,075
$
$
122,804
81,842
4,113
8,949
(216)
4,136
36,062
(11,612)
19,208
(1,275)
9,420
17,274
295
2,005
(88,002)
578
355,210
(183,232)
(183,232)
265,405
(180,405)
(690)
(176,310)
4,878
(319)
(87,441)
84,537
2,248
86,785
20,293
44,637
160,134
25,166
$
10,869
$
18,515
The accompanying notes are an integral part of these consolidated financial statements.
62
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, offers a unique
grocery experience featuring an open layout with fresh produce at the heart of the store. The Company
continues to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients
such as organic, plant-based and gluten-free. As of January 2, 2022, the Company operated 374 stores
in 23 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..............................................................................
57.7%
42.3%
57.2%
42.8%
57.7%
42.3%
2021
2020
2019
All dollar amounts are in thousands, unless otherwise indicated. Certain prior period amounts have
been reclassified to conform with the current year presentation.
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 2021 ended on January 2, 2022 and included 52 weeks.
Fiscal year 2020 ended on January 3, 2021 and included 53 weeks. Fiscal year 2019 ended on
December 29, 2019 and included 52 weeks. Fiscal years 2021, 2020, and 2019 are referred to as 2021,
2020, and 2019, respectively.
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 inventories, lease assumptions, self-insurance reserves, goodwill and
intangible assets, impairment of long-lived assets, and income taxes. Actual results could differ from
those estimates.
63
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 include 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 ............................... $
78,558 $
93,130
As Of
January 2,
2022
January 3,
2021
Restricted Cash
Restricted cash relates to the Company’s defined benefit plan forfeitures and the Company’s
healthcare, general liability and workers’ compensation plan benefits of approximately $1.7 million as of
January 2, 2022 and January 3, 2021, 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,
receivables for ecommerce sales and billings to 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 to be 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.
Inventories are reduced for estimated losses related to shrinkage. The Company believes that all
inventories are saleable and no allowances or reserves for obsolescence were recorded as of January 2,
2022 and January 3, 2021.
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 as finance leases, is computed using the straight-line method over the
estimated useful lives of the individual assets. 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 certain.
64
The following table includes the estimated useful lives of certain of the Company’s asset classes:
Computer hardware and software...........................................................................................
Furniture, fixtures and equipment ...........................................................................................
Leasehold improvements .........................................................................................................
Buildings......................................................................................................................................
3 to 5 years
7 to 20 years
up to 15 years
40 years
Store development costs, which include costs associated with the selection and procurement of real
estate sites, are also included in property and equipment. These costs are included in leasehold
improvements and are amortized over the remaining lease term of the successful sites with which they
are associated.
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 based on independent actuarial estimates, which are based on
historical information and assumptions about future events. The Company utilizes various techniques,
including analysis of historical trends and actuarial valuation methods, to estimate the cost to settle
reported claims and claims incurred but not yet reported as of the balance sheet date. The actuarial
valuation methods consider loss development factors, which include the development time frame and
expected claim reporting and settlement patterns, and expected loss costs, which include the expected
frequency and severity of claim activity. Amounts expected to be recovered from insurance companies
are included in the liability, with a corresponding amount recorded in accounts receivable.
Goodwill and Intangible Assets
Goodwill represents the cost of acquired businesses in excess of the fair value of assets and
liabilities acquired. The Company’s indefinite-lived intangible assets consist of trade names related to
“Sprouts Farmers Market” and liquor licenses. The Company also held intangible assets with finite useful
lives consisting of the “Sunflower Farmers Market” trade name. The trade name related to “Sunflower
Farmers Market” met the definition of a defensive intangible asset and is fully amortized.
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. 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. The Company’s qualitative assessment considered factors including changes in the
competitive market, budget-to-actual performance, trends in market capitalization for the Company and its
peers, turnover in key management personnel and overall changes in macroeconomic environment. If
this 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, we
compare the estimated fair value of the reporting unit to its carrying amount with an impairment loss
recognized for the amount, if any, by which carrying value exceeds estimated fair value.
The impairment evaluation for the Company’s indefinite-lived intangible assets consists of a
qualitative assessment similar to that for goodwill. If the 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.
65
The Company has determined its business consists of a single reporting unit, healthy grocery
stores. The Company has had no goodwill impairment charges for the past three fiscal years. See Note 8,
“Intangible Assets” and Note 9, “Goodwill” for further discussion.
Impairment of Long-Lived Assets
The Company assesses its long-lived assets, including property and equipment and right-of-use
assets, for potential impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset group may not be recoverable. These events primarily 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 decision to close or relocate a store. 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 the asset group to the future undiscounted cash flows expected to
be generated by that asset group. The Company’s impairment analysis contains management
assumptions about key variables including sales growth rate, gross margin, payroll and other controllable
expenses.
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 of the asset group is estimated based on the
discounted future cash flows using a discount rate commensurate with the related risk or comparable
market values, if available. The Company recorded an impairment loss of $4.8 million in 2021 as part of
the normal course of business primarily related to the write-down of right-of-use assets and leasehold
improvements. There were no impairment charges in 2020. In 2019, the Company recorded an
impairment loss of $4.1 million as part of the normal course of business primarily related to the write-down
of leasehold improvements. These charges are recorded as a component of Store closure and other
costs, net in the accompanying consolidated statements of income.
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 13, “Long-Term Debt and Finance Lease Liabilities”), 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.
Leases
The Company leases all stores, distribution centers, and administrative offices. The Company
determines if an arrangement is a lease at inception. Operating leases are included in operating lease
assets, current portion of operating lease liabilities and noncurrent portion of operating lease liabilities in
the accompanying consolidated balance sheets. Finance leases are included in property, plant,
equipment, net, current portion of finance lease liabilities, and long-term debt and finance lease liabilities
in the accompanying consolidated balance sheets. Operating lease payments are charged on a straight-
line basis to rent expense, a component of selling, general and administrative expenses, over the lease
term and finance lease payments are charged to interest expense and depreciation and amortization
expense using a debt model over the lease term.
66
The Company’s lease assets represent a right to use an underlying asset for the lease term and
lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease
assets and liabilities and the related rent expense are recognized at the lease commencement date (date
on which the Company gains access to the property) based on the estimated present value of lease
payments over the lease term, net of landlord allowances expected to be received. The Company
accounts for the lease and non-lease components as a single lease component for all current classes of
leases.
Most of the Company’s lease agreements include variable payments related to pass-through costs
for maintenance, taxes, and insurance. Additionally, some of the Company’s lease agreements include
rental payments based on a percentage of retail sales over contractual levels. These variable payments
are not included in the measurement of the lease liability or asset and are expensed as incurred.
As most of the Company’s lease agreements do not provide an implicit rate, the Company uses an
estimated incremental borrowing rate, which is derived from third-party information available at the lease
commencement date, in determining the present value of lease payments. The rate used is for a secured
borrowing of a similar term as the lease.
Most leases include one or more options to renew, with renewal terms that can extend the lease
term from one to twenty years or more. The exercise of lease renewal options is at the Company’s sole
discretion. The lease term includes the initial contractual term as well as any options to extend the lease
when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months
or less (“short-term leases”) are not recorded on the balance sheet. The Company does not currently
have any material short-term leases. Additionally, the Company’s lease agreements do not contain any
residual value guarantees or material restrictive covenants.
