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,~~May 1, 2018, the registrant had ~~133,070,570~~131,846,682 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,~~December 31, 2017, and our other filings with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

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

	October 1, 2017		January 1, 2017
	(Unaudited)				April 1, 2018		December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	18,892	$	12,465	$	21,356	$	19,479
Accounts receivable, net		23,231		25,228		26,746		25,893
Inventories		222,216		204,464		239,611		229,542
Prepaid expenses and other current assets		25,594		21,869		27,301		24,593
Total current assets		289,933		264,026		315,014		299,507
Property and equipment, net of accumulated depreciation		690,763		604,660		738,656		713,031
Intangible assets, net of accumulated amortization		196,556		197,608		195,855		196,205
Goodwill		368,078		368,078		368,078		368,078
Other assets		5,886		5,521		9,541		4,782
Total assets	$	1,551,216	$	1,439,893	$	1,627,144	$	1,581,603
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	179,482	$	157,550
Accounts payable and other accrued liabilities					$	270,385	$	244,853
Accrued salaries and benefits		41,219		32,859		33,569		45,623
Other accrued liabilities		60,683		56,376
Current portion of capital and financing lease obligations		8,776		12,370		11,964		9,238
Total current liabilities		290,160		259,155		315,918		299,714
Long-term capital and financing lease obligations		126,806		117,366		122,833		125,489
Long-term debt		349,000		255,000		368,000		348,000
Other long-term liabilities		126,127		116,200		134,215		130,640
Deferred income tax liability		42,508		19,263		37,695		27,066
Total liabilities		934,601		766,984		978,661		930,909
Commitments and contingencies (Note 8)
Stockholders’ equity:
Undesignated preferred stock; $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding		—		—		—		—
Common stock, $0.001 par value; 200,000,000 shares authorized, 133,070,570 and 140,256,313 shares issued and outstanding, October 1, 2017 and January 1, 2017, respectively		133		140
Common stock, $0.001 par value; 200,000,000 shares authorized, 131,860,411 shares issued and outstanding, April 1, 2018; 132,823,981 shares issued and outstanding, December 31, 2017						131		132
Additional paid-in capital		614,232		597,269		631,631		620,788
Accumulated other comprehensive income (loss)						2,536		(784	)
Retained earnings		2,250		75,500		14,185		30,558
Total stockholders’ equity		616,615		672,909		648,483		650,694
Total liabilities and stockholders’ equity	$	1,551,216	$	1,439,893	$	1,627,144	$	1,581,603

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 1, 2018			April 2, 2017
Net sales	$	1,206,059		$	1,035,801		$	3,520,679		$	3,060,685		$	1,287,196		$	1,130,645
Cost of sales, buying and occupancy		859,650			744,288			2,494,998			2,156,857			900,144			793,359
Gross profit		346,409			291,513			1,025,681			903,828			387,052			337,286
Direct store expenses		250,191			216,932			715,336			617,817			262,595			229,058
Selling, general and administrative expenses		39,955			29,664			110,312			91,482			41,447			32,168
Store pre-opening costs		2,456			3,446			10,055			11,625			3,320			3,458
Store closure and other costs		803			24			992			159			10			91
Income from operations		53,004			41,447			188,986			182,745			79,680			72,511
Interest expense		(5,609	)		(3,723	)		(15,447	)		(10,985	)		(6,065	)		(4,738	)
Other income		162			135			388			326			208			95
Income before income taxes		47,557			37,859			173,927			172,086			73,823			67,868
Income tax provision		(16,071	)		(13,974	)		(55,186	)		(64,785	)		(7,199	)		(21,581	)
Net income	$	31,486		$	23,885		$	118,741		$	107,301		$	66,624		$	46,287
Net income per share:
Basic	$	0.23		$	0.16		$	0.87		$	0.72		$	0.50		$	0.34
Diluted	$	0.23		$	0.16		$	0.86		$	0.71		$	0.50		$	0.33
Weighted average shares outstanding:
Basic		134,320			147,743			136,063			149,202			132,423			137,069
Diluted		136,770			150,024			138,860			151,568			133,752			140,147

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

	Shares			Common Stock			Additional Paid In Capital		Retained Earnings			Total Stockholders’ Equity			Shares			Common Stock			Additional Paid In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			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			140,002,242		$	140		$	597,269	$	75,500		$	—		$	672,909
Net income		—			—			—		118,741			118,741			—			—			—		158,440			—			158,440
Other comprehensive income (loss)																—			—			—		—			(784	)		(784	)
Issuance of shares under stock plans		1,800,157			2			6,638		—			6,640			2,144,669			2			9,298		—			—			9,300
Repurchase and retirement of common stock		(9,136,468	)		(9	)		—		(191,991	)		(192,000	)		(9,696,819	)		(10	)		—		(203,382	)		—			(203,392	)
Equity-based compensation		—			—			10,325		—			10,325			—			—			14,221		—			—			14,221
Balances at October 1, 2017		132,665,931		$	133		$	614,232	$	2,250		$	616,615
Balances at December 31, 2017																132,450,092		$	132		$	620,788	$	30,558		$	(784	)	$	650,694
Net income																—			—			—		66,624			—			66,624
Other comprehensive income (loss)																—			—			—		—			3,320			3,320
Issuance of shares under stock plans																2,292,511			2			6,875		—			—			6,877
Repurchase and retirement of common stock																(3,329,409	)		(3	)		—		(82,997	)		—			(83,000	)
Equity-based compensation																—			—			3,968		—			—			3,968
Balances at April 1, 2018																131,413,194		$	131		$	631,631	$	14,185		$	2,536		$	648,483

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

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

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

	Thirteen Weeks Ended
	April 1, 2018			April 2, 2017
Cash flows from operating activities
Net income	$	66,624		$	46,287
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		26,810			22,622
Accretion of asset retirement obligation and closed store reserve		79			19
Amortization of financing fees and debt issuance costs		376			116
Loss on disposal of property and equipment		79			45
Equity-based compensation		3,968			2,446
Deferred income taxes		10,629			8,878
Changes in operating assets and liabilities:
Accounts receivable		(1,957	)		213
Inventories		(10,069	)		196
Prepaid expenses and other current assets		(2,135	)		(1,350	)
Other assets		(1,070	)		(27	)
Accounts payable and other accrued liabilities		18,637			31,547
Accrued salaries and benefits		(11,995	)		(1,642	)
Other long-term liabilities		4,511			5,187
Cash flows from operating activities		104,487			114,537
Cash flows from investing activities
Purchases of property and equipment		(44,158	)		(57,205	)
Proceeds from sale of property and equipment		—			30
Cash flows used in investing activities		(44,158	)		(57,175	)
Cash flows from financing activities
Proceeds from revolving credit facilities		40,000			60,000
Payments on revolving credit facilities		(20,000	)		(30,000	)
Payments on capital and financing lease obligations		(1,039	)		(1,093	)
Payments of deferred financing costs		(2,131	)		—
Cash from landlords related to financing lease obligations		900			300
Repurchase of common stock		(83,000	)		(80,000	)
Proceeds from exercise of stock options		6,877			2,292
Other		(59	)		—
Cash flows used in financing activities		(58,452	)		(48,501	)
Increase in cash and cash equivalents		1,877			8,861
Cash and cash equivalents at beginning of the period		19,479			12,465
Cash and cash equivalents at the end of the period	$	21,356		$	21,326

Supplemental disclosure of cash flow information
Cash paid for interest	$	6,080		$	4,435
Cash refunded for income taxes		—			(48	)

Supplemental disclosure of non-cash investing and financing activities
Property and equipment in accounts payable	$	25,068		$	36,038
Property acquired through capital and financing lease obligations		5,019			3,167

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

Sprouts Farmers Market, Inc., a Delaware corporation, through its subsidiaries, operates as a healthy grocery store that offers fresh, natural and organic food through a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, beer and wine, natural body care and household items catering to consumers’ growing interest in health and wellness. The “Company” is used to refer collectively to Sprouts Farmers Market, Inc. and unless the context otherwise requires, its subsidiaries.

The accompanying unaudited consolidated financial statements include the accounts of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission in instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company's financial position, results of operations and cash flows for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The information included in these consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the fiscal year ended ~~January 1,~~December 31, 2017 (“fiscal year ~~2016”~~2017”) included in the Company’s Annual Report on Form 10-K, filed on February ~~23, 2017.~~22, 2018.

The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. The fiscal year ending December ~~31, 2017~~30, 2018 (“fiscal year ~~2017”~~2018”) ~~is a 52-week year,~~ and fiscal year ~~2016 was a~~2017 are 52-week ~~year.~~years. The Company reports its results of operations on a 13-week quarter, except for 53-week fiscal years.

Certain reclassifications of amounts reported in prior periods have been made to conform with the current period presentation.

