10-Q 1 sfm-20220403.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

 

For the quarterly period ended April 3, 2022

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: 001-36029

img143167736_0.jpg 

Sprouts Farmers Market, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

32-0331600

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

5455 East High Street, Suite 111

Phoenix, Arizona 85054

(Address of principal executive offices and zip code)

(480) 814-8016

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

Name of Each Exchange on Which Registered

 

Common Stock, $0.001 par value

SFM

NASDAQ Global Select Market

 

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

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

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 No

As of May 2, 2022, the registrant had 109,622,826 shares of common stock, $0.001 par value per share, outstanding.

 


 

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED APRIL 3, 2022

TABLE OF CONTENTS

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements.

4

 

 

 

 

Consolidated Balance Sheets as of April 3, 2022 (unaudited) and January 2, 2022

4

 

 

 

 

Consolidated Statements of Income for the thirteen weeks ended April 3, 2022 and April 4, 2021 (unaudited)

5

 

 

 

 

Consolidated Statements of Comprehensive Income for the thirteen weeks ended April 3, 2022 and April 4, 2021 (unaudited)

6

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the thirteen weeks ended April 3, 2022 and April 4, 2021 (unaudited)

7

 

 

 

 

Consolidated Statements of Cash Flows for the thirteen weeks ended April 3, 2022 and April 4, 2021 (unaudited)

8

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

9

 

 

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

21

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

31

 

 

Item 4. Controls and Procedures.

31

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings.

32

 

 

Item 1A. Risk Factors.

32

 

 

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

33

 

 

Item 6. Exhibits.

34

 

 

Signatures

35

 

 


 

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 2, 2022, 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)

 

 

 

April 3, 2022

 

 

January 2, 2022

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

324,301

 

 

$

245,287

 

Accounts receivable, net

 

 

13,675

 

 

 

21,574

 

Inventories

 

 

272,178

 

 

 

265,387

 

Prepaid expenses and other current assets

 

 

30,556

 

 

 

35,468

 

Total current assets

 

 

640,710

 

 

 

567,716

 

Property and equipment, net of accumulated depreciation

 

 

701,102

 

 

 

716,029

 

Operating lease assets, net

 

 

1,086,008

 

 

 

1,072,019

 

Intangible assets, net of accumulated amortization

 

 

184,960

 

 

 

184,960

 

Goodwill

 

 

368,878

 

 

 

368,878

 

Other assets

 

 

16,096

 

 

 

13,513

 

Total assets

 

$

2,997,754

 

 

$

2,923,115

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

165,703

 

 

$

145,901

 

Accrued liabilities

 

 

143,462

 

 

 

155,996

 

Accrued salaries and benefits

 

 

44,637

 

 

 

58,743

 

Accrued income tax

 

 

15,275

 

 

 

 

Current portion of operating lease liabilities

 

 

153,500

 

 

 

151,755

 

Current portion of finance lease liabilities

 

 

1,116

 

 

 

1,078

 

Total current liabilities

 

 

523,693

 

 

 

513,473

 

Long-term operating lease liabilities

 

 

1,106,716

 

 

 

1,095,909

 

Long-term debt and finance lease liabilities

 

 

259,442

 

 

 

259,656

 

Other long-term liabilities

 

 

35,743

 

 

 

36,306

 

Deferred income tax liability

 

 

60,186

 

 

 

57,895

 

Total liabilities

 

 

1,985,780

 

 

 

1,963,239

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Undesignated preferred stock; $0.001 par value; 10,000,000 shares
   authorized,
no shares issued and outstanding

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized,
   
110,243,288 shares issued and outstanding, April 3, 2022;
   
111,114,374 shares issued and outstanding, January 2, 2022

 

 

110

 

 

 

111

 

Additional paid-in capital

 

 

711,712

 

 

 

704,701

 

Accumulated other comprehensive loss

 

 

(1,263

)

 

 

(3,758

)

Retained earnings

 

 

