UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 1, 20172, 2022
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 |
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
5455 East High Street, Suite 111
Phoenix, Arizona85054
(Address of principal executive offices and zip code)
(480) (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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 | ☐ | ||
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Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||
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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 31, 2017,November 4, 2022, the registrant had 133,070,570105,852,470 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 OCTOBER 1, 20172, 2022
TABLE OF CONTENTS
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| Consolidated Balance Sheets as of October |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk. |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. |
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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 January 1, 2017,2, 2022, 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“Sprouts Farmers Market,” “we,” “us” and “our” refer to Sprouts Farmers Market, Inc. and, where appropriate, its subsidiaries.
PART I - FINANCIALFINANCIAL INFORMATION
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
|
| October 1, 2017 |
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| January 1, 2017 |
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| (Unaudited) |
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| October 2, 2022 |
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| January 2, 2022 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 18,892 |
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| $ | 12,465 |
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| $ | 316,042 |
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| $ | 245,287 |
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Accounts receivable, net |
|
| 23,231 |
|
|
| 25,228 |
|
|
| 11,455 |
|
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| 21,574 |
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Inventories |
|
| 222,216 |
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| 204,464 |
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| 301,667 |
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| 265,387 |
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Prepaid expenses and other current assets |
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| 25,594 |
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| 21,869 |
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| 43,867 |
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| 35,468 |
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Total current assets |
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| 289,933 |
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| 264,026 |
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| 673,031 |
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| 567,716 |
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Property and equipment, net of accumulated depreciation |
|
| 690,763 |
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| 604,660 |
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| 694,098 |
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| 716,029 |
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Operating lease assets, net |
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| 1,081,514 |
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| 1,072,019 |
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Intangible assets, net of accumulated amortization |
|
| 196,556 |
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| 197,608 |
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| 184,960 |
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| 184,960 |
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Goodwill |
|
| 368,078 |
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| 368,078 |
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| 368,878 |
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| 368,878 |
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Other assets |
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| 5,886 |
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| 5,521 |
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| 15,036 |
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| 13,513 |
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Total assets |
| $ | 1,551,216 |
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| $ | 1,439,893 |
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| $ | 3,017,517 |
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| $ | 2,923,115 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
| $ | 179,482 |
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| $ | 157,550 |
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| $ | 166,968 |
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| $ | 145,901 |
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Accrued liabilities |
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| 144,935 |
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| 155,996 |
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Accrued salaries and benefits |
|
| 41,219 |
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| 32,859 |
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| 53,875 |
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| 58,743 |
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Other accrued liabilities |
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| 60,683 |
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| 56,376 |
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Current portion of capital and financing lease obligations |
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| 8,776 |
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| 12,370 |
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Current portion of operating lease liabilities |
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| 158,219 |
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| 151,755 |
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Current portion of finance lease liabilities |
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| 1,141 |
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| 1,078 |
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Total current liabilities |
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| 290,160 |
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| 259,155 |
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| 525,138 |
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| 513,473 |
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Long-term capital and financing lease obligations |
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| 126,806 |
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| 117,366 |
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Long-term debt |
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| 349,000 |
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| 255,000 |
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Long-term operating lease liabilities |
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| 1,095,154 |
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| 1,095,909 |
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Long-term debt and finance lease liabilities |
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| 258,992 |
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| 259,656 |
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Other long-term liabilities |
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| 126,127 |
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| 116,200 |
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| 38,486 |
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| 36,306 |
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Deferred income tax liability |
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| 42,508 |
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| 19,263 |
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| 58,919 |
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| 57,895 |
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Total liabilities |
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| 934,601 |
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| 766,984 |
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| 1,976,689 |
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| 1,963,239 |
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Commitments and contingencies (Note 8) |
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Commitments and contingencies (Note 7) |
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Stockholders’ equity: |
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Undesignated preferred stock; $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding |
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| — |
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| — |
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Common stock, $0.001 par value; 200,000,000 shares authorized, 133,070,570 and 140,256,313 shares issued and outstanding, October 1, 2017 and January 1, 2017, respectively |
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| 133 |
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| 140 |
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Undesignated preferred stock; $0.001 par value; 10,000,000 shares |
|
| — |
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| — |
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Common stock, $0.001 par value; 200,000,000 shares authorized, |
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| 106 |
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| 111 |
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Additional paid-in capital |
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| 614,232 |
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| 597,269 |
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| 720,447 |
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| 704,701 |
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Accumulated other comprehensive income (loss) |
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| 498 |
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| (3,758 | ) | ||||||||
Retained earnings |
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| 2,250 |
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| 75,500 |
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| 319,777 |
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| 258,822 |
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Total stockholders’ equity |
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| 616,615 |
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| 672,909 |
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| 1,040,828 |
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| 959,876 |
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Total liabilities and stockholders’ equity |
| $ | 1,551,216 |
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| $ | 1,439,893 |
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| $ | 3,017,517 |
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| $ | 2,923,115 |
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The accompanying notes are an integral part of these consolidated financial statements.
14
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
| Thirteen Weeks Ended |
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| Thirty-nine Weeks Ended |
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| Thirteen weeks ended |
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| Thirty-nine weeks ended |
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| October 1, 2017 |
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| October 2, 2016 |
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| October 1, 2017 |
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| October 2, 2016 |
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| October 2, 2022 |
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| October 3, 2021 |
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| October 2, 2022 |
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| October 3, 2021 |
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Net sales |
| $ | 1,206,059 |
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| $ | 1,035,801 |
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| $ | 3,520,679 |
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| $ | 3,060,685 |
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| $ | 1,591,026 |
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| $ | 1,509,633 |
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| $ | 4,827,669 |
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| $ | 4,607,073 |
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Cost of sales, buying and occupancy |
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| 859,650 |
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| 744,288 |
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| 2,494,998 |
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| 2,156,857 |
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Cost of sales |
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| 1,007,376 |
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| 969,904 |
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| 3,051,914 |
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| 2,931,089 |
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Gross profit |
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| 346,409 |
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| 291,513 |
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| 1,025,681 |
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| 903,828 |
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| 583,650 |
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| 539,729 |
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| 1,775,755 |
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| 1,675,984 |
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Direct store expenses |
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| 250,191 |
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| 216,932 |
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| 715,336 |
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| 617,817 |
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Selling, general and administrative expenses |
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| 39,955 |
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| 29,664 |
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| 110,312 |
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| 91,482 |
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| 460,834 |
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| 423,416 |
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| 1,382,854 |
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| 1,299,498 |
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Store pre-opening costs |
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| 2,456 |
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| 3,446 |
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| 10,055 |
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| 11,625 |
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Store closure and other costs |
|
| 803 |
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| 24 |
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| 992 |
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| 159 |
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Depreciation and amortization (exclusive |
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| 30,313 |
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| 30,377 |
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| 93,377 |
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| 92,036 |
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Store closure and other costs, net |
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| 2,164 |
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|
| 128 |
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| 3,034 |
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| 1,757 |
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Income from operations |
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| 53,004 |
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| 41,447 |
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| 188,986 |
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| 182,745 |
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| 90,339 |
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| 85,808 |
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| 296,490 |
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| 282,693 |
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Interest expense |
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| (5,609 | ) |
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| (3,723 | ) |
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| (15,447 | ) |
|
| (10,985 | ) | ||||||||||||||||
Other income |
|
| 162 |
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|
| 135 |
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|
| 388 |
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| 326 |
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Interest expense, net |
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| 1,951 |
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| 2,911 |
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| 7,648 |
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| 8,840 |
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Income before income taxes |
|
| 47,557 |
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| 37,859 |
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| 173,927 |
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| 172,086 |
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| 88,388 |
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| 82,897 |
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| 288,842 |
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|
| 273,853 |
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Income tax provision |
|
| (16,071 | ) |
|
| (13,974 | ) |
|
| (55,186 | ) |
|
| (64,785 | ) |
|
| 22,648 |
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|
| 19,030 |
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|
| 72,798 |
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|
| 65,924 |
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Net income |
| $ | 31,486 |
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| $ | 23,885 |
|
| $ | 118,741 |
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| $ | 107,301 |
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| $ | 65,740 |
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| $ | 63,867 |
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| $ | 216,044 |
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| $ | 207,929 |
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Net income per share: |
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Basic |
| $ | 0.23 |
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| $ | 0.16 |
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| $ | 0.87 |
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| $ | 0.72 |
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| $ | 0.61 |
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| $ | 0.56 |
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| $ | 1.98 |
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| $ | 1.78 |
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Diluted |
| $ | 0.23 |
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| $ | 0.16 |
|
| $ | 0.86 |
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| $ | 0.71 |
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| $ | 0.61 |
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| $ | 0.56 |
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| $ | 1.97 |
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| $ | 1.77 |
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Weighted average shares outstanding: |
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Basic |
|
| 134,320 |
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|
| 147,743 |
|
|
| 136,063 |
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|
| 149,202 |
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|
| 107,229 |
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|
| 114,201 |
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|
| 109,066 |
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|
| 116,497 |
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Diluted |
|
| 136,770 |
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|
| 150,024 |
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|
| 138,860 |
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|
| 151,568 |
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|
| 108,095 |
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|
| 114,818 |
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|
| 109,888 |
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|
| 117,252 |
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The accompanying notes are an integral part of these consolidated financial statements.
25
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCOMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)THOUSANDS)
|
| Shares |
|
| Common Stock |
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| Additional Paid In Capital |
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| Retained Earnings |
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| Total Stockholders’ Equity |
| |||||
Balances at January 3, 2016 |
|
| 152,577,884 |
|
| $ | 153 |
|
| $ | 577,393 |
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| $ | 245,446 |
|
| $ | 822,992 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 124,306 |
|
|
| 124,306 |
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Issuance of shares under stock plans |
|
| 666,841 |
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|
| — |
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|
| 2,740 |
|
|
| — |
|
|
| 2,740 |
|
Repurchase and retirement of common stock |
|
| (13,242,483 | ) |
|
| (13 | ) |
|
| — |
|
|
| (294,252 | ) |
|
| (294,265 | ) |
Excess tax benefit for exercise of options |
|
| — |
|
|
| — |
|
|
| 3,737 |
|
|
| — |
|
|
| 3,737 |
|
Equity-based compensation |
|
| — |
|
|
| — |
|
|
| 13,399 |
|
|
| — |
|
|
| 13,399 |
|
Balances at January 1, 2017 |
|
| 140,002,242 |
|
| $ | 140 |
|
| $ | 597,269 |
|
| $ | 75,500 |
|
| $ | 672,909 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 118,741 |
|
|
| 118,741 |
|
Issuance of shares under stock plans |
|
| 1,800,157 |
|
|
| 2 |
|
|
| 6,638 |
|
|
| — |
|
|
| 6,640 |
|
Repurchase and retirement of common stock |
|
| (9,136,468 | ) |
|
| (9 | ) |
|
| — |
|
|
| (191,991 | ) |
|
| (192,000 | ) |
Equity-based compensation |
|
| — |
|
|
| — |
|
|
| 10,325 |
|
|
| — |
|
|
| 10,325 |
|
Balances at October 1, 2017 |
|
| 132,665,931 |
|
| $ | 133 |
|
| $ | 614,232 |
|
| $ | 2,250 |
|
| $ | 616,615 |
|
|
| Thirteen weeks ended |
|
| Thirty-nine weeks ended |
| ||||||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| October 2, 2022 |
|
| October 3, 2021 |
| ||||
Net income |
| $ | 65,740 |
|
| $ | 63,867 |
|
| $ | 216,044 |
|
| $ | 207,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Unrealized gains (losses) on cash flow |
|
| 432 |
|
|
| 2,044 |
|
|
| 6,266 |
|
|
| 6,339 |
|
Reclassification of net gains (losses) on |
|
| (127 | ) |
|
| (1,076 | ) |
|
| (2,010 | ) |
|
| (3,216 | ) |
Total other comprehensive income (loss) |
|
| 305 |
|
|
| 968 |
|
|
| 4,256 |
|
|
| 3,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income |
| $ | 66,045 |
|
| $ | 64,835 |
|
| $ | 220,300 |
|
| $ | 211,052 |
|
The accompanying notes are an integral part of these consolidated financial statements.
36
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY
(UNAUDITED)
(IN THOUSANDS)THOUSANDS, EXCEPT SHARE AMOUNTS)
|
| Thirty-nine Weeks Ended |
| |||||
|
| October 1, 2017 |
|
| October 2, 2016 |
| ||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 118,741 |
|
| $ | 107,301 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
| 70,875 |
|
|
| 59,997 |
|
Accretion of asset retirement obligation and closed store reserve |
|
| 168 |
|
|
| 237 |
|
Amortization of financing fees and debt issuance costs |
|
| 347 |
|
|
| 347 |
|
Loss on disposal of property and equipment |
|
| 820 |
|
|
| 226 |
|
Equity-based compensation |
|
| 10,325 |
|
|
| 10,322 |
|
Deferred income taxes |
|
| 23,245 |
|
|
| 20,119 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 1,660 |
|
|
| (1,336 | ) |
Inventories |
|
| (17,752 | ) |
|
| (29,784 | ) |
Prepaid expenses and other current assets |
|
| (3,734 | ) |
|
| (1,212 | ) |
Other assets |
|
| (702 | ) |
|
| (1,480 | ) |
Accounts payable |
|
| 31,669 |
|
|
| 24,050 |
|
Accrued salaries and benefits |
|
| 8,360 |
|
|
| (4,959 | ) |
Other accrued liabilities and income taxes payable |
|
| 4,288 |
|
|
| (2,762 | ) |
Other long-term liabilities |
|
| 10,659 |
|
|
| 14,971 |
|
Cash flows from operating activities |
|
| 258,969 |
|
|
| 196,037 |
|
Cash flows used in investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (158,459 | ) |
|
| (142,571 | ) |
Proceeds from sale of property and equipment |
|
| 30 |
|
|
| 662 |
|
Purchase of leasehold interests |
|
| — |
|
|
| (491 | ) |
Cash flows used in investing activities |
|
| (158,429 | ) |
|
| (142,400 | ) |
Cash flows used in financing activities |
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility |
|
| 134,000 |
|
|
| 45,000 |
|
Payments on revolving credit facility |
|
| (40,000 | ) |
|
| — |
|
Payments on capital and financing lease obligations |
|
| (3,053 | ) |
|
| (3,144 | ) |
Cash from landlords related to financing lease obligations |
|
| 300 |
|
|
| — |
|
Repurchase of common stock |
|
| (192,000 | ) |
|
| (187,836 | ) |
Proceeds from exercise of stock options |
|
| 6,640 |
|
|
| 2,616 |
|
Excess tax benefit for exercise of stock options |
|
| — |
|
|
| 3,948 |
|
Cash flows used in financing activities |
|
| (94,113 | ) |
|
| (139,416 | ) |
Increase / (Decrease) in cash and cash equivalents |
|
| 6,427 |
|
|
| (85,779 | ) |
Cash and cash equivalents at beginning of the period |
|
| 12,465 |
|
|
| 136,069 |
|
Cash and cash equivalents at the end of the period |
| $ | 18,892 |
|
| $ | 50,290 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 15,052 |
|
| $ | 10,942 |
|
Cash paid for income taxes |
|
| 25,710 |
|
|
| 38,142 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities |
|
|
|
|
|
|
|
|
Property and equipment in accounts payable |
| $ | 13,476 |
|
| $ | 19,919 |
|
Property acquired through capital and financing lease obligations |
|
| 5,512 |
|
|
| 8,324 |
|
For the thirteen and thirty-nine weeks ended October 2, 2022 |
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Shares |
|
| Common |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
Balances at July 3, 2022 |
|
| 107,967,677 |
|
| $ | 108 |
|
| $ | 715,331 |
|
| $ | 298,058 |
|
| $ | 193 |
|
| $ | 1,013,690 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 65,740 |
|
|
| — |
|
|
| 65,740 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 305 |
|
|
| 305 |
|
Issuance of shares under stock plans |
|
| 81,841 |
|
|
| — |
|
|
| 1,364 |
|
|
| — |
|
|
| — |
|
|
| 1,364 |
|
Repurchase and retirement of common stock |
|
| (1,558,196 | ) |
|
| (2 | ) |
|
| — |
|
|
| (44,021 | ) |
|
| — |
|
|
| (44,023 | ) |
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 3,752 |
|
|
| — |
|
|
| — |
|
|
| 3,752 |
|
Balances at October 2, 2022 |
|
| 106,491,322 |
|
| $ | 106 |
|
| $ | 720,447 |
|
| $ | 319,777 |
|
| $ | 498 |
|
| $ | 1,040,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Shares |
|
| Common |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
Balances at January 2, 2022 |
|
| 111,114,374 |
|
| $ | 111 |
|
| $ | 704,701 |
|
| $ | 258,822 |
|
| $ | (3,758 | ) |
| $ | 959,876 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 216,044 |
|
|
| — |
|
|
| 216,044 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,256 |
|
|
| 4,256 |
|
Issuance of shares under stock plans |
|
| 814,002 |
|
|
| — |
|
|
| 4,074 |
|
|
| — |
|
|
| — |
|
|
| 4,074 |
|
Repurchase and retirement of common stock |
|
| (5,437,054 | ) |
|
| (5 | ) |
|
| — |
|
|
| (155,089 | ) |
|
| — |
|
|
| (155,094 | ) |
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 11,672 |
|
|
| — |
|
|
| — |
|
|
| 11,672 |
|
Balances at October 2, 2022 |
|
| 106,491,322 |
|
| $ | 106 |
|
| $ | 720,447 |
|
| $ | 319,777 |
|
| $ | 498 |
|
| $ | 1,040,828 |
|
The accompanying notes are an integral part of these consolidated financial statements.