The Company subleases certain real estate to third parties, which have all been classified as
operating leases. The Company recognized sublease income on a straight-line basis.
Fair Value Measurements
The Company records its financial assets and liabilities in accordance with the framework for
measuring fair value in accordance with ASC 820. This framework establishes a three-level 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. Impairment losses related to store-level assets are calculated using significant unobservable
inputs including the present value of future cash flows expected to be generated using a risk-adjusted
market based weighted-average cost of capital, comparable store sales growth assumptions, and third
party property appraisal data. Therefore, these inputs are classified as a level 3 measurement in the fair
value hierarchy.
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.
67
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. See Note 25, “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’s performance obligations are satisfied upon the transfer of goods to the customer,
which occurs 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
Company’s gift cards do not expire. Based on historical redemption rates, a small and relatively stable
percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue
is recognized over time in proportion to actual gift card redemptions and was not material in any period
presented.
Balance as of
January 3,
2021
Gift Cards
Issued During
Current Period
But Not
Redeemed (1)
Revenue
Recognized
From
Beginning
Liability
Balance as of
January 2,
2022
Gift card liability, net ......................... $
15,888
$
5,711
$
(9,013)
$
12,586
(1) net of estimated breakage
The nature of goods the Company transfers to customers at the point of sale are inventories,
consisting of merchandise purchased for resale.
68
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 January 2, 2022.
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 44%, 42% and 40% of total purchases
during 2021, 2020, and 2019, 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 costs, pre-opening and other administrative costs.
The Company charges certain vendors to place advertisements in the Company’s in-store guide
and circulars under a cooperative advertising program. 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 $45.9 million, $54.4 million and $57.2
million for 2021, 2020, and 2019, 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.
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 files income tax returns for federal purposes and in many states. The Company’s tax
filings remain subject to examination by applicable tax authorities for a certain length of time, generally
three years, following the tax year to which those filings relate. The Company’s U.S. federal income tax
returns for the fiscal years ended December 31, 2017, and January 1, 2017, are currently under
examination by the Internal Revenue Service.
69
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
Income Taxes –Accounting for Income Taxes
In December 2019, the FASB issued ASU no. 2019-12, “Income Taxes (Topic 740) Simplifying the
Accounting for Income Taxes.” Among other things, the amendment removes certain exceptions for
periods with operating losses, and reduces the complexity surrounding franchise tax, step up in tax basis
of goodwill in conjunction with a business combination, and timing of enacting changes in tax laws during
interim periods. The Company adopted this standard effective January 4, 2021 on a prospective
basis. There was no impact on the Company’s consolidated financial statements.
Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU no. 2016-13, “Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.” The amendments in this update introduce a
new standard to replace the incurred loss impairment methodology under current GAAP with a
methodology that reflects expected credit losses and requires consideration of a broader range of
reasonable and supportable information to inform credit loss estimates. Subsequent to the initial
standards, the FASB has also issued several ASUs to clarify specific topics. The Company adopted ASU
2016-13 effective December 30, 2019, using the modified retrospective approach. There was no impact
to opening retained earnings as of December 30, 2019 or on the Company’s consolidated financial
statements.
Compensation – Fair Value Disclosures
In August 2018, the FASB issued ASU No. 2018-13, “Fair value measurement (Topic 820) –
Disclosure framework – Changes to the disclosure requirements for fair value measurement.” The
amendments in this update improve the effectiveness of fair value measurement disclosures. The
Company adopted this standard effective December 30, 2019. There was no impact on the Company’s
disclosure in its consolidated financial statements.
70
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 financing or operating lease.
The Company adopted the standard as of December 31, 2018, the first day of fiscal year 2019. The
Company elected 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 on lease
identification, lease classification and initial direct costs. The Company did not elect the hindsight practical
expedient.
The adoption of the standard resulted in the recognition of operating lease assets and liabilities of
approximately $1.0 billion and $1.1 billion, respectively, as of December 31, 2018, including recognition of
operating lease assets and liabilities for certain third-party operated distribution center locations. Included
in the measurement of the new lease assets and liabilities is the reclassification of balances historically
recorded as deferred rent and unfavorable and favorable leasehold interests. Additionally, the Company
recognized a cumulative effect adjustment, which increased retained earnings by $11.4 million, net of tax.
This adjustment was driven by the derecognition of approximately $114.0 million of lease obligations and
$102.6 million of net assets related to leases that had been classified as financing lease obligations under
the former failed-sale leaseback guidance, and are now classified as operating leases as of the transition
date.
This reclassification also resulted in the recognition of rent expense beginning December 31, 2018,
which was previously reported as interest expense under the former failed sale-leaseback guidance.
Lastly, the adoption of this standard resulted in a change in naming convention for leases classified
historically as capital leases. These leases are now referred to as finance leases. The adoption of this
standard did not have any impact on the Company’s liquidity or cash flows.
Refer to Note 7, “Leases”, for additional information related to the Company’s leases.
Recently Issued Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020 and January 2021, the FASB issued ASU no. 2020-04, “Reference Rate Reform
(Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and ASU 2021-
01, “Reference Rate Reform (Topic 848): Scope,” respectively. The amendments in these updates
provide optional expedients and exceptions for a limited period of time to ease the potential burden in
accounting for contracts, hedging relationships, and other transactions affected by reference rate reform.
Generally, the guidance allows contract modifications related to reference rate reform to be considered
events that do not require remeasurements or reassessments of previous accounting determinations at
the modification date. These updates only apply to modifications made prior to December 31, 2022. No
such modifications occurred in the year ending January 2, 2022. The Company expects to utilize this
optional guidance but does not expect it to have a material impact on its consolidated financial
statements.
No other new accounting pronouncements issued or effective during fiscal 2021 had, or are
expected to have, a material impact on the Company’s consolidated financial statements.
71
4. Accounts Receivable
A summary of accounts receivable is as follows:
As Of
January 2,
2022
January 3,
2021
Landlords............................................................................................................ $
Vendors...............................................................................................................
Insurance............................................................................................................
Ecommerce ........................................................................................................
Other ...................................................................................................................
Total..................................................................................................................... $
4,856 $
4,191
2,161
4,857
5,509
21,574 $
4,715
3,275
1,279
3,080
2,466
14,815
The Company recorded allowances for certain vendor receivables of $0.7 million and $0.4 million at
January 2, 2022 and January 3, 2021, respectively.
5. Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets is as follows:
Prepaid expenses ............................................................................................. $
Restricted cash..................................................................................................
Income tax receivable ......................................................................................
Other current assets .........................................................................................
Total .................................................................................................................... $
21,548 $
1,717
11,639
564
35,468 $
16,089
1,744
8,827
564
27,224
As Of
January 2,
2022
January 3,
2021
6. Property and Equipment
A summary of property and equipment, net is as follows:
As Of
January 2,
2022
January 3,
2021
Land and finance lease assets ....................................................................... $
Furniture, fixtures and equipment...................................................................
Leasehold improvements.................................................................................
Construction in progress ..................................................................................
Total property and equipment....................................................................
Accumulated depreciation and amortization.................................................
