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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 26, 2020,~~November 2, 2021, the registrant had ~~117,950,276~~112,258,568 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 ~~December 29, 2019,~~January 3, 2021, 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.

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


	Thirty-nine weeks ended						Thirty-nine weeks ended
	September 27, 2020			September 29, 2019			October 3, 2021			September 27, 2020
Cash flows from operating activities
Net income	$	219,053		$	117,995		$	207,929		$	219,053
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		94,748			91,546			94,422			94,748
Operating lease asset amortization		71,765			62,251			80,295			71,765
Store closure and other costs, net		(321	)		850			—			(321	)
Share-based compensation		10,400			6,901			11,304			10,400
Deferred income taxes		228			(245	)		2,085			228
Other non-cash items		1,996			(2,873	)		883			1,996
Changes in operating assets and liabilities:
Accounts receivable		7,372			28,978			12,999			7,372
Inventories		18,724			(21,348	)		(16,860	)		18,724
Prepaid expenses and other current assets		(8,937	)		(2,379	)		(6,001	)		(8,937	)
Other assets		(2,575	)		(762	)		(2,834	)		(2,575	)
Accounts payable		45,806			63,947			29,479			45,806
Accrued liabilities		(7	)		32,963			1,046			(7	)
Accrued salaries and benefits		23,577			(4,054	)		(30,544	)		23,577
Accrued income tax		2,083			3,764			—			2,083
Operating lease liabilities		(79,602	)		(52,209	)		(88,664	)		(79,602	)
Other long-term liabilities		5,954			(2,013	)		1,120			5,954
Cash flows from operating activities		410,264			323,312			296,659			410,264
Cash flows from investing activities
Purchases of property and equipment		(95,874	)		(146,480	)		(70,010	)		(95,874	)
Cash flows used in investing activities		(95,874	)		(146,480	)		(70,010	)		(95,874	)
Cash flows from financing activities
Proceeds from revolving credit facilities		—			187,405

Payments on revolving credit facilities		(263,000	)		(125,405	)		—			(263,000	)
Payments on finance lease liabilities		(474	)		(536	)		(507	)		(474	)
Repurchase of common stock		—			(163,310	)		(137,484	)		—
Proceeds from exercise of stock options		1,343			4,483			1,918			1,343
Other		—			(320	)
Cash flows used in financing activities		(262,131	)		(97,683	)		(136,073	)		(262,131	)
Increase in cash, cash equivalents, and restricted cash		52,259			79,149			90,576			52,259
Cash, cash equivalents, and restricted cash at beginning of the period		86,785			2,248			171,441			86,785
Cash, cash equivalents, and restricted cash at the end of the period	$	139,044		$	81,397		$	262,017		$	139,044

Supplemental disclosure of cash flow information
Cash paid for interest	$	11,513		$	15,212		$	8,710		$	11,513
Cash paid for income taxes		63,393			32,115			65,783			63,393
Leased assets obtained in exchange for new operating lease liabilities		90,751			157,134			96,713			90,751

Supplemental disclosure of non-cash investing and financing activities
Property and equipment in accounts payable	$	13,016		$	18,396		$	19,228		$	13,016

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

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

2. Summary of Significant Accounting Policies

Revenue Recognition

The Company’s performance obligations are satisfied upon the transfer of goods to the customer, which occurs at the point of sale, and payment from customers is also due at the time of sale. Proceeds from the sale of gift cards are recorded as a liability at the time of sale and recognized as sales when they are redeemed by the customer and the performance obligation is satisfied by the Company. The Company’s gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions and was not material in any period presented.


	Balance at January 3, 2021		Gift Cards Issued During Current Period but Not Redeemed(a)		Revenue Recognized from Beginning Liability			Balance at October 3, 2021
Gift card liability, net	$	15,888	$	3,742	$	(8,076	)	$	11,554

(a) net of estimated breakage

Balance at
December 29, 2019

Gift Cards Issued During
Current Period but Not
Redeemed^(a)

Revenue Recognized from
Beginning Liability

Balance at
September 27, 2020

Gift card liability, net

$
15,902

$
2,134

$
(9,031
)

$
9,005

~~(a)~~

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~net of estimated breakage~~

The Company does not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current period from performance obligations satisfied in previous periods, or any remaining performance obligations as of ~~September 27, 2020.~~October 3, 2021.

Restricted Cash

Restricted cash relates to defined benefit plan forfeitures as well as ~~health~~healthcare, general liability and ~~welfare~~workers’ compensation restricted funds of approximately ~~$1.5~~$1.8 million and ~~$1.5~~$1.7 million as of ~~September 27, 2020~~October 3, 2021 and ~~December 29, 2019,~~January 3, 2021, respectively. These balances are included in prepaid expenses and other current assets in the consolidated balance sheets.

Recently Adopted Accounting Pronouncements

~~Financial Instruments – Credit Losses~~

In June 2016, the FASB issued ASU no. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this update introduce a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Subsequent to the initial standards, the FASB has also issued several ASUs to clarify specific topics. The Company adopted ASU 2016-13 effective December 30, 2019, using the modified retrospective approach. There was no impact to opening retained earnings as of December 30, 2019, or the consolidated financial statements dated September 27, 2020.

~~Compensation – Fair Value Disclosures~~

In August 2018, the FASB issued ASU No. 2018-13, “Fair value measurement (Topic 820) – Disclosure framework – Changes to the disclosure requirements for fair value measurement.” The amendments in this update improve the effectiveness of fair value measurement disclosures. The Company adopted this standard effective December 30, 2019. There was no impact on the Company’s disclosure in its consolidated financial statements.

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~Recently Issued Accounting Pronouncements Not Yet Adopted~~

Income Taxes – Accounting for Income Taxes

In December 2019, the FASB issued ASU no. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” Among other things, the amendment removes certain exceptions for periods with operating losses, and reduces the complexity surrounding ~~franchise~~hybrid tax regimes, step up in tax basis of goodwill in conjunction with a business combination, and timing of enacting changes in tax laws during interim periods. The ~~amendments in~~Company adopted this ~~update are~~standard effective ~~for the Company for its fiscal year~~January 4, 2021 ~~with early adoption permitted. The Company does not expect this update to have~~ on a ~~material effect~~prospective basis. There was no impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

Reference Rate Reform

In March 2020 and January 2021, the FASB issued ASU no. 2020-04, “Reference ~~rate reform~~Rate Reform (Topic 848) –: Facilitation of the ~~effects~~Effects of ~~reference rate reform~~Reference Rate Reform on ~~financial reporting”.~~Financial Reporting” and ASU 2021-01, “Reference Rate Reform (Topic 848): Scope,” respectively. The amendments in ~~this update~~these updates provide optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationships, and other transactions affected by reference rate reform. Generally, the guidance allows contract modifications related to reference rate reform to be considered events that do not require remeasurements or reassessments of previous accounting determinations at the modification date. ~~This update~~These updates only ~~applies~~apply to modifications made prior to December 31, 2022. No such modifications occurred in the period ending ~~September 27, 2020.~~October 3, 2021. The Company expects to utilize this optional guidance but does not expect it to have a material impact on its consolidated financial statements.

No other new accounting pronouncements issued or effective during the thirteen weeks ended ~~September 27, 2020~~October 3, 2021 had, or are expected to have, a material impact on the Company’s consolidated financial statements.

3.3. Fair Value Measurements

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

Level 1: Quoted prices for identical instruments in active markets.

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

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

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the valuation of derivative instruments, impairment analysis of goodwill, intangible assets and long-lived assets.

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

The following tables present the fair value hierarchy for the Company’s financial liabilities measured at fair value on a recurring basis as of ~~September 27, 2020~~October 3, 2021 and ~~December 29, 2019:~~January 3, 2021:

September 27, 2020	Level 1		Level 2		Level 3		Total

October 3, 2021									Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	275,000	$	—	$	275,000	$	—	$	250,000	$	—	$	250,000
Interest rate swap liability		—		13,209		—		13,209		—		7,281		—		7,281
Total financial liabilities	$	—	$	288,209	$	—	$	288,209	$	—	$	257,281	$	—	$	257,281

December 29, 2019	Level 1		Level 2		Level 3		Total
January 3, 2021									Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	538,000	$	—	$	538,000	$	—	$	250,000	$	—	$	250,000
Interest rate swap liability		—		6,305		—		6,305		—		11,451		—		11,451
Total financial liabilities	$	—	$	544,305	$	—	$	544,305	$	—	$	261,451	$	—	$	261,451

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 is based upon Level 3 inputs. The weighted average cost of capital is estimated using information from comparable companies and management’s judgment related to the risk associated with the operations of the stores.

Cash, cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities, and accrued salaries and benefits approximate fair value because of the short maturity of those instruments. Based on comparable open market transactions, the fair value of the long-term debt approximated carrying value as of ~~September 27, 2020~~October 3, 2021 and ~~December 29, 2019.~~January 3, 2021.

4. Long-Term Debt and Finance Lease Liabilities

A summary of long-term debt and finance lease liabilities is as follows:


			As of						As of
Facility	Maturity	Interest Rate	September 27, 2020		December 29, 2019		Maturity	Interest Rate	October 3, 2021		January 3, 2021
Senior secured debt
$700.0 million Credit Agreement	March 27, 2023	Variable	$	275,000	$	538,000
$700.0 million Credit Agreement							March 27, 2023	Variable	$	250,000	$	250,000
Finance lease liabilities	Various	n/a		10,704		11,419	Various	n/a		9,871		10,459
Long-term debt and finance lease liabilities			$	285,704	$	549,419			$	259,871	$	260,459

Senior Secured Revolving Credit Facility

The Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), is the borrower under an amended and restated credit agreement entered into on March 27, 2018 (the “Amended and Restated Credit Agreement”) to amend and restate the Company’s former’s 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~~$700.0 million, an increase from ~~$450.0~~$450.0 million from 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 Agreement.