301,415

 

 

 

258,822

 

Total stockholders’ equity

 

 

1,011,974

 

 

 

959,876

 

Total liabilities and stockholders’ equity

 

$

2,997,754

 

 

$

2,923,115

 

 

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)

 

 

 

Thirteen weeks ended

 

 

 

April 3, 2022

 

 

April 4, 2021

 

Net sales

 

$

1,641,161

 

 

$

1,575,447

 

Cost of sales

 

 

1,029,413

 

 

 

989,273

 

Gross profit

 

 

611,748

 

 

 

586,174

 

Selling, general and administrative expenses

 

 

459,910

 

 

 

439,662

 

Depreciation and amortization (exclusive
   of depreciation included in cost of
   sales)

 

 

31,820

 

 

 

31,229

 

Store closure and other costs, net

 

 

377

 

 

 

2,048

 

Income from operations

 

 

119,641

 

 

 

113,235

 

Interest expense, net

 

 

3,039

 

 

 

2,991

 

Income before income taxes

 

 

116,602

 

 

 

110,244

 

Income tax provision

 

 

28,295

 

 

 

27,196

 

Net income

 

$

88,307

 

 

$

83,048

 

Net income per share:

 

 

 

 

 

 

Basic

 

$

0.80

 

 

$

0.70

 

Diluted

 

$

0.79

 

 

$

0.70

 

Weighted average shares outstanding:

 

 

 

 

 

 

Basic

 

 

110,903

 

 

 

118,044

 

Diluted

 

 

111,833

 

 

 

118,607

 

 

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)

 

 

 

 

Thirteen weeks ended

 

 

 

April 3, 2022

 

 

April 4, 2021

 

Net income

 

$

88,307

 

 

$

83,048

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

Unrealized gains (losses) on cash flow
   hedging activities, net of income tax of
    $
1,240 and $800

 

 

3,586

 

 

 

2,314

 

Reclassification of net gains (losses) on
   cash flow hedges to net income, net
   of income tax of ($
377) and ($370)

 

 

(1,091

)

 

 

(1,070

)

Total other comprehensive income (loss)

 

 

2,495

 

 

 

1,244

 

 

 

 

 

 

 

 

Comprehensive income

 

$

90,802

 

 

$

84,292

 

 

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 weeks ended April 3, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common
Stock

 

 

Additional
Paid In
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
Stockholders’
Equity

 

Balances at January 2, 2022

 

 

111,114,374

 

 

$

111

 

 

$

704,701

 

 

$

258,822

 

 

$

(3,758

)

 

$

959,876

 

Net income

 

 

 

 

 

 

 

 

 

 

 

88,307

 

 

 

 

 

 

88,307

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,495

 

 

 

2,495

 

Issuance of shares under stock plans

 

 

610,101

 

 

 

 

 

 

2,555

 

 

 

 

 

 

 

 

 

2,555

 

Repurchase and retirement of common stock

 

 

(1,481,187

)

 

 

(1

)

 

 

 

 

 

(45,714

)

 

 

 

 

 

(45,715

)

Share-based compensation

 

 

 

 

 

 

 

 

4,456

 

 

 

 

 

 

 

 

 

4,456

 

Balances at April 3, 2022

 

 

110,243,288

 

 

$

110

 

 

$

711,712

 

 

$

301,415

 

 

$

(1,263

)

 

$

1,011,974

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the thirteen weeks ended April 4, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common
Stock

 

 

Additional
Paid In
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
Stockholders’
Equity

 

Balances at January 3, 2021

 

 

117,953,435

 

 

$

118

 

 

$

686,648

 

 

$

203,001

 

 

$

(8,474

)

 

$

881,293

 

Net income

 

 

 

 

 

 

 

 

 

 

 

83,048

 

 

 

 

 

 

83,048

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,244

 

 

 

1,244

 

Issuance of shares under stock plans

 

 

371,109

 

 

 

 

 

 

881

 

 

 

 

 

 