47
For the thirteen and thirty-nine weeks ended October 3, 2021 |
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Shares |
|
| Common |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
Balances at July 4, 2021 |
|
| 115,180,832 |
|
| $ | 115 |
|
| $ | 695,745 |
|
| $ | 259,582 |
|
| $ | (6,319 | ) |
| $ | 949,123 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 63,867 |
|
|
| — |
|
|
| 63,867 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 968 |
|
|
| 968 |
|
Issuance of shares under stock plans |
|
| 54,007 |
|
|
| — |
|
|
| 672 |
|
|
| — |
|
|
| — |
|
|
| 672 |
|
Repurchase and retirement of common stock |
|
| (2,079,420 | ) |
|
| (2 | ) |
|
| — |
|
|
| (49,998 | ) |
|
| — |
|
|
| (50,000 | ) |
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 3,453 |
|
|
| — |
|
|
| — |
|
|
| 3,453 |
|
Balances at October 3, 2021 |
|
| 113,155,419 |
|
| $ | 113 |
|
| $ | 699,870 |
|
| $ | 273,451 |
|
| $ | (5,351 | ) |
| $ | 968,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Shares |
|
| Common |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
Balances at January 3, 2021 |
|
| 117,953,435 |
|
| $ | 118 |
|
| $ | 686,648 |
|
| $ | 203,001 |
|
| $ | (8,474 | ) |
| $ | 881,293 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 207,929 |
|
|
| — |
|
|
| 207,929 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,123 |
|
|
| 3,123 |
|
Issuance of shares under stock plans |
|
| 562,021 |
|
|
| — |
|
|
| 1,918 |
|
|
| — |
|
|
| — |
|
|
| 1,918 |
|
Repurchase and retirement of common stock |
|
| (5,360,037 | ) |
|
| (5 | ) |
|
| — |
|
|
| (137,479 | ) |
|
| — |
|
|
| (137,484 | ) |
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 11,304 |
|
|
| — |
|
|
| — |
|
|
| 11,304 |
|
Balances at October 3, 2021 |
|
| 113,155,419 |
|
| $ | 113 |
|
| $ | 699,870 |
|
| $ | 273,451 |
|
| $ | (5,351 | ) |
| $ | 968,083 |
|
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 |
| |||||
|
| October 2, 2022 |
|
| October 3, 2021 |
| ||
Operating activities |
|
|
|
|
|
| ||
Net income |
| $ | 216,044 |
|
| $ | 207,929 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization expense |
|
| 96,057 |
|
|
| 94,422 |
|
Operating lease asset amortization |
|
| 87,316 |
|
|
| 80,295 |
|
Store closure and other costs, net |
|
| 171 |
|
|
| — |
|
Share-based compensation |
|
| 11,672 |
|
|
| 11,304 |
|
Deferred income taxes |
|
| 1,025 |
|
|
| 2,085 |
|
Other non-cash items |
|
| 404 |
|
|
| 883 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
| ||
Accounts receivable |
|
| 16,491 |
|
|
| 12,999 |
|
Inventories |
|
| (36,280 | ) |
|
| (16,860 | ) |
Prepaid expenses and other current assets |
|
| (7,880 | ) |
|
| (6,001 | ) |
Other assets |
|
| 1,678 |
|
|
| (2,834 | ) |
Accounts payable |
|
| 23,121 |
|
|
| 29,479 |
|
Accrued liabilities |
|
| 2,482 |
|
|
| 1,046 |
|
Accrued salaries and benefits |
|
| (4,868 | ) |
|
| (30,544 | ) |
Operating lease liabilities |
|
| (99,055 | ) |
|
| (88,664 | ) |
Other long-term liabilities |
|
| (1,588 | ) |
|
| 1,120 |
|
Cash flows from operating activities |
|
| 306,790 |
|
|
| 296,659 |
|
Investing activities |
|
|
|
|
|
| ||
Purchases of property and equipment |
|
| (80,749 | ) |
|
| (70,010 | ) |
Cash flows used in investing activities |
|
| (80,749 | ) |
|
| (70,010 | ) |
Financing activities |
|
|
|
|
|
| ||
Payments on finance lease liabilities |
|
| (600 | ) |
|
| (507 | ) |
Payments of deferred financing costs |
|
| (3,373 | ) |
|
| — |
|
Repurchase of common stock |
|
| (155,094 | ) |
|
| (137,484 | ) |
Proceeds from exercise of stock options |
|
| 4,074 |
|
|
| 1,918 |
|
Cash flows used in financing activities |
|
| (154,993 | ) |
|
| (136,073 | ) |
Increase in cash, cash equivalents, and restricted cash |
|
| 71,048 |
|
|
| 90,576 |
|
Cash, cash equivalents, and restricted cash at beginning of the period |
|
| 247,004 |
|
|
| 171,441 |
|
Cash, cash equivalents, and restricted cash at the end of the period |
| $ | 318,052 |
|
| $ | 262,017 |
|
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information |
|
|
|
|
|
| ||
Cash paid for interest |
| $ | 8,415 |
|
| $ | 8,710 |
|
Cash paid for income taxes |
|
| 65,671 |
|
|
| 65,783 |
|
Leased assets obtained in exchange for new operating lease liabilities |
|
| 96,956 |
|
|
| 96,713 |
|
|
|
|
|
|
|
| ||
Supplemental disclosure of non-cash investing and financing activities |
|
|
|
|
|
| ||
Property and equipment in accounts payable and accrued liabilities |
| $ | 17,834 |
|
| $ | 19,228 |
|
The accompanying notes are an integral part of these consolidated financial statements.
9
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
Sprouts Farmers Market, Inc., a Delaware corporation, through its subsidiaries, operates as a healthy grocery store that offers fresh, natural and organic food through a complete shoppingunique grocery experience that includesfeaturing an open layout with fresh produce bulk foods, vitaminsat 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 supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, beer and wine, natural body care and household items catering to consumers’ growing interestgluten-free. As of October 2, 2022, the Company operated 379 stores in health and wellness.23 states. The “Company” is used to refer collectively to Sprouts Farmers Market, Inc. and unless the context otherwise requires, its subsidiaries.
The accompanying unaudited consolidated financial statements include the accounts of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission in instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company's financial position, results of operations and cash flows for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The information included in these consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the fiscal year ended January 1, 20172, 2022 (“fiscal year 2016”2021”) included in the Company’s Annual Report on Form 10-K, filed on February 23, 2017.24, 2022.
The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.
The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. The fiscal year ending December 31, 2017January 1, 2023 (“fiscal year 2017”2022”) is a 52-week year, and fiscal year 2016 was a2021 are 52-week year.years. The Company reports its results of operations on a 13-week quarter, except for 53-week fiscal years.
Certain reclassifications of amounts reported in prior periods have been made to conform withyears (in which the current period presentation.
The Companyfourth quarter has one reportable and one operating segment, healthy grocery stores.14 weeks).
All dollar amounts are in thousands, unless otherwise noted.
510
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company’s performance obligations are satisfied upon the transfer of goods to the customer, which occurs at the point of sale, and payment from customers is also due at the time of sale. Proceeds from the sale of gift cards are recorded as a liability at the time of sale and recognized as sales when they are redeemed by the customer and the performance obligation is satisfied by the Company. The Company’s gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions and was not material in any period presented.
|
| Balance at |
|
| Gift Cards Issued During |
|
| Revenue Recognized from |
|
| Balance at |
| ||||
Gift card liability, net |
| $ | 12,586 |
|
| $ | 1,911 |
|
| $ | (5,350 | ) |
| $ | 9,147 |
|
(1) net of estimated breakage
The Company does not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current period from performance obligations satisfied in previous periods, or any remaining performance obligations as of October 2, 2022.
Restricted Cash
2. Recently Issued Accounting PronouncementsRestricted cash relates to defined benefit plan forfeitures as well as healthcare, general liability and workers’ compensation restricted funds of approximately $2.0 million and $1.7 million as of October 2, 2022 and January 2, 2022, respectively. These balances are included in prepaid expenses and other current assets in the consolidated balance sheets.
Recently Adopted Accounting Pronouncements
Reference Rate Reform
In July 2015,March 2020 and January 2021, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” ASU No. 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business; less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for the Company for its fiscal year 2017. Adoptionno. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the guidance took place prospectively during 2017,Effects of Reference Rate Reform on Financial Reporting” and the adoption did not have a material effect on the Company’s consolidated financial statements or disclosures.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation2021-01, “Reference Rate Reform (Topic 718).848): Scope,” This update involves several aspects of the accounting for share-based transactions, including the income tax consequences, classification of awards as either equity or liabilities, how to account for forfeitures, and classification on the statement of cash flows.respectively. The amendments in this update are effectivethese updates provide optional expedients and exceptions for a limited period of time to ease the Companypotential burden in accounting for its fiscal year 2017. As a result of the adoption, the Company recognized excess tax benefits related to the exercise of options in its income tax provision duringcontracts, hedging relationships, and other transactions affected by reference rate reform. In the thirty-nine weeks ended October 1, 2017 (see Note 6). Prior2, 2022, the Company adopted certain optional expedients provided under Topic 848 that permit its hedging relationships to continue without de-designation upon changes due to reference rate reform. The adoption of this guidance resulted in no material impact to the adoption, these items were recordedCompany’s consolidated financial statements. See Note 10, “Derivative Financial Instruments” for more information on our hedging activities. The optional expedients and accounting relief in Additional Paid-in Capital. The Company has elected to prospectively apply the amendments related to classifying cash flows related to excess tax benefits as an operating activity. During 2017, excess tax benefits were classified as an operating activity on the consolidated statement of cash flows, along with other income tax cash flows. The Company has made a policy election to account for forfeitures as they occur. This election was adopted using a modified retrospective approach resulting in no cumulative effect on retained earnings at the beginning of the period. Prior to the adoption, forfeitures were accounted for using an estimated forfeiture rate.Topic 848 remain effective through December 31, 2022.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, and estimating the amount of variable consideration to include in the transaction price attributable to each separate performance obligation. Subsequent to the initial standards, the FASB has also issued several ASUs to clarify specific revenue recognition topics. This guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company is currently evaluating the potential impact of this guidance and does not expect this ASU to materially impact the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (ASC 842).” ASU No. 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than twelve months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The new guidance also requires certain additional quantitative and qualitative disclosures. This guidance will be effective for the Company for its fiscal year 2019, with early adoption permitted, and the Company is currently evaluating the potential impact of this guidance. The adoption of this ASU is expected to result in a material increase to the Company’s consolidated balance sheets for right-of-use assets and lease liabilities.
In March 2016, the FASB issued ASU No. 2016-04, “Liabilities-Extinguishments of Liabilities (Subtopic 405-20): Recognition of breakage for certain prepaid stored-value products.” ASU No. 2016-04 provides a narrow scope exception to the guidance in Subtopic 405-20 to require that stored-value breakage be accounted for consistently with the breakage guidance in Topic 606. The amendments in this update contain specific guidance for derecognition of prepaid stored-value product liabilities, thereby eliminating the current and potential future diversity. This guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.
6
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update provides clarifications on the cash flow classification for eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this update eliminate the second step of the goodwill impairment test and provide that an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The guidance will be effective for the Company for its fiscal year 2020, with early adoption permitted. The Company is currently evaluating the potential impact of this guidance.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this update provide guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in Topic 718. The guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.
No other new accounting pronouncements issued or effective during the thirty-ninethirteen weeks ended October 1, 20172, 2022 had, or are expected to have, a material impact on the Company’s consolidated financial statements.
11
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Fair Value Measurements
The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with GAAP. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the valuation of derivative instruments, impairment analysis of goodwill, indefinite-lived intangible assets and long-lived assets,assets.
The following tables present the fair value hierarchy for the Company’s financial liabilities measured at fair value on a recurring basis as of October 2, 2022 and January 2, 2022:
October 2, 2022 |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Long-term debt |
| $ | — |
|
| $ | 250,000 |
|
| $ | — |
|
| $ | 250,000 |
|
Total financial liabilities |
| $ | — |
|
| $ | 250,000 |
|
| $ | — |
|
| $ | 250,000 |
|
Interest rate swap asset |
| $ | — |
|
| $ | 687 |
|
| $ | — |
|
| $ | 687 |
|
Total assets |
| $ | — |
|
| $ | 687 |
|
| $ | — |
|
| $ | 687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
January 2, 2022 |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Long-term debt |
| $ | — |
|
| $ | 250,000 |
|
| $ | — |
|
| $ | 250,000 |
|
Interest rate swap liability |
|
| — |
|
|
| 5,107 |
|
|
| — |
|
|
| 5,107 |
|
Total financial liabilities |
| $ | — |
|
| $ | 255,107 |
|
| $ | — |
|
| $ | 255,107 |
|
The Company’s interest rate swaps are considered Level 2 in the valuationhierarchy and are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of store closure and exit costs.the yield curve on floating interest rates, which is readily available on public markets.
The determination of fair values of certain tangible and intangible assets for purposes of the Company’s goodwill impairment evaluation as described above wasis based upon a step zero assessment. Closed facility reserves are recorded at net present value to approximate fair value which is classified as Level 3 in the hierarchy. The estimated fair value of the closed facility reserve is calculated based on the present value of the remaining lease payments and other charges using a weighted average cost of
7
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
capital, reduced by estimated sublease rentals.inputs. The weighted average cost of capital wasis estimated using information from comparable companies and management’s judgment related to the risk associated with the operations of the stores.
Cash, and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities, and accrued salaries and benefits and other accrued liabilities approximate fair value because of the short maturity of those instruments. Based on comparable open market transactions, comparable to the Credit Facility (as defined in Note 4, “Long-Term Debt”), the fair value of the long-term debt approximatesapproximated carrying value as of October 1, 20172, 2022 and January 1, 2017. The Company’s estimates2, 2022.
12
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Long-Term Debt and Finance Lease Liabilities
A summary of long-term debt and finance lease liabilities is as follows:
|
|
|
|
|
| As of |
| |||||
Facility |
| Maturity |
| Interest Rate |
| October 1, 2017 |
|
| January 1, 2017 |
| ||
Senior secured debt |
|
|
|
|
|
|
|
|
|
|
|
|
$450.0 million Credit Facility |
| April 17, 2020 |
| Variable |
| $ | 349,000 |
|
| $ | 255,000 |
|
Total debt |
|
|
|
|
|
| 349,000 |
|
|
| 255,000 |
|
Long-term debt |
|
|
|
|
| $ | 349,000 |
|
| $ | 255,000 |
|
|
|
|
|
|
| As of |
| |||||
Facility |
| Maturity |
| Interest Rate |
| October 2, 2022 |
|
| January 2, 2022 |
| ||
Senior secured debt |
|
|
|
|
|
|
|
|
|
| ||
$700.0 million Credit Agreement |
| March 25, 2027 |
| Variable |
| $ | 250,000 |
|
| $ | — |
|
Former Credit Facility |
| March 27, 2023 |
| Variable |
|
| — |
|
|
| 250,000 |
|
Finance lease liabilities |
| Various |
| n/a |
|
| 8,992 |
|
|
| 9,656 |
|
Long-term debt and finance lease liabilities |
|
|
|
|
| $ | 258,992 |
|
| $ | 259,656 |
|
Senior Secured RevolvingNew Credit FacilityAgreement
On April 17, 2015, theThe Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), asis the borrower entered intounder a credit agreement thatentered into on March 25, 2022 (the “Credit Agreement”). The Credit Agreement provides for a revolving credit facility (the "Revolving Credit Facility") with an initial aggregate commitment of $450.0 million (the “Credit Facility”), which$700.0 million. Amounts outstanding under the Credit Agreement may be increased from time to time pursuant toin accordance with an expansion feature set forth in the Credit Facility. The Credit Facility replaced the Company’s existing senior secured credit facility, dated April 23, 2013.Agreement.
The Company capitalized debt issuance costs of $2.3$3.4 million related to the Credit Facility,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 Facility.Agreement.
The Credit Facility alsoAgreement provides for a $70.0 million letter of credit subfacilitysub-facility (the "Letter of Credit Sub-Facility") and a $15.0$50.0 million swingline facility. Letters of credit issued under the Credit FacilityAgreement reduce the borrowing capacity of Intermediate Holdings to borrow under the Revolving Credit Facility. Letters of credit totaling $24.8$24.8 million have been issued as of October 1, 2017,2, 2022 under the Letter of Credit Sub-Facility, primarily to support the Company’s insurance programs.