Property and equipment, net ..................................................................... $
15,753 $
797,169
665,237
58,621
1,536,780
(820,751)
716,029 $
15,753
745,514
638,149
27,140
1,426,556
(700,056)
726,500
Depreciation expense was $124.1 million, $125.6 million and $121.3 million for 2021, 2020, and
2019, respectively. Depreciation expense is primarily reflected in depreciation and amortization on the
consolidated statements of income.
Impairment expense was $4.8 million and $4.1 million for 2021 and 2019, respectively. There was
no impairment expense recognized in 2020.
72
7. Leases
Lease cost includes both the fixed and variable expenses recorded for leases. The components of
lease cost are as follows:
Operating lease cost ................
Finance lease cost:
Amortization of Property
and Equipment .....................
Interest on lease liabilities.......
Variable lease cost...................
Sublease income ......................
Total net lease cost ..................
Classification
Selling, general and administrative
expenses(1)
Depreciation and amortization
Interest expense
Selling, general and administrative
expenses(1)
Selling, general and administrative
expenses
January 2,
2022
Year Ended
January 3,
2021
December 29,
2019
$196,602 $ 191,279 $ 177,089
966
906
966
970
966
997
60,763
57,789
53,731
(839)
(1,057)
$258,398 $ 249,812 $ 231,726
(1,192)
(1)
Supply chain-related amounts of $10.6 million, $7.8 million and $8.2 million were included in
cost of sales for 2021, 2020 and 2019, respectively.
Supplemental balance sheet information related to leases is as follows:
Classification
January 2, 2022
January 3, 2021
As Of
Assets
Operating ........................ Operating lease assets
Finance............................ Property and equipment, net
Total lease assets..........
Liabilities
Current
Operating...................
Finance ...................... Current portion of finance lease liabilities
Current portion of operating lease
liabilities
Noncurrent
Operating................... Long-term operating lease liabilities
Finance ......................
Total lease liabilities ......
Long-term debt and finance lease
liabilities
$
$
$
$
1,072,019
8,251
1,080,270
151,755
1,078
$
$
$
1,045,408
9,218
1,054,626
135,739
959
1,095,909
1,069,535
9,656
1,258,398
$
10,459
1,216,692
Weighted average remaining lease term (years)
Operating leases ..................................................
Finance leases......................................................
Weighted average discount rate
Operating leases ..................................................
Finance leases......................................................
2021
2020
2019
9.6
8.8
6.7%
8.4%
9.8
9.7
7.2%
8.4%
10.2
10.7
7.5%
8.3%
73
Supplemental cash flow and other information related to leases is as follows:
Cash paid for amounts included in measurement
of lease liabilities:
Operating cash flows for operating leases....... $
Operating cash flows for finance leases ..........
182,926
906
$
186,280
970
$
153,292
997
January 2, 2022
Year Ended
January 3, 2021
December 29, 2019
Lease assets obtained in exchange for lease
liabilities:
Finance leases ..................................................... $
Operating leases ..................................................
— $
— $
139,349
118,075
—
160,134
A summary of maturities of lease liabilities is as follows:
2022.......................................................................... $
2023..........................................................................
2024..........................................................................
2025..........................................................................
2026..........................................................................
Thereafter ................................................................
Total lease payments .......................................
Less: Imputed interest ...........................................
Total lease liabilities .........................................
Less: Current portion .............................................
Long-term lease liabilities ................................ $
Operating Leases(1), (2)
209,402
190,278
193,676
190,815
159,902
781,298
1,725,371
(477,707)
1,247,664
(151,755)
1,095,909
Finance Leases
1,671
1,556
1,734
1,904
1,758
6,804
15,427
(4,693)
10,734
(1,078)
9,656
$
$
$
Total
211,073
191,834
195,410
192,719
161,660
788,102
1,740,798
(482,400)
1,258,398
(152,833)
$ 1,105,565
(1)
(2)
Operating lease payments include $105.5 million related to periods covered by options to
extend lease terms that are reasonably certain of being exercised and exclude $451.5 million
of legally binding minimum lease payments for leases executed but not yet commenced.
We have subtenant agreements under which we will receive $1.0 million in 2022, $0.9 million
in 2023, $0.9 million in 2024, $0.9 million in 2025, $0.7 million in 2026, and $1.0 million
thereafter.
74
8. Intangible Assets
A summary of the activity and balances in intangible assets is as follows:
Balance at
December 29,
2019
Adjustments/Transfer
s
Balance at
January 3,
2021
Gross Intangible Assets
Indefinite-lived trade names............................................... $
Indefinite-lived liquor licenses............................................
Finite-lived trade names .....................................................
Total intangible assets .................................................. $
Accumulated Amortization
Finite-lived trade names ..................................................... $
Total accumulated amortization................................... $
182,937 $
2,023
1,800
186,760 $
(1,365) $
(1,365) $
— $
—
(800)
(800) $
182,937
2,023
1,000
185,960
365 $
365 $
(1,000)
(1,000)
Indefinite-lived trade names ................................................ $
Indefinite-lived liquor licenses .............................................
Total intangible assets (1)................................................ $
Balance at
January 3,
2021
182,937 $
2,023
184,960 $
Adjustments/Transfer
s
Balance at
January 2,
2022
182,937
2,023
184,960
— $
—
— $
(1)
Excludes the original cost and accumulated amortization of fully-amortized finite-lived
intangible assets.
There was no amortization expense in 2021. Amortization expense was ($0.4) million and $0.2
million for 2020 and 2019, respectively.
9. Goodwill
The Company’s goodwill balance was $368.9 million as of January 2, 2022 and January 3, 2021. As
of January 2, 2022 and January 3, 2021, 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.
10. Other Assets
As of January 2, 2022 and January 3, 2021, other assets of $13.5 million and $14.7 million,
respectively, primarily consisted of deferred software as a service, capitalized durable supplies, sublease
deferred rent, and miscellaneous other assets.
11. Accrued Liabilities
A summary of accrued liabilities is as follows:
Self-insurance reserves ................................................................................... $
Accrued occupancy related (CAM, property taxes, etc.) ............................
Gift cards, net of breakage ..............................................................................
Accrued sales and use tax...............................................................................
Other accrued liabilities....................................................................................
Total..................................................................................................................... $
27,136 $
20,649
12,586
12,327
83,298
155,996 $
25,227
19,939
15,888
14,712
67,636
143,402
As Of
January 2,
2022
January 3,
2021
75
12. Accrued Salaries and Benefits
A summary of accrued salaries and benefits is as follows:
Bonuses .......................................................
Payroll ..........................................................
Vacation .......................................................
Severance and other .................................
Total..............................................................
$
$
January 2,
2022
As Of
24,292
18,065
15,302
1,084
58,743
$
$
January 3,
2021
41,637
18,171
14,669
2,218
76,695
13. Long-Term Debt and Finance Lease Liabilities
A summary of long-term debt and finance lease liabilities is as follows:
Facility
Senior secured debt
Maturity
Interest Rate
As Of
January 2,
2022
January 3,
2021
$700.0 million Credit Agreement.
March 27, 2023
Variable $
250,000 $
250,000
Finance lease liabilities
(see Note 7, "Leases").................
Long-term debt and finance lease
liabilities ................................................
Various
n/a
9,656
10,459
$
259,656 $
260,459
A summary of maturities of long-term debt is as follows:
$700 million Credit Agreement
2022 .................................................................................
2023 .................................................................................
2024 .................................................................................
2025 .................................................................................
