Sprouts Farmers Market, Inc 10-Q for FY2021 Q3
Sprouts Farmers Market, Inc. (SFM)
About this 10-Q
Sprouts Farmers Market, Inc filed this 10-Q on November 4, 2021, covering the quarter ended October 3, 2021 (FY2021 Q3).
Headline figures
Quarter ended October 3, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.51B
- down 4.3% from $1.58B a year earlier
- Net income
- $63.87M
- up 6.0% from net income of $60.24M a year earlier
- Diluted EPS
- $0.56
- up 9.8% from $0.51 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices and zip code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class
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Trading Symbol(s) |
Name of Each Exchange on Which Registered
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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.
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).
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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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
As of November 2, 2021, the registrant had
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 2021
TABLE OF CONTENTS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the “Exchange Act”), including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses, and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended January 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.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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October 3, 2021 |
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January 3, 2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net of accumulated depreciation |
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Operating lease assets, net |
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Intangible assets, net of accumulated amortization |
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Goodwill |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities |
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Accrued salaries and benefits |
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Current portion of operating lease liabilities |
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Current portion of finance lease liabilities |
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Total current liabilities |
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Long-term operating lease liabilities |
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Long-term debt and finance lease liabilities |
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Other long-term liabilities |
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Deferred income tax liability |
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Total liabilities |
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Stockholders’ equity: |
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Undesignated preferred stock; $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Retained earnings |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
4
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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Thirteen weeks ended |
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Thirty-nine weeks ended |
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October 3, 2021 |
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September 27, 2020 |
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October 3, 2021 |
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September 27, 2020 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Depreciation and amortization (exclusive |
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Store closure and other costs, net |
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( |
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Income from operations |
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Interest expense, net |
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Income before income taxes |
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Income tax provision |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Net income per share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these consolidated financial statements.
5
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
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Thirteen weeks ended |
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Thirty-nine weeks ended |
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October 3, 2021 |
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September 27, 2020 |
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October 3, 2021 |
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September 27, 2020 |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss), net of tax |
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Unrealized gains (losses) on cash flow |
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( |
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Reclassification of net gains (losses) on |
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( |
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( |
) |
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( |
) |
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( |
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Total other comprehensive income (loss) |
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( |
) |
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Comprehensive income |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
6
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
For the thirteen and thirty-nine weeks ended October 3, 2021 |
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Shares |
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Common |
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Additional |
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(Accumulated |
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Accumulated |
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Total |
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Balances at July 4, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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Issuance of shares under stock plans |
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— |
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— |
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— |
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Repurchase and retirement of common stock |
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( |
) |
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( |
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— |
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( |
) |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Balances at October 3, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Shares |
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Common |
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Additional |
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(Accumulated |
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Accumulated |
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Total |
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Balances at January 3, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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Issuance of shares under stock plans |
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— |
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— |
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— |
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Repurchase and retirement of common stock |
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( |
) |
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( |
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— |
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( |
) |
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— |
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( |
) |
Share-based compensation |
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— |
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— |
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— |
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— |
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Balances at October 3, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
7
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
For the thirteen and thirty-nine weeks ended September 27, 2020 |
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Shares |
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Common |
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Additional |
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(Accumulated |
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Accumulated |
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Total |
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Balances at June 28, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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Issuance of shares under stock plans |
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— |
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— |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Balances at September 27, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Shares |
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Common |
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Additional |
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(Accumulated |
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Accumulated |
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Total |
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Balances at December 29, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Issuance of shares under stock plans |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Balances at September 27, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
8
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
|
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Thirty-nine weeks ended |
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October 3, 2021 |
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September 27, 2020 |
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Cash flows from operating activities |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization expense |
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Operating lease asset amortization |
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Store closure and other costs, net |
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— |
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( |
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Share-based compensation |
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Deferred income taxes |
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Other non-cash items |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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( |
) |
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Prepaid expenses and other current assets |
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( |
) |
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( |
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Other assets |
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( |
) |
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( |
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Accounts payable |
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Accrued liabilities |
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( |
) |
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Accrued salaries and benefits |
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( |
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Accrued income tax |
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— |
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Operating lease liabilities |
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( |
) |
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( |
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Other long-term liabilities |
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Cash flows from operating activities |
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Cash flows from investing activities |
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Purchases of property and equipment |
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( |
) |
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( |
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Cash flows used in investing activities |
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( |
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( |
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Cash flows from financing activities |
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Payments on revolving credit facilities |
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— |
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( |
) |
Payments on finance lease liabilities |
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( |
) |
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( |
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Repurchase of common stock |
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( |
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— |
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Proceeds from exercise of stock options |
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Cash flows used in financing activities |
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( |
) |
|
|
( |
) |
Increase in cash, cash equivalents, and restricted cash |
|
|
|
|
|
|
||
Cash, cash equivalents, and restricted cash at beginning of the period |
|
|
|
|
|
|
||
Cash, cash equivalents, and restricted cash at the end of the period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
Cash paid for income taxes |
|
|
|
|
|
|
||
Leased assets obtained in exchange for new operating lease liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Supplemental disclosure of non-cash investing and financing activities |
|
|
|
|
|
|
||
Property and equipment in accounts payable |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these consolidated financial statements.