Guarantees
Obligations under the Credit FacilityAgreement are guaranteed by the Company and substantially all of its currentexisting 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 itsthe subsidiary guarantors, including, without limitation, a pledge by the Company of its equity interest in Intermediate Holdings.
13
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Interest and Fees
Loans under the Credit FacilityAgreement will initially bear interest, at the Company’sCompany's option, either at adjusted LIBORthe Term SOFR (with a floor of 0.00%) plus 1.50%a 0.10% SOFR adjustment and 1.00% per annum or a base rate (with a floor of 0.00%) plus 0.50%0.00% per annum. The interest rate margins are subject to adjustmentupward adjustments pursuant to a pricing grid based on the Company’s total grossnet leverage ratio as definedset forth in the Credit Facility. 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 forth in the Credit Agreement.
Under the terms of the Credit Facility,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 subject to upward or downward adjustments of up to 0.01% based upon the achievement of certain diversity and sustainability-linked metric thresholds, as set forth in the Credit Facility commitments equal to 0.20%Agreement.
As of October 2, 2022, 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.
OutstandingThe effective interest rate on 100% of outstanding debt under the Credit Agreement is fixed, reflecting the effects of floating to fixed interest rate swaps (see Note 10, “Derivative Financial Instruments”).
As of October 2, 2022,outstanding letters of credit issued under the Credit Facility areAgreement were subject to a participation fee of 1.50%1.00% per annum and an issuance fee of 0.125%0.125% per annum.
8
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Credit FacilityAgreement is scheduled to mature, and the commitments thereunder will terminate on April 17, 2020,March 25, 2027, subject to extensions as set forth in the Credit Facility.therein.
The Company may repayprepay loans and permanently reduce commitments under the Credit FacilityAgreement at any time in agreed-upon minimum principal amounts, without premium or penalty (except LIBORSOFR breakage costs, if applicable).
In connection with the execution of the Credit Agreement, the obligations as borrower under the Former Credit Facility were prepaid and terminated.
During fiscal year 2016,the thirteen and thirty-nine weeks ended October 2, 2022, the Company borrowed $105.0 million and made a total of $10.0 million ofno additional borrowings or principal payments;payments, resulting in total outstanding debt under the Credit FacilityAgreement of $255.0 million at January 1, 2017. During the thirteen weeks ended October 1, 2017, the Company borrowed $49.0 million and made a total of $10.0 million of principal payments. During the thirty-nine weeks ended October 1, 2017, the Company borrowed $134.0 million and made a total of $40.0 million of principal payments; resulting in total outstanding debt under the Credit Facility of $349.0$250.0 million as of October 1, 2017. The Company has used borrowings under the Credit Facility to assist with its share repurchase programs (see Note 9).2, 2022.
Covenants
The Credit FacilityAgreement contains financial, affirmative and negative covenants. The negative covenants include, among other things, limitations on the Company’s ability to:
incur additional indebtedness;
grant additional liens;
enter into sale-leaseback transactions;
make loans or investments;
merge, consolidate or enter into acquisitions;
pay dividends or distributions;
enter into transactions with affiliates;
enter into new lines of business;
14
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
modify the terms of certain debt or other material agreements; and
change its fiscal year.
Each of these covenants is subject to customary and other agreed-upon exceptions.
In addition, the Credit FacilityAgreement requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed 3.003.75 to 1.00, which ratio may be increased from time to time in connection with certain permitted acquisitions pursuant to conditions as set forth in the Credit Agreement, and a minimum interest coverage ratio not to be less than 1.753.00 to 1.00. Each of these covenants is tested as of the last day of each fiscal quarter.
The Company was in compliance with all applicable covenants under the Credit FacilityAgreement as of October 1, 2017.2, 2022.
9
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Closed Store and Other Costs
The following is a summary of closed store reserve activity during the thirty-nine weeks ended October 1, 2017 and fiscal year 2016:
|
| Thirty-nine Weeks Ended |
|
| Fiscal Year Ended |
| ||
|
| October 1, 2017 |
|
| January 1, 2017 |
| ||
Beginning balance |
| $ | 1,083 |
|
| $ | 2,017 |
|
Additions |
|
| — |
|
|
| — |
|
Usage |
|
| (387 | ) |
|
| (998 | ) |
Adjustments |
|
| 205 |
|
|
| 64 |
|
Ending balance |
| $ | 901 |
|
| $ | 1,083 |
|
The Closed Store Reserve is included in Other accrued liabilities and Other long-term liabilities in the consolidated balance sheets. Usage relates to lease payments made during the period for closed stores.
During August and September 2017, 14 of our stores in Texas, Florida and Georgia were affected by Hurricanes Harvey and Irma. While physical damage was minimal, these stores experienced, to varying degrees, loss of perishable inventory, additional expenses to clean up and power stores, and a loss of business while closed. Actual costs incurred, not including the impact of lost sales, are estimated to be $1.0 million, with an estimated insurance recovery of $0.3 million for these costs. We are pursuing additional recovery under our business interruption and other insurance policy provisions; however, any additional recoveries are not expected to be material.
6. Income Taxes
The Company’s effective tax rate increased to 25.6% for the thirteen weeks ended October 1, 2017 and2, 2022, compared to 23.0% for the thirteen weeks ended October 2, 2016 was 33.8% and 36.9%, respectively. The decrease3, 2021.The increase in the effective tax rate is primarily due to tax returna decrease in enhanced charitable contributions due to provision adjustments for the 2016 income tax return.expiration of CARES Act benefits as well as an increase of non-deductible executive compensation.
The Company’s effective tax rate increased to 25.2% for the thirty-nine weeks ended October 1, 2017 and2, 2022, compared to 24.1% for the thirty-nine weeks ended October 2, 2016 was 31.7% and 37.7%, respectively. The decrease3, 2021.The increase in the effective tax rate is primarily relateddue to recognitiona decrease in enhanced charitable contributions due to the expiration of CARES Act benefits as well as an increase of non-deductible executive compensation, partially offset by an increase in benefit from share-based payment awards in the current year. The income tax effect resulting from excess tax benefits related to the exercise or vesting of equity-based awards in the income tax provision. See ASU 2016-09, Compensation – “Stock Compensation (Topic 718)” under Recently Adopted Accounting Pronouncements (Note 2).
Excess tax benefits associated with share-based payment awards are recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur.
The income tax benefits resulting from equity-based awards were $0.2 million for the thirteen weeks ended October 1, 2017. The income tax benefits resulting from the equity-based awards for the thirteen weeks ended October 2, 2016 were $0.2$1.6 million and recorded in Additional Paid-in Capital.
The income tax benefits resulting from equity-based awards were $8.4$0.2 million for the thirty-nine weeks ended October 1, 2017. 2, 2022 and October 3, 2021, respectively.
The Company files income tax benefits resulting from equity-based awardsreturns for federal purposes and in many states. The Company’s tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three years, following the thirty-nine weeks ended October 2, 2016 were $3.9 million and recorded in Additional Paid-in Capital.tax year to which those filings relate.
6. Related Party Transactions
7. Related-Party Transactions
AOn May 24, 2022, the Company appointed a new member of the Company’sto its board of directors who is an investor inexecutive officer of a company that is a supplier of coffeenutrition bars and related products to the Company for resale. DuringThe cost of sales recognized from this supplier was $1.2 million during the thirteen weeks ended October 1, 20172, 2022 and October 2, 2016, purchases from this supplier were $2.7was $2.5 million and $2.1 million, respectively. Duringsince the thirty-nine weeks ended October 1, 2017 and October 2, 2016, purchases from this supplier were $8.1 million and $7.3
10
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
million, respectively. The Company had recorded accounts payable due to this vendor of $0.7 million, as of both October 1, 2017 and October 2, 2016, respectively.
The Company’s former Executive Chairmanbeginning of the Board has been the chief executive officer, an equity investor, and lender to a technology supplier to the Company. During the thirteen weeks ended October 1, 2017 and October 2, 2016, purchases from this supplier and its predecessors were $1.6 million and $2.2 million, respectively. During the thirty-nine weeks ended October 1, 2017 and October 2, 2016, purchases from this supplier and its predecessors were $5.2 million and $6.0 million, respectively. Assecond quarter of October 1, 2017, and October 2, 2016, the Company had recorded accounts payable due to the supplier of $0.2 million and $0.5 million, respectively.2022.
8.7. Commitments and Contingencies
The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters that are believed to best serve the interests of the Company’s stakeholders. The Company’s primary contingencies are associated with self-insurance obligations.obligations and litigation matters. Self-insurance liabilities require significant judgment and actual claim settlements and associated expenses may differ from the Company’s current provisions for loss.
SecuritiesProposition 65 Coffee Action
On March 4, 2016,April 13, 2010, an organization named Council for Education and Research on Toxics (“CERT”) filed a complaint was filedlawsuit in the Superior Court forof the State of ArizonaCalifornia, County of Los Angeles, against nearly 80 defendants who manufacture, package, distribute or sell brewed coffee, including the Company. CERT alleged that the defendants failed to provide warnings for their coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986, better known as Proposition 65. CERT seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties.
15
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company, as part of a joint defense group, asserted multiple defenses against the Companylawsuit. On May 7, 2018, the trial court issued a ruling adverse to defendants on these defenses to liability. On October 1, 2019, before the court tried damages, remedies and certainattorneys' fees, California’s Office of its directorsEnvironmental Health Hazard Assessment adopted a regulation that exempted “Exposures to listed chemicals in coffee created by and officers on behalf of a purported class of purchasers of shares of the Company’s common stockinherent in the Company’s underwritten secondary public offering which closed on March 10, 2015 (the “March 2015 Offering”). The complaint purports to state claims under Sections 11, 12 and 15processes of the Securities Act of 1933, based on an alleged failure by the Company to disclose adequate information about produce price deflation in the March 2015 Offering documents. The complaint seeks damages on behalf of the purported class in an unspecified amount, rescission, and an award of reasonable costs and attorneys’ fees. After removal to federal court, the plaintiffs sought remand, whichroasting coffee beans or brewing coffee” from Proposition 65’s warning requirement. On August 25, 2020, the court granted in March 2017. The Company has appealed the order granting remanddefense motion for summary judgment based on the regulation, and the case was dismissed.
On November 20, 2020, CERT filed a notice of appeal to appeal the Ninth Circuit Court of Appeals.ruling on the defense motion for summary judgment. On May 25, 2017,October 26, 2022, the appellate court affirmed the trial court’s decision. As the Company filed a Motionexpects CERT to Dismiss inappeal this ruling, the Superior Court for the State of Arizona, which the court granted in part and denied in part by order entered August 30, 2017. The Company answered the complaint on September 28, 2017. The Company will continueis unable to defend this case vigorously, but it is not possible at this time topredict or reasonably estimate the outcome of, or any potential liability from,loss or effect on the case.Company or its operations. Accordingly, no loss contingency was recorded for this matter.
9.8. Stockholders’ Equity
Share Repurchases
On November 4, 2015,March 2, 2022, the Company’s board of directors authorized a $150 million common stock share repurchase program, which was completed during the second quarter of 2016. On September 6, 2016, the Company’s board of directors authorized a $250 million common stock share repurchase program, which was completed during the first quarter of 2017. On February 20, 2017, the Company’sCompany's board of directors authorized a new $250$600 million common stock share repurchase program. program for 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 following table outlines the common stock share repurchase programs authorized by the Board,Company’s board of directors and the related repurchase activity and available authorization as of October 1, 2017 (in thousands):2, 2022.
Effective date |
| Expiration date |
| Amount |
|
| Cost of |
|
| Authorization |
| |||
March 3, 2021 |
| March 2, 2022 |
| $ | 300,000 |
|
| $ | 200,200 |
|
| $ | — |
|
March 2, 2022 |
| December 31, 2024 |
| $ | 600,000 |
|
| $ | 143,236 |
|
| $ | 456,764 |
|
Effective date |
| Expiration date |
| Amount authorized |
|
| Cost of repurchases |
|
| Authorization available |
| |||
November 4, 2015 |
| November 4, 2017 |
| $ | 150,000 |
|
| $ | 150,000 |
|
| $ | — |
|
September 6, 2016 |
| December 31, 2017 |
| $ | 250,000 |
|
| $ | 250,000 |
|
| $ | — |
|
February 20, 2017 |
| December 31, 2018 |
| $ | 250,000 |
|
| $ | 112,000 |
|
| $ | 138,000 |
|
The shares under the Company’s repurchase programs may be purchased on a discretionary basis from time to time prior tothrough the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated
11
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
transactions, or other means, including through Rule 10b5-1 trading plans.The board’s authorization of the share repurchase programs does not obligate the Company to acquire any particular amount of common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time. The Company has used borrowings under its Credit Facility to assist with the repurchase programs authorized on September 6, 2016 and February 20, 2017 (see Note 4).
Share repurchase activity under the Company’s repurchase programs for the periods indicated was as follows (total cost in thousands):
|
| Thirteen Weeks Ended |
|
| Thirty-nine Weeks Ended |
|
| Thirteen weeks ended |
|
| Thirty-nine weeks ended |
| |||||||||||||||||||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| October 2, 2022 |
|
| October 3, 2021 |
| |||||||||
Number of common shares acquired |
|
| 3,249,204 |
|
|
| 3,189,818 |
|
|
| 9,136,468 |
|
|
| 8,169,510 |
|
|
| 1,558,196 |
|
|
| 2,079,420 |
|
|
| 5,437,054 |
|
|
| 5,360,037 |
| |
Average price per common share acquired |
| $ | 22.16 |
|
| $ | 19.93 |
|
| $ | 21.01 |
|
| $ | 22.99 |
|
| $ | 28.25 |
|
| $ | 24.05 |
|
| $ | 28.53 |
|
| $ | 25.65 |
| |
Total cost of common shares acquired |
| $ | 72,000 |
|
| $ | 63,572 |
|
| $ | 192,000 |
|
| $ | 187,836 |
|
| $ | 44,023 |
|
| $ | 50,000 |
|
| $ | 155,094 |
|
| $ | 137,484 |
| |
Shares purchased under the Company’s repurchase programs were subsequently retired.retired and the excess of the repurchase price over par value was charged to retained earnings.
Subsequent to October 2, 2022 and through November 4, 2022, the Company repurchased an additional 0.6 million shares of common stock for $17.8 million.
16
10.SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. Net Income Per Share
The computation of basic net income per share is based on the number of weighted average shares outstanding during the period. The computation of diluted net income per share includes the dilutive effect of share equivalents consisting of incremental shares deemed outstanding from the assumed exercise of options, assumed vesting of restricted stock units (“RSUs”), and assumed vesting of performance stockshare awards (“PSAs”),. PSAs are included in the computation of diluted net income per share only to the extent that the underlying performance conditions are satisfied prior to the end of the reporting period or would be satisfied if the end of the reporting period were the end of the related performance period, and assumed vesting of restricted stock awards (“RSAs”).if the effect would be dilutive.
A reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is as follows (in thousands, except per share amounts):
|
| Thirteen Weeks Ended |
|
| Thirty-nine Weeks Ended |
|
| Thirteen weeks ended |
|
| Thirty-nine weeks ended |
| |||||||||||||||||||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| October 2, 2022 |
|
| October 3, 2021 |
| |||||||||
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| $ | 31,486 |
|
| $ | 23,885 |
|
| $ | 118,741 |
|
| $ | 107,301 |
|
| $ | 65,740 |
|
| $ | 63,867 |
|
| $ | 216,044 |
|
| $ | 207,929 |
| |
Weighted average shares outstanding |
|
| 134,320 |
|
|
| 147,743 |
|
|
| 136,063 |
|
|
| 149,202 |
|
|
| 107,229 |
|
|
| 114,201 |
|
|
|
| 109,066 |
|
|
| 116,497 |
|
Basic net income per share |
| $ | 0.23 |
|
| $ | 0.16 |
|
| $ | 0.87 |
|
| $ | 0.72 |
|
| $ | 0.61 |
|
| $ | 0.56 |
|
| $ | 1.98 |
|
| $ | 1.78 |
| |
Diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| $ | 31,486 |
|
| $ | 23,885 |
|
| $ | 118,741 |
|
| $ | 107,301 |
|
| $ | 65,740 |
|
| $ | 63,867 |
|
| $ | 216,044 |
|
| $ | 207,929 |
| |
Weighted average shares outstanding - basic |
|
| 134,320 |
|
|
| 147,743 |
|
|
| 136,063 |
|
|
| 149,202 |
|
|
| 107,229 |
|
|
| 114,201 |
|
|
| 109,066 |
|
|
| 116,497 |
| |
Dilutive effect of equity-based awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Dilutive effect of share-based awards: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Assumed exercise of options to purchase shares |
|
| 2,128 |
|
|
| 2,200 |
|
|
| 2,506 |
|
|
| 2,278 |
|
|
| 314 |
|
|
| 197 |
|
|
| 318 |
|
|
| 211 |
| |
RSUs |
|
| 122 |
|
|
| 28 |
|
|
| 124 |
|
|
| 49 |
|
|
| 266 |
|
|
| 245 |
|
|
| 371 |
|
|
| 376 |
| |
RSAs |
|
| 114 |
|
|
| 13 |
|
|
| 102 |
|
|
| 9 |
| |||||||||||||||||
PSAs |
|
| 86 |
|
|
| 40 |
|
|
| 65 |
|
|
| 30 |
|
|
| 286 |
|
|
| 175 |
|
|
| 133 |
|
|
| 168 |
| |
Weighted average shares and equivalent shares outstanding |
|
| 136,770 |
|
|
| 150,024 |
|
|
| 138,860 |
|
|
| 151,568 |
|
|
| 108,095 |
|
|
| 114,818 |
|
|
| 109,888 |
|
|
| 117,252 |
| |
Diluted net income per share |
| $ | 0.23 |
|
| $ | 0.16 |
|
| $ | 0.86 |
|
| $ | 0.71 |
|
| $ | 0.61 |
|
| $ | 0.56 |
|
| $ | 1.97 |
|
| $ | 1.77 |
| |
For the thirteen weeks ended October 1, 2017,2, 2022, the Company had 0.3 million options and 0.3 million PSAs outstanding which were excluded from the computation of diluted net income per share does not include 1.9 million options and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards.awards with performance conditions not yet deemed met. For the thirteen weeks ended October 2, 2016,3, 2021, 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 does not include 2.2 million options, 0.1 million RSUs, and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards.awards with performance conditions not yet deemed met.