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

The Amended and Restated Credit Agreement also provides for a letter of credit sub-facility and a ~~$15.0~~$15.0 million swingline facility. Letters of credit issued under the Amended and Restated Credit Agreement reduce its borrowing capacity. Letters of credit totaling ~~$34.4~~$28.3 million have been issued as of ~~September 27, 2020,~~October 3, 2021, primarily to support the Company’s insurance programs.

On March 6, 2019, Intermediate Holdings entered into an amendment to the Amended and Restated Credit Agreement intended to align the treatment of certain lease accounting terms with the Company’s adoption of ASC 842. This amendment had no impact on borrowing capacity, interest rate, or maturity.

~~Guarantees~~

Guarantees

Obligations under the Amended and Restated Credit 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.

Interest and Fees

Loans under the Amended and Restated Credit Agreement initially bore interest at LIBOR plus ~~1.50%~~1.50% per annum or prime plus ~~0.50%~~0.50%. The interest rate margins are subject to adjustment pursuant to a pricing grid based on the Company’s total net leverage ratio, as set forth in the Amended and Restated Credit Agreement. Under the terms of the Amended and Restated Credit Agreement, the Company is obligated to pay a commitment fee on the available unused amount of the commitments between ~~0.15%~~0.15% to ~~0.30%~~0.30% per annum, also pursuant to a pricing grid based on the Company’s total net leverage ratio. As of ~~September 27, 2020,~~October 3, 2021, loans under the Amended and Restated Credit Agreement bore interest at LIBOR plus ~~1.25%~~1.25% per annum or prime plus ~~0.25%~~0.25%.

The interest rate on ~~approximately 91%~~100% of outstanding debt under the Amended and Restated Credit Agreement is fixed, reflecting the effects of floating to fixed interest rate swaps (see Note 9, “Derivative Financial Instruments”).

As of ~~September 27, 2020,~~October 3, 2021, outstanding letters of credit under the Amended and Restated Credit Agreement were subject to a participation fee of ~~1.25%~~1.25% per annum and an issuance fee of ~~0.125%~~0.125% per annum.

Payments and Borrowings

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

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

During the thirteen and thirty-nine weeks ended ~~September 27, 2020,~~October 3, 2021, the Company made 0 additional borrowings ~~and made~~or principal payments, ~~totaling $176.0 million and $263.0 million, respectively;~~ resulting in total outstanding debt under the Amended and Restated Credit Agreement of ~~$275.0~~$250.0 million as of ~~September 27, 2020.~~October 3, 2021. During fiscal year ~~2019,~~2020, the Company ~~borrowed an~~made 0 additional ~~$265.4 million to be used in connection with the Company’s share repurchase programs (see Note 7, “Stockholders’ Equity”)~~borrowings and made a total of ~~$180.4~~$288.0 million of principal ~~payments;~~payments, resulting in total outstanding debt under the Amended and Restated Credit Agreement of ~~$538.0~~$250.0 million at ~~December 29, 2019.~~January 3, 2021.

1413

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Covenants

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



incur additional indebtedness;



grant additional liens;



enter into sale-leaseback transactions;



make loans or investments;



merge, consolidate or enter into acquisitions;



pay dividends or distributions;



enter into transactions with affiliates;



enter into new lines of business;



modify the terms of debt or other material agreements; and



change its fiscal year.

•

~~incur additional indebtedness;~~

•

~~grant additional liens;~~

•

~~enter into sale-leaseback transactions;~~

•

~~make loans or investments;~~

•

~~merge, consolidate or enter into acquisitions;~~

•

~~pay dividends or distributions;~~

•

~~enter into transactions with affiliates;~~

•

~~enter into new lines of business;~~

•

~~modify the terms of debt or other material agreements; and~~

•

~~change its fiscal year.~~

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

In addition, the Amended and Restated Credit Agreement requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed 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 on the last day of each fiscal quarter.

The Company was in compliance with all applicable covenants under the Amended and Restated Credit Agreement as of ~~September 27, 2020.~~October 3, 2021.

5. Income Taxes

The Company’s effective tax rate ~~decreased~~increased to ~~20.0%~~23.0% for the thirteen weeks ended October 3, 2021, compared to 20.0% for the thirteen weeks ended September 27, 2020, compared to 22.8% for the thirteen weeks ended September 29, 2019. The decrease in the effective tax rate was primarily due to a benefit for return to provision adjustments in the current year period, partially offset by a decrease in federal tax credits. The income tax benefits resulting from discrete adjustments and return to provision adjustments were $5.4 million and $1.0 million for the thirteen weeks ended September 27, 2020 and September 29, 2019, respectively.

~~The Company’s effective tax rate increased to 23.7% for the thirty-nine weeks ended September 27, 2020, compared to 23.6% for the thirty-nine weeks ended September 29, 2019.~~2020. The increase in the effective tax rate was primarily due to a decrease in federal tax credits along with tax detriments for share-based payment awards in the current year period compared to prior year period benefits, partially offset by a benefit for discrete adjustments and return to provision ~~adjustments in~~benefit compared to the ~~current~~prior year period.

The ~~income~~Company’s effective tax ~~benefits resulting from return~~rate increased to ~~provision adjustments were $5.4 million and $1.7 million~~24.1% for the thirty-nine weeks ended October 3, 2021, compared to 23.7% for the thirty-nine weeks ended September 27, ~~2020~~2020.The increase in the effective tax rate is primarily due to a decrease in return to provision benefit compared to the prior year period. The income tax effect resulting from excess tax detriments/(benefits) of share-based payment awards were ($0.2) million and $0.5 million for the thirty-nine weeks ended October 3, 2021 and September ~~29, 2019,~~27, 2020, respectively.

The Company files income tax returns for federal purposes and in many states. The Company’s tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three years, following the tax year to which those filings relate. The Company’s U.S. federal income tax return for the fiscal year ended December 31, 2017 is currently under examination by the Internal Revenue Service.

1514

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. Commitments and Contingencies

The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters that are believed to best serve the interests of the Company’s stakeholders. The Company’s primary contingencies are associated with self-insurance obligations and litigation matters. Self-insurance liabilities require significant judgment and actual claim settlements and associated expenses may differ from the Company’s current provisions for loss.

~~Securities Action~~

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 its underwritten secondary public offering which closed on March 10, 2015 (the “March 2015 Offering”). The complaint purported 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 sought damages on behalf of the purported class in an unspecified amount, rescission, and an award of reasonable costs and attorneys’ fees. On August 4, 2018, the Company reached an agreement in principle to settle these claims. The parties’ settlement agreement was approved by the court on May 31, 2019 and the complaint was subsequently dismissed. The settlement was funded from the Company’s directors and officers liability insurance policy and did not have a material impact on the consolidated financial statements.

“Phishing” Scam Actions

In April 2016, 4 complaints were filed, 2 in the federal courts of California, 1 in the Superior Court of California and 1 in the federal court in the District of Colorado, each on behalf of a purported class of the Company’s current and former team members whose personally identifiable information (“PII”) was inadvertently disclosed to an unauthorized third party that perpetrated an email “phishing” scam against one of the Company’s team members. The complaints alleged the Company failed to properly safeguard the PII in accordance with applicable law. The complaints sought damages on behalf of the purported class in unspecified amounts, attorneys’ fees and litigation expenses. On March 1, 2019, a number of individual plaintiffs filed arbitration demands. On May 15, 2019, certain other plaintiffs filed a second amended class action complaint in the District of Arizona, alleging that certain subclasses of team members are not subject to the Company’s arbitration agreement and attempted to pursue those team members’ claims in federal court. In late August 2019, the Company reached an agreement in principle to settle the majority of these claims, which were funded in the fourth quarter of 2019. Primary funding for the settlement came from the Company’s cyber insurance policy, and the settlement did not have a material impact on the consolidated financial statements. Following the group settlement, ~~three~~3 (3) individual claimants planned to proceed with arbitration of their claims. The ~~three~~3 individual arbitrations were settled in late June and early July 2020, with immaterial settlement amounts fully funded by the Company’s cyber insurance policy.

Proposition 65 Coffee Action

On April 13, 2010, an organization named Council for Education and Research on Toxics (“CERT”) filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against nearly 80 defendants who manufacture, package, distribute or sell brewed coffee, including the Company. CERT alleged that the defendants failed to provide warnings for their coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986, better known as Proposition 65. ~~CERT~~CERT seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties.

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

The Company, as part of a joint defense group, asserted multiple defenses against the lawsuit. On May 7, 2018, the trial court issued a ruling adverse to defendants on these defenses to liability. On ~~June 15, 2018,~~October 1, 2019, before the court tried damages, remedies and attorneys' fees, California’s Office of Environmental Health Hazard Assessment ~~(“OEHHA”) published~~adopted a ~~proposal to amend Proposition 65’s implementing regulations by adding a stand-alone sentence~~regulation that ~~reads as follows:~~exempted “Exposures to listed chemicals in coffee created by and inherent in the processes of roasting coffee beans or brewing coffee do not pose a significant risk of cancer.” The proposed regulation has been finalized with an effective date of October 1, 2019. The defendants amended their answers to assert the regulation as an affirmative defense.coffee” from Proposition 65’s warning requirement. On August 25, 2020, the court granted the defense motion for summary judgment based on the ~~affirmative defense,~~regulation, and the case was dismissed.

