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.

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,~~April 27, 2023, the registrant had ~~133,070,570~~103,048,290 shares of common stock, $0.001 par value per share, outstanding.

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,~~2023, 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.

	October 1, 2017		January 1, 2017
	(Unaudited)				April 2, 2023		January 1, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	18,892	$	12,465	$	294,905	$	293,233
Accounts receivable, net		23,231		25,228		12,404		16,108
Inventories		222,216		204,464		306,940		310,545
Prepaid expenses and other current assets		25,594		21,869		41,699		53,918
Total current assets		289,933		264,026		655,948		673,804
Property and equipment, net of accumulated depreciation		690,763		604,660		715,342		722,241
Intangible assets, net of accumulated amortization		196,556		197,608
Operating lease assets, net						1,195,187		1,106,524
Intangible assets						208,060		184,960
Goodwill		368,078		368,078		381,751		368,878
Other assets		5,886		5,521		13,106		13,973
Total assets	$	1,551,216	$	1,439,893	$	3,169,394	$	3,070,380
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	179,482	$	157,550	$	187,948	$	172,904
Accrued liabilities						148,865		151,306
Accrued salaries and benefits		41,219		32,859		48,160		61,574
Other accrued liabilities		60,683		56,376
Current portion of capital and financing lease obligations		8,776		12,370
Accrued income tax						5,456		—
Current portion of operating lease liabilities						123,726		135,584
Current portion of finance lease liabilities						976		1,012
Total current liabilities		290,160		259,155		515,131		522,380
Long-term capital and financing lease obligations		126,806		117,366
Long-term debt		349,000		255,000
Long-term operating lease liabilities						1,266,282		1,145,173
Long-term debt and finance lease liabilities						233,720		258,902
Other long-term liabilities		126,127		116,200		36,421		36,340
Deferred income tax liability		42,508		19,263		66,910		61,123
Total liabilities		934,601		766,984		2,118,464		2,023,918
Commitments and contingencies (Note 8)
Commitments and contingencies (Note 7)
Stockholders’ equity:
Undesignated preferred stock; $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $0.001 par value; 200,000,000 shares authorized, 133,070,570 and 140,256,313 shares issued and outstanding, October 1, 2017 and January 1, 2017, respectively		133		140
Undesignated preferred stock; $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding						—		—
Common stock, $0.001 par value; 200,000,000 shares authorized, 103,470,717 shares issued and outstanding, April 2, 2023; 105,072,756 shares issued and outstanding, January 1, 2023						104		105
Additional paid-in capital		614,232		597,269		753,822		726,345
Retained earnings		2,250		75,500		297,004		320,012
Total stockholders’ equity		616,615		672,909		1,050,930		1,046,462
Total liabilities and stockholders’ equity	$	1,551,216	$	1,439,893	$	3,169,394	$	3,070,380

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


	Thirteen Weeks Ended						Thirty-nine Weeks Ended						Thirteen weeks ended
	October 1, 2017			October 2, 2016			October 1, 2017			October 2, 2016			April 2, 2023		April 3, 2022
Net sales	$	1,206,059		$	1,035,801		$	3,520,679		$	3,060,685		$	1,733,310	$	1,641,161
Cost of sales, buying and occupancy		859,650			744,288			2,494,998			2,156,857
Cost of sales														1,083,248		1,029,413
Gross profit		346,409			291,513			1,025,681			903,828			650,062		611,748
Direct store expenses		250,191			216,932			715,336			617,817
Selling, general and administrative expenses		39,955			29,664			110,312			91,482			486,195		459,910
Store pre-opening costs		2,456			3,446			10,055			11,625
Store closure and other costs		803			24			992			159
Depreciation and amortization (exclusive of depreciation included in cost of sales)														34,068		31,820
Store closure and other costs, net														28,277		377
Income from operations		53,004			41,447			188,986			182,745			101,522		119,641
Interest expense		(5,609	)		(3,723	)		(15,447	)		(10,985	)
Other income		162			135			388			326
Interest expense, net														2,220		3,039
Income before income taxes		47,557			37,859			173,927			172,086			99,302		116,602
Income tax provision		(16,071	)		(13,974	)		(55,186	)		(64,785	)		23,142		28,295
Net income	$	31,486		$	23,885		$	118,741		$	107,301		$	76,160	$	88,307
Net income per share:
Basic	$	0.23		$	0.16		$	0.87		$	0.72		$	0.73	$	0.80
Diluted	$	0.23		$	0.16		$	0.86		$	0.71		$	0.73	$	0.79
Weighted average shares outstanding:
Basic		134,320			147,743			136,063			149,202			103,827		110,903
Diluted		136,770			150,024			138,860			151,568			104,876		111,833

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

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	April 2, 2023		January 1, 2023
Senior secured debt
$700.0 million Credit Agreement	March 25, 2027	Variable	$	225,000	$	250,000
Finance lease liabilities	Various	n/a		8,720		8,902
Long-term debt and finance lease liabilities			$	233,720	$	258,902

~~Senior Secured Revolving~~ Credit ~~Facility~~Agreement

~~On April 17, 2015, the~~The Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), asis the borrower ~~entered into~~under a credit agreement ~~that~~entered 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 to~~in 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 also~~Agreement provides for a $70.0 million letter of credit ~~subfacility~~sub-facility (the "Letter of Credit Sub-Facility") and a ~~$15.0~~$50.0 million swingline facility. Letters of credit issued under the Credit ~~Facility~~Agreement reduce the ~~borrowing~~ capacity of Intermediate Holdings to borrow under the Revolving Credit Facility. Letters of credit totaling ~~$24.8~~$21.6 million have been issued as of ~~October 1, 2017,~~April 2, 2023 under the Letter of Credit Sub-Facility, primarily to support the Company’s insurance programs.

~~Guarantees~~11

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Guarantees

Obligations under the Credit ~~Facility~~Agreement are guaranteed by the Company and substantially all of its ~~current~~existing and future wholly-owned material domestic subsidiaries, and are secured by first-priority security interests in substantially all of the assets of the Company, Intermediate Holdings, and ~~its~~the subsidiary guarantors, including, without limitation, a pledge by the Company of its equity interest in Intermediate Holdings.