 

 

 

881

 

Repurchase and retirement of common stock

 

 

(129,968

)

 

 

 

 

 

 

 

 

(3,209

)

 

 

 

 

 

(3,209

)

Share-based compensation

 

 

 

 

 

 

 

 

3,613

 

 

 

 

 

 

 

 

 

3,613

 

Balances at April 4, 2021

 

 

118,194,576

 

 

$

118

 

 

$

691,142

 

 

$

282,840

 

 

$

(7,230

)

 

$

966,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

7


 

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

 

 

Thirteen weeks ended

 

 

 

April 3, 2022

 

 

April 4, 2021

 

Operating activities

 

 

 

 

 

 

Net income

 

$

88,307

 

 

$

83,048

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

32,720

 

 

 

31,841

 

Operating lease asset amortization

 

 

28,043

 

 

 

25,816

 

Store closure and other costs, net

 

 

171

 

 

 

 

Share-based compensation

 

 

4,456

 

 

 

3,613

 

Deferred income taxes

 

 

2,291

 

 

 

2,757

 

Other non-cash items

 

 

313

 

 

 

207

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

9,770

 

 

 

8,795

 

Inventories

 

 

(6,790

)

 

 

(16,733

)

Prepaid expenses and other current assets

 

 

3,613

 

 

 

(7,747

)

Other assets

 

 

1,757

 

 

 

(1,078

)

Accounts payable

 

 

27,645

 

 

 

27,004

 

Accrued liabilities

 

 

(6,857

)

 

 

(10,568

)

Accrued salaries and benefits

 

 

(14,106

)

 

 

(32,959

)

Accrued income tax

 

 

15,275

 

 

 

16,251

 

Operating lease liabilities

 

 

(32,180

)

 

 

(28,719

)

Other long-term liabilities

 

 

(1,399

)

 

 

3,910

 

Cash flows from operating activities

 

 

153,029

 

 

 

105,438

 

Investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

(27,227

)

 

 

(16,605

)

Cash flows used in investing activities

 

 

(27,227

)

 

 

(16,605

)

Financing activities

 

 

 

 

 

 

Payments on finance lease liabilities

 

 

(176

)

 

 

(163

)

Payments of deferred financing costs

 

 

(3,373

)

 

 

 

Repurchase of common stock

 

 

(45,715

)

 

 

(3,209

)

Proceeds from exercise of stock options

 

 

2,555

 

 

 

881

 

Cash flows used in financing activities

 

 

(46,709

)

 

 

(2,491

)

Increase in cash, cash equivalents, and restricted cash

 

 

79,093

 

 

 

86,342

 

Cash, cash equivalents, and restricted cash at beginning of the period

 

 

247,004

 

 

 

171,441

 

Cash, cash equivalents, and restricted cash at the end of the period

 

$

326,097

 

 

$

257,783

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

3,044

 

 

$

2,974

 

Cash refunded for income taxes

 

 

(46

)

 

 

(226

)

Leased assets obtained in exchange for new operating lease liabilities

 

 

42,176

 

 

 

23,863

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

Property and equipment in accounts payable and accrued liabilities

 

$

15,666

 

 

$

6,532

 

 

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

8


 

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 April 3, 2022, the Company operated 379 stores in 23 states. The “Company” is used to refer collectively to Sprouts Farmers Market, Inc. and unless the context otherwise requires, its subsidiaries.

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 2, 2022 (“fiscal year 2021”) included in the Company’s Annual Report on Form 10-K, filed on February 24, 2022.

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 1, 2023 (“fiscal year 2022”) and fiscal year 2021 are 52-week years. 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.

 

 

9


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2. Summary of Significant Accounting Policies

Revenue Recognition

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

 

 

 

Balance at
January 2, 2022

 

 

Gift Cards Issued During
Current Period but Not
Redeemed
(1)

 

 

Revenue Recognized from
Beginning Liability

 

 

Balance at
April 3, 2022

 

Gift card liability, net

 

$

12,586

 

 

$

1,192

 

 

$

(3,276

)

 

$

10,502

 

(1) net of estimated breakage

The Company does not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current period from performance obligations satisfied in previous periods, or any remaining performance obligations as of April 3, 2022.

