Sprouts Farmers Market(SFM) - 2024 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for the thirteen and thirty-nine weeks ended October 1, 2023, covering balance sheets, income, and cash flows, along with detailed notes on key activities Consolidated Balance Sheets As of October 1, 2023, total assets increased to $3.29 billion from $3.07 billion, driven by operating lease assets and property, with total liabilities rising to $2.18 billion and stockholders' equity reaching $1.12 billion Balance Sheet Summary (in thousands) | Account | October 1, 2023 | January 1, 2023 | | :--- | :--- | :--- | | Total Current Assets | $620,551 | $673,804 | | Total Assets | $3,290,508 | $3,070,380 | | Total Current Liabilities | $541,545 | $522,380 | | Total Liabilities | $2,175,499 | $2,023,918 | | Total Stockholders' Equity | $1,115,009 | $1,046,462 | Consolidated Statements of Income Net sales increased to $1.71 billion in Q3 and $5.14 billion YTD, but higher SG&A and store closure costs led to a slight decrease in Q3 net income and a 3.3% decline YTD to $208.8 million Income Statement - Thirteen Weeks Ended (in thousands) | Metric | October 1, 2023 | October 2, 2022 | | :--- | :--- | :--- | | Net Sales | $1,713,282 | $1,591,026 | | Gross Profit | $625,434 | $583,650 | | Income from Operations | $87,655 | $90,339 | | Net Income | $65,313 | $65,740 | | Diluted EPS | $0.64 | $0.61 | Income Statement - Thirty-nine Weeks Ended (in thousands) | Metric | October 1, 2023 | October 2, 2022 | | :--- | :--- | :--- | | Net Sales | $5,138,839 | $4,827,669 | | Gross Profit | $1,901,468 | $1,775,755 | | Store closure and other costs, net | $33,880 | $3,034 | | Income from Operations | $280,793 | $296,490 | | Net Income | $208,807 | $216,044 | | Diluted EPS | $2.01 | $1.97 | Consolidated Statements of Cash Flows Net cash from operating activities increased to $409.0 million YTD, while cash used in investing activities rose to $178.0 million and financing activities increased to $272.3 million due to debt repayments and share repurchases Cash Flow Summary - Thirty-nine Weeks Ended (in thousands) | Activity | October 1, 2023 | October 2, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $409,025 | $306,790 | | Net cash used in investing activities | ($178,048) | ($80,749) | | Net cash used in financing activities | ($272,320) | ($154,993) | | (Decrease)/Increase in cash | ($41,343) | $71,048 | Notes to Consolidated Financial Statements Notes detail significant accounting policies and events, including the $31.1 million acquisition of Ronald Cohn, Inc., 11 store closures with a $27.8 million impairment, and $182.0 million in share repurchases YTD - On March 20, 2023, the company acquired Ronald Cohn, Inc., which owned two stores operating under the 'Sprouts Farmers Market' name, for $18.1 million in stock and $13.0 million in cash[108] - In 2023, the company closed 11 underperforming stores, resulting in a $27.8 million impairment charge for leasehold improvements and right-of-use assets[106] Share Repurchase Activity (YTD) | Period | Shares Acquired | Total Cost (in thousands) | | :--- | :--- | :--- | | Thirty-nine weeks ended Oct 1, 2023 | 5,307,759 | $181,974 | | Thirty-nine weeks ended Oct 2, 2022 | 5,437,054 | $155,094 | - Total assets increased to $3.29 billion as of October 1, 2023, from $3.07 billion as of January 1, 2023, primarily due to increases in operating lease assets and property and equipment[11] - Net cash provided by operating activities for the thirty-nine weeks ended October 1, 2023, was $409.0 million, a significant increase from $306.8 million in the prior-year period[24] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q3 2023 performance, highlighting an 8% net sales increase driven by new stores and comparable sales growth, strategic initiatives, and operational results, noting impacts from higher SG&A and store closure costs on net income, while maintaining strong liquidity Business Overview and Strategy Sprouts operates 401 stores in 23 states as a specialty retailer of fresh, natural, and organic food, with a strategy focused on target customers, smaller store formats, supply chain optimization, data analytics, and talent investment - As of October 1, 2023, the company operated 401 stores in 23 states[114] - Strategic pillars include: winning with target customers, updating store formats, creating an advantaged fresh supply chain, refining brand and marketing, and engaging talent[118][121] - The company has opened 36 stores in its new, smaller format and aims for approximately 10% annual unit growth starting in 2024[118] Results of Operations (Q3 2023 vs Q3 2022) Q3 2023 net sales grew 8% to $1.7 billion with 3.9% comparable store sales growth, but higher SG&A and distribution costs led to a slight gross margin decrease and flat net income of $65.3 million, while diluted EPS rose to $0.64 Q3 Performance Summary | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,713.3M | $1,591.0M | +8% | | Comparable Store Sales Growth | 3.9% | 2.4% | +1.5 p.p. | | Gross Margin | 36.5% | 36.7% | -0.2 p.p. | | SG&A as % of