Interest and Fees

Loans under the Credit ~~Facility~~Agreement will initially bear interest, at the ~~Company’s~~Company's option, either at ~~adjusted LIBOR~~the 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 ~~adjustment~~upward adjustments pursuant to a pricing grid based on the Company’s total ~~gross~~net leverage ratio as ~~defined~~set 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 April 2, 2023, loans outstanding under the Credit Agreement bore interest at Term SOFR (as defined in the Credit Agreement) plus a 0.10% SOFR adjustment and 1.00% per annum.

~~Outstanding~~As of April 2, 2023,outstanding letters of credit issued under the Credit ~~Facility are~~Agreement were subject to a participation fee of ~~1.50%~~1.00% per annum and an issuance fee of ~~0.125%~~0.125% per annum.

~~SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Payments and Borrowings

The Credit ~~Facility~~Agreement 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 ~~repay~~prepay loans and permanently reduce commitments under the Credit ~~Facility~~Agreement at any time in agreed-upon minimum principal amounts, without premium or penalty (except ~~LIBOR~~SOFR breakage costs, if applicable).

In connection with the execution of the Credit Agreement, the Company's obligations under the Former Credit Facility were prepaid and terminated.

During ~~fiscal year 2016,~~the thirteen weeks ended April 2, 2023, the Company ~~borrowed $105.0 million~~made no additional borrowings and made ~~a total~~principal payments of ~~$10.0~~$25.0 million, ~~of principal payments;~~ resulting in total outstanding debt under the Credit ~~Facility~~Agreement of ~~$255.0~~$225.0 million ~~at January 1, 2017.~~as of April 2, 2023. During ~~the thirteen weeks ended October 1, 2017,~~2022, the Company ~~borrowed $49.0~~made no additional borrowings or principal payments, other than the net change of $62.5 million ~~and made~~in the composition of the lending syndicate associated with a ~~total~~modification 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;~~Company's revolving credit facility on March 25, 2022, resulting in total outstanding debt under the Credit ~~Facility~~Agreement of ~~$349.0~~$250.0 million as of ~~October~~January 1, ~~2017. The~~2023.

Subsequent to April 2, 2023, the Company ~~has used borrowings~~made a $25.0 million principal payment, resulting in total outstanding debt under the Credit ~~Facility to assist with its share repurchase programs (see Note 9).~~Agreement of $200.0 million as of May 1, 2023.

Covenants

The Credit ~~Facility~~Agreement contains financial, affirmative and negative covenants. The negative covenants include, among other things, limitations on the Company’s ability to:

•

incur additional indebtedness;

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SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

•

grant additional liens;

•

enter into sale-leaseback transactions;

•

make loans or investments;

•

merge, consolidate or enter into acquisitions;

•

pay dividends or distributions;

•

enter into transactions with affiliates;

•

enter into new lines of business;

•

modify the terms of 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 ~~Facility~~Agreement requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed ~~3.00~~3.75 to 1.00, which ratio may be increased from time to time in connection with certain permitted acquisitions pursuant to conditions as set forth in the Credit Agreement, and a minimum interest coverage ratio not to be less than ~~1.75~~3.00 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 ~~Facility~~Agreement as of ~~October 1, 2017.~~April 2, 2023.

~~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 decreased to 23.3% for the thirteen weeks ended ~~October 1, 2017 and October~~April 2, ~~2016 was 33.8% and 36.9%, respectively.~~2023, compared to 24.3% for the thirteen weeks ended April 3, 2022. The decrease in the effective tax rate is primarily due to ~~tax return to provision adjustments for the 2016 income tax return.~~

~~The Company’s effective tax rate for the thirty-nine weeks ended October 1, 2017 and October 2, 2016 was 31.7% and 37.7%, respectively. The decrease~~an increase in ~~the effective tax rate is primarily related to recognition of~~ 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~~partially offset by an increase of ~~exercised or vested awards are treated as discrete items in the reporting period in which they occur.~~

non-deductible executive compensation. The income tax ~~benefits~~effect resulting from ~~equity-based~~excess tax benefits of share-based payment awards were ~~$0.2~~$2.6 million and $1.5 million for the thirteen weeks ended ~~October 1, 2017.~~ April 2, 2023 and April 3, 2022, respectively.

The Company files income tax ~~benefits resulting from~~returns for federal purposes and in many states. The Company’s tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three years, following the ~~equity-based awards for~~tax year to which those filings relate.

6. Related Party Transactions

On May 24, 2022, the ~~thirteen weeks ended October 2, 2016 were $0.2 million and recorded in Additional Paid-in Capital.~~

The income tax benefits resulting from equity-based awards were $8.4 million for the thirty-nine weeks ended October 1, 2017. The income tax benefits resulting from equity-based awards for the thirty-nine weeks ended October 2, 2016 were $3.9 million and recorded in Additional Paid-in Capital.

~~7. Related-Party Transactions~~

ACompany appointed a new member ~~of the Company’s~~to its board of directors iswho served as an ~~investor in~~executive officer of a company that is a supplier of ~~coffee~~nutrition bars and related products to the Company for resale. ~~During~~The director departed employment from this supplier on February 28, 2023, and the cost of sales recognized from this supplier during the thirteen weeks ended ~~October 1, 2017 and October~~April 2, 2016, purchases from this supplier were $2.7 million and $2.1 million, respectively. During the thirty-nine weeks ended October 1, 2017 and October 2, 2016, purchases from this supplier were $8.1 million and $7.32023 was immaterial.

1013

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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 Chairman 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. As 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.

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.

~~Securities~~Proposition 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 filed~~lawsuit in the Superior Court ~~for~~of the State of ~~Arizona~~California, County of Los Angeles, against nearly 80 defendants who manufacture, package, distribute or sell brewed coffee, including the Company. CERT alleged that the defendants failed to provide warnings for their coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986, better known as Proposition 65. CERT seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties.

The Company, as part of a joint defense group, asserted multiple defenses against the ~~Company~~lawsuit. 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 ~~certain~~attorneys' fees, California’s Office of ~~its directors~~Environmental 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 stock~~inherent 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 15~~processes 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~~the defense 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 ruling on the defense motion for summary judgment. On October 26, 2022, the appellate court affirmed the trial court’s decision. In December 2022, CERT appealed ~~the order granting remand~~this ruling to the ~~Ninth Circuit~~Supreme Court of ~~Appeals. On May 25, 2017, the Company filed a Motion to Dismiss in the Superior Court for~~ the State of ~~Arizona,~~California, which denied the petition for review in February 2023. Until the case is dismissed by the trial court, ~~granted in part and denied in part by order entered August 30, 2017. The~~the Company ~~answered the complaint on September 28, 2017. The Company will continue~~is unable to ~~defend this case vigorously, but it is not possible at this time to~~predict 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):~~April 2, 2023.