9
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
Sprouts Farmers Market, Inc., a Delaware corporation, through its subsidiaries, operates as a healthy grocery store that offers a unique grocery experience featuring an open layout with fresh produce at the heart of the store. The Company continues to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and gluten-free. As of October 3, 2021, the Company operated
The accompanying unaudited consolidated financial statements include the accounts of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission in instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company's financial position, results of operations and cash flows for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The information included in these consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the fiscal year ended January 3, 2021 (“fiscal year 2020”) included in the Company’s Annual Report on Form 10-K, filed on February 25, 2021.
The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.
The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. The fiscal year ending January 2, 2022 (“fiscal year 2021”) is a 52-week year and fiscal year 2020 was a 53-week year. The Company reports its results of operations on a 13-week quarter, except for 53-week fiscal years (in which the fourth quarter has 14 weeks).
All dollar amounts are in thousands, unless otherwise noted.
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."
|
|
Balance at |
|
|
Gift Cards Issued During |
|
|
Revenue Recognized from |
|
|
Balance at |
|
||||
Gift card liability, net |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
(a)
10
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Restricted Cash
Restricted cash relates to defined benefit plan forfeitures as well as healthcare, general liability and workers’ compensation restricted funds of approximately $
Recently Adopted Accounting Pronouncements
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 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 Company adopted this standard effective
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 (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and ASU 2021-01, “Reference Rate Reform (Topic 848): Scope,” respectively. The amendments in 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. These updates only apply to modifications made prior to December 31, 2022. No such modifications occurred in the period ending 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 October 3, 2021 had, or are expected to have, a material impact on the Company’s consolidated financial statements.
3
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.
11
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.
The following tables present the fair value hierarchy for the Company’s financial liabilities measured at fair value on a recurring basis as of October 3, 2021 and January 3, 2021:
October 3, 2021 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Long-term debt |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Interest rate swap liability |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total financial liabilities |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
January 3, 2021 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Long-term debt |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Interest rate swap liability |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total financial liabilities |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
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 October 3, 2021 and 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 |
|
|||||
Facility |
|
Maturity |
|
Interest Rate |
|
October 3, 2021 |
|
|
January 3, 2021 |
|
||
Senior secured debt |
|
|
|
|
|
|
|
|
|
|
||
$ |
|
|
Variable |
|
$ |
|
|
$ |
|
|||
Finance lease liabilities |
|
|
n/a |
|
|
|
|
|
|
|||
Long-term debt and finance lease liabilities |
|
|
|
|
|
$ |
|
|
$ |
|
||
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 $
12
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company capitalized debt issuance costs of $
The Amended and Restated Credit Agreement also provides for a letter of credit sub-facility and a $
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
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
The interest rate on
As of October 3, 2021, outstanding letters of credit under the Amended and Restated Credit Agreement were subject to a participation fee of
Payments and Borrowings
The Amended and Restated Credit Agreement is scheduled to mature, and the commitments thereunder will terminate on
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 October 3, 2021, the Company made
13
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:
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
The Company was in compliance with all applicable covenants under the Amended and Restated Credit Agreement as of October 3, 2021.
5. Income Taxes
The Company’s effective tax rate increased to
The Company’s effective tax rate increased to
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.
14
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.
“Phishing” Scam Actions
In April 2016,
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
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 October 1, 2019, before the court tried damages, remedies and attorneys' fees, California’s Office of Environmental Health Hazard Assessment adopted a regulation that exempted “Exposures to listed chemicals in coffee created by and inherent in the processes of roasting coffee beans or brewing coffee” from Proposition 65’s warning requirement. On August 25, 2020, the court granted the defense motion for summary judgment based on the regulation, and the case was dismissed.
On November 20, 2020, CERT filed a notice of appeal to appeal the ruling on the defense motion for summary judgment. 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.
15
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Stockholders’ Equity
Share Repurchases
On March 3, 2021, the Company’s board of directors authorized a new $
Effective date |
|
Expiration date |
|
Amount |
|
|
Cost of |
|
|
Authorization |
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
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. The board’s authorization of the share repurchase programs does not obligate the Company to acquire any particular amount of common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time.
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 |
|
||||||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||||
Number of common shares acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Average price per common share acquired |
|
$ |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
||||
Total cost of common shares acquired |
|
$ |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
||||
Shares purchased under the Company’s repurchase programs were subsequently 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
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”).