12
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the thirty-nine weeks ended October 1, 2017,2, 2022, the Company had 0.5 million options, 0.1 million RSUs, and 0.3 million PSAs outstanding which were excluded from the computation of diluted net income per share does not include 1.9 million options and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards.awards with performance conditions not yet deemed met. For the thirty-nine weeks ended October 2, 2016,3, 2021, 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 does not include 1.3 million options, 0.1 million RSUs and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards.awards with performance conditions not yet deemed met.
17
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Derivative Financial Instruments
The Company entered into an interest rate swap agreement in December 2017 to manage its cash flow associated with variable interest rates. This forward contract has been designated and qualifies as a cash flow hedge, and its change in fair value is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the forecasted transaction occurs. The forward contract initially consisted of five cash flow hedges, of which one was outstanding at October 2, 2022. To qualify as a hedge, the Company needs to formally document, designate and assess the effectiveness of the transactions that receive hedge accounting.
The notional dollar amount of the one outstanding swap was $250.0 million at October 2, 2022 and January 2, 2022, under which the Company pays a fixed rate and receives a variable rate of interest (cash flow swap). The cash flow swap hedges the change in interest rates on debt related to fluctuations in interest rates and has a length of one year, maturing in 2022. This interest rate swap has been designated and qualifies as a cash flow hedge and has met the requirements to assume zero ineffectiveness. The Company reviews the effectiveness of its hedging instruments on a quarterly basis. During the first quarter of 2022, the Company elected to apply certain hedge accounting optional expedients allowed under Topic 848. The expedients allow the Company to continue the method of assessing effectiveness as documented in the original hedge documentation and allows the reference rate on the hypothetical derivative to match the reference rate on the hedging instrument.
The counterparties to these derivative financial instruments are major financial institutions. The Company evaluates the credit ratings of the financial institutions and believes that credit risk is at an acceptable level. The following table summarizes the fair value of the Company’s derivative instruments designated as hedging instruments:
|
| As of |
|
| As of |
| ||||||
|
| Balance Sheet Location |
| Fair Value |
|
| Balance Sheet Location |
| Fair Value |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Interest rate swaps |
| Other current assets |
| $ | 687 |
|
| Other current assets |
| $ | — |
|
Interest rate swaps |
| Accrued liabilities |
| $ | — |
|
| Accrued liabilities |
| $ | 5,107 |
|
The gain or loss on these derivative instruments is recognized in other comprehensive income, net of tax, with the portion related to current period interest payments reclassified to interest expense, net on the consolidated statements of income. The following table summarizes these losses classified on the consolidated statements of income:
|
| Thirteen weeks ended |
|
| Thirty-nine weeks ended |
| ||||||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| October 2, 2022 |
|
| October 3, 2021 |
| ||||
Consolidated Statements of |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense, net |
| $ | 171 |
|
| $ | 1,448 |
|
| $ | 2,705 |
|
| $ | 4,328 |
|
18
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. Equity-BasedComprehensive Income
The following table presents the changes in accumulated other comprehensive income (loss) for the thirty-nine weeks ended October 3, 2021 and October 2, 2022.
|
| Cash Flow |
| |
Balance at January 3, 2021 |
| $ | (8,474 | ) |
Other comprehensive income (loss), net of tax |
|
|
| |
Unrealized gains on cash flow hedging activities, net of income tax of $2,192 |
|
| 6,339 |
|
Reclassification of net losses on cash flow hedges to net income, net of income |
|
| (3,216 | ) |
Total other comprehensive income (loss) |
|
| 3,123 |
|
Balance at October 3, 2021 |
| $ | (5,351 | ) |
|
|
|
| |
Balance at January 2, 2022 |
| $ | (3,758 | ) |
Other comprehensive income (loss), net of tax |
|
|
| |
Unrealized gains on cash flow hedging activities, net of income tax of $2,167 |
|
| 6,266 |
|
Reclassification of net losses on cash flow hedges to net income, net of income |
|
| (2,010 | ) |
Total other comprehensive income (loss) |
|
| 4,256 |
|
Balance at October 2, 2022 |
| $ | 498 |
|
Amounts reclassified from accumulated other comprehensive income (loss) are included within interest expense, net on the consolidated statements of income.
12. Segments
The Company has one reportable and one operating segment, healthy grocery stores.
In accordance with ASC 606, the following table represents a disaggregation of revenue for the thirteen and thirty-nine weeks ended October 2, 2022 and October 3, 2021.
|
| Thirteen weeks ended |
| |||||||||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
| ||||||||||
Perishables |
| $ | 928,908 |
|
|
| 58.4 | % |
| $ | 867,880 |
|
|
| 57.5 | % |
Non-Perishables |
|
| 662,118 |
|
|
| 41.6 | % |
|
| 641,753 |
|
|
| 42.5 | % |
Net Sales |
| $ | 1,591,026 |
|
|
| 100.0 | % |
| $ | 1,509,633 |
|
|
| 100.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Thirty-nine weeks ended |
| |||||||||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
| ||||||||||
Perishables |
| $ | 2,817,268 |
|
|
| 58.4 | % |
| $ | 2,668,532 |
|
|
| 57.9 | % |
Non-Perishables |
|
| 2,010,401 |
|
|
| 41.6 | % |
|
| 1,938,541 |
|
|
| 42.1 | % |
Net Sales |
| $ | 4,827,669 |
|
|
| 100.0 | % |
| $ | 4,607,073 |
|
|
| 100.0 | % |
The Company categorizes the varieties of products it sells as perishable and non-perishable. Perishable product categories include produce, meat and meat alternatives, seafood, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care.
19
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Share-Based Compensation
20132022 Incentive Plan
TheIn March 2022, the Company’s board of directors adopted and its equity holders approved, the Sprouts Farmers Market, Inc. 20132022 Omnibus Incentive Compensation Plan (the “2022 Incentive Plan”), which became effective May 25, 2022, upon approval by the Company’s stockholders. The 2022 Incentive Plan (the “2013 Incentive Plan”).provides team members of the Company, certain consultants and advisors who perform services for 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 20132022 Incentive Plan became effective July 31, 2013 in connection with the Company’s initial public offering and replaced the 2011 Option Plan (as defined below) (except with respect to outstanding options under the 2011 Option Plan). The 2013 Incentive Plan serves as the umbrella plan for the Company’s equity-based and cash-based incentive compensation programs for its directors, officers and other team members. On May 1, 2015, the Company’s stockholders approved the material terms of the performance goals under the 2013 Incentive Plan for purposes of Section 162(m) of(as described below).
Awards Granted under the Internal Revenue Code.2022 Incentive Plan
During the thirty-nine weeks ended October 2, 2022, the Company granted the following share-based compensation awards under the 2022 Incentive Plan:
Grant Date |
| RSUs |
|
| PSAs |
|
| Options |
| |||
June 7, 2022 |
|
| 58,057 |
|
|
| — |
|
|
| — |
|
September 7, 2022 |
|
| 21,598 |
|
|
| — |
|
|
| — |
|
Total |
|
| 79,655 |
|
|
| — |
|
|
| — |
|
Weighted-average grant date fair value |
| $ | 27.75 |
|
| $ | — |
|
| $ | — |
|
Weighted-average exercise price |
|
| — |
|
|
| — |
|
|
| — |
|
The aggregate number of shares of common stock that may be issued to team members and directors under the 20132022 Incentive Plan may not exceed 10,089,072. Shares6,600,000, subject to the following adjustments. If any awards granted under the 2022 Incentive Plan, terminate, expire, or are cancelled, forfeited, exchanged, or surrendered without having been exercised, vested or paid in shares, the shares will again be available for purposes of the 2022 Incentive Plan. In addition, the number of shares subject 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, forfeited, exchanged, or surrendered without having been exercised, vested, or paid in shares under the 2013 Incentive Plan which are subsequently forfeited, expire unexercised or are otherwise not issued will not be treated as having been issued for purposesafter the effective date of the share limitation.2022 Incentive Plan will be available for issuance under the 2022 Incentive Plan. As of October 1, 2017,2, 2022, there were 3,686,04379,655 stock awards outstanding and 5,805,6746,621,800 shares remaining available for issuance under the 2022 Incentive Plan.
2013 Incentive Plan.Plan
2011 Option Plan
In May 2011,Prior to the Company adopted the Sprouts Farmers Markets, LLC Option Plan (the “2011 Option Plan”) to provide team members or directorsadoption of the Company with options to acquire shares2022 Incentive Plan, the 2013 Incentive Plan served as the umbrella plan for the Company’s share-based and cash-based incentive compensation programs for its directors, officers and other team members. Upon adoption of the Company. The Company had authorized 12,100,000 shares for issuance2022 Incentive Plan on May 25, 2022, no further awards will be granted under the 2011 Option Plan. Options may no longer be issued under the 2011 Option Plan. As of October 1, 2017, there were 2,384,978 options2013 Incentive Plan, but awards outstanding under the 2011 Option2013 Incentive Plan will remain outstanding in accordance with their terms and the terms of the 2013 Incentive Plan.
Awards Granted under the 2013 Incentive Plan
During the thirty-nine weeks ended October 1, 2017,2, 2022, the Company granted the following equity-basedshare-based compensation awards:awards under the 2013 Incentive Plan:
Grant Date |
| RSUs |
|
| PSAs |
|
| RSAs |
| |||
March 2017 |
|
| 325,406 |
|
|
| 148,944 |
|
|
| 288,746 |
|
May 2017 |
|
| 21,820 |
|
|
| — |
|
|
| — |
|
August 2017 |
|
| 10,630 |
|
|
| — |
|
|
| — |
|
Total: |
|
| 357,856 |
|
|
| 148,944 |
|
|
| 288,746 |
|
Weighted-average grant date fair value |
| $ | 18.66 |
|
| $ | 18.11 |
|
| $ | 18.11 |
|
Grant Date |
| RSUs |
|
| PSAs |
|
| Options |
| |||
March 15, 2022 |
|
| 370,177 |
|
|
| 147,846 |
|
|
| 211,352 |
|
March 21, 2022 |
|
| 104,913 |
|
|
| 14,260 |
|
|
| 20,270 |
|
Total |
|
| 475,090 |
|
|
| 162,106 |
|
|
| 231,622 |
|
Weighted-average grant date fair value |
| $ | 31.60 |
|
| $ | 31.52 |
|
| $ | 10.58 |
|
Weighted-average exercise price |
|
| — |
|
|
| — |
|
| $ | 31.52 |
|
20
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock Options
The Company uses the Black-Scholes option pricing model to estimate the fair value of options at grant date. Options vest in accordance with the terms set forth in the grant letter and vary depending on if they are time-based or performance-based.letter.
Time-based options granted prior to fiscal year 2016 generally vest ratably over a period of 12 quarters (three years), and time-based options granted in fiscal year 2016 vest annually over a period of three years.years.
13
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIESRSUs
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The fair value of RSUs is based on the closing price of the Company’s common stock on the grant date. RSUs generally vest annually over a period of two or three years from the grant date.
PSAs
PSAs granted in fiscal year 2015 are restricted shares that2018 were subject to the Company achieving certain earnings per share performance targets, as well as additional time-vesting conditions. The fair value of PSAs is based on the closing price of the Company’s common stock on the grant date. During the thirty-nine weeks ended October 2, 2016, the performance conditions with respect to 2015 earnings per share were deemed to have been met, and the PSAs will vest 50 percent at each of the second and third anniversary of the grant date. During the thirty-nine weeks ended October 1, 2017, 21,050 of the 2015 PSAs were vested. No PSAs vested during the thirty-nine weeks ended October 2, 2016.
PSAs granted in fiscal year 2016 are restricted shares that are subject to the Company achieving certain earnings before interest and taxes (“EBIT”) performance targets for the 2020 fiscal year. The criteria was based on an annuala range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. The performance conditions with respect to fiscal year 2020 EBIT were deemed to have been met, and cumulative basis over a three-yearthe PSAs vested at the maximum pay out level on the third anniversary of the grant date (March 2021). There were no outstanding 2018 PSAs as of October 2, 2022.
PSAs granted in 2019 are subject to the Company achieving certain EBIT performance period, as well as additional time-vesting conditions. targets for the 2021 fiscal year. The fair value of these PSAscriteria is based on the closing pricea range of performance targets in which grantees may earn 0% to 200% of the Company’s common stockbase number of awards granted. The performance 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 grant date. The EBIT target resets annually for eachthird anniversary of the three years duringgrant date (March 2022). During the thirty-nine weeks ended October 2, 2022, 208,172 of the 2019 PSAs vested. There were no outstanding 2019 PSAs as of October 2, 2022.
PSAs granted in 2020 are subject to the Company achieving certain earnings before taxes (“EBT”) performance periodtargets for the 2022 fiscal year. The criteria is based on a percentage increase over the previous year’s actual EBIT, with each annualrange of performance tranche independenttargets in which grantees may earn 0% to 200% of the previous and next tranche. Cumulative performance is based on the aggregate annual performance targets. Payout of the performance shares will either be 0% or range from 50% to 150% of the targetbase number of sharesawards granted. If the performance conditions are met, PSAs cliffthe applicable number of performance shares will vest on the third anniversary of the grant date. The Company’s board of directors determined that the performance targets for the fiscal year 2016 tranche were not met and 30,981 performance shares were not earned.date (March 2023).
PSAs granted in fiscal year 2017 are restricted shares that2021 are subject to the Company achieving certain earnings per shareEBIT performance targets as well as additional time-vesting conditions. for the 2023 fiscal year. The fair value of PSAscriteria is based on the closing pricea range of performance targets in which grantees may earn 0% to 200% of the Company’s common stock on the grant date. Payout of the performance shares will either be 0% or range from 10% to 150% of the targetbase number of sharesawards granted. If the performance conditions are met, PSAsthe applicable number of performance shares will vest 50 percent at each ofon the second and third anniversary of the grant date.date (March 2024).
RSAs
PSAs granted in 2022 are subject to the Company achieving certain EBIT performance targets for the 2024 fiscal year. The fair value of RSAscriteria is based on the closing pricea range of performance targets in which grantees may earn 0% to 200% of the Company’s common stockbase number of awards granted. If performance conditions are met, the applicable number of performance shares will vest on the grant date. RSAs granted prior to January 1, 2017 will vest either ratably over a seven quarter period, beginning on December 31, 2016 or cliff vest on June 30, 2018. RSAs granted in fiscal year 2017 will vest annually over a periodthird anniversary of three years from the grant date.date (March 2025).
Equity Award RestructuringShare-based Compensation Expense
In connection with the appointments ofThe Company presents share-based compensation expense in selling, general and administrative expenses on the Company’s Chief Executive Officer and President & Chief Operating Officer in August 2015, the Compensation Committeeconsolidated statements of the Company’s Boardincome. The amount recognized was as follows:
|
| Thirteen weeks ended |
|
| Thirty-nine weeks ended |
| ||||||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| October 2, 2022 |
|
| October 3, 2021 |
| ||||
Share-based compensation expense |
| $ | 3,752 |
|
| $ | 3,453 |
|
| $ | 11,672 |
|
| $ | 11,304 |
|
21
In order to satisfy the original intent with respect to these individuals’ compensation, on May 23, 2016, the Compensation Committee granted to the Company’s Chief Executive Officer and President & Chief Operating Officer under the 2013 Incentive Plan options to purchase 386,496 and 33,439 shares of
14
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the Company’s common stock at an exercise price of $24.48 per share, respectively, and 215,251 and 2,601 RSAs, respectively. The Company recognized compensation expense of $0.9 million during the thirteen week period and $2.9 million during the thirty-nine week period ended October 1, 2017 related to the options and RSAs granted. The Company recognized compensation expense of $1.0 million during the thirteen week period and $1.4 million during the thirty-nine week period ended October 2, 2016 related to the options and RSAs granted.