Restricted Cash

Restricted cash relates to defined benefit plan forfeitures as well as healthcare, general liability and workers’ compensation restricted funds of approximately $1.8 million and $1.7 million as of April 3, 2022 and January 2, 2022, respectively. These balances are included in prepaid expenses and other current assets in the consolidated balance sheets.

Recently Adopted Accounting Pronouncements

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. In the thirteen weeks ended April 3, 2022, the Company adopted certain optional expedients provided under Topic 848 that permit its hedging relationships to continue without de-designation upon changes due to reference rate reform. The adoption of this guidance resulted in no material impact to the Company’s consolidated financial statements. See Note 9, “Derivative Financial Instruments” for more information on our hedging activities. The optional expedients and accounting relief in Topic 848 remain effective through December 31, 2022.

Recently Issued Accounting Pronouncements Not Yet Adopted

No other new accounting pronouncements issued or effective during the thirteen weeks ended April 3, 2022 had, or are expected to have, a material impact on the Company’s consolidated financial statements.

 

10


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

3. Fair Value Measurements

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

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

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

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

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 April 3, 2022 and January 2, 2022:

 

April 3, 2022

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Long-term debt

 

$

 

 

$

250,000

 

 

$

 

 

$

250,000

 

Interest rate swap liability

 

 

 

 

 

1,771

 

 

 

 

 

 

1,771

 

Total financial liabilities

 

$

 

 

$

251,771

 

 

$

 

 

$

251,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 2, 2022

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Long-term debt

 

$

 

 

$

250,000

 

 

$

 

 

$

250,000

 

Interest rate swap liability

 

 

 

 

 

5,107

 

 

 

 

 

 

5,107

 

Total financial liabilities

 

$

 

 

$

255,107

 

 

$

 

 

$

255,107

 

 

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 April 3, 2022 and January 2, 2022.

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

 

April 3, 2022

 

 

January 2, 2022

 

Senior secured debt

 

 

 

 

 

 

 

 

 

 

$700.0 million Credit Agreement

 

March 25, 2027

 

Variable

 

$

250,000

 

 

$

 

Former Credit Facility

 

March 27, 2023

 

Variable

 

 

 

 

 

250,000

 

Finance lease liabilities

 

Various

 

n/a

 

 

9,442

 

 

 

9,656

 

Long-term debt and finance lease liabilities

 

 

 

 

 

$

259,442

 

 

$

259,656

 

 

11


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

New Credit Agreement

The Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), is the borrower under a credit agreement entered into on March 25, 2022 (the “Credit Agreement”). The Credit Agreement provides for a revolving credit facility (the "Revolving Credit Facility") with an initial aggregate commitment of $700.0 million. Amounts outstanding under the Credit Agreement may be increased from time to time in accordance with an expansion feature set forth in the Credit Agreement.

The Company capitalized debt issuance costs of $3.4 million related to the Credit Agreement, which, combined with the remaining $0.5 million debt issuance costs in respect of that certain amended and restated credit agreement entered into on March 27, 2018, by and among the Company, Intermediate Holdings, certain lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (the “Former Credit Facility”), which remained outstanding as of the time of Intermediate Holdings’ entry into the Credit Agreement, are being amortized on a straight-line basis to interest expense over the five-year term of the Credit Agreement.

The Credit Agreement provides for a $70.0 million letter of credit sub-facility (the "Letter of Credit Sub-Facility") and a $50.0 million swingline facility. Letters of credit issued under the Credit Agreement reduce the capacity of Intermediate Holdings to borrow under the Revolving Credit Facility. Letters of credit totaling $24.8 million have been issued under the Letter of Credit Sub-Facility, primarily to support the Company’s insurance programs.