16
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 |
|
||||||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||||
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
||||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic net income per share |
|
$ |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
||||
Diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
||||
Weighted average shares outstanding - |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of share-based awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Assumed exercise of options to purchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
RSUs |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
RSAs |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
PSAs |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares and |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted net income per share |
|
$ |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
||||
For the thirteen weeks ended October 3, 2021, the Company had
For the thirty-nine weeks ended October 3, 2021, the Company had
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 initially consisted of
17
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The notional dollar amount of the two outstanding swaps was $
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.
|
|
As of |
|
|
As of |
|
||||||
|
|
Balance Sheet Location |
|
Fair Value |
|
|
Balance Sheet Location |
|
Fair Value |
|
||
Interest rate swaps |
|
Accrued liabilities |
|
$ |
|
|
Accrued liabilities |
|
$ |
|
||
Interest rate swaps |
|
Other long-term liabilities |
|
|
|
|
Other long-term liabilities |
|
|
|
||
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.
|
|
Thirteen weeks ended |
|
|
Thirty-nine weeks ended |
|
||||||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||||
Consolidated Statements of |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
18
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Comprehensive Income
The following table presents the changes in accumulated other comprehensive income (loss) for the thirty-nine weeks ended September 27, 2020 and October 3, 2021.
|
|
Cash Flow |
|
|
Balance at December 29, 2019 |
|
$ |
( |
) |
Other comprehensive income (loss), net of tax |
|
|
|
|
Unrealized losses on cash flow hedging activities, net of income tax of ($ |
|
|
( |
) |
Reclassification of net losses on cash flow hedges to net income, net of income |
|
|
( |
) |
Total other comprehensive income (loss) |
|
|
( |
) |
Balance at September 27, 2020 |
|
$ |
( |
) |
|
|
|
|
|
Balance at January 3, 2021 |
|
$ |
( |
) |
Other comprehensive income (loss), net of tax |
|
|
|
|
Unrealized gains on cash flow hedging activities, net of income tax of $ |
|
|
|
|
Reclassification of net losses on cash flow hedges to net income, net of income |
|
|
( |
) |
Total other comprehensive income (loss) |
|
|
|
|
Balance at October 3, 2021 |
|
$ |
( |
) |
Amounts reclassified from accumulated other comprehensive income (loss) are included within interest expense, net on the consolidated statements of income.
11. Segments
The Company has
In accordance with ASC 606, the following table represents a disaggregation of revenue for the thirteen and thirty-nine weeks ended October 3, 2021 and September 27, 2020.
|
|
Thirteen weeks ended |
|
|||||||||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||||||||||
Perishables |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
Non-Perishables |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Net Sales |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Thirty-nine weeks ended |
|
|||||||||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||||||||||
Perishables |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
Non-Perishables |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Net Sales |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
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.
19
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 October 3, 2021, the Company granted the following share-based compensation awards under the 2013 Incentive Plan:
Grant Date |
|
RSUs |
|
|
PSAs |
|
|
Options |
|
|||
March 16, 2021 |
|
|
|
|
|
|
|
|
|
|||
June 9, 2021 |
|
|
|
|
|
— |
|
|
|
|
||
September 7, 2021 |
|
|
|
|
|
— |
|
|
|
|
||
September 20, 2021 |
|
|
|
|
|
— |
|
|
|
— |
|
|
Total |
|
|
|
|
|
|
|
|
|
|||
Weighted-average grant date fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Weighted-average exercise price |
|
|
|
|
|
|
|
$ |
|
|||
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
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 vest annually over a period of
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 or
PSAs
PSAs granted in 2017 were subject to the Company achieving certain earnings per share performance targets during fiscal year 2017.
20
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PSAs granted in 2018 were subject to the Company achieving certain earnings before interest and taxes (“EBIT”) performance targets for the 2020 fiscal year.
PSAs granted in 2019 are subject to the Company achieving certain EBIT performance targets for the 2021 fiscal year.
PSAs granted in 2020 are subject to the Company achieving certain earnings before taxes (“EBT”) performance targets for the 2022 fiscal year.
PSAs granted in 2021 are subject to the Company achieving certain EBIT performance targets for the 2023 fiscal year.
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
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 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Income tax benefit |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net share-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following share-based awards were outstanding as of October 3, 2021 and September 27, 2020:
|
|
As of |
|
|||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||
|
|
(in thousands) |
|
|||||
Options |
|
|
|
|
|
|
||
Vested |
|
|
|
|
|
|
||
Unvested |
|
|
|
|
|
|
||
RSUs |
|
|
|
|
|
|
||
PSAs |
|
|
|
|
|
|
||
21
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of October 3, 2021, total unrecognized compensation expense and remaining weighted average recognition period related to outstanding share-based awards was as follows:
|
|
Unrecognized |
|
|
Remaining |
|
||
Options |
|
$ |
|
|
|
|
||
RSUs |
|
|
|
|
|
|
||
PSAs |
|
|
|
|
|
|
||
Total unrecognized compensation expense at October 3, 2021 |
|
$ |
|
|
|
|
||
During the thirty-nine weeks ended October 3, 2021 and September 27, 2020, the Company received $
22
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 2020 fiscal year, filed on February 25, 2021 (“Form 10-K”) with the Securities and Exchange Commission. All dollar amounts included below are in thousands, unless otherwise noted.
Business Overview
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 366 stores in 23 states as of 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.
Our Heritage
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.
