Sprouts Farmers Market, Inc 10-Q for FY2020 Q1

Sprouts Farmers Market, Inc. (SFM)

10-Q 2020-05-05 For: 2020-03-29

Added on April 07, 2026

About this 10-Q

Sprouts Farmers Market, Inc filed this 10-Q on May 5, 2020, covering the quarter ended March 29, 2020 (FY2020 Q1).

Headline figures

Quarter ended March 29, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $1.65B; up 16.5% from $1.41B a year earlier
Net income: $91.81M; up 62.8% from net income of $56.39M a year earlier
Diluted EPS: $0.78; up 69.6% from $0.46 a year earlier

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		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.		4

	Consolidated Balance Sheets as of March 29, 2020 (unaudited) and December 29, 2019	4

	Consolidated Statements of Income for the thirteen weeks ended March 29, 2020 and March 31, 2019 (unaudited)	5

	Consolidated Statements of Comprehensive Income for the thirteen ended March 29, 2020 and March 31, 2019 (unaudited)	6

	Consolidated Statements of Stockholders’ Equity for the thirteen weeks ended March 29, 2020 and March 31, 2019 (unaudited)	7

	Consolidated Statements of Cash Flows for the thirteen weeks ended March 29, 2020 and March 31, 2019 (unaudited)	8

	Notes to Unaudited Consolidated Financial Statements	9

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		32

Item 4. Controls and Procedures.		33

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.		34

Item 1A. Risk Factors.		34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		35

Item 6. Exhibits.		36

Signatures		37

	March 29, 2020			December 29, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	247,101		$	85,314
Accounts receivable, net		12,411			15,713
Inventories		253,191			275,979
Prepaid expenses and other current assets		18,079			10,833
Total current assets		530,782			387,839
Property and equipment, net of accumulated depreciation		734,504			741,508
Operating lease assets, net		1,024,510			1,028,436
Intangible assets, net of accumulated amortization		185,350			185,395
Goodwill		368,078			368,078
Other assets		11,976			11,727
Total assets	$	2,855,200		$	2,722,983
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	200,762		$	122,839
Accrued liabilities		153,365			136,482
Accrued salaries and benefits		51,563			48,579
Accrued income tax		30,911			2,005
Current portion of operating lease liabilities		109,961			106,153
Current portion of finance lease liabilities		833			754
Total current liabilities		547,395			416,812
Long-term operating lease liabilities		1,074,318			1,078,927
Long-term debt and finance lease liabilities		462,185			549,419
Other long-term liabilities		45,993			41,517
Deferred income tax liability		54,587			54,356
Total liabilities		2,184,478			2,141,031
Commitments and contingencies (Note 6)
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, 117,786,608 shares issued and outstanding, March 29, 2020; 117,543,668 shares issued and outstanding, December 29, 2019		117			117
Additional paid-in capital		673,366			670,966
Accumulated other comprehensive income (loss)		(10,122	)		(4,682	)
Retained earnings (Accumulated deficit)		7,361			(84,449	)
Total stockholders’ equity		670,722			581,952
Total liabilities and stockholders’ equity	$	2,855,200		$	2,722,983

	Thirteen weeks ended
	March 29, 2020			March 31, 2019
Net sales	$	1,646,539		$	1,413,887
Cost of sales		1,052,707			929,538
Gross profit		593,832			484,349
Selling, general and administrative expenses		436,304			374,826
Depreciation and amortization (exclusive of depreciation included in cost of sales)		31,021			29,459
Store closure costs and other credits		(1,082	)		508
Income from operations		127,589			79,556
Interest expense, net		4,827			5,002
Income before income taxes		122,762			74,554
Income tax provision		30,952			18,162
Net income	$	91,810		$	56,392
Net income per share:
Basic	$	0.78		$	0.46
Diluted	$	0.78		$	0.46
Weighted average shares outstanding:
Basic		117,545			123,258
Diluted		117,748			123,926

	Thirteen weeks ended
	March 29, 2020			March 31, 2019
Net income	$	91,810		$	56,392

Other comprehensive income (loss), net of tax
Unrealized gain/(loss) on cash flow hedging activities, net of income tax of ($1,882) and ($905)		(5,440	)		(2,616	)
Total other comprehensive income (loss)	$	(5,440	)		(2,616	)

Comprehensive income	$	86,370		$	53,776

For the thirteen weeks ended March 29, 2020

	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		—		—		—		91,810			—			91,810
Other comprehensive loss		—		—		—		—			(5,440	)		(5,440	)
Issuance of shares under stock plans		333,690		—		—		—			—			—
Share-based compensation		—		—		2,400		—			—			2,400
Balances at March 29, 2020		117,786,608	$	117	$	673,366	$	7,361		$	(10,122	)		670,722