~~The Company has one reportable and one operating segment, healthy grocery stores.~~

The Company has adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” in the first quarter of fiscal year 2018, with a date of initial application of January 1, 2018, using the modified retrospective approach. Comparative information presented has not been adjusted and continues to be reported under ASC 605.

The Company applied ASC 606 to all of its contracts with customers. As a result of the adoption, there is no impact to any financial statement line item, and the Company has recorded no impact to opening retained earnings as of January 1, 2018.

The Company does not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current period from performance obligations satisfied in previous periods, any contract performance obligations, or any material costs to obtain or fulfill a contract as of April 1, 2018. The Company had a net gift card liability balance of $8.9 million as of April 1, 2018 and $13.1 million as of December 31, 2017. During the thirteen weeks ended April 1, 2018, the Company recognized $7.1 million in sales related to gift cards redeemed by customers.

~~2. Recently Issued Accounting Pronouncements~~Revenue is recognized at the point of sale. The Company’s performance obligations are satisfied upon the transfer of goods to the customer, at the point of sale, and payment from customers is also due at the time of sale. Proceeds from the sale of gift cards are recorded as a liability at the time of sale, and recognized as sales when they are redeemed by the customer and the performance obligation is satisfied by the Company.

The nature of goods the Company transfers to customers at the point of sale are inventories, consisting of merchandise purchased for resale.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” ASU No. 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business; less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for the Company for its fiscal year 2017. Adoption of the guidance took place prospectively during 2017, and the adoption did not have a material effect on the Company’s consolidated financial statements or disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718).” This update involves several aspects of the accounting for share-based transactions, including the income tax consequences, classification of awards as either equity or liabilities, how to account for forfeitures, and classification on the statement of cash flows. The amendments in this update are effective for the Company for its fiscal year 2017. As a result of the adoption, the Company recognized excess tax benefits related to the exercise of options in its income tax provision during the thirty-nine weeks ended October 1, 2017 (see Note 6). Prior to the adoption, these items were recorded in Additional Paid-in Capital. The Company has elected to prospectively apply the amendments related to classifying cash flows related to excess tax benefits as an operating activity. During 2017, excess tax benefits were classified as an operating activity on the consolidated statement of cash flows, along with other income tax cash flows. The Company has made a policy election to account for forfeitures as they occur. This election was adopted using a modified retrospective approach resulting in no cumulative effect on retained earnings at the beginning of the period. Prior to the adoption, forfeitures were accounted for using an estimated forfeiture rate.

In May 2014, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU~~Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, and estimating the amount of variable consideration to include in the transaction price attributable to each separate performance obligation. Subsequent to the initial standards, the FASB has also issued several ASUs to clarify specific revenue recognition topics. ~~This~~The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective approach. As noted above, there is no impact to any financial statement line item as a result of the adoption, and the Company has recorded no impact to opening retained earnings as of January 1, 2018. The Company has added additional disclosures of disaggregated revenue by type in Note 13, “Segments.”

In March 2016, the FASB issued ASU No. 2016-04, “Liabilities-Extinguishments of Liabilities (Subtopic 405-20): Recognition of breakage for certain prepaid stored-value products.” ASU No. 2016-04 provides a narrow scope exception to the guidance ~~will~~in Subtopic 405-20 to require that stored-value breakage be accounted for consistently with the breakage guidance in Topic 606. The amendments in this update contain specific guidance for derecognition of prepaid stored-value product liabilities, thereby eliminating the current and potential future diversity. The guidance was effective for the Company for its fiscal year ~~2018, with early adoption permitted.~~2018. The Company adopted this guidance using the modified retrospective approach. As noted above, there is ~~currently evaluating~~no impact to any financial statement line item as a result of the ~~potential~~adoption, and the Company has recorded no impact to opening retained earnings as of January 1, 2018.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update provides clarifications on the cash flow classification for eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. Adoption of this guidance took place during the first quarter of fiscal year 2018, using the retrospective transition method, and ~~does not expect this ASU to materially~~the adoption had no impact on the Company’s consolidated financial ~~statements.~~statements or disclosures.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this update provide guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in Topic 718. Adoption of this guidance took place prospectively in fiscal year 2018, and the adoption did not have an impact on the Company’s consolidated financial statements or disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (ASC 842).” ASU No. 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than twelve months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The new guidance also requires certain additional quantitative and qualitative disclosures. This guidance will be effective for the Company for its fiscal year 2019, with early adoption permitted, and the Company is currently evaluating the potential impact of this guidance. The adoption of this ASU is expected to result in a material increase to the Company’s consolidated balance sheets for right-of-use assets and lease liabilities.

In March 2016, the FASB issued ASU No. 2016-04, “Liabilities-Extinguishments of Liabilities (Subtopic 405-20): Recognition of breakage for certain prepaid stored-value products.” ASU No. 2016-04 provides a narrow scope exception to the guidance in Subtopic 405-20 to require that stored-value breakage be accounted for consistently with the breakage guidance in Topic 606. The amendments in this update contain specific guidance for derecognition of prepaid stored-value product liabilities, thereby eliminating the current and potential future diversity. This guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update provides clarifications on the cash flow classification for eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this update eliminate the second step of the goodwill impairment test and provide that an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The guidance will be effective for the Company for its fiscal year 2020, with early adoption permitted. The Company ~~is currently evaluating the potential impact of this guidance.~~

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this update provide guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in Topic 718. ~~The guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company~~ does not expect this ASU to materially impact the Company’s consolidated financial statements.

No other new accounting pronouncements issued or effective during the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017~~2018 had, or are expected to have, a material impact on the Company’s consolidated financial statements.

The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with GAAP. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the impairment analysis of goodwill, indefinite-lived intangible assets and long-lived assets, and in the valuation of store closure and exit costs.

The following tables present our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of April 1, 2018 and December 31, 2017:

April 1, 2018	Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	368,000	$	—	$	368,000
Total liabilities	$	—	$	368,000	$	—	$	368,000

Interest rate swap asset	$	—	$	3,415	$	—	$	3,415
Closed store reserves		—		—		764		764
Total assets	$	—	$	3,415	$	764	$	4,179

December 31, 2017	Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	348,000	$	—	$	348,000
Interest rate swap liability		—		1,064		—		1,064
Total liabilities	$	—	$	349,064	$	—	$	349,064

Closed store reserves	$	—	$	—	$	811	$	811
Total assets	$	—	$	—	$	811	$	811

The Company’s interest rate swaps are considered Level 2 in the hierarchy and are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of the yield curve on floating interest rates, which is readily available on public markets.

The determination of fair values of certain tangible and intangible assets for purposes of the Company’s goodwill impairment evaluation as described above ~~was~~is based upon ~~a step zero assessment.~~Level 3 inputs. Closed ~~facility~~store reserves are recorded at net present value to approximate fair value which is classified as Level 3 in the hierarchy. The estimated fair value of the closed ~~facility~~store reserve is calculated based on the present value of the remaining lease payments and other charges using a weighted average cost of

capital, reduced by estimated sublease rentals. The weighted average cost of capital ~~was~~is estimated using information from comparable companies and management’s judgment related to the risk associated with the operations of the stores.

Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and other accrued liabilities and, accrued salaries and benefits ~~and other accrued liabilities~~ approximate fair value because of the short maturity of those instruments. Based on comparable open market transactions, ~~comparable to the Credit Facility (as defined in Note 4, “Long-Term Debt”),~~ the fair value of the long-term debt ~~approximates~~approximated carrying value as of ~~October~~April 1, ~~2017~~2018 and ~~January 1,~~December 31, 2017. ~~The Company’s estimates of the fair value of long-term debt were classified as Level 2 in the fair value hierarchy.~~

			As of						As of
Facility	Maturity	Interest Rate	October 1, 2017		January 1, 2017		Maturity	Interest Rate	April 1, 2018		December 31, 2017
Senior secured debt
$450.0 million Credit Facility	April 17, 2020	Variable	$	349,000	$	255,000
$700.0 million Credit Agreement							March 27, 2023	Variable	$	368,000	$	—
Former Credit Facility							April 17, 2020	Variable		—		348,000
Total debt				349,000		255,000				368,000		348,000
Long-term debt			$	349,000	$	255,000			$	368,000	$	348,000

On ~~April 17, 2015,~~March 27, 2018, the Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), as borrower, entered into aan amended and restated credit agreement ~~that~~(the “Amended and Restated Credit Agreement”) to amend and restate the Company’s existing senior secured credit facility, dated April 17, 2015 (the “Former Credit Facility”). The Amended and Restated Credit Agreement provides for a revolving credit facility with an initial aggregate commitment of $700.0 million, an increase from $450.0 million ~~(the “Credit Facility”),~~under the Former Credit Facility, which may be increased from time to time pursuant to an expansion feature set forth in the Amended and Restated Credit ~~Facility. The~~Agreement.

