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Section 1: 10-Q (10-Q)

sfm-10q_20190929.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 29, 2019

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

32-0331600

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

5455 East High Street, Suite 111

Phoenix, Arizona 85054

(Address of principal executive offices and zip code)

(480) 814-8016

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

Name of Each Exchange on Which Registered

 

Common Stock, $0.001 par value

SFM

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No

As of October 28, 2019, the registrant had 118,138,870 shares of common stock, $0.001 par value per share, outstanding.

 

 


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2019

TABLE OF CONTENTS

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements.

4

 

 

 

 

Consolidated Balance Sheets as of September 29, 2019 (unaudited) and December 30, 2018

4

 

 

 

 

Consolidated Statements of Income for the thirteen and thirty-nine weeks ended September 29, 2019 and September 30, 2018 (unaudited)

5

 

 

 

 

Consolidated Statements of Comprehensive Income for the thirteen and thirty-nine weeks ended September 29, 2019 and September 30, 2018 (unaudited)

6

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the thirteen and thirty-nine weeks ended September 29, 2019 and September 30, 2018 (unaudited)

7

 

 

 

 

Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 29, 2019 and September 30, 2018 (unaudited)

9

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

10

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

27

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

41

 

 

Item 4. Controls and Procedures.

42

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings.

43

 

 

Item 1A. Risk Factors.

44

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

44

 

 

Item 6. Exhibits.

45

 

 

Signatures

46

 

 


Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the “Exchange Act”), including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses, and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, and our other filings with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the “Company,” “Sprouts,” “Sprouts Farmers Market,” “we,” “us” and “our” refer to Sprouts Farmers Market, Inc. and, where appropriate, its subsidiaries.

 

 

 


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

 

 

September 29,

2019

 

 

December 30,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

79,912

 

 

$

1,588

 

Accounts receivable, net

 

 

14,212

 

 

 

40,564

 

Inventories

 

 

285,715

 

 

 

264,366

 

Prepaid expenses and other current assets

 

 

32,111

 

 

 

27,323

 

Total current assets

 

 

411,950

 

 

 

333,841

 

Property and equipment, net of accumulated depreciation

 

 

742,235

 

 

 

766,429

 

Operating lease assets

 

 

1,045,144

 

 

 

 

Intangible assets, net of accumulated amortization

 

 

185,440

 

 

 

194,803

 

Goodwill

 

 

368,078

 

 

 

368,078

 

Other assets

 

 

12,020

 

 

 

12,463

 

Total assets

 

$

2,764,867

 

 

$

1,675,614

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

184,893

 

 

$

120,266

 

Accrued liabilities

 

 

158,010

 

 

 

133,703

 

Accrued salaries and benefits

 

 

44,229

 

 

 

48,603

 

Current portion of capital and financing lease obligations

 

 

 

 

 

7,428

 

Current portion of operating lease liabilities

 

 

84,356

 

 

 

 

Current portion of finance lease liabilities

 

 

628

 

 

 

 

Total current liabilities

 

 

472,116

 

 

 

310,000

 

Long-term capital and financing lease obligations

 

 

 

 

 

119,642

 

Long-term operating lease liabilities

 

 

1,107,872

 

 

 

 

Long-term debt and finance lease liabilities

 

 

526,699

 

 

 

453,000

 

Other long-term liabilities

 

 

43,932

 

 

 

153,377

 

Deferred income tax liability

 

 

54,327

 

 

 

50,399

 

Total liabilities

 

 

2,204,946

 

 

 

1,086,418

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Undesignated preferred stock; $0.001 par value; 10,000,000 shares

   authorized, no shares issued and outstanding

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized,

   118,138,870 shares issued and outstanding, September 29, 2019;

   124,975,691 shares issued and outstanding, December 30, 2018

 

 

118

 

 

 

124

 

Additional paid-in capital

 

 

668,522

 

 

 

657,140

 

Accumulated other comprehensive income (loss)

 

 

(5,635

)

 

 

1,134

 

Accumulated deficit

 

 

(103,084

)

 

 

(69,202

)

Total stockholders’ equity

 

 

559,921

 

 

 

589,196

 

Total liabilities and stockholders’ equity

 

$

2,764,867

 

 

$

1,675,614

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.  