Outlook
In 2020, we announced the initial steps of our long-term growth strategy that we believe will transform our company and drive profitable growth. We are executing on this strategy, focusing on the following areas:
23
Recent Developments – COVID-19
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 spread throughout the country, the situation has continued to evolve, including, more recently, the adoption of the COVID-19 vaccine as impacted by vaccine aversion, vaccine mandates and booster vaccines, and the reopening of state economies to pre-pandemic levels. As we cycle periods of 2020 where our results benefited from the initial onset of the pandemic, we are reporting declines in year over year net sales and comparable store sales growth. We have seen varying levels of inflation and experienced obstacles sourcing in certain categories resulting from product supply disruptions complicated by the pandemic. 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 depend on the length, severity and potential resurgence of the pandemic, vaccine efficacy, adoption and mandates, the emergence and severity of 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.
24
Results of Operations for Thirteen Weeks Ended October 3, 2021 and September 27, 2020
The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted.
|
|
Thirteen weeks ended |
|
|||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||
Unaudited Quarterly Consolidated Statement of Income Data: |
|
|
|
|
|
|
||
Net sales |
|
$ |
1,509,633 |
|
|
$ |
1,577,598 |
|
Cost of sales |
|
|
969,904 |
|
|
|
992,829 |
|
Gross profit |
|
|
539,729 |
|
|
|
584,769 |
|
Selling, general and administrative expenses |
|
|
423,416 |
|
|
|
475,053 |
|
Depreciation and amortization (exclusive of depreciation included |
|
|
30,377 |
|
|
|
31,067 |
|
Store closure and other costs, net |
|
|
128 |
|
|
|
268 |
|
Income from operations |
|
|
85,808 |
|
|
|
78,381 |
|
Interest expense, net |
|
|
2,911 |
|
|
|
3,117 |
|
Income before income taxes |
|
|
82,897 |
|
|
|
75,264 |
|
Income tax provision |
|
|
19,030 |
|
|
|
15,023 |
|
Net income |
|
$ |
63,867 |
|
|
$ |
60,241 |
|
|
|
|
|
|
|
|
||
Weighted average shares outstanding - basic |
|
|
114,201 |
|
|
|
117,947 |
|
Diluted effect of equity-based awards |
|
|
617 |
|
|
|
503 |
|
Weighted average shares and equivalent shares outstanding |
|
|
114,818 |
|
|
|
118,450 |
|
Diluted net income per share |
|
$ |
0.56 |
|
|
$ |
0.51 |
|
|
|
Thirteen weeks ended |
|
|||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||
Other Operating Data: |
|
|
|
|
|
|
||
Comparable store sales growth |
|
|
(5.4 |
)% |
|
|
4.2 |
% |
Stores at beginning of period |
|
|
363 |
|
|
|
350 |
|
Closed |
|
|
— |
|
|
|
— |
|
Opened |
|
|
3 |
|
|
|
6 |
|
Stores at end of period |
|
|
366 |
|
|
|
356 |
|
Comparison of Thirteen Weeks Ended October 3, 2021 to Thirteen Weeks Ended
September 27, 2020
Net sales
|
|
Thirteen weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Net sales |
|
$ |
1,509,633 |
|
|
$ |
1,577,598 |
|
|
$ |
(67,965 |
) |
|
|
(4 |
)% |
Comparable store sales growth |
|
|
(5.4 |
)% |
|
|
4.2 |
% |
|
|
|
|
|
|
||
Net sales during the thirteen weeks ended October 3, 2021 totaled $1.5 billion, a decrease of $68.0 million, or 4%, compared to the thirteen weeks ended September 27, 2020. The sales decrease was primarily due to a 5.4% decrease in comparable store sales as a result of cycling the sales impact of the COVID-19 pandemic, partially offset by sales from new stores. Comparable stores contributed approximately 97% of total sales for the thirteen weeks ended October 3, 2021 and approximately 93% for the thirteen weeks ended September 27, 2020.
25
Cost of sales and gross profit
|
|
Thirteen weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Net sales |
|
$ |
1,509,633 |
|
|
$ |
1,577,598 |
|
|
$ |
(67,965 |
) |
|
|
(4 |
)% |
Cost of sales |
|
|
969,904 |
|
|
|
992,829 |
|
|
|
(22,925 |
) |
|
|
(2 |
)% |
Gross profit |
|
|
539,729 |
|
|
|
584,769 |
|
|
|
(45,040 |
) |
|
|
(8 |
)% |
Gross margin |
|
|
35.8 |
% |
|
|
37.1 |
% |
|
|
(1.3 |
)% |
|
|
|
|
Gross profit totaled $539.7 million during the thirteen weeks ended October 3, 2021, a decrease of $45.0 million, or 8%, compared to the thirteen weeks ended September 27, 2020, driven by decreased sales volume for the reasons discussed above. Gross margin decreased by 1.3% to 35.8%, compared to 37.1% for the thirteen weeks ended October 3, 2021, primarily from cycling elevated demand in the prior year period due to the COVID-19 pandemic, in addition to the balancing of cost inflation and retail pricing.