Equity-based Compensation Expense
Equity-based compensation expense was reflected in the consolidated statements of operations as follows:
|
| Thirteen Weeks Ended |
|
| Thirty-nine Weeks Ended |
| ||||||||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| October 1, 2017 |
|
| October 2, 2016 |
| ||||
Cost of sales, buying and occupancy |
| $ | 265 |
|
| $ | 244 |
|
| $ | 777 |
|
| $ | 726 |
|
Direct store expenses |
|
| 349 |
|
|
| 339 |
|
|
| 1,098 |
|
|
| 1,015 |
|
Selling, general and administrative expenses |
|
| 3,471 |
|
|
| 3,414 |
|
|
| 8,450 |
|
|
| 8,581 |
|
Equity-based compensation expense before income taxes |
|
| 4,085 |
|
|
| 3,997 |
|
|
| 10,325 |
|
|
| 10,322 |
|
Income tax benefit |
|
| (1,528 | ) |
|
| (1,519 | ) |
|
| (3,863 | ) |
|
| (3,922 | ) |
Net equity-based compensation expense |
| $ | 2,557 |
|
| $ | 2,478 |
|
| $ | 6,462 |
|
| $ | 6,400 |
|
The following equity-basedshare-based awards were outstanding as of October 1, 20172, 2022 and January 1, 2017:October 3, 2021:
|
| As of |
|
| As of |
| ||||||||||
|
| October 1, 2017 |
|
| January 1, 2017 |
|
| October 2, 2022 |
|
| October 3, 2021 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Vested |
|
| 4,394 |
|
|
| 5,552 |
|
|
| 313 |
|
|
| 244 |
|
Unvested |
|
| 609 |
|
|
| 1,205 |
|
|
| 1,047 |
|
|
| 1,134 |
|
RSUs |
|
| 453 |
|
|
| 274 |
|
|
| 974 |
|
|
| 935 |
|
PSAs |
|
| 231 |
|
|
| 159 |
|
|
| 460 |
|
|
| 433 |
|
RSAs |
|
| 384 |
|
|
| 187 |
| ||||||||
As of October 1, 2017,2, 2022, total unrecognized compensation expense related to outstanding equity-based awards was as follows:
|
| As of |
| |
|
| October 1, 2017 |
| |
Options |
| $ | 3,629 |
|
RSUs |
|
| 6,803 |
|
PSAs |
|
| 3,171 |
|
RSAs |
|
| 6,106 |
|
Total unrecognized compensation expense |
| $ | 19,709 |
|
As of October 1, 2017, the totaland remaining weighted average recognition period related to outstanding equity-basedshare-based awards was as follows:
| ||||
| ||||
|
| |||
|
| |||
|
| |||
|
| |||
|
| Unrecognized |
|
| Remaining |
| ||
Options |
| $ | 3,781 |
|
|
| 1.1 |
|
RSUs |
|
| 19,114 |
|
|
| 1.7 |
|
PSAs |
|
| 784 |
|
|
| 1.4 |
|
Total unrecognized compensation expense at October 2, 2022 |
| $ | 23,679 |
|
|
|
| |
15
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the thirty-nine weeks ended October 1, 20172, 2022 and October 2, 2016,3, 2021, the Company received $6.6$4.1 million and $2.6$1.9 million, respectively, in cash proceeds from the exercise of options.
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the 2021 fiscal year, filed on February 23, 201724, 2022 (“Form 10-K”) with the Securities and Exchange Commission. All dollar amounts included below are in thousands, unless otherwise noted.
Business Overview
Sprouts Farmers Market operates asoffers a healthyunique grocery store that offers fresh, natural and organic food that includesexperience featuring an open layout with fresh produce bulk foods, vitaminsat the heart of the store. Sprouts inspires wellness naturally with a carefully curated assortment of better-for-you products paired with purpose-driven people. We continue to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, body care and natural household items catering to consumers’ growing interestgluten-free.Headquartered in health and wellness. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. With 282Phoenix with 379 stores in 1523 states as of October 1, 2017,2, 2022, we are one of the largest and fastest growing specialty retailers of fresh, natural and organic food in the United States. As of November 1, 2017, we have grown to 285 stores in 15 states.
At Sprouts, we believe healthy living is a journey and every meal is a choice. The cornerstones of our business are fresh, natural and organic products at compelling prices (which we refer to as “Healthy Living for Less”), an attractive and differentiated shopping experience featuring a broad selection of innovative healthy products, and knowledgeable team members who we believe provide best-in-class customer engagement and product education.
Our Heritage
In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding in 2002, through October 1, 2017, we continued to open new stores whilehave grown rapidly, significantly increasing our sales, store count and profitability, including successfully rebranding 43 Henry’s Farmers Market and 39 Sunflower Farmers Market stores added in 2011 and 2012, respectively, through acquisitions to the Sprouts banner (referred to as the “Transactions”).banner. These three businesses all trace their lineage back to Henry’s Farmers Market and were built with similar store formats and operations including a strong emphasis on value, produce and service in smaller, convenient locations. The consistency
Outlook
In 2020, we announced our new long-term growth strategy that we believe will transform our company and drive profitable growth. We are executing on this strategy, focusing on the following areas:
Outlook
Expand in Select Markets
. We are23
Recent Developments
Our operations have generally stabilized since the onset of the COVID-19 pandemic. However, we continue to experience varying levels of inflation through increased product costs which we continue to pass through to retail pricing. In addition, due to continued difficulties in obtaining necessary equipment from third parties and growinginflationary pressures due to supply chain delays complicated by the Sprouts brand. We intendCOVID-19 pandemic, we have experienced and may continue to continue expandingexperience increased costs and delays in our store base by pursuingplanned new store openingsopenings. See “Risk Factors—The coronavirus (COVID-19) pandemic has disrupted our business and could negatively impact our financial condition.” in our existing markets, expanding into adjacent markets and penetrating new markets. Although we plan to expand our store base primarily through new store openings, we may grow through strategic acquisitions if we identify suitable targets and are able to negotiate acceptable terms and conditionsForm 10-K for acquisition. We intend to open 32 new stores in 2017,additional information.
24
We also believe we can continue to deliver positive comparable store sales growth by enhancing our core value proposition and distinctive customer-oriented shopping experience, as well as through expanding and refining our fresh, natural and organic product offerings, our targeted and personalized marketing efforts and our in-store education. We are committed to growing the Sprouts brand by supporting our stores, product offerings and corporate partnerships, including the expansion of innovative marketing and promotional strategies through print, digital and social media platforms.
Results of Operations for Thirteen Weeks Ended October 1, 20172, 2022 and October 2, 20163, 2021
The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted.
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| Thirteen weeks ended |
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| October 1, 2017 |
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| October 2, 2016 |
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| Thirteen weeks ended |
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Unaudited Consolidated Statement of Operations Data: |
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| October 2, 2022 |
|
| October 3, 2021 |
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Unaudited Quarterly Consolidated Statement of Income Data: |
|
|
|
|
|
| ||||||||||
Net sales |
| $ | 1,206,059 |
|
| $ | 1,035,801 |
|
| $ | 1,591,026 |
|
| $ | 1,509,633 |
|
Cost of sales, buying and occupancy |
|
| 859,650 |
|
|
| 744,288 |
| ||||||||
Cost of sales |
|
| 1,007,376 |
|
|
| 969,904 |
| ||||||||
Gross profit |
|
| 346,409 |
|
|
| 291,513 |
|
|
| 583,650 |
|
|
| 539,729 |
|
Direct store expenses |
|
| 250,191 |
|
|
| 216,932 |
| ||||||||
Selling, general and administrative expenses |
|
| 39,955 |
|
|
| 29,664 |
|
|
| 460,834 |
|
|
| 423,416 |
|
Store pre-opening costs |
|
| 2,456 |
|
|
| 3,446 |
| ||||||||
Store closure and other costs |
|
| 803 |
|
|
| 24 |
| ||||||||
Depreciation and amortization (exclusive of depreciation included |
|
| 30,313 |
|
|
| 30,377 |
| ||||||||
Store closure and other costs, net |
|
| 2,164 |
|
|
| 128 |
| ||||||||
Income from operations |
|
| 53,004 |
|
|
| 41,447 |
|
|
| 90,339 |
|
|
| 85,808 |
|
Interest expense |
|
| (5,609 | ) |
|
| (3,723 | ) | ||||||||
Other income |
|
| 162 |
|
|
| 135 |
| ||||||||
Interest expense, net |
|
| 1,951 |
|
|
| 2,911 |
| ||||||||
Income before income taxes |
|
| 47,557 |
|
|
| 37,859 |
|
|
| 88,388 |
|
|
| 82,897 |
|
Income tax provision |
|
| (16,071 | ) |
|
| (13,974 | ) |
|
| 22,648 |
|
|
| 19,030 |
|
Net income |
| $ | 31,486 |
|
| $ | 23,885 |
|
| $ | 65,740 |
|
| $ | 63,867 |
|
|
|
|
|
|
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|
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|
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|
|
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| ||
Weighted average shares outstanding |
|
| 134,320 |
|
|
| 147,743 |
| ||||||||
Dilutive effect of equity-based awards |
|
| 2,450 |
|
|
| 2,281 |
| ||||||||
Weighted average shares outstanding - basic |
|
| 107,229 |
|
|
| 114,201 |
| ||||||||
Diluted effect of equity-based awards |
|
| 866 |
|
|
| 617 |
| ||||||||
Weighted average shares and equivalent shares outstanding |
|
| 136,770 |
|
|
| 150,024 |
|
|
| 108,095 |
|
|
| 114,818 |
|
Diluted net income per share |
| $ | 0.23 |
|
| $ | 0.16 |
|
| $ | 0.61 |
|
| $ | 0.56 |
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| Thirteen weeks ended |
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| October 1, 2017 |
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| October 2, 2016 |
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Other Operating Data: |
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Comparable store sales growth |
|
| 4.6 | % |
|
| 1.3 | % |
Stores at beginning of period |
|
| 274 |
|
|
| 240 |
|
Opened |
|
| 8 |
|
|
| 10 |
|
Stores at end of period |
|
| 282 |
|
|
| 250 |
|
|
| Thirteen weeks ended |
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| October 2, 2022 |
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| October 3, 2021 |
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Other Operating Data: |
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Comparable store sales growth |
|
| 2.4 | % |
|
| (5.4 | )% |
Stores at beginning of period |
|
| 378 |
|
|
| 363 |
|
Closed |
|
| — |
|
|
| — |
|
Opened |
|
| 1 |
|
|
| 3 |
|
Stores at end of period |
|
| 379 |
|
|
| 366 |
|
Comparison of Thirteen Weeks Ended October 1, 20172, 2022 to Thirteen Weeks Ended
October 2, 20163, 2021
Net sales
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| Thirteen weeks ended |
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| Thirteen weeks ended |
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|
| October 1, 2017 |
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| October 2, 2016 |
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| Change |
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| % Change |
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| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
|
| % Change |
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Net sales |
| $ | 1,206,059 |
|
| $ | 1,035,801 |
|
| $ | 170,258 |
|
|
| 16 | % |
| $ | 1,591,026 |
|
| $ | 1,509,633 |
|
| $ | 81,393 |
|
|
| 5 | % |
Comparable store sales growth |
|
| 4.6 | % |
|
| 1.3 | % |
|
|
|
|
|
|
|
|
|
| 2.4 | % |
|
| (5.4 | )% |
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Net sales during the thirteen weeks ended October 1, 20172, 2022 totaled $1.2$1.6 billion, increasing 16% overan increase of $81.4 million, or 5%, compared to the same period of the prior fiscal year. Sales growththirteen weeks ended October 3, 2021. The sales increase was primarily driven by solid performance insales from new stores opened.opened in the last twelve months and a 2.4% increase in comparable store sales. The increase in comparable store sales was due in part to an increase in basket value due to retail price inflation, partially offset by a slight reduction in the number of items per basket. Comparable stores contributed approximately 87%97% of nettotal sales for each of the thirteen weeks ended October 1, 20172, 2022 and October 2, 2016, respectively.3, 2021.
25
Cost of sales buying and occupancy and gross profit
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| Thirteen weeks ended |
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| Thirteen weeks ended |
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|
| October 1, 2017 |
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| October 2, 2016 |
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| Change |
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| % Change |
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| October 2, 2022 |
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| October 3, 2021 |
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| Change |
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| % Change |
| ||||||||
Net sales |
| $ | 1,206,059 |
|
| $ | 1,035,801 |
|
| $ | 170,258 |
|
|
| 16 | % |
| $ | 1,591,026 |
|
| $ | 1,509,633 |
|
| $ | 81,393 |
|
|
| 5 | % |
Cost of sales, buying and occupancy |
|
| 859,650 |
|
|
| 744,288 |
|
|
| 115,362 |
|
|
| 15 | % | ||||||||||||||||
Cost of sales |
|
| 1,007,376 |
|
|
| 969,904 |
|
|
| 37,472 |
|
|
| 4 | % | ||||||||||||||||
Gross profit |
|
| 346,409 |
|
|
| 291,513 |
|
|
| 54,896 |
|
|
| 19 | % |
|
| 583,650 |
|
|
| 539,729 |
|
|
| 43,921 |
|
|
| 8 | % |
Gross margin |
|
| 28.7 | % |
|
| 28.1 | % |
|
| 0.6 | % |
|
|
|
|
|
| 36.7 | % |
|
| 35.8 | % |
|
| 0.9 | % |
|
|
| |
Gross profit increasedtotaled $583.7 million during the thirteen weeks ended October 1, 20172, 2022, an increase of $43.9 million, or 8%, compared to the thirteen weeks ended October 2, 20163, 2021, driven by $54.9 million, of which $47.4 million was as a result of increased sales volume and $7.5 million relatedvolume. Gross margin increased by 0.9% to increased margin rate. This improvement was primarily driven by cycling a heightened promotional environment in the third quarter of 2016 in addition to leverage from increased comparable sales.
Direct store expenses
|
| Thirteen weeks ended |
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|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
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| % Change |
| ||||
Direct store expenses |
| $ | 250,191 |
|
| $ | 216,932 |
|
| $ | 33,259 |
|
|
| 15 | % |
Percentage of net sales |
|
| 20.7 | % |
|
| 20.9 | % |
|
| -0.2 | % |
|
|
|
|
Direct store expenses36.7% for the thirteen weeks ended October 1, 2017 increased $33.3 million, including $26.5 million related2, 2022, compared to stores opened after October 2, 2016, and $6.8 million related to stores operated prior to the same period in 2016. Direct store expenses, as a percentage of net sales, decreased 20 basis points. This leverage is primarily driven by improved comparable sales, as well as operating efficiencies, partially offset by higher benefit costs.
Selling, general and administrative expenses
|
| Thirteen weeks ended |
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|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
|
| % Change |
| ||||
Selling, general and administrative expenses |
| $ | 39,955 |
|
| $ | 29,664 |
|
| $ | 10,291 |
|
|
| 35 | % |
Percentage of net sales |
|
| 3.3 | % |
|
| 2.9 | % |
|
| 0.4 | % |
|
|
|
|
The increase in selling, general and administrative expenses primarily reflects a $7.1 million increase in bonus and compensation expenses, $1.5 million increase in advertising expenses, and $1.7 million of increases in other corporate expenses, commensurate with store growth and improved company performance.
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| Thirteen weeks ended |
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|
| October 1, 2017 |
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| October 2, 2016 |
|
| Change |
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| % Change |
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Attributable to 2016 store openings |
|
| — |
|
|
| 3,109 |
|
|
| (3,109 | ) |
|
|
|
|
Attributable to 2017 store openings |
|
| 2,046 |
|
|
| 337 |
|
|
| 1,709 |
|
|
|
|
|
Attributable to future store openings |
|
| 410 |
|
|
| — |
|
|
| 410 |
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|
|
|
|
Total store pre-opening costs |
| $ | 2,456 |
|
| $ | 3,446 |
|
| $ | (990 | ) |
|
| (29 | )% |
Percentage of net sales |
|
| 0.2 | % |
|
| 0.3 | % |
|
| (0.1 | )% |
|
|
|
|
Store pre-opening costs in the thirteen weeks ended October 1, 2017 included $1.9 million related to opening 8 stores during the thirteen weeks ended October 1, 2017 and $0.6 million associated with stores expected to open subsequent to October 1, 2017. Store pre-opening costs in the thirteen weeks ended October 2, 2016 included $2.6 million related to opening 10 stores during that period and $0.8 million associated with stores opened subsequent to quarter end.
Store closure and other costs
Store closure costs35.8% for the thirteen weeks ended October 1, 20173, 2021, primarily as a result of offering fewer promotions in the current year.