For the thirteen weeks ended March 31, 2019

	Shares			Common Stock			Additional Paid In Capital		(Accumulated Deficit) Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balances at December 30, 2018		124,581,190		$	124		$	657,140	$	(69,202	)	$	1,134		$	589,196
Net income		—			—			—		56,392			—			56,392
Other comprehensive income (loss)		—			—			—		—			(2,616	)		(2,616	)
Issuance of shares under stock plans		549,212			1			1,664		—			—			1,665
Repurchase and retirement of common stock		(4,890,766	)		(5	)		—		(111,880	)		—			(111,885	)
Share-based compensation		—			—			2,450		—			—			2,450
Impact of adoption of ASC 842 related to leases		—			—			—		21,319			—			21,319
Balances at March 31, 2019		120,239,636		$	120		$	661,254	$	(103,371	)	$	(1,482	)	$	556,521

	Thirteen weeks ended
	March 29, 2020			March 31, 2019
Cash flows from operating activities
Net income	$	91,810		$	56,392
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		31,600			30,073
Operating lease asset amortization		23,137			20,653
Store closure costs and other credits		—			710
Share-based compensation		2,400			2,450
Deferred income taxes		232			6,217
Other non-cash items		(768	)		(30	)
Changes in operating assets and liabilities:
Accounts receivable		12,652			3,247
Inventories		22,787			6,500
Prepaid expenses and other current assets		(8,652	)		(744	)
Other assets		656			(1,086	)
Accounts payable		80,669			(5,531	)
Accrued liabilities		16,492			13,840
Accrued salaries and benefits		2,984			(9,634	)
Accrued income tax		28,906			10,510
Operating lease liabilities		(30,107	)		(20,632	)
Other long-term liabilities		2,274			(330	)
Cash flows from operating activities		277,072			112,605
Cash flows from investing activities
Purchases of property and equipment		(28,036	)		(30,142	)
Cash flows used in investing activities		(28,036	)		(30,142	)
Cash flows from financing activities
Proceeds from revolving credit facilities		—			89,734
Payments on revolving credit facilities		(87,000	)		(42,734	)
Payments on finance lease liabilities		(154	)		(186	)
Repurchase of common stock		—			(111,885	)
Proceeds from exercise of stock options		—			1,661
Other		—			(319	)
Cash flows used in financing activities		(87,154	)		(63,729	)
Increase in cash, cash equivalents, and restricted cash		161,882			18,734
Cash, cash equivalents, and restricted cash at beginning of the period		86,785			2,248
Cash, cash equivalents, and restricted cash at the end of the period	$	248,667		$	20,982

Supplemental disclosure of cash flow information
Cash paid for interest	$	4,905		$	5,046
Cash paid for income taxes		(58	)		(22	)
Leased assets obtained in exchange for new operating lease liabilities		26,287			81,691
Leased assets obtained in exchange for new finance lease liabilities		—			—

Supplemental disclosure of non-cash investing and financing activities
Property and equipment in accounts payable	$	13,999		$	28,617

March 29, 2020	Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	451,000	$	—	$	451,000
Interest rate swap liability		—		13,632		—		13,632
Total financial liabilities	$	—	$	464,632	$	—	$	464,632

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

			As of
Facility	Maturity	Interest Rate	March 29, 2020		December 29, 2019
Senior secured debt
$700.0 million Credit Agreement	March 27, 2023	Variable	$	451,000	$	538,000
Finance lease liabilities	Various	n/a		11,185		11,419
Long-term debt and finance lease liabilities			$	462,185	$	549,419

	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 ($905)		(2,616	)
Total other comprehensive income (loss)		(2,616	)
Balance at March 31, 2019	$	(1,482	)

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 ($1,882)		(5,440	)
Total other comprehensive income (loss)		(5,440	)
Balance at March 29, 2020	$	(10,122	)

Grant Date	RSUs		PSAs		Options
March 9, 2020		485,367		174,902		1,055,907
Total		485,367		174,902		1,055,907
Weighted-average grant date fair value	$	16.47	$	16.47	$	4.86
Weighted-average exercise price		—		—	$	16.47

	Unrecognized compensation expense		Remaining weighted average recognition period
Options	$	5,296		2.9
RSUs		16,357		2.3
PSAs		6,118		2.3
RSAs		—		—
Total unrecognized compensation expense at March 29, 2020	$	27,771

