Sprouts Farmers Market
Annual Report 2022

Plain-text annual report

To our Shareholders, Thank you foff r your support and ownership of Sprouts through another dynamic year in foff od retail. I’m extremely proud of the way our talented store, distribution center, and support office teams executed our strategy with a relentless foff cus on our customers. The progress the business has made and the financial results we produced are a testament to their effoff rts. I firmly believe the foff undation we continued laying in 2022 will position us to deliver sustainable growth and meaningful returns to shareholders well into the future. Throughout the year we made significant investments in team member wages, benefits, and training, and we foff stered an inclusive company culture. We built more product innovation capabilities to drive a diffeff rentiated assortment that resonates with our target customer. We advanced our fresh supply chain work to improve the customer experience and reduce shrink. We improved customer communication and connectedness across digital and e-commerce channels. And, importantly,yy we supported the health of our communities by championing local vendors, reducing waste, fighting hunger, and underwriting children’s nutrition education programs in underserved areas. Throughout a year filled with macro challenges, these effoff rts made our business stronger, more resilient, and more sustainable. Here are just some of our 2022 successes: •Annual sales of $6.4 billion and earnings per share of $2.39, a growth of 14%. •Cash from operations of $371 million self-ff funded our 16 new stores. •Introduced approximately 8400 new fresh, healthy,yy and attribute-driven products. •Sprouts Brand products exceeded $1 billion in sales. •Returned $200 million of value to shareholders through our share buyback program. •E-commerce sales grew 11%, supported by our partnerships with Instacart and the new addition of DoorDash to reach even more customers. •Recovered 87% of foff od waste and donated the equivalent of 27 million meals to those in need. •Created 1,600 new jobs, promoted 24% of our team members, and delivered more than 682 thousand training hours. •Local produce sales grew over 100% to $150 million as we built key grower relationships and introduced more unique local items. •Today,yy we are 51% feff male and 48% ethnically diverse across our stores. Also improved diversity on our board of directors. •AwAA arded a “A“ AA”AA rating by MSCI, a leading ESG rating organization, and named as one of the 100 most sustainable companies in the world by Corporate Knights. •60% of new stores were in our new smaller foff rmat with reduced operational costs, less rent, and more operational efficiencies. •Strengthened our fresh supply chain operational execution and technology stack creating stability and improved service to our stores, resulting in a fresher product foff r the customer. •Created value foff r our communities by supporting non-profit-led school gardens and nutrition learning programs that impacted an estimated 3 million students. •Built a talented customer analytics team to better understand our customers’ behaviors and digitally connected with 13% more customers. • $200M in sales of products from diverse suppliers. When I look back at all our accomplishments in 2022, what I am most proud of is the way our team members lived our company VaVV lues every day with intentionality.yy We cared foff r each other, our customers, our communities, our suppliers, and the planet. We celebrated and embraced being diffeff rent as a business and as individuals. We owned our areas of responsibility and demonstrated a collective desire to improve the business and drive outcomes. The dedication and collaboration of our 30,000+ team members make me exceedingly optimistic about the future. As we begin the new fiscal year, we believe our diffeff rentiated healthy offeff ring has never been more relevant. Many Americans’ dietary needs and choices make foff r continued trends that faff vor our business model. I sometimes must remind myself that, even though Sprouts opened its first store 20 years ago, we are still in the early chapters of our growth story.yy I’m excited about the chapters yet to come and am more confident than ever in our ability to deliver results and do right by all our stakeholders. Jack Sinclair, Chief Exexx cutive 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 Januaryrr 1, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to 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 offff ices 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 foff r such shorter period that the registrant was required to file such reports), and (2) has been subjb ect to such filing requirements fof r 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 foff r 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 foff r 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 effff ectiveness 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 1, 2022, 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-affff iliates of the registrant was $2,761,959,072, based on the last reported sale price of such stock as reported on The NASDAQ Global Select Market on such date. As of February 28, 2023, there were 103,067,514 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 fof r its 2023 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K where indicated. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended January 1, 2023. TABLE OF CONTENTS PART I Item 1. Business .............................................................................................................................................. Item 1A. Risk Factors ........................................................................................................................................ Item 1B. Unresolved Staffff Comments ............................................................................................................ Item 2. Properties ............................................................................................................................................ Item 3. Legal Proceedings ............................................................................................................................. Item 4. Mine Safety Disclosures ................................................................................................................... PART II Item 5. Market foff r Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ........................................................................................................ Item 6. Reserverr d ............................................................................................................................................. 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 Infoff rmation ............................................................................................................................... Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections ...................................... PART III Item 10. Directors, Executive Offff icers 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 Servirr ces........................................................................................ Item 15. Exhibits and Financial Statement Schedules ................................................................................ Item 16. Form 10-K Summary ........................................................................................................................ Signatures .............................................................................................................................................. PART IV Page 1 18 33 34 35 35 36 38 39 55 56 98 98 99 100 101 101 101 101 101 101 104 105 As used inii thtt isii Annual Reportrr on FoFF rmrr 10-K,KK unless thtt e context othtt erwrr iww seii rerr quirii err s, rerr feff rerr nces to thtt e “Company,” “S“ pS rorr uts,tt corprr orarr titt on, and,d whww ererr approrr prirr ai Annual Reportrr on FoFF rmrr 10-K does not inii clude or inii corprr orarr te by rerr feff rerr nce thtt e inii . accessibii te, itstt subsididd ai rirr es. ThTT e inii clusion of our weww bsite addrdd err sses inii foff rmrr atitt on on or ” “w““ eww ,” “u“ s” and “o“ ur” rerr feff r to SpS rorr utst FaFF rmrr ersrr Markerr le thtt rorr ugh our weww bsites hererr inii t,t Inc., a Delawaww rerr thtt isii SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS inii turerr operarr titt ons, fuff thtt at inii volve substantitt aii l igi ht,t ” “p“ lan,” “p“ rorr jo ect,t ” “w““ foff rwrr aww rdrr -lookinii g statementstt wiww thtt titt es. ThTT e statementstt containii ed inii ThTT isii Annual Reportrr on FoFF rmrr 10-K containii s “f““ off rwrr aww rdrr -lookinii g statements”tt and uncertrr ainii ange Act”)” , inii cludidd nii g, but not lill mii tentitt ons, fuff thtt isii Annual Reportrr on FoFF rmrr 10-K thtt at arerr not purerr lyl thtt e meaninii g of Sectitt on 27A77 of thtt e Securirr titt es Act of 1933, ii rirr sks histii orirr cal arerr as amended (r(( err feff rrrr err d to as thtt e “S“ ecurirr titt es Act”)” , and Sectitt on 21E of thtt e Securirr titt es ExchEE 1934, as amended (r(( err feff rrrr err d to as thtt e “E“ xchEE our grorr wthtt strtt arr tegy,gg expectatitt ons, belill efs,ff inii rerr venue, prorr jo ected expenses, and plans and objb ectitt ves of management. In some cases, you can identitt fii yff foff rwrr aww rdrr -lookinii g statementstt by termrr s such as “a“ ntitt cipii ate,” “b“ elill eve,” “e“ stitt mii ate,” “e“ xpect,t ” “i“ nii tend,d ” “m“ ay,” “m“ “o“ bjb ectitt ve,” or thtt e negatitt ve of thtt ese termrr s, and simii statements.t Howeww ver,rr not allll foff rwrr aww rdrr -lookinii g statementstt containii lookinii g statementst and othtt er faff ctorsrr materirr aii cause or contrtt irr bii ute to such didd fii fff eff rerr nces inii clude, but arerr not lill mii “R“ inii cluded inii statementst speak onlyl as of thtt e date of thtt to upu date any foff rwrr aww rdrr -lookinii g statementstt statements.t turerr eventstt and inii volve knownww rirr sks, levelsll of actitt vity,t perfrr off rmrr ance, or achievement to be thtt at could thtt e sectitt on titt tltt ed isii to rerr flff ect eventstt or cirii curr mstances aftff er thtt e date of such llll yl didd fii fff eff rerr nt frff orr m thtt ose exprerr ssed or imii plill ed by thtt e foff rwrr aww rdrr -lookinii g statements.tt FaFF ctorsrr thtt ese identitt fii yiff nii g woww rdrr s.d ThTT ese foff rwrr aww rdrr - ii rerr flff ect our currrr err nt viewsww about fuff thtt at may cause our actual rerr sults,t isii Annual Reportrr on FoFF rmrr 10-K.KK Furtrr htt ermrr orerr , such foff rwrr aww rdrr -lookinii g iww lii lll ,l ” “w““ oww uld,d ” “sh“ ould,d ” “co“ uld,d ” “ca“ n,” “p“ rerr didd ct,t ” “p“ otentitt aii pt as rerr quirii err d by law,ww weww undertrr ake no oblill gi atitt on rerr gardrr idd nii g turerr ited to, thtt ose didd scuii ited to, statementst ilii ar exprerr ssions inii tended to identitt fii yff foff rwrr aww rdrr -lookinii g l,l ” “co“ ntitt nii ue,” rerr portrr . ExceEE l posititt on, fuff ange Act of uncertrr ainii FaFF ctors”rr fiff nii anciaii ssed inii titt es, turerr iskii thtt Item 1. Businii ess PART I Sprouts Farmers Market offff ers 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-foff r-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. Headquartered in Phoenix with 386 stores in 23 states as of January 1, 2023, we are one of the largest and fastest growing specialty retailers of fresh, natural and organic foff od in the United States. Our Heritage In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our foff unding in 2002 through January 1, 2023, 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, to the Sprouts banner through acquisitions. These three businesses all trace their lineage back to Henry’s Farmers Market and were built with similar store foff rmats and operations including a strong emphasis on value, produce and servirr ce in smaller, convenient locations. 1 Our Growth Strategy Since 2020, we have foff cused on a long-term growth strategy that we believe is transfoff rming our company and driving profitable growth. We continue to execute on this strategy, foff cusing on the foff areas: llowing • • • • • • WiWW nii wiww thtt TaTT rgrr et Customersrr . We are foff cusing attention on our target customers, identified through research as ‘health enthusiasts’ and ‘selective shoppers’, 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-foff r-you, quality products and by providing a full omnichannel offff ering through delivery or pickup via our website or the Sprouts app. UpUU date FoFF rmrr at and ExpEE and inii Select Markerr ts.tt We are delivering unique smaller stores with expectations of stronger returns, while maintaining the approachable, fresh-foff cused farmer’s market heritage Sprouts is known foff r. In 2021, we opened three stores and remodeled one store featuring our new foff rmat, and in 2022, we opened nine new foff rmat stores. 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 2024. Crerr ate an Advantaged FrFF err sh Supu plyl Chainii centers can drive effff iciencies across the chain and support growth plans. To further deliver on our fresh commitment and reputation, as well as to increase our local offff erings and improve financial results, we 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. . We believe our network of fresh distribution titt nii g Approrr ach. We believe we are elevating our national brand Refiff nii e Brarr nd and Markerr recognition and positioning by telling our unique brand story rooted in product innovation and diffff erentiation. We are investing savings from largely removing our weekly promotional print ad into increasing engagement and personalization with our target customers through digital and social connections, driving additional sales growth and loyalty. Inspirii err and EnEE gage Our TaTT lent to Crerr ate a Best PlPP ace to WoWW rk.rr Subsequent to the initial launch of our long-term growth strategy, we have added the foff cus area of inspiring and engaging our talent through our culture, acquisition and development and total rewards program to attract and retain the talent we believe we need to execute on our strategic goals and transfoff rm our company into a premier place to work. l TaTT rgrr etstt and Box Economics. We are measuring and reporting on the Delill ver on FiFF nii anciaii success of this strategy against a number of long-term financial and operational targets. With the implementation of our strategy beginning in 2020, 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 foff ods stores, and smaller specialty markets, distinguishing us from other foff od retailers, while also providing a broad offff ering of innovative and diffff erentiated products with lifestyle friendly ingredients foff r our customers. • • • Storerr Desigi n and ExpEE erirr ence. Our stores are organized in a “flipped” conventional foff od retail store model, positioning our produce at the center of the store surrounded by a specialty grocery offff ering. Produce remains the heart of our stores, as we typically dedicate approximately 20% of a store’s selling square foff otage 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 foff rmat allows foff r quick in-and-out servirr ce, and our curated assortment of innovative, responsibly and locally sourced items offff er treasure hunt shopping experiences. The below diagram shows a sample layout of our new smaller foff rmat stores: Customer EnEE gagement. We are committed to providing, and believe we have, best-in-class customer engagement, which builds trust with our customers and diffff erentiates 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, diffff erentiated customer servirr ce 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 offff ering as many customers use both in-store and online foff r their grocery needs. . Currently, our stores average approximately 28,000 square feet, which we believe Storerr Sizeii is smaller than many of our peers’ average stores. Under our long-term growth strategy, our new foff rmat stores feature a smaller box size, generally between 21,000 and 25,000 square feet, that stay true to our fresh-foff cused, farmers market heritage but 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. 3 • TeTT am Members.rr Our stores are typically staffff ed 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 offff ice and regional teams. We have prioritized making investments in training development that we believe enhances our team members’ knowledge, particularly with respect to our expanded and evolving product offff erings, so our team members can continue to engage and assist our customers. We also support leadership and career opportunities foff r our team members at Sprouts. We believe our team members contribute to our consistently high servirr ce standards and that this helps us successfully open and operate our stores. Our Product Offff ering We are a specialty natural and organic foff od retailer that offff ers a unique shopping experience foff r our customers. To offff er the right assortment of healthy alternatives and good-foff r-you options, we curate our product mix to diffff erentiated fresh, natural and organic foff ods and healthier options throughout all of our departments, with innovative products that feature lifestyle friendly ingredients. FrFF err sh, Naturarr l and Orgrr anic FoFF odsdd We foff cus our product offff erings on fresh, natural and organic foff ods. Foods are generally considered “fresh” if they are minimally processed or in their raw state not subjb ect to any type of preservarr tion or freezing. Natural foff ods can be broadly defined as foff ods that are minimally processed and are free of synthetic preservarr antibiotics, hydrogenated oils, stabilizers and emulsifiers. Essentially, natural foff ods are largely or completely free of non-naturally occurring chemicals and are as near to their whole, natural state as possible. tives, artificial sweeteners, colors, flavors and other additives, growth hormones, Organic foff ods refer to the foff od itself as well as the method by which it is produced. In general, organic operations must demonstrate that they are protecting natural resources, conservirr ng biodiversity, and using only approved substances and must be certified by a USDA-accredited certifyiff ng agency. Further, retailers that handle, store or sell organic products must implement measures to protect their organic character. PrP orr duct Categorirr es We categorize the varieties of products we sell as perishable and non-perishable. Perishable product categories include produce, meat, seafoff od, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foff ods, beer and wine, and natural health and body care. The foff non-perishable sales mix: llowing is a breakdown of our perishable and Perishables Non-Perishables Depe artrr mtt entstt 2022 2021 2020 58.0% 42.0% 57.7% 42.3% 57.2% 42.8% While we foff cus on providing an abundant and affff off rdable offff ering of natural and organic produce, llowing departments that enable customers to have a full grocery shopping our stores also include the foff experience: packaged groceries, meat and seafoff od, deli, vitamins and supplements, dairy and dairy alternatives, bulk items, baked goods, frozen foff ods, natural health and body care, and beer and wine. Our departments reflect our unique selling proposition featuring intentional curation of responsibly and locally sourced products. We believe each of our departments provides high-quality, diffff erentiated and value- oriented offff erings foff r our customers which we continuously refine with our customer preferences in mind. 4 SpS rorr utstt Brarr nd We have been expanding the breadth of our Sprouts branded products over the last several years and have a dedicated product development team foff cused on continuing this growth. We sell a broad assortment of products that are diffff erentiated and fun to explore, offff er incredible taste, quality, value and experience, and are only available at Sprouts. We started a program in 2022 to update and redesign all Sprouts branded products, and we are expecting to complete this in 2024. Though early in the rollout of the new design, we are seeing positive impact in terms of sales and recognition. The Sprouts Brand program accounted foff r just over 19% of our revenue in fiscal 2022. We believe our Sprouts Brand products build and enhance the overall Sprouts brand and allow us to distinguish ourselves from our competitors, promoting customer loyalty and creating a destination shopping experience. PrP orr duct InII novavv titt on We believe Sprouts is on the foff refront of foff od innovation and has paved the way foff r natural foff od trends foff r over two decades. Since our foff unding, Sprouts has carried a wide selection of innovative natural and organic brands that resonate with our target customers and inspire healthy living foff r everyone. We have nurtured and grown many once-shoestring brands that now serverr leaders. As we continue to grow, we aspire to become the most innovative health and wellness specialty foff od retailer in the country by seeking out and growing our relationships with niche vendors to bring their unique, quality products to the millions of shoppers who visit our stores every week. Led by our dedicated foff raging team, we embrace product innovation, and we believe our stores serverr as an incubator foff r growth across the natural foff ods industry, highlighting new and diffff erentiated items in our innovation center merchandising displays. as category In 2022, we launched approximately 8,400 new products. 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 offff er a treasure hunt experience foff r our customers by sourcing new, innovative and diffff erentiated offff erings into every department of our stores. Sourcing and Distribution We manage the buying of, and set the standards foff r, 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 seek to partner with suppliers and servirr ce providers that share this commitment, as included in our Supplier Code of Conduct, which details our expectations regarding workplace standards and supplier best practices, and Commitment to Human Rights. We work closely with our supply chain partners to improve animal welfare standards, sustainable seafoff od sourcing, support foff r organic agriculture and the ethical treatment of people. For an overvirr ew of our product sourcing policies and programs, please visit: about.sprorr uts.t com/mm p// rorr duct-sourcirr nii g/gg .// We believe, based on our industry experience, that our strong relationships in the produce business provide us a competitive advantage and enable us to offff er high-quality produce at prices we believe are generally below those of conventional foff od retailers and even further below high-end natural and organic foff od 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 foff rm meaningful relationships with farmers to build a path to growing with them as we grow, and our flexibility allows us to react to produce markets quickly in order to purchase produce in smaller quantities than larger chains and to help us bring new and innovative varietals to our customers at favorable pricing. These products become treasure hunt items foff und at our stores. 5 Given the importance of produce to our stores, we source, warehouse and self-ff 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 maja ority of our stores. We currently have seven distribution centers, with two located in Califoff rnia 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 products from local farmers and improving effff iciencies in our distribution process. We believe our scale, together with this decentralized purchasing structure and flexibility generates cost savings, which we frequently 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 foff llowing specifications and quality control standards that are set by us. KeHE Distributors, LLC (“KeHE”), is our primary supplier of dry grocery and frozen foff od products, accounting foff r approximately 45%, 44% and 42% of our total purchases in fiscal 2022, 2021, and 2020, respectively. Another 3% of our total purchases in each of fiscal 2022, 2021 and 2020 were made through our secondary supplier, United Natural Foods, Inc. (“UNFI”). Our primary supplier of meat and seafoff od accounted foff r approximately 13% of our total purchases in each of fiscal 2022, 2021 and 2020. See “Risk Factors—Disruption of significant supplier relationships could negatively affff ect our business.” Our Pricing, Marketing and Advertising PrP irr cinii g As a farmers market style store, we emphasize competitive prices throughout the entire store, as we are able to pass along the benefits of our scale and purchasing power to our customers, particularly in certain categories such as produce. We position our prices with everyday value foff r our customers within our margin structure, with regular promotions that drive traffff ic and trial. Our brands products offff er entry- level price points in certain categories, but also foff cuses on innovation, treasure hunt experience, wellness or health benefits and quality. Markrr etitt nii g and Advevv rtrr itt sii inii g As part of our long-term growth strategy to refine our brand and marketing approach, we have pivoted our marketing strategy to attempt to drive more profitable growth and create more meaningful connections with our customers. Our digital-first marketing program is foff cused on connecting with our most important, higher value target customers via precision geographic targeting, data-driven media and foff cusing on personal relevance to tap into our target audience’s needs and affff inities. 6 We believe our story telling through broadcast and digital media will reach more customers than our prior approach utilizing weekly paper flyers, which we largely discontinued. During 2022, we garnered more than 20 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 27% increase in SMS subscribers and a 16% increase in email subscribers in 2022 compared to 2021. Additionally, digital, TV and radio ads reached shoppers with 4.3 billion impressions, and we ended the year with 2.2 million foff llowers across all social platfoff rms. Leveraging digital communications targeted to specific geographic areas also provides us with greater flexibility to offff er diffff erent promotions and respond to local competitive activity and allows us to make our customers aware of what is new and diffff erent in our stores in real time. Sprouts continues to educate and reach shoppers through social partnerships, special content and sponsorships. Among our 2022 highlights: • • • • We worked with 270 social influencers from coast-to-coast last year who shared what they love about Sprouts in their own words to their unique foff llowers. In June, we announced our long-term commitment to and investment in collegiate women’s athletics through partnerships with the Big 12 and Pac 12 conferences along with supporting 50 individual Name, Image and Likeness (NIL) deals with female athletes from multiple schools from both conferences, becoming the first grocery retailer to make such a commitment. In conjunction with our partnerships with the Big 12 and Pac 12 conferences, in September we announced individual sponsorship agreements with the athletics departments at Arizona State University, University of Califoff rnia, Los Angeles, University of Southern Califoff rnia and University of Texas, pursuant to which we will continue our commitment to women’s athletics by sponsorship of season-long activities and entitlement games. Sprouts first ever back-of-ff j- ersey sponsorship with the Angel City Football Club took flight as the club began play in the National Women’s Soccer League in 2022. A portion of the partnership funds are being allocated to support local causes that provide fresh foff od access and further children’s nutrition education throughout Los Angeles. 