Effective date	Expiration date	Amount authorized		Cost of repurchases		Authorization available
March 2, 2022	December 31, 2023	$	600,000	$	286,472	$	313,528

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 to~~through the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated

~~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).~~

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SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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
	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016		April 2, 2023		April 3, 2022
Number of common shares acquired		3,249,204		3,189,818		9,136,468		8,169,510		3,038,411		1,481,187
Average price per common share acquired	$	22.16	$	19.93	$	21.01	$	22.99	$	32.64	$	30.86
Total cost of common shares acquired	$	72,000	$	63,572	$	192,000	$	187,836	$	99,171	$	45,715

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. The cost of common shares repurchased during the thirteen weeks ended April 2, 2023 included the 1% excise tax imposed as part of the Inflation Reduction Act of 2022.

Subsequent to April 2, 2023 and through the date of this filing, the Company repurchased an additional 0.5 million shares of common stock for $16.0 million.

~~10.~~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~~and unvested restricted stock units ~~(“RSUs”~~("RSUs")~~, assumed vesting~~. Performance share awards ("PSAs") are included in the computation of diluted net income per share only to the extent that the underlying performance ~~stock awards (“PSAs”),~~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
	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016		April 2, 2023		April 3, 2022
Basic net income per share:
Net income	$	31,486	$	23,885	$	118,741	$	107,301	$	76,160	$	88,307
Weighted average shares outstanding		134,320		147,743		136,063		149,202		103,827		110,903
Basic net income per share	$	0.23	$	0.16	$	0.87	$	0.72	$	0.73	$	0.80
Diluted net income per share:
Net income	$	31,486	$	23,885	$	118,741	$	107,301	$	76,160	$	88,307
Weighted average shares outstanding - basic		134,320		147,743		136,063		149,202		103,827		110,903
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		395		347
RSUs		122		28		124		49		481		470
RSAs		114		13		102		9
PSAs		86		40		65		30		173		113
Weighted average shares and equivalent shares outstanding		136,770		150,024		138,860		151,568		104,876		111,833
Diluted net income per share	$	0.23	$	0.16	$	0.86	$	0.71	$	0.73	$	0.79

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SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

For the thirteen weeks ended ~~October 1, 2017,~~April 2, 2023, the Company had 0.4 million options, 0.4 million RSUs and 0.5 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,~~April 3, 2022, the Company had 0.2 million options, 0.5 million RSUs, and 0.5 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.

10. Derivative Financial Instruments

The Company did not have any outstanding interest rate swap agreements as of April 2, 2023 and January 1, 2023.

In December 2017, the Company entered into an interest rate swap agreement to manage its cash flow associated with variable interest rates. This forward contract was designated and qualified as a cash flow hedge, and its change in fair value was recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the forecasted transaction occurred. The forward contract consisted of five cash flow hedges with a notional dollar amount of $250.0 million, and each had a length of one year and matured annually from 2018 to 2022.

12The gain or loss on these derivative instruments was recognized in other comprehensive income, net of tax, with the portion related to current period interest payments reclassified to interest expense, net on the consolidated statements of income. The following table summarizes these losses classified on the consolidated statements of income:


	Thirteen weeks ended
	April 2, 2023		April 3, 2022
Consolidated Statements of Income Classification
Interest expense, net	$	—	$	1,468

11. Comprehensive Income

The following table presents the changes in accumulated other comprehensive income (loss) for the thirteen weeks ended April 3, 2022.


	Cash Flow Hedges
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 $1,240		3,586
Reclassification of net losses on cash flow hedges to net income, net of income tax of ($377)		(1,091	)
Total other comprehensive income (loss)		2,495
Balance at April 3, 2022	$	(1,263	)

Amounts reclassified from accumulated other comprehensive income (loss) were included within interest expense, net on the consolidated statements of income.

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SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

12. Segments

The Company has one reportable and one operating segment.

~~For~~In accordance with ASC 606, the ~~thirty-nine~~following table represents a disaggregation of revenue for the thirteen weeks ended ~~October 1, 2017,~~April 2, 2023 and April 3, 2022.


	Thirteen weeks ended
	April 2, 2023				April 3, 2022
Perishables	$	999,575	57.7	%	$	952,087	58.0	%
Non-Perishables		733,735	42.3	%		689,074	42.0	%
Net Sales	$	1,733,310	100.0	%	$	1,641,161	100.0	%

The Company categorizes the ~~computation~~varieties of ~~diluted net income per share does not~~products it sells as perishable and non-perishable. Perishable product categories include ~~1.9 million options~~produce, meat and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards. For the thirty-nine weeks ended October 2, 2016, the computation of diluted net income per share does notmeat alternatives, seafood, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include ~~1.3 million options, 0.1 million RSUs~~grocery, vitamins and ~~0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards.~~supplements, bulk items, frozen foods, beer and wine, and natural health and body care.

13. Share-Based Compensation

~~11. Equity-Based Compensation~~

~~2013~~2022 Incentive Plan

~~The~~In March 2022, the Company’s board of directors adopted ~~and its equity holders approved,~~ the Sprouts Farmers Market, Inc. ~~2013~~2022 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 ~~2013~~2022 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 thirteen weeks ended April 2, 2023, the Company granted the following share-based compensation awards under the 2022 Incentive Plan:


Grant Date	RSUs		PSAs		Options
March 14, 2023		491,729		172,059		221,085
Total		491,729		172,059		221,085
Weighted-average grant date fair value	$	32.95	$	32.95	$	12.63
Weighted-average exercise price	$	—	$	—	$	32.95

The aggregate number of shares of common stock that may be issued to team members and directors under the ~~2013~~2022 Incentive Plan may not exceed ~~10,089,072. Shares~~6,600,000, 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 purposes~~after 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,~~April 2, 2023, there were ~~3,686,043~~971,034 stock awards outstanding and ~~5,805,674~~5,749,809 shares remaining available for issuance under the 2022 Incentive Plan.

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SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 directors~~adoption of the ~~Company with options to acquire shares~~2022 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 stockholder approval of the ~~Company. The Company had authorized 12,100,000 shares for issuance~~2022 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 options~~2013 Incentive Plan, but awards outstanding under the ~~2011 Option~~2013 Incentive Plan will remain outstanding in accordance with their terms and the terms of the 2013 Incentive Plan.