4


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

 

 

Thirteen weeks ended

 

 

Thirty-nine weeks ended

 

 

 

September 29,

2019

 

 

September 30,

2018 (1)

 

 

September 29,

2019

 

 

September 30,

2018 (1)

 

Net sales

 

$

1,440,222

 

 

$

1,329,109

 

 

$

4,269,844

 

 

$

3,937,998

 

Cost of sales

 

 

963,497

 

 

 

885,693

 

 

 

2,843,989

 

 

 

2,611,492

 

Gross profit

 

 

476,725

 

 

 

443,416

 

 

 

1,425,855

 

 

 

1,326,506

 

Selling, general and administrative expenses

 

 

404,285

 

 

 

362,584

 

 

 

1,162,226

 

 

 

1,051,771

 

Depreciation and amortization (exclusive of

   depreciation included in cost of sales)

 

 

30,764

 

 

 

27,593

 

 

 

89,788

 

 

 

80,079

 

Store closure and other costs

 

 

2,119

 

 

 

461

 

 

 

3,396

 

 

 

497

 

Income from operations

 

 

39,557

 

 

 

52,778

 

 

 

170,445

 

 

 

194,159

 

Interest expense, net

 

 

(5,557

)

 

 

(7,411

)

 

 

(15,997

)

 

 

(20,015

)

Other income

 

 

 

 

 

 

 

 

 

 

 

320

 

Income before income taxes

 

 

34,000

 

 

 

45,367

 

 

 

154,448

 

 

 

174,464

 

Income tax provision

 

 

(7,740

)

 

 

(7,867

)

 

 

(36,453

)

 

 

(28,631

)

Net income

 

$

26,260

 

 

$

37,500

 

 

$

117,995

 

 

$

145,833

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

 

$

0.30

 

 

$

0.98

 

 

$

1.13

 

Diluted

 

$

0.22

 

 

$

0.29

 

 

$

0.98

 

 

$

1.12

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

118,029

 

 

 

126,855

 

 

 

119,846

 

 

 

129,572

 

Diluted

 

 

118,174

 

 

 

127,627

 

 

 

120,227

 

 

 

130,537

 

 

(1)

Effective in the fourth quarter of fiscal year 2018, the Company made a voluntary change in accounting principle to change the classification of certain expenses on its consolidated statements of income. The change was applied retrospectively to all periods presented. See Note 2, “Summary of Significant Accounting Policies” for further information.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.


5


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN THOUSANDS)

 

 

 

Thirteen weeks ended

 

 

Thirty-nine weeks ended

 

 

 

September 29,

2019

 

 

September 30,

2018

 

 

September 29,

2019

 

 

September 30,

2018

 

Net income

 

$

26,260

 

 

$

37,500

 

 

$

117,995

 

 

$

145,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on cash flow hedging

   activities, net of income tax of ($365),

   $299, ($2,341), and $1,851

 

 

(1,056

)

 

 

865

 

 

 

(6,769

)

 

 

5,351

 

Total other comprehensive income (loss)

 

$

(1,056

)

 

 

865

 

 

$

(6,769

)

 

 

5,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

25,204

 

 

$

38,365

 

 

$

111,226

 

 

$

151,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

6


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

 

For the thirteen and thirty-nine weeks ended September 29, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

Stock

 

 

Additional

Paid In

Capital

 

 

(Accumulated

Deficit)

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Stockholders’

Equity

 

Balances at June 30, 2019

 

 

118,022,271

 

 

$

118

 

 

$

665,454

 

 

$

(129,344

)

 

$

(4,579

)

 

$

531,649

 

Net income

 

 

 

 

 

 

 

 

 

 

 

26,260

 

 

 

 

 

 

26,260

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,056

)

 

 

(1,056

)

Issuance of shares under stock plans

 

 

25,849

 

 

 

 

 

 

358

 

 

 

 

 

 

 

 

 

358

 

Repurchase and retirement of common

   stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

2,710

 

 

 

 

 

 

 

 

 

2,710

 

Balances at September 29, 2019

 

 

118,048,120

 

 

$

118

 

 

$

668,522

 

 

$

(103,084

)

 

$

(5,635

)

 

 

559,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

Stock

 

 

Additional

Paid In

Capital

 

 

(Accumulated

Deficit)

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Stockholders’

Equity

 

Balances at December 30, 2018

 

 

124,581,190

 

 

$

124

 

 

$

657,140

 

 

$

(69,202

)

 

$

1,134

 

 

$

589,196

 

Net income

 

 

 

 

 

 

 

 

 

 

 

117,995

 

 

 

 

 

 