	Rolling Four Quarters Ended
	March 29, 2020			March 31, 2019
	(dollars in thousands)
Net Income ⁽¹⁾	$	185,046		$	148,303
Income Tax Adjustment for Tax Act ⁽²⁾		—			(2,573	)
Special items, net of tax ^{(3), (4)}		892			11,950
Interest expense, net of tax ^{(4), (5)}		15,914			21,444
Net operating profit after tax (NOPAT)	$	201,852		$	179,124

Total rent expense, net of tax ⁽⁴⁾		132,002			109,803
Estimated depreciation on operating leases, net of tax ⁽⁴⁾		(65,473	)		(42,421	)
Estimated interest on operating leases, net of tax ^{(4), (6), (7)}		66,529			67,382
NOPAT, including effect of operating leases	$	268,381		$	246,506

Average working capital		49,290			32,029
Average property and equipment		730,643			751,434
Average other assets		565,510			574,183
Average other liabilities		(99,964	)		(184,481	)
Average invested capital	$	1,245,479		$	1,173,165

Average operating leases ⁽⁸⁾		1,171,563			1,142,013
Average invested capital, including operating leases	$	2,417,042		$	2,315,178

ROIC		16.2	%		15.3	%
ROIC, including operating leases		11.1	%		10.6	%

	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)		451,000	$	—	$	451,000	$	—	$	—
Interest payments on $700.0 million Credit Agreement (2)		43,107		10,848		29,470		2,789		—
Finance lease obligations (3)		18,344		1,591		3,280		3,446		10,027
Operating lease obligations (3)		1,797,890		197,884		387,430		337,130		875,446
Totals	$	2,310,341	$	210,323	$	871,180	$	343,365	$	885,473

Exhibit Number		Description

10.1		2020 Form of Performance Share Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan

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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101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

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

		SPROUTS FARMERS MARKET, INC.

Date: May 5, 2020	By:	/s/ Denise A. Paulonis
	Name:	Denise A. Paulonis
	Title:	Chief Financial Officer
		(Principal Financial Officer)

Granted to:
Grant Date:
Number of Performance Shares:
Issuance of Shares:
Vesting Schedule:

Right to Shares			The award of Performance Shares represents your right to receive, and the Company’s obligation to issue, one Share for each Performance Share earned, based on the Company’s 2022 EBT as set forth in the Cover Sheet. The Shares issued will be subject to the vesting conditions described below. Issuance of Shares equal to the Performance Shares earned will occur as soon as practicable following the date the Compensation Committee certifies 2022 EBT, based on the Company’s 2022 fiscal year audited financial statements (the “Certification Date”).

Vesting			The Performance Shares issued to you will vest in accordance with the schedule set forth in the Cover Sheet. All Performance Shares will cease vesting as of the date your employment with the Company and its Affiliates has terminated for any reason.

Termination; Specified Conduct			Should your employment with the Company and its Affiliates terminate for any reason or if you engage in Specified Conduct (as defined in Exhibit A) prior to the Certification Date, you shall forfeit all rights to receive any Performance Shares. Should your employment with the Company and its Affiliates terminate for any reason after the Certification Date or if you engage in Specified Conduct after the Certification Date, you shall forfeit all Performance Shares that are not then vested, and such Performance Shares shall be returned to the Company automatically and for no consideration.

Change in Control			Notwithstanding the foregoing: (A) if there occurs a Change in Control (as defined in Exhibit A), and this award does not continue or is not assumed by an acquiror, then (i) if the Change in Control occurs prior to the Certification Date, you will be entitled to receive, immediately prior to the Change in Control, the greater of (x) the target number of Performance Shares, or (y) the number of Performance Shares which would have been earned pursuant to the Cover Sheet based on actual 2022 EBT through the date the Change in Control occurs, and (ii) if the Change in Control occurs after the Certification Date, all Performance Shares that have not yet vested shall vest immediately prior to the Change in Control; and (B) if there occurs a Change in Control, and this award continues or is assumed by an acquiror, and your employment is terminated by the Company or an acquiror without Cause (as defined in Exhibit A) or by you for Good Reason (as defined in Exhibit A), in each case within 24 months following the Change in Control, then (i) if such termination occurs prior to the Certification Date, you will be entitled to receive, as soon as practicable following such termination, the greater of (x) the target number of Performance Shares, or (y) the number of Performance Shares which would have been earned pursuant to the Cover Sheet based on actual 2022 EBT through the date of such termination, which Shares shall be immediately vested, and (ii) if such termination occurs after the Certification Date, all Performance Shares that have not yet vested shall vest immediately upon such termination. For purposes of the foregoing, this award shall not be treated as continued or assumed unless it is continued or assumed on a substantially equivalent basis, including, without limitation, continuation or assumption of the same Company EBT performance metrics, subject to adjustment in accordance with the Plan.

