Sprouts Farmers Market 2013 Annual Report Download

Download and view the complete annual report

Please find the complete 2013 Sprouts Farmers Market annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 148

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148

SPROUTS FARMERS MARKET, INC.
FORM 10-K
(Annual Report)
Filed 02/27/14 for the Period Ending 12/29/13
Address 11811 N. TATUM BOULEVARD SUITE 2400
PHOENIX, AZ 85028
Telephone 480-814-8016
CIK 0001575515
Symbol SFM
SIC Code 5411 - Grocery Stores
Fiscal Year 12/29
http://www.edgar-online.com
© Copyright 2014, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    SPROUTS FARMERS MARKET, INC. FORM 10-K (Annual Report) Filed 02/27/14 for the Period Ending 12/29/13 Address Telephone CIK Symbol SIC Code Fiscal Year 11811 N. TATUM BOULEVARD SUITE 2400 PHOENIX, AZ 85028 480-814-8016 0001575515 SFM 5411 - Grocery Stores 12/29 http://www.edgar-online.com © ...

  • Page 2
    ... of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 29, 2013 Commission File Number: 001-36029 Sprouts Farmers Market, Inc. (Exact...

  • Page 3
    As of June 30, 2013, the last business day of the registrant's most recently completed second fiscal quarter, there was no established public market for the registrant's common stock. The registrant's common stock began trading on The NASDAQ Global Select Market on August 1, 2013. As of February 24,...

  • Page 4
    ... Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services PART IV Item 15. Exhibits, Financial Statement Schedules Signatures 131 134 1 19...

  • Page 5
    ... of Operations-Corporate Conversion." As used in this Annual Report on Form 10-K, unless the context otherwise requires, references to the "Company," "Sprouts," "we," "us" and "our" refer to Sprouts Farmers Markets, LLC and, after the corporate conversion, to Sprouts Farmers Market, Inc. and, where...

  • Page 6
    ... a high-growth, differentiated, specialty retailer of natural and organic food focusing on health and wellness at great value. We offer a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, grocery, meat and seafood, bakery, dairy, frozen foods, body care...

  • Page 7
    ... supermarket customers are attracted to competitors' unique product offerings, formats and differentiated shopping experiences. Sprouts is a high-growth, natural and organic food retailer offering a complete grocery shopping experience, catering to consumers' growing interest in living and eating...

  • Page 8
    ... an expansive offering of high-quality natural and organic products. On average, our stores carry approximately 16,500 SKUs across produce, bulk foods, vitamins and supplements, grocery, meat and seafood, bakery, dairy, frozen foods, beer and wine, body care and natural household departments. We...

  • Page 9
    ... process help us to efficiently source new, high-quality store locations. From our founding in 2002 through December 29, 2013, we opened 91 new stores while successfully rebranding 43 Henry's Farmers Markets ("Henry's") and 39 Sunflower Farmers Market ("Sunflower") stores to the Sprouts banner...

  • Page 10
    ... our fresh, natural and organic product offering, our targeted and personalized marketing efforts and our in-store education designed to make customers more aware of our full product offering. We believe these factors, combined with the continued strong growth in natural and organic food consumption...

  • Page 11
    ... to open new stores and, as of December 29, 2013, had 167 stores in eight states. We are one of the largest specialty retailers of natural and organic food in the United States. In connection with our initial public offering (referred to as our "IPO"), on July 29, 2013, Sprouts Farmers Markets, LLC...

  • Page 12
    ... an easy-to-shop environment that allows our customers to view the entire store. The design of our stores is a farmers market style, with wooden crates stacked with fresh produce and self-service bulk food barrels and bins in a bright and open atmosphere. We believe our stores provide customers with...

  • Page 13
    ... factors. We believe our team members contribute to our consistently high service standards and that this helps us successfully open new stores. We believe Sprouts is an attractive place to work with significant growth opportunities for our team members. We offer competitive wages and benefits as...

  • Page 14
    ... sell as perishable and non-perishable. Perishable product categories include produce, meat, seafood, deli and bakery. Non-perishable product categories include grocery, vitamins and supplements, bulk items, dairy and dairy alternatives, frozen foods, beer and wine, and natural health and body care...

  • Page 15
    ... vitamin and supplement team members to better educate and serve our customers through personalized service and more than 300 annual in-store and online seminars. • Grocery . Our grocery offering focuses on healthy options. We carry approximately 4,600 natural and organic products in our grocery...

  • Page 16
    ... affect our business." Our Customers Our target customer seeks a wide assortment of high-quality fresh and nutritious food as well as vitamins and supplements at competitive prices. We believe our value proposition and complete grocery offering engages both conventional and health-focused shoppers...

  • Page 17
    ... stores by our fresh produce, which we offer at prices we believe are significantly below those of conventional food retailers and even further below high-end natural and organic food retailers. We drive customer traffic by aggressively promoting produce and other items through weekly advertisements...