7 We have developed and maintain the Sprouts app on which we include digital coupons and in-store scan features, and our website, www.sprorr uts.tt com, on which we display our weekly sales flyers, highlight our product offff erings and offff er special deals. Our website and app also feature online ordering foff r delivery and pickup. We offff er home deliveries from our stores through partner servirr ces in all of our markets nationwide, as well as “click and collect” pickup servirr ce at all of our stores. We will continue to explore mobile and digital opportunities to further connect with our customers and leverage data foff r 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 selective shoppers (whom we foff rmerly referred to as experience seekers), and we are foff cusing on these groups in our long-term growth strategy. Our target customer over-indexes on lifestyle choices and seeks better-foff r-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 serverr gain a larger proportion of their market share of foff od-at-home purchases by targeting and identifyiff ng those innovative, attribute-driven, quality products and providing the in-store experience and support in living a healthy lifestyle that they are seeking. a small portion of these target customers at present and have an opportunity to 8 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") effff off rts to maximize our influence. Through this materiality review with internal and external stakeholders, we intend to foff cus our effff off rts on sustainable and responsible sourcing, plastics and packaging reduction and carbon emission reduction. Our 2022 ESG highlights included: • • • • • • Nearly 26% of total sales from organic products; Approximately $200M in sales of products produced by women, minority, veteran, or LGBTQ- owned suppliers; $145M in local produce sales; 21% increase in less carbon intensive plant-based product sales; Recovered 87% of foff od waste, and donated the equivalent of 27 million meals; and Recycled more than 800,000 pounds of plastic from customer returned bags and product shipping wrap. Based on our ESG accomplishments, we received a rating of AAAA AAA in the 2022 MSCI ESG Ratings assessment. The AAAA AAA rating represents the highest on the scale and signifies a company leading its industry in managing the most significant ESG risks and opportunities. Sprouts was also named as one of the 100 most sustainable companies in the world by Corporate Knights. For more infoff rmation on our ESG effff off rts and reporting, including our most recent ESG reports, please visit about.sprouts.com/sustainability/. The infoff rmation 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. ThTT e SpS rorr utstt Healthtt y Communititt es FoFF undadd titt on In 2015, we foff rmed the Sprouts Healthy Communities Foundation (referred to as our “Foundation”), a registered 501(c)(3) organization foff cused on promoting nutrition education and increasing access to fresh, nutritious foff od in communities where Sprouts operates. Since the Foundation’s inception, it has awarded approximately $18.5 million in donations to more than 440 nonprofit organizations and hosted an estimated 270 volunteer servirr ce projo ects. Our Foundation's 2022 highlights included: • • • • Invested over $3.2 million into programs to provide an estimated three million students with school garden and nutrition education programming; Hosted annual Sprouts’ Day of Servirr ce, where 700 team members donated 3,000 volunteer hours. In total, the Foundation hosted 59 volunteer activities that resulted in 4,000 servirr ce hours in 2022; Awarded $2.2 million in high-impact capacity grants to empower nonprofit organizations to expand their program operations; and United more than 400 educators foff r the first-ever Sprouts’ School Garden Summit, a national foff ur-day learning event dedicated to strengthening the school garden and outdoor education movement. For more infoff rmation on our Foundation, please visit about.sprouts.com/sprouts-foff undation/. 9 Human Capitatt l Management At Sprouts, our culture is rooted in our values of “Care”, “Own it”, and “Love Being Diffff erent”. We remain foff cused on improving the health of the communities we serverr . 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 foff od, pride themselves on servirr ce excellence, and share our purpose driven culture. We build on our targeted recruitment effff off rts with robust training on customer engagement and product knowledge to ensure there is friendly, knowledgeable staffff we had approximately 31,000 team members. None of our team members are subjb ect 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. in every store. As of January 1, 2023, 2022 Higi hlill gi hts.tt We are proud of the foff llowing achievements during the year: • • • • • • We continue to cascade our three core values to intentionally shape our culture and act as a lens to guide the decisions we make. The values will infoff rm our behaviors and actions to create a sense of inclusion and belonging. We engaged in leadership development sessions across the organization with a foff cus on behaviors aligned to our values. As one of the fastest growing specialty retailers of fresh, natural and organic foff od in the country, we created 1,600 new jobs in 2022 through new store openings. Additionally, we promoted 7,350 team members and filled 64% of store manager positions with internal candidates. Team members saved approximately $18.6 million through store discounts. We awarded 58 scholarships to team members and dependents in 2022. Since the scholarship program’s inception, we have awarded more than $1.7 million in scholarships. ToTT tal Rewaww rdrr s.d Because we are a people powered business, we are proud to continuously invest in our workfoff rce by offff ering competitive salaries and wages, which we regularly assess against the current business environment and labor market. We proactively make changes to our total rewards programs to attract the talent that will support our growth strategy and will elevate the customer experience. Furthermore, we offff er comprehensive, relevant and market competitive benefits to all eligible team members: • • • • • • • We offff er a variety of medical benefit plans to allow team members the ability to choose the best plan foff r them and their families. We offff er well-being servirr ces and support dedicated to the mental, physical, emotional and financial well-being of our team members. We have a quarterly bonus plan foff r which all store team members are eligible. All team members over 18 can enroll in our 401(k) plan the first of the month foff months of servirr ce, and we offff er a contribution matching program. llowing three We offff er a paid sick time policy foff r all team members and offff er generous leave programs. All hourly team members are eligible foff r semi-annual reviews and merit increases. We offff er 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 2022, 64 Sprouts team members enrolled in this program, and 8 team members graduated from the program. 10 • • • We participated in the McKinsey Connected Leaders Academy, foff r the second year, engaging high perfrr off rming leaders in programs designed to develop diverse leaders at Sprouts. We had 39 participants in 2022, which included leaders participating in Hispanic, Black & Asian Executive level and Manager level programs. We offff er The Henry Boney Memorial Scholarship, which is designed to offff er team members or their dependents a $3,000 scholarship to achieve their college dreams. All Sprouts team members can save at our stores, with a 15% Work Perk Discount. This year we offff ered a 30% discount to all team members over the course of six days aligned with our holiday celebrations. Educatitt on, TrTT arr inii inii g and Safeff ty.t We believe Sprouts is an attractive place to work with significant growth opportunities foff r our approximately 31,000 team members. To grow the next generation of leaders at Sprouts, we have developed a Leadership Training Model to on-board store managers new to Sprouts. In 2022, we had 37 Leadership graduates totaling more than 8,900 hours in training. We introduced a college fast-track program in stores in 2022 to train college graduates foff r assistant store management roles, with 9 graduates in the program. Our store team members completed over 674,000 hours of in- store training in 2022. We are committed to maintaining a safe environment foff r 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 2022, our stores reported a 12% reduction in non-COVID worker compensation claims and a 15% reduction in general liability claims over the prior year. Diversirr tyt and Inclusion. We pride ourselves on supporting an inclusive, respectful, and caring culture throughout our organization. In 2022, 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 50% were awarded to ethnically diverse team members. We conduct foff rmal talent review and succession planning to identifyff 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. In 2022, we launched three additional team member resource groups representing affff inity team members and allies: “Sabor” our Hispanic & Latin resource group, “Soul” our frican American resource group and “Rainbow Alliance” our LBGTQIA+ resource group. Black/A// top talent and intentionally make hiring and promotional 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 2024. 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 foff r us to achieve our growth target. We intend to continue to foff cus our growth on areas where we have a large concentration of stores, such as Califoff rnia and Texas, while building out our newer markets, such as Florida, Georgia and the Mid-Atlantic region, to achieve a larger concentration of stores. We have opened 16, 12 and 22 new stores in fiscal 2022, 2021 and 2020, respectively. We expect to continue to expand our store base with approximately 30 store openings planned foff r fiscal 2023. Beyond 2023, we expect to target at least 10% annual unit growth, subjb ect to the impact of supply chain disruptions which delayed a number of our new store openings in 2020- 2022. See “Item 2. Properties” foff r additional infoff rmation with respect to our planned store closures in 2023. 11 The below diagram shows our store foff otprint, by state, as of January 1, 2023. 12 New Store Development We have an extensive analytics-based process foff r new store site selection, which includes in-depth analysis of area demographics, competition, growth potential, traffff ic 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 offff icers. Multiple members of this committee oftff en 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 deliver a unique and friendly shopping experience that stays true to our farmers market heritage by featuring a smaller box size than our recent vintages, generally between 21,000 and 25,000 square feet. By reducing our store square foff otage, 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 higher returns than our larger stores and continue to accelerate our growth. See “Item 2. Properties” foff r additional infoff rmation with respect to our store locations. Our business is subjb ect 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 foff urth quarter. Seasonality Our Competition and Industryrr We operate within the competitive and highly fragmented grocery store industry which encompasses a wide array of foff od retailers, including large national and regional conventional chain supermarkets, warehouse clubs, small grocery and convenience stores, independent grocers, and natural and organic, specialty, mass, discount and other foff od retail and online foff rmats. Based on our industry experience, we believe our new stores capture market share from conventional supermarkets and specialty concepts in the supermarket segment. Grocery customers are attracted to unique product offff erings, foff rmats and diffff erentiated shopping experiences. Based on our industry experience, we also believe consumers are increasingly foff cused on health and wellness and are actively seeking healthy foff ods in order to improve eating habits. This overall demand foff r healthy products is driven by many factors, including increased awareness about the benefits of eating healthy, a greater foff cus on preventative health measures, and the rising costs of health care. We believe customers are attracted to retailers with comprehensive health and wellness product offff erings. As a result, foff od retailers are offff ering an increased assortment of fresh, natural and organic foff ods as well as vitamins and supplements to meet this demand. Our competitors primarily include other specialty foff od retailers such as Whole Foods, Trader Joe’s, and smaller local or regional operators, conventional supermarkets such as Kroger, Albertsons, Safeway, H-E-B and Publix, as well as mass or discount retailers such as Target and Wal-Mart, warehouse membership clubs, online retailers such as Amazon, specialty stores, restaurants, home delivery and meal solution companies, and any other outlets offff ering foff od and similar products as those foff und in our stores. We believe Sprouts offff ers consumers a compelling value and diffff erentiated products relative to our competitors and will continue to benefit from increasing consumer foff cus 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. 13 Insurance and Risk Management We use a combination of insurance and self-ff insurance to provide foff r potential liability foff r workers’ compensation, general liability, product liability, director and offff icers’ 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 affff ect 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 reinfoff rce 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-ff court settlements as well as litigation. Information Technology Systems We have made significant investments in infoff rmation technology infrastructure and business systems, including point-of-ff sale, data warehouse, labor management, purchasing, inventory control, demand foff recasting, and financial and reporting systems. Our recent investments have foff cused on solutions to enhance our operational productivity, optimize our labor, maintain our in-stock positions and foff recast our customer demand, while maintaining our high quality and value proposition. All of our stores operate under one integrated infoff rmation technology platfoff rm which allows foff r our current and future store growth. We will continue making investments in our current infoff rmation technology infrastructure and invest in systems that scale to support our growth and add effff iciencies to our growing operations. In addition, we continue our foff cused effff off rts on limiting risk of cyber-security incidents by investing in IT security technology tools, resources, penetration assessments, third-party security audits and employee training. Regulatoryrr Compliance Our stores and online retail operations are subjb ect to various local, state and federal laws, regulations and administrative practices affff ecting our business. We must comply with provisions regulating health, sanitation and foff od safety standards, foff od labeling, equal employment, minimum wages, data privacy, environmental protection, licensing foff r the manufacture, preparation and sale of foff od and, in many stores, licensing foff r beer and wine or other alcoholic beverages, and cannabidiol (“CBD”) products. Our operations, including the manufacturing, processing, foff rmulating, packaging, labeling and advertising of products by us and our vendors are subjb ect 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”). 14 FoFF od. The FDA has comprehensive authority to regulate the manufacture, labeling, distribution, sale, marketing and safety of foff od and foff od 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 Servirr ce (“FSIS”) is the public health agency responsible foff r 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 effff ect. 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 observerr d by the maja ority of foff od producers. This authority applies to all domestic foff od facilities and, by way of imported foff od supplier verification requirements, to all foff reign facilities that supply foff od products. The FDA and FSIS also exercise broad jurisdiction over the labeling and promotion of foff od. 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 foff ods, including dietary supplements, must bear labeling that provides consumers with essential infoff rmation 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 infoff rmation foff r frequently sold items are now in effff ect. 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 foff rmat, began to go into effff ect in 2020. USDA’s Agricultural Marketing Servirr ce (“AMS”) oversees compliance with the National Organic Standards Program and related labeling activity. In addition, AMS has responsibility foff r newly enacted requirements surrounding the disclosure of the presence of bioengineered ingredients in foff od. AMS also enfoff rces 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 subjb ect to rules and regulations under PACA. Dietaryr Supu plements.tt 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 subjb ect to the general foff od 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. Cosmetitt cs. 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 affff ect the structure or function of the body. 15 Homeopathtt ic Prorr ductstt . The FDA has the authority to regulate homeopathic products. Under the FDCA, homeopathic products are subjb ect 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 foff r safety or effff ectiveness. CBD Prorr ducts.tt The 2018 Farm Bill legalized the production of hemp and products made from hemp, hemp derivatives including CBD oil and extracts, and established that these products are no longer controlled substances, as long as the cannabis plant and products derived from the plant contain no more than 0.3% THC. Under the FDCA, it is unlawful to introduce into interstate commerce a foff od to which has been added a substance that is an active ingredient in an approved drug product or a substance foff r which substantial clinical investigations have been instituted, and the existence of such investigations has been made public. FDA has approved one drug product containing CBD as an active ingredient. Consequently, because CBD has been approved as a drug active ingredient, FDA’s current legal position is that CBD cannot be legally contained in a dietary supplement or foff od product. This restriction only applies to dietary supplements and foff ods. To date, FDA has limited its enfoff rcement actions to those ingestible, topical, and cosmetic CBD products that make therapeutic or drug claims. However, regardless of enfoff rcement priorities, FDA has the authority to remove from the market any CBD product if it is adulterated, its labeling is false or misleading, it is otherwrr requirement or regulation. This enfoff rcement authority extends to states that have legalized and regulated the distribution of ingestible CBD products. ise misbranded, or if it violates any other FDCA or FDA FoFF od,d Cosmetitt cs, Homeopathtt ic and CBD Prorr ducts,tt and Dietaryr Supu plement Advertrr itt si ii nii g. The FTC exercises jurisdiction over the advertising of foff ods, cosmetics, homeopathic and CBD 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 enfoff rcement actions against companies foff r failure to have adequate substantiation foff r claims made in advertising or foff r the use of false or misleading advertising claims. Complill aii nce. 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 refoff rmulated, eliminated or relabeled certain of their products and we have revised certain provisions of our sales and marketing program. 16 COVID-19 Pandemic Our operations have generally stabilized since the onset of the COVID-19 pandemic in 2020. However, we continue to experience varying levels of inflation through increased product costs attributable in part due to the effff ects of the pandemic, which we continue to pass through to retail pricing. In addition, due to continued diffff iculties in obtaining necessary equipment from third parties and inflationary pressures due to supply chain delays complicated by the COVID-19 pandemic, we have experienced and may continue to experience increased costs and delays in our planned new store openings. See “Risk Factors—The coronavirus (COVID-19) pandemic has disrupted our business and could negatively impact our financial condition.” foff r additional infoff rmation. Corporate Offff ices Our principal executive offff ices are located at 5455 E. High Street, Suite 111, Phoenix, Arizona 85054. Our website address is www.sprorr uts.tt com. The infoff rmation 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 foff r our Annual Meeting of Stockholders are made available, free of charge, on our investor relations website at httptt :/:: /// i// nii vestors.rr sprorr uts.tt com/mm ,// as soon as reasonably practicable aftff er such reports have been filed with or furnished to the SEC. We also use our website as a tool to disclose important infoff rmation about our company and comply with our disclosure obligations under Regulation Fair Disclosure. Our corporate governance documents, code of ethics and Board committee charters and policies are also posted on httptt :/:: /// i// nii vestors.rr sprorr uts.tt com/mm .// 17 Item 1A. Risii k FaFF ctorsrr Certrr ainii faff ctorsrr may have a materirr ai l adverserr effff eff ct on our businii ess, fiff nii anciaii l condidd titt on and rerr sultstt foff rmrr atitt on inii of operarr titt ons. YoYY u should carerr fuff of thtt e othtt er inii statementst and rerr lated notes. Any of thtt e foff llll owiww nii g rirr sksii businii ess, rerr sultstt of operarr titt ons, cash flff ows,ww fiff nii anciai common stock to declill nii e. llll yl consider thtt e rirr sksii and uncertrr ainii thtt isii Annual Reportrr on FoFF rmrr 10-K,KK inii cludidd nii g our consolill dated fiff nii anciaii titt es descrirr bii ed below,ww togethtt er wiww thtt allll could materirr ai llll yl and adverserr l condidd titt on, or prorr spectst and cause thtt e value of our l lyl affff eff ct our Market and Other External Risks Generarr l economic condidd titt ons thtt at imii pact consumer sps endidd nii g or rerr sult inii competitt titt vevv rerr sps onses could advevv rsrr elyl affff eff ct our businii ess. The retail foff od business is sensitive to changes in general economic conditions. In addition to the impact of the COVID-19 pandemic, inflation, recessionary economic cycles, increases in interest rates, higher prices foff r commodities, raw materials, fuel and other energy, high levels of unemployment and consumer debt, depressed home values, high tax rates, tariffff sff and other macroeconomic factors that affff ect consumer spending and confidence or buying habits may materially adversely affff ect the demand foff r and prices of products we sell in our stores. As a result, consumers may be more cautious and could reduce their spending in our stores or shiftff their spending to lower-priced competition, such as warehouse membership clubs, dollar stores, online retailers or extreme value foff rmats, which could have a material and adverse effff ect on our operating results and financial condition. In addition, prolonged inflation or deflation can impact our business. Food inflation, such as the elevated levels we experienced during 2022, 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 affff ected. 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 faff ilii urerr and prorr fiff tatt bilii ill tyt .yy to compete successfuff llll yl inii our competitt titt vevv inii dustrtt yr may advevv rsrr elyl affff eff ct our rerr vevv nues We operate in the competitive retail foff od industry. Our competitors include specialty grocers, conventional supermarkets, natural foff od 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 foff r products, customers and locations. We compete on a combination of factors, primarily diffff erentiated product selection, quality, convenience, shopping experience, customer engagement, store foff rmat, location, price and delivery options. Our failure to offff er products or servirr ces that appeal to our customers’ preferences or to effff ectively market these products or servirr ces could lead to a decrease in our sales. To the extent that our competitors offff er 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 offff erings, increasing the space allocated to perishable, prepared and specialty foff ods, including fresh, natural and organic foff ods, and enhancing options of engaging with and delivering their products to customers. Some of these competitors may have been in business longer or may have greater financial or marketing resources than we do and may be able to devote greater resources to sourcing, promoting and selling their products. As competition in certain areas or platfoff rms 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 traffff ic and market share, reduction in margin from competitive price changes or greater operating costs. WeWW rerr lyl heavivv lii yl on sales of frff err sh prorr duce and qualill tyt prorr duct suppp lyl didd sii rurr ptitt ons may havevv an advevv rsrr e effff eff ct on our prorr fiff tatt bilii ill tyt and operarr titt nii g rerr sultstt . frff err sh, naturarr l and orgrr anic prorr ductstt , and We have a significant foff cus on perishable products, including fresh produce and natural and organic products. Sales of produce accounted foff r approximately 20% and 21% of our net sales in fiscal 2022 and 18 2021, respectively. Despite temporary challenges related to the COVID-19 pandemic, we have generally not experienced significant diffff iculty 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, tariffff sff and import regulations or restrictions on foff reign-sourced products and the ability of our vendors to maintain organic, non-genetically modified or other applicable third-party certifications foff r 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 effff ects 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 foff od retailers in the procurement of fresh, natural and organic products, and other specialty, attribute-driven products which are oftff en less available than conventional products. If our competitors significantly increase these types of product offff erings due to increases in consumer demand or otherwrr suffff icient supply of such products on favorable terms, or at all, and our sales may decrease, which could have a material adverse effff ect on our business, financial condition, results of operations and cash flows. We could also suffff er 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 foff r our business needs, it would materially adversely affff ect our financial condition, results of operations and cash flows. ise, we and our suppliers may not be able to obtain a ThTT e currrr err nt geograrr phic concentrtt arr titt on of our storerr s crerr ates an exee pxx osurerr downww turnrr s or catatt strtt orr phic occurrrr err nces and thtt e imii pact of clill mii ate change. to local or rerr gional As of January 1, 2023, we operated 130 stores in Califoff rnia, making Califoff rnia our largest market representing 34% of our total stores in fiscal 2022. We also have store concentration in Texas, Arizona and Colorado, operating 51, 44 and 32 stores in those states, respectively, and representing 13%, 11% and 8% of our total stores in fiscal 2022, respectively. As we execute our long-term growth strategy, we may become even more concentrated in these markets, as well as identified expansion markets such as Florida, in which we operated 35 stores in fiscal 2022. In addition, we source a large portion of our produce from Califoff rnia, 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 unfoff reseen events or circumstances that negatively affff ect these areas in which we have stores or from which we obtain products could materially adversely affff ect 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, diminished water resources, windstorms such as tornados, cyclones, hurricanes and tropical storms, winter storms or other severe weather conditions, which may be caused or exacerbated by climate change; and other catastrophic occurrences, such as pandemics, earthquakes or wildfires. Such conditions may result in reduced customer traffff ic 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 foff rce in our markets, temporary disruption in the supply of products whether from self or third-party distribution, delays in the delivery of goods to our stores and a reduction in the availability of products in our stores. Any of these factors, particularly in areas with significant geographic concentration of our stores or produce grocers on which we rely, may disrupt our business and materially adversely affff ect our financial condition, results of operations and cash flows. FlFF uctuatitt ons inii commodidd tyt prirr ces and avavv ilii all bilii ill tyt may imii pact prorr fiff tatt bilii ill tyt .yy Many products we sell include ingredients such as wheat, corn, oils, milk, sugar, cocoa, nuts and other key commodities. Many commodity prices are subjb ect to significant fluctuations and may be 19 impacted by economic factors such as inflation and tariffff s,ff and availability of commodities may be impacted by weather events and catastrophic occurrences. 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. ThTT e cororr navivv rii urr s (C(( OVIVV DII our fiff nii anciaii l condidd titt on. -19)9 panded mic has didd sii rurr pted our businii ess and could negatitt vevv lyl imii pact The unprecedented global outbreak of the novel coronavirus (COVID-19) that began in the first quarter of 2020 had a significant impact on all aspects of our business, including strains on our entire supply chain, store operations and merchandising functions. While our operations have generally stabilized since the peak of the pandemic, our operations may continue to be impacted by any continuing effff ects of COVID-19, including resurgences and variants of COVID-19 or outbreaks of any new viruses or contagions. These impacts may include diffff iculties and delays in sourcing, transporting and stocking products, inabilities to staffff our stores and distribution centers at adequate levels to conduct our operations resulting in store closures or operating hour reductions, and incurring significant costs in support of our front-line store team members foff r enhanced benefits, safety measures and government- mandated wage increases. Measures taken by governmental authorities to reduce the transmission of COVID-19 or any new viruses, including vaccine and testing mandates, may cause additional costs and disruptions in workfoff rce availability, as well as costly litigation, enfoff rcement actions and penalties. In addition, the COVID-19 pandemic has required and COVID-19 or new viruses may in the future again 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. Store traffff ic 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 foff od. 