Sales | 29.3% | 29.0% | +0.3 p.p. | | Diluted EPS | $0.64 | $0.61 | +5% | Results of Operations (YTD 2023 vs YTD 2022) YTD 2023 net sales increased 6% to $5.1 billion with 3.4% comparable store sales growth and improved gross margin, but a surge in store closure costs to $33.9 million led to a 3% decrease in net income to $208.8 million YTD Performance Summary | Metric | YTD 2023 | YTD 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $5,138.8M | $4,827.7M | +6% | | Comparable Store Sales Growth | 3.4% | 2.0% | +1.4 p.p. | | Gross Margin | 37.0% | 36.8% | +0.2 p.p. | | Store closure costs, net | $33.9M | $3.0M | +1017% | | Net Income | $208.8M | $216.0M | -3% | | Diluted EPS | $2.01 | $1.97 | +2% | Liquidity and Capital Resources The company's liquidity is primarily from operations, generating $409.0 million YTD, with cash used for $178.0 million in capital expenditures and $272.3 million in financing activities, including $100.0 million debt repayment and $180.4 million share repurchases - Cash flows from operating activities increased to $409.0 million YTD, up from $306.8 million in the prior year period[151][152] - Financing activities used $272.3 million YTD, primarily for $180.4 million in stock repurchases and $100.0 million in payments on the Credit Agreement[156] - As of October 1, 2023, $231.5 million remained available under the $600 million share repurchase program authorized through December 31, 2024[160] - The company's long-term growth strategy focuses on winning with target customers, updating store formats, creating an advantaged fresh supply chain, refining marketing, and engaging talent[118][121] - In the first 39 weeks of 2023, the company opened 24 new stores, acquired 2, and closed 11 underperforming stores, ending the period with 401 stores[134] - Return on Invested Capital (ROIC), a non-GAAP measure, including operating leases, increased to 12.9% for the rolling four quarters ended October 1, 2023, up from 12.0% in the prior year period[149] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its variable-rate Credit Agreement, where a 100 basis point change in SOFR would alter annual interest expense by $1.5 million on $150.0 million outstanding debt - The company is exposed to interest rate risk from its variable-rate Credit Agreement tied to SOFR[173] - A 1% (100 basis point) change in SOFR would result in a $1.5 million annual change in interest expense based on the $150.0 million outstanding debt as of October 1, 2023[173] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of October 1, 2023, with no material changes to internal controls over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of October 1, 2023[176] - There were no changes in internal controls over financial reporting during the third quarter of 2023 that materially affected, or were reasonably likely to materially affect, these controls[177] PART II - OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, with the Proposition 65 Coffee Action lawsuit concluded in its favor in February 2023, and no expected material adverse effects from current cases - The company is party to legal proceedings arising in the ordinary course of business, which have not resulted in material losses to date[179] - The long-running Proposition 65 Coffee Action lawsuit was concluded in February 2023 when the Supreme Court of the State of California denied the plaintiff's petition for review, affirming a lower court's decision in favor of the defendants[69] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended January 1, 2023 - There have been no material changes to the Risk Factors described in the company's Annual Report on Form 10-K for the fiscal year ended January 1, 2023[182] Issuer Purchases of Equity Securities During Q3 2023, the company repurchased 831,416 shares for approximately $32.1 million under its $600 million program, with $231.5 million remaining available as of October 1, 2023 Share Repurchases in Q3 2023 | Period | Total Shares Purchased | Average Price Paid | Total Cost | | :--- | :--- | :--- | :--- | | July 3 - July 30, 2023 | 176,918 | $37.17 | ~$6.6M | | July 31 - Aug 27, 2023 | 265,699 | $38.02 | ~$10.1M | | Aug 28 - Oct 1, 2023 | 388,799 | $39.59 | ~$15.4M | | Total | 831,416 | - | ~$32.1M | - The current $600 million share repurchase program is effective through December 31, 2024. As of October 1, 2023, $231,462,000 remained available for repurchase[184] Other Information On August 11, 2023, CFO Lawrence Molloy adopted a Rule 10b5-1 trading plan for the sale of up to 108,568 shares of common stock, with no other such plans adopted or terminated by executives during the quarter - On August 11, 2023, CFO Lawrence Molloy adopted a Rule 10b5-1 trading plan for the sale of up to 108,568 shares of common stock[185] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications required by Sarbanes-Oxley Sections 302 and 906, and Inline XBRL data files - Filed exhibits include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906[188] - The filing includes Inline XBRL documents for financial data tagging[188]