117,995

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,769

)

 

 

(6,769

)

Issuance of shares under stock plans

 

 

769,808

 

 

 

1

 

 

 

4,481

 

 

 

 

 

 

 

 

 

4,482

 

Repurchase and retirement of common

   stock

 

 

(7,302,878

)

 

 

(7

)

 

 

 

 

 

(163,303

)

 

 

 

 

 

(163,310

)

Share-based compensation

 

 

 

 

 

 

 

 

6,901

 

 

 

 

 

 

 

 

 

6,901

 

Impact of adoption of ASC 842 related

   to leases

 

 

 

 

 

 

 

 

 

 

 

11,426

 

 

 

 

 

 

11,426

 

Balances at September 29, 2019

 

 

118,048,120

 

 

$

118

 

 

$

668,522

 

 

$

(103,084

)

 

$

(5,635

)

 

 

559,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

 

For the thirteen and thirty-nine weeks ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

Stock

 

 

Additional

Paid In

Capital

 

 

(Accumulated

Deficit)

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Stockholders’

Equity

 

Balances at July 1, 2018

 

 

127,156,251

 

 

$

126

 

 

$

636,445

 

 

$

(39,101

)

 

$

3,702

 

 

$

601,172

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

37,500

 

 

 

 

 

 

37,500

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

865

 

 

 

865

 

Issuance of shares under stock plans

 

 

772,088

 

 

 

1

 

 

 

14,021

 

 

 

 

 

 

 

 

 

14,022

 

Repurchase and retirement of common

   stock

 

 

(719,004

)

 

 

 

 

 

 

 

 

(15,307

)

 

 

 

 

 

(15,307

)

Share-based compensation

 

 

 

 

 

 

 

 

3,043

 

 

 

 

 

 

 

 

 

3,043

 

Balances at September 30, 2018

 

 

127,209,335

 

 

$

127

 

 

$

653,509

 

 

$

(16,908

)

 

$

4,567

 

 

$

641,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

Stock

 

 

Additional

Paid In

Capital

 

 

(Accumulated

Deficit)

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Stockholders’

Equity

 

Balances at December 31, 2017

 

 

132,450,092

 

 

$

132

 

 

$

620,788

 

 

$

30,558

 

 

$

(784

)

 

$

650,694

 

Net income

 

 

 

 

 

 

 

 

 

 

 

145,833

 

 

 

 

 

 

145,833

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,351

 

 

 

5,351

 

Issuance of shares under stock plans

 

 

3,170,818

 

 

 

3

 

 

 

21,048

 

 

 

 

 

 

 

 

 

21,051

 

Repurchase and retirement of common

   stock

 

 

(8,411,575

)

 

 

(8

)

 

 

 

 

 

(193,299

)

 

 

 

 

 

(193,307

)

Share-based compensation

 

 

 

 

 

 

 

 

11,673

 

 

 

 

 

 

 

 

 

11,673

 

Balances at September 30, 2018

 

 

127,209,335

 

 

$

127

 

 

$

653,509

 

 

$

(16,908

)

 

$

4,567

 

 

$

641,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

8


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

 

 

Thirty-nine weeks ended

 

 

 

September 29,

2019

 

 

September 30,

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

117,995

 

 

$

145,833

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

91,546

 

 

 

81,959

 

Operating lease asset amortization

 

 

62,251

 

 

 

 

Store closure and other costs

 

 

850

 

 

 

 

Share-based compensation

 

 

6,901

 

 

 

11,673

 

Deferred income taxes

 

 

(245

)

 

 

29,773

 

Other non-cash items

 

 

(2,873

)

 

 

1,281

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

28,978

 

 

 

(10,299

)

Inventories

 

 

(21,348

)

 

 

(23,503

)

Prepaid expenses and other current assets

 

 

(2,379

)

 

 

(13,758

)

Other assets

 

 

(762

)

 

 

(3,945

)

Accounts payable and other accrued liabilities

 

 

100,674

 

 

 

3,240

 

Accrued salaries and benefits

 

 

(4,054

)

 

 

(2,130

)

Operating lease liabilities

 

 

(52,209

)

 

 

 

Other long-term liabilities

 

 

(2,013

)

 

 

15,342

 

Cash flows from operating activities

 

 

323,312

 

 

 

235,466

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(146,480

)

 

 

(148,432

)

Cash flows used in investing activities

 

 

(146,480

)

 

 

(148,432

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from revolving credit facilities