Concurrently with the closing of the Amended and Restated Credit Agreement, all commitments under the Former Credit Facility ~~replaced~~were terminated, resulting in a $0.3 million loss on early extinguishment of debt, recorded in interest expense. The loss was due to the ~~Company’s existing senior secured credit facility, dated~~write-off of a proportional amount of deferred financing costs associated with the Former Credit Facility as the result of certain banks exiting the Amended and Restated Credit Agreement in connection with the refinancing. No amounts are outstanding under the Former Credit Facility as of April ~~23, 2013.~~1, 2018.

The Company capitalized debt issuance costs of ~~$2.3~~$2.1 million related to the refinancing which combined with the remaining $0.7 million debt issuance costs for the Former Credit Facility, ~~which~~ are being amortized on a straight-line basis to interest expense over the five-year term of the Amended and Restated Credit ~~Facility.~~Agreement.

The Amended and Restated Credit ~~Facility~~Agreement also provides for a letter of credit subfacility and a $15.0 million swingline facility. Letters of credit issued under the Amended and Restated Credit ~~Facility~~Agreement reduce ~~the~~its borrowing ~~capacity of the Credit Facility.~~capacity. Letters of credit totaling ~~$24.8~~$27.0 million have been issued as of ~~October~~April 1, ~~2017,~~2018, primarily to support the Company’s insurance programs.

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

Loans under the Amended and Restated Credit ~~Facility~~Agreement initially bear interest at ~~the Company’s option, either at adjusted~~ LIBOR plus 1.50% ~~per annum, or a base rate plus 0.50%~~ per annum. The interest rate margins are subject to adjustment pursuant to a pricing grid based on the Company’s total ~~gross~~net leverage ratio, as ~~defined~~set forth in the Amended and Restated Credit ~~Facility.~~Agreement. Under the terms of the Amended and Restated Credit ~~Facility,~~Agreement, the Company is obligated to pay a commitment fee on the available unused amount of the commitments between 0.15% to 0.30% per annum, also pursuant to a pricing grid based on the Company’s total net leverage ratio.

The rate on approximately 70% of outstanding debt under the Amended and Restated Credit ~~Facility commitments equal~~Agreement is fixed, due to ~~0.20% per annum.~~certain floating to fixed swaps implemented in December 2017 (see Note 11, “Derivative Financial Instruments”).

Outstanding letters of credit under the Amended and Restated Credit ~~Facility~~Agreement are subject to a participation fee of 1.50% per annum and an issuance fee of 0.125% per annum.

The Amended and Restated Credit ~~Facility~~Agreement is scheduled to mature, and the commitments thereunder will terminate on ~~April 17, 2020,~~March 27, 2023, subject to extensions as set forth ~~in the Credit Facility.~~therein.

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

During fiscal year ~~2016,~~2017, the Company borrowed ~~$105.0~~$153.0 million under the Former Credit Facility to be used in connection with the Company’s $250.0 million share repurchase program (see Note 9, “Stockholders’ Equity”) and made a total of ~~$10.0~~$60.0 million of principal payments; resulting in total outstanding debt under the Former Credit Facility of ~~$255.0~~$348.0 million at ~~January 1,~~December 31, 2017. During the thirteen weeks ended ~~October~~April 1, ~~2017,~~2018, the Company borrowed ~~$49.0~~an additional $40.0 million and made a total of ~~$10.0 million of principal payments. During the thirty-nine weeks ended October 1, 2017, the Company borrowed $134.0 million and made a total of $40.0~~$20.0 million of principal payments; resulting in total outstanding debt under the Amended and Restated Credit ~~Facility~~Agreement of ~~$349.0~~$368.0 million as of ~~October~~April 1, ~~2017. The Company has used borrowings under the Credit Facility to assist with its share repurchase programs (see Note 9).~~2018.

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

Each of these covenants is subject to customary and other agreed-upon exceptions.

In addition, the Amended and Restated Credit ~~Facility~~Agreement requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed ~~3.00~~3.25 to 1.00 and minimum interest coverage ratio not to be less than 1.75 to 1.00. Each of these covenants is tested ~~as of~~on the last day of each fiscal ~~quarter.~~quarter, starting with the fiscal quarter ended April 1, 2018.

The Company was in compliance with all applicable covenants under the Amended and Restated Credit ~~Facility~~Agreement as of ~~October~~April 1, ~~2017.~~2018.

On April 17, 2015, Intermediate Holdings, as borrower, entered into the Former Credit Facility that provided for a revolving credit facility with an initial aggregate commitment of $450.0 million, subject to an expansion feature set forth therein. The Former Credit Facility also provided for a letter of credit subfacility and a $15.0 million swingline facility.

The Former Credit Facility was scheduled to mature, and the commitments thereunder were scheduled to terminate, on April 17, 2020.

Loans under the Former Credit Facility bore interest, at the Company’s option, either at adjusted LIBOR plus 1.50% per annum, or a base rate plus 0.50% per annum. The interest rate margins were subject to adjustment pursuant to a pricing grid based on the Company’s total gross leverage ratio, as defined in the Former Credit Facility. Under the terms of the Former Credit Facility, the Company was obligated to pay a commitment fee on the available unused amount of the commitments equal to 0.20% per annum.

The following is a summary of closed store reserve activity during the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017~~2018 and fiscal year ~~2016:~~2017:

	Thirty-nine Weeks Ended			Fiscal Year Ended			Thirteen Weeks Ended			Fiscal Year Ended
	October 1, 2017			January 1, 2017			April 1, 2018			December 31, 2017
Beginning balance	$	1,083		$	2,017		$	811		$	1,083
Additions		—			—			—			—
Usage		(387	)		(998	)		(107	)		(492	)
Adjustments		205			64			60			220
Ending balance	$	901		$	1,083		$	764		$	811

~~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~~periods 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.

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted into law, which changes various corporate income tax provisions within the existing Internal Revenue Code.

The ~~Company’s effective~~most significant changes that impact the Company are the reduction in the corporate federal income tax rate from 35% to 21% and 100% bonus depreciation for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.

Under the guidance set forth in the SEC's Staff Accounting Bulletin No. 118 (“SAB 118”), the Company may record provisional amounts for the ~~thirteen weeks ended October 1,~~impact of the Tax Act. In 2017, the Company had substantially completed the measurement and ~~October 2, 2016 was 33.8%~~made a provisional and ~~36.9%, respectively.~~reasonable estimate of the effects of the Tax Act on its existing deferred tax balances. The ~~decrease~~final impact of the Tax Act may differ due to changes in interpretations and assumptions the Company has made and guidance that may be issued. In accordance with SAB 118, future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the ~~effective tax rate is primarily due~~period in which those adjustments become estimable and finalized. As of April 1, 2018 the Company has not made any changes to ~~tax return to provision adjustments for~~ the ~~2016 income tax return.~~provisional and estimated amounts.

The Company’s effective tax rate decreased to 9.8% for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, 2018 from 31.8% for the thirteen weeks ended April 2, 2017 primarily due to the enactment of the Tax Act as disclosed above and ~~October 2, 2016 was 31.7% and 37.7%, respectively. The decrease in~~ the ~~effective tax rate is primarily related to~~ recognition of excess tax benefits related to the exercise ~~or vesting~~ of ~~equity-based awards~~stock options in the income tax provision. ~~See ASU 2016-09, Compensation – “Stock Compensation (Topic 718)” under Recently Adopted Accounting Pronouncements (Note 2).~~

Excess tax benefits associated with share-based payment awards are recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur.

The income tax benefits resulting from ~~equity-based~~excess tax benefits of share-based payment awards were ~~$0.2~~$11.1 million and $3.8 million for the thirteen weeks ended ~~October~~April 1, ~~2017. The income tax benefits resulting from the equity-based awards for the thirteen weeks ended October~~2018 and April 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.2017, respectively.

A member of the Company’s board of directors is an investor in a company that is a supplier of coffee to the Company for resale. During the thirteen weeks ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016,~~2017, purchases from this supplier were ~~$2.7~~$2.3 million and ~~$2.1~~$2.9 million, respectively. ~~During~~As of April 1, 2018 and December 31, 2017, the ~~thirty-nine weeks ended October 1, 2017 and October 2, 2016, purchases from~~Company had recorded accounts payable due to this ~~supplier were $8.1~~vendor of $0.4 million and ~~$7.3~~$0.7 million, respectively.

~~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, who retired from this position in February 2017, has been the chief executive officer, an equity investor, and lender to a technology supplier to the Company. During the thirteen weeks ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016,~~2017, purchases from this supplier and its predecessors were ~~$1.6~~$1.2 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~~$1.5 million, respectively. As of ~~October~~April 1, ~~2017,~~2018 and ~~October 2, 2016,~~December 31, 2017, the Company had recorded accounts payable due to the supplier of ~~$0.2~~$0.4 million and ~~$0.5~~$0.1 million, respectively.