~~Awards Granted~~

~~During the thirty-nine weeks ended October 1, 2017, the Company granted the following equity-based compensation awards:~~

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

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.

~~SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES~~RSUs

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~RSUs~~

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 that~~2019 were subject to the Company achieving certain ~~earnings per share~~EBIT performance targets ~~as well as additional time-vesting conditions.~~ for the 2021 fiscal year. The ~~fair value of PSAs is~~criteria was based on ~~the closing price~~a range of performance targets in which grantees may earn 0% to 200% of the ~~Company’s common stock on the grant date. During the thirty-nine weeks ended October 2, 2016, the~~base number of awards granted. The performance conditions with respect to ~~2015 earnings per share~~fiscal year 2021 EBIT were deemed to have been met, and the PSAs ~~will vest 50 percent~~vested at ~~each of~~ the ~~second and~~maximum pay out level on the third anniversary of the grant ~~date. During the thirty-nine weeks ended October 1, 2017, 21,050~~date (March 2022). There were no outstanding 2019 PSAs as of ~~the 2015 PSAs were vested. No PSAs vested during the thirty-nine weeks ended October~~April 2, ~~2016.~~2023.

PSAs granted in ~~fiscal year 2016 are restricted shares that are~~2020 were subject to the Company achieving certain earnings before ~~interest and~~ taxes (“~~EBIT”~~EBT”) performance targets for the 2022 fiscal year. The criteria was based on ~~an annual~~a range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. The performance conditions with respect to fiscal year 2022 EBT were deemed to have been met, and ~~cumulative basis over a three-year~~the PSAs vested at the maximum pay out level on the third anniversary of the grant date (March 2023). During the thirteen weeks ended April 2, 2023, 268,699 of the 2020 PSAs vested. There were no outstanding 2020 PSAs as of April 2, 2023.

PSAs granted in 2021 are subject to the Company achieving certain EBIT performance ~~period, as well as additional time-vesting conditions.~~ targets for the 2023 fiscal year. The ~~fair value of these PSAs~~criteria is based on ~~the closing price~~a range of performance targets in which grantees may earn 0% to 200% of the Company’s common stock on the grant date. The EBIT target resets annually for each of the three years during the performance period based on a percentage increase over the previous year’s actual EBIT, with each annual performance tranche independent 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 ~~shares~~awards granted. If ~~the~~ performance conditions are met, ~~PSAs cliff~~the 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 2024).

PSAs granted in ~~fiscal year 2017 are restricted shares that~~2022 are subject to the Company achieving certain ~~earnings per share~~EBIT performance targets ~~as well as additional time-vesting conditions.~~ for the 2024 fiscal year. The ~~fair value of PSAs~~criteria is based on ~~the closing price~~a 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 target~~base number of ~~shares~~awards granted. If ~~the~~ performance conditions are met, ~~PSAs~~the applicable number of performance shares will vest ~~50 percent at each of~~on the ~~second and~~ third anniversary of the grant ~~date.~~date (March 2025).

~~RSAs~~

PSAs granted in 2023 are subject to the Company achieving certain EBIT performance targets for the 2025 fiscal year. The ~~fair value of RSAs~~criteria is based on ~~the closing price~~a range of performance targets in which grantees may earn 0% to 200% of the ~~Company’s common stock~~base 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 2026).

~~Equity Award Restructuring~~

In connection with the appointments of the Company’s Chief Executive Officer and President & Chief Operating Officer in August 2015, the Compensation Committee of the Company’s Board of Directors approved a grant of stock options to purchase 1,200,000 and 500,000 shares of the Company’s common stock at an exercise price of $20.98 per share to these officers, respectively (the “August 2015 Options”) pursuant to the 2013 Incentive Plan. The August 2015 Options, taken together with other options granted under the 2013 Incentive Plan to such officers during 2015, exceeded the limit of 500,000 shares which may be granted pursuant to stock options and stock appreciation rights per calendar year to each participant under the 2013 Incentive Plan by 733,439 shares in the case of the Company’s Chief Executive Officer and 33,439 shares in the case of the Company’s President & Chief Operating Officer (the “Excess Options”). Accordingly, the Company has determined, and these officers have acknowledged, that the grants of the Excess Options were null and void.

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

1418

Table of Contents

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Share-based Compensation Expense

~~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~~presents share-based compensation expense ~~of $0.9 million during~~in selling, general and administrative expenses on 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~~Company’s consolidated statements of ~~operations~~income. The amount recognized was as follows:


	Thirteen weeks ended
	April 2, 2023		April 3, 2022
Share-based compensation expense	$	3,852	$	4,456

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-based~~share-based awards were outstanding as of ~~October 1, 2017~~April 2, 2023 and ~~January 1, 2017:~~April 3, 2022:


	As of
	April 2, 2023		April 3, 2022
	(in thousands)
Options
Vested		740		376
Unvested		481		1,088
RSUs		1,156		1,083
PSAs		471		491

As of

October 1, 2017

January 1, 2017

(in thousands)

Options

Vested

4,394

5,552

Unvested

609

1,205

RSUs

453

274

PSAs

231

159

RSAs

384

187

As of ~~October 1, 2017,~~April 2, 2023, 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 total~~and remaining weighted average recognition period related to outstanding ~~equity-based~~share-based awards ~~was~~were as follows:

Unrecognized
compensation
expense

Remaining
weighted
average
recognition
period

Options

$
5,062

2.2

RSUs

28,583

1.8

PSAs

7,149

2.0

Total unrecognized compensation expense at April 2, 2023

$
40,794

~~As of~~

~~October 1, 2017~~

~~Options~~

~~1.0~~

~~RSUs~~

~~1.7~~

~~PSAs~~

~~1.7~~

~~RSAs~~

~~2.0~~

~~SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

During the ~~thirty-nine~~thirteen weeks ended ~~October 1, 2017~~April 2, 2023 and ~~October 2, 2016,~~April 3, 2022, the Company received ~~$6.6~~$5.5 million and ~~$2.6~~$2.6 million, respectively, in cash proceeds from the exercise of options.

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 2022 fiscal year, filed ~~February 23, 2017~~on March 2, 2023 (“Form 10-K”) with the Securities and Exchange Commission. All dollar amounts included below are in thousands, unless otherwise noted.