2026 .................................................................................
Thereafter........................................................................
Total ...........................................................................
$
$
Senior Secured Revolving Credit Facility
March 2018 Refinancing
—
250,000
—
—
—
—
250,000
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 January 2, 2022.
76
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.
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 $28.0 million have been issued as of
January 2, 2022, primarily to support the Company’s insurance programs.
On March 6, 2019, Intermediate Holdings entered into an amendment to the Amended and
Restated Credit Agreement intended to align the treatment of certain lease accounting terms with the
Company’s adoption of ASC 842. This amendment had no impact on borrowing capacity, interest rate, or
maturity.
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 bore interest at LIBOR plus
1.50% per annum or prime plus 0.5%. 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. As
of January 2, 2022, loans under the Amended and Restated Credit Agreement bore interest at LIBOR
plus 1.25% per annum or prime plus 0.25%.
The interest rate on 100% of outstanding debt under the Amended and Restated Credit Agreement
is fixed as of January 2, 2022, reflecting the effects of floating to fixed interest rate swaps (see Note 21,
“Derivative Financial Instruments”).
As of January 2, 2022, outstanding letters of credit under the Amended and Restated Credit
Agreement were subject to a participation fee of 1.25% 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 2021, the Company made no additional borrowings or payments, resulting in total
outstanding debt under the Amended and Restated Credit Agreement of $250.0 million as of January 2,
2022. During fiscal year 2020, the Company made no additional borrowings and made a total of $288.0
million of principal payments, resulting in total outstanding debt under the Amended and Restated Credit
Agreement of $250.0 million as of January 3, 2021.
77
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:
incur additional indebtedness;
grant additional liens;
enter into sale-leaseback transactions;
make loans or investments;
merge, consolidate or enter into acquisitions;
pay dividends or distributions;
enter into transactions with affiliates;
enter into new lines of business;
modify the terms of debt or other material agreements; and
change its fiscal year.
Each of these covenants is subject to customary and other agreed-upon exceptions.
In addition, the 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 January 2, 2022.
14. Other Long-Term Liabilities
A summary of other long-term liabilities is as follows:
Long-term portion of self-insurance reserves ............................................... $
Other ...................................................................................................................
Total..................................................................................................................... $
23,393 $
12,913
36,306 $
23,291
17,621
40,912
As Of
January 2,
2022
January 3,
2021
15. 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 various techniques, including analysis of historical trends and actuarial valuation methods.
The Company purchases coverage from third-party insurers for exposures in excess of certain stop-
loss limits and recorded receivables of $1.6 million and a $1.0 million from its insurance carriers for
payments expected to be made in excess of self-insured retentions at January 2, 2022 and January 3,
2021, respectively. The Company recorded amounts for general liability, workers' compensation and team
member health benefit liabilities of $50.5 million and $48.5 million at January 2, 2022 and January 3,
2021, respectively. See Note 11, “Accrued Liabilities” for current amounts recorded for general liability,
workers’ compensation and team member health benefit liabilities.
78
16. Defined Contribution Plan
The Company maintains the Sprouts Farmers Market, Inc. Employee 401(k) Savings Plan (the
“Plan”), which is a defined contribution plan covering all eligible team members. Under the provisions of
the Plan, participants may direct the Company to defer a portion of their compensation to the Plan,
subject to the Internal Revenue Code limitations. The Company provides for an employer matching
contribution equal to 50% of each dollar contributed by the participants up to 6% of their eligible
compensation.
Total expense recorded for the matching under the Plan:
January 2,
2022
Year Ended
January 3,
2021
December 29,
2019
$
7,517 $
6,588 $
5,756
17. Income Taxes
Income Tax Provision
The income tax provision consists of the following:
January 2,
2022
Year Ended
January 3,
2021
December 29,
2019
U.S. Federal—current ................................ $
U.S. Federal—deferred..............................
U.S. Federal—total .....................................
State—current .............................................
State—deferred...........................................
State—total ..................................................
Total provision ............................................. $
60,329 $
(1,663)
58,666
19,715
(146)
19,569
78,235 $
63,957 $
3,725
67,682
20,442
1,304
21,746
89,428 $
36,091
186
36,277
8,649
1,613
10,262
46,539
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:
Federal statutory rate...............................................
Increase (decrease) in income taxes resulting
from:
State income taxes, net of federal benefit.......
Enhanced charitable contribution impact ........
Change in uncertain tax position reserves......
Amended returns.................................................
Benefit of federal tax credit................................
Other, net .............................................................
Effective tax rate .......................................................
January 2,
2022
Year Ended
January 3,
2021
December 29,
2019
21.0%
21.0%
21.0%
4.8
(1.5)
—
(0.2)
(0.4)
0.6
24.3%
4.6
(1.0)
0.1
(1.0)
(0.9)
0.9
23.7%
4.4
(0.7)
(1.1)
—
(1.6)
1.7
23.7%
79
The effective income tax rate increased to 24.3% in 2021 from 23.7% in 2020 primarily due to
benefits recognized from amended returns in 2020, partially offset by increased charitable contribution
deductions in 2021. The effective income tax rate was 23.7% in 2020 and 2019. The effective income tax
rate in 2020 was primarily affected by a decrease in federal tax credits and prior year release of uncertain
tax positions, partially offset by an increase in charitable contribution deductions and the benefit
recognized from amended returns.
Excess tax benefits or detriments associated with share-based payment awards are recognized as
income tax benefits or expense 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 benefit resulting
from share-based awards was $0.2 million for 2021 and is reflected as a reduction to the 2021 income tax
provision. The income tax detriment resulting from share-based awards were $0.5 million and $1.6 million
for 2020 and 2019, respectively, and are reflected as increases to the 2020 and 2019 income tax
provisions.
80
Deferred Taxes
Significant components of the Company’s deferred tax assets and deferred tax liabilities are as
follows:
Deferred tax assets
Employee benefits ...................................................................................... $
Tax credits....................................................................................................
Operating leases .........................................................................................
Other lease related(1) ..................................................................................
Other accrued liabilities..............................................................................
Charitable contribution carryforward ........................................................
Inventories and other..................................................................................
Total gross deferred tax assets...........................................................
Deferred tax liabilities
Depreciation and amortization ..................................................................
Intangible assets .........................................................................................
Operating leases .........................................................................................
Asset retirement obligations(1)...................................................................
Total gross deferred tax liabilities .......................................................
Net deferred tax (liability) / asset ........................................................ $
As Of
January 2,
2022
January 3,
2021
17,543 $
228
320,650
5,881
4,283
1,781
3,206
353,572
(88,970)
(45,978)
(275,509)
(1,010)
(411,467)
(57,895) $
19,498
270
309,756
5,962
3,926
1,028
4,504
344,944
(93,738)
(39,602)
(268,670)
(1,007)
(403,017)
(58,073)
(1)
The deferred tax assets and liabilities disclosure at January 3, 2021 has been adjusted to
reflect the gross deferred asset retirement asset and related gross deferred asset retirement
obligation.
A valuation allowance is established for deferred tax assets if it is more likely than not that these
items will either expire before the Company is able to realize their benefits, or that the realization of future
deductions is uncertain.
Management performs an assessment over future taxable income to analyze whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The Company has evaluated all
available positive and negative evidence and believes it is probable that the deferred tax assets will be
realized and has not recorded a valuation allowance against the Company’s deferred tax assets as of
January 2, 2022 and January 3, 2021.