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.

On March 4, 2016, a complaint was filed in the Superior Court for the State of Arizona against the Company and certain of its directors and officers on behalf of a purported class of purchasers of shares of the Company’s common stock 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 of the Securities Act of 1933, as amended, 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~~plaintiff sought remand, which the court granted in March 2017. ~~The Company has appealed the order granting remand to the Ninth Circuit Court of Appeals.~~ On May 25, 2017, the Company 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. The Company answered the complaint on September 28, 2017. The parties are engaged in discovery at this time. The Company 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.

On November 4, 2015, 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’s board of directors authorized a new $250 million common stock share repurchase program. The following table outlines the common stock share repurchase programs authorized by the ~~Board,~~Company’s board of directors from time to time, and the related repurchase activity and available authorization as of ~~October~~April 1, ~~2017 (in thousands):~~2018.

Effective date	Expiration date	Amount authorized		Cost of repurchases		Authorization available		Expiration date	Amount authorized		Cost of repurchases		Authorization available
November 4, 2015	November 4, 2017	$	150,000	$	150,000	$	—	November 4, 2017	$	150,000	$	150,000	$	—
September 6, 2016	December 31, 2017	$	250,000	$	250,000	$	—	December 31, 2017	$	250,000	$	250,000	$	—
February 20, 2017	December 31, 2018	$	250,000	$	112,000	$	138,000	December 31, 2018	$	250,000	$	206,400	$	43,600
February 20, 2018								December 31, 2019	$	350,000	$	—	$	350,000

The shares under the Company’s repurchase programs may be purchased on a discretionary basis from time to time prior to 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 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 Former Credit Facility and Amended and Restated Credit Agreement to assist with the repurchase programs ~~authorized on September 6, 2016 and February 20, 2017~~ (see Note 4)4, “Long-Term Debt”).

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 1, 2018		April 2, 2017
Number of common shares acquired		3,249,204		3,189,818		9,136,468		8,169,510		3,329,409		4,099,936
Average price per common share acquired	$	22.16	$	19.93	$	21.01	$	22.99	$	24.93	$	19.51
Total cost of common shares acquired	$	72,000	$	63,572	$	192,000	$	187,836	$	83,000	$	80,000

Shares purchased under the Company’s repurchase programs were subsequently retired.

The computation of net income per share is based on the number of weighted average shares outstanding during the period. The computation of diluted net income per share includes the dilutive effect of share equivalents consisting of incremental shares deemed outstanding from the assumed exercise of options, assumed vesting of restricted stock units (“RSUs”), assumed vesting of performance stock awards (“PSAs”), and assumed vesting of restricted stock awards (“RSAs”).

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 1, 2018		April 2, 2017
Basic net income per share:
Net income	$	31,486	$	23,885	$	118,741	$	107,301	$	66,624	$	46,287
Weighted average shares outstanding		134,320		147,743		136,063		149,202		132,423		137,069
Basic net income per share	$	0.23	$	0.16	$	0.87	$	0.72	$	0.50	$	0.34
Diluted net income per share:
Net income	$	31,486	$	23,885	$	118,741	$	107,301	$	66,624	$	46,287
Weighted average shares outstanding - basic		134,320		147,743		136,063		149,202		132,423		137,069
Dilutive effect of equity-based awards:
Assumed exercise of options to purchase shares		2,128		2,200		2,506		2,278		807		2,962
RSUs		122		28		124		49		221		62
RSAs		114		13		102		9		160		19
PSAs		86		40		65		30		141		35
Weighted average shares and equivalent shares outstanding		136,770		150,024		138,860		151,568		133,752		140,147
Diluted net income per share	$	0.23	$	0.16	$	0.86	$	0.71	$	0.50	$	0.33

For the thirteen weeks ended ~~October~~April 1, 2018, the computation of diluted net income per share does not include 1.1 million options and 0.1 million PSAs as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met. For the thirteen weeks ended April 2, 2017, the computation of diluted net income per share does not include ~~1.9~~2.6 million options and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards. ~~For~~

We entered into an interest rate swap agreement in December 2017 to manage our cash flow associated with variable interest rates. This forward contract has been designated and qualifies as a cash flow hedge, and its change in fair value is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the forecasted transaction occurs. The forward contract consists of five cash flow hedges. To qualify as a hedge, we need to formally document, designate and assess the effectiveness of the transactions that receive hedge accounting.

The notional dollar amount of the five outstanding swaps was $250.0 million at April 1, 2018 and December 31, 2017, respectively, under which we pay a fixed rate and received a variable rate of interest (cash flow swap). The cash flow swaps hedge the change in interest rates on debt related to fluctuations in interest rates and each have a length of one year and mature annually from 2018 to 2022. These interest rate swaps have been designated and qualify as cash flow hedges and have met the requirements to assume zero ineffectiveness. We review the effectiveness of our hedging instruments on a quarterly basis.

The counterparties to our derivative financial instruments are major financial institutions. We evaluate the credit ratings of the financial institutions and believe that credit risk is at an acceptable level.

The gain or loss on these derivative instruments is recognized in other comprehensive income, net of tax, with the portion related to current period interest payments reclassified to interest expense on the Consolidated Statements of Income.

During the thirteen weeks ended ~~October~~April 2, ~~2016,~~2017, the ~~computation of diluted net~~Company did not record accumulated other comprehensive income. The following table presents the changes in accumulated other comprehensive 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.~~for the thirteen weeks ended April 1, 2018.

~~For~~Amounts reclassified from accumulated other comprehensive income (loss) are included within interest expense on the ~~thirty-nine weeks ended October 1, 2017, the computation~~Consolidated Statements 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. For the thirty-nine weeks ended October 2, 2016, the computation of diluted net income per share does not include 1.3 million options, 0.1 million RSUs and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards.Income.

~~11.~~The Company has one reportable and one operating segment, healthy grocery stores.

In accordance with ASC 606, the following table represents a disaggregation of revenue for the thirteen weeks ended April 1, 2018 and April 2, 2017.

We categorize the varieties of products we sell as perishable and non-perishable. Perishable product categories include produce, meat, seafood, deli, bakery, and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care.

The Company’s board of directors adopted, and its equity holders approved, the Sprouts Farmers Market, Inc. 2013 Incentive Plan (the “2013 Incentive Plan”). The 2013 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~~stock-based and cash-based incentive compensation programs for its directors, officers and other team ~~members.~~members, including RSUs, PSAs, and RSAs. 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 the Internal Revenue Code.

The aggregate number of shares of common stock that may be issued to team members and directors under the 2013 Incentive Plan may not exceed 10,089,072. Shares subject to awards granted 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 of the share limitation. As of ~~October~~April 1, ~~2017,~~2018, there were ~~3,686,043~~3,720,726 stock awards outstanding and ~~5,805,674~~5,205,419 shares remaining available for issuance under the 2013 Incentive Plan.

In May 2011, the Company adopted the Sprouts Farmers Markets, LLC Option Plan (the “2011 Option Plan”) to provide team members or directors of the Company with options to acquire shares of the Company. The Company had authorized 12,100,000 shares for issuance under the 2011 Option Plan. Options may no longer be issued under the 2011 Option Plan. As of ~~October~~April 1, ~~2017,~~2018, there were ~~2,384,978~~315,836 options outstanding under the 2011 Option Plan.

During the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017,~~2018, the Company granted the following ~~equity-based~~stock-based compensation awards:

Grant Date	RSUs		PSAs		RSAs		RSUs		PSAs
March 2017		325,406		148,944		288,746
May 2017		21,820		—		—
August 2017		10,630		—		—
March 5, 2018								447,594		126,098
March 12, 2018								4,357		—
Total:		357,856		148,944		288,746		451,951		126,098
Weighted-average grant date fair value	$	18.66	$	18.11	$	18.11	$	25.18	$	25.18
Weighted-average exercise price								—		—

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.

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.