Selling, general and administrative expenses
|
|
Thirteen weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Selling, general and administrative |
|
$ |
423,416 |
|
|
$ |
475,053 |
|
|
$ |
(51,637 |
) |
|
|
(11 |
)% |
Percentage of net sales |
|
|
28.0 |
% |
|
|
30.1 |
% |
|
|
(2.1 |
)% |
|
|
|
|
Selling, general and administrative expenses decreased $51.6 million, or 11%, compared to the thirteen weeks ended September 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 decreased to 28.0% from 30.1%.
Depreciation and amortization
|
|
Thirteen weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Depreciation and amortization |
|
$ |
30,377 |
|
|
$ |
31,067 |
|
|
$ |
(690 |
) |
|
|
(2 |
)% |
Percentage of net sales |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
0.0 |
% |
|
|
|
|
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) remained flat at 2.0%.
26
Store closure and other costs, net
|
|
Thirteen weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Store closure and other costs, net |
|
$ |
128 |
|
|
$ |
268 |
|
|
$ |
(140 |
) |
|
|
(52 |
)% |
Percentage of net sales |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
Store closure and other costs, net decreased $0.1 million to $0.1 million for the 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.
Interest expense, net
|
|
Thirteen weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Long-term debt |
|
$ |
1,133 |
|
|
$ |
1,358 |
|
|
$ |
(225 |
) |
|
|
(17 |
)% |
Capital and financing leases |
|
|
223 |
|
|
|
235 |
|
|
|
(12 |
) |
|
|
(5 |
)% |
Deferred financing costs |
|
|
141 |
|
|
|
141 |
|
|
|
— |
|
|
|
0 |
% |
Interest rate hedge and other |
|
|
1,414 |
|
|
|
1,383 |
|
|
|
31 |
|
|
|
2 |
% |
Total interest expense, net |
|
$ |
2,911 |
|
|
$ |
3,117 |
|
|
$ |
(206 |
) |
|
|
(7 |
)% |
The decrease in interest expense, net was primarily due to the decrease in the average balance outstanding under the Amended and Restated Credit Agreement.
Income tax provision
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:
|
|
Thirteen weeks ended |
|
|
|||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
||
Federal statutory rate |
|
|
21.0 |
% |
|
|
21.0 |
% |
|
Change in income taxes resulting from: |
|
|
|
|
|
|
|
||
State income taxes, net of federal benefit |
|
|
3.9 |
% |
|
|
6.0 |
% |
|
Enhanced charitable contributions |
|
|
(1.3 |
)% |
|
|
(0.7 |
)% |
|
Federal credits |
|
|
(0.3 |
)% |
|
|
(0.1 |
)% |
|
Share-based payment awards |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
Return to Provision |
|
|
(0.6 |
)% |
|
|
(7.3 |
)% |
|
Other, net |
|
|
0.3 |
% |
|
|
1.0 |
% |
|
Effective tax rate |
|
|
23.0 |
% |
|
|
20.0 |
% |
|
The effective tax rate increased to 23.0% for the thirteen weeks ended October 3, 2021 from 20.0% for the thirteen weeks ended September 27, 2020. The increase in the effective tax rate was primarily due to a decrease in return to provision benefit compared to the prior year period.
27
Net income
|
|
Thirteen weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Net income |
|
$ |
63,867 |
|
|
$ |
60,241 |
|
|
$ |
3,626 |
|
|
|
6 |
% |
Percentage of net sales |
|
|
4.2 |
% |
|
|
3.8 |
% |
|
|
0.4 |
% |
|
|
|
|
Net income increased $3.6 million primarily due to lower selling, general and administrative expenses, partially offset by decreased sales.
Diluted earnings per share
|
|
Thirteen weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Diluted earnings per share |
|
$ |
0.56 |
|
|
$ |
0.51 |
|
|
$ |
0.05 |
|
|
|
10 |
% |
Diluted weighted average shares |
|
|
114,818 |
|
|
|
118,450 |
|
|
|
(3,632 |
) |
|
|
|
|
The increase in diluted earnings per share of $0.05 was driven by higher net income in addition to fewer diluted shares outstanding compared to the prior year, due primarily to the share repurchase program.