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:
Beginning balance........................................................................... $
Additions based on tax positions related to the
current year...................................................................................
Additions based on tax positions related to prior years ............
Reductions for tax positions for prior years.................................
Ending balance................................................................................ $
January 2,
2022
As Of
January 3,
2021
December 29,
2019
1,803 $
1,343 $
3,658
16
31
(80)
1,770 $
16
647
(203)
1,803 $
289
—
(2,604)
1,343
81
The Company had unrecognized tax benefits (tax effected) of $1.8 million as of January 2, 2022 and
January 3, 2021. These would impact the effective tax rate if recognized.
The Company’s policy is to recognize accrued interest and penalties as a component of income tax
expense.
The Company does not anticipate a decrease in the total amount of unrecognized tax benefits
during the next twelve months.
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 2016 through 2020 and state tax returns for the tax years 2017 through 2020. The Company’s U.S.
federal income tax returns for the fiscal years ended December 31, 2017, and January 1, 2017, are
currently under examination by the Internal Revenue Service.
18. Commitments and Contingencies
Commitments
Real estate obligations, which include legally binding minimum lease payments for leases executed
but not yet commenced, were $451.5 million as of January 2, 2022.
In addition to its lease obligations, the Company maintains certain purchase commitments with
various vendors to ensure its operational needs are fulfilled. As of January 2, 2022, total future purchase
commitments under noncancelable service and supply contracts were $14.3 million.
Commitments related to the Company’s business operations cover varying periods of time and are
not individually significant. These commitments are expected to be fulfilled with no adverse
consequences to the Company’s operations or financial conditions.
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 15, “Self-Insurance Programs” for more information.
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 its underwritten secondary public offering which closed on March 10,
2015 (the “March 2015 Offering”). The complaint purported 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
sought damages on behalf of the purported class in an unspecified amount, rescission, and an award of
reasonable costs and attorneys’ fees. On August 4, 2018, the Company reached an agreement in
principle to settle these claims. The parties’ settlement agreement was approved by the court on May 31,
2019 and the complaint was subsequently dismissed. The settlement was funded from the Company’s
directors and officers liability insurance policy and did not have a material impact on the consolidated
financial statements.
82
“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 the Company’s 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 the Company’s team members. The complaints alleged the Company failed to
properly safeguard the PII in accordance with applicable law. The complaints sought damages on behalf
of the purported class in unspecified amounts, attorneys’ fees and litigation expenses. On March 1, 2019,
a number of individual plaintiffs filed arbitration demands. On May 15, 2019, certain other plaintiffs filed a
second amended class action complaint in the District of Arizona, alleging that certain subclasses of team
members are not subject to the Company’s arbitration agreement and attempted to pursue those team
members’ claims in federal court. In late August 2019, the Company reached an agreement in principle to
settle the majority of these claims, which were funded in the fourth quarter of 2019. Primary funding for
the settlement came from the Company’s cyber insurance policy, and the settlement did not have a
material impact on the consolidated financial statements. Following the group settlement, three (3)
individual claimants planned to proceed with arbitration of their claims. The three individual arbitrations
were settled in late June and early July 2020, with immaterial settlement amounts fully funded by the
Company’s cyber insurance policy.
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 the Company. CERT
alleged 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.
The 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.” The proposed regulation has been finalized with an effective date
of October 1, 2019. The defendants have amended their answers to assert the regulation as an
affirmative defense. On August 25, 2020, the court granted the defense motion for summary judgment on
the affirmative defense, and the case was dismissed.
On November 20, 2020, CERT filed a notice of appeal to appeal the ruling on the defense motion
for summary judgment. The case is currently being briefed, with a decision expected in 2022. At this
stage of the proceedings, the Company is unable to predict or reasonably estimate any potential loss or
effect on the Company or its operations. Accordingly, no loss contingency was recorded for this matter.
83
19. Capital Stock
Common stock
As of January 2, 2022, 111,114,374 shares of the Company’s common stock were issued and
outstanding after repurchase and retirement of 7,416,357 shares during 2021, as described below. As of
January 2, 2022, 3,680,083 shares of common stock are reserved for issuance under the 2013 Incentive
Plan (see Note 25, “Share-Based Compensation”). The following table outlines the options exercised in
exchange for the issuance of shares of common stock during 2021, 2020, and 2019.
Options exercised .................................................
Other share issuances under stock plans ........
Share Repurchases
January 2,
2022
115,123
462,173
Year Ended
January 3,
2021
59,561
440,956
December 29,
2019
316,493
506,093
On February 20, 2018, the Company’s board of directors authorized a $350 million common stock
share repurchase program, replacing the previous share repurchase program which was completed in the
second quarter of 2018. Upon this authorization’s December 31, 2019 expiration, $42.0 million remained
unused. On March 3, 2021, the Company’s board of directors authorized a new $300 million share
repurchase program for its common stock.
The shares under the Company’s repurchase program may be purchased on a discretionary basis
from time to time through March 3, 2024, subject to general business and market conditions and other
investment opportunities, through open market purchases, privately negotiated transactions, or other
means, including through Rule 10b5-1 trading plans. 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 13, “Long-Term Debt and Finance Lease Liabilities”).
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............................................................
Average price per common share acquired................................................. $
Total cost of common shares acquired......................................................... $
Year Ended
January 2,
2022
7,416,357
25.40 $
188,343 $
January 3,
2021
—
—
—
Shares purchased under the Company’s repurchase programs were subsequently retired and the
excess of the repurchase price over par value was charged to retained earnings.
Subsequent to January 2, 2022 and through February 24, 2022, we repurchased an additional 0.2
million shares of common stock for $5.7 million.
84
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.
20. Net Income per Share
The computation of basic 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, unvested restricted stock units and unvested restricted stock awards. Performance share awards
are included in the computation of diluted net income per share only to the extent that the underlying
performance conditions are satisfied prior to the end of the reporting period or would be satisfied if the
end of the reporting period were the end of the related performance period, and if the effect would be
dilutive.
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):
January 2,
2022
Year Ended
January 3,
2021
December 29,
2019
Basic net income per share:
Net income.................................................................................. $
Weighted average shares outstanding...................................
244,157 $
115,377
287,450 $
117,821
Basic net income per share................................................ $
2.12 $
2.44 $
149,629
119,368
1.25
Diluted net income per share:
Net income.................................................................................. $
Weighted average shares outstanding...................................
Dilutive effect of equity-based awards:
Assumed exercise of options to purchase
shares.......................................................................................
Restricted Stock Units...............................................................
Restricted Stock Awards ..........................................................
Performance Share Awards.....................................................
Weighted average shares and equivalent
244,157 $
115,377
287,450 $
117,821
149,629
119,368
215
390
—
95
16
341
9
37
52
178
55
89
shares outstanding ...........................................................
Diluted net income per share ............................................. $
116,077
118,224
2.10 $
2.43 $
119,742
1.25
85
For the year ended January 2, 2022, the Company had 0.5 million options and 0.3 million PSAs
outstanding which were excluded from the computation of diluted net income per share as those awards
would have been antidilutive or were performance awards with performance conditions not yet deemed
met. For the year ended January 3, 2021, the Company had 0.2 million options, 0.1 million RSUs and 0.3
million PSAs outstanding which were excluded from the computation of diluted net income per share as
those awards would have been antidilutive or were performance awards with performance conditions not
yet deemed met. For the year ended December 29, 2019, the Company had 0.5 million options and 0.3
million PSAs outstanding which were excluded from the computation of diluted net income per share as
those awards would have been antidilutive or were performance awards with performance conditions not
yet deemed met.