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 granted in fiscal year 2015 are restricted shares that were subject to the Company achieving certain earnings per share performance targets, as well as additional time-vesting conditions. The fair value of PSAs is based on the closing price of the Company’s common stock on the grant date. ~~During the thirty-nine weeks ended October 2, 2016, the~~The performance conditions with respect to 2015 earnings per share targets were deemed to have been met, and all PSAs have vested. During the ~~PSAs will vest 50 percent at each~~thirteen weeks ended April 1, 2018, 20,595 of the ~~second~~2015 PSAs were vested, and ~~third anniversary of~~during the ~~grant date. During the thirty-nine~~thirteen weeks ended ~~October 1,~~April 2, 2017, 21,050 of the 2015 PSAs were vested. ~~No PSAs vested during the thirty-nine weeks ended October 2, 2016.~~

PSAs granted in fiscal year 2016 are restricted shares that are subject to the Company achieving certain earnings before interest and taxes (“EBIT”) performance targets on an annual and cumulative basis over a three-year performance period, as well as additional time-vesting conditions. ~~The fair value of these PSAs is based on the closing price 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 is based on a percentage increase over the previous year’s actual EBIT, with each annual performance tranche ~~independent~~measured independently of the previous and next tranche. Cumulative performance is based on the aggregate annual performance ~~targets.~~and is measured against a cumulative performance target. Payout of the performance shares will either be 0% or range from 50% to 150% of the target number of shares ~~granted.~~granted, depending upon goal achievement. If the performance conditions are met, ~~PSAs~~the applicable number of performance shares is subject to cliff ~~vest~~vesting on the third anniversary of the grant ~~date.~~date (March 2019). The ~~Company’s board of directors determined that the~~ performance ~~targets for the fiscal year~~conditions with respect to 2016 ~~tranche~~and 2017 EBIT were not ~~met and 30,981 performance shares were not earned.~~met.

PSAs granted in ~~fiscal year~~March 2017 ~~are restricted shares that are~~were subject to the Company achieving certain earnings per share performance targets ~~as well as additional time-vesting conditions.~~during 2017. The ~~fair value of PSAs~~criteria is based on ~~the closing price~~a range of ~~the Company’s common stock on the grant date. Payout of the~~ performance ~~shares will either be 0% or range from~~targets in which grantees may earn between 10% toand 150% of the ~~target~~base number of ~~shares~~awards granted. IfDuring the thirteen weeks ended April 1, 2018, the performance conditions ~~are~~with respect to 2017 earnings per share were deemed to have been met, and the PSAs will vest ~~50 percent at each~~50% on the second anniversary of the ~~second~~grant date (2019) and 50% on the third anniversary of the grant ~~date.~~date (2020).

PSAs granted in March 2018 are subject to the Company achieving certain EBIT performance targets for the 2020 fiscal year. The criteria is based on a range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (2021).

The fair value of RSAs is based on the closing price of the Company’s common stock on the grant date. ~~RSAs granted prior to January 1, 2017~~Outstanding RSA grants have varying vest schedules. Such grants will vest either a) ratably over a seven quarter period, ~~beginning on December 31, 2016 or~~b) cliff vest on June 30, ~~2018. RSAs granted in fiscal year 2017 will~~2018 or c) vest annually over ~~a period of~~ three ~~years from the grant date.~~

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

~~the Company’s common stock at an exercise price of $24.48 per share, respectively, and 215,251 and 2,601 RSAs, respectively.~~ The Company recognized compensation expense of $0.9 million during the thirteen week period and $2.9 million during the thirty-nine week period ended October 1, 2017 related to the options and RSAs granted. The Company recognized compensation expense of $1.0 million during the thirteen week period and $1.4 million during the thirty-nine week period ended October 2, 2016 related to the options and RSAs granted.years.

Equity-based compensation expense was reflected in the consolidated statements of operations as follows:

	Thirteen Weeks Ended						Thirty-nine Weeks Ended						Thirteen Weeks Ended
	October 1, 2017			October 2, 2016			October 1, 2017			October 2, 2016			April 1, 2018			April 2, 2017
Cost of sales, buying and occupancy	$	265		$	244		$	777		$	726		$	269		$	246
Direct store expenses		349			339			1,098			1,015			328			361
Selling, general and administrative expenses		3,471			3,414			8,450			8,581			3,371			1,839
Equity-based compensation expense before income taxes		4,085			3,997			10,325			10,322			3,968			2,446
Income tax benefit		(1,528	)		(1,519	)		(3,863	)		(3,922	)		(1,020	)		(915	)
Net equity-based compensation expense	$	2,557		$	2,478		$	6,462		$	6,400		$	2,948		$	1,531

The following equity-based awards were outstanding as of ~~October~~April 1, ~~2017~~2018 and ~~January 1,~~December 31, 2017:

	As of				As of
	October 1, 2017		January 1, 2017		April 1, 2018		December 31, 2017
	(in thousands)				(in thousands)
Options
Vested		4,394		5,552		2,505		4,226
Unvested		609		1,205		233		464
RSUs		453		274		692		449
PSAs		231		159		380		231
RSAs		384		187		226		353

As of ~~October~~April 1, ~~2017,~~2018, total unrecognized compensation expense ~~related to outstanding equity-based awards was as follows:~~

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

During the thirteen weeks ended April 1, 2018 and April 2, 2017, the Company received $6.9 million and $2.3 million, respectively, in cash proceeds from the exercise of options.

Subsequent to April 1, ~~2017~~2018, and ~~October 2, 2016,~~through April 30, 2018, the Company ~~received $6.6 million and $2.6 million, respectively, in cash proceeds from the exercise~~repurchased an additional 44,000 shares of ~~options.~~common stock for $1.0 million.

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 filed for the 2017 fiscal year, February ~~23, 2017~~22, 2018 with the Securities and Exchange Commission. All dollar amounts included below are in thousands, unless otherwise noted.

Sprouts Farmers Market operates as a healthy grocery store that ~~offers~~specializes in fresh, natural and organic products at prices that appeal to everyday grocery shoppers. Based on the belief that healthy food should be affordable, Sprouts’ welcoming environment and knowledgeable team members continue to drive its growth. Sprouts offers a complete shopping experience that includes an array of fresh produce ~~bulk foods,~~in the heart of the store, a deli with prepared entrees and side dishes, The Butcher Shop, The Fish Market, an expansive vitamins and supplements ~~packaged groceries, meat~~department and ~~seafood, deli, baked goods, dairy products, frozen foods, body care and natural household items catering to consumers’ growing interest in health and wellness.~~more. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. With ~~282~~294 stores in 1516 states as of ~~October~~April 1, ~~2017,~~2018, we are one of the largest specialty retailers of fresh, natural and organic food in the United States. As of ~~November 1, 2017,~~April 30, 2018, we have grown to ~~285~~297 stores in 1516 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~~April 1, ~~2017,~~2018, we continued to open new stores while successfully rebranding 43 Henry’s Farmers Market and 39 Sunflower Farmers Market stores added in 2011 and 2012, respectively, through acquisitions to the Sprouts ~~banner (referred to as the “Transactions”).~~banner. These three businesses all trace their lineage back to Henry’s Farmers Market and were built with similar store formats and operations including a strong emphasis on value, produce and service in smaller, convenient locations. The consistency of these formats and operations was an important factor that allowed us to rapidly and successfully rebrand and integrate each of these businesses under the Sprouts banner and on a common platform.

We are pursuing a number of strategies designed to continue our growth, including expansion of our 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 32approximately 30 new stores in ~~2017,~~2018, of which ~~all 32~~12 have opened through ~~November 1, 2017,~~April 30, 2018, and approximately 30 new stores per year for the near term.

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~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016~~2017

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.

	Thirteen weeks ended						Thirteen weeks ended
	October 1, 2017			October 2, 2016			April 1, 2018			April 2, 2017
Unaudited Consolidated Statement of Operations Data:
Unaudited Quarterly Consolidated Statement of Income Data:
Net sales	$	1,206,059		$	1,035,801		$	1,287,196		$	1,130,645
Cost of sales, buying and occupancy		859,650			744,288			900,144			793,359
Gross profit		346,409			291,513			387,052			337,286
Direct store expenses		250,191			216,932			262,595			229,058
Selling, general and administrative expenses		39,955			29,664			41,447			32,168
Store pre-opening costs		2,456			3,446			3,320			3,458
Store closure and other costs		803			24			10			91
Income from operations		53,004			41,447			79,680			72,511
Interest expense		(5,609	)		(3,723	)		(6,065	)		(4,738	)
Other income		162			135			208			95
Income before income taxes		47,557			37,859			73,823			67,868
Income tax provision		(16,071	)		(13,974	)		(7,199	)		(21,581	)
Net income	$	31,486		$	23,885		$	66,624		$	46,287

Weighted average shares outstanding		134,320			147,743			132,423			137,069
Dilutive effect of equity-based awards		2,450			2,281
Diluted effect of equity-based awards								1,329			3,078
Weighted average shares and equivalent shares outstanding		136,770			150,024			133,752			140,147
Diluted net income per share	$	0.23		$	0.16		$	0.50		$	0.33

	Thirteen weeks ended						Thirteen weeks ended
	October 1, 2017			October 2, 2016			April 1, 2018			April 2, 2017
Other Operating Data:
Comparable store sales growth		4.6	%		1.3	%		2.7	%		1.1	%
Stores at beginning of period		274			240			285			253
Closed								—			—
Opened		8			10			9			8
Stores at end of period		282			250			294			261

Comparison of Thirteen Weeks Ended ~~October~~April 1, ~~2017~~2018 to Thirteen Weeks Ended

	Thirteen weeks ended											Thirteen weeks ended
	October 1, 2017			October 2, 2016			Change		% Change			April 1, 2018			April 2, 2017			Change		% Change
Net sales	$	1,206,059		$	1,035,801		$	170,258		16	%	$	1,287,196		$	1,130,645		$	156,551		14	%
Comparable store sales growth		4.6	%		1.3	%							2.7	%		1.1	%

Net sales during the thirteen weeks ended ~~October~~April 1, ~~2017~~2018 totaled ~~$1.2~~$1.3 billion, increasing ~~16%~~14% 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%~~89% of ~~net~~total 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 compared to the thirteen weeks ended October 2, 2016 by $54.9 million, of which $47.4 million 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 in the third quarter of 2016 in addition to leverage from increased comparable sales.