~~Although the Company expects~~On November 20, 2020, CERT filed a notice of appeal to appeal the ruling on the defense motion for summary ~~judgment,~~judgment. The case is currently being briefed, with a decision expected in 2022. At this stage of the proceedings, the Company is unable to predict or reasonably estimate any potential loss or effect on the Company or its operations. Accordingly, no loss contingency was recorded for this matter.

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

7. Stockholders’ Equity

Share Repurchases

On March 3, 2021, the Company’sboard of directors authorized a new $300 million share repurchase program for its common stock. The following table outlines the common stock share repurchase programs authorized by the Company’s board of directors and the related repurchase activity and available authorization as of ~~September 27, 2020.~~October 3, 2021.


Effective date	Expiration date	Amount authorized		Cost of repurchases		Authorization available
February 20, 2018	December 31, 2019	$	350,000	$	308,017	$	—
March 3, 2021	March 3, 2024	$	300,000	$	137,484	$	162,516

Effective date

Expiration date

Amount
authorized

Cost of
repurchases

Authorization
available

February 20, 2017

December 31, 2018

$
250,000

$
250,000

$
—

February 20, 2018

December 31, 2019

$
350,000

$
308,017

$
—

The shares under the Company’s repurchase programs may be purchased on a discretionary basis from time to time through March 3, 2024, 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. ~~board of directors has not authorized additional share repurchases subsequent to the expiration~~The board’s authorization of the ~~prior authorization on December 31, 2019, and there was 0~~ share repurchase ~~authorization available as~~programs does not obligate the Company to acquire any particular amount of ~~September 27, 2020.~~common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time.

Share repurchase activity under the Company’s repurchase programs for the periods indicated was as follows (total cost in thousands):


	Thirteen weeks ended				Thirty-nine weeks ended				Thirteen weeks ended				Thirty-nine weeks ended
	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019		October 3, 2021		September 27, 2020		October 3, 2021		September 27, 2020
Number of common shares acquired		—		—		—		7,302,878		2,079,420		0		5,360,037		0
Average price per common share acquired	$	—	$	—	$	—	$	22.36	$	24.05	$	0	$	25.65	$	0
Total cost of common shares acquired	$	—	$	—	$	—	$	163,310	$	50,000	$	0	$	137,484	$	0

Shares purchased under the Company’s repurchase programs were subsequently ~~retired.~~retired and the excess of the repurchase price over par value was charged to retained earnings.

Subsequent to October 3, 2021 and through November 4, 2021, we repurchased an additional 0.9 million shares of common stock for $20.0 million.

8. Net Income Per Share

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”).

1716

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

A reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is as follows (in thousands, except per share amounts):


	Thirteen weeks ended				Thirty-nine weeks ended				Thirteen weeks ended				Thirty-nine weeks ended
	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019		October 3, 2021		September 27, 2020		October 3, 2021		September 27, 2020
Basic net income per share:
Net income	$	60,241	$	26,260	$	219,053	$	117,995	$	63,867	$	60,241	$	207,929	$	219,053
Weighted average shares outstanding		117,947		118,029		117,775		119,846		114,201		117,947		116,497		117,775
Basic net income per share	$	0.51	$	0.22	$	1.86	$	0.98	$	0.56	$	0.51	$	1.78	$	1.86
Diluted net income per share:
Net income	$	60,241	$	26,260	$	219,053	$	117,995	$	63,867	$	60,241	$	207,929	$	219,053
Weighted average shares outstanding - basic		117,947		118,029		117,775		119,846		114,201		117,947		116,497		117,775
Dilutive effect of share-based awards:
Assumed exercise of options to purchase shares		160		32		14		62		197		160		211		14
RSUs		318		42		315		167		245		318		376		315
RSAs		—		25		12		58		—		—		—		12
PSAs		25		46		41		94		175		25		168		41
Weighted average shares and equivalent shares outstanding		118,450		118,174		118,157		120,227		114,818		118,450		117,252		118,157
Diluted net income per share	$	0.51	$	0.22	$	1.85	$	0.98	$	0.56	$	0.51	$	1.77	$	1.85

For the thirteen weeks ended ~~September 27, 2020,~~October 3, 2021, the Company had ~~0.2~~0.5 million options and 0.3 million PSAs outstanding which were excluded from the computation of diluted net income per share as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met. For the thirteen weeks ended September ~~29, 2019,~~27, 2020, the Company had ~~0.6~~0.2 million options ~~0.4 million RSUs~~ and ~~0.1~~0.3 million PSAs outstanding which were excluded from the computation of diluted net income per share as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met.

For the thirty-nine weeks ended ~~September 27, 2020,~~October 3, 2021, the Company had ~~0.2~~0.5 million options ~~0.1 million RSUs,~~ and 0.3 million PSAs outstanding which were excluded from the computation of diluted net income per share as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met. For the thirty-nine weeks ended September ~~29, 2019,~~27, 2020, the Company had ~~0.6~~0.2 million options, ~~0.3~~0.1 million RSUs, and ~~0.4~~0.3 million PSAs outstanding which were excluded from the computation of diluted net income per share as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met.

9. Derivative Financial Instruments

The Company entered into an interest rate swap agreement in December 2017 to manage its cash flow associated with variable interest rates. This forward contract has been designated and qualifies as a cash flow hedge, and its change in fair value is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the forecasted transaction occurs. The forward contract ~~consists~~initially consisted of 35 cash flow ~~hedges.~~hedges, of which 2 were outstanding at October 3, 2021. To qualify as a hedge, the Company needs to formally document, designate and assess the effectiveness of the transactions that receive hedge accounting.

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The notional dollar amount of ~~the3~~the two outstanding swaps was ~~$250.0~~$250.0 million at ~~September 27, 2020~~October 3, 2021 and ~~December 29, 2019,~~January 3, 2021, under which the Company pays a fixed rate and receives 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 ~~2020~~2021 to ~~2022.~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

2022. These interest rate swaps have been designated and qualify as cash flow hedges and have met the requirements to assume 0 ineffectiveness. The Company reviews the effectiveness of its hedging instruments on a quarterly basis.

The counterparties to these derivative financial instruments are major financial institutions. The Company evaluates the credit ratings of the financial institutions and believes that credit risk is at an acceptable level. The following table summarizes the fair value of the Company’s derivative instruments designated as hedging instruments:

As of
October 3, 2021

As of
January 3, 2021

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Interest rate swaps

Accrued liabilities

1,479

Accrued liabilities

5,695

Interest rate swaps

Other long-term liabilities

5,802

Other long-term liabilities

5,756

As of
September 27, 2020

As of
December 29, 2019

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Interest rate swaps

Accrued liabilities

$
1,848

Accrued liabilities

$
1,736

Interest rate swaps

Other long-term liabilities

11,361

Other long-term liabilities

4,569

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


	Thirteen weeks ended				Thirty-nine weeks ended
	October 3, 2021		September 27, 2020		October 3, 2021		September 27, 2020
Consolidated Statements of Income Classification
Interest expense, net	$	1,448	$	1,345	$	4,328	$	2,855

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Thirteen weeks ended

Thirty-nine weeks ended

September 27, 2020

September 29, 2019

September 27, 2020

September 29, 2019

Consolidated Statements of
Income Classification

Interest expense (income), net

$
1,345

$
(54
)

$
2,855

$
(458
)

10. Comprehensive Income

The following table presents the changes in accumulated other comprehensive income (loss) for the thirty-nine weeks ended September ~~29, 2019~~27, 2020 and ~~September 27, 2020.~~October 3, 2021.

Cash Flow
Hedges

Balance at December 30, 2018

$
1,134

Other comprehensive income (loss), net of tax

Unrealized loss on cash flow hedging activities, net of income tax of ($2,341)

(6,769
)
Total other comprehensive income (loss)

(6,769
)
Balance at September 29, 2019

$
(5,635
)

Balance at December 29, 2019

$
(4,682
)
Other comprehensive income (loss), net of tax

Unrealized loss on cash flow hedging activities, net of income tax of ($1,661)

(4,802
)
Total other comprehensive income (loss)

(4,802
)
Balance at September 27, 2020

$
(9,484
)


	Cash Flow Hedges
Balance at December 29, 2019	$	(4,682	)
Other comprehensive income (loss), net of tax
Unrealized losses on cash flow hedging activities, net of income tax of ($927)		(2,681	)
Reclassification of net losses on cash flow hedges to net income, net of income ��tax of ($734)		(2,121	)
Total other comprehensive income (loss)		(4,802	)
Balance at September 27, 2020	$	(9,484	)

Balance at January 3, 2021	$	(8,474	)
Other comprehensive income (loss), net of tax
Unrealized gains on cash flow hedging activities, net of income tax of $2,192		6,339
Reclassification of net losses on cash flow hedges to net income, net of income tax of ($1,112)		(3,216	)
Total other comprehensive income (loss)		3,123
Balance at October 3, 2021	$	(5,351	)

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

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

11. Segments

The Company has 1 reportable and 1one operating segment, healthy grocery stores.

In accordance with ~~Accounting Standards Codification~~ASC 606, ~~“Revenue from Contracts with Customers,”~~ the following table represents a disaggregation of revenue for the thirteen and thirty-nine weeks ended October 3, 2021 and September 27, ~~2020 and September 29, 2019.~~2020.


