Sprouts Farmers Market, Inc 10-Q for FY2023 Q2

Sprouts Farmers Market, Inc. (SFM)

10-Q 2023-08-01 For: 2023-07-02

Added on April 07, 2026

About this 10-Q

Sprouts Farmers Market, Inc filed this 10-Q on August 1, 2023, covering the quarter ended July 2, 2023 (FY2023 Q2).

Headline figures

Quarter ended July 2, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $1.69B; up 6.1% from $1.6B a year earlier
Net income: $67.33M; up 8.6% from net income of $62M a year earlier
Diluted EPS: $0.65; up 14.0% from $0.57 a year earlier

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Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐


		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.		4

	Consolidated Balance Sheets as of July 2, 2023 (unaudited) and January 1, 2023	4

	Consolidated Statements of Income for the thirteen and twenty-six weeks ended July 2, 2023 and July 3, 2022 (unaudited)	5

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

	Consolidated Statements of Stockholders’ Equity for the thirteen and twenty-six weeks ended July 2, 2023 and July 3, 2022 (unaudited)	7

	Consolidated Statements of Cash Flows for the twenty-six weeks ended July 2, 2023 and July 3, 2022 (unaudited)	9

	Notes to Consolidated Financial Statements (Unaudited)	10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		22

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		36

Item 4. Controls and Procedures.		36

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.		37

Item 1A. Risk Factors.		37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		38

Item 5. Other Information.		38

Item 6. Exhibits.		39

Signatures		40


	July 2, 2023		January 1, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	259,484	$	293,233
Accounts receivable, net		13,616		16,108
Inventories		320,006		310,545
Prepaid expenses and other current assets		40,231		53,918
Total current assets		633,337		673,804
Property and equipment, net of accumulated depreciation		738,693		722,241
Operating lease assets, net		1,232,725		1,106,524
Intangible assets		208,060		184,960
Goodwill		381,751		368,878
Other assets		13,630		13,973
Total assets	$	3,208,196	$	3,070,380
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	168,541	$	172,904
Accrued liabilities		194,621		151,306
Accrued salaries and benefits		59,311		61,574
Current portion of operating lease liabilities		114,685		135,584
Current portion of finance lease liabilities		1,068		1,012
Total current liabilities		538,226		522,380
Long-term operating lease liabilities		1,312,823		1,145,173
Long-term debt and finance lease liabilities		184,173		258,902
Other long-term liabilities		36,478		36,340
Deferred income tax liability		61,343		61,123
Total liabilities		2,133,043		2,023,918
Commitments and contingencies (Note 7)
Stockholders’ equity:
Undesignated preferred stock; $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $0.001 par value; 200,000,000 shares authorized, 102,183,083 shares issued and outstanding, July 2, 2023; 105,072,756 shares issued and outstanding, January 1, 2023		102		105
Additional paid-in capital		761,181		726,345
Retained earnings		313,870		320,012
Total stockholders’ equity		1,075,153		1,046,462
Total liabilities and stockholders’ equity	$	3,208,196	$	3,070,380


	Thirteen weeks ended				Twenty-six weeks ended
	July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
Net sales	$	1,692,247	$	1,595,482	$	3,425,557	$	3,236,643
Cost of sales		1,066,275		1,015,125		2,149,523		2,044,538
Gross profit		625,972		580,357		1,276,034		1,192,105
Selling, general and administrative expenses		497,965		462,110		984,160		922,020
Depreciation and amortization (exclusive of depreciation included in cost of sales)		33,964		31,244		68,032		63,064
Store closure and other costs, net		2,427		493		30,704		870
Income from operations		91,616		86,510		193,138		206,151
Interest expense, net		2,140		2,658		4,360		5,697
Income before income taxes		89,476		83,852		188,778		200,454
Income tax provision		22,142		21,855		45,284		50,150
Net income	$	67,334	$	61,997	$	143,494	$	150,304
Net income per share:
Basic	$	0.65	$	0.57	$	1.39	$	1.37
Diluted	$	0.65	$	0.57	$	1.38	$	1.36
Weighted average shares outstanding:
Basic		102,824		109,067		103,326		109,985
Diluted		103,514		109,619		104,240		110,762