Sprouts Farmers Market ~~operates as~~offers a ~~healthy grocery store that offers fresh, natural and organic~~unique food ~~that includes~~specialty retail experience featuring an open layout with fresh produce ~~bulk foods, vitamins~~at the heart of the store. Sprouts inspires wellness naturally with a carefully curated assortment of better-for-you products paired with purpose-driven people. We continue to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and ~~supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, body care and natural household items catering to consumers’ growing interest~~gluten-free. Headquartered in ~~health and wellness. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. With 282~~Phoenix with 395 stores in 1523 states as of ~~October 1, 2017,~~ April 2, 2023, 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.

In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding in 2002 through ~~October 1, 2017,~~April 2, 2023, we ~~continued to open new stores while~~have grown rapidly, significantly increasing our sales, store count and profitability, including successfully rebranding 43 Henry’s Farmers Market and 39 Sunflower Farmers Market stores added ~~through acquisitions~~in 2011 and 2012, respectively, to the Sprouts banner ~~(referred to as the “Transactions”).~~through acquisitions. These three businesses all trace their lineage back to Henry’s Farmers Market and were built with similar store formats and operations including a strong emphasis on value, produce and service in smaller, convenient locations. ~~The consistency~~

Since 2020, we have focused on our long-term growth strategy that we believe is transforming our company and driving profitable growth. We continue to execute on this strategy, focusing on the following areas:

In February 2023 as part of our real estate portfolio review, we determined to close 11 stores during 2023. These stores, on average, are approximately 30% larger than our current prototype format and were underperforming financially. See Note 15, “Store Closures” of our unaudited consolidated financial statements for additional information regarding these store base, continuing positive comparable store sales and growing the Sprouts brand. We intend to continue expanding our store base by pursuing new store openings 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 conditions for acquisition. We intend to open 32 new stores in 2017,closures.

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, 2017~~April 2, 2023 and ~~October 2, 2016~~April 3, 2022

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.

Comparison of Thirteen Weeks Ended ~~October 1, 2017~~April 2, 2023 to Thirteen Weeks Ended

Net sales during the thirteen weeks ended ~~October 1, 2017~~April 2, 2023 totaled ~~$1.2~~$1.7 billion, ~~increasing 16% over the same period~~an increase of the prior fiscal year. Sales growth was primarily driven by solid performance in new stores opened. Comparable stores contributed approximately 87% of net sales for each of the thirteen weeks ended October 1, 2017 and October 2, 2016, respectively.

~~Gross profit increased during the thirteen weeks ended October 1, 2017~~$92.1 million, or 6%, compared to the thirteen weeks ended ~~October 2, 2016 by $54.9 million, of which $47.4 million~~April 3, 2022. The sales increase was ~~as a result of increased sales volume and $7.5 million related to increased margin rate. This improvement was primarily~~ driven by ~~cycling a heightened promotional environment~~sales from new stores opened in the ~~third quarter~~last twelve months and a 3.1% 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 ~~2016 in addition to leverage from increased comparable sales.~~

~~Direct store expenses~~items per basket. See "Impact of Inflation and Deflation". Comparable stores contributed approximately 97% of total sales for the thirteen weeks ended ~~October 1, 2017 increased $33.3 million, including $26.5 million related to stores opened after October~~April 2, ~~2016,~~2023 and ~~$6.8 million related to stores operated prior to the same period in 2016. Direct store expenses, as a percentage~~approximately 98% of ~~net~~total 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.~~

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.

~~Store pre-opening costs in~~for the thirteen weeks ended ~~October 1, 2017 included $1.9~~April 3, 2022.

Gross profit totaled $650.1 million ~~related to opening 8 stores~~ during the thirteen weeks ended ~~October 1, 2017 and $0.6~~April 2, 2023, an increase of $38.3 million, ~~associated with stores expected~~or 6%, compared to ~~open subsequent to October 1, 2017. Store pre-opening costs in~~ the thirteen weeks ended ~~October 2, 2016 included $2.6 million related~~April 3, 2022 Gross margin increased by 0.2% to ~~opening 10 stores during that period and $0.8 million associated with stores opened subsequent to quarter end.~~

~~Store closure costs~~37.5% for the thirteen weeks ended ~~October 1, 2017 and October~~April 2, ~~2016 are related~~2023, 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 in37.3% for the thirteen weeks ended ~~October 1, 2017.~~

April 3, 2022. The increase ~~in interest expense~~was a result of continued promotional optimization and favorable product mix.

Selling, general and administrative expenses increased $26.3 million, or 6%, compared to the thirteen weeks ended April 3, 2022.The increase is primarily due to the net increase in new stores opened since the prior year, higher ~~principal balance on the Credit Facility for borrowing to support our share repurchase program, combined with the slightly~~wages and utilities, and higher ~~interest rate on our Credit Facility for the thirteen weeks ended October 1, 2017.~~ecommerce costs resulting from an increase in ecommerce sales.

~~Income tax provision increased to $16.1~~Depreciation and amortization expense (exclusive of depreciation included in cost of sales) was $34.1 million for the thirteen weeks ended ~~October 1, 2017 from $14.0~~April 2, 2023, compared to $31.8 million for the thirteen weeks ended ~~October~~April 3, 2022. Depreciation and amortization primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment for new stores as well as remodel initiatives in older stores. Depreciation and amortization for the thirteen weeks ended April 2, ~~2016,~~2023 was inclusive of $4.0 million in accelerated depreciation in connection with the decision to close certain underperforming stores during 2023. See Note 15, “Store Closures” of our unaudited consolidated financial statements.

Store closure and other costs, net for the thirteen weeks ended April 2, 2023 of $28.3 million primarily consisted of $27.8 million of impairment losses related to the write-down of leasehold improvements and right-of-use assets in association with the decision to close certain underperforming stores. Store closure and other costs, net for the thirteen weeks ended April 3, 2022 primarily related to ~~an increase in~~ongoing activity associated with our closed store locations.

Interest expense, net decreased to $2.2 million for the thirteen weeks ended April 2, 2023, compared to $3.0 million for the thirteen weeks ended April 3, 2022 primarily due to higher interest income ~~before taxes. Our~~as a result of higher average interest rates. See Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements.

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:

The effective ~~income~~ tax rate decreased to ~~33.8% in~~23.3% for the thirteen weeks ended ~~October 1, 2017~~April 2, 2023 from ~~36.9% in~~24.3% for the thirteen weeks ended ~~October 2, 2016.~~April 3, 2022. The decrease in the effective tax rate was primarily due to an increase in excess tax ~~return to provision adjustments for the 2016 income tax return.~~benefits associated with share-based payment awards, partially offset by an increase of non-deductible executive compensation.