	Thirteen weeks ended								Thirteen weeks ended
	September 27, 2020				September 29, 2019				October 3, 2021				September 27, 2020
Perishables	$	918,860	58.2	%	$	844,553	58.6	%	$	867,880	57.5	%	$	918,860	58.2	%
Non-Perishables		658,738	41.8	%		595,669	41.4	%		641,753	42.5	%		658,738	41.8	%
Net Sales	$	1,577,598	100.0	%	$	1,440,222	100.0	%	$	1,509,633	100.0	%	$	1,577,598	100.0	%

	Thirty-nine weeks ended								Thirty-nine weeks ended
	September 27, 2020				September 29, 2019				October 3, 2021				September 27, 2020
Perishables	$	2,782,084	57.2	%	$	2,479,091	58.1	%	$	2,668,532	57.9	%	$	2,782,084	57.2	%
Non-Perishables		2,084,841	42.8	%		1,790,753	41.9	%		1,938,541	42.1	%		2,084,841	42.8	%
Net Sales	$	4,866,925	100.0	%	$	4,269,844	100.0	%	$	4,607,073	100.0	%	$	4,866,925	100.0	%

The Company categorizes the varieties of products it sells as perishable and non-perishable. Perishable product categories include produce, meat, seafood, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care.

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

12. Share-Based Compensation

2013 Incentive Plan

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. The 2013 Incentive Plan serves as the umbrella plan for the Company’s share-based and cash-based incentive compensation programs for its directors, officers and other team members. Awards granted under these plans include stock options, 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 as then in effect.

Awards Granted

During the thirty-nine weeks ended ~~September 27, 2020,~~October 3, 2021, the Company granted the following share-based compensation awards under the 2013 Incentive Plan:


Grant Date	RSUs		PSAs		Options		RSUs		PSAs		Options
March 9, 2020		485,367		174,902		1,055,907
May 12, 2020		66,550		11,389		15,569
August 10, 2020		35,655		5,762		14,052
March 16, 2021								356,503		178,780		404,016
June 9, 2021								50,839		—		6,493
September 7, 2021								25,579		—		11,128
September 20, 2021								168,137		—		—
Total		587,572		192,053		1,085,528		601,058		178,780		421,637
Weighted-average grant date fair value	$	18.01	$	17.26	$	4.94	$	24.11	$	24.42	$	7.66
Weighted-average exercise price		—		—	$	16.71		0		0	$	24.45

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

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.~~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 ~~September 27, 2020,~~October 3, 2021, there were ~~2,559,249~~2,746,105 stock awards outstanding and ~~4,522,005~~3,673,561 shares remaining available for issuance under the 2013 Incentive Plan.

Stock Options

The Company uses the Black-Scholes option pricing model to estimate the fair value of options at grant date. Options vest in accordance with the terms set forth in the grant letter.

Time-based options ~~granted prior to fiscal year 2016 generally vested ratably over a period of 12 quarters (three years), and time-based options granted after 2016~~ vest annually over a period of three ~~years.~~years.

RSUs

The fair value of RSUs is based on the closing price of the Company’s common stock on the grant date. RSUs generally vest annually over a period of two or three years from the grant date.

PSAs

PSAs granted in ~~March~~ 2017 were subject to the Company achieving certain earnings per share performance targets during fiscal year 2017. The criteria was based on a range of performance targets in which grantees could earn between ~~10%~~10% and ~~150%~~150% of the base number of awards granted. The performance conditions with respect to fiscal year 2017 earnings per share were deemed to have been met, and the PSAs vested ~~50%~~50% on the second anniversary of the grant date (March 2019) and vested ~~50%~~50% on the third anniversary of the grant date (March 2020). ~~During the thirty-nine weeks ended September 27, 2020, 35,697 of the 2017 PSAs vested.~~ There were 0 outstanding 2017 PSAs as of ~~September 27, 2020.~~October 3, 2021.

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

PSAs granted in ~~March~~ 2018 ~~are~~were subject to the Company achieving certain ~~EBIT~~earnings before interest and taxes (“EBIT”) performance targets for the 2020 fiscal year. The criteria iswas based on a range of performance targets in which grantees may earn 0%0% to ~~200%~~200% of the base number of awards granted. If The performance conditions ~~are~~with respect to fiscal year 2020 EBIT were deemed to have been met, and the ~~applicable number of performance shares will vest~~PSAs vested at the maximum pay out level on the third anniversary of the grant date (March 2021). During the thirty-nine weeks ended October 3, 2021, 31,544 of the 2018 PSAs vested. There were 0 outstanding 2018 PSAs as of October 3, 2021.

PSAs granted in 2019 are subject to the Company achieving certain EBIT performance targets for the 2021 fiscal year. The criteria is based on a range of performance targets in which grantees may earn 0%0% to ~~200%~~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 (March 2022).

PSAs granted in 2020 are subject to the Company achieving certain earnings before taxes (“EBT”) performance targets for the 2022 fiscal year. The criteria is based on a range of performance targets in which grantees may earn 0%0% to ~~200%~~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 (March 2023).

~~RSAs~~PSAs granted in 2021 are subject to the Company achieving certain EBIT performance targets for the 2023 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 (March 2024).

RSAs

The fair value of RSAs is based on the closing price of the Company’s common stock on the grant date. Outstanding RSA grants vest annually over three ~~years. During the thirty-nine weeks ended September 27, 2020, 55,053 RSAs vested and there~~years. There were 0 outstanding RSAs as of ~~September 27, 2020.~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

October 3, 2021.

Share-based Compensation Expense

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


	Thirteen weeks ended						Thirty-nine weeks ended
	October 3, 2021			September 27, 2020			October 3, 2021			September 27, 2020
Share-based compensation expense before income taxes	$	3,453		$	3,673		$	11,304		$	10,400
Income tax benefit		(518	)		(663	)		(1,929	)		(2,011	)
Net share-based compensation expense	$	2,935		$	3,010		$	9,375		$	8,389

Thirteen weeks ended

Thirty-nine weeks ended

September 27, 2020

September 29, 2019

September 27, 2020

September 29, 2019

Share-based compensation expense
before income taxes

$
3,673

$
2,710

$
10,400

$
6,901

Income tax benefit

(663
)

(697
)

(2,011
)

(1,647
)
Net share-based compensation expense

$
3,010

$
2,013

$
8,389

$
5,254

The following share-based awards were outstanding as of October 3, 2021 and September 27, ~~2020 and September 29, 2019:~~2020:


	As of
	October 3, 2021		September 27, 2020
	(in thousands)
Options
Vested		244		235
Unvested		1,134		1,095
RSUs		935		914
PSAs		433		315

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As of

September 27, 2020

September 29, 2019

(in thousands)

Options

Vested

235

578

Unvested

1,095

64

RSUs

914

774

PSAs

315

225

RSAs

—

55

As of ~~September 27, 2020,~~October 3, 2021, total unrecognized compensation expense and remaining weighted average recognition period related to outstanding share-based awards was as follows:


	Unrecognized compensation expense		Remaining weighted average recognition period		Unrecognized compensation expense		Remaining weighted average recognition period
Options	$	4,469		2.4	$	4,458		1.8
RSUs		13,410		1.9		16,090		1.7
PSAs		7,793		2.0		6,627		1.6
RSAs		—		—
Total unrecognized compensation expense at September 27, 2020	$	25,672
Total unrecognized compensation expense at October 3, 2021					$	27,175

During the thirty-nine weeks ended October 3, 2021 and September 27, 2020, ~~and September 29, 2019,~~ the Company received ~~$1.3~~$1.9 million and ~~$4.5~~$1.3 million, respectively, in cash proceeds from the exercise of options.

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

You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the ~~2019~~2020 fiscal year, filed on February ~~20, 2020~~25, 2021 (“Form 10-K”) with the Securities and Exchange Commission. All dollar amounts included below are in thousands, unless otherwise noted.

Sprouts Farmers Market offers a unique grocery experience featuring an open layout with fresh produce at the heart of the store. Sprouts inspires wellness naturally with a carefully curated assortment of better-for-you products paired with purpose-driven people. We continue to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and gluten-free. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. Headquartered in Phoenix with ~~356~~366 stores in 23 states as of ~~September 27, 2020,~~October 3, 2021, we are one of the largest specialty retailers of fresh, natural and organic food, and fastest growing retailers in the United States. ~~As of October 28, 2020, we have grown to 360 stores in 23 states.~~

In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability, including successfully rebranding 43 Henry’s Farmers Market and 39 Sunflower Farmers Market stores added in 2011 and 2012, respectively, through acquisitions to the Sprouts 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~~In 2020, we announced the initial steps of our long-term growth strategy that we believe will transform our company and drive profitable ~~growth that includes~~growth. We are executing on this strategy, focusing on the following areas:

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, and on March 13, 2020, the United States declared the pandemic to be a national emergency. As COVID-19 ~~has continued to~~ spread throughout the country, the situation has continued to evolve, including, ~~in particular,~~more recently, the ~~fluctuations~~adoption of ~~positive~~the COVID-19 ~~cases in various states around~~vaccine as impacted by vaccine aversion, vaccine mandates and booster vaccines, and the ~~country in and subsequent~~reopening of state economies to ~~the third quarter~~pre-pandemic levels. As we cycle periods of 2020 ~~as state economies have begun to reopen. Our~~where our results ~~of operations for the thirteen and thirty-nine weeks ended September 27, 2020 have~~ benefited from ~~increased demand from our customers initially stockpiling groceries and wellness products at~~ the initial onset of the pandemic, we are reporting declines in year over year net sales and continuing to consume more food at home as restaurants have not fully reopened to pre-pandemic levels, and we in turn have made significant investments in compensation, benefits and personal protective equipment for our front-linecomparable store ~~team members, as well as enhanced store sanitation procedures.~~sales growth. We have ~~also incurred increased ecommerce fees as consumers have increasingly used online shopping alternatives to purchase our products during~~seen varying levels of inflation and experienced obstacles sourcing in certain categories resulting from product supply disruptions complicated by the pandemic. ~~However,~~In addition, due to continued difficulties in obtaining necessary equipment from third parties due to supply chain delays complicated by the COVID-19 pandemic, we expect six of our planned new store-openings in the fourth quarter of 2021 to be delayed until 2022. In addition, the implementation of governmental vaccine mandates and testing requirements may cause additional costs and disruptions in workforce availability. The ultimate impact of the COVID-19 pandemic on our results of operations for future periods will ~~ultimately~~ depend on the length, severity and potential resurgence of the pandemic, vaccine efficacy, adoption and mandates, the emergence and severity of ~~the pandemic~~COVID-19 variants and governmental, team member and consumer actions taken in response, which we cannot predict. These uncertainties make it challenging for our management to estimate our future business performance. See “Item 1A”. Risk Factors” below and “Item 1A. Risk Factors—The coronavirus (COVID-19) pandemic has disrupted our business and could negatively impact our financial condition.” in our Form 10-K for additional information.

Results of Operations for Thirteen Weeks Ended October 3, 2021 and September 27, 2020 ~~and September 29, 2019~~

The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted.

Comparison of Thirteen Weeks Ended ~~September 27, 2020~~October 3, 2021 to Thirteen Weeks Ended

Net sales during the thirteen weeks ended ~~September 27, 2020~~October 3, 2021 totaled ~~$1.6~~$1.5 billion, ~~an increase~~a decrease of ~~$137.4~~$68.0 million, or ~~10%~~4%, compared to the thirteen weeks ended September ~~29, 2019. Sales growth~~27, 2020. The sales decrease was primarily due to a ~~4.2% increase~~5.4% decrease in comparable store sales ~~and strong performance in new stores opened in the last twelve months, each of which was largely driven by sustained demand~~ as a result of cycling the sales impact of the COVID-19 ~~pandemic.~~pandemic, partially offset by sales from new stores. Comparable stores contributed approximately ~~93%~~97% of total sales for the thirteen weeks ended ~~September 27, 2020~~October 3, 2021 and approximately ~~91%~~93% for the thirteen weeks ended September ~~29, 2019.~~27, 2020.

Gross profit totaled ~~$584.8~~$539.7 million during the thirteen weeks ended ~~September 27, 2020, an increase~~October 3, 2021, a decrease of ~~$108.0~~$45.0 million, or ~~23%~~8%, compared to the thirteen weeks ended September ~~29, 2019, primarily~~27, 2020, driven by ~~increased~~decreased sales ~~volume.~~volume for the reasons discussed above. Gross margin ~~increased~~decreased by ~~4.0%~~1.3% to ~~37.1%~~35.8%, compared to ~~33.1%~~37.1% for the thirteen weeks ended ~~September 27, 2020~~October 3, 2021, primarily from cycling elevated demand in the prior year period due to ~~strategic changes in promotional activities, initiatives to decrease shrink, and positive leverage from the increase in sales driven by~~ the COVID-19 ~~pandemic.~~pandemic, in addition to the balancing of cost inflation and retail pricing.

Selling, general and administrative expenses ~~increased $70.8~~decreased $51.6 million, or ~~18%~~11%, compared to the thirteen weeks ended September ~~29, 2019.~~27, 2020. The decrease was primarily driven by lower COVID related costs including payroll and bonus expense, and lower marketing and ecommerce fees. As a result of this decrease, selling, general and administrative expenses as a percentage of net sales ~~selling, general and administrative expenses increased~~decreased to ~~30.1%~~28.0% from ~~28.1%~~30.1%. The increases were primarily driven by higher payroll expense from the continuation of team member incentives and bonuses due to COVID-19. In addition, we incurred higher ecommerce fees in the current year period as more customers have relied on home delivery and curbside pickup during the pandemic.

Depreciation and amortization expenses (exclusive of depreciation included in cost of sales) ~~increased $0.3 million~~primarily consists of depreciation and ~~primarily related to new~~amortization for buildings, store ~~growth as well as remodel initiatives~~leasehold improvements, and equipment. As a percentage of net sales, depreciation and amortization expenses (exclusive of depreciation included in ~~older stores.~~cost of sales) remained flat at 2.0%.

Store closure and other costs, net indecreased $0.1 million to $0.1 million for the ~~current year period~~thirteen weeks ended October 3, 2021 compared to $0.3 million for the thirteen weeks ended September 27, 2020. Store closure and other costs, net primarily related to ongoing activity associated with our closed store locations.~~Store closure and other costs, net during the thirteen weeks ended September 29, 2019 primarily represented charges associated with executive severance and hurricane preparedness.~~

The decrease in interest expense, net was primarily due to the decrease in the average balance outstanding under the Amended and Restated Credit Agreement. ~~This was partially offset by the interest expense paid as a result of an unfavorable interest rate swap.~~

Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:

The effective tax rate ~~decreased~~increased to 23.0% for the thirteen weeks ended October 3, 2021 from 20.0% infor the ~~third quarter of 2020 from 22.8% in the same period last year.~~thirteen weeks ended September 27, 2020. The ~~decrease~~increase in the effective tax rate was primarily due to a ~~benefit for discrete adjustments and~~decrease in return to provision ~~adjustments in~~benefit compared to the ~~current~~prior year ~~period, partially offset by a decrease in federal tax credits.~~period.

Net income increased ~~$34.0~~$3.6 million primarily due to ~~increased net sales and favorable margin impact related to COVID-19, partially offset by higher~~lower selling, general and administrative ~~expenses.~~expenses, partially offset by decreased sales.

The increase in diluted earnings per share of ~~$0.29~~$0.05 was driven by higher net ~~income.~~income in addition to fewer diluted shares outstanding compared to the prior year, due primarily to the share repurchase program.

Results of Operations for Thirty-nine Weeks Ended October 3, 2021 and September 27, 2020 ~~and September 29, 2019~~

Comparison of Thirty-nine Weeks Ended ~~September 27, 2020~~October 3, 2021 to Thirty-nine Weeks Ended

Net sales during the thirty-nine weeks ended ~~September 27, 2020~~October 3, 2021 totaled ~~$4.9~~$4.6 billion, ~~an increase~~a decrease of ~~$597.1~~$259.9 million, or ~~14%~~5%, over the same period of the prior fiscal year. ~~Sales growth~~The sales decrease was primarily ~~driven by strong performance in new stores opened in the last twelve months and an 8.0% increase~~due to a 8.4% decrease in comparable store sales ~~each of which was largely driven by increased demand~~ as a result of cycling the sales impact of COVID-19 ~~pandemic.~~in the prior year, partially offset by sales from new stores. Comparable stores contributed approximately ~~93%~~96% of total sales for the thirty-nine weeks ended ~~September 27, 2020~~October 3, 2021 and approximately ~~91%~~93% for the thirty-nine weeks ended September ~~29, 2019.~~27, 2020.

Gross profit totaled ~~$1.8~~$1.7 billion during the thirty-nine weeks ended ~~September 27, 2020, an increase~~October 3, 2021, a decrease of ~~$365.4~~$115.3 million, or ~~26%~~6%, compared to the thirty-nine weeks ended September ~~29, 2019, primarily driven by increased sales volume.~~27, 2020. Gross margin ~~increased by 3.5%~~decreased to ~~36.8%~~36.4% for the thirty-nine weeks ended October 3, 2021 compared to ~~33.4%~~36.8% for the thirty-nine weeks ended September 27, ~~2020, driven by more efficient promotions in addition to shrink favorability and positive leverage from the increase in sales~~2020. The decreases were primarily driven by the ~~COVID-19 pandemic.~~decreased sales volume and cycling exceptionally low shrink in the prior year for the reasons discussed above, partially offset by the impact of strategic initiatives on promotions and shrink.

Selling, general and administrative expenses ~~increased $238.0~~decreased $100.7 million, or ~~20%~~7%, compared to the thirty-nine weeks ended September ~~29, 2019.~~27, 2020. The decrease is primarily due to lower compensation and other COVID driven costs in the current year, partially offset by new stores opened since the comparable period in the prior year. As a percentage of net sales, selling, general and administrative expenses ~~increased~~decreased to ~~28.8%~~28.2% from ~~27.2%~~28.8%. The increases primarily were due to higher bonus expense, store operational expenses and ecommerce fees associated with COVID-19 as well as professional fees related to strategic initiatives. These increases were partially offset by lower marketing costs due to our strategic shift from print ads to more digital spend in the current year.

Depreciation and amortization expenses (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment. As a percentage of net sales, depreciation and amortization expenses (exclusive of depreciation included in cost of sales) increased ~~$2.8 million and primarily related~~slightly to ~~new store growth~~2.0% from 1.9% as ~~well as remodel initiatives in older stores.~~a result of sales deleverage.