~~Direct store expenses~~ for the thirteen weeks ended ~~October~~April 1, 2017 increased $33.3 million, including $26.5 million related to stores opened after October 2, 2016, and $6.8 million related to stores operated prior to the same period in 2016. Direct store expenses, as a percentage of net sales, decreased 20 basis points. This leverage is primarily driven by improved comparable sales, as well as operating efficiencies, partially offset by higher benefit costs.

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 the thirteen weeks ended October 1, 2017 included $1.9 million related to opening 8 stores during the thirteen weeks ended October 1, 2017 and $0.6 million associated with stores expected to open subsequent to October 1, 2017. Store pre-opening costs in the thirteen weeks ended October 2, 2016 included $2.6 million related to opening 10 stores during that period and $0.8 million associated with stores opened subsequent to quarter end.

Store closure costs for the thirteen weeks ended October 1, 2017 and October 2, 2016 are related to adjustments to the closed store facility reserve primarily related to refinement of estimated subtenant income and other actual occupancy costs from original estimates.

During the third quarter of 2017, 14 of our stores were affected by hurricanes in three states. Although physical damage was minimal, the stores experienced loss of business due to temporary closures, inventory loss and additional expenses to clean up and power the stores. These costs, net of estimated insurance recovery, approximate $0.7 million in the thirteen weeks ended October 1, 2017.

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 thirteen weeks ended October 1, 2017.

Income tax provision increased to $16.1 million for the thirteen weeks ended October 1, 2017 from $14.0 million for the thirteen weeks ended October 2, 2016, primarily related to an increase in income before taxes. Our effective income tax rate decreased to 33.8% in the thirteen weeks ended October 1, 2017 from 36.9% in the thirteen weeks ended October 2, 2016. The decrease in the effective tax rate was primarily due to tax return to provision adjustments for the 2016 income tax return.

Net income as a percentage of net sales increased primarily due to 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.

The increase in diluted earnings per share of $0.07 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.

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

Thirty-nine Weeks Ended

October 1, 2017

October 2, 2016

Unaudited Consolidated Statement of Operations Data:

Net sales

$
3,520,679

$
3,060,685

Cost of sales, buying and occupancy

2,494,998

2,156,857

Gross profit

1,025,681

903,828

Direct store expenses

715,336

617,817

Selling, general and administrative expenses

110,312

91,482

Store pre-opening costs

10,055

11,625

Store closure and other costs

992

159

Income from operations

188,986

182,745

Interest expense

(15,447
)

(10,985
)
Other income

388

326

Income before income taxes

173,927

172,086

Income tax provision

(55,186
)

(64,785
)
Net income

$
118,741

$
107,301

Weighted average shares outstanding

136,063

149,202

Dilutive effect of equity-based awards

2,797

2,366

Weighted average shares and equivalent shares outstanding

138,860

151,568

Diluted net income per share

$
0.86

$
0.71

~~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, 20172018 and approximately ~~88%~~86% for the same period of the prior fiscal year.

	Thirty-nine Weeks Ended												Thirteen weeks ended
	October 1, 2017			October 2, 2016			Change			% Change			April 1, 2018			April 2, 2017			Change			% Change
Net sales	$	3,520,679		$	3,060,685		$	459,994			15	%	$	1,287,196		$	1,130,645		$	156,551			14	%
Cost of sales, buying and occupancy		2,494,998			2,156,857			338,141			16	%		900,144			793,359			106,785			13	%
Gross profit		1,025,681			903,828			121,853			13	%		387,052			337,286			49,766			15	%
Gross margin		29.1	%		29.5	%		(0.4	)%					30.1	%		29.8	%		0.3	%

Gross profit increased during the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017~~2018 compared to the ~~thirty-nine~~thirteen weeks ended ~~October~~April 2, ~~2016~~2017 by ~~$121.9~~$49.8 million, ~~primarily~~of which $46.3 million was as a result of increased sales ~~volume. Gross~~volume, in addition to $3.5 million related to improved margin ~~decreased due to the competitive environment,~~rate, primarily ~~in the first half of 2017, as well as higher occupancy costs.~~reflecting stronger merchandise margins.

	Thirty-nine Weeks Ended												Thirteen weeks ended
	October 1, 2017			October 2, 2016			Change			% Change			April 1, 2018			April 2, 2017			Change			% Change
Direct store expenses	$	715,336		$	617,817		$	97,519			16	%	$	262,595		$	229,058		$	33,537			15	%
Percentage of net sales		20.3	%		20.2	%		0.1	%					20.4	%		20.3	%		0.1	%

Direct store expenses for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, 2018 increased $33.5 million, including $25.8 million related to stores opened after April 2, 2017, ~~increased $97.5 million.~~and $7.7 million related to stores operating prior to the same period in 2017. Direct store expenses, as a percentage of net sales, increased 10 basis points. This deleverage is primarily ~~reflects~~driven by higher ~~payroll and~~holiday pay related to calendar shift in New Years as well as increased benefit costs ~~in part due to deleverage of fixed costs associated with lower comparable store sales growth,~~and depreciation. This was partially offset by improvement in labor productivity and other operating efficiencies.

	Thirty-nine Weeks Ended												Thirteen weeks ended
	October 1, 2017			October 2, 2016			Change			% Change			April 1, 2018			April 2, 2017			Change			% Change
Selling, general and administrative expenses	$	110,312		$	91,482		$	18,830			21	%	$	41,447		$	32,168		$	9,279			29	%
Percentage of net sales		3.1	%		3.0	%		0.1	%					3.2	%		2.8	%		0.4	%

The increase in selling, general and administrative expenses ~~primarily reflects an $8.1~~included $4.6 million ~~increase in~~of compensation expense ~~a $3.7~~(including stock-based compensation and bonus expense), $2.2 million ~~increase in regional expenses, a $3.5 million increase in advertising~~ to support ~~growth~~our strategic technology investments, $1.7 million for advertising, and ~~$3.5~~$0.8 million ~~of increases in~~for other corporate expenses, commensurate with store growth and improved company performance.

	Thirty-nine weeks ended												Thirteen weeks ended
	October 1, 2017			October 2, 2016			Change			% Change			April 1, 2018			April 2, 2017			Change			% Change
Attributable to 2016 store openings		—			11,186			(11,186	)
Attributable to 2017 store openings		9,210			439			8,771						—			3,458			(3,458	)
Attributable to future store openings		845			—			845
Attributable to 2018 store openings														2,516			—			2,516
Attributable to planned 2018 store openings														804			—			804
Total store pre-opening costs	$	10,055		$	11,625		$	(1,570	)		(14	)%	$	3,320		$	3,458		$	(138	)		(4	)%
Percentage of net sales		0.3	%		0.4	%		(0.1	)%					0.3	%		0.3	%		—

Store pre-opening costs in the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017~~2018 included ~~$9.0~~$2.5 million related to opening 299 stores during the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017~~2018 and ~~$1.0~~$0.8 million associated with stores expected to open subsequent to ~~October~~April 1, ~~2017.~~2018. Store pre-opening costs in the ~~thirty-nine~~thirteen weeks ended ~~October~~April 2, ~~2016~~2017 included ~~$10.6~~$2.2 million related to opening 338 stores during that period and ~~$1.0~~$1.2 million associated with stores opened subsequent to quarter end.