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 infoff rmation which may emerge concerning the severity of the pandemic, emergence of variants and the actions necessary to contain COVID-19 or treat its impact. Suppp lyl chainii didd sii rurr ptitt ons havevv ded lall yeyy d our storerr grorr wthtt plall ns. Due to continued diffff iculties in obtaining necessary equipment from third parties due to supply chain delays complicated by the COVID-19 pandemic, 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. Anothtt er wiww desprerr ad healthtt epe ided mic or othtt er inii cided ntstt beyoyy nd our contrtt orr l could materirr aii imii pact our businii ess. llll yl 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 otherwrr occurrences could adversely impact our business by disrupting production and delivery of products to our stores and by impacting our ability to appropriately staffff our stores. ise change their shopping behaviors. Additionally, these InII crerr asinii g energrr ygg coststt , unless offff sff et by morerr effff iff cient usage or othtt er operarr titt onal rerr sps onses, may imii pact our prorr fiff tatt bilii ill tyt .yy 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 have been adversely impacted by the 20 increased costs of energy and may be further adversely impacted if costs continue to increase. 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 ise, will increase the costs of operating our stores and distribution centers. of any such events or otherwrr 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 effff iciency 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. WeWW may rerr quirii err addidd titt onal capitatt l to fuff nd thtt e exee pxx ansion of our businii ess, and our inii abilii ill tyt obtatt inii such capitatt l could harmrr our businii ess. to To support our growth strategy, we must have suffff icient capital to continue to make significant investments in our new and existing stores and advertising. If cash flows from operations are not suffff icient, 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 foff rm 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 effff ect on our business, operating results, financial condition or prospects. Business and Operating Risks Our abilii ill tyt and our faff ilii urerr to exee ecute on our long-termrr grorr wthtt strtt arr tegygg lall rgrr elyl ded pe endsdd on new storerr openinii gs, to successfuff llll yl open new storerr s could negatitt vevv lyl imii pact our businii ess. 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 effff ectively achieve a level of cash flow or obtain necessary financing to support our expansion; find suitable sites foff r new store locations; manage supply chain constraints to obtain necessary equipment; negotiate and execute leases on acceptable terms; secure and manage the inventory necessary foff r 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 foff rmat; 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 identifyff suitable targets and negotiate acceptable terms and conditions foff r their acquisition, as well as our ability to obtain financing foff r such acquisitions, integrate the acquired stores into our existing store base and retain the customers of such stores. If we are ineffff ective in perfrr off rming these activities, then our effff off rts to open and operate new stores may be unsuccessful or unprofitable, and we may be unable to execute our growth strategy. We opened 16 and 12 stores in fiscal 2022 and 2021, respectively, and we currently expect to open ise. We may not have the level of cash flow or financing necessary to support our approximately 30 new stores in 2023. Beyond 2023, 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 inability to find suitable sites, supply chain disruptions or otherwrr 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 effff ectively, which in turn could cause deterioration in the financial perfrr off rmance 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 perfrr off rmance, we may slow or discontinue store openings, or we may decide to close stores that we are unable to 21 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 affff ected. WeWW may be unable to mainii tatt inii or inii crerr ase compararr ble storerr sales, whww ich could negatitt vevv lyl our businii ess and stock prirr ce. imii pact 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 foff r many reasons, including general economic conditions, competition, cycling prior year perfrr off rmance 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. Real or percrr eivevv d concernrr s thtt at prorr ductstt weww sellll could cause unexee pxx ected ilii lll nll ess, sided effff eff ctstt , inii jn uryr or deathtt could rerr sult inii rerr sult inii unexee pxx ected coststt and dadd mage to our rerr pe utatt titt on. thtt eirii didd sii contitt nii uance or exee pxx ose us to lall wsww uitstt , eithtt er of whww ich could There is increasing public awareness regarding and governmental scrutiny of foff od safety. Unexpected illness, side effff ects, injury, or death caused by products we prepare and/or sell, in particular our Sprouts brand products, or involving vendors that provide us with products or servirr ces that are consumed by our customers could expose us to severe damage to our reputation, product liability or negligence lawsuits or government enfoff rcement 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 s, which would reduce our capital resources. policy limits would have to be paid from our cash reserverr Further, we may not have suffff icient capital resources to pay a judgment, in which case our creditors could levy against our assets. Such illnesses, side effff ects, injuries or deaths could also result in the discontinuance of sales of these products or our relationship with such vendors or prevent us from achieving market acceptance of the affff ected products. 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 foff od safety. As a result, we believe that our customers hold us to a high foff od safety and quality standards, in particular our Sprouts brand products. Therefoff re, real or perceived quality or foff od 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 servirr ces, 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 effff ect on our business, results of operations, cash flows or financial condition. Any sigi nififf cant inii terrrr urr ptitt on inii could didd sii rurr pt our abilii ill tyt thtt e operarr titt ons of our didd sii trtt irr bii utitt on centersrr or supppp lyl chainii networkrr to delill vevv r our prorr duce and othtt er prorr ductstt inii a titt mii elyl manner.rr We self-ff distribute our produce through seven distribution centers located in Arizona, Texas, northern Califoff rnia, southern Califoff rnia, Georgia, Colorado and Florida. As we further expand our geographic foff otprint, 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, foff od safety concerns, integration of new distribution centers into our supply chain network, inability of our new distribution centers to perfrr off rm as expected or contractual disputes with third-party servirr ce 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 servirr ce providers. While we maintain business interruption and property insurance, if the operation of our distribution centers or transportation network were interrupted foff r any reason, causing delays in shipment of product to our stores, our insurance may not be suffff icient to cover losses we experience, which could have a material adverse effff ect 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 labor or fuel costs) could have a material adverse effff ect 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 22 regulations such as hours-of-ff servirr ce rules that lead to delays or interruptions of deliveries or increased costs could negatively affff ect our business. Disii rurr ptitt on of sigi nififf cant supppp lill er rerr lall titt onshipii s could negatitt vevv lyl affff eff ct our businii ess. KeHE is our primary supplier of dry grocery and frozen foff od products, accounting foff r approximately 45% and 44% of our total purchases in fiscal 2022 and 2021, respectively. Our current primary contractual relationship with KeHE continues through July 18, 2025 and provides that KeHE will be our primary supplier foff r all of our stores. Our primary supplier of meat and seafoff od products accounted foff r approximately 13% of our total purchases in both fiscal 2022 and 2021, 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 timely deliver product to our stores in quantities or within servirr ce parameters that meet our requirements may materially and adversely affff ect our operating results while we establish alternative supply chain channels. Another 3% of our total purchases in both fiscal 2022 and 2021, respectively, were made through our secondary supplier of dry grocery and frozen foff od products, UNFI. Our current contractual relationship with UNFI continues through March 31, 2023, and we are engaging in discussions regarding a renewal. 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 foff od safety, labeling or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. Further, the foff od 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 on commercially reasonable terms, which would have a material adverse effff ect on our financial condition, results of operations and cash flows. Disii rurr ptitt ons to, securirr tyt brerr aches or non-complill aii nce inii volvivv nii g,g our inii foff rmrr atitt on technologygg sysyy tems could harmrr our abilii ill tyt rerr vevv nues. to rurr n our businii ess and exee pxx ose us to potentitt aii l lill aii bilii ill tyt and loss of We rely extensively on infoff rmation technology systems foff r point-of-ff sale processing in our stores, supply chain, financial reporting, human resources, store operations, ecommerce and various other processes and transactions. Our infoff rmation technology systems are subjb ect 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 pervarr sive, including as a means foff r ransomware attacks, which have increased both in frequency and breadth. Point-of-ff sale hardware in our stores has also been targeted by individuals attempting to install skimmer devices or conduct other tampering to illicitly obtain payment card infoff rmation. In response to these wide-ranging cybersecurity and data privacy risks, 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 foff r example the Califoff rnia Privacy Act of 2018 (“CCPA”) and the Califoff rnia Privacy Rights Act (“CPRA”), can be costly and time-consuming. These costs could have a material adverse effff ect on our business, and our effff off rts may not meaningfully limit the success of future attempts to breach our infoff rmation technology systems. Our infoff rmation technology systems may also fail to perfrr off rm as we anticipate, and we may encounter diffff iculties 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, do not function as anticipated or are perceived to have failed, we may have to make significant investments to fix or replace them; suffff er interruptions in our operations; experience data loss; incur liability to our customers, team members and others; face costly litigation, enfoff rcement actions and penalties; and our brand and reputation with our customers may be harmed. Various third parties, such as our suppliers and payment processors and their suppliers (i.e., our foff urth parties), also rely heavily on infoff rmation technology systems, and any failure of these systems foff r any reason (e.g., cybersecurity 23 attack, softff ware glitch, human or system error or omission), 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 infoff rmation technology systems we rely on may have a material adverse effff ect on our business, operating results and financial condition. In addition, many of our store support team members remain in a remote or hybrid work environment in response to changes in the work environment due to the COVID-19 pandemic. 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. If weww arerr unable to successfuff llll yl prerr feff rerr nces inii a titt mii elyl manner,rr our sales may ded crerr ase. identitt fyff markrr et trtt err ndsdd and rerr act to changinii g consumer We believe our success depends, in substantial part, on our ability to: • • • anticipate, identifyff 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 servirr ce offff erings in our stores befoff re our competitors and effff ectively market these trends to our target customers; and develop and maintain vendor and servirr ce provider relationships that provide us access to the newest on-trend merchandise and customer engagement options on reasonable terms. Consumer preferences oftff en change rapidly and without warning, moving from one trend to another among many product or retail concepts. Our perfrr off rmance is impacted by trends regarding healthy lifestyles, product attributes, dietary preferences, convenient options, fresh, 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 fresh, natural and organic foff od products might shiftff as a result of, among other things, economic conditions, foff od safety perceptions, scientific research or findings regarding the benefits or effff icacy of such products, national media attention and the cost, attributes or sustainability of these products. Our store offff erings currently include fresh, natural and organic products and dietary supplements. A change in consumer preferences away from our offff erings would have a material adverse effff ect on our business. Additionally, negative publicity over the safety, effff icacy or benefits of any such items, in particular our Sprouts brand products, may adversely affff ect demand foff r our products, and could result in lower customer traffff ic, sales, results of operations and cash flows. If we are unable to anticipate and satisfyff consumer preferences with respect to product offff erings and customer engagement options, our sales may decrease, which could have a material adverse effff ect on our business, financial condition, results of operations and cash flows. Our newlww yl opened storerr s may negatitt vevv lyl , and may not achievevv sales and operarr titt nii g levevv lsll consisii tent wiww thtt our morerr maturerr storerr s on a titt mii elyl basisii or at allll .ll imii pact our fiff nii anciaii thtt e shortrr -tt termrr l rerr sultstt inii We have actively pursued new store growth as part of our long-term strategy 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 effff ect of store opening costs and lower sales and contribution to overall profitability during the initial period foff 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 result in store closures or otherwrr ise have an adverse effff ect 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 llowing opening. New stores build their sales volume and their 24 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 affff ected. On many of our projo ects, we have received landlord contributions foff r 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. WeWW may be unable to mainii tatt inii or imii prorr vevv our operarr titt nii g margrr inii s, whww ich could advevv rsrr elyl affff eff ct our fiff nii anciaii l condidd titt on and abilii ill tyt to grorr w.ww If we are unable to successfully manage the potential diffff iculties associated with store growth, we may not be able to capture the effff iciencies of scale that we expect from expansion. If we are not able to capture effff iciencies of scale related to our smaller store foff rmat, improve our systems, sustain cost discipline, optimize promotional activity and maintain appropriate store labor levels and disciplined product selection, our customer traffff ic and operating margins may stagnate or decline. In addition, competition and pricing pressures from competitors and our inability to timely pass on product cost increases due to inflation or otherwrr impact our operating margins. Both our inability to capture the effff iciencies from scale and competition could have a material adverse effff ect on our business, financial condition, results of operations and cash flows and adversely affff ect the price of our common stock. ise to our customers through retail price increases may also adversely If weww faff ilii to mainii tatt inii our rerr pe utatt titt on and thtt e vavv lue of our brarr nd,dd our sales may ded clill nii e. 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 effff off rts and our ability to provide a consistent, high-quality customer experience. Brand value is based in large part on perceptions of subjb ective qualities, and even isolated incidents involving our company, our team members, suppliers, agents, marketing partners, or third-party servirr ce providers, or the products we sell can erode trust and confidence, particularly if they involve our Sprouts brand products, or result in adverse publicity, governmental investigations or litigation. Our brand could be adversely affff ected if we fail to achieve these objb ectives, or if our public image or reputation were to be tarnished by negative publicity. ThTT e loss of key management could negatitt vevv lyl affff eff ct our businii ess. We are dependent upon a number of key management and other team members. If we were to lose the servirr ces 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 effff ect 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 weww arerr unable to attrtt arr ct,tt trtt arr inii and rerr tatt inii successfuff llll yl operarr te our businii ess. team membersrr , weww may not be able to grorr w or The foff od retail industry is labor intensive. Our continued success and ability to grow through new store openings is dependent upon our ability to attract and retain qualified team members in our stores and at our store support offff ices who understand and appreciate our culture and are able to represent our brand effff ectively and establish credibility with our business partners and customers. We face intense competition foff r qualified team members, many of whom are subjb ect to offff ers from competing employers. Due to a tight labor market, availability of talent and other factors, we have experienced, and could continue to experience, a shortage of labor foff r store positions. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subjb ect to numerous external factors, including the availability of a suffff icient number of qualified persons in the work foff rce in the markets in which we are located, unemployment levels within those markets, unionization of the available work foff rce, 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 workfoff rce could decline, causing our customer engagement to suffff er, while increasing our wages could 25 cause our earnings to decrease. If we are unable to hire, train 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 staffff ing needs or any material increase in turnover rates of our team members or team member wages may adversely affff ect our business, results of operations, cash flows or financial condition. UnUU ion attemptstt to orgrr anizeii our team membersrr could negatitt vevv lyl affff eff ct our businii ess. None of our team members are currently subjb ect to a collective bargaining agreement. As we continue to grow and enter diffff erent 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. HiHH gi her waww ge and benefiff t coststt could advevv rsrr elyl affff eff ct our businii ess. 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 servirr ce 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 oblill gi atitt ons could advevv rsrr elyl affff eff ct our fiff nii anciaii contitt nii ue payiyy nii g rerr nt foff r storerr locatitt ons thtt at weww no longer operarr te. l perfrr off rmrr ance and may rerr quirii err us to We are subjb ect to risks associated with our current and future store, distribution center and administrative offff ice real estate leases. Our high level of fixed lease obligations will require us to use a portion of cash generated by our operations to satisfyff 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 foff r 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 offff ices may, among other things, repossess those assets, which could adversely affff ect 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 perfrr off rm our obligations under the applicable lease, including paying the base rent foff r 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 affff ect our business, results of operations, cash flows or financial condition. imii s under our inii surarr nce plall ns may didd ffff eff r frff orr m our estitt mii ates, whww ich could materirr aii Clall our rerr sultstt of operarr titt ons. llll yl imii pact We use a combination of insurance and self-ff insurance plans to provide foff r potential liabilities, including foff r workers’ compensation, general liability (including, in connection with legal proceedings described under “—Legal proceedings could materially impact our business, financial condition, results of operations and cash flows” below), property insurance, director and offff icers’ liability insurance, automobile liability insurance, environmental liability insurance, 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 diffff er from these assumptions and historical trends. WeWW may be unable to generarr te suffff iff cient cash flff ow to satitt sii fyff our ded bt servrr ivv ce oblill gi atitt ons, whww ich could advevv rsrr elyl imii pact our businii ess. As of January 1, 2023, we had outstanding indebtedness of $250.0 million under our credit agreement (referred to as the “Credit Agreement”). We may incur additional indebtedness in the future, including borrowings under our Credit Agreement. Our indebtedness, any additional indebtedness we 26 may incur, or any hedging arrangements related to such indebtedness could require us to divert funds identified foff r other purposes foff r debt servirr ce and impair our liquidity position. If we cannot generate suffff icient cash flow from operations to servirr ce 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. Covevv nantstt inii our Crerr didd t Agrerr ement rerr strtt irr ct our operarr titt onal flff exee ixx bii ilii ill tyt .yy Our 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 affff iliates; and granting liens on our assets. Our 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 affff ected by events beyond our control. Failure to comply with any of the covenants under our 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 effff ect on our business, operating results, and financial condition. Financial Reporting, Legal and Other Regulatoryrr Risks Legal prorr ceedidd nii gs could materirr aii and cash flff owsww . llll yl imii pact our businii ess, fiff nii anciaii l condidd titt on, rerr sultstt of operarr titt ons Our operations, which are characterized by a high volume of customer traffff ic 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, foff od-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. Additionally, we could be exposed to industry-wide or class-action claims arising from products we carry or industry-specific business or employment practices. The outcome of litigation, particularly class action lawsuits, is diffff icult to assess or quantify.ff Plaintiffff sff 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 foff r substantial periods of time. While we maintain insurance, insurance coverage may not be adequate, and the cost to defend against future litigation may be significant. There may also be adverse publicity associated with litigation that may decrease consumer confidence in or perceptions of our business and impact our ability to hire and retain team members, regardless of whether the allegations are valid or whether we are ultimately foff und liable. As a result, litigation may materially adversely affff ect our business, financial condition, results of operations and cash flows. thtt ese lall wsww and rerr gulall titt ons may inii crerr ase our coststt , lill mii WeWW , as weww llll as our vevv ndorsrr , arerr subjb ect to numerorr us lall wsww and rerr gulall titt ons and our complill aii nce wiww thtt prorr ductstt , rarr isii e rerr gulall toryr enfoff rcrr ement rirr sii kskk , or othtt erwrr rerr pe utatt titt on, rerr sultstt of operarr titt ons, cash flff owsww and fiff nii anciaii iww sii e advevv rsrr elyl affff eff ct our businii ess, inii ate our abilii ill tyt l condidd titt on. it or elill mii to sellll certrr att inii EnEE foff rcerr ment. Both FDA and USDA have broad authority to enfoff rce their applicable provisions relating to the safety, labeling, manufacturing, distribution and promotion of foff ods, cosmetics, homeopathic and CBD products, and dietary supplements, including powers to issue a public warning letter to a company, publicize infoff rmation about adulterated or misbranded products, institute an administrative detention of products, request or order a recall of foff od from the market, impose import restrictions and request the Department of Justice to initiate a seizure action, an injunction action or a criminal prosecution. Dietaryr Supu plement,t CBD and Homeopathtt ic Prorr duct Risks. ii Our sales of dietary supplements are regulated by FDA. However, other public and private actors are increasingly targeting dietary supplement 27 retailers and manufacturers foff r selling products that fail to adhere to requirements under FDCA, as amended by DSHEA. While the FDCA provides FDA with the authority to remove products from the market that are adulterated or misbranded, state actors, and the Plaintiffff s’ff Bar have been targeting retailers and manufacturers of dietary supplements foff r failing to adhere to current good manufacturing practices and foff r false or misleading product statements. As a retailer of certain topical or ingestible 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 otherwrr requirement or regulation. This enfoff rcement authority extends to states that have legalized and regulated the distribution of CBD products. States in which we operate have also imposed restrictions or permitting requirements foff r the sale of various 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 active ingredients. Further marketing homeopathic and CBD products with misbranding, misleading claims or quality issues have also been targets foff r litigation. ise misbranded, or if it violates any other FDCA or FDA Advertrr itt si ii nii g and Prorr duct Claimii s Risks. ii 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 enfoff rcing 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 foff od or foff od ingredient and a disease or health condition), and other claims that impermissibly suggest therapeutic benefits foff r certain foff ods or foff od 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 suffff icient quantities or quality to our stores, which could result in a material adverse effff ect on our business, financial condition, results of operations and cash flows. Our reputation could also suffff er 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” foff r use in the foff od industry. The resulting uncertainty has led to consumer confusion, distrust and legal challenges. Plaintiffff sff have commenced legal actions against a number of foff od 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 subjb ect to similar claims, consumers may avoid purchasing products from us or seek alternatives, even if the basis foff r the claim is unfoff unded. 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 diffff icult and costly to overcome and may significantly reduce our brand value. Any of these events could adversely affff ect our reputation and brand and decrease our sales, which would have a material adverse effff ect on our business, financial condition, results of operations and cash flows. Orgrr anic and GMO Claimii s. We are also subjb ect to the USDA’s Organic Rule, which facilitates interstate commerce and the marketing of organically produced foff od, and provides assurance to our customers that such products meet consistent, unifoff rm 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 offff erings. Additionally, the USDA has promulgated regulations that require disclosure of whether foff od offff ered foff r sale contains bioengineered (GMO) ingredients. Implementation began in January 2022. FSMAMM Implementatitt on Costs.tt FSMA directed an historic shiftff at FDA from the agency reacting to and solving problems in the foff od supply chain to preventing contamination of foff od befoff re it occurs. FSMA accomplished this goal by overhauling FDA’s current foff od safety program to require all actors in the foff od supply chain to expand their safety programs and record keeping processes. FSMA’s continued implementation, such as the rule on Addidd titt onal TrTT arr ceabilii ill tyt Recordrr sd foff r Certrr ainii FoFF odsd established in its Section 204(d) and finalized November 15, 2022, and FDA’s own development in understanding effff ective ways to enfoff rce FSMA provisions could delay the supply of certain products, result in certain products being unavailable to us foff r sale, see an increase in price of certain products, and/or increase the expenditure of company resources to ensure compliance (e.g., technology, consultants, employees, etc.). 