Store closure and other costs, net increased $2.1 million to $1.8 million, compared to a credit of $0.3 million for the thirty-nine weeks ended September 27, 2020. The increase was driven by inventory loss and additional expenses, net of insurance recovery, related to the impact of winter storms at several of our stores and a fire at one of our stores during the thirty-nine weeks ended October 3, 2021. Store closure and other costs, net during the thirty-nine weeks ended September 27, 2020 primarily ~~represented~~represents a recognized gain on the assignment of the lease for one of our closed locations in the first quarter of 2020, partially offset by ongoing activity associated with our closed store locations. Store closure and other costs, net during the thirty-nine weeks ended September 29, 2019 represented charges associated with a planned store closure, relocation of another store upon expiration of the lease, and executive severance costs.2020.

The decrease in interest expense, ~~was~~net is primarily due to the decrease in the average balance outstanding under the Amended and Restated Credit Agreement. This ~~was~~is partially offset by the interest expense paid as a result of an unfavorable interest rate swap.

Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:

The effective tax rate increased to ~~23.7%~~24.1% for the thirty-nine weeks ended ~~2020~~October 3, 2021 from ~~23.6%~~23.7% in the same period last year. The increase in the effective tax rate ~~was~~is primarily due to a decrease in federal tax credits along with tax detriments for share-based payment awards in the current year period compared to prior year period benefits, partially offset by a benefit for discrete adjustments and return to provision ~~adjustments in~~benefit compared to the ~~current~~prior year period.

Net income ~~increased $101.1~~decreased $11.1 million primarily due to ~~increased~~decreased net sales, ~~and favorable margin impact related to COVID-19 and more balanced promotions,~~ partially offset by ~~higher~~lower selling, general and administrative expenses.

The ~~increase~~decrease in diluted earnings per share of ~~$0.87~~$0.08 was driven by ~~higher~~lower net income, ~~and reduced~~partially offset by fewer diluted shares ~~outstanding.~~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 lease interest r~~epresents~~represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as a finance lease (capital lease prior to adoption of ASC 842). The assumed ownership and associated interest expense are calculated using the discount rate for each lease as recorded as a component of rent expense within selling, general and administrative expenses. Invested capital reflects a trailing twelve-month average.

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

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, cash equivalents and restricted cash at the end of each period (in thousands):

We have generally financed our operations principally through cash generated from operations and borrowings under our credit facilities. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures primarily for opening new stores, remodels and maintenance, repurchases of our common stock and debt service. We believe that our existing cash, cash equivalents and restricted cash, and cash anticipated to be generated from operations will be sufficient to meet our anticipated cash needs for at least the next 12 ~~months, and we may continue to use borrowings under our Amended and Restated Credit Agreement as discussed in Note 4, “Long-Term Debt and Finance Lease Liabilities”.~~months. Our future capital requirements will depend on many factors, including the impact of the COVID-19 pandemic on our operations, new store openings, remodel and maintenance capital expenditures at existing stores, store initiatives and other corporate capital expenditures and activities. Our cash, cash equivalents and restricted cash position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.

Cash flows from operating activities ~~increased $87.0~~decreased $113.6 million to $296.7 million for the thirty-nine weeks ended October 3, 2021 compared to $410.3 million for the thirty-nine weeks ended September 27, ~~2020 compared to $323.3 million for the thirty-nine weeks ended September 29, 2019.~~2020. The ~~increase~~decrease in cash flows from operating activities was primarily a result of cash generated from net income of $219.1 million for the thirty-nine weeks ended September 27, 2020 compared to $118.0 million for the thirty-nine weeks ended September 29, 2019. The increase was partially offset by a decrease in cash flows provided by operating activities from changes in working capital.

Cash flows provided byby/(used in) operating activities from changes in working capital were ($9.9) million in the thirty-nine weeks ended October 3, 2021 compared to $88.6 million in the thirty-nine weeks ended September 27, ~~2020 compared to $101.9 million in the thirty-nine weeks ended September 29, 2019~~.2020. The decrease was primarily driven by ~~elevated accounts payable and accrual balances~~the payout of incentive compensation amounts earned in the prior year ~~period.~~and inventory stock recovery in the current year after levels were depleted during the height of the pandemic in the prior year.

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 ~~$95.9~~$70.0 million and ~~$146.5~~$95.9 million, for the thirty-nine weeks ended October 3, 2021 and September 27, 2020, respectively.

We expect capital expenditures to be in the range of $95 - $105 million in 2021, including expenditures incurred to date, net of estimated landlord tenant improvement allowances, primarily to fund investments in new stores, remodels, maintenance capital expenditures and ~~September 29, 2019, respectively.~~corporate capital expenditures. We expect to fund our capital expenditures with cash on hand and cash generated from operating activities.

Cash flows used in financing activities were $136.1 million for the thirty-nine weeks ended October 3, 2021 compared to $262.1 million for the thirty-nine weeks ended September 27, ~~2020 compared to $97.7 million for~~2020. During the thirty-nine weeks ended ~~September 29, 2019.~~ October 3, 2021, cash flows used in financing activities primarily consisted of $137.5 million for stock repurchases.

During the thirty-nine weeks ended September 27, 2020, cash flows used in financing activities primarily consisted of $263.0 million in payments on our credit ~~facility.~~facilities.

During the thirty-nine weeks ended September 29, 2019, cash flows used in financing activities primarily consisted of $163.3 million for stock repurchases, partially offset by $62.0 million of net borrowings on our credit facility, and $4.5 million in proceeds from the exercise of stock options.

Long-term debt ~~decreased $263.0 million to $275.0~~outstanding was $250.0 million as of ~~September 27, 2020, compared to December 29, 2019. The decrease was due to payments under our Amended~~October 3, 2021 and ~~Restated Credit Agreement.~~January 3, 2021.

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

Our board of directors from time to time authorizes share repurchase programs for our common stock. The following table outlines the share repurchase programs authorized by our board, and the related repurchase activity and available authorization as of ~~September 27, 2020.~~October 3, 2021.

The shares under our current repurchase program may be purchased on a discretionary basis from time to time through March 3, 2024, 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.Our ~~board of directors has not authorized additional share repurchases subsequent to the expiration~~board’s authorization of the ~~prior authorization on December 31, 2019, and there was no~~ share repurchase ~~authorization available as~~program does not obligate our Company to acquire any particular amount of ~~September 27, 2020.~~common stock, and the repurchase program may be commenced, suspended, or discontinued at any time.

Share repurchase activity under our repurchase ~~programs~~program for the periods indicated was as follows (total cost in thousands):

Shares purchased under our repurchase programs were subsequently ~~retired.~~retired and the excess of the repurchase price over par value was charged to retained earnings.

Subsequent to October 3, 2021 and through November 4, 2021, we repurchased an additional 0.9 million shares of common stock for $20.0 million.

We are committed under certain operating and finance leases for the rental of land, buildings, and for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates through 2040.

The following table summarizes our contractual obligations as of ~~September 27, 2020,~~October 3, 2021, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

We have other contractual commitments which were presented under Contractual Obligations in our Annual Report on Form 10-K for the fiscal year ended ~~December 29, 2019,~~January 3, 2021, and for which there have not been material changes since that filing through ~~September 27, 2020.~~October 3, 2021.

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.

~~Deflation~~Inflation and ~~inflation~~deflation in the prices of food and other products we sell may periodically affect our sales, gross profit and gross margin. Food inflation, when combined with reduced consumer spending, could also reduce sales, gross profit margins and comparable store sales. Food deflation across multiple categories, particularly in produce, could reduce sales growth and earnings if our competitors react by lowering their retail pricing and expanding their promotional activities, which can lead to retail deflation higher than cost deflation that could reduce our sales, gross profit margins and comparable store sales. ~~Food inflation, when combined with reduced consumer spending, could also reduce sales, gross profit margins and comparable store sales.~~ The short-term impact of ~~deflation~~inflation and ~~inflation~~deflation is largely dependent on whether or not the effects are passed through to our customers, which is subject to competitive market conditions.

Food ~~deflation~~inflation and ~~inflation~~deflation is affected by a variety of factors and our determination of whether to pass on the effects of ~~deflation~~inflation or ~~inflation~~deflation to our customers is made in conjunction with our overall pricing and marketing strategies, as well as our competitors’ responses. Although we may experience periodic effects on sales, gross profit, gross margins and cash flows as a result of changing prices, including most recently from inflationary pressures due primarily to supply chain disruptions complicated by the COVID-19 pandemic, we do not expect the effect of ~~deflation~~inflation or ~~inflation~~deflation to have a material impact on our ability to execute our long-term business strategy.

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. Our critical accounting estimates include ~~but are not limited to, those related to~~ inventory valuations, lease assumptions, self-insurance reserves, ~~sublease assumptions for closed stores, goodwill and intangible assets,~~ impairment of long-lived assets, fair values of share-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~~ thirteen and thirty-nine weeks ended ~~September 27, 2020.~~October 3, 2021. 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 ~~December 29, 2019.~~January 3, 2021.

See Note 2, “Summary of Significant Accounting Policies” to our accompanying unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.

As described in Note 4, “Long-Term Debt and Finance Lease Liabilities” to our unaudited consolidated financial statements located elsewhere in this Quarterly Report on Form 10-Q, we have an Amended and Restated Credit Agreement that bears interest at a rate based in part on LIBOR. Accordingly, we ~~are~~could be exposed to fluctuations in interest rates. Based solely on the ~~$275~~$250.0 million principal outstanding under our Amended and Restated Credit Agreement as of ~~September 27, 2020,~~October 3, 2021, each hundred basis point change in LIBOR would result in a change in interest expense by ~~$2.8~~$2.5 million annually. We entered into an interest rate swap agreement in December 2017 to manage our cash flow associated with variable interest rates. The notional dollar amount of the ~~three~~two outstanding swaps at ~~September 27, 2020~~October 3, 2021 and ~~December 29, 2019~~ January 3, 2021 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 ~~$275~~$250.0 million principal outstanding under our Amended and Restated Credit Agreement as of ~~September 27, 2020,~~October 3, 2021, each hundred basis point change in LIBOR would result in ano change in interest expense ~~by $0.3 million~~ annually.