21. 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 consisted of five cash flow hedges, of which one remains outstanding as of January
2, 2022. 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 one outstanding swap was $250.0 million at January 2, 2022,
under which the Company pays a fixed rate and receives a variable rate of interest (cash flow swap). The
cash flow swap hedges the change in interest rates on debt related to fluctuations in interest rates and
has a length of one year, maturing in 2022. This interest rate swap has been designated and qualifies as
a cash flow hedge and has 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:
Interest rate swaps .................. Accrued liabilities
Interest rate swaps .................. Other long-term liabilities
$ 5,107 Accrued liabilities
— Other long-term liabilities
Balance Sheet Location
Fair
Value
Balance Sheet Location
Fair
Value
$ 5,695
5,756
Balance at January 2, 2022
Balance at January 3, 2021
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, net on
the consolidated statements of income. The following table summarizes these losses (gains) for 2021,
2020 and 2019:
Consolidated Statements of Income
Classification
Interest expense (income), net................... $
5,778 $
4,307 $
(256)
January 2, 2022
Year Ended
January 3, 2021
December 29, 2019
86
22. Comprehensive Income
The following table presents the changes in accumulated other comprehensive income (loss) for the
year ended January 2, 2022:
Balance at December 29, 2019 ........................................................................................
Other comprehensive income (loss), net of tax
Unrealized losses on cash flow hedging activities, net of income tax of ($205) .........
Reclassification of net losses on cash flow hedges to net income, net of income
tax of ($1,107) ...................................................................................................................
Total other comprehensive income (loss)....................................................................
Balance at January 3, 2021...............................................................................................
Other comprehensive income (loss), net of tax
Unrealized gains on cash flow hedging activities, net of income tax of $3,116 ..........
Reclassification of net losses on cash flow hedges to net income, net of income
tax of ($1,485) ...................................................................................................................
Total other comprehensive income (loss)....................................................................
Balance at January 2, 2022...............................................................................................
$
$
$
Cash Flow
Hedges
(4,682)
(592)
(3,200)
(3,792)
(8,474)
9,009
(4,293)
4,716
(3,758)
Amounts reclassified from accumulated other comprehensive income (loss) to net income are
included within interest expense, net on the consolidated statement of income. The estimated amount
expected to be reclassified from accumulated other comprehensive income (loss) to net income within the
next twelve months, based on interest rates at January 2, 2022, is a loss of $5.1 million.
23. 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.
87
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 January 2, 2022 and January 3, 2021:
January 2, 2022
Level 1
Level 2
Level 3
Long-term debt........................................ $
Interest rate swap liability ......................
Total liabilities ....................................... $
— $
—
— $
250,000 $
5,107
255,107 $
January 3, 2021
Level 1
Level 2
Level 3
Long-term debt........................................ $
Interest rate swap liability ......................
Total liabilities ....................................... $
— $
—
— $
250,000 $
11,451
261,451 $
— $
—
— $
Total
250,000
5,107
255,107
— $
—
— $
Total
250,000
11,451
261,451
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 or long-lived asset impairment evaluation as described above is based upon Level 3
inputs. When necessary, the Company uses third party market data and market participant assumptions
to derive the fair value of its asset groupings, which primarily include right-of-use lease assets and
property and equipment. For further details, see Note 3, “Significant Accounting Policies – Impairment of
Long-lived Assets”.
Cash, cash equivalents, and restricted cash, accounts receivable, prepaid expenses and other
current assets, accounts payable, 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 January 2, 2022 and
January 3, 2021.
24. 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
2021, 2020 and 2019.
January 2, 2022
Year Ended
January 3, 2021
December 29, 2019
Perishables ......................... $ 3,518,181
2,581,688
Non-Perishables.................
Net Sales ....................... $ 6,099,869
57.7% $ 3,700,878
2,767,881
42.3%
100.0% $ 6,468,759
57.2% $ 3,252,928
2,381,907
42.8%
100.0% $ 5,634,835
57.7%
42.3%
100.0%
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.
88
25. 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 Sprouts Farmers
Markets, LLC 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
2021 and 2020, under the 2013 Incentive Plan:
Grant Date
March 16, 2021................
June 9, 2021 ....................
September 7, 2021 .........
September 20, 2021 .......
Award Type
RSUs
PSAs
Options
RSUs
Options
RSUs
Options
RSUs
Shares of
common
stock
356,503
178,780
404,016
50,839
6,493
25,579
11,128
168,137
$
$
$
Exercise
Price
Grant date
fair value
— $
— $
$
— $
$
— $
$
— $
24.42
27.67
23.80
24.42
24.42
7.65
27.67
8.66
23.80
7.41
22.41
The RSUs generally 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.
Grant Date
March 9, 2020 ....................
May 12, 2020......................
August 10, 2020.................
Award Type
RSUs
PSAs
Options
RSUs
PSAs
Options
RSUs
PSAs
Options
Shares of
common
stock
485,367
174,902
1,055,907
66,550
11,389
15,569
35,655
5,762
14,052
$
$
$
Exercise
Price
Grant date
fair value
—
—
16.47
—
—
25.58
—
—
24.77
$
$
$
$
$
$
$
$
$
16.47
16.47
4.86
25.58
25.58
8.03
24.77
24.77
7.74
The RSUs generally 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.
89
The aggregate number of shares of common stock that may be issued to team members and
directors under the 2013 Incentive Plan may not exceed 10,089,072. Shares subject to awards granted
under the 2013 Incentive Plan which are subsequently forfeited, expire unexercised or are otherwise not
issued will not be treated as having been issued for purposes of the share limitation. As of January 2,
2022, there were 2,724,308 stock awards outstanding and 3,680,083 shares remaining available for
issuance under the 2013 Incentive Plan.
Stock Options
In the event of a change in control as defined in the award agreements issued under the 2013
Incentive 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.
The estimated weighted average fair values of options granted during 2021, 2020, and 2019 are
$7.66, $4.94 and $7.63, respectively, and were calculated using the following assumptions in the table
below:
Dividend yield..............................................................................
Expected volatility ......................................................................
Risk free interest rate ................................................................
Expected term, in years ............................................................
2021
2020
2019
0.00%
36.35%
0.83%
4.50
0.00%
34.80%
0.46%
4.50
0.00%
34.89%
2.53%
4.50
The grant date weighted average fair value of the 1.1 million options issued but not vested as of
January 2, 2022 was $5.81. The grant date weighted average fair value of the 1.1 million options issued
but not vested as of January 3, 2021 was $5.00. The grant date weighted average fair value of the 0.1
million options issued but not vested as of December 29, 2019 was $7.63.
The following table summarizes grant date weighted average fair value of options granted and
options forfeited:
January 2,
2022
Year Ended
January 3,
2021
December 29,
2019
Grant date weighted average fair value of options granted ... $
Grant date weighted average fair value of options forfeited... $
7.66 $
7.10 $
4.94 $
8.94 $
7.63
7.03
Expected volatility for option grants and modifications are calculated based upon the Company’s
historical volatility data over a time frame 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 $0.7 million, $0.2 million,
and $2.1 million for 2021, 2020, and 2019, respectively.