Selling, general and October 2, 2016 are relatedadministrative expenses
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| Thirteen weeks ended |
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| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
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| % Change |
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Selling, general and administrative |
| $ | 460,834 |
|
| $ | 423,416 |
|
| $ | 37,418 |
|
|
| 9 | % |
Percentage of net sales |
|
| 29.0 | % |
|
| 28.0 | % |
|
| 1.0 | % |
|
|
| |
Selling, general and administrative expenses increased $37.4 million, or 9%, compared to adjustments to the closed store facility reserve primarily related to refinement of estimated subtenant income and other actual occupancy costs from original estimates.
During the third quarter of 2017, 14 of our stores were affected by hurricanes in three states. Although physical damage was minimal, the stores experienced loss of business due to temporary closures, inventory loss and additional expenses to clean up and power the stores. These costs, net of estimated insurance recovery, approximate $0.7 million in the thirteen weeks ended October 1, 2017.
Interest expense
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| Thirteen weeks ended |
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| October 1, 2017 |
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| October 2, 2016 |
|
| Change |
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| % Change |
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Capital and financing leases |
| $ | 3,033 |
|
| $ | 2,708 |
|
| $ | 325 |
|
|
| 12 | % |
Long-term debt |
|
| 2,305 |
|
|
| 786 |
|
|
| 1,519 |
|
|
| 193 | % |
Deferred financing costs / Original issuance discount |
|
| 116 |
|
|
| 116 |
|
|
| — |
|
|
| 0 | % |
Other |
|
| 155 |
|
|
| 113 |
|
|
| 42 |
|
|
| 37 | % |
Total Interest Expense |
| $ | 5,609 |
|
| $ | 3,723 |
|
| $ | 1,886 |
|
|
| 51 | % |
The3, 2021.The increase in interest expense is primarily due to new stores opened since the comparable period in the prior year, higher principal balance onwages and higher marketing spend in the Credit Facility for borrowing to support our share repurchase program, combined with the slightlycurrent year, as well as higher interest rate on our Credit Facility for the thirteen weeks ended October 1, 2017.credit card and ecommerce fees.
Depreciation and amortization
Income tax provision
|
| Thirteen weeks ended |
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|
| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
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| % Change |
| ||||
Depreciation and amortization |
| $ | 30,313 |
|
| $ | 30,377 |
|
| $ | (64 | ) |
|
| 0 | % |
Percentage of net sales |
|
| 1.9 | % |
|
| 2.0 | % |
|
| (0.1 | )% |
|
|
| |
Income tax provision increased to $16.1 million for the thirteen weeks ended October 1, 2017 from $14.0Depreciation and amortization expense (exclusive of depreciation included in cost of sales) was $30.3 million for the thirteen weeks ended October 2, 2016, primarily related2022, compared to an increase in income before taxes. Our effective income tax rate decreased to 33.8% in$30.4 million for the thirteen weeks ended October 1, 2017 from 36.9% in3, 2021. Depreciation and amortization primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment.
26
Store closure and other costs, net
|
| Thirteen weeks ended |
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| ||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
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| Change |
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| % Change | |||
Store closure and other costs, net |
| $ | 2,164 |
|
| $ | 128 |
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| $ | 2,036 |
|
| n/m |
Percentage of net sales |
|
| 0.1 | % |
|
| 0.0 | % |
|
| 0.1 | % |
|
|
Store closure and other costs, net increased $2.0 million to $2.2 million for the thirteen weeks ended October 2, 2016.2022 compared to $0.1 million for the thirteen weeks ended October 3, 2021. The decreaseincrease in store closure and other costs, net was driven by inventory loss and other expenses incurred by several of our stores impacted by Hurricane Ian in the current quarter.
Interest expense, net
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| Thirteen weeks ended |
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| October 2, 2022 |
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| October 3, 2021 |
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| Change |
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| % Change |
| ||||
Long-term debt |
| $ | 2,246 |
|
| $ | 1,133 |
|
| $ | 1,113 |
|
|
| 98 | % |
Capital and financing leases |
|
| 209 |
|
|
| 223 |
|
|
| (14 | ) |
|
| (6 | )% |
Deferred financing costs |
|
| 193 |
|
|
| 141 |
|
|
| 52 |
|
|
| 37 | % |
Interest rate hedge and other |
|
| (697 | ) |
|
| 1,414 |
|
|
| (2,111 | ) |
|
| (149 | )% |
Total interest expense, net |
| $ | 1,951 |
|
| $ | 2,911 |
|
| $ | (960 | ) |
|
| (33 | )% |
Interest expense, net decreased to $2.0 million for the thirteen weeks ended October 2, 2022, compared to $2.9 million for the thirteen weeks ended October 3, 2021 primarily due to higher interest income and lower credit facility fees. See Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements.
Income tax provision
Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:
|
| Thirteen weeks ended |
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|
| October 2, 2022 |
|
| October 3, 2021 |
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| ||
Federal statutory rate |
|
| 21.0 | % |
|
| 21.0 | % |
|
Change in income taxes resulting from: |
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|
|
|
|
|
| ||
State income taxes, net of federal benefit |
|
| 4.9 | % |
|
| 3.9 | % |
|
Enhanced charitable contributions |
|
| (0.9 | )% |
|
| (1.3 | )% |
|
Federal credits |
|
| (0.3 | )% |
|
| (0.3 | )% |
|
Return to Provision |
|
| (0.3 | )% |
|
| (0.6 | )% |
|
Other, net |
|
| 1.2 | % |
|
| 0.3 | % |
|
Effective tax rate |
|
| 25.6 | % |
|
| 23.0 | % |
|
The effective tax rate increased to 25.6% for the thirteen weeks ended October 2, 2022 from 23.0% for the thirteen weeks ended October 3, 2021. The increase in the effective tax rate was primarily due to tax returnan increase of non-deductible executive compensation as well as a decrease in enhanced charitable contributions due to provision adjustments for the 2016 income tax return.expiration of CARES Act benefits.
27
Net income
|
| Thirteen weeks ended |
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| Thirteen weeks ended |
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|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
|
| % Change |
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
|
| % Change |
| ||||||||
Net income |
| $ | 31,486 |
|
| $ | 23,885 |
|
| $ | 7,601 |
|
|
| 32 | % |
| $ | 65,740 |
|
| $ | 63,867 |
|
| $ | 1,873 |
|
|
| 3 | % |
Percentage of net sales |
|
| 2.6 | % |
|
| 2.3 | % |
|
| 0.3 | % |
|
|
|
|
|
| 4.1 | % |
|
| 4.2 | % |
|
| (0.1 | )% |
|
|
| |
Net income as a percentage of net sales increased $1.9 million primarily due to higherincreased sales and margins combined withgross profit, partially offset by higher selling, general and administrative expenses and a lowerhigher effective tax rate offset in part by higher interest expense associated withfor the drawdown on our Credit Facility in connection with the stock buyback program.reasons discussed above.
Diluted earnings per share
|
| Thirteen weeks ended |
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| Thirteen weeks ended |
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|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
|
| % Change |
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
|
| % Change |
| ||||||||
Diluted earnings per share |
| $ | 0.23 |
|
| $ | 0.16 |
|
| $ | 0.07 |
|
|
| 44 | % |
| $ | 0.61 |
|
| $ | 0.56 |
|
| $ | 0.05 |
|
|
| 9 | % |
Diluted weighted average shares outstanding |
|
| 136,770 |
|
|
| 150,024 |
|
|
| (13,254 | ) |
|
|
|
|
|
| 108,095 |
|
|
| 114,818 |
|
|
| (6,723 | ) |
|
|
| |
The increase in diluted earnings per share of $0.07$0.05 was driven by the increase inhigher net income as well asin addition to fewer diluted shares outstanding compared to the prior year, due primarily to the share repurchase program.
28
Results of Operations for Thirty-nine Weeks Ended October 1, 20172, 2022 and October 2, 20163, 2021
The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted.
|
| Thirty-nine Weeks Ended |
| |||||
|
| October 1, 2017 |
|
| October 2, 2016 |
| ||
Unaudited Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
Net sales |
| $ | 3,520,679 |
|
| $ | 3,060,685 |
|
Cost of sales, buying and occupancy |
|
| 2,494,998 |
|
|
| 2,156,857 |
|
Gross profit |
|
| 1,025,681 |
|
|
| 903,828 |
|
Direct store expenses |
|
| 715,336 |
|
|
| 617,817 |
|
Selling, general and administrative expenses |
|
| 110,312 |
|
|
| 91,482 |
|
Store pre-opening costs |
|
| 10,055 |
|
|
| 11,625 |
|
Store closure and other costs |
|
| 992 |
|
|
| 159 |
|
Income from operations |
|
| 188,986 |
|
|
| 182,745 |
|
Interest expense |
|
| (15,447 | ) |
|
| (10,985 | ) |
Other income |
|
| 388 |
|
|
| 326 |
|
Income before income taxes |
|
| 173,927 |
|
|
| 172,086 |
|
Income tax provision |
|
| (55,186 | ) |
|
| (64,785 | ) |
Net income |
| $ | 118,741 |
|
| $ | 107,301 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
| 136,063 |
|
|
| 149,202 |
|
Dilutive effect of equity-based awards |
|
| 2,797 |
|
|
| 2,366 |
|
Weighted average shares and equivalent shares outstanding |
|
| 138,860 |
|
|
| 151,568 |
|
Diluted net income per share |
| $ | 0.86 |
|
| $ | 0.71 |
|
|
| Thirty-nine Weeks Ended |
| |||||
|
| October 1, 2017 |
|
| October 2, 2016 |
| ||
Other Operating Data: |
|
|
|
|
|
|
|
|
Comparable store sales growth |
|
| 2.4 | % |
|
| 3.4 | % |
|
|
|
|
|
|
|
|
|
Stores at beginning of period |
|
| 253 |
|
|
| 217 |
|
Opened |
|
| 29 |
|
|
| 33 |
|
Stores at end of period |
|
| 282 |
|
|
| 250 |
|
Comparison of Thirty-nine Weeks Ended October 1, 20172, 2022 to Thirty-nine Weeks Ended
October 2, 20163, 2021
|
| Thirty-nine weeks ended |
| |||||
|
| October 2, 2022 |
|
| October 3, 2021 |
| ||
Unaudited Quarterly Consolidated Statement of Income Data: |
|
|
|
|
|
| ||
Net sales |
| $ | 4,827,669 |
|
| $ | 4,607,073 |
|
Cost of sales |
|
| 3,051,914 |
|
|
| 2,931,089 |
|
Gross profit |
|
| 1,775,755 |
|
|
| 1,675,984 |
|
Selling, general and administrative expenses |
|
| 1,382,854 |
|
|
| 1,299,498 |
|
Depreciation and amortization (exclusive of depreciation included |
|
| 93,377 |
|
|
| 92,036 |
|
Store closure and other costs, net |
|
| 3,034 |
|
|
| 1,757 |
|
Income from operations |
|
| 296,490 |
|
|
| 282,693 |
|
Interest expense, net |
|
| 7,648 |
|
|
| 8,840 |
|
Income before income taxes |
|
| 288,842 |
|
|
| 273,853 |
|
Income tax provision |
|
| 72,798 |
|
|
| 65,924 |
|
Net income |
| $ | 216,044 |
|
| $ | 207,929 |
|
|
|
|
|
|
|
| ||
Weighted average shares outstanding - basic |
|
| 109,066 |
|
|
| 116,497 |
|
Diluted effect of equity-based awards |
|
| 822 |
|
|
| 755 |
|
Weighted average shares and equivalent shares outstanding |
|
| 109,888 |
|
|
| 117,252 |
|
Diluted net income per share |
| $ | 1.97 |
|
| $ | 1.77 |
|
|
| Thirty-nine weeks ended |
| |||||
|
| October 2, 2022 |
|
| October 3, 2021 |
| ||
Other Operating Data: |
|
|
|
|
|
| ||
Comparable store sales growth |
|
| 2.0 | % |
|
| (8.4 | )% |
Stores at beginning of period |
|
| 374 |
|
|
| 362 |
|
Closed |
|
| (4 | ) |
|
| — |
|
Opened |
|
| 9 |
|
|
| 4 |
|
Stores at end of period |
|
| 379 |
|
| 366 |
| |
29
Net salesSales
|
| Thirty-nine Weeks Ended |
|
|
|
|
|
|
|
|
| |||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
|
| % Change |
| ||||
Net sales |
| $ | 3,520,679 |
|
| $ | 3,060,685 |
|
| $ | 459,994 |
|
|
| 15 | % |
Comparable store sales growth |
|
| 2.4 | % |
|
| 3.4 | % |
|
|
|
|
|
|
|
|
|
| Thirty-nine weeks ended |
|
|
|
|
|
|
| |||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
|
| % Change |
| ||||
Net sales |
| $ | 4,827,669 |
|
| $ | 4,607,073 |
|
| $ | 220,596 |
|
|
| 5 | % |
Comparable store sales growth |
|
| 2.0 | % |
|
| (8.4 | )% |
|
|
|
|
|
| ||
Net sales during the thirty-nine weeks ended October 1, 20172, 2022 totaled $3.5$4.8 billion, increasing 15%an increase of $220.6 million, or 5%, over the same period of the prior fiscal year. Sales growthThe sales increase was primarily due to a 2.0% increase in comparable store sales, driven primarily by solid performancean increase in basket due to retail inflation partially offset by a slight reduction of items in the basket, as well as sales from new stores opened.opened in the last twelve months. Comparable stores contributed approximately 87%97% of nettotal sales for the thirty-nine weeks ended October 1, 20172, 2022 and approximately 88%96% for the same period of the prior fiscal year.thirty-nine weeks ended October 3, 2021.
Cost of sales buying and occupancy and gross profit
|
| Thirty-nine Weeks Ended |
|
|
|
|
|
|
|
|
| |||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
|
| % Change |
| ||||
Net sales |
| $ | 3,520,679 |
|
| $ | 3,060,685 |
|
| $ | 459,994 |
|
|
| 15 | % |
Cost of sales, buying and occupancy |
|
| 2,494,998 |
|
|
| 2,156,857 |
|
|
| 338,141 |
|
|
| 16 | % |
Gross profit |
|
| 1,025,681 |
|
|
| 903,828 |
|
|
| 121,853 |
|
|
| 13 | % |
Gross margin |
|
| 29.1 | % |
|
| 29.5 | % |
|
| (0.4 | )% |
|
|
|
|
|
| Thirty-nine weeks ended |
|
|
|
|
|
|
| |||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
|
| % Change |
| ||||
Net sales |
| $ | 4,827,669 |
|
| $ | 4,607,073 |
|
| $ | 220,596 |
|
|
| 5 | % |
Cost of sales |
|
| 3,051,914 |
|
|
| 2,931,089 |
|
|
| 120,825 |
|
|
| 4 | % |
Gross profit |
|
| 1,775,755 |
|
|
| 1,675,984 |
|
|
| 99,771 |
|
|
| 6 | % |
Gross margin |
|
| 36.8 | % |
|
| 36.4 | % |
|
| 0.4 | % |
|
|
| |
Gross profit increasedtotaled $1.8 billion during the thirty-nine weeks ended October 1, 20172, 2022, an increase of $99.8 million, or 6%, compared to the thirty-nine weeks ended October 2, 20163, 2021 driven by $121.9 million, primarily as a result of increased sales volume. Gross margin decreased dueincreased to the competitive environment, primarily in the first half of 2017, as well as higher occupancy costs.
Direct store expenses
|
| Thirty-nine Weeks Ended |
|
|
|
|
|
|
|
|
| |||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
|
| % Change |
| ||||
Direct store expenses |
| $ | 715,336 |
|
| $ | 617,817 |
|
| $ | 97,519 |
|
|
| 16 | % |
Percentage of net sales |
|
| 20.3 | % |
|
| 20.2 | % |
|
| 0.1 | % |
|
|
|
|
Direct store expenses36.8% for the thirty-nine weeks ended October 1, 2017 increased $97.5 million. Direct store expenses, as a percentage of net sales, increased 10 basis points. This primarily reflects higher payroll and benefit costs, in part due2, 2022, compared to deleverage of fixed costs associated with lower comparable store sales growth, partially offset by other operating efficiencies.