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

We do not enter into derivative financial instruments for trading purposes (see Note 9, “Derivative Financial Instruments” of our u~~naudited~~unaudited consolidated financial ~~statements~~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 periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures under the Exchange Act as of ~~September 27, 2020,~~October 3, 2021, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

During the quarterly period ended ~~September 27, 2020,~~October 3, 2021, 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.

See Note 6, “Commitments and Contingencies” to our Unaudited Consolidated Financial Statements for information regarding certain legal proceedings in which we are involved.

Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should carefully consider the risks and uncertainties referenced below, together with all of the other information in this Quarterly Report on Form 10-Q, including our consolidated financial statements and related notes. Any of those risks could materially and adversely affect our business, operating results, financial condition, or prospects and cause the value of our common stock to decline, which could cause you to lose all or part of your investment.

Aside from that set forth below, 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 ~~December 29, 2019.~~

~~The coronavirus (COVID-19) pandemic has disrupted our business and could negatively impact our financial condition.~~

The unprecedented global outbreak of the novel coronavirus (COVID-19) that began in the first quarter of 2020 and has surged in many parts of the country as state economies have begun to open to varying degrees during the second and third quarters of 2020 has affected us in several ways. While the health and safety of our team members and customers remains our first priority, the impact of the COVID-19 pandemic has disrupted our business and could continue to do so for the foreseeable future until the impact of the pandemic subsides.

Although our grocery store operations are generally deemed “essential” operations by federal, state and local authorities, thereby allowing our stores to remain open despite government mandated stay-at-home or similar shelter-in-place orders, there can be no assurance that our stores will continue to be allowed by governmental authorities to remain open while the COVID-19 pandemic persists or if it worsens. A closure of stores would adversely impact our net sales, and any alleged failure to comply with such orders or any other governmental regulations promulgated in response to the COVID-19 crisis could result in ~~costly litigation, enforcement actions and penalties.~~ Even if our stores remain open, we have previously reduced operating hours and implemented restrictions on the number of customers allowed in our stores at a given time to promote social distancing, and we may reimplement similar measures if the pandemic surges again. Store traffic may further decline as customers shop less frequently, choose other retail or online outlets to minimize potential exposure to COVID-19 or return to restaurants and other outlets to purchase and consume food as state economies reopen. We have incurred ~~incremental ecommerce fees as more customers adopt our digital solutions.~~January 3, 2021.

Supply chain disruptions have delayed our ~~operations have generally stabilized since the onset of the crisis, the COVID-19 pandemic has strained our entire~~store growth plans.

Due to continued difficulties in obtaining necessary equipment from third parties due to supply chain ~~store operations and merchandising functions. We have encountered difficulties and~~ delays in obtaining products from our distributors, delivering products to our stores and adequately staffing our stores and distribution centers. If we are unable to continue to source, transport and stock products in our stores or to maintain adequate staffing levels in our stores and distribution centers due to disruptions causedcomplicated by ~~the COVID-19 crisis, we will be unable to maintain inventory levels and continue to operate our stores at levels to meet customer demand. Further, if we do~~

~~not identify and source appropriate products in response to our customers’ evolving needs during the COVID-19 crisis, we may lose existing customers and fail to attract new customers,~~ ~~which could cause our sales to decrease, resulting in a material adverse effect on our business, financial condition, results of operations and cash flows.~~

We have incurred, and expect to continue to incur, significant costs to support our front-line store team members, including expenses for added labor, store bonuses, enhanced benefits and safety measures. If, as a result of the impact of the COVID-19 pandemic, we ~~are unable~~expect six of our planned new store-openings in the fourth quarter of 2021 to be delayed until 2022. We may continue to ~~provide~~experience delays in our ~~team members with appropriate compensation and protective measures, we may be unable~~new store openings until disruptions to ~~retain current or attract new team members to perform necessary functions within our stores and engage with our customers. Because of~~ the ~~increased demand arising from the pandemic, we~~global supply chain have been ~~hiring new team members. There~~resolved, the timing of which is no assurance we will be able to hire sufficient numbers of individuals to meet our needs. In addition, nearly all of our store support team members remain in a remote work environment in an effort to mitigate the spread of COVID-19. Our failure to provide appropriate technological resources and maintain adequate safeguards around our remote work environment could ~~result in loss of productivity and usage errors by our team members or the loss or compromise of confidential customer, team member or company data. In addition, the remote work environment may~~ ~~increase certain risks to our business, including phishing and other cybersecurity attacks.~~ uncertain.

W39~~e have experienced instances of our team members contracting COVID-19 that have generally tracked national trends, and in response, we follow~~

CDC and other health authority guidelines to report positive test results and reduce further transmission. Any widespread transmission of COVID-19 among our team members within a particular store or geographical area might necessitate that we temporarily close impacted stores, which may negatively affect our business and financial condition, as well as the perception of our company. Further, if individuals believe they have contracted COVID-19 in our stores or believe that we have not taken appropriate precautionary measures to reduce the transmission of COVID-19, we may be subject to costly and time-consuming litigation.

Although we haven’t experienced significant delays to date, our growth plans for 2020 and beyond may be negatively impacted by the COVID-19 pandemic if our new store construction projects are placed on hold or delayed due to restrictions on construction work or constraints on necessary resources, and we expect such delays may continue for as long as the COVID-19 crisis persists.

Measures taken by governmental authorities to reduce the transmission of COVID-19, including stay-at-home orders and business closures, as well as lack of subsequent economic stimulus initiatives, have resulted in wide-scale unemployment and financial hardship for a large portion of the U.S. population. Shifts in demand to lower priced options and reduced traffic from stockpiling in preparation for the pandemic or from consuming less food at home as restaurants and other businesses reopen may negatively impact sales in subsequent periods. The economic fallout of the COVID-19 pandemic on the geographic areas where we operate may adversely affect our business.

The full extent to which the COVID-19 pandemic impacts our business and financial condition will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the pandemic and the actions necessary to contain COVID-19 or treat its impact.

~~There was no~~The following table provides information about our share repurchase activity during the thirteen weeks ended ~~September 27, 2020.~~October 3, 2021.


		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.		4

	Consolidated Balance Sheets as of ~~September 27, 2020~~October 3, 2021 (unaudited) and ~~December 29, 2019~~January 3, 2021	4

	Consolidated Statements of Income for the thirteen and thirty-nine weeks ended October 3, 2021 and September 27, 2020 ~~and September 29, 2019~~ (unaudited)	5

	Consolidated Statements of Comprehensive Income for the thirteen and thirty-nine weeks ended October 3, 2021 and September 27, 2020 ~~and September 29, 2019~~ (unaudited)	6

	Consolidated Statements of Stockholders’ Equity for the thirteen and thirty-nine weeks ended October 3, 2021 and September 27, 2020 ~~and September 29, 2019~~ (unaudited)	7

	Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 3, 2021 and September 27, 2020 ~~and September 29, 2019~~ (unaudited)	9

	Notes to Unaudited Consolidated Financial Statements	10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		37

Item 4. Controls and Procedures.		38

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.		39

Item 1A. Risk Factors.		39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		40

Item 6. Exhibits.		41

Signatures		42


	September 27, 2020			December 29, 2019			October 3, 2021			January 3, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	137,518		$	85,314		$	260,218		$	169,697
Accounts receivable, net		24,258			15,713			19,475			14,815
Inventories		257,255			275,979			271,084			254,224
Prepaid expenses and other current assets		18,948			10,833			36,126			27,224
Total current assets		437,979			387,839			586,903			465,960
Property and equipment, net of accumulated depreciation		735,670			741,508			709,342			726,500
Operating lease assets, net		1,040,329			1,028,436			1,061,825			1,045,408
Intangible assets, net of accumulated amortization		184,960			185,395			184,960			184,960
Goodwill		368,878			368,078			368,878			368,878
Other assets		14,407			11,727			14,512			14,698
Total assets	$	2,782,223		$	2,722,983		$	2,926,420		$	2,806,404
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	163,259		$	122,839		$	171,766		$	139,337
Accrued liabilities		138,996			136,482			144,817			143,402
Accrued salaries and benefits		72,155			48,579			46,151			76,695
Accrued income tax		4,089			2,005
Current portion of operating lease liabilities		130,088			106,153			143,385			135,739
Current portion of finance lease liabilities		994			754			1,041			959
Total current liabilities		509,581			416,812			507,160			496,132
Long-term operating lease liabilities		1,074,267			1,078,927			1,087,586			1,069,535
Long-term debt and finance lease liabilities		285,704			549,419			259,871			260,459
Other long-term liabilities		50,140			41,517			43,562			40,912
Deferred income tax liability		54,585			54,356			60,158			58,073
Total liabilities		1,974,277			2,141,031			1,958,337			1,925,111
Commitments and contingencies (Note 6)
Stockholders’ equity:
Undesignated preferred stock; $0.001 par value; 10,000,000 shares authorized, 0 shares issued and outstanding		—			—
Common stock, $0.001 par value; 200,000,000 shares authorized, 117,950,276 shares issued and outstanding, September 27, 2020; 117,543,668 shares issued and outstanding, December 29, 2019		117			117
Undesignated preferred stock; $0.001 par value; 10,000,000 shares authorized, 0 shares issued and outstanding								—			—
Common stock, $0.001 par value; 200,000,000 shares authorized, 113,155,419 shares issued and outstanding, October 3, 2021; 117,953,435 shares issued and outstanding, January 3, 2021								113			118
Additional paid-in capital		682,709			670,966			699,870			686,648
Accumulated other comprehensive income (loss)		(9,484	)		(4,682	)
Retained earnings (Accumulated deficit)		134,604			(84,449	)
Accumulated other comprehensive loss								(5,351	)		(8,474	)
Retained earnings								273,451			203,001
Total stockholders’ equity		807,946			581,952			968,083			881,293
Total liabilities and stockholders’ equity	$	2,782,223		$	2,722,983		$	2,926,420		$	2,806,404