Net income ~~as a percentage of net sales increased~~decreased $12.1 million primarily due to higher store closure and other costs, net and selling, general and administrative expenses for the reasons discussed above, partially offset by higher sales and ~~margins combined with a lower effective tax rate, offset in part by higher interest expense associated with the drawdown on our Credit Facility in connection with the stock buyback program.~~favorable margin impact.

The ~~increase~~decrease in diluted earnings per share of ~~$0.07~~$0.06 was driven by ~~the increase in~~lower net income, ~~as well as~~partially offset by fewer diluted shares outstanding compared to the prior year, due primarily to the share repurchase program.

~~Results~~Table of ~~Operations for Thirty-nine Weeks Ended October 1, 2017 and October 2, 2016~~Contents

~~Comparison of Thirty-nine Weeks Ended October 1, 2017 to Thirty-nine Weeks Ended~~

Net sales during the thirty-nine weeks ended October 1, 2017 totaled $3.5 billion, increasing 15% over the same period of the prior fiscal year. Sales growth was primarily driven by solid performance in new stores opened. Comparable stores contributed approximately 87% of net sales for the thirty-nine weeks ended October 1, 2017 and approximately 88% for the same period of the prior fiscal year.

Gross profit increased during the thirty-nine weeks ended October 1, 2017 compared to the thirty-nine weeks ended October 2, 2016 by $121.9 million, primarily as a result of increased sales volume. Gross margin decreased due to the competitive environment, primarily in the first half of 2017, as well as higher occupancy costs.

Direct store expenses 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 due to deleverage of fixed costs associated with lower comparable store sales growth, partially offset by other operating efficiencies.

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.

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 costs 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.

The increase in interest expense is primarily due to the higher principal balance on 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.

Income tax provision decreased to $55.2 million for the thirty-nine weeks ended October 1, 2017 from $64.8 million for the thirty-nine weeks ended October 2, 2016, primarily related 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 the thirty-nine weeks ended October 1, 2017 from 37.7% in the thirty-nine weeks ended October 2, 2016 primarily related to recognition of 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).

Net income increased $11.4 million as a result of increased sales, but decreased slightly as a percentage of net sales due to lower gross margin and higher payroll expenses partially offset by a lower effective tax rate.

The increase in diluted earnings per share of $0.15 was driven by the increase in net income as well as fewer diluted shares outstanding compared to the prior year, due to the share repurchase program.

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 adjustment~~the add-back to ~~NOPAT and is calculated~~operating income driven by the hypothetical ~~capitalization of~~interest expense we would incur if the property under our operating leases were owned or accounted for as a finance lease. The assumed ownership and associated interest expense are calculated using ~~eight times our trailing twelve months~~the 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~~four-quarter 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.

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):

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 2044. 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.

Cash flows from operating activities increased ~~$63.0~~$26.8 million to ~~$259.0~~$179.8 million for the ~~thirty-nine~~thirteen weeks ended ~~October 1, 2017~~April 2, 2023 compared to ~~$196.0~~$153.0 million for the ~~thirty-nine~~thirteen weeks ended ~~October 2, 2016.~~April 3, 2022. The increase in cash flows from operating activities ~~came from~~was primarily a result of higher net income adjusted ~~primarily~~ for non-cash ~~expenses of depreciation and amortization, deferred income taxes, equity-based compensation~~items and changes in working capital.

Cash flows provided by operating activities from changes in working capital ~~was $34.4~~were $37.9 million in the ~~thirty-nine~~thirteen weeks ended ~~October 1, 2017,~~April 2, 2023 compared to ~~$2.5~~$28.6 million ~~use of cash~~ in the ~~thirty-nine~~thirteen weeks ended ~~October 2, 2016.~~April 3, 2022. The increase ~~in cash flows from operating activities for changes in working capital in the thirty-nine weeks ended October 1, 2017, compared to the thirty-nine weeks ended October 2, 2016,~~ was ~~primarily due to higher net income combined with working capital improvements as a result of operating efficiencies achieved through our strategic initiatives,~~driven by inventories and ~~higher payroll~~prepaid expenses and ~~bonus accruals in line with improved performance and company growth.~~ other current assets.

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. 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.~~investments as well as cash outlays for acquisitions. Cash flows used in investing activities were $60.1 million and $27.2 million, for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively.

We expect capital expenditures to be ~~approximately $170~~in the range of $210 - $230 million in ~~fiscal 2017,~~2023, 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.

Cash flows used in financing activities were ~~$94.1~~$118.1 million for the ~~thirty-nine~~thirteen weeks ended ~~October 1, 2017~~April 2, 2023 compared to ~~$139.4~~$46.7 million for the ~~thirty-nine~~thirteen weeks ended ~~October 2, 2016.~~April 3, 2022. During the ~~thirty-nine~~thirteen weeks ended ~~October 1, 2017,~~April 2, 2023, cash flows used in financing activities primarily consisted of ~~$192.0~~$98.3 million for stock repurchases ~~$40.0~~and $25.0 million in payments on 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~~$5.5 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~~thirteen weeks ended ~~October 2, 2016,~~April 3, 2022, cash flows used in financing activities primarily consisted of ~~$187.8~~$45.7 million for stock repurchases and ~~$3.1~~$3.4 million ~~cash paid for capital and financing lease obligations,~~in debt issuance costs in connection with our Credit Agreement, 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.

Long-term debt ~~increased $144.0 million to $349.0~~outstanding was $225.0 million as of ~~October~~April 2, 2023 and $250.0 million as of January 1, ~~2017, compared to October 2, 2016 primarily related to borrowings to fund our share repurchase programs.~~2023.

See Note 4, “Long-Term ~~Debt”~~Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements for a description of our Credit ~~Facility.~~Agreement and our Former Credit Facility (each as defined therein).

~~On November 4, 2015, our~~Our board of directors ~~authorized a $150 million common stock~~from 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.~~April 2, 2023.