Taxes			Unless you make an election under Section 83(b) of the Code within 30 days of the Certification Date, the value of the Performance Shares as and when they vest will be treated as wages subject to payroll withholding. The Company will satisfy the withholding obligation through a “sell to cover” whereby you irrevocably direct a securities broker approved by the Company to sell a portion of your Performance Shares that are then scheduled to vest and to deliver the sale proceeds to the Company in payment of the applicable withholding taxes. You agree to provide these directions by signing and returning the Irrevocable Standing Order to Sell Shares attached hereto, along with a signed copy of the Cover Sheet, within 60 days of the Grant Date. The number of Shares that the broker will sell will be based on an estimate made by the broker of the Shares required to be sold to satisfy the withholding taxes. You agree that the proceeds received from the sale of Shares will be used to satisfy the withholding taxes and, accordingly, you authorize the broker to pay such proceeds to the Company for such purpose. To the extent that the proceeds obtained by such sale exceed the amount necessary to satisfy the withholding taxes, such excess proceeds shall be deposited into your brokerage account and in the event of a shortfall, additional Shares may be sold and/or cash withholding may be required from you. Any remaining Shares shall be deposited into your brokerage account. If there is not a market in the Shares or the Company determines in its sole discretion that the sell to cover procedure is not advisable or sufficient, the Company will have the right to make other arrangements to satisfy the withholding taxes due upon the vesting of the Shares with respect to the Performance Shares, including, but not limited to, the right to deduct amounts from salary or payments of any kind otherwise due to the Participant or withhold in Shares (by transferring Shares back to the Company), provided that the Company only withholds the amount of Shares necessary to satisfy the statutory minimum withholding amount. If such other arrangements are made, your Irrevocable Standing Order to Sell Shares will be voided. You represent to the Company that, as of the date you sign the Irrevocable Standing Order to Sell Shares, you are not aware of any material nonpublic information about the Company or the Shares. You and the Company have structured this Agreement to constitute a “binding contract” relating to the sale of Shares, consistent with the affirmative defense to liability under Section 10(b) of the Exchange Act under Rule 10b5-1(c) issued under such Act.

Restrictions on Resale			By signing this Agreement, you agree not to sell any Performance Shares at a time when applicable laws, regulations or Company policies prohibit a sale. In addition, until the Performance Shares have vested pursuant to the schedule set forth in the Cover Sheet, they may not be sold, transferred, assigned, pledged, margined, or otherwise encumbered or disposed of (except for transfers and forfeitures to the Company). The Company’s obligation to issue Performance Shares upon the Certification Date shall be subject to applicable laws, rules and regulations and also to such approvals by governmental agencies as may be deemed appropriate to comply with relevant securities laws and regulations. You shall deliver to the Chief Legal Officer of the Company, at the time of execution of this Agreement and/or at such other time or times as the Chief Legal Officer may request, one or more executed stock powers, authorizing the transfer of the Performance Shares to the Company upon forfeiture, and you shall take such other steps or perform such other actions as may be requested by the Chief Legal Officer to effect the transfer of any forfeited Performance Shares.

Transfer of right to receive Performance Shares			Prior to the Vesting Date, you cannot transfer or assign your right to receive Performance Shares. For instance, you may not sell your right to Performance Shares or use such right as security for a loan. If you attempt to do any of these things, your award will immediately become invalid. Regardless of any marital property settlement agreement, the Company or a securities broker, as applicable, is not obligated to recognize your former spouse’s interest in your right to Performance Shares in any way.

Stockholder Rights; Dividend Equivalent Rights			You, or your estate or heirs, have no rights as a stockholder of the Company in respect of Performance Shares until the Certification Date. No adjustments are made for dividends or other rights if the applicable record date occurs before Shares are issued, except as described in the Plan. On and following the Certification Date, you shall have the rights as a stockholder, subject to the restrictions set forth in this Agreement (including, without limitation, transfer restrictions and forfeiture during the vesting period).

Applicable Law			This Agreement will be interpreted and enforced under the laws of the State of Delaware.

The Plan and Other Agreements			The text of the Plan and any amendments thereto are incorporated in this Agreement by reference. This Agreement, the Cover Sheet and the Plan constitute the entire understanding between you and the Company regarding the Performance Shares. Any prior agreements, commitments or negotiations concerning the Performance Shares are superseded.

Date: May 5, 2020		/s/ Jack L. Sinclair
		Jack L. Sinclair
		Chief Executive Officer
		(Principal Executive Officer)