28 ii Ecommercerr PlPP atftt off rmrr and ThTT irii drr -Partrr yt Risks. Our online order ecommerce platfoff rm is subjb ect 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 refoff rmulated, eliminated or relabeled certain of their products and we have revised certain provisions of our sales and marketing program. WeWW arerr alsll o subjb ect to lall wsww and rerr gulall titt ons morerr generarr llll yl appp lill cable to rerr tatt ilii ersrr . Complill aii nce wiww thtt or changes to such lall wsww and rerr gulall titt ons may inii crerr ase our coststt , lill mii to sellll certrr att inii prorr ductstt or othtt erwrr operarr titt ons, fiff nii anciaii iww sii e advevv rsrr elyl affff eff ct our businii ess, rerr pe utatt titt on, rerr sultstt of l condidd titt on or cash flff owsww . it or elill mii inii ate our abilii ill tyt We are subjb ect to laws and regulations more generally applicable to retailers, including those related to labor and employment, taxation, zoning and land use, environmental protection, workplace safety, public health, community right-to-know, data privacy, hazardous waste disposal, consumer protection and alcoholic beverage sales. Due to the COVID-19 pandemic, we are subjb ect to additional governmental regulations and health guidelines, as well as other voluntary safety protocols. Our stores are subjb ect to unscheduled inspections on a regular basis, which, if violations are foff und, 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 diffff iculties or failures in our ability to obtain or maintain required permits, approvals or licenses. In addition, we are subjb ect to environmental laws pursuant to which we could be held responsible foff r 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 foff r, 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 refoff rmulated, 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 effff ect 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, enfoff rcement actions and fines; require the refoff rmulation of certain products or alternative sourcing from domestic suppliers or otherwrr ise to meet new standards, regulations or trade restrictions; require the recall or discontinuance of certain products not able to be refoff rmulated or alternatively sourced in compliance with new regulations or restrictions; impose additional recordkeeping; expand documentation of the properties of certain products; necessitate expanded or diffff erent labeling and/or scientific substantiation; or require us to discontinue certain operations. Any or all of such requirements could have a material adverse effff ect on our business, financial condition, results of operations and cash flows. WeWW may be unable to aded quatelyl prorr tect our inii tellll ectual prorr pertrr yt businii ess. rirr gi htstt , whww ich could harmrr our 29 We rely on a combination of trademark, trade secret, copyright and domain name law and internal ise violate our intellectual property rights. There can be no assurance that our intellectual property 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 suffff icient to distinguish our products and servirr ces 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 otherwrr 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 affff ected, and our sales and profitability could suffff er as a result. We also license the SPROUTS FARMERS MARKETS trademark to a third party foff r use in operating two grocery stores. If the licensee fails to maintain the quality of the goods and servirr ces 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 infoff rmation could also have a material adverse effff ect on our business. We may also be subjb ect to claims that our intellectual property, activities or the products we sell infringe, misappropriate or otherwrr ise 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, foff r example, prevent us from using our trademarks in certain geographies or in connection with certain products and servirr ces), pay costly damage awards, and face a temporary or permanent injunction prohibiting us from marketing or providing the affff ected products and servirr ces, any of which could have a material adverse effff ect on our business. Changes inii accountitt nii g statt ndadd rdrr sdd may materirr aii rerr sultstt of operarr titt ons. llll yl imii pact rerr pe ortrr itt nii g of our fiff nii anciaii l condidd titt on and Accounting principles generally accepted in the United States and related accounting pronouncements, implementation guidelines, and interpretations foff r many aspects of our business, such as accounting foff r leases, inventories, goodwill and intangible assets, store closures, insurance, income taxes, share-based compensation and accounting foff r mergers and acquisitions and other special items, are complex and involve subjb ective 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. If weww arerr unable to mainii tatt inii effff eff ctitt vevv inii ternrr al contrtt orr l ovevv r fiff nii anciaii faff ilii to prerr vevv nt or detect materirr aii inii vevv storsrr may lose confiff ded nce inii markrr et prirr ce of our common stock may ded clill nii e. l misii statt tementstt inii our fiff nii anciaii l rerr pe ortrr itt nii g inii thtt e fuff turerr , weww may l statt tementstt , inii whww ich case thtt e accurarr cyc and completeness of our fiff nii anciaii l rerr pe ortrr stt and thtt e As a public company, we are required to maintain internal control over financial reporting. If we are unable to maintain effff ective internal control over financial reporting, if we identifyff any material weaknesses therein, if we are unsuccessful in our effff off rts to remediate any such material weakness, if our management is unable to report that our internal control over financial reporting is effff ective, or if our independent registered public accounting firm is unable to express an opinion as to the effff ectiveness 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 affff ected. In addition, we could become subjb ect to investigations by the NASDAQ Stock Market, the SEC, or other regulatory authorities, which could require additional financial and management resources. 30 If our goodwiww lii lll or othtt er inii tatt ngibii sigi nififf cant chargrr e to earnrr inii gs. le assetstt become imii pairii err d,dd weww may be rerr quirii err d to rerr cordrr a We have a significant amount of goodwill and other intangible assets. As of January 1, 2023, we had goodwill and intangible assets of approximately $368.9 million and $185.0 million, respectively, which represented approximately 12% and 6% of our total assets as of such date, respectively. Goodwill is reviewed foff r impairment on an annual basis in the foff urth 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 foff r 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 affff ect our operating results. Our nutrtt irr titt on-orirr ented educatitt onal actitt vivv titt es may be imii pacted by govevv rnrr ment rerr gulall titt on or our inii abilii ill tyt to securerr adequate lill aii bilii ill tyt inii surarr nce. We provide nutrition-oriented infoff rmation to our customers, and these activities may be subjb ect to state and federal regulation and oversight by professional organizations. In the past, the FDA has expressed concerns regarding summarized health and nutrition-related infoff rmation that it (i) does not, in the FDA’s view, accurately present such infoff rmation, (ii) diverts a consumer’s attention and foff cus from FDA-required nutrition labeling and infoff rmation or (iii) impermissibly promotes drug-type disease-related benefits. If our team members or third parties we engage to provide this infoff rmation do not act in accordance with regulatory requirements, we may become subjb ect to penalties or litigation that could have a material adverse effff ect on our business. Our businii ess and rerr pe utatt titt on may be advevv rsrr elyl govevv rnrr ance mattersrr . imii pacted by evov lvivv nii g envivv rii orr nmentatt l,ll sociaii l and Increasingly, investors, customers, government agencies, non-governmental organizations, team members, communities and other stakeholders are foff cusing on environmental, social and governance (ESG) matters and related disclosures. Many of these stakeholders evaluate and measure the perfrr off rmance of companies based on a variety of ESG metrics. As a fresh, natural and organic specialty retailer, we believe that many stakeholders hold us to higher standards with respect to ESG matters. As a result, we disclose certain ESG-related metrics, initiatives and goals in our SEC filings and other public disclosures. Execution against these ESG initiatives may be costly, and we may be unable to achieve our goals due to factors outside of our control. If our ESG-related reporting is incomplete or inaccurate or fails to comply with regulatory requirements, or if we fail to achieve significant progress with respect to our ESG goals on a timely basis, or at all, our business, financial perfrr off rmance, growth and reputation with our investors, customers and other stakeholders could be adversely affff ected. Common Stock Ownership Risks Our stock prirr ce may be vov lall titt lii e, and yoyy u may not be able to rerr sellll yoy ur sharerr s at or abovevv thtt e prirr ce yoyy u paid foff r thtt em or at allll .ll 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 subjb ect 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 affff ected and continue to affff ect the market prices of equity securities of many companies. These fluctuations oftff en have been unrelated or disproportionate to the operating perfrr off rmance of those companies. These and other factors may cause the market price and demand foff r our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwrr ise negatively affff ect 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 foff r settlements or damages. Such a lawsuit could also divert the time and attention of our management. 31 Antitt -ii tatt keovevv r prorr vivv sii stockhkk olded rsrr . ions could imii pairii a tatt keovevv r attempt and advevv rsrr elyl affff eff ct exee ixx sii titt nii g Certain provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may have the effff ect of rendering more diffff icult, 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 foff llowing provisions: • • • • a classified board of directors (referred to as the “Board”) whose members serverr three-year terms; staggered “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 foff rce consideration of a proposal or the ability of holders controlling a maja ority of our capital stock to take action, including the removal of directors; and required advance notice of stockholder proposals foff r business to be conducted at meetings of our stockholders and foff r nominations of candidates foff r election to the board. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effff ect of delaying or deterring a change in control could limit the opportunity foff r our stockholders to receive a premium foff r their shares of our common stock, and could also affff ect the price that some investors are willing to pay foff r our common stock. If securirr titt es or inii dustrtt yr analyl syy tstt cease publill sii hinii g rerr searcrr h or rerr pe ortrr stt about us, our businii ess, or our markrr et,tt or if thtt ey advevv rsrr elyl change thtt eirii rerr commendadd titt ons rerr gardrr idd nii g our stock,kk our stock prirr ce and trtt arr didd nii g vov lume could ded clill nii e. The trading market foff r 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. Sinii ce weww do not exee pxx ect to pay any cash didd vivv ded ndsdd inii sellll thtt eirii stock inii ordrr er to obtatt inii a rerr turnrr on thtt eirii inii vevv stmtt ent.tt thtt e near fuff turerr , inii vevv storsrr may be foff rcrr ed to Although we regularly evaluate our capital structure and opportunities to create value foff r 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 Credit Agreement contains covenants that we must satisfyff in order to pay cash dividends. Accordingly, investors must rely on sales of their common stock aftff er 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 businii ess could be imii pacted as a rerr sult of actitt ons by actitt vivv sii t stockhkk oldedd rsrr or othtt ersrr . We may be subjb ect, 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, effff off rts to foff rce 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 affff ect our stock price, relationships with vendors, customers, prospective and current team members and others. 32 Item 1B. UnUU rerr solvevv d Statt ffff Commentstt None. 33 Item 2. PrP orr pertrr itt es We seek to select sites foff r our store locations in markets with growth potential where our target customers and supply chain capabilities intersect. As of January 1, 2023, we had 386 stores located in 23 states, as shown in the chart below: State AAlabama AArizona Califoff rnia Colorado Delaware Florida Georgia Kansas Louisiana Maryland Missouri Nevada Number of Stores State 3 New Jersey 44 New Mexico 130 North Carolina 32 Oklahoma 1 Pennsylvania 35 South Carolina 18 Tennessee 4 Texas 1 Utah 5 Virginia 3 Washington 14 Number of Stores 1 9 5 11 2 1 6 51 5 1 4 In fiscal 2022, we opened 16 new stores. In fiscal 2021, we opened 12 new stores. We lease all of our stores from unaffff iliated third parties. A typical store lease is foff r an initial 10 to 15 year term with three or foff ur 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 perfrr off rmance. See “Business – New Store Development” foff r additional infoff rmation with respect to our store site selection process. As of January 1, 2023, we utilized seven distribution centers. Infoff rmation about such facilities, as well as our current corporate offff ice in Phoenix, Arizona, is set foff rth in the table below: Facilityy Corporate Offff ice Distribution Center Distribution Center Distribution Center Distribution Center Distribution Center Distribution Center Distribution Center State Arizona Arizona Califoff rnia Califoff rnia 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 offff ice and our distribution centers in Arizona, Colorado, Florida and Texas from unaffff iliated third parties; our remaining three distribution centers are leased or owned by our third- party logistics providers. We expect to expand our distribution center network to support our growth. See “Business – Sourcing and Distribution” foff r additional infoff rmation with respect to our distribution centers. We believe our portfoff lio 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 lease is material to our financial condition or results of operations. 34 In February 2023 as part of our real estate portfoff lio review, we determined to close 11 stores during 2023. These stores, on average, are approximately 30% larger than our current prototype foff rmat and are underperfrr off rming financially. See Note 28, “Subsequent Events” to our Consolidated Financial Statements foff r additional infoff rmation regarding these store closures. Item 3. Legal PrP orr ceedidd nii gs 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 effff ect on our financial condition or results of operations, litigation is inherently unpredictable. Therefoff re, we could incur judgments or enter into settlements of claims that could materially impact our results. See Note 19, “Commitments and Contingencies” to our Consolidated Financial Statements for information regarding certain legal proceedings in which we are involved. Item 4. Minii e Safeff tyt Disii closurerr s Not applicable. 35 PART II Item 5. Markrr et foff r Regisii trtt arr nt’s’ Common Equityt ,yy Relall ted Stockhkk olded r Mattersrr and IsII suer Purcrr hases of Equityt Securirr titt es 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 28, 2023 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 foff r 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 Credit Agreement contains covenants that we must satisfyff in order to pay cash dividends. Issuer Purchases of Equity Securities The foff llowing table provides infoff rmation about our share repurchase activity during the thirteen weeks ended January 1, 2023. Period (1) Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced plans or programs Approximate dollar value of shares that may yet be purchased under the plans or programs (2) October 3, 2022 - October 30, 2022 October 31, 2022 - November 27, 2022 November 28, 2022 - January 1, 2023 Total 516,534 $ 436,669 $ 506,825 $ 1,460,028 27.61 31.01 33.71 516,534 $ 442,504,000 436,669 $ 428,964,000 506,825 $ 411,877,000 1,460,028 (1) (2) Periodic infoff rmation is presented by reference to our fiscal periods during the foff urth quarter of fiscal year 2022. On March 2, 2022, our board of directors authorized a $600 million share repurchase program of our common stock. The shares may be purchased on a discretionary basis from time to time through December 31, 2023, subjb ect 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. 36 Perfrr ormance Graph The graph set foff rth below compares the cumulative total stockholder return on our common stock between December 31, 2017 and January 1, 2023, with the cumulative total return of (i) the NASDAQ Composite Index and (ii) the S&P Food Retail Index, over the same period. The comparison assumes that $100.00 was invested in our common stock, the NASDAQ Composite Index and the S&P Food Retail Index, and assumes reinvestment of dividends, if any. The graph assumes the initial value of our common stock on December 29, 2017 (the last trading day prior to the beginning of fiscal 2018) was the closing sale price on that day of $24.35 per share. The perfrr off rmance shown on the graph below is based on historical results and is not intended to suggest future perfrr off rmance. This perfrr off rmance graph shall not be deemed “soliciting material” or to be “filed” with the SEC foff r purposes of Section 18 of the Exchange Act or otherwrr 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. ise subjb ect to the liabilities under that section, and 37 Item 6. [Reservrr ed] 38 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations YoYY u should rerr ad thtt e foff llll owiww nii g didd scuii ssion and analysi sii of our fiff nii anciai l l condidd titt on and rerr sultstt of thtt e consolill dated fiff nii anciaii l stat tementstt and rerr lated notes thtt at arerr inii cluded thtt isii Annual Reportrr on FoFF rmrr 10-K as weww llll as "P" artrr II—I II tem 7. Management's' Discuii ssion and l Condidd titt on and Resultst of OpO erarr titt ons" inii cluded inii our Annual Reportrr on FoFF rmrr 10-K l year ended Januaryr 2, 2022 fiff lii ed wiww thtt thtt e SEC on Februrr aryr 24, 2022, whww ich prorr vides l 2020, and whww ich isii inii corprr orarr ted by rerr feff rerr nce hererr inii ssion containii s foff rwrr aww rdrr -lookinii g statementstt based upu on currrr err nt expectatitt ons thtt at inii volve rirr sks llll yl titt es. Our actual rerr sultst may didd fii fff eff r materirr aii and inii cludidd nii g thtt ose set foff rtrr htt under “R“ frff orr m thtt ose antitt cipii ated inii iskii see thtt e sectitt on entitt tltt ed “S“ pS eciai thtt ese foff rwrr aww rdrr -lookinii g FaFF ctors”rr or inii othtt er partrr stt of l Note Regardrr idd nii g FoFF rwrr aww rdrr - sii of FiFF nii anciaii operarr titt ons togethtt er wiww thtt inii elsell whww ererr Analysi l foff r thtt e fiff scaii comparirr soii ns of fiff scaii didd scuii uncertrr ainii statementst as a rerr sult of varirr ous faff ctors,rr thtt Lookinii g Statements.t l 2021 and fiff scaii ” isii Annual Reportrr on FoFF rmrr 10-K.KK PlPP ease alsoll . ThTT isii ii Business Overvrr iew Sprouts Farmers Market offff ers 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-foff r-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. Headquartered in Phoenix with 386 stores in 23 states as of January 1, 2023, we are one of the largest and fastest growing specialty retailers of fresh, natural and organic foff od in the United States. Our Heritage In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our foff unding in 2002 through January 1, 2023, 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, to the Sprouts banner through acquisitions. These three businesses all trace their lineage back to Henry’s Farmers Market and were built with similar store foff rmats and operations including a strong emphasis on value, produce and servirr ce in smaller, convenient locations. 39 Outlook Since 2020, we have foff cused on our long-term growth strategy that we believe is transfoff rming our company and driving profitable growth. We continue to execute on this strategy, foff cusing on the foff areas: llowing • • • • • • WiWW nii wiww thtt TaTT rgrr et Customersrr . We are foff cusing attention on our target customers, identified through research as ‘health enthusiasts’ and ‘selective shoppers’, 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-foff r-you, quality products and by providing a full omnichannel offff ering through delivery or pickup via our website or the Sprouts app. ts.tt We are delivering unique smaller stores with UpUU date FoFF rmrr at and ExpEE and inii Select Markerr expectations of stronger returns, while maintaining the approachable, fresh-foff cused farmer’s market heritage Sprouts is known foff r. In 2021, we opened three stores and remodeled one store featuring our new foff rmat, and in 2022, we opened nine new foff rmat stores. 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 2024. Crerr ate an Advantaged FrFF err sh Supu plyl Chainii centers can drive effff iciencies across the chain and support growth plans. To further deliver on our fresh commitment and reputation, as well as to increase our local offff erings and improve financial results, we 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. . We believe our network of fresh distribution titt nii g Approrr ach. We believe we are elevating our national brand Refiff nii e Brarr nd and Markerr recognition and positioning by telling our unique brand story rooted in product innovation and diffff erentiation. We are investing savings from largely removing our weekly promotional print ad into increasing engagement and personalization with our target customers through digital and social connections, driving additional sales growth and loyalty. Inspirii err and EnEE gage Our TaTT lent to Crerr ate a Best PlPP ace to WoWW rk.rr Subsequent to the initial launch of our long-term growth strategy, we have added the foff cus area of inspiring and engaging our talent through our culture, acquisition and development and total rewards program to attract and retain the talent we believe we need to execute on our strategic goals and transfoff rm our company into a premier place to work. l TaTT rgrr etstt and Box Economics. We are measuring and reporting on the Delill ver on FiFF nii anciaii success of this strategy against a number of long-term financial and operational targets. With the implementation of our strategy beginning in 2020, 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 foff ur-week periods and one five-week period. Fiscal 2022 and fiscal 2021 were 52-week years ending on January 1, 2023 and January 2, 2022, respectively. Fiscal 2020 was a 53-week year ending on January 3, 2021. 40 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 giftff 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” foff r additional infoff rmation on revenue recognition related to giftff cards. We do not include sales taxes in net sales. We monitor our comparable store sales growth to evaluate and identifyff trends in our sales perfrr off rmance. Our practice is to include sales from a store in comparable store sales beginning on the first day of the 61st week foff comparable store sales on the day of closure. This practice may diffff er from the methods that other retailers use to calculate similar measures. llowing the store’s opening and to exclude sales from a closed store from Historically, our net sales have increased as a result of new store openings 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; 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 identifyff market trends, and to source and provide product offff erings that promote customer traffff ic and growth in average ticket; the number of customer transactions and average ticket; the prices of our products, including the effff ects of factors beyond our control, such as inflation, deflation and tariffff s;ff opening new stores in the vicinity of our existing stores; and advertising, in-store merchandising and other marketing activities. Cost of sales and grorr ss prorr fiff t 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 depreciation and amortization expense foff r 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 foff od and other products we sell may periodically affff ect our gross profit and gross margin. The short-term impact of inflation and deflation is largely dependent on whether or not we pass the effff ects 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 affff ected by the relative mix of products sold, pricing and promotional strategies, inventory shrinkage and leverage of fixed costs of sales. Sellll ill nii g,g generarr l and admdd inii isii trtt arr titt vevv exee pxx enses 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. 41 Depe rerr ciaii titt on and Amortrr itt zaii titt on Depreciation and amortization (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization foff r buildings, store leasehold improvements, and equipment. Storerr closurerr and othtt er coststt , net Store closure and other costs, net primarily reflects impairment charges of long-lived assets and costs incurred related to store closures, including severance and any exit costs associated with closing a store, in addition to occupancy costs associated with closed store locations. One-time disaster recovery and executive severance costs are also included here. Results of Operations for Fiscal 2022, 2021 and 2020 The foff llowing tables set foff rth our results of operations and other operating data foff r 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 2022 and 2021 consisted of 52 weeks, while Fiscal 2020 consisted of 53 weeks. Consolidated Statement of Income Data: Net sales Cost of sales Gross profit Selling, general and administrative expenses Depreciation and amortization (exclusive of depreciation included in cost of sales) Store closure and other costs, net Income from operations Interest expense, net Income befoff re income taxes Income tax provision Net income Fiscal 2022 Fiscal 2021 (in thousands, except per share data) Fiscal 2020 $ 6,404,223 $ 6,099,869 $ 6,468,759 4,089,470 2,379,289 3,890,657 2,209,212 4,055,659 2,348,564 1,855,649 1,748,205 1,863,869 123,530 11,025 358,360 9,047 349,313 88,149 122,258 4,673 334,076 11,684 322,392 78,235 $ 261,164 $ 244,157 $ 124,124 (369) 391,665 14,787 376,878 89,428 287,450 117,821 403 118,224 2.43 Weighted average shares outstanding - basic Dilutive effff ect of equity-based awards Weighted average shares and equivalent shares outstanding - diluted Diluted net income per share 108,232 907 115,377 700 109,139 116,077 $ 2.39 $ 2.10 $ Other Operating Data: Comparable store sales growth Stores at beginning of period Opened (1) Closed Stores at end of period Selling square feet at the end of the period AAverage store size at the end of the period (selling square feet) Fiscal 2022 Fiscal 2021 Fiscal 2020 2.2% 374 16 (4) 386 10,894,396 (6.7)% 362 12 — 374 10,625,686 6.9% 340 22 — 362 10,344,669 28,224 28,411 28,576 (1) Stores opened is exclusive of one store relocation during fiscal 2021. 