Store closure and other costs ~~for~~were insignificant in the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 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.~~

	Thirty-nine weeks ended									Thirteen weeks ended
	October 1, 2017		October 2, 2016		Change		% Change			April 1, 2018			April 2, 2017		Change			% Change
Capital and financing leases	$	8,715	$	8,048	$	667		8	%	$	3,040		$	2,810	$	230		��	8	%
Long-term debt		5,919		2,247		3,672		163	%		2,712			1,665		1,047			63	%
Deferred financing costs / Original issuance discount		347		347		—		0	%
Deferred financing costs											376			116		260			224	%
Other		466		343		123		36	%		(63	)		147		(210	)		(143	)%
Total Interest Expense	$	15,447	$	10,985	$	4,462		41	%	$	6,065		$	4,738	$	1,327			28	%

The increase in interest expense is ~~primarily~~ due to the higher principal balance on the Amended and Restated Credit ~~Facility for borrowing to support our share repurchase program~~Agreement combined with the slightly higher interest rate on our Former Credit Facility for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017.~~2018.

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:

Income tax provision decreased to ~~$55.2~~$7.2 million for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017~~2018 from ~~$64.8~~$21.6 million for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 2, ~~2016,~~2017. Our effective income tax rate decreased to 9.8% in the thirteen weeks ended April 1, 2018 from 31.8% in the thirteen weeks ended April 2, 2017 primarily related to the ~~recognition~~effects of the Tax Act and higher excess tax benefits related to the exercise ~~or vesting~~ of ~~equity-based awards~~options in the income tax provision. ~~Our effective~~

Net 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).

	Thirty-nine Weeks Ended												Thirteen weeks ended
	October 1, 2017			October 2, 2016			Change			% Change			April 1, 2018			April 2, 2017			Change			% Change
Net income	$	118,741		$	107,301		$	11,440			11	%	$	66,624		$	46,287		$	20,337			44	%
Percentage of net sales		3.4	%		3.5	%		(0.1	)%					5.2	%		4.1	%		1.1	%

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~~increased, driven by a lower effective tax ~~rate.~~rate due to the Tax Act and the exercise of expiring pre-IPO options, as well as higher sales and margins.

	Thirty-nine weeks ended										Thirteen weeks ended
	October 1, 2017		October 2, 2016		Change			% Change			April 1, 2018		April 2, 2017		Change			% Change
Diluted earnings per share	$	0.86	$	0.71	$	0.15			21	%	$	0.50	$	0.33	$	0.17			52	%
Diluted weighted average shares outstanding		138,860		151,568		(12,708	)					133,752		140,147		(6,395	)

The increase in diluted earnings per share of ~~$0.15~~$0.17 was driven by ~~the increase in~~higher net income ~~as well as~~and fewer diluted shares outstanding compared to the prior year, due primarily 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 to NOPAT and is calculated by the hypothetical capitalization of our operating leases, using eight times our trailing twelve months rent expense and an interest rate factor of seven percent. Operating leases are determined as the trailing twelve months’ rent expense times a factor of eight. Invested capital reflects a trailing twelve-month average.

As numerous methods exist for calculating ROIC, our method may differ from methods used by other companies to calculate their ROIC. It is important to understand the methods and the differences in those methods used by other companies to calculate their ROIC before comparing our ROIC to that of other companies.

	Rolling Four Quarters Ended						Rolling Four Quarters Ended
	October 1, 2017			October 2, 2016 (4)			April 1, 2018			April 2, 2017
	(dollars in thousands)						(dollars in thousands)
Net income (1)	$	135,745		$	135,518		$	178,776		$	124,386
Interest expense, net of tax (2)		11,770			9,580
Q4 Income Tax Adjustment for Tax Act (2)								(18,693	)		—
Interest expense, net of tax (3)								17,035			9,587
Net operating profit after tax (NOPAT)	$	147,515		$	145,098		$	177,118		$	133,973

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
Total rent expense, net of tax (3)								95,151			70,655
Estimated depreciation on capitalized operating leases, net of tax (3)								(41,866	)		(31,088	)
Estimated interest on capitalized operating leases, net of tax (3) (4)								53,285			39,567
NOPAT, including effect of capitalized operating leases	$	191,258		$	180,928		$	230,403		$	173,540

Average working capital		15,093			103,321			4,416			48,121
Average property and equipment		641,451			522,183			695,375			578,511
Average other assets		574,281			586,777			571,313			581,683
Average other liabilities		(149,039	)		(115,077	)		(169,221	)		(132,077	)
Average invested capital	$	1,081,786		$	1,097,204		$	1,101,883		$	1,076,238

Average estimated asset base of capitalized operating leases		930,645			814,532			1,005,567			877,789
Average invested capital, including the effect of capitalized operating leases	$	2,012,431		$	1,911,736		$	2,107,450		$	1,954,027

ROIC		13.6	%		13.2	%		16.1	%		12.4	%
ROIC, including the effect of capitalized operating leases		9.5	%		9.5	%		10.9	%		8.9	%

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 at the end of each period (in thousands):

	Thirty-nine weeks ended						Thirteen weeks ended
	October 1, 2017			October 2, 2016			April 1, 2018			April 2, 2017
Cash and cash equivalents at end of period	$	18,892		$	50,290		$	21,356		$	21,326
Cash flows from operating activities	$	258,969		$	196,037		$	104,487		$	114,537
Cash flows used in investing activities	$	(158,429	)	$	(142,400	)	$	(44,158	)	$	(57,175	)
Cash flows used in financing activities	$	(94,113	)	$	(139,416	)	$	(58,452	)	$	(48,501	)

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. We believe that our existing cash and cash equivalents, 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 Amended and Restated Credit ~~Facility~~Agreement to fund our share repurchase programs. 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 and 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~~decreased $10.1 million to ~~$259.0~~$104.5 million for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017~~2018 compared to ~~$196.0~~$114.5 million for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 2, ~~2016.~~2017. The decrease in cash flows from operating activities ~~came from net income adjusted primarily for non-cash expenses~~is a result of ~~depreciation and amortization, deferred income taxes, equity-based compensation and~~ changes in working ~~capital.~~capital including a decrease in income tax liability as a result of the Tax Act, partially offset by higher net sales and pretax income reflecting higher gross profit due to store and sales growth and higher noncash depreciation and amortization.

Cash flows provided byby/(used in) operating activities from changes in working capital was ~~$34.4~~($7.6) million in the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017,~~2018, compared to ~~$2.5~~$29.0 million ~~use of cash~~ in the ~~thirty-nine~~thirteen weeks ended ~~October~~April 2, ~~2016.~~2017. The ~~increase~~decrease in cash flows from operating activities for changes in working capital in the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017,~~2018, compared to the ~~thirty-nine~~thirteen weeks ended ~~October~~April 2, ~~2016,~~2017, was primarily due to ~~higher net income combined with working capital improvements as a result of operating efficiencies achieved through our strategic initiatives,~~increased spend for inventory, annual incentive compensation and ~~higher payroll and bonus accruals~~other payables in line with improved performance and ~~company growth.~~store growth used for accounts payable and inventory.

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. Cash flows used in investing activities were $44.2 million, and $57.2 million, for the thirteen weeks ended April 1, 2018 and April 2, 2017, respectively. The increase in cash flows used in investing activities in each of these periods is primarily due to capital investments in new stores combined with store remodels and other store-level capital projects.

We expect capital expenditures to be ~~approximately~~in the range of $165 - $170 million in fiscal ~~2017,~~2018, 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, cash generated from operating activities and, if required, borrowings under our Amended and Restated Credit ~~Facility.~~Agreement.

Cash flows used in financing activities were ~~$94.1~~$58.5 million for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017~~2018 compared to ~~$139.4~~$48.5 million for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 2, ~~2016.~~2017. During the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017,~~2018, cash flows used in financing activities primarily consisted of ~~$192.0~~$83.0 million for stock repurchases, ~~$40.0 million in payments on our Credit Facility, $3.0 million cash paid for capital and financing lease obligations,~~ partially offset by ~~$134.0~~$20.0 million of net borrowings on ~~the Credit Facility, $6.6~~our credit facilities, and $6.9 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~~April 2, ~~2016,~~2017, cash flows used in financing activities primarily consisted of ~~$187.8~~$80.0 million for stock repurchases, ~~and $3.1 million cash paid for capital and financing lease obligations,~~ partially offset by ~~$45.0~~$30.0 million of net borrowings on the Former Credit Facility, ~~$3.9 million of excess tax benefits from the exercise of stock options~~ and ~~$2.6~~$2.3 million in proceeds from the exercise of stock options.

Long-term debt increased ~~$144.0~~$20.0 million to ~~$349.0~~$368.0 million as of ~~October~~April 1, ~~2017,~~2018, compared to ~~October 2, 2016~~December 31, 2017. The increase resulted primarily ~~related to~~from $20.0 million of net borrowings ~~to fund~~under our credit facilities primarily used for our share repurchase programs.

See Note 4, “Long-Term Debt” of our unaudited consolidated financial statements for a description of our Amended and Restated 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~~April 1, ~~2017.~~2018.