28
Results of Operations for Thirty-nine Weeks Ended October 3, 2021 and September 27, 2020
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 Thirty-nine Weeks Ended October 3, 2021 to Thirty-nine Weeks Ended
September 27, 2020
|
|
Thirty-nine weeks ended |
|
|||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||
Unaudited Quarterly Consolidated Statement of Income Data: |
|
|
|
|
|
|
||
Net sales |
|
$ |
4,607,073 |
|
|
$ |
4,866,925 |
|
Cost of sales |
|
|
2,931,089 |
|
|
|
3,075,665 |
|
Gross profit |
|
|
1,675,984 |
|
|
|
1,791,260 |
|
Selling, general and administrative expenses |
|
|
1,299,498 |
|
|
|
1,400,234 |
|
Depreciation and amortization (exclusive of depreciation included |
|
|
92,036 |
|
|
|
92,637 |
|
Store closure and other costs, net |
|
|
1,757 |
|
|
|
(344 |
) |
Income from operations |
|
|
282,693 |
|
|
|
298,733 |
|
Interest expense, net |
|
|
8,840 |
|
|
|
11,681 |
|
Income before income taxes |
|
|
273,853 |
|
|
|
287,052 |
|
Income tax provision |
|
|
65,924 |
|
|
|
67,999 |
|
Net income |
|
$ |
207,929 |
|
|
$ |
219,053 |
|
|
|
|
|
|
|
|
||
Weighted average shares outstanding - basic |
|
|
116,497 |
|
|
|
117,775 |
|
Diluted effect of equity-based awards |
|
|
755 |
|
|
|
382 |
|
Weighted average shares and equivalent shares outstanding |
|
|
117,252 |
|
|
|
118,157 |
|
Diluted net income per share |
|
$ |
1.77 |
|
|
$ |
1.85 |
|
|
|
Thirty-nine weeks ended |
|
|||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||
Other Operating Data: |
|
|
|
|
|
|
||
Comparable store sales growth |
|
|
(8.4 |
)% |
|
|
8.0 |
% |
Stores at beginning of period |
|
|
362 |
|
|
|
340 |
|
Closed |
|
|
— |
|
|
|
— |
|
Opened |
|
|
4 |
|
|
|
16 |
|
Stores at end of period |
|
|
366 |
|
|
356 |
|
|
29
Net Sales
|
|
Thirty-nine weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Net sales |
|
$ |
4,607,073 |
|
|
$ |
4,866,925 |
|
|
$ |
(259,852 |
) |
|
|
(5 |
)% |
Comparable store sales growth |
|
|
(8.4 |
)% |
|
|
8.0 |
% |
|
|
|
|
|
|
||
Net sales during the thirty-nine weeks ended October 3, 2021 totaled $4.6 billion, a decrease of $259.9 million, or 5%, over the same period of the prior fiscal year. The sales decrease was primarily due to a 8.4% decrease in comparable store sales as a result of cycling the sales impact of COVID-19 in the prior year, partially offset by sales from new stores. Comparable stores contributed approximately 96% of total sales for the thirty-nine weeks ended October 3, 2021 and approximately 93% for the thirty-nine weeks ended September 27, 2020.
Cost of sales and gross profit
|
|
Thirty-nine weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Net sales |
|
$ |
4,607,073 |
|
|
$ |
4,866,925 |
|
|
$ |
(259,852 |
) |
|
|
(5 |
)% |
Cost of sales |
|
|
2,931,089 |
|
|
|
3,075,665 |
|
|
|
(144,576 |
) |
|
|
(5 |
)% |
Gross profit |
|
|
1,675,984 |
|
|
|
1,791,260 |
|
|
|
(115,276 |
) |
|
|
(6 |
)% |
Gross margin |
|
|
36.4 |
% |
|
|
36.8 |
% |
|
|
(0.4 |
)% |
|
|
|
|
Gross profit totaled $1.7 billion during the thirty-nine weeks ended October 3, 2021, a decrease of $115.3 million, or 6%, compared to the thirty-nine weeks ended September 27, 2020. Gross margin decreased to 36.4% for the thirty-nine weeks ended October 3, 2021 compared to 36.8% for the thirty-nine weeks ended September 27, 2020. The decreases were primarily driven by the 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
|
|
Thirty-nine weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Selling, general and administrative expenses |
|
$ |
1,299,498 |
|
|
$ |
1,400,234 |
|
|
$ |
(100,736 |
) |
|
|
(7 |
)% |
Percentage of net sales |
|
|
28.2 |
% |
|
|
28.8 |
% |
|
|
(0.6 |
)% |
|
|
|
|
Selling, general and administrative expenses decreased $100.7 million, or 7%, compared to the thirty-nine weeks ended September 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 decreased to 28.2% from 28.8%.
30
Depreciation and amortization
|
|
Thirty-nine weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Depreciation and amortization |
|
$ |
92,036 |
|
|
$ |
92,637 |
|
|
$ |
(601 |
) |
|
|
(1 |
)% |
Percentage of net sales |
|
|
2.0 |
% |
|
|
1.9 |
% |
|
|
0.1 |
% |
|
|
|
|
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 slightly to 2.0% from 1.9% as a result of sales deleverage.
Store closure and other costs, net
|
|
Thirty-nine weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Store closure and other costs, net |
|
$ |
1,757 |
|
|
$ |
(344 |
) |
|
$ |
2,101 |
|
|
|
611 |
% |
Percentage of net sales |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
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 represents a recognized gain on the assignment of the lease for one of our closed locations in the first quarter of 2020.
Interest expense, net
|
|
Thirty-nine weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Long-term debt |
|
$ |
3,474 |
|
|
$ |
7,661 |
|
|
$ |
(4,187 |
) |
|
|
(55 |
)% |
Capital and financing leases |
|
|
686 |
|
|
|
719 |
|
|
|
(33 |
) |
|
|
(5 |
)% |
Deferred financing costs |
|
|
423 |
|
|
|
423 |
|
|
|
— |
|
|
|
0 |
% |
Interest rate hedge and other |
|
|
4,257 |
|
|
|
2,878 |
|
|
|
1,379 |
|
|
|
48 |
% |
Total interest expense, net |
|
$ |
8,840 |
|
|
$ |
11,681 |
|
|
$ |
(2,841 |
) |
|
|
(24 |
)% |
The decrease in interest expense, net is primarily due to the decrease in the average balance outstanding under the Amended and Restated Credit Agreement. This is partially offset by the interest expense paid as a result of an unfavorable interest rate swap.