42 Net sales Comparison of Fiscal 2022 to 2021 Net sales Comparable store sales growth $ 6,404,223 $ (dollars in thousands) 6,099,869 $ 2.2% (6.7)% 304,354 5% Fiscal 2022 Fiscal 2021 Change % Change Net sales during 2022 totaled $6.4 billion, increasing 5%, over the prior fiscal year. The sales increase was primarily due to a 2.2% increase in comparable store sales as well as sales from new stores opened since the prior year. The increase in comparable store sales was due in part to an increase in t by a slight reduction in the number of items per basket value due to retail price inflation, partially offff seff basket. Comparable store sales contributed approximately 97% of total sales foff r both 2022 and 2021. Cost of sales and grorr ss prorr fiff t Net sales Cost of sales Gross profit Gross margin Fiscal 2022 Fiscal 2021 Change % Change $ $ 6,404,223 4,055,659 2,348,564 36.7% (dollars in thousands) 6,099,869 3,890,657 2,209,212 $ 36.2% 304,354 165,002 139,352 0.5% 5% 4% 6% Gross profit increased during 2022 compared to 2021 by $139.4 million to $2.3 billion driven by increased sales volume foff r the reasons discussed above. Gross margin increased by 0.5% to 36.7% compared to 36.2%. The increase was a result of strategic initiatives to improve shrink, less promotional activity and better management of prices in line with inflationary product cost increases. Sellll ill nii g,g generarr l and admdd inii isii trtt arr titt vevv exee pxx enses Selling, general and administrative expenses Percentage of net sales Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) $ 1,855,649 $ 1,748,205 $ 107,444 6% 29.0% 28.7% 0.3% Selling, general and administrative expenses increased $107.4 million, or 6%, compared to 2021 due to the net increase in new stores opened since the prior year as well as inflationary conditions driving increases in store costs including wages, utilities and supplies. In addition, we experienced the effff ects of higher credit card fees as more consumers shiftff ed to credit compared to the prior year and higher ecommerce costs resulting from an increase in ecommerce sales compared to the prior year. 43 Depe rerr ciaii titt on and amortrr itt zaii titt on Depreciation and amortization Percentage of net sales $ 123,530 $ 122,258 $ 1.9% 2.0% 1,272 (0.1)% 1% Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Depreciation and amortization expense (exclusive of depreciation included in cost of sales) was $123.5 million in 2022, compared to $122.3 million in 2021. Depreciation and amortization expenses (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization foff r buildings, store leasehold improvements, and equipment foff r new stores as well as remodel initiatives in older stores. Storerr closurerr and othtt er coststt , net Store closure and other costs, net $ Percentage of net sales 11,025 $ 0.2% 4,673 $ 0.1% 6,352 0.1% 136% Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Store closure and other costs, net in 2022 of $11.0 million primarily consisted of $8.1 million of impairment losses related to the write-down of leasehold improvements and right-of-ff use assets, in addition to inventory loss and expenses incurred by several of our stores impacted by Hurricane Ian and costs associated with the closing of foff ur stores. Store closure and other costs, net in 2021 of $4.7 million primarily included $4.8 million of impairment losses related to the write-down of leasehold improvements and right-of-ff use assets. InII tererr st exee pxx ense, net Long-term debt Capital and financing leases Deferred financing costs Interest rate hedge and other Total interest expense, net $ $ Fiscal 2022 Fiscal 2021 Change % Change 7,930 $ 852 800 (535) 9,047 $ (dollars in thousands) 4,601 $ 906 564 5,613 11,684 $ 3,329 (54) 236 (6,148) (2,637) 72% (6)% 42% (110)% (23)% The decrease in interest expense, net was primarily due to higher interest income and lower credit facility fees. See Note 13, “Long-Term Debt and Finance Lease Liabilities” and Note 22, “Derivative Financial Instruments.” InII come tatt x prorr vivv sii ion Income tax provision Effff ective income tax rate $ 88,149 $ 25.2% 78,235 $ 24.3% 9,914 0.9% 13% Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Income tax provision increased by $9.9 million to $88.1 million foff r 2022 from $78.2 million foff r 2021, primarily related to an increase in income befoff re income taxes. The effff ective income tax rate increased to 25.2% in 2022 from 24.3% in 2021 primarily due to decreased charitable contribution deductions in 2022 from the lapsing of benefits initially provided foff r in the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act"). 44 Net inii come Net income Percentage of net sales $ 261,164 $ 244,157 $ 4.1% 4.0% 17,007 0.1% 7% Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Net income increased $17.0 million primarily due to increased net sales and favorable margin impact, partially offff seff rate foff r the reasons discussed above. t by higher selling, general and administrative expenses and a higher effff ective tax Dilii uted earnrr inii gs per sharerr Diluted earnings per share Diluted weighted average shares outstanding Fiscal 2022 Fiscal 2021 Change % Change (shares in thousands) $ 2.39 $ 2.10 $ 0.29 14% 109,139 116,077 (6,938) The increase in diluted earnings per share of $0.29 was driven by higher net income, in addition to fewer diluted shares outstanding compared to the prior year, due to our repurchase of approximately 6.9 million shares foff r a total cost of $200.0 million under our share repurchase program. 45 Return on Invested Capital In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAAA P, we provide infoff rmation regarding Return on Invested Capital (“ROIC”) as additional infoff rmation about our operating results. ROIC is a non-GAAAA P financial measure and should not be reviewed in isolation or considered as a substitute foff r our financial results as reported in accordance with GAAAA P. ROIC is an important measure used by management to evaluate our investment returns on capital and provides a meaningful measure of the effff ectiveness of our capital allocation over time. We define ROIC as net operating profit aftff er-tax (“NOPAT”), including the effff ect 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 foff r as a finance lease. The assumed ownership and associated interest expense are calculated using the discount rate foff r each lease as recorded as a component of rent expense within selling, general and administrative expenses. Invested capital reflects a trailing foff ur- quarter average. As numerous methods exist foff r calculating ROIC, our method may diffff er from methods used by other companies to calculate their ROIC. It is important to understand the methods and the diffff erences in those methods used by other companies to calculate their ROIC befoff re comparing our ROIC to that of other companies. Our calculation of ROIC foff r the fiscal years indicated was as foff llows: 2022 Net income (2) Special items, net of tax (3), (4) Interest expense, net of tax (4) Net operating profit aftff er-tax (NOPAT) 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 effff ect of operating leases $ $ $ 2020(1) 2021 (dollars in thousands) $ 244,157 — 8,848 $ 253,005 261,164 — 6,764 267,928 $ 287,450 6,565 11,272 $ 305,287 154,626 (87,775) 66,851 334,779 150,047 (88,015) 62,032 $ 315,037 146,630 (80,944) 65,686 $ 370,973 AAverage working capital AAverage property and equipment AAverage other assets AAverage other liabilities Average invested capital 271,604 704,786 568,609 (96,583) $ 1,448,416 193,900 712,496 568,744 (101,339) $1,373,801 101,622 735,651 567,188 (100,531) $1,303,930 AAverage operating leases (6) Average invested capital, including operating leases 1,259,362 $ 2,707,778 1,222,513 $2,596,314 1,196,822 $2,500,752 ROIC, including operating leases 12.4% 12.1% 14.8% 46 (1) Fiscal 2020 includes 53 weeks. (2) Net income amounts represent total net income foff r the past foff ur trailing quarters. (3) 2020 special items include professional fees related to our strategic initiatives. (4) Net of tax amounts are calculated using the normalized effff ective tax rate foff r the periods presented. (5) (6) 2022, 2021 and 2020 estimated interest on operating leases is calculated by multiplying operating leases by the 7.1%, 6.7% and 7.2% discount rate, respectively, foff r each lease recorded as rent expense within direct store expense. 2022, 2021 and 2020 average operating leases represents the average net present value of outstanding lease obligations over the trailing foff ur quarters. Liquidity and Capital Resources The foff llowing table sets foff rth the maja or sources and uses of cash foff r each of the periods set foff rth below, as well as our cash, cash equivalents and restricted cash at the end of each period (in thousands): Cash, cash equivalents and restricted cash at end of period Cash from operating activities Cash used in investing activities Cash used in financing activities Fiscal 2022 Fiscal 2021 Fiscal 2020 $ $ $ $ 295,192 $ 371,329 $ (124,010) $ (199,131) $ 247,004 $ 364,799 $ (102,378) $ (186,858) $ 171,441 494,035 (121,968) (287,411) We have generally financed our operations principally through cash generated from operations and borrowings under our credit facilities. Our primary uses of cash are foff r purchases of inventory, operating expenses, capital expenditures primarily foff r opening new stores, remodels and maintenance, repurchases of our common stock and debt servirr ce. Our principal contractual obligations and commitments consist of obligations under our Credit Agreement, interest on our Credit Agreement, operating and finance leases, purchase commitments and self-ff insurance liabilities. We believe that our existing cash, cash equivalents and restricted cash, and cash anticipated to be generated from operations will be suffff icient to meet our anticipated cash needs foff r 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. OpO erarr titt nii g Actitt vivv titt es Cash flows from operating activities increased $6.5 million to $371.3 million in 2022 compared to $364.8 million in 2021. The increase in cash flows from operating activities was primarily a result of higher t by changes in working capital. The increase in net income was primarily due to net income, partially offff seff increased net sales and favorable margin impact. Cash flows used in operating activities from changes in working capital were $28.6 million in 2022, compared to $13.2 million in 2021. The increase was primarily driven by higher inventories impacted by inflationary cost increases on our purchases in the current year and higher prepaid expenses and other current assets primarily due to the timing of marketing spend, partially offff seff COVID related incentive compensation amounts earned in 2020 and paid in 2021. t by the higher payout of 47 InII vevv stitt nii g Actitt vivv titt es 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 $124.0 million and $102.4 million foff r 2022 and 2021, respectively. The increase in cash flows used in investing activities was primarily due to more stores under construction in 2022 as compared to 2021. We expect capital expenditures to be in the range of $210 - $230 million in 2023, 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 foff r future capital expenditures as of January 1, 2023. FiFF nii ancinii g Actitt vivv titt es Cash flows used in financing activities were $199.1 million foff r 2022 compared to $186.9 million foff r 2021. During 2022, cash flows used in financing activities primarily consisted of approximately $200 million foff r share repurchases and $3.4 million in debt issuance costs in connection with our Credit Agreement, partially offff seff cash flows used in financing activities primarily consisted of $188.3 million foff r share repurchases. t by $5.0 million in proceeds from the exercise of stock options. During 2021, Long-termrr Debt and Crerr didd t FaFF cilii ill titt es Long-term debt outstanding was $250.0 million as of January 1, 2023 and January 2, 2022. See Note 13, “Long-Term Debt and Finance Lease Liabilities” foff r a description of our Credit Agreement and our Former Credit Facility (as defined therein). Sharerr Repe urcrr hase PrP orr grarr m Our board of directors from time to time authorizes share repurchase programs foff r our common stock. The foff llowing table outlines the share repurchase programs authorized by our board, and the related repurchase activity and available authorization as of January 1, 2023. Effff ective date March 3, 2021 March 2, 2022 Expiration date March 2, 2022 December 31, 2023 Amount authorized Cost of repurchases Authorization available $ $ 300,000 $ 600,000 $ 200,200 $ 188,123 $ — 411,877 48 The shares under our current repurchase program may be purchased on a discretionary basis from time to time through the applicable expiration date, subjb ect 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. Our board’s authorization of the share repurchase program does not obligate us to acquire any particular amount of common stock, and the repurchase program may be commenced, suspended, or discontinued at any time. Share repurchase activity under our repurchase programs foff r the periods indicated was as foff llows (total cost in thousands): Number of common shares acquired AAverage price per common share acquired Total cost of common shares acquired Januaryrr 1, 2023 Januaryrr 2, 2022 Year Ended $ $ 6,897,082 28.99 199,980 $ $ 7,416,357 25.40 188,343 Shares purchased under our repurchase programs were subsequently retired and the excess of the repurchase price over par value was charged to retained earnings. On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. Among other provisions, the IRA includes a 1% excise tax on stock repurchases made aftff er December 31, 2022. The IRA is not expected to have a material impact on our consolidated financial statements. Subsequent to January 1, 2023 and through February 28, 2023, we repurchased an additional 2.0 million shares of common stock foff r $64.0 million. FaFF ctorsrr Affff eff ctitt nii g Liquididd tyt We can currently borrow under our 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 foff rth in the Credit Agreement. We have previously utilized borrowings under our Credit Agreement to fund our share repurchase program as described above. The interest rate we pay on our borrowings increases as our net leverage ratio increases and may increase or decrease based upon the achievement of certain diversity and sustainability-linked metric thresholds. The Credit Agreement contains financial, affff irmative 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 affff iliates; enter into new lines of business; modifyff the terms of debt or other material agreements; and change our fiscal year. Each of these covenants is subjb ect to customary and other agreed-upon exceptions. 49 In addition, the Credit Agreement requires that we and our subsidiaries maintain a maximum total net leverage ratio not to exceed 3.75 to 1.00, which ratio may be increased from time to time in connection with certain permitted acquisitions pursuant to conditions as set foff rth in the Credit Agreement, and a minimum interest coverage ratio not to be less than 3.00 to 1.00. Each of these covenants is tested on the last day of each fiscal quarter, starting with the fiscal quarter ended April 3, 2022. We were in compliance with all applicable covenants under the Credit Agreement as of January 1, 2023. Our 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. Contrtt arr ctual Oblill gi atitt ons Our principal contractual obligations and commitments consist of obligations under our Credit Agreement, interest on our Credit Agreement, operating and finance leases, purchase commitments and self-ff insurance liabilities. See Note 7, "Leases," Note 13, “Long-Term Debt and Finance Lease Liabilities,” Note 15, "Self-ff Insurance Programs" and Note 19, "Commitments and Contingencies" to our consolidated financial statements located elsewhere in this Annual Report on Form 10-K foff r more infoff rmation 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 25, 2027 maturity date of our Credit Agreement based on the outstanding amounts as of January 1, 2023 and interest rates in effff ect at the time of this filing, are estimated to be approximately $52.5 million. These payments are estimated to be approximately $15.2 million in 2023 and approximately $37.3 million thereaftff er. Real estate obligations, consisting of legally binding minimum lease payments foff r leases executed but not yet commenced, were $504.5 million as of January 1, 2023, including $7.2 million in 2023 and $497.3 million thereaftff er through 2044. Our purchase commitments under noncancelable servirr ce and supply contracts that are enfoff rceable and legally binding totaled $19.8 million as of January 1, 2023, including $9.8 million in 2023 and $10.0 million thereaftff er through 2027. Obligations under contracts that we can cancel without a significant penalty are not included in purchase commitments. We periodically make other commitments and become subjb ect 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. 50 Impact of Inflation and Deflation Inflation and deflation in the prices of foff od and other products we sell may periodically affff ect 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. Inflationary pressures on compensation, utilities, commodities, equipment and supplies may also impact our profitability. 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 effff ects are passed through to our customers, which is subjb ect to competitive market conditions. Food inflation and deflation is affff ected by a variety of factors and our determination of whether to pass on the effff ects 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 effff ects on sales, gross profit, gross margins and cash flows as a result of changing prices, including pressures we experienced in fiscal 2022 due to product cost inflation which we largely passed along to retail pricing, we do not expect the effff ect of inflation or deflation to have a material impact on our ability to execute our long-term business strategy. 51 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 GAAAA P. These principles require us to make estimates and judgments that affff ect 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 diffff er from these estimates. To the extent that there are material diffff erences between these estimates and our actual results, our future financial statements will be affff ected. 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 llowing accounting policies involve the most diffff icult, complex or subjb ective judgments: Form 10-K, the foff inventories, lease assumptions, self-ff insurance reserverr 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. s, goodwill and intangible assets, impairment of InII vevv ntorirr es 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 perfrr off rm 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 reserverr s foff r obsolescence were recorded as of January 1, 2023 and January 2, 2022. Lease Assumptitt ons The most significant estimates used by management in accounting foff r leases and the impact of those estimates are as foff llows: ExpEE ected lease termrr —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 foff r 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 foff r a leased property recorded on our balance sheets. Increrr mental borrrr orr wiww nii g rarr te—The incremental borrowing rate is primarily used in determining whether the lease is accounted foff r 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. FaFF irii markerr t value of thtt e leased asset—Ttt he 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 staffff . Fair market value is used in determining whether the lease is accounted foff r as an operating lease or a finance lease. 52 Self-ff InII surarr nce Reservrr evv s balance was $47.6 million, of which a maja ority of the balance related We are self-ff insured foff r costs related to workers’ compensation, general liability and employee health benefits up to certain self-ff insured retentions and stop-loss limits. As of January 1, 2023, the consolidated self-ff insurance reserverr to workers' compensation and general liability reserverr estimated based on independent actuarial estimates, which are based on historical infoff rmation 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 reserverr materially by future events or claims experiences that diffff er from historical trends and assumptions. s. Liabilities foff r self-ff insurance reserverr s foff r these liabilities could be affff ected s are Goodwiww lii lll and InII tatt ngibii le Assetstt 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 foff r impairment on an annual basis during the foff urth 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 perfrr off rmance, trends in market capitalization foff r us and our peers, turnover in key management personnel and overall changes in macroeconomic environment. Our impairment evaluation foff r our indefinite-lived intangible assets consists of a qualitative assessment similar to that foff r 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 foff r 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 therefoff re possible that materially diffff erent amounts could be recorded if we used diffff erent assumptions or if the underlying circumstances were to change. As of January 1, 2023, 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 2022, 2021 or 2020 because the fair value of those assets was substantially above carrying value. 53 ImII pairii mrr ent of Long-Livevv d Assetstt Long-lived assets are reviewed foff r impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. This evaluation is perfrr off rmed 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 diffff erent results. We recorded an impairment loss of $8.1 million and $4.8 million in 2022 and 2021, 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". InII come TaTT xes Income taxes are accounted foff r under the asset and liability method. Deferred tax assets and liabilities are recognized foff r the future tax consequences attributable to diffff erences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryfoff rwrr ards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary diffff erences are expected to be recovered or settled. The effff ect 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 effff ect 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 foff r 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 suffff icient 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, projo ected future taxable income may also represent positive evidence, to the extent that such projo ections 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. 54 Item 7A. Quantitt tatt titt vevv and Qualill tatt titt vevv Disii closurerr s about Markrr et Risii k 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 a Credit Agreement that bears interest at a rate based in part on SOFR. Accordingly, we could be exposed to fluctuations in interest rates. Based on the $250.0 million principal outstanding under our Credit Agreement as of January 1, 2023, each hundred basis point change in SOFR would result in a corresponding increase or decrease in interest expense by $2.5 million annually. This sensitivity analysis assumes our mix of financial instruments and all other variables will remain constant in future periods. These assumptions are made in order to facilitate the sensitivity analysis and are not necessarily indicative of our future intentions. We do not enter into derivative financial instruments foff r trading purposes (see Note 22, “Derivative Financial Instruments”). 55 Item 8. FiFF nii anciaii l Statt tementstt and Supppp lementatt ryr Datatt INDEX TO FINANCIAL STATEMENTS p 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 1, 2023 and January 2, 2022 .............................................. Consolidated Statements of Income foff r the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021 ........................................................................................................................................... Consolidated Statements of Comprehensive Income foff r the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021 ............................................................................................................ Consolidated Statements of Stockholders’ Equity foff r the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021.............................................................................................................. Consolidated Statements of Cash Flows foff r the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021 ................................................................................................................................. Notes to Consolidated Financial Statements .................................................................................................. 57 60 61 62 63 64 65 56 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Sprouts Farmers Market, Inc. OpO inii ions on thtt e FiFF nii anciaii l Statt tementstt and InII ternrr al Contrtt orr l ovevv r FiFF nii anciaii l Repe ortrr itt nii g We have audited the accompanying consolidated balance sheets of Sprouts Farmers Market, Inc. and its subsidiaries (the “Company”) as of January 1, 2023 and January 2, 2022, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows foff r each of the three years in the period ended January 1, 2023 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 1, 2023, based on criteria established in Internrr al Contrtt orr l - Integrarr ted FrFF arr mewoww rkrr (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 1, 2023 and January 2, 2022, and the results of its operations and its cash flows foff r each of the three years in the period ended January 1, 2023 in confoff rmity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effff ective internal control over financial reporting as of January 1, 2023, based on criteria established in Internrr al Contrtt orr l - Integrarr ted FrFF arr mewoww rkrr (2013) issued by the COSO. Basisii foff r OpO inii ions The Company's management is responsible foff r these consolidated financial statements, foff r maintaining effff ective internal control over financial reporting, and foff r its assessment of the effff ectiveness 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 perfrr off rm 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 effff ective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included perfrr off rming procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and perfrr off rming 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 effff ectiveness of internal control based on the assessed risk. Our audits also included perfrr off rming such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis foff r our opinions. 57 Defiff nii ititt on and Limii itatt titt ons of InII ternrr al Contrtt orr l ovevv r FiFF nii anciaii l Repe ortrr itt nii g 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 foff r 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 effff ect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projo ections of any evaluation of effff ectiveness to future periods are subjb ect 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. Crirr titt cal Audidd t Mattersrr 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, subjb ective, 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. VaVV luatitt on of Self-ff Insurarr nce Reserverr s s. Management estimates the self-ff insurance reserverr balance related to workers’ compensation and general liability self-ff insurance As described in Notes 3 and 15 to the consolidated financial statements, the Company is self-ff insured foff r costs related to workers’ compensation, general liability and employee health benefits up to certain stop- loss limits. As of January 1, 2023, the Company’s recorded amounts foff r general liability, workers’ compensation and team member health benefit liabilities was $47.6 million, with the most significant portion of the reserverr reserverr which are based on historical infoff rmation 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-ff insurance reserverr 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. s, several factors are considered by management, including (i) loss s based on independent actuarial estimates, s is a critical audit matter are (i) the significant judgment by management when The principal considerations foff r our determination that perfrr off rming procedures relating to the valuation of self-ff insurance reserverr estimating the self-ff insurance reserverr reported claims and claims incurred but not yet reported; (ii) the high degree of auditor judgment, subjb ectivity and effff off rt in perfrr off rming procedures and evaluating audit evidence related to the loss development factors and expected loss costs; and (iii) the audit effff off rt involved the use of professionals with specialized skill and knowledge. s due to the use of various techniques to estimate the cost to settle 58 Addressing the matter involved perfrr off rming procedures and evaluating audit evidence in connection with foff rming our overall opinion on the consolidated financial statements. These procedures included testing the effff ectiveness of controls relating to the valuation of self-ff insurance reserverr s, including controls over the historical infoff rmation and assumptions about future events used in the actuarial valuation methods. These procedures also included, among others (i) evaluating management’s self-ff 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 foff r estimating the valuation of the self-ff insurance reserverr s, 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 March 2, 2023 We have serverr d as the Company’s auditor since 2011. 59 SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 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 Total assets 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 Commitments and contingencies (Note 19) Stockholders’ equity: Januaryrr 1, 2023 Januaryrr 2, 2022 $ $ $ 293,233 $ 16,108 310,545 53,918 673,804 722,241 1,106,524 184,960 368,878 13,973 3,070,380 $ 172,904 $ 151,306 61,574 135,584 1,012 522,380 1,145,173 258,902 36,340 61,123 2,023,918 245,287 21,574 265,387 35,468 567,716 716,029 1,072,019 184,960 368,878 13,513 2,923,115 145,901 155,996 58,743 151,755 1,078 513,473 1,095,909 259,656 36,306 57,895 1,963,239 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, 105,072,756 shares issued and outstanding, January 1, 2023; 111,114,374 shares issued and outstanding, January 2, 2022 Additional paid-in capital Accumulated other comprehensive income (loss) Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity — — 105 726,345 — 320,012 1,046,462 3,070,380 $ 111 704,701 (3,758) 258,822 959,876 2,923,115 $ The accompanying notes are an integral part of these consolidated financial statements. 