	Thirteen weeks ended					Twenty-six weeks ended
	July 2, 2023		July 3, 2022			July 2, 2023		July 3, 2022
Net income	$	67,334	$	61,997		$	143,494	$	150,304

Other comprehensive income, net of tax
Unrealized gains on cash flow hedging activities, net of income tax of $778 and $2,018 during the thirteen and twenty-six weeks ended July 3, 2022		—		2,248			—		5,834
Reclassification of net losses on cash flow hedges to net income, net of income tax of ($274) and ($651) during the thirteen and twenty- six weeks ended July 3, 2022		—		(792	)		—		(1,883	)
Total other comprehensive income		—		1,456			—		3,951

Comprehensive income	$	67,334	$	63,453		$	143,494	$	154,255


☒	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


For the thirteen and twenty-six weeks ended July 2, 2023

	Shares			Common Stock			Additional Paid In Capital		Retained Earnings			Total Stockholders’ Equity
Balances at April 2, 2023		103,470,717		$	104		$	753,822	$	297,004		$	1,050,930
Net income		—			—			—		67,334			67,334
Issuance of shares under stock plans		150,298			—			1,750		—			1,750
Repurchase and retirement of common stock		(1,437,932	)		(2	)		—		(50,468	)		(50,470	)
Share-based compensation		—			—			5,609		—			5,609
Balances at July 2, 2023		102,183,083		$	102		$	761,181	$	313,870		$	1,075,153

	Shares			Common Stock			Additional Paid In Capital		Retained Earnings			Total Stockholders’ Equity
Balances at January 1, 2023		105,072,756		$	105		$	726,345	$	320,012		$	1,046,462
Net income		—			—			—		143,494			143,494
Issuance of shares under stock plans		1,032,312			1			7,237		—			7,238
Repurchase and retirement of common stock		(4,476,343	)		(5	)		—		(149,636	)		(149,641	)
Share-based compensation		—			—			9,461		—			9,461
Issuance of shares for acquisition		554,358			1			18,138		—			18,139
Balances at July 2, 2023		102,183,083		$	102		$	761,181	$	313,870		$	1,075,153


July 2, 2023	Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	175,000	$	—	$	175,000
Total financial liabilities	$	—	$	175,000	$	—	$	175,000

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


			As of
Facility	Maturity	Interest Rate	July 2, 2023		January 1, 2023
Senior secured debt
$700.0 million Credit Agreement	March 25, 2027	Variable	$	175,000	$	250,000
Finance lease liabilities	Various	n/a		9,173		8,902
Long-term debt and finance lease liabilities			$	184,173	$	258,902


Effective date	Expiration date	Amount authorized		Cost of repurchases		Authorization available
March 2, 2022	December 31, 2024	$	600,000	$	336,470	$	263,530


	Cash Flow Hedges
Balance at January 2, 2022	$	(3,758	)
Other comprehensive income, net of tax
Unrealized gains on cash flow hedging activities, net of income tax of $2,018		5,834
Reclassification of net losses on cash flow hedges to net income, net of income tax of ($651)		(1,883	)
Total other comprehensive income		3,951
Balance at July 3, 2022	$	193


Grant Date	RSUs		PSAs		Options
March 14, 2023		491,729		172,059		221,085
May 1, 2023		2,931		—		—
June 7, 2023		1,271		—		—
Total		495,931		172,059		221,085
Weighted-average grant date fair value	$	32.96	$	32.95	$	12.63
Weighted-average exercise price	$	—	$	—	$	32.95


	Unrecognized compensation expense		Remaining weighted average recognition period
Options	$	4,395		1.9
RSUs		23,572		1.6
PSAs		6,477		1.8
Total unrecognized compensation expense at July 2, 2023	$	34,444