31
Income tax provision
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:
|
|
Thirty-nine weeks ended |
|
|||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||
Federal statutory rate |
|
|
21.0 |
% |
|
|
21.0 |
% |
Decrease in income taxes resulting from: |
|
|
|
|
|
|
||
State income taxes, net of federal benefit |
|
|
4.5 |
% |
|
|
5.0 |
% |
Enhanced charitable contributions |
|
|
(1.2 |
)% |
|
|
(0.8 |
)% |
Federal Credits |
|
|
(0.4 |
)% |
|
|
(0.4 |
)% |
Share-based payment awards |
|
|
(0.1 |
)% |
|
|
0.2 |
% |
Return to Provision |
|
|
(0.2 |
)% |
|
|
(1.9 |
)% |
Other, net |
|
|
0.5 |
% |
|
|
0.6 |
% |
Effective tax rate |
|
|
24.1 |
% |
|
|
23.7 |
% |
The effective tax rate increased to 24.1% for the thirty-nine weeks ended October 3, 2021 from 23.7% in the same period last year. The increase in the effective tax rate is primarily due to a decrease in return to provision benefit compared to the prior year period.
Net income
|
|
Thirty-nine weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Net income |
|
$ |
207,929 |
|
|
$ |
219,053 |
|
|
$ |
(11,124 |
) |
|
|
(5 |
)% |
Percentage of net sales |
|
|
4.5 |
% |
|
|
4.5 |
% |
|
|
0.0 |
% |
|
|
|
|
Net income decreased $11.1 million primarily due to decreased net sales, partially offset by lower selling, general and administrative expenses.
Diluted earnings per share
|
|
Thirty-nine weeks ended |
|
|
|
|
|
|
|
|||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
Change |
|
|
% Change |
|
||||
Diluted earnings per share |
|
$ |
1.77 |
|
|
$ |
1.85 |
|
|
$ |
(0.08 |
) |
|
|
(4 |
)% |
Diluted weighted average shares |
|
|
117,252 |
|
|
|
118,157 |
|
|
|
(905 |
) |
|
|
|
|
The decrease in diluted earnings per share of $0.08 was driven by lower net income, partially offset by fewer diluted shares outstanding compared to the prior year, due primarily to the share repurchase program.
32
Return on Invested Capital
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 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.
Our calculation of ROIC for the fiscal periods indicated was as follows:
|
|
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 |
% |
33
Liquidity and Capital Resources
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):
|
|
Thirty-nine weeks ended |
|
|||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||
Cash, cash equivalents and restricted cash at end of period |
|
$ |
262,017 |
|
|
$ |
139,044 |
|
Cash flows from operating activities |
|
$ |
296,659 |
|
|
$ |
410,264 |
|
Cash flows used in investing activities |
|
$ |
(70,010 |
) |
|
$ |
(95,874 |
) |
Cash flows used in financing activities |
|
$ |
(136,073 |
) |
|
$ |
(262,131 |
) |
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. 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.
Operating Activities
Cash flows from operating activities 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. The decrease in cash flows from operating activities was primarily a result of changes in working capital.
Cash flows provided by/(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. The decrease was primarily driven by the payout of incentive compensation amounts earned in the prior year and inventory stock recovery in the current year after levels were depleted during the height of the pandemic in the prior year.
Investing Activities
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 $70.0 million and $95.9 million, for the thirty-nine weeks ended October 3, 2021 and September 27, 2020, respectively.
34
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 corporate capital expenditures. We expect to fund our capital expenditures with cash on hand and cash generated from operating activities.
Financing 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. During the thirty-nine weeks ended 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 facilities.
Long-Term Debt and Credit Facilities
Long-term debt outstanding was $250.0 million as of October 3, 2021 and 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).
Share Repurchase Program
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 October 3, 2021.
Effective date |
|
Expiration date |
|
Amount |
|
|
Cost of |
|
|
Authorization |
|
|||
February 20, 2018 |
|
December 31, 2019 |
|
$ |
350,000 |
|
|
$ |
308,017 |
|
|
$ |
— |
|
March 3, 2021 |
|
March 3, 2024 |
|
$ |
300,000 |
|
|
$ |
137,484 |
|
|
$ |
162,516 |
|
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’s authorization of the share repurchase program does not obligate our Company to acquire any particular amount of common stock, and the repurchase program may be commenced, suspended, or discontinued at any time.
Share repurchase activity under our repurchase program for the periods indicated was as follows (total cost in thousands):
|
|
Thirteen weeks ended |
|
|
|
Thirty-nine weeks ended |
|
||||||||||
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
|
|
October 3, 2021 |
|
|
September 27, 2020 |
|
||||
Number of common shares acquired |
|
|
2,079,420 |
|
|
|
— |
|
|
|
|
5,360,037 |
|
|
|
— |
|
Average price per common share acquired |
|
$ |
24.05 |
|
|
$ |
— |
|
|
|
$ |
25.65 |
|
|
$ |
— |
|
Total cost of common shares acquired |
|
$ |
50,000 |
|
|
$ |
— |
|
|
|
$ |
137,484 |
|
|
$ |
— |
|
Shares purchased under our repurchase programs were subsequently 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.