	Thirteen weeks ended				Thirty-nine weeks ended					Thirteen weeks ended				Thirty-nine weeks ended
	September 27, 2020		September 29, 2019		September 27, 2020			September 29, 2019		October 3, 2021		September 27, 2020		October 3, 2021		September 27, 2020
Net sales	$	1,577,598	$	1,440,222	$	4,866,925		$	4,269,844	$	1,509,633	$	1,577,598	$	4,607,073	$	4,866,925
Cost of sales		992,829		963,497		3,075,665			2,843,989		969,904		992,829		2,931,089		3,075,665
Gross profit		584,769		476,725		1,791,260			1,425,855		539,729		584,769		1,675,984		1,791,260
Selling, general and administrative expenses		475,053		404,285		1,400,234			1,162,226		423,416		475,053		1,299,498		1,400,234
Depreciation and amortization (exclusive of depreciation included in cost of sales)		31,067		30,764		92,637			89,788		30,377		31,067		92,036		92,637
Store closure and other costs, net		268		2,119		(344	)		3,396		128		268		1,757		(344	)
Income from operations		78,381		39,557		298,733			170,445		85,808		78,381		282,693		298,733
Interest expense, net		3,117		5,557		11,681			15,997		2,911		3,117		8,840		11,681
Income before income taxes		75,264		34,000		287,052			154,448		82,897		75,264		273,853		287,052
Income tax provision		15,023		7,740		67,999			36,453		19,030		15,023		65,924		67,999
Net income	$	60,241	$	26,260	$	219,053		$	117,995	$	63,867	$	60,241	$	207,929	$	219,053
Net income per share:
Basic	$	0.51	$	0.22	$	1.86		$	0.98	$	0.56	$	0.51	$	1.78	$	1.86
Diluted	$	0.51	$	0.22	$	1.85		$	0.98	$	0.56	$	0.51	$	1.77	$	1.85
Weighted average shares outstanding:
Basic		117,947		118,029		117,775			119,846		114,201		117,947		116,497		117,775
Diluted		118,450		118,174		118,157			120,227		114,818		118,450		117,252		118,157


	Thirteen weeks ended				Thirteen weeks ended
	September 27, 2020		September 29, 2019		October 3, 2021		September 27, 2020
Unaudited Quarterly Consolidated Statement of Income Data:
Net sales	$	1,577,598	$	1,440,222	$	1,509,633	$	1,577,598
Cost of sales		992,829		963,497		969,904		992,829
Gross profit		584,769		476,725		539,729		584,769
Selling, general and administrative expenses		475,053		404,285		423,416		475,053
Depreciation and amortization (exclusive of depreciation included in cost of sales)		31,067		30,764		30,377		31,067
Store closure and other costs, net		268		2,119		128		268
Income from operations		78,381		39,557		85,808		78,381
Interest expense, net		3,117		5,557		2,911		3,117
Income before income taxes		75,264		34,000		82,897		75,264
Income tax provision		15,023		7,740		19,030		15,023
Net income	$	60,241	$	26,260	$	63,867	$	60,241

Weighted average shares outstanding - basic		117,947		118,029		114,201		117,947
Diluted effect of equity-based awards		503		145		617		503
Weighted average shares and equivalent shares outstanding		118,450		118,174		114,818		118,450
Diluted net income per share	$	0.51	$	0.22	$	0.56	$	0.51


	Thirteen weeks ended										Thirteen weeks ended
	September 27, 2020		September 29, 2019		Change			% Change			October 3, 2021		September 27, 2020		Change			% Change
Long-term debt	$	1,358	$	5,136	$	(3,778	)		(74	)%	$	1,133	$	1,358	$	(225	)		(17	)%
Capital and financing leases		235		246		(11	)		(4	)%		223		235		(12	)		(5	)%
Deferred financing costs		141		141		—			0	%		141		141		—			0	%
Interest rate hedge and other		1,383		34		1,349		n/m				1,414		1,383		31			2	%
Total interest expense, net	$	3,117	$	5,557	$	(2,440	)		(44	)%	$	2,911	$	3,117	$	(206	)		(7	)%


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


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


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

For the thirteen and thirty-nine weeks ended September 27, 2020

	Shares		Common Stock		Additional Paid In Capital		(Accumulated Deficit) Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balances at June 28, 2020		117,944,450	$	117	$	679,036	$	74,363		$	(10,239	)	$	743,277
Net income		—		—		—		60,241			—			60,241
Other comprehensive income/(loss)		—		—		—		—			755			755
Issuance of shares under stock plans		5,826		—		—		—			—			—
Share-based compensation		—		—		3,673		—			—			3,673
Balances at September 27, 2020		117,950,276	$	117	$	682,709	$	134,604		$	(9,484	)	$	807,946

	Shares		Common Stock		Additional Paid In Capital		(Accumulated Deficit) Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balances at December 29, 2019		117,452,918	$	117	$	670,966	$	(84,449	)	$	(4,682	)	$	581,952
Net income								219,053						219,053
Other comprehensive loss		—		—		—		—			(4,802	)		(4,802	)
Issuance of shares under stock plans		497,358		—		1,343		—			—			1,343
Share-based compensation		—		—		10,400		—			—			10,400
Balances at September 27, 2020		117,950,276	$	117	$	682,709	$	134,604		$	(9,484	)	$	807,946

	Cash Flow Hedges
Balance at December 30, 2018	$	1,134
Other comprehensive income (loss), net of tax
Unrealized loss on cash flow hedging activities, net of income tax of ($2,341)		(6,769	)
Total other comprehensive income (loss)		(6,769	)
Balance at September 29, 2019	$	(5,635	)

Balance at December 29, 2019	$	(4,682	)
Other comprehensive income (loss), net of tax
Unrealized loss on cash flow hedging activities, net of income tax of ($1,661)		(4,802	)
Total other comprehensive income (loss)		(4,802	)
Balance at September 27, 2020	$	(9,484	)


	Rolling Four Quarters Ended
	October 3, 2021 (1)			September 27, 2020
	(dollars in thousands)
Net Income (2)	$	276,326		$	250,687
Special items, net of tax (3), (4)		1,339			5,226
Interest Expense, net of tax (4)		9,075			12,862
Net operating profit after tax (NOPAT)	$	286,740		$	268,775

Total rent expense, net of tax (4)		151,764			140,468
Estimated depreciation on operating leases, net of tax (4)		(85,366	)		(71,301	)
Estimated interest on operating leases, net of tax (4), (5)		66,398			69,167
NOPAT, including effect of operating leases	$	353,138		$	337,942

Average working capital		164,740			85,809
Average property and equipment		716,425			739,621
Average other assets		568,922			566,645
Average other liabilities		(103,444	)		(99,789	)
Average invested capital	$	1,346,643		$	1,292,286

Average operating leases (6)		1,213,852			1,194,213
Average invested capital, including operating leases	$	2,560,495		$	2,486,499

ROIC, including operating leases		13.8	%		13.6	%


	Payments Due by Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
	(in thousands)
$700.0 million Credit Agreement (1)	$	250,000	$	—	$	250,000	$	—	$	—
Interest payments on $700.0 million Credit Agreement (2)		14,238		2,527		11,711		—		—
Finance lease obligations (3)		15,957		1,635		3,416		3,515		7,391
Operating lease obligations (3)		1,997,022		214,446		428,416		366,013		988,147
Totals	$	2,277,217	$	218,608	$	693,543	$	369,528	$	995,538


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 5, 2021 - August 1, 2021		989,636	$	25.26		989,636	$	187,516,000
August 2, 2021 - August 29, 2021		—	$	—		—	$	—
August 30, 2021 - October 3, 2021		1,089,784	$	22.94		1,089,784	$	162,516,000


Exhibit Number		Description

~~31.1~~ 10.1		Offer Letter from Sprouts Farmers Market, Inc., to Lawrence “Chip” Molloy, dated August 31, 2021 (1)

10.2		Severance Agreement, dated September 19, 2021, between Sprouts Farmers Market, Inc. and Lawrence "Chip" Molloy (2)

10.3		2021 Form of Restricted Stock Unit Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan for Chief Financial Officer (2)

31.1		Certification of Chief Executive 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

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~~104~~		Cover Page Interactive Data File (embedded within the Inline XBRL document)


		SPROUTS FARMERS MARKET, INC.

Date: ~~October 28, 2020~~November 4, 2021	By:	/s/ ~~Denise A. Paulonis~~Lawrence P. Molloy
	Name:	~~Denise A. Paulonis~~Lawrence P. Molloy
	Title:	Chief Financial Officer
		(Principal Financial Officer)