Guarantees

Obligations under the Credit Agreement are guaranteed by the Company and substantially all of its existing and future wholly-owned material domestic subsidiaries, and are secured by first-priority security interests in substantially all of the assets of the Company, Intermediate Holdings, and the subsidiary guarantors, including, without limitation, a pledge by the Company of its equity interest in Intermediate Holdings.

Interest and Fees

Loans under the Credit Agreement will initially bear interest, at the Company's option, either at the Term SOFR (with a floor of 0.00%) plus a 0.10% SOFR adjustment and 1.00% per annum or base rate (with a floor of 0.00%) plus 0.00% per annum. The interest rate margins are subject to upward adjustments pursuant to a pricing grid based on the Company’s total net leverage ratio as set forth in the Credit Agreement and to upward or downward adjustments of up to 0.05% based upon the achievement of certain diversity and sustainability-linked metric thresholds, as set forth in the Credit Agreement.

Under the terms of the Credit Agreement, the Company is obligated to pay a commitment fee on the available unused amount of the commitments, which commitment fee ranges between 0.10% to 0.225% per annum, pursuant to a pricing grid based on the Company’s total net leverage ratio. The commitment fees are subject to upward or downward adjustments of up to 0.01% based upon the achievement of certain diversity and sustainability-linked metric thresholds, as set forth in the Credit Agreement.

As of April 3, 2022, loans outstanding under the Credit Agreement bore interest at Term SOFR (as defined in the Credit Agreement) plus a 0.10% SOFR adjustment and 1.00% per annum or prime plus 0.00%.

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

As of April 3, 2022, outstanding letters of credit issued under the Credit Agreement were subject to a participation fee of 1.00% per annum and an issuance fee of 0.125% per annum.

12


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Payments and Borrowings

The Credit Agreement is scheduled to mature, and the commitments thereunder will terminate on March 25, 2027, subject to extensions as set forth therein.

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

In connection with the execution of the Credit Agreement, the obligations as borrower under the Former Credit Facility were prepaid and terminated.

During the thirteen weeks ended April 3, 2022, the Company made no additional borrowings or principal payments, resulting in total outstanding debt under the Credit Agreement of $250.0 million as of April 3, 2022.

Covenants

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

incur additional indebtedness;
grant additional liens;
enter into sale-leaseback transactions;
make loans or investments;
merge, consolidate or enter into acquisitions;
pay dividends or distributions;
enter into transactions with affiliates;
enter into new lines of business;
modify the terms of certain debt or other material agreements; and
change its fiscal year.

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

In addition, the Credit Agreement requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed 3.75 to 1.00, which ratio may be increased from time to time in connection with certain permitted acquisitions pursuant to conditions as set forth in the Credit Agreement, and a minimum interest coverage ratio not to be less than 3.00 to 1.00. Each of these covenants is tested as of the last day of each fiscal quarter.

The Company was in compliance with all applicable covenants under the Credit Agreement as of April 3, 2022.

 

 

13


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

5. Income Taxes

The Company’s effective tax rate decreased to 24.3% for the thirteen weeks ended April 3, 2022, compared to 24.7% for the thirteen weeks ended April 4, 2021.The decrease in the effective tax rate is primarily due to an increase in benefit from share-based payment awards in the current period, partially offset by a decrease in enhanced charitable contributions due to the expiration of CARES Act benefits. The income tax effect resulting from excess tax benefits of share-based payment awards were $1.5 million and $0.1 million for the thirteen weeks ended April 3, 2022 and April 4, 2021, respectively.

The Company files income tax returns for federal purposes and in many states. The Company’s tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three years, following the tax year to which those filings relate. The Company’s U.S. federal income tax returns for the fiscal years ended December 31, 2017 and January 1, 2017, are currently under examination by the Internal Revenue Service.

 

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.

Proposition 65 Coffee Action

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

The Company, as part of a joint defense group, asserted multiple defenses against the lawsuit. On May 7, 2