  • Page 18
    ...-Hour Sale Incredible Bulk Sale As weekly ads run from Wednesday to Wednesday, on each Wednesday there are twice as many items on sale Every vitamin, supplement and body care product is 25% off 20% off any frozen item a customer can fit into a Sprouts grocery bag. These products include natural and...

  • Page 19
    ...200 Sprouts Farmers Market stores operating under our current format. We believe we have significant growth opportunity in existing markets, as approximately 300 of these 1,200 potential stores are located in our current markets (nine states). We intend to achieve 12% or more annual new store growth...

  • Page 20
    ... in the first half of the fiscal year. Produce, which contributed approximately 26% of our net sales for the fiscal year ended December 29, 2013, is generally more available in the first six months of our fiscal year due to the timing of peak growing seasons. Trademarks and Other Intellectual...

  • Page 21
    ...a company's website or similar printed or graphic medium. All foods, including dietary supplements, must bear labeling that provides consumers with essential information with respect to ingredients, product weight, etc. The FDA administers a systematic review and approval program for certain "health...

  • Page 22
    ... supplement products available in the market before DSHEA to now be classified to include a "new dietary ingredient" if the dietary supplement product was produced using manufacturing processes different from those used in 1994. DSHEA also empowered the FDA to establish binding good manufacturing...

  • Page 23
    ... sales and marketing program. Employees As of December 29, 2013, we had approximately 14,000 team members. None of our team members are subject to collective bargaining agreements. We consider our relations with our team members to be good, and we have never experienced a strike or significant work...

  • Page 24
    ...growth strategy. Although we believe, based on research conducted for us by a third-party research firm, that the U.S. market can support approximately 1,200 Sprouts Farmers Market stores operating under our current format, we anticipate that it will take years to grow our store count to that number...

  • Page 25
    ...; product price inflation and deflation; the number and dollar amount of customer transactions in our stores; cycling against any year of above-average sales results; our ability to provide product offerings that generate new and repeat visits to our stores; and the level of customer service that...

  • Page 26
    ... mature stores on a timely basis or at all. We have actively pursued new store growth and plan to continue doing so in the future. We cannot assure you that our new store openings will be successful or reach the sales and profitability levels of our existing stores. New store openings may negatively...

  • Page 27
    ... and quality of products we sell. We are a fresh, natural and organic retailer, and we believe that many customers choose to shop our stores because of their interest in health, nutrition and food safety. As a result, we believe that our customers hold us to a high food safety standard. Concerns...

  • Page 28
    ... concentration of our stores creates an exposure to local or regional downturns or catastrophic occurrences. As of December 29, 2013, we operated 73 stores in California, making California our largest market representing 44% of our total stores and 46% of our net sales in the fiscal year ended 23

  • Page 29
    ... primary supplier of dry grocery and frozen food products, accounting for approximately 23% and 17% of our total purchases in fiscal 2013 and 2012, respectively. We also have commitments in place with NB to order certain amounts of our distribution-sourced organic and natural produce from NB, and to...

  • Page 30
    ... the marketing of organically produced food, and provides assurance to our customers that such products meet consistent, uniform standards. Compliance with the USDA's Organic Rule also places a significant burden on some of our suppliers, which may cause a disruption in some of our product offerings...

  • Page 31
    ... the registration of any facility producing food, including supplements, deemed to present a reasonable probability of causing serious adverse health consequences. In connection with the marketing and advertisement of products we sell, we could be the target of claims relating to false or deceptive...

  • Page 32
    ... data, catastrophic events, and usage errors by our team members. In January 2013, we discovered sophisticated malware installed on certain credit card "pin pads" in a limited number of our stores designed to illegally access our customers' credit card information. We discovered the malware shortly...

  • Page 33
    ... demand for products we sell in our stores. In recent years, the U.S. economy has experienced volatility due to uncertainties related to energy prices, credit availability, difficulties in the banking and financial services sectors, decreases in home values and retirement accounts, high unemployment...

  • Page 34
    ... brand and products could be negatively affected, and our sales and profitability could suffer as a result. We also license the SPROUTS FARMERS MARKETS trademark to a third party for use in operating two grocery stores. If the licensee fails to maintain the quality of the goods and services used in...

  • Page 35
    ... in this Annual Report on Form 10-K, but are not reflected as liabilities on our consolidated balance sheets. During fiscal 2013, our rent expense charged under operating leases was approximately $64.7 million. The Financial Accounting Standards Board (referred to as "FASB") is currently working on...

  • Page 36
    ... of companies operating in some other industries. Consequently, we may be a party to individual personal injury, product liability, intellectual property, employment-related and other legal actions in the ordinary course of our business, including litigation arising from food-related illness...

  • Page 37
    ... subject to offers from competing employers. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force in the markets in which we are located...

