Sprouts Farmers Market

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

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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

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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

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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