The shares under ~~the~~our current repurchase ~~programs~~program may be purchased on a discretionary basis from time to time ~~prior to~~through 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. ~~The~~Our board’s authorization of the share repurchase ~~programs~~program does not obligate usour Company to acquire any particular amount of common stock, and the repurchase ~~programs~~program 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 ~~programs~~program for the periods indicated was as ~~follows:~~follows (total cost in thousands):

We are committed under certain capital leases for the rental 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 obligations as of October 1, 2017,~~retired and the ~~effect such~~excess of the repurchase price over par value was charged to retained earnings. The cost of common shares repurchased during the thirteen weeks ended April 2, 2023 included the 1% excise tax imposed as part of the Inflation Reduction Act of 2022.

Subsequent to April 2, 2023 and through the date of this filing, we repurchased an additional 0.5 million shares of common stock for $16.0 million.

Our principal contractual obligations ~~are expected to have~~and commitments arising in the normal course of business consist of obligations under our Credit Agreement, interest on our ~~liquidity~~Credit Agreement, operating and ~~cash flow in future periods:~~

~~We have other contractual~~finance leases, purchase commitments and ~~debt, which were presented under Contractual Obligations~~self-insurance liabilities. There have been no material changes outside the normal course of business as of April 2, 2023 in our contractual obligations and commitments from those reported in our Annual Report on Form 10-K for the fiscal year ended January 1, ~~2017. There have not been material changes~~2023.

The future amount and timing of interest payments are expected to ~~our contractual purchase commitments since that filing through October 1, 2017. As of October 1, 2017,~~vary with the outstanding ~~balance~~amounts and then prevailing contractual interest rates. Interest payments through the March 25, 2027 maturity date of our Credit Agreement based on the ~~Credit Facility was $349.0 million,~~outstanding amounts as ~~discussed~~of April 2, 2023 and interest rates in ~~Note 4 to~~effect at the ~~unaudited consolidated financial statements.~~

~~We periodically make other commitments and become subject to other contractual obligations that we believe~~time 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 $42.7 million, with $12.8 million payable within 12 months.

~~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.~~

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 or declining levels of inflation across multiple categories, particularly in produce, could reduce sales growth and earnings, particularly 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 experienced in fiscal 2022 and continue to experience in fiscal 2023 due to product cost inflation which we largely passed 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.

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 ~~thirty-nine~~thirteen weeks ended ~~October 1, 2017.~~April 2, 2023 . 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.~~2023.

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.~~

Item 3. Quantitative and ~~Qualitativ~~eQualitative 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 a~~our Credit ~~Facility that~~Agreement bears interest at a rate based in part on ~~LIBOR.~~SOFR. Accordingly, we ~~are~~could be exposed to fluctuations in interest rates. Based solely on the ~~$349.0~~$225.0 million principal outstanding under our Credit ~~Facility~~Agreement as of ~~October 1, 2017,~~April 2, 2023, each hundred basis point change in ~~LIBOR~~SOFR would result in a change in interest expense by ~~$3.5~~$2.3 million annually.

This sensitivity analysis assumes our mix of financial instruments and all other variables will remain constant in future periods. These assumptions are made in order to facilitate the analysis and are not necessarily indicative of our future intentions.

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 ~~period~~periods 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,~~April 2, 2023, 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.

During the quarterly period ended ~~October 1, 2017,~~April 2, 2023, 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.

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.

~~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 and~~information 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.

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 stay~~legal 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 plaintiffs~~we 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.~~2023.

The following table provides information about our share repurchase activity during the thirteen weeks ended ~~October 1, 2017.~~April 2, 2023.

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.


Delaware	32-0331600
~~Delaware~~	~~32-0331600~~
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐ ~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☐

		Emerging growth company	☐


		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.		14

	Consolidated Balance Sheets as of ~~October 1, 2017~~April 2, 2023 (unaudited) and January 1, ~~2017~~2023	14

	Consolidated Statements of ~~Operations~~Income for the thirteen ~~and thirty-nine~~ weeks ended ~~October 1, 2017~~April 2, 2023 and ~~October 2, 2016~~April 3, 2022 (unaudited)	25

	Consolidated Statements of Comprehensive Income for the thirteen weeks ended April 2, 2023 and April 3, 2022 (unaudited)	6

	Consolidated Statements of Stockholders’ Equity for the ~~thirty-nine~~thirteen weeks ended ~~October 1, 2017~~April 2, 2023 and April 3, 2022 (unaudited) ~~and the year ended January 1, 2017~~	37

	Consolidated Statements of Cash Flows for the ~~thirty-nine~~thirteen weeks ended ~~October 1, 2017~~April 2, 2023 and ~~October 2, 2016~~April 3, 2022 (unaudited)	48

	Notes to ~~Unaudited~~ Consolidated Financial Statements (Unaudited)	59

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations..		1721

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		3031

Item 4. Controls and Procedures.		3031

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.		3132

Item 1A. Risk Factors.		3132

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		3233

Item 6. Exhibits.		3234

Signatures		3335

	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


	Thirteen weeks ended
	April 2, 2023			April 3, 2022
Operating activities
Net income	$	76,160		$	88,307
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		34,912			32,720
Operating lease asset amortization		30,696			28,043
Impairment of assets		27,845			171
Share-based compensation		3,852			4,456
Deferred income taxes		(386	)		2,291
Other non-cash items		14			313
Changes in operating assets and liabilities, net of effects from acquisition:
Accounts receivable		6,241			9,770
Inventories		5,400			(6,790	)
Prepaid expenses and other current assets		9,528			3,613
Other assets		2,609			1,757
Accounts payable		27,006			27,645
Accrued liabilities		(2,024	)		(6,857	)
Accrued salaries and benefits		(13,712	)		(14,106	)
Accrued income tax		5,456			15,275
Operating lease liabilities		(33,956	)		(32,180	)
Other long-term liabilities		179			(1,399	)
Cash flows from operating activities		179,820			153,029
Investing activities
Purchases of property and equipment		(47,044	)		(27,227	)
Payments for acquisition, net of cash acquired		(13,042	)		—
Cash flows used in investing activities		(60,086	)		(27,227	)
Financing activities
Proceeds from revolving credit facilities		—			62,500
Payments on revolving credit facilities		(25,000	)		(62,500	)
Payments on finance lease liabilities		(219	)		(176	)
Payments of deferred financing costs		—			(3,373	)
Repurchase of common stock		(98,349	)		(45,715	)
Proceeds from exercise of stock options		5,488			2,555
Cash flows used in financing activities		(118,080	)		(46,709	)
Increase in cash, cash equivalents, and restricted cash		1,654			79,093
Cash, cash equivalents, and restricted cash at beginning of the period		295,192			247,004
Cash, cash equivalents, and restricted cash at the end of the period	$	296,846		$	326,097