60 SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales Cost of sales Gross profit Selling, general and administrative expenses Depreciation and amortization (exclusive of depreciation included in cost of sales) Store closure and other costs, net Income from operations Interest expense, net Income befoff re income taxes Income tax provision Net income Net income per share: Basic Diluted Weighted average shares outstanding: Basic Diluted $ $ $ $ Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 6,404,223 $ 4,055,659 2,348,564 1,855,649 123,530 6,099,869 $ 3,890,657 2,209,212 1,748,205 122,258 6,468,759 4,089,470 2,379,289 1,863,869 124,124 11,025 358,360 9,047 349,313 88,149 261,164 $ 4,673 334,076 11,684 322,392 78,235 244,157 $ 2.41 $ 2.39 $ 2.12 $ 2.10 $ 108,232 109,139 115,377 116,077 (369) 391,665 14,787 376,878 89,428 287,450 2.44 2.43 117,821 118,224 The accompanying notes are an integral part of these consolidated financial statements. 61 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 $1,819, $3,116 and ($205) Reclassification of net gains (losses) on cash flow hedges to net income, net of income tax of ($520), ($1,485) and ($1,107) Total other comprehensive income (loss) Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 $ 261,164 $ 244,157 $ 287,450 5,259 9,009 (592) (1,501) 3,758 (4,293) 4,716 (3,200) (3,792) Comprehensive income $ 264,922 $ 248,873 $ 283,658 The accompanying notes are an integral part of these consolidated financial statements. 62 d e t a l u m u c c A r e h t O l a t o T l ’ s r e d o h k c o t S y t i u q E e v i s n e h e r p m o C ) t i c i f e D d e t a l u m u c c A ( l a n o i t i d d A e m o c n I ) s s o L ( d e n i a t e R i s g n n r a E n i - d i a P l a t i p a C n o m m o C k c o t S s e r a h S I Y T U Q E ’ S R E D L O H K C O T S F O S T N E M E T A T S D E T A D L O S N O C I ) S T N U O M A E R A H S T P E C X E , S D N A S U O H T N I ( I I I S E R A D S B U S D N A . C N I , T E K R A M S R E M R A F S T U O R P S ) 2 9 7 , 3 ( 4 4 3 , 1 9 3 3 , 4 1 2 5 9 , 1 8 5 0 5 4 , 7 8 2 6 1 7 , 4 0 7 1 , 2 3 9 2 , 1 8 8 7 5 1 , 4 4 2 ) 3 4 3 , 8 8 1 ( 3 8 8 , 5 1 6 7 8 , 9 5 9 4 6 1 , 1 6 2 8 5 7 , 3 1 4 0 , 5 3 0 6 , 6 1 ) 0 8 9 , 9 9 1 ( 2 6 4 , 6 4 0 , 1 $ ) 2 8 6 , 4 ( — ) 2 9 7 , 3 ( — — ) 4 7 4 , 8 ( — 6 1 7 , 4 — — — ) 8 5 7 , 3 ( — 8 5 7 , 3 $ — — — — $ ) 9 4 4 , 4 8 ( 0 5 4 , 7 8 2 — — — — — 1 0 0 , 3 0 2 7 5 1 , 4 4 2 ) 6 3 3 , 8 8 1 ( — 2 2 8 , 8 5 2 4 6 1 , 1 6 2 — — — ) 4 7 9 , 9 9 1 ( $ 2 1 0 , 0 2 3 $ . s t n e m e t a t s l i a c n a n i f d e t $ 6 6 9 , 0 7 6 $ 7 1 1 $ 8 1 9 , 2 5 4 , 7 1 1 9 1 0 2 , 9 2 r e b m e c e D t a s e c n a l a B a d i l o s n o c e s e h t 3 6 f o t r a p l a r g e n t i n a e r a s e t o n i g n y n a p m o c c a e h T — — — — 3 4 3 , 1 9 3 3 , 4 1 8 4 6 , 6 8 6 — 0 7 1 , 2 3 8 8 , 5 1 1 0 7 , 4 0 7 — — — 1 4 0 , 5 3 0 6 , 6 1 5 4 3 , 6 2 7 — — 1 — 8 1 1 — — — ) 7 ( — — — — ) 6 ( — 1 1 1 — — — — — 7 1 5 , 0 0 5 5 3 4 , 3 5 9 , 7 1 1 — 6 9 2 , 7 7 5 ) 7 5 3 , 6 1 4 , 7 ( 4 7 3 , 4 1 1 , 1 1 1 — — — 4 6 4 , 5 5 8 ) 2 8 0 , 7 9 8 , 6 ( $ 5 0 1 $ 6 5 7 , 2 7 0 , 5 0 1 k c o t s n o m m o c f o t n e m e r i t e r d n a e s a h c r u p e R s n a p l k c o t s r e d n u s e r a h s f o e c n a u s s I ) s s o l ( e m o c n i i e v s n e h e r p m o c r e h t O 2 2 0 2 , 2 y rr r a u n a J t a s e c n a l a B n o i t a s n e p m o c d e s a b - e r a h S e m o c n i t e N k c o t s n o m m o c f o t n e m e r i t e r d n a e s a h c r u p e R s n a p l k c o t s r e d n u s e r a h s f o e c n a u s s I ) s s o l ( e m o c n i i e v s n e h e r p m o c r e h t O 3 2 0 2 , 1 y rr r a u n a J t a s e c n a l a B n o i t a s n e p m o c d e s a b - e r a h S s n a p l k c o t s r e d n u s e r a h s f o e c n a u s s I ) s s o l ( e m o c n i i e v s n e h e r p m o c r e h t O 1 2 0 2 , 3 y rr r a u n a J t a s e c n a l a B n o i t a s n e p m o c d e s a b - e r a h S e m o c n i t e N e m o c n i t e N SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Operating activities Net income AAdjustments to reconcile net income to net cash provided by operating activities: Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 $ 261,164 $ 244,157 $ 287,450 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 Payments of deferred financing costs Repurchase of common stock Proceeds from exercise of stock options 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 foff r interest Cash paid foff r income taxes Leased assets obtained in exchange foff r new operating lease liabilities Supplemental disclosure of non-cash investing and financing activities Property and equipment in accounts payable and accrued liabilities $ $ $ 127,067 117,315 8,066 16,603 3,228 672 13,381 (45,158) (18,467) 2,039 13,362 5,416 2,831 — (132,889) (3,301) 371,329 (124,010) (124,010) 62,500 (62,500) (819) (3,373) (199,980) 5,041 (199,131) 48,188 247,004 295,192 11,132 93,419 157,269 $ $ 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 36,177 $ 25,166 $ 10,869 The accompanying notes are an integral part of these consolidated financial statements. 64 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, offff ers 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 1, 2023, the Company operated 386 stores in 23 states. For convenience, the “Company” is used to refer collectively to Sprouts Farmers Market, Inc. and, unless the context requires otherwrr conducted by its subsidiaries. ise, its subsidiaries. The Company’s store operations are 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 (“GAAAA P”). 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, seafoff od, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foff ods, beer and wine, and natural health and body care. The foff llowing is a breakdown of the Company’s perishable and non-perishable sales mix: Perishables Non-Perishables 2022 2021 2020 58.0% 42.0% 57.7% 42.3% 57.2% 42.8% All dollar amounts are in thousands, unless otherwrr ise indicated. 3. Significant Accounting Policies FiFF sii cal YeYY arsrr 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 2022 ended on January 1, 2023 and included 52 weeks. 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 years 2022, 2021 and 2020 are referred to as 2022, 2021 and 2020, respectively. Sigi nififf cant Accountitt nii g EsEE titt mii ates The preparation of financial statements in confoff rmity with GAAAA P requires management to make estimates and assumptions. Such estimates and assumptions affff ect 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 s, goodwill and accounting estimates include inventories, lease assumptions, self-ff insurance reserverr intangible assets, impairment of long-lived assets, and income taxes. Actual results could diffff er from those estimates. 65 Cash and Cash Equivavv lentstt 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 maja ority of which were paid with credit and debit cards and settle within a few days of the sales transactions. The amounts due from banks foff r these transactions at each reporting date were as foff llows: As Of Due from banks foff r debit and credit card transactions Restrtt irr cted Cash Januaryrr 1, 2023 $ 77,665 $ Januaryrr 2, 2022 78,558 Restricted cash relates to the Company’s defined benefit plan foff rfrr eitures and the Company’s healthcare, general liability and workers’ compensation plan benefits of approximately $2.0 million and $1.7 million as of January 1, 2023 and January 2, 2022, respectively, and is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Accountstt Receivavv ble Accounts receivable primarily represents billings to vendors foff r scan, advertising and other rebates, receivables foff r ecommerce sales and billings to landlords foff r tenant allowances. Accounts receivable also includes receivables from the Company’s insurance carrier foff r payments expected to be made in excess of self-ff insured retentions. The Company provides an allowance foff r doubtful accounts when a specific account is determined to be uncollectible. InII vevv ntorirr es Inventories consist of merchandise purchased foff r resale, which are stated at the lower of cost or net realizable value. The cost method is used foff r 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 foff r estimated losses related to shrinkage. The Company believes that all inventories are saleable and no allowances or reserverr 2023 and January 2, 2022. s foff r obsolescence were recorded as of January 1, PrP orr pertrr yt and Equipii ment Property and equipment are stated at cost, net of accumulated depreciation and amortization. Expenditures foff r maja or additions and improvements to facilities as well as significant component replacements are capitalized. All other maintenance and repairs are charged to expense as incurred. When property is retired or otherwrr ise 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. 66 The foff llowing table includes the estimated useful lives of certain of the Company’s asset classes: Computer hardware and softff ware 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-ff InII surarr nce Reservrr evv s The Company uses a combination of insurance and self-ff insurance programs to provide foff r costs associated with general liability, workers’ compensation and team member health benefits. Liabilities foff r s are estimated based on independent actuarial estimates, which are based on self-ff insurance reserverr historical infoff rmation 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. Goodwiww lii lll and InII tatt ngibii le Assetstt 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 foff r impairment on an annual basis during the foff urth 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 perfrr off rmance, trends in market capitalization foff r the Company and its peers, turnover in key management personnel and overall changes in the 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. Otherwrr the Company compares the estimated fair value of the reporting unit to its carrying amount with an impairment loss recognized foff r the amount, if any, by which carrying value exceeds estimated fair value. ise, The impairment evaluation foff r the Company’s indefinite-lived intangible assets consists of a qualitative assessment similar to that foff r 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. Otherwrr ise, the Company compares the estimated fair value of the asset to its carrying amount with an impairment loss recognized foff r the amount, if any, by which carrying value exceeds estimated fair value. 67 The Company has determined its business consists of a single reporting unit, healthy grocery stores. The Company has had no goodwill impairment charges foff r the past three fiscal years. See Note 8, “Intangible Assets” and Note 9, “Goodwill” foff r further discussion. ImII pairii mrr ent of Long-Livevv d Assetstt The Company assesses its long-lived assets, including property and equipment and right-of-ff use assets, foff r 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 projo ection 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 foff r 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 foff r 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 $8.1 million and $4.8 million in 2022 and 2021, respectively, as part of the normal course of business primarily related to the write-down of right-of-ff use assets and leasehold improvements. There were no impairment charges in 2020. These charges are recorded as a component of Store closure and other costs, net in the accompanying consolidated statements of income. Defeff rrrr err d FiFF nii ancinii g Coststt 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 effff ective interest method. For the 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 its stores, distribution centers, and administrative offff ices. 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. 68 The Company’s lease assets represent a right to use an underlying asset foff r 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 foff r the lease and non-lease components as a single lease component foff r all current classes of leases. Most of the Company’s lease agreements include variable payments related to pass-through costs foff r common area maintenance ("CAM"), property 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 infoff rmation available at the lease commencement date, in determining the present value of lease payments. The rate used is foff r 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 recognizes sublease income on a straight-line basis. FaFF irii VaVV lue Measurerr mentstt The Company records its financial assets and liabilities in accordance with the framework foff r 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 foff r identical instruments in active markets. Level 2: Quoted prices foff r similar instruments in active markets; quoted prices foff r identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observarr ble in active markets. Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservarr ble. Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the valuation of derivative instruments and the impairment analysis of goodwill, intangible assets, and long- lived assets. Impairment losses related to store-level assets are calculated using significant unobservarr ble 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. Therefoff re, these inputs are classified as a level 3 measurement in the fair value hierarchy. 69 Derirr vavv titt vevv FiFF nii anciaii l InII strtt urr mentstt 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 foff r hedge accounting if, at inception, the derivative is expected to be highly effff ective in offff seff 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 qualifyiff ng 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 effff ect on earnings. tting the underlying The Company reviews the effff ectiveness of its hedging instruments quarterly. The Company recognizes changes in the fair value foff r derivatives not designated as hedges or those not qualifyiff ng foff r hedge accounting in current period earnings. The Company discontinues hedge accounting foff r any hedge that is no longer evaluated to be highly effff ective. The Company does not enter into derivative financial instruments foff r trading or speculative purposes, and it monitors the financial stability and credit standing of its counterparties in these transactions. The Company had no active derivative financial instruments as of January 1, 2023. Sharerr -Based Compensatitt on 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 foff r actual foff rfrr eitures as they occur. The Company uses the Black-Scholes option-pricing model to determine the grant date fair value foff r each option grant. See Note 26, “Share-Based Compensation” foff r a discussion of assumptions used in the calculation of fair values. Application of alternative assumptions could produce diffff erent 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”), perfrr off rmance share awards (“PSAs”), and restricted stock awards (“RSAs”) is based on the closing price per share of the Company’s common stock on the grant date. The Company recognizes compensation expense foff r time-based awards on a straight-line basis and foff r perfrr off rmance- based awards on the graded-vesting method over the vesting period of the awards. 70 Revevv nue Recognititt on The Company’s perfrr off rmance 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 giftff cards are recorded as a liability at the time of sale and recognized as sales when they are redeemed by the customer and the perfrr off rmance obligation is satisfied by the Company. The Company’s giftff cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of giftff cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is recognized over time in proportion to actual giftff card redemptions and was not material in any period presented. A summary of the activity and balances in the giftff card liability, net is as foff llows: Balance, beginning of year Giftff cards issued during the period but not redeemed (1) Revenue recognized from beginning liability Balance, end of year $ $ 12,586 $ 4,291 (5,971) 10,906 $ (1) net of estimated breakage Year Ended Januaryrr 1, 2023 Januaryrr 2, 2022 15,888 $ 5,711 (9,013) 12,586 $ Januaryrr 3, 2021 15,902 9,895 (9,909) 15,888 The nature of goods the Company transfers to customers at the point of sale are inventories, consisting of merchandise purchased foff r resale. The Company does not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current period from perfrr off rmance obligations satisfied in previous periods, any contract perfrr off rmance obligations, or any material costs to obtain or fulfill a contract as of January 1, 2023. 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, and depreciation and amortization foff r 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 foff r approximately 45%, 44% and 42% of total purchases during 2022, 2021 and 2020, respectively. Sellll ill nii g,g Generarr l and Admdd inii isii trtt arr titt vevv ExEE pxx enses Selling, general and administrative expenses primarily consist of salaries, wages and benefits costs, share-based compensation, occupancy costs (including rent, property taxes, utilities, CAM 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 $49.2 million, $45.9 million and $54.4 million foff r 2022, 2021 and 2020, respectively. Depe rerr ciaii titt on and amortrr itt zaii titt on Depreciation and amortization expense (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization foff r buildings, store leasehold improvements, and equipment. 71 InII come TaTT xes Income taxes are accounted foff r under the asset and liability method. Deferred tax assets and liabilities are recognized foff r the future tax consequences attributable to diffff erences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryfoff rwrr ards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary diffff erences are expected to be recovered or settled. The effff ect 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 subjb ect 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 projo ected future taxable income offff seff the period in which the judgment occurs. t by deferred tax liabilities. Changes in recognition or measurement are reflected in The Company files income tax returns foff r federal purposes and in many states. The Company’s tax filings remain subjb ect to examination by applicable tax authorities foff r a certain length of time, generally three years, foff llowing the tax year to which those filings relate. The Company recognizes the effff ect 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. Sharerr Repe urcrr hases 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 the purchase price of the retired shares in excess of par value directly as a reduction of retained earnings. Net InII come per Sharerr 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. Comprerr hensivevv InII come Comprehensive income consists of net income and the unrealized gains or losses on derivative foff r and have been designated as cash flow hedges, foff r all periods presented. instruments that qualifyff 72 Recentltt yl Adopted Accountitt nii g PrP orr nouncementstt Refeff rerr nce Rate Refoff rmrr In March 2020 and January 2021, the FASB issued ASU no. 2020-04, “Reference Rate Refoff rm (Topic 848): Facilitation of the Effff ects of Reference Rate Refoff rm on Financial Reporting” and ASU 2021- 01, “Reference Rate Refoff rm (Topic 848): Scope,” respectively. The amendments in these updates provide optional expedients and exceptions foff r a limited period of time to ease the potential burden in accounting foff r contracts, hedging relationships, and other transactions affff ected by reference rate refoff rm. During 2022, the Company adopted certain optional expedients provided under Topic 848 that permitted its hedging relationships to continue without de-designation upon changes due to reference rate refoff rm. The adoption of this guidance resulted in no material impact to the Company’s consolidated financial statements. See Note 22, “Derivative Financial Instruments” foff r more infoff rmation on our hedging activities. Income TaTT xes –A– ccountitt nii g foff r Income TaTT xes In December 2019, the FASB issued ASU no. 2019-12, “Income Taxes (Topic 740) Simplifyiff ng the Accounting foff r Income Taxes.” Among other things, the amendment removes certain exceptions foff r 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 effff ective January 4, 2021 on a prospective basis. There was no impact on the Company’s consolidated financial statements. FiFF nii anciai l Instrtt urr mentstt – Crerr didd t 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 GAAAA P with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable infoff rmation to infoff rm credit loss estimates. Subsequent to the initial standards, the FASB has also issued several ASUs to clarifyff specific topics. The Company adopted ASU 2016-13 effff ective 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. Compensatitt on – FaFF irii VaVV lue Discl ii osurerr s In August 2018, the FASB issued ASU No. 2018-13, “Fair value measurement (Topic 820) – Disclosure framework – Changes to the disclosure requirements foff r fair value measurement.” The amendments in this update improve the effff ectiveness of fair value measurement disclosures. The Company adopted this standard effff ective December 30, 2019. There was no impact on the Company’s disclosure in its consolidated financial statements. Recentltt yl IsII sued Accountitt nii g PrP orr nouncementstt Not YeYY t Adopted No other new accounting pronouncements issued or effff ective during 2022 had, or are expected to have, a material impact on the Company’s consolidated financial statements. 73 4. Accounts Receivable A summary of accounts receivable is as foff llows: As Of Landlords Vendors Insurance Ecommerce Other Total Januaryrr 1, 2023 $ 232 $ 3,544 2,320 6,988 3,024 Januaryrr 2, 2022 4,856 4,191 2,161 4,857 5,509 21,574 $ 16,108 $ The Company recorded allowances foff r certain vendor receivables of $1.4 million and $0.7 million at January 1, 2023 and January 2, 2022, respectively. 5. Prepaid Expenses and Other Current Assets A summary of prepaid expenses and other current assets is as foff llows: Prepaid expenses Restricted cash Income tax receivable Other current assets Total 6. Property and Equipment A summary of property and equipment, net is as foff llows: Land and finance lease assets Furniture, fixtures and equipment Leasehold improvements Construction in progress Total property and equipment AAccumulated depreciation and amortization Property and equipment, net As Of Januaryrr 1, 2023 33,034 $ 1,959 18,155 770 53,918 $ Januaryrr 2, 2022 21,548 $ 1,717 11,639 564 35,468 $ As Of Januaryrr 1, 2023 $ 15,753 $ Januaryrr 2, 2022 15,753 797,169 665,237 58,621 1,536,780 (820,751) 716,029 850,357 679,880 110,106 1,656,096 (933,855) 722,241 $ $ Depreciation expense was $125.7 million, $124.1 million and $125.6 million foff r 2022, 2021 and 2020, respectively. Depreciation expense is primarily reflected in depreciation and amortization on the consolidated statements of income. Impairment expense was $8.1 million and $4.8 million foff r 2022 and 2021, respectively. There was no impairment expense recognized in 2020. 74 7. Leases Lease cost includes both the fixed and variable expenses recorded foff r leases. The components of lease cost are as foff llows: Operating lease cost Finance lease cost: AAmortization 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 Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 $204,559 $ 196,602 $ 191,279 966 852 966 906 966 970 65,979 60,763 57,789 (833) (1,192) $271,523 $ 258,398 $ 249,812 (839) (1) Supply chain-related amounts of $12.4 million, $10.6 million and $7.8 million were included in cost of sales foff r 2022, 2021 and 2020, respectively. Supplemental balance sheet infoff rmation related to leases is as foff llows: Assets Operating Finance Total lease assets Liabilities Current Operating Finance Noncurrent Operating Finance Total lease liabilities Classification Januaryrr 1, 2023 Januaryrr 2, 2022 As of Operating lease assets Property and equipment, net Current portion of operating lease liabilities Current portion of finance lease liabilities Long-term operating lease liabilities Long-term debt and finance lease liabilities $ $ $ $ 1,106,524 7,285 1,113,809 135,584 1,012 $ $ $ 1,072,019 8,251 1,080,270 151,755 1,078 1,145,173 1,095,909 8,902 1,290,671 $ 9,656 1,258,398 Weighted average remaining lease term (years) Operating leases Finance leases Weighted average discount rate Operating leases Finance leases 2022 2021 2020 9.4 7.8 7.1% 8.4% 9.6 8.8 6.7% 8.4% 9.8 9.7 7.2% 8.4% 75 Supplemental cash flow and other infoff rmation related to leases is as foff llows: Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 Cash paid foff r amounts included in measurement of lease liabilities: Operating cash flows foff r operating leases Operating cash flows foff r finance leases Lease assets obtained in exchange foff r lease liabilities: Operating leases $ $ A summary of maturities of lease liabilities is as foff llows: 207,516 $ 852 182,926 $ 906 186,280 970 157,269 $ 139,349 $ 118,075 2023 2024 2025 2026 2027 Thereaftff er Total lease payments Less: Imputed interest Total lease liabilities Less: Current portion Long-term lease liabilities Operating Leases(1), (2) 202,017 $ 223,817 224,534 192,101 176,190 910,418 1,929,077 (648,320) 1,280,757 (135,584) 1,145,173 $ $ $ Finance Leases 1,556 1,734 1,904 1,758 1,845 4,959 13,756 (3,842) 9,914 (1,012) 8,902 $ Total 203,573 225,551 226,438 193,859 178,035 915,377 1,942,833 (652,162) 1,290,671 (136,596) $ 1,154,075 (1) (2) Operating lease payments include $67.5 million related to periods covered by options to extend lease terms that are reasonably certain of being exercised and exclude $504.5 million of legally binding minimum lease payments foff r leases executed but not yet commenced. We have subtenant agreements under which we will receive $1.0 million in 2023, $1.0 million in 2024, $0.9 million in 2025, $0.7 million in 2026, $0.6 million in 2027 and $0.4 million thereaftff er. 76 8. Intangible Assets A summary of the activity and balances in intangible assets is as foff llows: Balance at Januaryrr 3, 2021 Adjustments/Transfers Balance at Januaryrr Indefinite-lived trade names Indefinite-lived liquor licenses Total intangible assets (1) Indefinite-lived trade names Indefinite-lived liquor licenses Total intangible assets (1) $ $ $ $ 182,937 $ 2,023 184,960 $ 182,937 $ 2,023 184,960 $ — $ — — $ 2, 2022 182,937 2,023 184,960 — $ — — $ 2023 182,937 2,023 184,960 Balance at Januaryrr 2, 2022 Adjustments/Transfers Balance at Januaryrr 1, (1) Excludes the original cost and accumulated amortization of fully-amortized finite-lived intangible assets. There was no amortization expense in 2022 and 2021. Amortization expense was ($0.4) million in 2020. 9. Goodwill The Company’s goodwill balance was $368.9 million as of January 1, 2023 and January 2, 2022. As of January 1, 2023 and January 2, 2022, 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 1, 2023 and January 2, 2022, other assets of $14.0 million and $13.5 million, respectively, primarily consisted of deferred softff ware as a servirr ce, deferred financing costs, capitalized durable supplies, utilities deposits and miscellaneous other assets. 11. Accrued Liabilities A summary of accrued liabilities is as foff llows: s Self-ff insurance reserverr AAccrued occupancy related (CAM, property taxes, etc.) Giftff cards, net of breakage AAccrued sales and use tax Other accrued liabilities Total 77 Januaryrr 1, 2023 $ As Of 23,954 $ 24,981 10,906 13,820 77,645 Januaryrr 2, 2022 27,136 20,649 12,586 12,327 83,298 155,996 $ 151,306 $ 12. Accrued Salaries and Benefits A summary of accrued salaries and benefits is as foff llows: Bonuses Payroll Vacation Severance and other Total Januaryrr 1, 2023 Januaryrr 2, 2022 As Of $ $ 23,679 19,873 16,732 1,290 61,574 $ $ 24,292 18,065 15,302 1,084 58,743 13. Long-Term Debt and Finance Lease Liabilities A summary of long-term debt and finance lease liabilities is as foff llows: Facility Senior secured debt Maturity Interest Rate As of Januaryrr 1, 2023 Januaryrr 2, 2022 $700.0 million Credit Agreement Former Credit Facility March 25, 2027 March 27, 2023(1) Variable $ Variable 250,000 $ — — 250,000 Finance lease liabilities (see Note 7, "Leases") Long-term debt and finance lease liabilities 9,656 259,656 In connection with the execution of the Credit Agreement on March 25, 2022, the Company's obligations as borrower under the Former Credit Facility were prepaid and terminated. 8,902 258,902 $ Various n/a $ (1) A summary of maturities of long-term debt is as foff llows: $700 million Credit Agreement 2023 2024 2025 2026 2027 Thereaftff er Total New Crerr didd t Agrerr ement $ $ — — — — 250,000 — 250,000 The Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), is the borrower under a credit agreement entered into on March 25, 2022 (the “Credit Agreement”). The Credit Agreement provides foff r a revolving credit facility (the "Revolving Credit Facility") with an initial aggregate commitment of $700.0 million. Amounts outstanding under the Credit Agreement may be increased from time to time in accordance with an expansion feature set foff rth in the Credit Agreement. The Company capitalized debt issuance costs of $3.4 million related to the Credit Agreement, which, combined with the remaining $0.5 million debt issuance costs in respect of that certain amended and restated credit agreement entered into on March 27, 2018, by and among the Company, Intermediate Holdings, certain lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (the “Former Credit Facility”), which remained outstanding as of the time of Intermediate Holdings’ entry into the Credit Agreement, are being amortized on a straight-line basis to interest expense over the five-year term of the Credit Agreement. 