90
The following table summarizes option activity during 2021:
Outstanding at January 3, 2021 .................................
Granted...........................................................................
Forfeited .........................................................................
Exercised .......................................................................
Outstanding at January 2, 2022 .................................
Exercisable—January 2, 2022....................................
Vested/Expected to vest—January 2, 2022 .............
Number of
Options
1,330,208 $
421,637
(273,815)
(115,123)
1,362,907
228,746
1,362,907 $
Weighted
Average
Remaining
Contractual
Life (In Years
)
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
19.19
24.45
24.35
18.84
19.81
22.95
19.81
$
5.13 $
3.31 $
5.13 $
704
13,656
1,747
13,656
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.
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.
If the awards continue or are assumed on a substantially
Shares issued for RSU vesting are newly issued shares.
The fair value for restricted stock units is calculated based on the closing stock price on the date of
grant. The total grant date fair value of RSUs vested during 2021, 2020 and 2019 was $8.8 million, $7.8
million and $7.4 million, respectively.
The following table summarizes the weighted average grant date fair value of RSUs awarded during
2021, 2020 and 2019:
RSUs awarded................................................................................. $
24.11 $
18.01 $
21.62
January 2,
2022
Year Ended
January 3,
2021
December 29,
2019
The following table summarizes RSU activity during 2021:
Outstanding at January 3, 2021 .....................................................................
Awarded..............................................................................................................
Released ............................................................................................................
Forfeited..............................................................................................................
Outstanding at January 2, 2022 .....................................................................
Number of
RSUs
902,258
601,058
(430,629)
(144,015)
928,672
$
$
Weighted
Average
Grant Date
Fair Value
19.43
24.11
20.51
19.89
21.89
91
PSAs
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 vested
50% on the second anniversary of the grant date (March 2019) and the remaining 50% vested on the
third anniversary of the grant date (March 2020). During the year ended January 3, 2021, 35,697 of the
2017 PSAs vested. There were no outstanding 2017 PSAs as of January 2, 2022.
PSAs granted in March 2018 were subject to the Company achieving certain earnings before
interest and taxes ("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.
The performance conditions with respect to 2020 EBIT were deemed to have been met, and the PSAs
vested on the third anniversary of the grant date (March 2021). During the year ended January 2, 2022,
31,544 of the 2018 PSAs vested. There were no outstanding 2018 PSAs as of January 2, 2022.
PSA’s granted in 2019 are subject to the Company achieving certain EBIT performance targets for
the 2021 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 2022). Based on
2021 performance, the Company has accrued at the maximum pay out level.
PSAs granted in 2020 are subject to the Company achieving certain earnings before taxes (“EBT”)
performance targets for the 2022 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 2023).
PSAs granted in 2021 are subject to the Company achieving certain EBIT performance targets for
the 2023 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 2024).
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 fair value for performance stock awards is calculated based on the closing stock price on the
date of grant.
The total grant date fair value of PSAs granted or earned during 2021 was $4.8 million. The total
grant date fair value of PSAs vested during 2021 was $0.8 million. The total grant date fair value of
performance shares forfeited or not earned during 2021 was $1.0 million. The total grant date fair value of
the 0.4 million PSAs issued but not released as of January 2, 2022 was $8.9 million.
92
The total grant date fair value of PSAs granted or earned during 2020 was $3.3 million. The total
grant date fair value of PSAs vested during 2020 was $0.6 million. The total grant date fair value of
performance shares forfeited or not earned during 2020 was $0.3 million. The total grant date fair value of
the 0.3 million PSAs issued but not released as of January 3, 2021 was $5.8 million.
The total grant date fair value of PSAs granted or earned during 2019 was $3.7 million. The total
grant date fair value of PSAs vested during 2019 was $1.9 million. The total grant date fair value of
performance shares forfeited or not earned during 2019 was $3.9 million. The total grant date fair value of
the 0.2 million PSAs issued but not released as of December 29, 2019 was $3.4 million.
The following table summarizes PSA activity during 2021:
Outstanding at January 3, 2021 .....................................................................
Awarded..............................................................................................................
Released ............................................................................................................
Forfeited..............................................................................................................
PSAs earned......................................................................................................
PSAs not earned ...............................................................................................
Outstanding at January 2, 2022 .....................................................................
Number of
PSAs
315,401
178,780
(31,544)
(45,680)
15,772
—
432,729
$
$
Weighted
Average
Grant Date
Fair Value
18.54
24.42
24.55
20.85
24.55
—
20.51
RSAs
The fair value of RSAs is based on the closing price of the Company’s common stock on the grant
date. RSAs either vested ratably over a seven quarter period beginning on December 31, 2016, cliff
vested 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 fair value for restricted stock awards is
calculated based on the closing stock price on the date of grant.
There were no RSAs granted during 2021, 2020 or 2019. There were no RSAs released in 2021,
and the total grant date fair value of shares of restricted stock released upon vesting during 2020 and
2019 was $1.0 million and $1.6 million, respectively. There were no RSAs forfeited in 2021 or 2020, and
the total grant date fair value of shares of restricted stock forfeited during 2019 was $0.3 million. There
were no outstanding RSAs as of January 2, 2022.
93
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:
Share-based compensation expense
before income taxes................................................................. $
Income tax benefit .......................................................................
Net share-based compensation expense ................................ $
15,883 $
(2,450)
13,433 $
14,339 $
(2,662)
11,677 $
8,949
(2,093)
6,856
January 2,
2022
Year Ended
January 3,
2021
December 29,
2019
As of January 2, 2022, total unrecognized compensation expense and remaining weighted average
recognition period related to outstanding share-based awards were as follows:
Options ................................................................................................................. $
RSUs ....................................................................................................................
PSAs.....................................................................................................................
Total unrecognized compensation expense at January 2, 2022 ................ $
3,832
13,184
5,436
22,452
Unrecognized
compensation
expense
Remaining
weighted
average
recognition
period
1.5
1.4
1.3
During 2021, 2020 and 2019, the Company received $2.2 million, $1.3 million and $4.9 million in
cash proceeds from the exercise of options, respectively.
The Company recorded tax benefits of $0.2 million during 2021, and recorded tax detriments of $0.5
million and $1.6 million during 2020 and 2019, respectively, resulting from share-based awards.
Share Award Restructuring
During the year ended December 29, 2019, certain stock options and awards were modified
pursuant to a separation agreement with the Company’s former President and Chief Operating Officer. A
total of 216,044 options and awards (RSUs, PSAs, and RSAs) were modified such that they were
permitted to vest in March 2020, which is subsequent to the former President and Chief Operating
Officer’s separation date. These options and awards expired three months after vesting, consistent with
the other modified options and awards. These modifications resulted in an incremental expense, net of
$1.0 million of stock compensation reversals, of $0.2 million during the year ended December 29, 2019.
All other unvested options and awards were forfeited. This expense was presented in store closure and
other costs, net on the Company’s consolidated statements of income.
26. Quarterly Financial Data (Unaudited)
There were no material retrospective changes to any quarters in the two most recent fiscal years
that would require this disclosure.