Effective date	Expiration date	Amount authorized		Cost of repurchases		Authorization available		Expiration date	Amount authorized		Cost of repurchases		Authorization available
November 4, 2015	November 4, 2017	$	150,000	$	150,000	$	—	November 4, 2017	$	150,000	$	150,000	$	—
September 6, 2016	December 31, 2017	$	250,000	$	250,000	$	—	December 31, 2017	$	250,000	$	250,000	$	—
February 20, 2017	December 31, 2018	$	250,000	$	112,000	$	138,000	December 31, 2018	$	250,000	$	206,400	$	43,600
February 20, 2018								December 31, 2019	$	350,000	$	—	$	350,000

The shares under ~~the~~our repurchase programs may be purchased on a discretionary basis from time to time prior to 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 does not obligate usour Company to acquire any particular amount of common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time. We have used borrowings under our ~~Credit Facility~~credit facilities to assist with the repurchase ~~program authorized on September 6, 2016 and February 20, 2017.~~programs (see Note 4, “Long-Term Debt” of our unaudited consolidated financial statements).

Share repurchase activity under our repurchase programs for the periods indicated was as ~~follows:~~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 1, 2018		April 2, 2017
Number of common shares acquired		3,249,204		3,189,818		9,136,468		8,169,510		3,329,409		4,099,936
Average price per common share acquired	$	22.16	$	19.93	$	21.01	$	22.99	$	24.93	$	19.51
Total cost of common shares acquired	$	72,000	$	63,572	$	192,000	$	187,836	$	83,000	$	80,000

Subsequent to April 1, 2018 and through April 30, 2018, we repurchased an additional 44,000 shares of common stock for $1.0 million.

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.~~2034.

The following table summarizes our lease obligations as of ~~October~~April 1, ~~2017,~~2018, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

Payments Due by Period

Total

Less Than
1 Year

1-3 Years

4-5 Years

More Than
5 Years

(in thousands)

Capital and financing lease obligations (1)

$
142,221

$
17,018

$
33,472

$
31,175

$
60,556

Operating lease obligations (1)

1,590,493

138,329

302,886

287,356

861,922

Totals

$
1,732,714

$
155,347

$
336,358

$
318,531

$
922,478

	Payments Due by Period
	Total		Less Than 1 Year		1-3 Years		4-5 Years		More Than 5 Years
	(in thousands)
$700.0 million Credit Agreement (1)	$	368,000		—		—	$	368,000		—
Interest payments on $700 million Credit Agreement (2)		60,166		13,792		28,719		17,655		—
Capital and financing lease obligations(3)		131,863		16,855		31,984		28,356		54,668
Operating lease obligations(3)		1,624,760		146,256		317,211		298,009		863,284
Totals	$	2,184,789	$	176,903	$	377,914	$	712,020	$	917,952

We have other contractual ~~purchase~~ commitments ~~and debt,~~ which were presented under Contractual Obligations in our Annual Report on Form 10-K for the fiscal year ended ~~January 1, 2017. There~~December 31, 2017, and for which there have not been material changes ~~to our contractual purchase commitments~~ since that filing through ~~October~~April 1, ~~2017. As of October 1, 2017, the outstanding balance on the Credit Facility was $349.0 million, as discussed in Note 4 to the unaudited consolidated financial statements.~~

We periodically make other commitments and become subject to other contractual obligations that we believe to be routine in nature and incidental to the operation of the business. Management believes that such routine commitments and contractual obligations do not have a material impact on our business, financial condition or results of operations.2018.

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. 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, 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 estimates include, but are not limited to, those related to inventory, 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 derivatives, 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~~April 1, ~~2017.~~2018. 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,~~December 31, 2017.

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” to our unaudited consolidated financial statements located elsewhere in this Quarterly Report on Form 10-Q, we have aan Amended and Restated Credit ~~Facility~~Agreement that bears interest at a rate based in part on LIBOR. Accordingly, we are exposed to fluctuations in interest rates. Based on the ~~$349.0~~$368.0 million principal outstanding under our Amended and Restated Credit ~~Facility~~Agreement as of ~~October~~April 1, ~~2017,~~2018, each hundred basis point change in LIBOR would result in a change in interest expense by ~~$3.5~~$3.7 million annually. We have entered into an interest rate swap agreement in December 2017 to manage our cash flow associated with variable interest rates. The notional dollar amount of the five outstanding swaps at December 31, 2017 was $250.0 million under which we pay a fixed rate and received a variable rate of interest (cash flow swap). Taking into account the interest rate swaps, based on the $368.0 million principal outstanding under our Amended and Restated Credit Agreement as of April 1, 2018, each hundred basis point change in LIBOR would result in a change in interest expense by $1.2 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 do not enter into derivative financial instruments for trading purposes (see Note 11, “Derivative Financial Instruments” of our unaudited consolidated financial statements).

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 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 Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures under the Exchange Act as of ~~October~~April 1, ~~2017,~~2018, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

During the quarterly period ended ~~October~~April 1, ~~2017,~~2018, 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 for the State of Arizona against our company and 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, as amended, 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~~plaintiff 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, weour company 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. WeOur company answered the complaint on September 28, 2017. The parties are engaged in discovery at this time. We ~~will continue~~intend 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 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 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~~intend 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.

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,~~December 31, 2017.

The following table provides information about our share repurchase activity during the thirteen weeks ended ~~October~~April 1, ~~2017.~~2018.

Period (1)

Total number
of shares
purchased

Average
price paid
per share

Total number of
shares purchased
as part of publicly
announced plans
or programs

Approximate dollar
value of shares
that may yet be
purchased under
the plans or
programs

July 3, 2017 - July 30, 2017

675,727

$
23.01

675,727

$
194,450,000

July 31, 2017 - August 27, 2017

1,017,618

$
24.03

1,017,618

$
170,000,000

August 28, 2017 - October 1, 2017

1,555,859

$
20.57

1,555,859

$
138,000,000

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
January 1, 2018 - January 28, 2018		1,239,175	$	24.56		1,239,175	$	96,180,000
January 29, 2018 - February 25, 2018		—		—		—		96,180,000
February 26, 2018 - April 1, 2018		2,090,234		25.15		2,090,234		43,600,000

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.

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.		1

	Consolidated Balance Sheets as of ~~October~~April 1, 2018 and December 31, 2017 (unaudited) ~~and January 1, 2017~~	1

	Consolidated Statements of ~~Operations~~Income for the thirteen ~~and thirty-nine~~ weeks ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016~~2017 (unaudited)	2

	Consolidated Statements of Comprehensive Income for the thirteen weeks ended April 1, 2018 and April 2, 2017 (unaudited)	3

	Consolidated Statements of Stockholders’ Equity for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017 (unaudited)~~2018 and the year ended ~~January 1,~~December 31, 2017 (unaudited)	34

	Consolidated Statements of Cash Flows for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016~~2017 (unaudited)	45

	Notes to Unaudited Consolidated Financial Statements	56

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		1720

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		3029

Item 4. Controls and Procedures.		3029

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.		31

Item 1A. Risk Factors.		31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		32

Item 6. Exhibits.		32

Signatures		33

	Cash Flow Hedges
Balance at December 31, 2017		(784	)
Other comprehensive income, net of tax
Unrealized gain on cash flow hedging activities, net of income tax of $1,148		3,320
Total other comprehensive income		3,320
Balance at April 1, 2018		2,536

	Thirteen Weeks Ended
	April 1, 2018				April 2, 2017
Perishables	$	732,602	56.9	%	$	649,434	57.4	%
Non-Perishables		554,594	43.1	%		481,211	42.6	%
Net Sales	$	1,287,196	100.0	%	$	1,130,645	100.0	%

	~~As of~~
	~~October 1, 2017~~
~~Options~~		~~1.0~~
~~RSUs~~		~~1.7~~
~~PSAs~~		~~1.7~~
~~RSAs~~		~~2.0~~

	Unrecognized compensation expense		Remaining weighted average recognition period
Options	$	1,548		0.6
RSUs		15,138		2.2
PSAs		5,324		1.9
RSAs		3,974		1.7
Total unrecognized compensation expense at April 1, 2018	$	25,984

Exhibit Number		Description
10.1		2018 Form of Performance Share Award Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan

10.2		Amended and Restated Credit Agreement, dated as of March 27, 2018, among Sprouts Farmers Market, Inc., Sprouts Farmers Markets Holdings, LLC, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as Syndication Agent, and BMO Harris Bank N.A., Coöperatieve Centrale Raiffeisen – Boerenleenbank, B.A. “Rabobank Nederland,” New York Branch, Wells Fargo Bank, N.A., and SunTrust Bank, as Documentation Agents (1)

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

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

		SPROUTS FARMERS MARKET, INC.

Date: ~~November 2, 2017~~May 3, 2018	By:	/s/ Bradley S. Lukow
	Name:	Bradley S. Lukow
	Title:	Chief Financial Officer
		(Principal Financial Officer)