78 The Credit Agreement provides foff r a $70.0 million letter of credit sub-facility (the "Letter of Credit Sub-Facility") and a $50.0 million swingline facility. Letters of credit issued under the Credit Agreement reduce the capacity of Intermediate Holdings to borrow under the Revolving Credit Facility. Letters of credit totaling $24.8 million have been issued as of January 1, 2023 under the Letter of Credit Sub- Facility, primarily to support the Company’s insurance programs. Guararr ntees Obligations under the Credit Agreement are guaranteed by the Company and substantially all of its existing and future wholly-owned material domestic subsidiaries, and are secured by first-priority security interests in substantially all of the assets of the Company, Intermediate Holdings, and the subsidiary guarantors, including, without limitation, a pledge by the Company of its equity interest in Intermediate Holdings. Intererr st and Fees Loans under the Credit Agreement will initially bear interest, at the Company's option, either at the Term SOFR (with a floor of 0.00%) plus a 0.10% SOFR adjustment and 1.00% per annum or base rate (with a floor of 0.00%) plus 0.00% per annum. The interest rate margins are subjb ect to upward adjustments pursuant to a pricing grid based on the Company’s total net leverage ratio as set foff rth in the Credit Agreement and to upward or downward adjustments of up to 0.05% based upon the achievement of certain diversity and sustainability-linked metric thresholds, as set foff rth in the Credit Agreement. Under the terms of the Credit Agreement, the Company is obligated to pay a commitment fee on the available unused amount of the commitments, which commitment fee ranges between 0.10% to 0.225% per annum, pursuant to a pricing grid based on the Company’s total net leverage ratio. The commitment fees are subjb ect to upward or downward adjustments of up to 0.01% based upon the achievement of certain diversity and sustainability-linked metric thresholds, as set foff rth in the Credit Agreement. As of January 1, 2023, loans outstanding under the Credit Agreement bore interest at Term SOFR (as defined in the Credit Agreement) plus a 0.10% SOFR adjustment and 1.00% per annum. As of January 1, 2023, outstanding letters of credit issued under the Credit Agreement were subjb ect to a participation fee of 1.00% per annum and an issuance fee of 0.125% per annum. Paymentstt and Borrrr orr wiww nii gs The Credit Agreement is scheduled to mature, and the commitments thereunder will terminate on March 25, 2027, subjb ect to extensions as set foff rth therein. The Company may prepay loans and permanently reduce commitments under the Credit Agreement at any time in agreed-upon minimum principal amounts, without premium or penalty (except SOFR breakage costs, if applicable). In connection with the execution of the Credit Agreement, the Company's obligations under the Former Credit Facility were prepaid and terminated. During 2022, the Company made no additional borrowings or principal payments, other than the net change of $62.5 million in the composition of the lending syndicate associated with a modification of the Company's revolving credit facility on March 25, 2022, resulting in total outstanding debt under the Credit Agreement of $250.0 million as of January 1, 2023. Subsequent to January 1, 2023, the Company made a $25.0 million principal payment, resulting in total outstanding debt under the Credit Agreement of $225.0 million as of February 28, 2023. 79 Covenantstt The Credit Agreement contains financial, affff irmative 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 affff iliates; enter into new lines of business; modifyff the terms of debt or other material agreements; and change its fiscal year. Each of these covenants is subjb ect to customary and other agreed-upon exceptions. In addition, the Credit Agreement requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed 3.75 to 1.00, which ratio may be increased from time to time in connection with certain permitted acquisitions pursuant to conditions as set foff rth in the Credit Agreement, and a minimum interest coverage ratio not to be less than 3.00 to 1.00. Each of these covenants is tested on the last day of each fiscal quarter. The Company was in compliance with all applicable covenants under the Credit Agreement as of January 1, 2023. FoFF rmrr er Crerr didd t FaFF cilii ill tyt On March 27, 2018, Intermediate Holdings, as borrower, entered into the Former Credit Facility that provided foff r a revolving credit facility with an initial aggregate commitment of $700.0 million, subjb ect to an expansion feature set foff rth therein. The Former Credit Facility also provided foff r a letter of credit subfacility and a $15.0 million swingline facility. The Former Credit Facility was scheduled to mature, and the commitments thereunder were scheduled to terminate, on March 27, 2023. Loans under the Former Credit Facility bore interest at LIBOR plus a spread between 1.25% and 2.00% per annum or prime plus a spread between 0.25% and 1.00%. The interest rate spreads were subjb ect to adjustment pursuant to a pricing grid based on the Company’s total net leverage ratio, as defined in the Former Credit Facility. Under the terms of the Former Credit Facility, the Company was obligated to pay a commitment fee on the available unused amount of the commitments between 0.15% to 0.30% per annum, also pursuant to a pricing grid based on the Company’s total net leverage ratio. Outstanding letters of credit were subjb ect to a participation fee between 1.25% and 2.00% per annum pursuant to a pricing grid based on the Company's total net leverage ratio and an issuance fee of 0.125% per annum. 80 14. Other Long-Term Liabilities A summary of other long-term liabilities is as foff llows: Long-term portion of self-ff insurance reserverr Other Total s 15. Self-Insurance Programs As Of Januaryrr 1, 2023 $ 23,658 $ 12,682 36,340 $ Januaryrr 2, 2022 23,393 12,913 36,306 $ The Company is self-ff insured foff r costs related to workers’ compensation, general liability and employee health benefits up to certain self-ff insured retentions and stop-loss limits. The Company establishes reserverr s foff r 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 foff r exposures in excess of certain stop- loss limits and recorded receivables of $1.2 million and $1.6 million from its insurance carriers foff r payments expected to be made in excess of self-ff insured retentions at January 1, 2023 and January 2, 2022, respectively. The Company recorded amounts foff r general liability, workers' compensation and team member health benefit liabilities of $47.6 million and $50.5 million at January 1, 2023 and January 2, 2022, respectively. The foff llowing table summarizes the changes in the Company's self-ff insurance reserverr s through January 1, 2023: Year Ended Januaryrr 1, 2023 Januaryrr 2, 2022 Beginning Balance Expenses, net of actuarial adjustments Claim Payments Ending Balance Less: Current portion Long-term portion $ $ 50,529 $ 76,720 (79,637) 47,612 (23,954) 23,658 $ 48,518 $ 85,892 (83,881) 50,529 (27,136) 23,393 $ Januaryrr 3, 2021 46,863 86,786 (85,131) 48,518 (25,227) 23,291 The current portion of the self-ff insurance reserverr s is included in "Accrued Liabilities" and the long- term portion is included in "Other Long-Term Liabilities" in the accompanying consolidated balance sheets. 81 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, subjb ect to the Internal Revenue Code limitations. The Company provides foff r an employer matching contribution equal to 50% of each dollar contributed by the participants up to 6% of their eligible compensation. Total expense recorded foff r the matching under the Plan: Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 $ 7,820 $ 7,517 $ 6,588 17. Income Taxes InII come TaTT x PrP orr vivv sii ion The income tax provision consists of the foff llowing: U.S. Federal—current U.S. Federal—deferred U.S. Federal—total State—current State—deferred State—total Total provision TaTT x Rate Reconcilii ill aii titt on Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 $ $ 66,398 $ 1,028 67,426 19,823 900 20,723 88,149 $ 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 Income tax provision diffff ered from the amounts computed by applying the U.S. federal income tax rate to pre-tax income as a result of the foff llowing: Federal statutory rate Increase (decrease) in income taxes resulting from: State income taxes, net of federal benefit Enhanced charitable contribution impact Amended returns Benefit of federal tax credit Other, net Effff ective income tax rate Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 21.0% 21.0% 21.0% 4.7 (0.9) — (0.5) 0.9 25.2% 4.8 (1.5) (0.2) (0.4) 0.6 24.3% 4.6 (1.0) (1.0) (0.9) 1.0 23.7% 82 The effff ective income tax rate increased to 25.2% in 2022 from 24.3% in 2021 primarily due to decreased charitable contribution deductions in 2022 from the lapsing of benefits initially provided foff r in the CARES Act. The effff ective 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 offff seff contribution deductions in 2021. t by increased charitable 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 effff ects 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 $1.7 million and $0.2 million foff r 2022 and 2021, respectively, and is reflected as a reduction to the 2022 and 2021 income tax provision. The income tax detriment resulting from share-based awards was $0.5 million foff r 2020 and is reflected as an increase to the 2020 income tax provision. 83 Defeff rrrr err d TaTT xes Significant components of the Company’s deferred tax assets and deferred tax liabilities are as foff llows: Deferred tax assets Employee benefits Tax credits Operating leases Other lease related Other accrued liabilities Charitable contribution carryfoff rwrr ard Inventories and other Total gross deferred tax assets Less: Valuation Allowance Total deferred tax assets, net of valuation allowance Deferred tax liabilities Depreciation and amortization Intangible assets Operating leases Asset retirement obligations Total gross deferred tax liabilities Net deferred tax liability As Of Januaryrr 1, 2023 Januaryrr 2, 2022 $ $ 16,052 166 329,154 5,740 4,004 2,819 2,605 360,540 (917) 359,623 (83,091) (52,413) (284,377) (865) (420,746) $ (61,123) $ 17,543 228 320,650 5,881 4,283 1,781 3,206 353,572 — 353,572 (88,970) (45,978) (275,509) (1,010) (411,467) (57,895) A valuation allowance is established foff r deferred tax assets if it is more likely than not that these items will either expire befoff re the Company is able to realize their benefits, or that the realization of future deductions is uncertain. Management perfrr off rms 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 diffff erences become deductible. The valuation allowance was $0.9 million as of January 1, 2023, related to contribution carryfoff rwrr ards that management does not believe will ultimately be realized. There was no valuation allowance as of January 2, 2022. The Company has evaluated all available positive and negative evidence and believes it is probable that all other the deferred tax assets will be realized and has not recorded any other valuation allowance against the Company’s deferred tax assets as of January 1, 2023 and January 2, 2022. 84 The Company applies the authoritative accounting guidance under ASC 740 foff r 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 foff llows: Beginning balance AAdditions based on tax positions related to the current year AAdditions based on tax positions related to prior years Reductions foff r settlements with taxing authorities Reductions foff r tax positions foff r prior years Ending balance Januaryrr 1, 2023 As Of Januaryrr 2, 2022 Januaryrr 3, 2021 $ 1,770 $ 1,803 $ 1,343 43 — (694) — 1,119 $ 16 31 — (80) 1,770 $ 16 647 — (203) 1,803 $ The Company had unrecognized tax benefits (tax effff ected) of $1.1 million and $1.8 million as of January 1, 2023 and January 2, 2022, respectively. These would impact the effff ective 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 foff r income tax examinations remains open foff r federal tax returns foff r tax years 2017 through 2021 and state tax returns foff r the tax years 2018 through 2021. 18. Related Party Transactions On May 24, 2022, the Company appointed a new member to its board of directors who is an executive offff icer of a company that is a supplier of nutrition bars and related products to the Company foff r resale. Since the beginning of the second quarter of 2022, the cost of sales recognized from this supplier was $3.4 million. The Company did not enter into any material related party transactions during 2021. 19. Commitments and Contingencies Commitmtt entstt Real estate obligations, which include legally binding minimum lease payments foff r leases executed but not yet commenced, were $504.5 million as of January 1, 2023. 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 1, 2023, total future purchase commitments under noncancelable servirr ce and supply contracts were $19.8 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. 85 Contitt nii gencies 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 serverr Company’s stakeholders. The Company’s primary contingencies are associated with self-ff insurance obligations and litigation matters. Self-ff insurance liabilities require significant judgments, and actual claim settlements and associated expenses may diffff er from the Company’s current provisions foff r loss. See Note 15, “Self-ff Insurance Programs” foff r more infoff rmation. the interests of the “Phisii hinii g” Scam Actitt ons 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. PrP orr posititt on 65 Coffff eff e Actitt on 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 coffff ee 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, befoff re the court tried damages, remedies and attorneys' fees, Califoff rnia’s Offff ice of Environmental Health Hazard Assessment (“OEHHA”) published a proposal to amend Proposition 65’s llows: “Exposures to listed implementing regulations by adding a stand-alone sentence that reads as foff chemicals in coffff ee created by and inherent in the processes of roasting coffff ee beans or brewing coffff ee do not pose a significant risk of cancer.” The proposed regulation was finalized with an effff ective date of October 1, 2019. The defendants amended their answers to assert the regulation as an affff irmative defense. On August 25, 2020, the trial court granted the defense motion foff r summary judgment on the affff irmative defense, and the case was dismissed. On November 20, 2020, CERT filed a notice of appeal to appeal the ruling on the defense motion foff r summary judgment. On October 26, 2022, the appellate court affff irmed the trial court's decision. In December 2022, CERT appealed this ruling to the Supreme Court of the State of Califoff rnia, which denied the petition foff r review in February 2023. Until the case is dismissed by the trial court, the Company is unable to predict or reasonably estimate any potential loss or effff ect on the Company or its operations. Accordingly, no loss contingency was recorded foff r this matter. 86 20. Capital Stock Common stock As of January 1, 2023, 105,072,756 shares of the Company’s common stock were issued and outstanding aftff er the repurchase and retirement of 6,897,082 shares during 2022, as described below. As of January 1, 2023, 6,623,638 shares of common stock are reserverr d foff r issuance under the 2022 Incentive Plan (see Note 26, “Share-Based Compensation”). The foff llowing table outlines the options exercised in exchange foff r the issuance of shares of common stock during 2022, 2021 and 2020. Options exercised Other share issuances under stock plans Sharerr Repe urcrr hases Januaryrr 1, 2023 218,509 636,955 Year Ended Januaryrr 2, 2022 115,123 462,173 Januaryrr 3, 2021 59,561 440,956 On March 2, 2022, the Company's board of directors authorized a new $600 million share repurchase program foff r its common stock. The new authorization replaced the Company's then-existing share repurchase authorization of $300 million that was due to expire on March 3, 2024, of which $99.8 million remained available upon its replacement. No further shares may be repurchased under the $300 million authorization. The foff llowing table outlines the common stock share repurchase programs authorized by the Company’s board of directors and the related repurchase activity and available authorization as of January 1, 2023: Effff ective date March 3, 2021 March 2, 2022 Expiration date March 2, 2022 December 31, 2023 Amount authorized Cost of repurchases Authorization available $ $ 300,000 $ 600,000 $ 200,200 $ 188,123 $ — 411,877 The shares under the Company’s repurchase programs may be purchased on a discretionary basis from time to time through the applicable expiration date, subjb ect 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. Share repurchase activity under the Company’s repurchase programs foff r the periods indicated was llows (total cost in thousands): as foff Number of common shares acquired AAverage price per common share acquired Total cost of common shares acquired Januaryrr 1, 2023 Januaryrr 2, 2022 Year Ended $ $ 6,897,082 28.99 199,980 $ $ 7,416,357 25.40 188,343 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 1, 2023 and through February 28, 2023, we repurchased an additional 2.0 million shares of common stock foff r $64.0 million. 87 PrP err feff rrrr err d Stock The Company’s board of directors is authorized, subjb ect 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 affff ect 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 effff ect of delaying, deferring, or preventing a change in control of the Company and might adversely affff ect the market price of the Company’s common stock and the voting and other rights of the holders of the Company’s common stock. The Company has no current plan to issue any shares of preferred stock. 21. Net Income per Share The computation of 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 effff ect of share equivalents consisting of incremental shares deemed outstanding from the assumed exercise of options, unvested RSUs and unvested RSAs. PSAs are included in the computation of diluted net income per share only to the extent that the underlying perfrr off rmance 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 perfrr off rmance period, and if the effff ect would be dilutive. A reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is as foff llows (in thousands, except per share amounts): Basic net income per share: Net income Weighted average shares outstanding Basic net income per share Diluted net income per share: Net income Weighted average shares outstanding - basic Dilutive effff ect of share-based awards: Assumed exercise of options to purchase shares RSUs RSAs PSAs Weighted average shares and equivalent shares outstanding Diluted net income per share Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 $ $ $ $ 261,164 $ 108,232 2.41 $ 244,157 $ 115,377 2.12 $ 287,450 117,821 2.44 261,164 $ 244,157 $ 287,450 108,232 115,377 117,821 337 394 — 176 215 390 — 95 16 341 9 37 109,139 2.39 $ 116,077 2.10 $ 118,224 2.43 88 For the year ended January 1, 2023, the Company had 0.2 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 perfrr off rmance awards with perfrr off rmance conditions not yet deemed met. 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 perfrr off rmance awards with perfrr off rmance 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 perfrr off rmance awards with perfrr off rmance conditions not yet deemed met. 22. Derivative Financial Instruments The Company entered into an interest rate swap agreement in December 2017 to manage its cash flow associated with variable interest rates. This foff rwrr ard contract was designated and qualified as a cash flow hedge, and its change in fair value was recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the foff recasted transaction occurred. The foff rwrr ard contract consisted of five cash flow hedges, of which none remained outstanding as of January 1, 2023. To qualifyff as a hedge, the Company needs to foff rmally document, designate and assess the effff ectiveness of the transactions that receive hedge accounting. The notional dollar amount of the one outstanding swap at January 2, 2022 was $250.0 million, under which the Company paid a fixed rate and received a variable rate of interest (cash flow swap). The cash flow swap hedged the change in interest rates on debt related to fluctuations in interest rates, had a length of one year and matured in 2022. This interest rate swap had been designated and qualified as a cash flow hedge and had met the requirements to assume zero ineffff ectiveness. The Company reviewed the effff ectiveness of its hedging instruments on a quarterly basis. During the first quarter of 2022, the Company elected to apply certain hedge accounting optional expedients allowed under Topic 848. The expedients allowed the Company to continue the method of assessing effff ectiveness as documented in the original hedge documentation and allowed the reference rate on the hypothetical derivative to match the reference rate on the hedging instrument. The counterparties to these derivative financial instruments were maja or financial institutions. The Company evaluated the credit ratings of the financial institutions and believed that credit risk was at an acceptable level. The foff llowing table summarizes the fair value of the Company’s derivative instruments: Balance Sheet Location Januaryrr 1, 2023 Januaryrr 2, 2022 As Of Interest rate swaps Accrued liabilities $ — $ 5,107 The gain or loss on these derivative instruments was 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 foff and 2020: llowing table summarizes these losses foff r 2022, 2021 Consolidated Statements of Income Classification Interest expense, net Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 $ 2,021 $ 5,778 $ 4,307 89 23. Comprehensive Income The foff llowing table presents the changes in accumulated other comprehensive income (loss) foff r the year ended January 1, 2023: Balance at Januaryrr 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 Januaryrr 2, 2022 Other comprehensive income (loss), net of tax Unrealized gains on cash flow hedging activities, net of income tax of $1,819 Reclassification of net losses on cash flow hedges to net income, net of income tax of ($520) Total other comprehensive income (loss) Balance at Januaryrr 1, 2023 Cash Flow Hedges (8,474) 9,009 (4,293) 4,716 (3,758) 5,259 (1,501) 3,758 — $ $ $ Amounts reclassified from accumulated other comprehensive income (loss) to net income are included within interest expense, net on the consolidated statements of income. 24. Fair Value Measurements The Company records its financial assets and liabilities in accordance with the framework foff r measuring fair value in accordance with GAAAA P. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value: Level 1: Quoted prices foff r identical instruments in active markets. Level 2: Quoted prices foff r similar instruments in active markets; quoted prices foff r identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observarr ble in active markets. Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservarr ble. Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the valuation of derivative instruments and the impairment analysis of goodwill, intangible assets, and long- lived assets. The foff llowing tables present the Company’s fair value hierarchy foff r the Company’s financial assets and liabilities measured at fair value on a recurring basis as of January 1, 2023 and January 2, 2022: Januaryrr 1, 2023 Long-term debt Total financial liabilities Januaryrr 2, 2022 Long-term debt Interest rate swap liability Total financial liabilities Level 1 Level 2 — $ 250,000 $ — $ 250,000 $ Level 3 Total — $ 250,000 — $ 250,000 Level 1 Level 2 — $ 250,000 $ — — $ 255,107 $ 5,107 Level 3 Total — $ 250,000 5,107 — — $ 255,107 $ $ $ $ 90 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 curvrr e on floating interest rates, which is readily available on public markets. The determination of fair values of certain tangible and intangible assets foff r 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-ff 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 1, 2023 and January 2, 2022. 25. Segments The Company has one reportable and one operating segment, healthy grocery stores. In accordance with ASC 606, the foff llowing table represents a disaggregation of revenue foff r 2022, 2021 and 2020. Perishables Non-Perishables Net Sales Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 $ 3,717,642 2,686,581 $ 6,404,223 58.0% $ 3,518,181 42.0% 2,581,688 100.0% $ 6,099,869 57.7% $ 3,700,878 42.3% 2,767,881 100.0% $ 6,468,759 57.2% 42.8% 100.0% The Company categorizes the varieties of products it sells as perishable and non-perishable. Perishable product categories include produce, meat, seafoff od, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foff ods, beer and wine, and natural health and body care. 26. Share-Based Compensation 2022 InII centitt vevv Plall n In March 2022, the Company’s board of directors adopted the Sprouts Farmers Market, Inc. 2022 Omnibus Incentive Compensation Plan (the “2022 Incentive Plan”), which became effff ective May 25, 2022, upon approval by the Company’s stockholders. The 2022 Incentive Plan provides team members of the Company, certain consultants and advisors who perfrr off rm servirr ces foff r the Company, and non- employee members of the Company's board of directors with the opportunity to receive grants of equity awards, including stock options, RSUs, PSAs, and other stock-based awards. The 2022 Incentive Plan replaced the 2013 Incentive Plan (as described below). 91 Awaww rdrr sdd Grarr nted undedd r thtt e 2022 InII centitt vevv Plall n The Company granted the foff llowing awards during 2022 under the 2022 Incentive Plan: Grant Date June 7, 2022 September 7, 2022 October 10, 2022 Total Weighted-average grant date fair value Weighted-average exercise price RSUs PSAs Options 58,057 21,598 6,506 86,161 $ 27.74 $ — — — — — — $ — — — — — — — The aggregate number of shares of common stock that may be issued to team members and directors under the 2022 Incentive Plan may not exceed 6,600,000, subjb ect to the foff If any awards granted under the 2022 Incentive Plan, terminate, expire, or are cancelled, foff rfrr eited, exchanged, or surrendered without having been exercised, vested or paid in shares, the shares will again be available foff r purposes of the 2022 Incentive Plan. In addition, the number of shares subjb ect to outstanding awards under the Sprouts Farmers Market, Inc. 2013 Incentive Plan (the “2013 Incentive Plan”) that terminate, expire, are paid in cash, or are cancelled, foff rfrr eited, exchanged, or surrendered without having been exercised, vested, or paid in shares under the 2013 Incentive Plan aftff er the effff ective date of the 2022 Incentive Plan will be available foff r issuance under the 2022 Incentive Plan. As of January 1, 2023, there were 86,161 stock awards outstanding and 6,623,638 shares remaining available foff r issuance under the 2022 Incentive Plan. llowing adjustments. 2013 InII centitt vevv Plall n Prior to the adoption of the 2022 Incentive Plan, the 2013 Incentive Plan serverr d as the umbrella plan foff r the Company’s share-based and cash-based incentive compensation programs foff r its directors, offff icers and other team members. Upon stockholder approval of the 2022 Incentive Plan on May 25, 2022, no further awards will be granted under the 2013 Incentive Plan, but awards outstanding under the 2013 Incentive Plan will remain outstanding in accordance with their terms and the terms of the 2013 Incentive Plan. Awaww rdrr sdd Grarr nted undedd r thtt e 2013 InII centitt vevv Plall n The Company granted the foff llowing awards during 2022 and 2021 under the 2013 Incentive Plan: Grant Date March 15, 2022 March 21, 2022 Total Weighted-average grant date fair value Weighted-average exercise price Grant Date March 16, 2021 June 9, 2021 September 7, 2021 September 20, 2021 Total Weighted-average grant date fair value Weighted-average exercise price RSUs 370,177 104,913 475,090 31.60 $ — PSAs 147,846 14,260 162,106 31.52 $ — $ RSUs 356,503 50,839 25,579 168,137 601,058 24.11 $ — PSAs 178,780 — — — 178,780 24.42 $ — $ Options 211,352 20,270 231,622 10.58 31.52 Options 404,016 6,493 11,128 — 421,637 7.66 24.45 $ $ The RSUs generally vest either one-third each year foff r three years or one-half each year foff r two years foff r team members. RSUs granted to independent members of the Company’s board of directors cliffff vest in one year. The options expire seven years from grant date. The PSAs are described below. 92 Stock OpO titt ons Outstanding options 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 foff r good reason (as such terms are defined in the applicable team member award agreement) within 24 months foff immediately vested upon such termination. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable award agreement. llowing the change in control, such options or awards will become Shares issued foff r option exercises are newly issued shares. The estimated weighted average fair values of options granted during 2022, 2021 and 2020 were llowing assumptions in the table $10.58, $7.66 and $4.94, respectively, and were calculated using the foff below: Dividend yield Expected volatility Risk free interest rate Expected term, in years 2022 2021 2020 0.00% 36.59% 2.12% 4.50 0.00% 36.35% 0.83% 4.50 0.00% 34.80% 0.46% 4.50 The grant date weighted average fair value of the 1.0 million options issued but not vested as of January 1, 2023 was $6.66. 