Selling, general and administrative expenses
|
| Thirty-nine Weeks Ended |
|
|
|
|
|
|
|
|
| |||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
|
| % Change |
| ||||
Selling, general and administrative expenses |
| $ | 110,312 |
|
| $ | 91,482 |
|
| $ | 18,830 |
|
|
| 21 | % |
Percentage of net sales |
|
| 3.1 | % |
|
| 3.0 | % |
|
| 0.1 | % |
|
|
|
|
The increase in selling, general and administrative expenses primarily reflects an $8.1 million increase in compensation expense, a $3.7 million increase in regional expenses, a $3.5 million increase in advertising to support growth and $3.5 million of increases in other corporate expenses, commensurate with store growth and improved company performance.
|
| Thirty-nine weeks ended |
|
|
|
|
|
|
|
|
| |||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
|
| % Change |
| ||||
Attributable to 2016 store openings |
|
| — |
|
|
| 11,186 |
|
|
| (11,186 | ) |
|
|
|
|
Attributable to 2017 store openings |
|
| 9,210 |
|
|
| 439 |
|
|
| 8,771 |
|
|
|
|
|
Attributable to future store openings |
|
| 845 |
|
|
| — |
|
|
| 845 |
|
|
|
|
|
Total store pre-opening costs |
| $ | 10,055 |
|
| $ | 11,625 |
|
| $ | (1,570 | ) |
|
| (14 | )% |
Percentage of net sales |
|
| 0.3 | % |
|
| 0.4 | % |
|
| (0.1 | )% |
|
|
|
|
Store pre-opening costs in the thirty-nine weeks ended October 1, 2017 included $9.0 million related to opening 29 stores during the thirty-nine weeks ended October 1, 2017 and $1.0 million associated with stores expected to open subsequent to October 1, 2017. Store pre-opening costs in the thirty-nine weeks ended October 2, 2016 included $10.6 million related to opening 33 stores during that period and $1.0 million associated with stores opened subsequent to quarter end.
Store closure and other costs
Store closure costs36.4% for the thirty-nine weeks ended October 1, 2017 and October 2, 2016 are related to adjustments to the closed facility reserve primarily related to refinement of estimated subtenant income and other actual occupancy costs from original estimates.
During the third quarter of 2017, 14 of our stores were affected by hurricanes in three states. Although physical damage was minimal, the stores experienced loss of business3, 2021, due to temporary closures, inventory lossimproved shrink and additionaloffering fewer promotions in the current year.
Selling, general and administrative expenses
|
| Thirty-nine weeks ended |
|
|
|
|
|
|
| |||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
|
| % Change |
| ||||
Selling, general and administrative expenses |
| $ | 1,382,854 |
|
| $ | 1,299,498 |
|
| $ | 83,356 |
|
|
| 6 | % |
Percentage of net sales |
|
| 28.6 | % |
|
| 28.2 | % |
|
| 0.4 | % |
|
|
| |
Selling, general and administrative expenses increased $83.4 million, or 6%, compared to clean up and power the stores. These costs, net of estimated insurance recovery, approximate $0.7 million in the thirty-nine weeks ended October 1, 2017.
Interest expense
|
| Thirty-nine weeks ended |
|
|
|
|
|
|
|
|
| |||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
|
| % Change |
| ||||
Capital and financing leases |
| $ | 8,715 |
|
| $ | 8,048 |
|
| $ | 667 |
|
|
| 8 | % |
Long-term debt |
|
| 5,919 |
|
|
| 2,247 |
|
|
| 3,672 |
|
|
| 163 | % |
Deferred financing costs / Original issuance discount |
|
| 347 |
|
|
| 347 |
|
|
| — |
|
|
| 0 | % |
Other |
|
| 466 |
|
|
| 343 |
|
|
| 123 |
|
|
| 36 | % |
Total Interest Expense |
| $ | 15,447 |
|
| $ | 10,985 |
|
| $ | 4,462 |
|
|
| 41 | % |
The3, 2021.The increase was primarily driven by the net increase in interest expense is primarily duenew stores opened since the prior year period as well as inflationary conditions driving increases in costs including wages, utilities and supplies. In addition, we have seen higher credit card fees as more consumers shift to credit compared to the higher principal balance onprior year and ecommerce costs resulting from an increase in ecommerce sales compared to the Credit Facility for borrowing to support our share repurchase program combined with the slightly higher interest rate on our Credit Facility for the thirty-nine weeks ended October 1, 2017.prior year.
Income tax provision
Income tax provision decreased to $55.2 million for the thirty-nine weeks ended October 1, 2017 from $64.8
30
Depreciation and amortization
|
| Thirty-nine weeks ended |
|
|
|
|
|
|
| |||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
|
| % Change |
| ||||
Depreciation and amortization |
| $ | 93,377 |
|
| $ | 92,036 |
|
| $ | 1,341 |
|
|
| 1 | % |
Percentage of net sales |
|
| 1.9 | % |
|
| 2.0 | % |
|
| (0.1 | )% |
|
|
| |
Depreciation and amortization expense (exclusive of depreciation included in cost of sales) was $93.4 million for the thirty-nine weeks ended October 2, 2016, primarily related2022, compared to the recognition of excess tax benefits related to the exercise or vesting of equity-based awards in the income tax provision. Our effective income tax rate decreased to 31.7% in$92.0 million for the thirty-nine weeks ended October 1, 2017 from 37.7%3, 2021.Depreciation and amortization expenses (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment.
Store closure and other costs, net
|
| Thirty-nine weeks ended |
|
|
|
|
|
|
| |||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
|
| % Change |
| ||||
Store closure and other costs, net |
| $ | 3,034 |
|
| $ | 1,757 |
|
| $ | 1,277 |
|
|
| 73 | % |
Percentage of net sales |
|
| 0.1 | % |
|
| 0.0 | % |
|
| 0.1 | % |
|
|
| |
Store closure and other costs, net increased $1.3 million to $3.0 million, compared to $1.8 million for the thirty-nine weeks ended October 3, 2021. Store closure and other costs, net during the thirty-nine weeks ended October 2, 20162022 primarily related to recognitioninventory loss and expenses incurred by several of excess tax benefitsour stores impacted by Hurricane Ian in addition to costs associated with the closing of four stores year-to-date. Store closure and other costs, net during the thirty-nine weeks ended October 3, 2021 was driven by inventory loss and additional expenses, net of insurance recovery, related to the exercise or vestingimpact of equity-based awards inwinter storms at several of our stores and a fire at one of our stores during the thirty-nine weeks ended October 3, 2021.
Interest expense, net
|
| Thirty-nine weeks ended |
|
|
|
|
|
|
| |||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
|
| % Change |
| ||||
Long-term debt |
| $ | 4,745 |
|
| $ | 3,474 |
|
| $ | 1,271 |
|
|
| 37 | % |
Capital and financing leases |
|
| 646 |
|
|
| 686 |
|
|
| (40 | ) |
|
| (6 | )% |
Deferred financing costs |
|
| 609 |
|
|
| 423 |
|
|
| 186 |
|
|
| 44 | % |
Interest rate hedge and other |
|
| 1,648 |
|
|
| 4,257 |
|
|
| (2,609 | ) |
|
| (61 | )% |
Total interest expense, net |
| $ | 7,648 |
|
| $ | 8,840 |
|
| $ | (1,192 | ) |
|
| (13 | )% |
Interest expense, net decreased to $7.6 million for the thirty-nine weeks ended October 2, 2022, compared to $8.8 million for the thirty-nine weeks ended October 3, 2021 primarily due to higher interest income and lower credit facility fees. See Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements.
31
Income tax provision
Income tax provision differed from the amounts computed by applying the U.S. federal income tax provision. See ASU 2016-09, Compensation – “Stock Compensation (Topic 718)” under Recently Adopted Accounting Pronouncements (Note 2).
|
| Thirty-nine Weeks Ended |
|
|
|
|
|
|
|
|
| |||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
|
| % Change |
| ||||
Net income |
| $ | 118,741 |
|
| $ | 107,301 |
|
| $ | 11,440 |
|
|
| 11 | % |
Percentage of net sales |
|
| 3.4 | % |
|
| 3.5 | % |
|
| (0.1 | )% |
|
|
|
|
Net income increased $11.4 million as a result of the following:
|
| Thirty-nine weeks ended |
| |||||
|
| October 2, 2022 |
|
| October 3, 2021 |
| ||
Federal statutory rate |
|
| 21.0 | % |
|
| 21.0 | % |
Change in income taxes resulting from: |
|
|
|
|
|
| ||
State income taxes, net of federal benefit |
|
| 4.9 | % |
|
| 4.5 | % |
Enhanced charitable contributions |
|
| (1.0 | )% |
|
| (1.2 | )% |
Federal Credits |
|
| (0.4 | )% |
|
| (0.4 | )% |
Share-based payment awards |
|
| (0.6 | )% |
|
| (0.1 | )% |
Return to Provision |
|
| (0.1 | )% |
|
| (0.2 | )% |
Other, net |
|
| 1.4 | % |
|
| 0.5 | % |
Effective tax rate |
|
| 25.2 | % |
|
| 24.1 | % |
The effective tax rate increased sales, but decreased slightlyto 25.2% for the thirty-nine weeks ended October 2, 2022 from 24.1% in the same period last year. The increase in the effective tax rate is primarily due to an increase of non-deductible executive compensation as well as a percentage of net salesdecrease in enhanced charitable contributions due to lower gross margin and higher payroll expensesthe expiration of CARES Act benefits, partially offset by an increase in benefit from share-based payment awards in the current year.
Net income
|
| Thirty-nine weeks ended |
|
|
|
|
|
|
| |||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
|
| % Change |
| ||||
Net income |
| $ | 216,044 |
|
| $ | 207,929 |
|
| $ | 8,115 |
|
|
| 4 | % |
Percentage of net sales |
|
| 4.5 | % |
|
| 4.5 | % |
|
| 0.0 | % |
|
|
| |
Net income increased $8.1 million primarily due to increased sales and gross profit, partially offset by higher selling, general and administrative expenses and a lowerhigher effective tax rate.rate for the reasons discussed above.
Diluted earnings per share
|
| Thirty-nine weeks ended |
|
|
|
|
|
|
|
|
|
| Thirty-nine weeks ended |
|
|
|
|
|
| |||||||||||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Change |
|
| % Change |
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| Change |
|
| % Change |
| ||||||||
Diluted earnings per share |
| $ | 0.86 |
|
| $ | 0.71 |
|
| $ | 0.15 |
|
|
| 21 | % |
| $ | 1.97 |
|
| $ | 1.77 |
|
| $ | 0.20 |
|
|
| 11 | % |
Diluted weighted average shares outstanding |
|
| 138,860 |
|
|
| 151,568 |
|
|
| (12,708 | ) |
|
|
|
|
|
| 109,888 |
|
|
| 117,252 |
|
|
| (7,364 | ) |
|
|
| |
The increase in diluted earnings per share of $0.15$0.20 was driven by the increase inhigher net income as well asin addition to fewer diluted shares outstanding compared to the prior year, due primarily to the share repurchase program.
32
Return on Invested Capital
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we provide information regarding Return on Invested Capital (referred to as “ROIC”) as additional information about our operating results. ROIC is a non-GAAP financial measure and should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital and provides a meaningful measure of the effectiveness of our capital allocation over time.
We define ROIC as net operating profit after tax (referred to as “NOPAT”), including the effect of capitalized operating leases, divided by average invested capital. Operating leases are capitalized as part of the ROIC calculation to control for differences in capital structure between us and our competitors. Capitalized operating lease interest represents this adjustmentthe add-back to NOPAT and is calculatedoperating income driven by the hypothetical capitalization ofinterest expense we would incur if the property under our operating leases were owned or accounted for as a finance lease (capital lease prior to adoption of ASC 842). The assumed ownership and associated interest expense are calculated using eight times our trailing twelve monthsthe discount rate for each lease as recorded as a component of rent expense within selling, general and an interest rate factor of seven percent. Operating leases are determined as the trailing twelve months’ rent expense times a factor of eight.administrative expenses. Invested capital reflects a trailing twelve-month average.
As numerous methods exist for calculating ROIC, our method may differ from methods used by other companies to calculate their ROIC. It is important to understand the methods and the differences in those methods used by other companies to calculate their ROIC before comparing our ROIC to that of other companies.
Our calculation of ROIC for the fiscal periods indicated was as follows:
|
| Rolling Four Quarters Ended |
| |||||
|
| October 2, 2022 |
|
| October 3, 2021 (1) |
| ||
|
| (dollars in thousands) |
| |||||
Net Income (2) |
| $ | 252,272 |
|
| $ | 276,326 |
|
Special items, net of tax (3), (4) |
|
| — |
|
|
| 1,339 |
|
Interest expense, net of tax (4) |
|
| 7,843 |
|
|
| 9,075 |
|
Net operating profit after tax (NOPAT) |
| $ | 260,115 |
|
| $ | 286,740 |
|
|
|
|
|
|
|
| ||
Total rent expense, net of tax (4) |
|
| 152,942 |
|
|
| 151,764 |
|
Estimated depreciation on operating leases, net of tax (4) |
|
| (90,349 | ) |
|
| (85,366 | ) |
Estimated interest on operating leases, net of tax (4), (5) |
|
| 62,593 |
|
|
| 66,398 |
|
NOPAT, including effect of operating leases |
| $ | 322,708 |
|
| $ | 353,138 |
|
|
|
|
|
|
|
| ||
Average working capital |
|
| 258,834 |
|
|
| 164,740 |
|
Average property and equipment |
|
| 702,206 |
|
|
| 716,425 |
|
Average other assets |
|
| 568,716 |
|
|
| 568,922 |
|
Average other liabilities |
|
| (97,834 | ) |
|
| (103,444 | ) |
Average invested capital |
| $ | 1,431,922 |
|
| $ | 1,346,643 |
|
|
|
|
|
|
|
| ||
Average operating leases (6) |
|
| 1,249,404 |
|
|
| 1,213,852 |
|
Average invested capital, including operating leases |
| $ | 2,681,326 |
|
| $ | 2,560,495 |
|
|
|
|
|
|
|
| ||
ROIC, including operating leases |
|
| 12.0 | % |
|
| 13.8 | % |
33
|
| Rolling Four Quarters Ended |
| |||||
|
| October 1, 2017 |
|
| October 2, 2016 (4) |
| ||
|
| (dollars in thousands) |
| |||||
Net income (1) |
| $ | 135,745 |
|
| $ | 135,518 |
|
Interest expense, net of tax (2) |
|
| 11,770 |
|
|
| 9,580 |
|
Net operating profit after tax (NOPAT) |
| $ | 147,515 |
|
| $ | 145,098 |
|
|
|
|
|
|
|
|
|
|
Total rent expense, net of tax (2) |
|
| 78,113 |
|
|
| 63,983 |
|
Estimated depreciation on capitalized operating leases, net of tax (2) |
|
| (34,370 | ) |
|
| (28,153 | ) |
Estimated interest on capitalized operating leases, net of tax (2) (3) |
|
| 43,743 |
|
|
| 35,830 |
|
NOPAT, including effect of capitalized operating leases |
| $ | 191,258 |
|
| $ | 180,928 |
|
|
|
|
|
|
|
|
|
|
Average working capital |
|
| 15,093 |
|
|
| 103,321 |
|
Average property and equipment |
|
| 641,451 |
|
|
| 522,183 |
|
Average other assets |
|
| 574,281 |
|
|
| 586,777 |
|
Average other liabilities |
|
| (149,039 | ) |
|
| (115,077 | ) |
Average invested capital |
| $ | 1,081,786 |
|
| $ | 1,097,204 |
|
|
|
|
|
|
|
|
|
|
Average estimated asset base of capitalized operating leases |
|
| 930,645 |
|
|
| 814,532 |
|
Average invested capital, including the effect of capitalized operating leases |
| $ | 2,012,431 |
|
| $ | 1,911,736 |
|
|
|
|
|
|
|
|
|
|
ROIC |
|
| 13.6 | % |
|
| 13.2 | % |
ROIC, including the effect of capitalized operating leases |
|
| 9.5 | % |
|
| 9.5 | % |
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash for each of the periods set forth below, as well as our cash, and cash equivalents and restricted cash at the end of each period (in thousands):
|
| Thirty-nine weeks ended |
| |||||||||||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| Thirty-nine weeks ended |
| |||||||
Cash and cash equivalents at end of period |
| $ | 18,892 |
|
| $ | 50,290 |
| ||||||||
|
| October 2, 2022 |
|
| October 3, 2021 |
| ||||||||||
Cash, cash equivalents and restricted cash at end of period |
| $ | 318,052 |
|
| $ | 262,017 |
| ||||||||
Cash flows from operating activities |
| $ | 258,969 |
|
| $ | 196,037 |
|
| $ | 306,790 |
|
| $ | 296,659 |
|
Cash flows used in investing activities |
| $ | (158,429 | ) |
| $ | (142,400 | ) |
| $ | (80,749 | ) |
| $ | (70,010 | ) |
Cash flows used in financing activities |
| $ | (94,113 | ) |
| $ | (139,416 | ) |
| $ | (154,993 | ) |
| $ | (136,073 | ) |
We have generally financed our operations principally through cash generated from operations and borrowings under our credit facilities. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures primarily for opening new stores, remodels and maintenance, repurchases of our common stock and debt service. Our principal contractual obligations and commitments consist of obligations under our Credit Agreement, interest on our Credit Agreement, operating and finance leases, purchase commitments and self-insurance liabilities. Our operating and finance leases for the rental of land, buildings, and for rental of facilities and equipment expire or become subject to renewal clauses at various dates through 2045. We believe that our existing cash, and cash equivalents and restricted cash, and cash anticipated to be generated from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months, and we may continue to use borrowings under our Credit Facility to fund our share repurchase programs.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
equivalents position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.