94
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 SEC, and is accumulated and
communicated to our management, including our Chief Executive Officer (our principal executive officer)
and our Chief Financial Officer (our principal financial officer), as appropriate, to allow timely decisions
regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures under the Exchange Act as of
January 2, 2022, the end of the period covered by this Annual Report on Form 10-K. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of January 2, 2022,
our disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal
control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial
reporting as of January 2, 2022, using the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 Framework).
Based on this assessment, our management has concluded that our internal control over financial
reporting was effective as of January 2, 2022.
PricewaterhouseCoopers LLP, our independent registered public accounting firm, assessed the
effectiveness of our internal control over financial reporting as of January 2, 2022, as stated in the firm’s
report which is included with the consolidated financial statements in Item 8 of this Annual Report on
Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the
quarterly period ended January 2, 2022 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
95
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection
Not Applicable.
96
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 2022 Annual Meeting of Stockholders (referred to as the “Proxy
Statement”), which is expected to be filed not later than 120 days after the end of our fiscal year ended
January 2, 2022, 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
https://investors.sprouts.com/esg/governance-documents/.
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.
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.
97
(b) Exhibits:
Exhibit
Number
Description
2.1
3.1
3.2
4.1
10.1
10.1.1
Plan of Conversion of Sprouts Farmers Markets, LLC (1)
Certificate of Incorporation of Sprouts Farmers Market, Inc. (1)
Amended and Restated Bylaws of Sprouts Farmers Market, Inc. (2)
Description of Sprouts Farmers Market, Inc. Securities (3)
Sprouts Farmers Market, Inc. 2013 Incentive Plan, amended as of May 1, 2015 (4)
Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan
(5)
10.1.2(a)
Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013
Incentive Plan (5)
10.1.2(b)
2019 Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013
Incentive Plan for Chief Executive Officer (6)
10.1.2(c)
2021 Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013
Incentive Plan for Chief Financial Officer (7)
10.1.3(a)
2018 Form of Performance Share Award Agreement under Sprouts Farmers Market, Inc.
2013 Incentive Plan (8)
10.1.3(b)
2019 Form of Performance Share Award Agreement under Sprouts Farmers Market, Inc.
2013 Incentive Plan (9)
10.1.3(c)
2019 Form of Performance Share Award Agreement under Sprouts Farmers Market, Inc.
2013 Incentive Plan for Chief Executive Officer (6)
10.1.3(d)
2020 Form of Performance Share Award Agreement under Sprouts Farmers Market, Inc.
2013 Incentive Plan (10)
10.1.3(e)
2021 Form of Performance Share Award Agreement under Sprouts Farmers Market, Inc.
2013 Incentive Plan (11)
10.2
10.2.1
10.3†
10.4
10.5
Offer Letter, dated August 31, 2021, from Sprouts Farmers Market, Inc. to Lawrence “Chip”
Molloy (12)
Severance Agreement, dated September 19, 2021, by and between Sprouts Farmers
Market, Inc. and Lawrence “Chip” Molloy (7)
Distribution Agreement, dated as of July 18, 2018, by and between SFM, LLC dba Sprouts
Farmers Market and KeHE Distributors, LLC (13)
Form of Indemnification Agreement by and between Sprouts Farmers Market, Inc. and its
directors and officers (14)
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)
98
10.5.1
10.6
10.7
10.8†
21.1
23.1
31.1
31.2
32.1
32.2
Amendment No. 1 to Amended and Restated Credit Agreement, dated as of March 6,
2019, among Sprouts Farmers Markets Holdings, LLC, the Lenders party thereto, and
JPMorgan Chase Bank, N.A., as Administrative Agent (16)
Form of Confidentiality, Non-Competition, and Non-Solicitation Agreement (17)
Amended and Restated Executive Severance and Change in Control Plan (18)
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)
List of subsidiaries
Consent of PricewaterhouseCoopers LLP, independent registered accounting firm
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
99
† Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment
previously submitted separately to the SEC.
(1)
Filed as an exhibit to Amendment No. 4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-
188493) filed with the SEC on July 29, 2013, and incorporated herein by reference.
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 Annual Report on Form 10-K filed with the SEC on February 20, 2020,
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 May 7, 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 1, 2019,
and incorporated herein by reference.
Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on September 22, 2021,
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.
Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 2, 2019, and
incorporated herein by reference.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 5, 2020, and
incorporated herein by reference.
(11) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 6, 2021, 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 August 31, 2021, and
incorporated herein by reference.
(13) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q/A filed with the SEC on April 1, 2019, and
incorporated herein by reference.
(14) 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.
(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 Current Report on Form 8-K filed with the SEC on March 7, 2019, and
incorporated herein by reference.
(17) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2015,
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 28, 2020,
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
None.
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 24, 2022
SPROUTS FARMERS MARKET, INC.
/s/ Lawrence P. Molloy
By:
Name: Lawrence P. Molloy
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
/s/ Jack L. Sinclair
Jack L. Sinclair
/s/ Lawrence P. Molloy
Lawrence P. Molloy
/s/ Stacy W. Hilgendorf
Stacy W. Hilgendorf
Title
Date
Director and Chief Executive Officer
(Principal Executive Officer)
February 24, 2022
Chief Financial Officer
(Principal Financial Officer)
Vice President, Controller
(Principal Accounting Officer)
February 24, 2022
February 24, 2022
/s/ Joseph Fortunato
Chairman of the Board
February 24, 2022
Joseph Fortunato
/s/ Joel D. Anderson
Director
February 24, 2022
Joel D. Anderson
/s/ Kristen E. Blum
Kristen E. Blum
Director
February 24, 2022
/s/ Terri Funk Graham
Director
February 24, 2022
Terri Funk Graham
/s/ Joseph D. O’Leary
Director
February 24, 2022
Joseph D. O’Leary
/s/ Douglas G. Rauch
Director
February 24, 2022
Douglas G. Rauch
101
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ABOUT SPROUTS
OUR EXECUTIVE TEAM
Jack Sinclair
Chief Executive Officer
Nicholas Konat
President and Chief Operating Officer
Lawrence “Chip” Molloy
Chief Financial Officer
Sco(cid:2) Neal
Chief Fresh Merchandising Officer
Dan Sanders
Chief Store Operations Officer
Dave McGlinchey
Chief Format Officer
Brandon Lombardi
Chief Legal Officer
OUR BOARD
Joseph Fortunato, Chairman of the Board; Operating Partner, Prospect Hills
Growth Partners, L.P.; Former Chairman and Chief Executive Officer,
GNC Holdings, Inc.
Joel Anderson, President, Chief Executive Officer and Director of Five Below, Inc.
Kristen Blum, Former Senior Vice President and Chief Information Officer,
PepsiCo, Inc.-Latin America
Terri Funk Graham, Branding Strategy Consultant; Former Senior Vice President
and Chief Marketing Officer, Jack in the Box, Inc.
Joseph O’Leary, Former President and Chief Operating Officer, PetSmart, Inc.
Doug Rauch, President, Daily Table; Former President, Trader Joe’s Company
Jack Sinclair, Chief Executive Officer, Sprouts Farmers Market, Inc.
VIRTUAL ANNUAL MEETING
May 25, 2022 - 8 a.m. PDT
Via webcast at
www.virtualshareholdermeeting.com/SFM
g
/
2022
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.