35
Contractual Obligations
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 October 3, 2021, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
|
|
Payments Due by Period |
|
|||||||||||||||||
|
|
Total |
|
|
Less Than |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More Than |
|
|||||
|
|
(in thousands) |
|
|||||||||||||||||
$700.0 million Credit Agreement (1) |
|
$ |
250,000 |
|
|
$ |
— |
|
|
$ |
250,000 |
|
|
$ |
— |
|
|
$ |
— |
|
Interest payments on $700.0 million |
|
|
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 |
|
We have other contractual commitments which were presented under Contractual Obligations in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021, and for which there have not been material changes since that filing through October 3, 2021.
Off-Balance Sheet Arrangements
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.
Impact of Inflation and Deflation
Inflation and deflation in the prices of food and other products we sell may periodically affect our sales, gross profit and gross margin. Food inflation, when combined with reduced consumer spending, could also reduce sales, gross profit margins and comparable store sales. 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. The short-term impact of inflation and deflation is largely dependent on whether or not the effects are passed through to our customers, which is subject to competitive market conditions.
36
Food inflation and deflation is affected by a variety of factors and our determination of whether to pass on the effects of inflation or deflation to our customers is made in conjunction with our overall pricing and marketing strategies, as well as our competitors’ responses. Although we may experience periodic effects on sales, gross profit, gross margins and cash flows as a result of changing prices, including most recently from inflationary pressures due primarily to supply chain disruptions complicated by the COVID-19 pandemic, we do not expect the effect of inflation or deflation to have a material impact on our ability to execute our long-term business strategy.
Critical Accounting Estimates
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 inventory valuations, lease assumptions, self-insurance reserves, impairment of long-lived assets, fair values of share-based awards, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
There have been no substantial changes to these estimates, or the policies related to them during thirteen and thirty-nine weeks ended 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 January 3, 2021.
Recently Issued Accounting Pronouncements
See Note 2, “Summary of Significant Accounting Policies” to our accompanying unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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 could be exposed to fluctuations in interest rates. Based solely on the $250.0 million principal outstanding under our Amended and Restated Credit Agreement as of October 3, 2021, each hundred basis point change in LIBOR would result in a change in interest expense by $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 two outstanding swaps at October 3, 2021 and 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 $250.0 million principal outstanding under our Amended and Restated Credit Agreement as of October 3, 2021, each hundred basis point change in LIBOR would result in no change in interest expense 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 unaudited consolidated financial statements).
37
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
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 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.
Changes in Internal Control Over Financial Reporting
During the quarterly period ended 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.
38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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.
Item 1A. Risk Factors.
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 January 3, 2021.
Supply chain disruptions have delayed our store growth plans.
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. We may continue to experience delays in our new store openings until disruptions to the global supply chain have been resolved, the timing of which is uncertain.
39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table provides information about our share repurchase activity during the thirteen weeks ended October 3, 2021.
Period (1) |
|
Total number |
|
|
Average |
|
|
Total number |
|
|
Approximate |
|
||||
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 |
|
40
Item 6. Exhibits.
Exhibit Number |
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Description |
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|
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10.1 |
|
Offer Letter from Sprouts Farmers Market, Inc., to Lawrence “Chip” Molloy, dated August 31, 2021 (1) |
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|
|
10.2 |
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|
|
|
|
10.3 |
|
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|
|
|
31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
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31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
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|
|
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32.2 |
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|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
SPROUTS FARMERS MARKET, INC. |
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|
|
Date: November 4, 2021 |
By: |
/s/ Lawrence P. Molloy |
|
Name: |
Lawrence P. Molloy |
|
Title: |
Chief Financial Officer |
|
|
(Principal Financial Officer) |
42
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Jack L. Sinclair, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Sprouts Farmers Market, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 4, 2021 |
|
/s/ Jack L. Sinclair |
|
|
Jack L. Sinclair |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Lawrence P. Molloy, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Sprouts Farmers Market, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 4, 2021 |
|
/s/ Lawrence P. Molloy |
|
|
Lawrence P. Molloy |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Sprouts Farmers Market, Inc. (the “Company”), on Form 10-Q for the quarterly period ended October 3, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jack L. Sinclair, Chief Executive Officer of the Company, certify, based on my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 4, 2021 |
|
/s/ Jack L. Sinclair |
|
|
Jack L. Sinclair |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
This certification accompanies the Report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Sprouts Farmers Market, Inc. (the “Company”), on Form 10-Q for the quarterly period ended October 3, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lawrence P. Molloy, Chief Financial Officer of the Company, certify, based on my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 4, 2021 |
|
/s/ Lawrence P. Molloy |
|
|
Lawrence P. Molloy |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
This certification accompanies the Report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.