Supplemental disclosure of cash flow information
Cash paid for interest	$	3,641		$	3,044
Cash refunded for income taxes		54			46
Leased assets obtained in exchange for new operating lease liabilities		138,662			42,176

Supplemental disclosure of non-cash investing and financing activities
Property and equipment in accounts payable and accrued liabilities	$	20,924		$	15,666
Issuance of shares for acquisition		18,139			—


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


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

	Shares			Common Stock			Additional Paid In Capital		Retained Earnings			Total Stockholders’ Equity
Balances at January 3, 2016		152,577,884		$	153		$	577,393	$	245,446		$	822,992
Net income		—			—			—		124,306			124,306
Issuance of shares under stock plans		666,841			—			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


For the thirteen weeks ended April 2, 2023

	Shares			Common Stock			Additional Paid In Capital		Retained Earnings			Total Stockholders’ Equity
Balances at January 1, 2023		105,072,756		$	105		$	726,345	$	320,012		$	1,046,462
Net income		—			—			—		76,160			76,160
Issuance of shares under stock plans		882,014			1			5,487		—			5,488
Repurchase and retirement of common stock		(3,038,411	)		(3	)		—		(99,168	)		(99,171	)
Share-based compensation		—			—			3,852		—			3,852
Issuance of shares for acquisition		554,358			1			18,138		—			18,139
Balances at April 2, 2023		103,470,717		$	104		$	753,822	$	297,004		$	1,050,930


For the thirteen weeks ended April 3, 2022

	Shares			Common Stock			Additional Paid In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balances at January 2, 2022		111,114,374		$	111		$	704,701	$	258,822		$	(3,758	)	$	959,876
Net income		—			—			—		88,307			—			88,307
Other comprehensive income (loss)		—			—			—		—			2,495			2,495
Issuance of shares under stock plans		610,101			—			2,555		—			—			2,555
Repurchase and retirement of common stock		(1,481,187	)		(1	)		—		(45,714	)		—			(45,715	)
Share-based compensation		—			—			4,456		—			—			4,456
Balances at April 3, 2022		110,243,288		$	110		$	711,712	$	301,415		$	(1,263	)	$	1,011,974


April 2, 2023	Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	225,000	$	—	$	225,000
Total financial liabilities	$	—	$	225,000	$	—	$	225,000

January 1, 2023	Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	250,000	$	—	$	250,000
Total financial liabilities	$	—	$	250,000	$	—	$	250,000

	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


	Balance at January 1, 2023		Additions		Balance at April 2, 2023
Goodwill	$	368,878	$	12,873	$	381,751

	Thirteen weeks ended
	October 1, 2017			October 2, 2016			Thirteen weeks ended
Unaudited Consolidated Statement of Operations Data:
							April 2, 2023		April 3, 2022
Unaudited Quarterly Consolidated Statement of Income Data:
Net sales	$	1,206,059		$	1,035,801		$	1,733,310	$	1,641,161
Cost of sales, buying and occupancy		859,650			744,288
Cost of sales								1,083,248		1,029,413
Gross profit		346,409			291,513			650,062		611,748
Direct store expenses		250,191			216,932
Selling, general and administrative expenses		39,955			29,664			486,195		459,910
Store pre-opening costs		2,456			3,446
Store closure and other costs		803			24
Depreciation and amortization (exclusive of depreciation included in cost of sales)								34,068		31,820
Store closure and other costs, net								28,277		377
Income from operations		53,004			41,447			101,522		119,641
Interest expense		(5,609	)		(3,723	)
Other income		162			135
Interest expense, net								2,220		3,039
Income before income taxes		47,557			37,859			99,302		116,602
Income tax provision		(16,071	)		(13,974	)		23,142		28,295
Net income	$	31,486		$	23,885		$	76,160	$	88,307

Weighted average shares outstanding		134,320			147,743
Dilutive effect of equity-based awards		2,450			2,281
Weighted average shares outstanding - basic								103,827		110,903
Diluted effect of equity-based awards								1,049		930
Weighted average shares and equivalent shares outstanding		136,770			150,024			104,876		111,833
Diluted net income per share	$	0.23		$	0.16		$	0.73	$	0.79


	Rolling Four Quarters Ended
	April 2, 2023			April 3, 2022
	(dollars in thousands)
Net Income (1)	$	249,018		$	249,416
Special items, net of tax (2), (3)		26,521			—
Interest expense, net of tax (3)		6,168			8,899
Net operating profit after tax (NOPAT)	$	281,707		$	258,315

Total rent expense, net of tax (3)		157,944			152,047
Estimated depreciation on operating leases, net of tax (3)		(89,396	)		(89,346	)
Estimated interest on operating leases, net of tax (3), (4)		68,548			62,701
NOPAT, including effect of operating leases	$	350,255		$	321,016

Average working capital		283,293			226,653
Average property and equipment		704,649			707,416
Average other assets		575,722			569,023
Average other liabilities		(98,409	)		(100,728	)
Average invested capital	$	1,465,255		$	1,402,364

Average operating leases (5)		1,287,831			1,233,502
Average invested capital, including operating leases	$	2,753,086		$	2,635,866

ROIC, including operating leases		12.7	%		12.2	%

	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	%

	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


Period (1)	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Approximate dollar value of shares that may yet be purchased under the plans or programs (2)
January 2, 2023 - January 29, 2023		971,422	$	31.50		971,422	$	381,278,000
January 30, 2023 - February 26, 2023		998,664	$	32.34		998,664	$	348,979,000
February 27, 2023 - April 2, 2023		1,068,325	$	33.18		1,068,325	$	313,528,000
Total		3,038,411				3,038,411


Exhibit Number		Description

~~31.1~~ 10.1		2023 Form of Performance Share Agreement under Sprouts Farmers Market, Inc. 2022 Omnibus Incentive Compensation Plan

31.1		Certification of Chief Executive ~~Office Pursuant~~Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer ~~Pursuant~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer ~~Pursuant~~pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer ~~Pursuant~~pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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		SPROUTS FARMERS MARKET, INC.

Date: ~~November 2, 2017~~May 1, 2023	By:	/s/ ~~Bradley S. Lukow~~Lawrence P. Molloy
	Name:	~~Bradley S. Lukow~~Lawrence P. Molloy
	Title:	Chief Financial Officer
		(Principal Financial Officer)