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


	Twenty-six weeks ended
	July 2, 2023			July 3, 2022
Operating activities
Net income	$	143,494		$	150,304
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		70,013			64,856
Operating lease asset amortization		62,331			57,360
Impairment of assets		27,845			171
Share-based compensation		9,461			7,920
Deferred income taxes		(5,953	)		1,770
Other non-cash items		254			324
Changes in operating assets and liabilities, net of effects from acquisition:
Accounts receivable		8,390			11,389
Inventories		(7,665	)		(27,475	)
Prepaid expenses and other current assets		9,915			(12,851	)
Other assets		3,205			164
Accounts payable		3,374			32,877
Accrued liabilities		41,733			(318	)
Accrued salaries and benefits		(2,561	)		(10,521	)
Operating lease liabilities		(68,986	)		(65,502	)
Other long-term liabilities		(69	)		(1,505	)
Cash flows from operating activities		294,781			208,963
Investing activities
Purchases of property and equipment		(98,683	)		(53,098	)
Payments for acquisition, net of cash acquired		(13,042	)		—
Cash flows used in investing activities		(111,725	)		(53,098	)
Financing activities
Proceeds from revolving credit facilities		—			62,500
Payments on revolving credit facilities		(75,000	)		(62,500	)
Payments on finance lease liabilities		(482	)		(385	)
Payments of deferred financing costs		—			(3,373	)
Repurchase of common stock		(148,346	)		(111,071	)
Proceeds from exercise of stock options		7,238			2,710
Cash flows used in financing activities		(216,590	)		(112,119	)
(Decrease)/Increase in cash, cash equivalents, and restricted cash		(33,534	)		43,746
Cash, cash equivalents, and restricted cash at beginning of the period		295,192			247,004
Cash, cash equivalents, and restricted cash at the end of the period	$	261,658		$	290,750

Supplemental disclosure of cash flow information


	Twenty-six weeks ended
	July 2, 2023			July 3, 2022
Balance, beginning of year	$	10,906		$	12,586
Gift cards issued during the period but not redeemed(1)		1,621			1,568
Revenue recognized from beginning liability		(3,562	)		(4,554	)
Balance, end of year	$	8,965		$	9,600


	Thirteen weeks ended
	July 2, 2023				July 3, 2022
Perishables	$	971,249	57.4	%	$	936,273	58.7	%
Non-Perishables		720,998	42.6	%		659,209	41.3	%
Net Sales	$	1,692,247	100.0	%	$	1,595,482	100.0	%

	Twenty-six weeks ended
	July 2, 2023				July 3, 2022
Perishables	$	1,970,824	57.5	%	$	1,888,360	58.3	%
Non-Perishables		1,454,733	42.5	%		1,348,283	41.7	%
Net Sales	$	3,425,557	100.0	%	$	3,236,643	100.0	%


	As of
	July 2, 2023		July 3, 2022
	(in thousands)
Options
Vested		641		370
Unvested		475		1,053
RSUs		1,084		993
PSAs		471		460


	Rolling Four Quarters Ended
	July 2, 2023			July 3, 2022
	(dollars in thousands)
Net income (1)	$	254,355		$	250,399
Special items, net of tax (2), (3)		32,492			—
Interest expense, net of tax (3)		5,800			8,639
Net operating profit after tax (NOPAT)	$	292,647		$	259,038

Total rent expense, net of tax (3)		162,916			152,902
Estimated depreciation on operating leases, net of tax (3)		(92,339	)		(90,084	)
Estimated interest on operating leases, net of tax (3), (4)		70,577			62,818
NOPAT, including effect of operating leases	$	363,224		$	321,856

Average working capital		271,139			238,717
Average property and equipment		712,167			704,101
Average other assets		582,423			569,054
Average other liabilities		(98,788	)		(99,049	)
Average invested capital	$	1,466,941		$	1,412,823

Average operating leases (5)		1,321,289			1,242,722
Average invested capital, including operating leases	$	2,788,230		$	2,655,545

ROIC, including operating leases		13.0	%		12.1	%


Period (1)	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Approximate dollar value of shares that may yet be purchased under the plans or programs (2)
April 3, 2023 - April 30, 2023		445,907	$	34.09		445,907	$	298,328,000
May 1, 2023 - May 28, 2023		425,039	$	36.11		425,039	$	282,979,000
May 29, 2023 - July 2, 2023		566,986	$	34.30		566,986	$	263,530,000
Total		1,437,932				1,437,932


Exhibit Number		Description

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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		SPROUTS FARMERS MARKET, INC.

Date: August 1, 2023	By:	/s/ Lawrence P. Molloy
	Name:	Lawrence P. Molloy
	Title:	Chief Financial Officer
		(Principal Financial Officer)


Date: August 1, 2023		/s/ Jack L. Sinclair
		Jack L. Sinclair
		Chief Executive Officer
		(Principal Executive Officer)