Operating Activities
Cash flows from operating activities increased $63.0$10.1 million to $259.0 million for the thirty-nine weeks ended October 1, 2017 compared to $196.0$306.8 million for the thirty-nine weeks ended October 2, 2016. The cash flows from operating activities came from net income adjusted primarily2022 compared to $296.7 million for non-cash expenses of depreciation and amortization, deferred income taxes, equity-based compensation and changes in working capital.
Cash flows provided by operating activities from changes in working capital was $34.4 million in the thirty-nine weeks ended October 1, 2017, compared to $2.5 million use of cash in the thirty-nine weeks ended October 2, 2016.3, 2021. The increase in cash flows from operating activities forwas primarily a result of cash generated from higher net income and changes in working capital.
Cash flows used in operating activities from changes in working capital were $6.9 million in the thirty-nine weeks ended October 1, 2017,2, 2022 compared to $9.9 million in the thirty-nine weeks ended October 2, 2016,3, 2021. The decrease was primarily due todriven by the higher net income combined with working capital improvements as a resultpayout of operating efficiencies achieved throughCOVID related incentive compensation amounts earned in 2020 and paid in 2021, partially offset by higher inventories impacted by inflationary cost increases on our strategic initiatives, and higher payroll and bonus accruals in line with improved performance and company growth.
Investing Activities
Cash flows used in investing activities were $158.4 million, and $142.4 million for the thirty-nine weeks ended October 1, 2017 and the thirty-nine weeks ended October 2, 2016, respectively. The increase in cash flows used in investing activities is primarily due to additional purchases of property and equipment, due to the addition of 32 stores in the last twelve months. current year.
Investing Activities
Cash flows used in investing activities consist primarily of capital expenditures in new stores, including leasehold improvements and store equipment, capital expenditures to maintain the appearance of our stores, sales enhancing initiatives and other corporate investments. Cash flows used in investing activities were $80.7 million and $70.0 million, for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively.
34
We expect capital expenditures to be approximately $170in the range of $120 - $135 million in fiscal 2017,2022, including expenditures incurred to date, net of estimated landlord tenant improvement allowances, primarily to fund investments in new stores, remodels, maintenance capital expenditures and corporate capital expenditures. We expect to fund our capital expenditures with cash on hand and cash generated from operating activities and, if required, borrowings under our Credit Facility.activities.
Financing Activities
Cash flows used in financing activities were $94.1 million for the thirty-nine weeks ended October 1, 2017 compared to $139.4$155.0 million for the thirty-nine weeks ended October 2, 2016.2022 compared to $136.1 million for the thirty-nine weeks ended October 3, 2021. During the thirty-nine weeks ended October 1, 2017,2, 2022, cash flows used in financing activities primarily consisted of $192.0$155.1 million for stock repurchases $40.0and $3.4 million in payments ondebt issuance costs in connection with our Credit Facility, $3.0 million cash paid for capital and financing lease obligations,Agreement, partially offset by $134.0 million of borrowings on the Credit Facility, $6.6$4.1 million in proceeds from the exercise of stock options and $0.3 million of cash received from landlords related to financing lease obligations.options.
During the thirty-nine weeks ended October 2, 2016,3, 2021, cash flows used in financing activities primarily consisted of $187.8$137.5 million for stock repurchases and $3.1 million cash paid for capital and financing lease obligations, partially offset by $45.0 million of borrowings on the Credit Facility $3.9 million of excess tax benefits from the exercise of stock options and $2.6 million in proceeds from the exercise of stock options.repurchases.
Long-Term Debt and Credit Facilities
Long-term debt increased $144.0 million to $349.0outstanding was $250.0 million as of October 1, 2017, compared to October 2, 2016 primarily related to borrowings to fund our share repurchase programs.2022 and January 2, 2022.
See Note 4, “Long-Term Debt”Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements for a description of our new Credit Facility.Agreement and our Former Credit Facility (each as defined therein).
On November 4, 2015, ourOur board of directors authorized a $150 million common stockfrom time to time authorizes share repurchase program, which was completed during the second quarter of 2016. On September 6, 2016, our board of directors authorized a $250 million share repurchase program for our common stock, which was completed during the first quarter of 2017. On February 20, 2017, our board of directors authorized a new $250 million share repurchase programprograms for our common stock. The following table outlines the share repurchase programs authorized by the Board,our board, and the related repurchase activity and available authorization as of October 1, 2017.2, 2022.
Effective date |
| Expiration date |
| Amount authorized |
|
| Cost of repurchases |
|
| Authorization available |
| |||
November 4, 2015 |
| November 4, 2017 |
| $ | 150,000 |
|
| $ | 150,000 |
|
| $ | — |
|
September 6, 2016 |
| December 31, 2017 |
| $ | 250,000 |
|
| $ | 250,000 |
|
| $ | — |
|
February 20, 2017 |
| December 31, 2018 |
| $ | 250,000 |
|
| $ | 112,000 |
|
| $ | 138,000 |
|
Effective date |
| Expiration date |
| Amount |
|
| Cost of |
|
| Authorization |
| |||
March 3, 2021 |
| March 2, 2022 |
| $ | 300,000 |
|
| $ | 200,200 |
|
| $ | — |
|
March 2, 2022 |
| December 31, 2024 |
| $ | 600,000 |
|
| $ | 143,236 |
|
| $ | 456,764 |
|
The shares under theour current repurchase programsprogram may be purchased on a discretionary basis from time to time prior tothrough the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. TheOur board’s authorization of the share repurchase programsprogram does not obligate usour Company to acquire any particular amount of common stock, and the repurchase programsprogram may be commenced, suspended, or discontinued at any time. We have used borrowings under our Credit Facility to assist with the repurchase program authorized on September 6, 2016 and February 20, 2017.
Share repurchase activity under our repurchase programsprogram for the periods indicated was as follows:follows (total cost in thousands):
|
| Thirteen Weeks Ended |
|
| Thirty-nine Weeks Ended |
|
| Thirteen weeks ended |
|
| Thirty-nine weeks ended |
| |||||||||||||||||||||
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| October 1, 2017 |
|
| October 2, 2016 |
|
| October 2, 2022 |
|
| October 3, 2021 |
|
| October 2, 2022 |
|
| October 3, 2021 |
| |||||||||
Number of common shares acquired |
|
| 3,249,204 |
|
|
| 3,189,818 |
|
|
| 9,136,468 |
|
|
| 8,169,510 |
|
|
| 1,558,196 |
|
|
| 2,079,420 |
|
|
| 5,437,054 |
|
|
| 5,360,037 |
| |
Average price per common share acquired |
| $ | 22.16 |
|
| $ | 19.93 |
|
| $ | 21.01 |
|
| $ | 22.99 |
|
| $ | 28.25 |
|
| $ | 24.05 |
|
| $ | 28.53 |
|
| $ | 25.65 |
| |
Total cost of common shares acquired |
| $ | 72,000 |
|
| $ | 63,572 |
|
| $ | 192,000 |
|
| $ | 187,836 |
|
| $ | 44,023 |
|
| $ | 50,000 |
|
| $ | 155,094 |
|
| $ | 137,484 |
| |
Shares purchased under our repurchase programs were subsequently retired.retired and the excess of the repurchase price over par value was charged to retained earnings.
Subsequent to October 2, 2022 and through November 4, 2022, we repurchased an additional 0.6 million shares of common stock for $17.8 million.
35
Contractual Obligations
We are committedOur principal contractual obligations and commitments arising in the normal course of business consist of obligations under certain capitalour Credit Agreement, interest on our Credit Agreement, operating and finance leases, forpurchase commitments and self-insurance liabilities. Except as otherwise disclosed in Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements, there have been no material changes outside the rentalnormal course of certain land and buildings and certain operating leases for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates through 2035.
The following table summarizes our lease obligationsbusiness as of October 1, 2017,2, 2022 in our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
|
| Payments Due by Period |
| |||||||||||||||||
|
| Total |
|
| Less Than 1 Year |
|
| 1-3 Years |
|
| 4-5 Years |
|
| More Than 5 Years |
| |||||
|
| (in thousands) |
| |||||||||||||||||
Capital and financing lease obligations (1) |
| $ | 142,221 |
|
| $ | 17,018 |
|
| $ | 33,472 |
|
| $ | 31,175 |
|
| $ | 60,556 |
|
Operating lease obligations (1) |
|
| 1,590,493 |
|
|
| 138,329 |
|
|
| 302,886 |
|
|
| 287,356 |
|
|
| 861,922 |
|
Totals |
| $ | 1,732,714 |
|
| $ | 155,347 |
|
| $ | 336,358 |
|
| $ | 318,531 |
|
| $ | 922,478 |
|
|
|
We have other contractual purchase commitments and debt, which were presented under Contractual Obligationsfrom those reported in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017. There have not been material changes2, 2022.
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 contractual purchase commitments since that filing through October 1, 2017. AsCredit Agreement based on the outstanding amounts as of October 1, 2017,2, 2022 and interest rates in effect at the outstanding balance on the Credit Facility was $349.0 million, as discussed in Note 4 to the unaudited consolidated financial statements.
We periodically make other commitments and become subject to other contractual obligations that we believetime of this filing, are estimated 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.approximately $52.7 million, with $12.5 million payable within 12 months.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities.
Impact of Inflation and Deflation
Inflation and deflation in the prices of food and other products we sell may periodically affect our sales, gross profit and gross margin. Food inflation, when combined with reduced consumer spending, could also reduce sales, gross profit margins and comparable store sales. 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 effects are passed through to our customers, which is subject to competitive market conditions.
Food inflation and deflation is affected by a variety of factors and our determination of whether to pass on the effects of inflation or deflation to our customers is made in conjunction with our overall pricing and marketing strategies, as well as our competitors’ responses. Although we may experience periodic effects on sales, gross profit, gross margins and cash flows as a result of changing prices, including pressures we are currently experiencing due to product cost inflation which we are largely passing along to retail pricing, we do not expect the effect of inflation or deflation to have a material impact on our ability to execute our long-term business strategy.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. Our critical accounting estimates include but are not limited to, those related to inventory,inventories, lease assumptions, self-insurance reserves, sublease assumptions for closed stores, goodwill and intangible assets, impairment of long-lived assets, fair values of equity-based awards and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
There have been no substantial changes to these estimates, or the policies related to them during the thirteen and thirty-nine weeks ended October 1, 2017.2, 2022. For a full discussion of these estimates and policies, see “Critical Accounting Estimates” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 1, 2017.2, 2022.
Recently Issued Accounting Pronouncements
See Note 2, “Recently Issued“Summary of Significant Accounting Pronouncements”Policies” to our accompanying unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.
We have determined that all other recently issued accounting standards will not have a material impact on our financial statements, or do not apply to our operations.36
Item 3. Quantitative and QualitativeQualitative Disclosures About Market Risk.
As described in Note 4, “Long-Term Debt”Debt and Finance Lease Liabilities” to our unaudited consolidated financial statements located elsewhere in this Quarterly Report on Form 10-Q, we have aour Credit Facility thatAgreement bears interest at a rate based in part on LIBOR.SOFR. Accordingly, we arecould be exposed to fluctuations in interest rates. Based solely on the $349.0$250.0 million principal outstanding under our Credit FacilityAgreement as of October 1, 2017,2, 2022, each hundred basis point change in LIBORSOFR would result in a change in interest expense by $3.5$2.5 million annually. We entered into an interest rate swap agreement in December 2017 to manage our cash flow associated with variable interest rates. The notional dollar amount of the one outstanding swap at October 2, 2022 and January 2, 2022 was $250.0 million under which we pay a fixed rate and received a variable rate of interest (cash flow swap). Taking into account the interest rate swap, based on the $250.0 million principal outstanding under our Credit Agreement as of October 2, 2022, each hundred basis point change in SOFR would result in no change in interest expense annually.
This sensitivity analysis assumes our mix of financial instruments and all other variables will remain constant in future periods. These assumptions are made in order to facilitate the analysis and are not necessarily indicative of our future intentions.
We do not enter into derivative financial instruments for trading purposes (see Note 10, “Derivative Financial Instruments” of our unaudited consolidated financial statements).
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periodperiods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures under the Exchange Act as of October 1, 2017,2, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the quarterly period ended October 1, 2017,2, 2022, there were no changes in our internal controls over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
37
PART II - OTHER INFORMATION
From time to time we are a party to legal proceedings, including matters involving personnel and employment issues, product liability, personal injury, intellectual property and other proceedings arising in the ordinary course of business, which have not resulted in any material losses to date. Although management does not expect that the outcome in these proceedings will have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we could incur judgments or enter into settlements of claims that could materially impact our results.
Securities Action
On March 4, 2016, a complaint was filed in the Superior Court See Note 7, “Commitments and Contingencies” to our unaudited consolidated financial statements for the State of Arizona against our company andinformation regarding certain of our directors and officers on behalf of a purported class of purchasers of shares of our common stock in our underwritten secondary public offering which closed on March 10, 2015 (the “March 2015 Offering”). The complaint purports to state claims under Sections 11, 12 and 15 of the Securities Act of 1933, based on an alleged failure by our company to disclose adequate information about produce price deflation in the March 2015 Offering documents. The complaint seeks damages on behalf of the purported class in an unspecified amount, rescission, and an award of reasonable costs and attorneys’ fees. After removal to federal court, the plaintiffs sought remand, which the court granted in March 2017. We have appealed the order granting remand to the Ninth Circuit Court of Appeals. On May 25, 2017, we filed a Motion to Dismiss in the Superior Court for the State of Arizona, which the court granted in part and denied in part by order entered August 30, 2017. We answered the complaint on September 28, 2017. We will continue to defend this case vigorously, but it is not possible at this time to reasonably estimate the outcome of, or any potential liability from, the case.
“Phishing” Scam Actions
In April 2016, four complaints were filed, two in the federal courts of California, one in the Superior Court of California and one in the federal court in the District of Colorado, each on behalf of a purported class of our current and former team members whose personally identifiable information (referred to as “PII”) was inadvertently disclosed to an unauthorized third party that perpetrated an email “phishing” scam against one of our team members. The complaints allege we failed to properly safeguard the PII in accordance with applicable law. The complaints seek damages on behalf of the purported class in unspecified amounts, attorneys’ fees and litigation expenses. In June 2016, a motion was filed before the Judicial Panel on Multidistrict Litigation (referred to as “JPML”) to transfer and consolidate all four of the cases to the federal court in the District of Arizona. The JPML granted the motion on October 6, 2016. On May 24, 2017, the JPML granted our motion to staylegal proceedings in the case pending a U.S. Supreme Court ruling which is likely to be dispositive on the question of whether the arbitration agreements signed by each of the named plaintiffswe are enforceable; oral argument in this case was heard by the U.S. Supreme Court on October 2, 2017, and we do not expect a decision from the U.S. Supreme Court until Spring 2018. We will continue to defend these cases vigorously, but it is not possible at this time to reasonably estimate the outcome of, or any potential liability from, the cases.involved.
Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should carefully consider the risks and uncertainties referenced below, together with all of the other information in this Quarterly Report on Form 10-Q, including our consolidated financial statements and related notes. Any of those risks could materially and adversely affect our business, operating results, financial condition, or prospects and cause the value of our common stock to decline, which could cause you to lose all or part of your investment.
There have been no material changes to the Risk Factors described under “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017.2, 2022.
38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table provides information about our share repurchase activity during the thirteen weeks ended October 1, 2017.2, 2022.
Period (1) |
| Total number |
|
| Average |
|
| Total number |
|
| Approximate |
| ||||
July 4, 2022 - July 31, 2022 |
|
| 502,432 |
|
| $ | 26.70 |
|
|
| 502,432 |
|
| $ | 487,373,000 |
|
August 1, 2022 - August 28, 2022 |
|
| 457,650 |
|
| $ | 29.49 |
|
|
| 457,650 |
|
| $ | 473,875,000 |
|
August 29, 2022 - October 2, 2022 |
|
| 598,114 |
|
| $ | 28.61 |
|
|
| 598,114 |
|
| $ | 456,764,000 |
|
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 |
| ||||
July 3, 2017 - July 30, 2017 |
|
| 675,727 |
|
| $ | 23.01 |
|
|
| 675,727 |
|
| $ | 194,450,000 |
|
July 31, 2017 - August 27, 2017 |
|
| 1,017,618 |
|
| $ | 24.03 |
|
|
| 1,017,618 |
|
| $ | 170,000,000 |
|
August 28, 2017 - October 1, 2017 |
|
| 1,555,859 |
|
| $ | 20.57 |
|
|
| 1,555,859 |
|
| $ | 138,000,000 |
|
|
|
39
Item 6. Exhibits.
Exhibit Number |
| Description |
|
|
|
31.1 |
| |
|
|
|
31.2 |
| |
|
|
|
32.1 |
| |
|
|
|
32.2 |
| |
|
|
|
101.INS |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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) |
40
Table of ContentsSIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| SPROUTS FARMERS MARKET, INC. |
|
|
|
Date: November | By: | /s/ |
| Name: |
|
| Title: | Chief Financial Officer |
|
| (Principal Financial Officer) |
41
33