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 foff llowing table summarizes grant date weighted average fair value of options granted and options foff rfrr eited: Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 Grant date weighted average fair value of options granted Grant date weighted average fair value of options foff rfrr eited $ $ 10.58 $ 8.66 $ 7.66 $ 7.10 $ 4.94 8.94 Expected volatility foff r 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 aftff er 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 curverr rates in effff ect 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 $1.8 million, $0.7 million, and $0.2 million foff r 2022, 2021 and 2020, respectively. 93 The foff llowing table summarizes option activity during 2022: Weighted Average Exercise Price Weighted Average Remaining Contractual Life (In Years) Aggregate Intrinsic Value 19.81 31.52 28.79 23.08 20.93 19.35 20.93 $ 4.73 $ 4.38 $ 4.73 $ 1,828 13,295 3,142 13,295 Number of Options 1,362,907 $ 231,622 (57,862) (218,509) 1,318,158 271,632 1,318,158 $ Outstanding at January 2, 2022 Granted Forfrr eited Exercised Outstanding at January 1, 2023 Exercisable—January 1, 2023 Vested/Expected to vest—January 1, 2023 RSUsUU Outstanding RSUs 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 foff r good reason (as such terms are defined in the applicable team member award agreement) within 24 months foff vested upon such termination. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable award agreement. llowing the change in control, such awards will become immediately Shares issued foff r RSU vesting are newly issued shares. The fair value foff r 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 2022, 2021 and 2020 was $9.2 million, $8.8 million and $7.8 million, respectively. The foff llowing table summarizes the weighted average grant date fair value of RSUs awarded during 2022, 2021 and 2020: RSUs awarded Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 $ 31.01 $ 24.11 $ 18.01 The foff llowing table summarizes RSU activity during 2022: Outstanding at January 2, 2022 AAwarded Vested Forfrr eited Outstanding at January 1, 2023 Number of RSUs 928,672 561,251 (428,783) (88,557) 972,583 $ $ Weighted Average Grant Date Fair Value 21.89 31.01 21.46 26.62 26.94 94 PSASS s PSAs granted in March 2018 were subjb ect to the Company achieving certain earnings befoff re interest and taxes ("EBIT") perfrr off rmance targets foff r the 2020 fiscal year. The criteria is based on a range of perfrr off rmance targets in which grantees may earn 0% to 200% of the base number of awards granted. The perfrr off rmance 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 1, 2023. PSAs granted in 2019 were subjb ect to the Company achieving certain EBIT perfrr off rmance targets foff r the 2021 fiscal year. The criteria is based on a range of perfrr off rmance targets in which grantees may earn 0% to 200% of the base number of awards granted. The perfrr off rmance conditions with respect to fiscal year 2021 EBIT were deemed to have been met, and the PSAs vested at the maximum pay out level on the third anniversary of the grant date (March 2022). During the year ended January 1, 2023, 208,172 of the 2019 PSAs vested. There were no outstanding 2019 PSAs as of January 1, 2023. PSAs granted in 2020 were subjb ect to the Company achieving certain earnings befoff re taxes (“EBT”) perfrr off rmance targets foff r the 2022 fiscal year. The criteria is based on a range of perfrr off rmance targets in which grantees may earn 0% to 200% of the base number of awards granted. Subsequent to January 1, 2023, the perfrr off rmance conditions with respect to 2022 EBT were deemed to have been met, and the PSAs will vest at the maximum pay out level on the third anniversary of the grant date (March 2023). PSAs granted in 2021 are subjb ect to the Company achieving certain EBIT perfrr off rmance targets foff r the 2023 fiscal year. The criteria is based on a range of perfrr off rmance targets in which grantees may earn 0% to 200% of the base number of awards granted. If perfrr off rmance conditions are met, the applicable number of perfrr off rmance shares will vest on the third anniversary of the grant date (March 2024). PSAs granted in 2022 are subjb ect to the Company achieving certain EBIT perfrr off rmance targets foff r the 2024 fiscal year. The criteria is based on a range of perfrr off rmance targets in which grantees may earn 0% to 200% of the base number of awards granted. If perfrr off rmance conditions are met, the applicable number of perfrr off rmance shares will vest on the third anniversary of the grant date (March 2025). 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 If the awards continue or are assumed on a substantially equivalent on a substantially equivalent basis. basis, but employment is terminated by the Company or an acquirer without cause or by the team member foff r good reason (as such terms are defined in the applicable team member award agreement) within 24 months foff termination. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable team member award agreement. llowing the change in control, such awards will become immediately vested upon such Shares issued foff r PSA vesting are newly issued shares. The fair value foff r PSAs is calculated based on the closing stock price on the date of grant. The total grant date fair value of PSAs granted during 2022 was $5.1 million. The total grant date fair value of PSAs vested during 2022 was $4.1 million. The total grant date fair value of perfrr off rmance shares foff rfrr eited or not earned during 2022 was $0.8 million. The total grant date fair value of the 0.5 million PSAs issued but not released as of January 1, 2023 was $11.1 million. 95 The total grant date fair value of PSAs granted 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 perfrr off rmance shares foff rfrr eited 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. The total grant date fair value of PSAs granted 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 perfrr off rmance shares foff rfrr eited 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 foff llowing table summarizes PSA activity during 2022: Outstanding at January 2, 2022 AAwarded Vested Forfrr eited PSAs earned PSAs not earned Outstanding at January 1, 2023 RSASS s Number of PSAs 432,729 162,106 (208,172) (30,643) 104,086 — 460,106 $ $ Weighted Average Grant Date Fair Value 20.51 31.52 19.85 26.76 19.85 — 24.12 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, cliffff vested on June 30, 2018, or vested annually over three years. Shares issued foff r RSA vesting were newly issued shares. The fair value foff r restricted stock awards was calculated based on the closing stock price on the date of grant. There were no RSAs granted during 2022, 2021 or 2020. There were no RSAs released in 2022 or 2021. The total grant date fair value of shares of restricted stock released upon vesting during 2020 was $1.0 million. There were no RSAs foff rfrr eited in 2022, 2021 or 2020. There were no outstanding RSAs as of January 1, 2023. Sharerr -Based Compensatitt on ExEE pxx ense 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 foff llows: Share-based compensation expense Income tax benefit Net share-based compensation expense Januaryrr 1, 2023 Year Ended Januaryrr 2, 2022 Januaryrr 3, 2021 $ $ 16,603 $ (2,495) 14,108 $ 15,883 $ (2,450) 13,433 $ 14,339 (2,662) 11,677 96 As of January 1, 2023, total unrecognized compensation expense and remaining weighted average recognition period related to outstanding share-based awards were as foff llows: Options RSUs PSAs Total unrecognized compensation expense at January 1, 2023 Unrecognized compensation expense $ $ 3,014 15,992 2,112 21,118 Remaining weighted average recognition period 0.8 1.5 1.2 During 2022, 2021 and 2020, the Company received $5.0 million, $2.2 million and $1.3 million in cash proceeds from the exercise of options, respectively. The Company recorded tax benefits of $1.7 million and $0.2 million during 2022 and 2021, respectively, and recorded tax detriments of $0.5 million during 2020, resulting from share-based awards. 27. Quarterly Financial Data (Unaudited) The Company identified an error in the financing activities section of its consolidated statements of cash flows foff r the thirteen weeks ended April 3, 2022, the twenty-six weeks ended July 3, 2022, and the thirty-nine weeks ended October 2, 2022, related to the presentation of proceeds from and repayments of borrowings associated with a modification of the Company's revolving credit facility on March 25, 2022. The correction did not have any impact on the previously reported consolidated balance sheets, statements of income, or statements of comprehensive income foff r any of the impacted periods, nor did it have any impact on total cash flows from operating activities, or used in investing or financing activities foff r any of the impacted periods. Although the Company has determined that the item did not have a material impact on its previously issued consolidated financial statements, the Company will revise its 2022 quarterly financial statements in conjunction with the issuance of its quarterly filings on Form 10-Q foff r the thirteen, twenty-six, and thirty-nine week periods ended April 2, 2023, July 2, 2023, and October 1, 2023, respectively. The revised quarterly financial statements will reflect the proceeds from borrowings under the revolving credit facility of $62.5 million as a cash inflow from financing activities and the repayments of borrowings under the revolving credit facility of $62.5 million as a cash outflow from financing activities. 28. Subsequent Events In February 2023, the Company's board of directors approved the closing of 11 stores. The closure of these stores will result in an estimated charge in the range of $30 million to $40 million in total, the maja ority of which will relate to the impairment of leasehold improvements and right-of-ff use assets and will be reflected in the Company's consolidated financial statements foff r the first quarter of fiscal 2023. Other associated costs including accelerated depreciation, severance and exit costs are included in that estimate and will be primarily recognized in the first half of fiscal 2023. See Note 13, “Long-Term Debt and Finance Lease Liabilities” and Note 20, “Capital Stock" foff r infoff rmation on additional subsequent events. 97 Item 9. Changes InII and Disii agrerr ementstt wiww thtt Accountatt ntstt on Accountitt nii g and FiFF nii anciaii l Disii closurerr None. Item 9A. Contrtt orr lsll and PrP orr cedurerr s Evavv luatitt on of Disii closurerr Contrtt orr lsll and PrP orr cedurerr s 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 infoff rmation 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 foff rms of the SEC, and is accumulated and communicated to our management, including our Chief Executive Offff icer (our principal executive offff icer) and our Chief Financial Offff icer (our principal financial offff icer), as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Offff icer and Chief Financial Offff icer, has evaluated the effff ectiveness of our disclosure controls and procedures under the Exchange Act as of January 1, 2023, the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, our Chief Executive Offff icer and Chief Financial Offff icer concluded that, as of January 1, 2023, our disclosure controls and procedures were effff ective. Management’s’ Annual Repe ortrr on InII ternrr al Contrtt orr l Ovevv r FiFF nii anciaii l Repe ortrr itt nii g Our management is responsible foff r 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 foff r 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, projo ections of any evaluation of effff ectiveness to future periods are subjb ect 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 supervirr sion and with the participation of our management, including our Chief Executive Offff icer and Chief Financial Offff icer, we assessed the effff ectiveness of our internal control over financial reporting as of January 1, 2023, using the criteria set foff rth 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 effff ective as of January 1, 2023. PricewaterhouseCoopers LLP, our independent registered public accounting firm, assessed the effff ectiveness of our internal control over financial reporting as of January 1, 2023, 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 inii InII ternrr al Contrtt orr l Ovevv r FiFF nii anciaii l Repe ortrr itt nii g There were no changes in our internal control over financial reporting that occurred during the quarterly period ended January 1, 2023 that have materially affff ected, or are reasonably likely to materially affff ect, our internal control over financial reporting. 98 Item 9B. Othtt er InII foff rmrr atitt on Second Amended and Restatt ted Bylawsww On February 28, 2023, our board adopted and approved the second amended and restated bylaws (the “Bylaws”), effff ective February 28, 2023, to: • • • • • • Require any stockholder delivering a director nomination notice to comply with Rule 14a-19(a) under the Exchange Act, certifyff that such stockholder has met the requirements of Rule 14a- 19(a) and deliver reasonable evidence of such compliance to the Company; Require that the infoff rmation provided in any director nomination notice or notice foff r any other business be updated and supplemented, if necessary, to be true and correct as of (i) the record date of the stockholder meeting and (ii) the date that is ten business days prior to the date of the stockholder meeting; Require stockholders nominating director candidates and any proposed nominee, or stockholders proposing other business, to furnish any additional infoff rmation as may be reasonably required foff r the Board’s review within ten business days aftff er it has been requested by the Board; that, if aftff er a stockholder delivers a director nomination notice, such stockholder Clarifyff subsequently fails either (i) to comply with the requirements of Rule 14a-19 or (ii) provide satisfactory evidence of compliance to the Company, then such stockholder’s nomination(s) will be deemed null and void; Require that a stockholder directly or indirectly soliciting proxies from other stockholders use a proxy card color other than white; and Reflect updates to requirements about adjournment procedures and stockholder lists at stockholder meetings, consistent with recent amendments to the Delaware General Corporation Law. The foff regoing description of the Bylaws does not purport to be complete and is qualified in its entirety by reference to the complete text of the Bylaws, filed as Exhibit 3.2 to this Annual Report on Form 10-K and incorporated herein by reference. Annual Bonus PlPP an On February 28, 2023, the Compensation Committee of our board (the “Compensation Committee”) approved the Sprouts Farmers Market, Inc. Annual Bonus Plan (the “Cash Plan”). The Cash Plan provides a means of rewarding employees designated as Participants with cash awards based on the perfrr off rmance of the Company and, where appropriate, a Participant’s personal perfrr off rmance (“Awards”). A copy of the Cash Plan is being filed as Exhibit 10.12 to this Annual Report on Form 10-K, and the foff without definition have the meanings set out in the Cash Plan. llowing summary is qualified in its entirety by the provisions of the Cash Plan. Capitalized terms used 99 The Cash Plan shall be administered by, foff r each Participant that is an executive offff icer, the Compensation Committee, and foff r other Participants, the Chief Executive Offff icer of the Company or other executive designated by the Chief Executive Offff icer (the “Administrator”). The Administrator shall determine the Participants foff r each Perfrr off rmance Period, each Participant’s Target AwA ard and the applicable Perfrr off rmance Goals. Perfrr off rmance Periods under the Cash Plan shall be the fiscal year of the Company or any other period designated by the Administrator with respect to which an Award may be earned. For any Perfrr off rmance Period, the Perfrr off rmance Goals selected by the Administrator may be goals of the Company or the Participant, measured either individually, alternatively or in any combination, and measured on an absolute basis or relative to one or more peer companies or indices or any combination thereof. The criteria foff r the Perfrr off rmance Goals may include one or more of the criteria included in the Cash Plan or such other criteria selected by the Administrator. A Participant will be eligible to earn an Award foff r a Perfrr off rmance Period based on his or her Target AwA ard and the level of achievement of the Perfrr off rmance Goals; provided that the Administrator may increase or decrease the amount payable pursuant to an Award in its sole discretion. The Administrator shall determine achievement of the Perfrr off rmance Goals and the Award, if any, that will be paid by the Company to each Participant, as soon as practicable foff determination of the Company’s financial results foff r the relevant Perfrr off rmance Period. Payment of the Awards determined by the Administrator shall be made in or around March of the calendar year immediately foff llowing the last day of the relevant Perfrr off rmance Period. The Administrator may permit a Participant to defer receipt of an AwA ard, consistent with the applicable requirements of Section 409A of the Code. No Participant shall have any right to receive payment of an Award under the Cash Plan foff r a Perfrr off rmance Period unless the Participant remains in the employ of the Company through the payment ise determined by the Administrator. date foff r the Award unless otherwrr llowing the final The Cash Plan is an unfunded incentive compensation plan and has no set expiration date. The Compensation Committee may amend or terminate the Cash Plan at any time. Item 9C. Disii closurerr Regardrr idd nii g FoFF rerr igi n Jurirr sii didd ctitt ons thtt at PrP err vevv nt InII sps ectitt on Not Applicable. 100 PART III Item 10. Dirii err ctorsrr , ExEE ecutitt vevv Offff iff cersrr and Corprr orarr te Govevv rnrr ance The infoff rmation required by this item will be contained in our definitive Proxy Statement to be filed with the SEC in connection with our 2023 Annual Meeting of Stockholders (referred to as the “Proxy Statement”), which is expected to be filed not later than 120 days aftff er the end of our fiscal year ended January 1, 2023, and is incorporated herein by reference. We have adopted a Code of Ethics – Principal Executive Offff icer and Senior Financial Offff icers (referred to as the “Code”) that applies to our principal executive offff icer, principal financial offff icer and principal accounting offff icer and controller. The Code is publicly available on our website at .// httptt s:/:: /// i// nii vestors.rr sprorr uts.tt com/mm e// sg/gg g// overnrr ance-documents/tt We will provide disclosure of future updates, amendments or waivers from the Code by posting them to our investor relations website located at inii vestors.rr sprorr uts.t com. The infoff rmation contained on or accessible through our website is not incorporated by reference into this Annual Report on Form 10-K. Item 11. ExEE ecutitt vevv Compensatitt on The infoff rmation required by this Item will be set foff rth in the Proxy Statement and is incorporated herein by reference. Item 12. Securirr tyt Ownww ersrr hipii of Certrr att inii Benefiff ciaii Stockhkk oldedd r Mattersrr l Ownww ersrr and Management and Relall ted The infoff rmation required by this Item will be set foff rth in the Proxy Statement and is incorporated herein by reference. Item 13. Certrr att inii Relall titt onshipii s and Relall ted TrTT arr nsactitt ons, and Dirii err ctor InII depe ended nce The infoff rmation required by this Item will be set foff rth in the Proxy Statement and is incorporated herein by reference. Item 14. PrP irr nii cipii al Accountatt nt FeFF es and Servrr ivv ces The infoff rmation required by this Item will be set foff rth in the Proxy Statement and is incorporated herein by reference. Item 15. ExEE hxx ibii itstt and FiFF nii anciaii l Statt tement Schedules (a) Documents filed as part of this report: PART IV 1. 2. 3. Financial Statements: The infoff rmation 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. 101 (b) Exhibits: Exhibit Number Descriptionp 2.1 3.1 3.2 4.1 Plan of Conversion of Sprouts Farmers Markets, LLC (1) Certificate of Incorporation of Sprouts Farmers Market, Inc. (1) Second Amended and Restated Bylaws of Sprouts Farmers Market, Inc. Description of Sprouts Farmers Market, Inc. Securities 10.1* Sprouts Farmers Market, Inc. 2013 Incentive Plan, amended as of May 1, 2015 (2) 10.1.1* Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (3) 10.1.2(a)* Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (3) 10.1.2(b)* 2019 Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan foff r Chief Executive Offff icer (4) 10.1.2(c)* 2021 Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan foff r Chief Financial Offff icer (5) 10.1.2(d)* 2022 Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan foff r President and Chief Operating Offff icer (6) 10.1.3(a)* 2018 Form of Perfrr off rmance Share Award Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (7) 10.1.3(b)* 2019 Form of Perfrr off rmance Share Award Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (8) 10.1.3(c)* 2019 Form of Perfrr off rmance Share Award Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan foff r Chief Executive Offff icer (4) 10.1.3(d)* 2020 Form of Perfrr off rmance Share Award Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (9) 10.1.3(e)* 2021 Form of Perfrr off rmance Share Award Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (10) 10.1.3(f)* 2022 Form of Perfrr off rmance Share Award Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (11) 10.1.4* 10.2* 10.2.1* 10.3† 10.4* Form Notice of Amendment to Outstanding AwA ards granted under the Sprouts Farmers Market, Inc. 2013 Incentive Plan (12) Offff er Letter, dated August 31, 2021, from Sprouts Farmers Market, Inc. to Lawrence “Chip” Molloy (13) Severance Agreement, dated September 19, 2021, by and between Sprouts Farmers Market, Inc. and Lawrence “Chip” Molloy (5) Distribution Agreement, dated as of July 18, 2018, by and between SFM, LLC dba Sprouts Farmers Market and KeHE Distributors, LLC (14) Form of Indemnification Agreement by and between Sprouts Farmers Market, Inc. and its directors and offff icers (15) 102 10.5 10.6* 10.7* 10.8† 10.9* 10.10* 10.10.1* Credit Agreement, dated as of March 25, 2022, among Sprouts Farmers Market, Inc., Sprouts Farmers Markets Holdings, LLC, the lenders named therein, Bank of America, N.A., as administrative agent, issuing bank and swingline lender, JPMorgan Chase Bank, N.A., as sustainability structuring agent, BMO Capital Markets Corp., JPMorgan Chase Bank, N.A. and Wells Fargo Securities, LLC as syndication agents, Truist Bank and PNC Bank, N.A. as documentation agents, and BofAff Securities, Inc., BMO Capital Markets Corp., JPMorgan Chase Bank, N.A. and Wells Fargo Securities, LLC as joint bookrunners and joint lead arrangers (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) Offff er Letter from Sprouts Farmers Market, Inc., to Nicholas Konat, dated January 25, 2022 (6) Letter Agreement between Sprouts Farmers Market, Inc. and Gil Phipps, dated February 18, 2022 (6) Letter Agreement, dated May 25, 2022, by and between Sprouts Farmers Market and Gil Phipps (12) 10.11* Sprouts Farmers Market, Inc. 2022 Omnibus Incentive Compensation Plan (12) 10.11.1(a)* Form of Restricted Stock Unit Agreement under the Sprouts Farmers Market, Inc. 2022 Omnibus Incentive Compensation Plan (12) 10.11.1(b)* Form of Restricted Stock Unit Agreement under the Sprouts Farmers Market, Inc. 2022 Omnibus Incentive Compensation Plan foff r Board of Directors 10.11.2* 2022 Form of Perfrr off rmance Share Award Agreement under the Sprouts Farmers Market, Inc. 2022 Omnibus Incentive Compensation Plan (12) 10.11.13* Form of Stock Option AwA ard Agreement under the Sprouts Farmers Market, Inc. 2022 Omnibus Incentive Compensation Plan(12) 10.12* Sprouts Farmers Market, Inc. Annual Bonus Plan 21.1 23.1 31.1 31.2 32.1 32.2 List of subsidiaries Consent of PricewaterhouseCoopers LLP, independent registered accounting firm Certification of Chief Executive Offff icer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Offff icer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Executive Offff icer 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 Offff icer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 103 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) † Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request foff r confidential treatment previously submitted separately to the SEC. * Management contract or compensatory plan or arrangement. (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 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 Current Report on Form 8-K filed with the SEC on February 24, 2022, 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. 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. (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 6, 2021, 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 4, 2022, 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 May 27, 2022, and incorporated herein by reference. (13) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on August 31, 2021, and incorporated herein by reference. (14) 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. (15) 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. (16) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on March 25, 2022, 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. FoFF rmrr 10-K Summaryr None. 104 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: March 2, 2023 SPROUTS FARMERS MARKET, INC. /s/// Lawrww err nce P. Mollll oy By: Name: Lawrence P. Molloy Title: Chief Financial Offff icer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the foff llowing persons on behalf of the registrant and in the capacities and on the dates indicated. Signature /s/// Jack L. Sinii clairii Jack L. Sinclair /s/// Lawrww err nce P. Mollll oy Lawrence P. Molloy /s/// Stacy W.WW Hilii gl endorfrr Stacy W. Hilgendorfrr Title Director and Chief Executive Offff icer (Principal Executive Offff icer) Chief Financial Offff icer (Principal Financial Offff icer) Vice President, Controller (Principal Accounting Offff icer) Date March 2, 2023 March 2, 2023 March 2, 2023 /s/// Joseph FoFF rtrr unato Chairman of the Board March 2, 2023 Joseph Fortunato /s/// Joel D. Andersorr n Director March 2, 2023 Joel D. Anderson /s/// Harirr K.KK Avula Hari K. Avula /s/// KrKK irr stii en E. Blum Kristen E. Blum Director Director March 2, 2023 March 2, 2023 /s/// TeTT rrrr irr Funk Grarr ham Director March 2, 2023 Terri Funk Graham /s/// Joseph D. O’L’ earyr Director March 2, 2023 Joseph D. O’Leary /s/// Douglas G. Rauch Director March 2, 2023 Douglas G. Rauch 105 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] ABOUT SPROUTS OUR EXECUTIVE TEAM Jack Sinclair Chief Executive Officer OUR BOARD Joseph Fortunato, Chairman of the Board; Operating Partner,rr Prospect Hills Growth Partners, L.P.;PP Former Chairman and Chief Executive Officer,rr GNC Holdings, Inc. Nick Konat President and Chief Operating Officer Joel Anderson, President, Chief Executive Officer and Director of Five Below,ww Inc. Lawaa rence “Chip” Molloy Chief Financial Officer Scott Neal Chief Merchandising Officer Dan Sanders Chief Store Operations Officer Davaa e McGlinchey Chief Strategy Officer Brandon Lombardi Chief Legal Officer Alisa Gmelich SVP,PP Chief Marketing Officer Hari AvAA ula, Former Executive Vice President and Chief Financial & Strategy Officer,rr Clif Bar & Companynn Kristen Blum, Former Senior Vice President and Chief Informa PepsiCo, Inc.-Latin America ff tion Officer,rr Funk Graham, Branding Strategy Consultant; Former Senior Vice President Terri TT and Chief Marketing Officer,rr Jack in the Box, Inc. Joseph O’Leary,yy Former President and Chief Operating Officer,rr PetSmart, Inc. Doug Rauch, President, Daily TaTT ble; Former President, Trader Joe’s Companynn Jack Sinclair, Chief Executive Officer,rr Sprouts Farmers Market, Inc. VIRTURR ALUU ANNUALUU MEETING Mayaa 24, 2023 - 8 a.m. PDT Via webcast at www.wwv. irtualshareholdermeetingg.com//SFM2023 STOCK LISTING NASDAQ Global Select Market: SFM TRANSFER AGENT American Stock Transferff & Trust Co. Shareholder Services: 800-937-5449 astfinancial.com INDEPENDENT AUDIT PricewaterhouseCoopers LLP AA OR INVESTOR RELATION S invnn estorrelations@sprouts.com AA SUPPORTRR OFFICE 5455 E. High Street, Suite 111, Phoenix, AZ 85054 480-814-8016 This Annual Report contains “forwff tual results, levels of activity,yy performff titled “Special Note Regarding Forward-Looking Statements” included in the Annual Report on Form 10-K included herewith. ard-looking statements” that reflect our current views about future events and invnn olve known risks, uncertainties, and other faff ctors that mayaa cause our ac- ation, see the section ance, or achievement to be materially differffff ent frff om those expressed or implied by the foff rward-looking statements. For more informff 

Continue reading text version or see original annual report in PDF format above