  • Page 38
    ... consequences, including the following reducing our ability to execute our growth strategy, including new store development; impacting our ability to continue to execute our operational strategies in existing stores; increasing our vulnerability to general adverse economic and industry conditions...

  • Page 39
    .... The reporting requirements, rules, and regulations require substantial legal and financial compliance costs and will make some activities more time-consuming and costly than when we were a private company. Our management has limited experience managing a public company, and our current resources...

  • Page 40
    ... which case investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline. As a public company, we are required to maintain internal control over financial reporting. In addition, beginning with our 2014 annual report on...

  • Page 41
    ...; fluctuations in stock market prices and trading volumes of securities of similar companies; sales, or anticipated sales, of large blocks of our stock; short selling of our common stock by investors; additions or departures of key personnel; new store openings or entry into new markets by us or by...

  • Page 42
    ...be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up arrangements described above. Sales of common stock as restrictions end may make it more difficult for us to sell equity securities in the future at a time and at a price that we...

  • Page 43
    ...annual meetings and to cancel previously scheduled special meetings; permitting newly created directorships resulting from an increase in the authorized number of directors or vacancies on our board of directors... also affect the price that some investors are willing to pay for our common stock. 38

  • Page 44
    ... below: State Number of Stores State Number of Stores Arizona California Colorado Nevada 26 73 24 2 New Mexico Oklahoma Texas Utah 6 4 29 3 In fiscal 2012, on a combined company basis, we opened 11 new stores, and we opened 19 new stores in fiscal 2013. As of the date of this Annual Report on...

  • Page 45
    ... of operations. Item 3. 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...

  • Page 46
    ...factors our board of directors may deem relevant. Our Credit Facility contains covenants that would restrict our ability to pay cash dividends. Issuer Purchases of Equity Securities None. Equity Compensation Plan Information As of December 29, 2013, the following table shows the number of securities...

  • Page 47
    ... our Sprouts Farmers Market, Inc. 2013 Incentive Plan (referred to as the "2013 Incentive Plan"). Represents our Sprouts Farmers Markets, LLC Option Plan (referred to as the "2011 Option Plan"). Performance Graph The graph set forth below compares the cumulative total stockholder return on...

  • Page 48
    ... of Contents Item 6. Selected Financial Data Fiscal 2013(3) Fiscal Fiscal Fiscal 2012(2) 2011(1) 2010(1) (dollars in thousands, except per share data) Fiscal 2009(1) Statements of Operations Data: Net sales Cost of sales, buying and occupancy Gross profit Direct store expenses Selling, general and...

  • Page 49
    ... related to the November 2013 Offering. Pro forma comparable store sales growth reflects comparable store sales growth calculated including stores acquired in the Transactions for all reported periods. Our practice is to include sales from a store in comparable store sales beginning on the first day...

  • Page 50
    ... a high-growth, differentiated, specialty retailer of natural and organic food focusing on health and wellness at great value. We offer a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, grocery, meat and seafood, bakery, dairy, frozen foods, body care...

  • Page 51
    ... our comparable store sales growth by enhancing our core value proposition and distinctive customer-oriented shopping experience, as well as through expanding and refining our fresh, natural and organic product offerings, our targeted and personalized marketing efforts and our in-store education. We...

  • Page 52
    ...of sales, buying and occupancy and gross profit are correlated to sales volumes. As sales increase, gross margin is affected by the relative mix of products sold, pricing strategies, inventory shrinkage and improved leverage of fixed costs of sales, buying and occupancy. Direct store expenses Direct...

  • Page 53
    ...various jurisdictions of the United States in which we conduct business. Income taxes are accounted for under the asset and liability method. On July 29, 2013, Sprouts Farmers Markets, LLC, a Delaware limited liability company, converted into Sprouts Farmers Market, Inc., a Delaware corporation. See...

  • Page 54
    ... of the Sprouts Farmers Market business. As a result, the Company was determined to be the accounting acquirer, effective April 18, 2011. Accordingly, the results of operations for fiscal 2010 and for the period from January 3, 2011 through April 18, 2011 reflect the sales and expenses directly...

  • Page 55
    ...achieved in future periods. Fiscal 2013 Fiscal 2012 (in thousands) Fiscal 2011 Consolidated Statement of Operations Data: Net sales Cost of sales, buying and occupancy Gross profit Direct store expenses Selling, general and administrative expenses Amortization of Henry's trade names and capitalized...

  • Page 56
    ... (in thousands) Unaudited Supplemental Pro Forma Information(1): Net sales Cost of sales, buying and occupancy Gross profit Direct store expenses Selling, general and administrative expenses Amortization of Henry's trade names and capitalized software Store pre-opening costs Store closure and exit...

  • Page 57
    ... items when compared to the exceptional produce growing season in 2012. In addition, we experienced lower margins in the vitamin, supplement and body care departments as a result of mark downs from merchandise alignment. Comparing 2013 to pro forma 2012, cost of sales, buying and occupancy and gross...

  • Page 58
    ... is related to stores that were opened during or prior to 2012. Direct store expenses, as a percentage of net sales were relatively in-line compared to pro forma 2012, as we utilized the leverage in payroll to invest in store level compensation programs and to fund higher health care costs. Selling...

  • Page 59
    ...The increase in store pre-opening costs in 2013 is due to the increased number of stores opened, increases related to opening stores in new markets which require additional pre-opening advertising, travel and team member training expenses, and certain pre-opening costs for stores opened in 2012 that...

  • Page 60
    ...800 0.9% 163% 109% Net income growth was attributable to strong business performance driven by comparable store sales and resulting operating leverage, strong performance of new stores opened, and reduced interest expense. Unaudited Supplemental Fiscal 2012 Pro Forma Information The comparability...

  • Page 61
    ... consolidated statement of operations shows the impact on the combined statement of operations of the acquisition method of accounting under Financial Accounting Standards Board ASC 805, Business Combinations. Under the acquisition method of accounting, the total purchase price is allocated to the...

  • Page 62
    ...for Sunflower Historical Sprouts Farmers Market, Inc.(1) Historical Sunflower (1) Fiscal Period Alignment (2) Sunflower Transaction (2) Pro Forma for Sunflower Transaction (2) Notes Net sales Cost of sales, buying and occupancy Gross profit Direct store expenses Selling, general and administrative...

  • Page 63
    ...Annual Report on Form 10-K. The historical Sprouts Farmers Market, Inc. results of operations for fiscal...new basis in the acquired Sunflower leases as of the acquisition date and (ii) a $0.1 million net increase in amortization expense related... useful lives of 38.4 years, 7.6 years and 4.7 years ...

  • Page 64
    ... of (i) stores added through the Sunflower Transaction in fiscal 2012 (net of closures), (ii) incremental sales from stores added through the Henry's Transaction in fiscal 2011 as a result of operating for a full year in fiscal 2012, (iii) new store openings and (iv) sales growth at stores operated...

  • Page 65
    ..., new store openings and sales growth, as discussed above. During fiscal 2012, gross profit increased $193.7 million as a result of increased sales volume and $25.6 million as a result of improved gross margin. The 140 basis point increase in gross margin during fiscal 2012 reflects (i) produce cost...

  • Page 66
    ... resulting from comparable store sales growth. These factors were partially offset by a $2.7 million loss on asset disposals during fiscal 2012. On a pro forma basis, direct store expenses increased during fiscal 2012 primarily due to new store openings. Pro forma direct store expenses increased $18...

  • Page 67
    ...'s Transaction and planned re-branding of Henry's stores, the estimated useful lives of the Henry's trade names and certain capitalized software were re-evaluated and amortization was accelerated. Amortization of Henry's trade names and capitalized software totaled $32.2 million in fiscal 2011 and...

  • Page 68
    ...of a full year of borrowings associated with the Henry's Transaction in fiscal 2012, (ii) $6.1 million of interest on incremental borrowings associated with the Sunflower Transaction and (iii) interest on financing leases associated with leases acquired in the Transactions and new store openings. In...

  • Page 69
    ... in gross profit attributable to the increased sales volumes following the Transactions, new store openings and comparable store sales growth, as well as produce cost deflation in the first half of fiscal 2012, as described above, (ii) $32.2 million of accelerated amortization of Henry's trade names...

  • Page 70
    ... have been obtained had the combined businesses been operating as a consolidated company during the relevant period presented. The unaudited supplemental pro forma information for fiscal 2011 also does not give effect to the potential impact of current financial conditions, any anticipated synergies...

  • Page 71
    ... Transactions (2) Pro Forma Sprouts Farmers Market, Inc. Notes Net sales Cost of sales, buying and occupancy Gross profit Direct store expenses Selling, general and administrative expenses Amortization of Henry's trade names and capitalized software Store pre-opening costs Store closure and exit...

  • Page 72
    ... included elsewhere in this Annual Report on Form 10-K. The historical Sprouts Farmers Market, Inc. results of operations for fiscal 2011 are derived from our audited consolidated financial statements included in the November 2013 Prospectus. The historical Sprouts Arizona results of operations for...

  • Page 73
    ... the new basis in the Sprouts Arizona and Sunflower...fiscal quarters in the fiscal years 2013 and 2012. September 30, April 1, 2012(1) July 1, 2012(2) 2012(3) Thirteen weeks ended December 30, March 31, 2012(4) 2013(5) September 29, June 30, 2013(6) 2013(7) December 29, 2013(8) Net sales Gross profit...

  • Page 74
    ... and new store openings. Between these fiscal periods, we opened 19 stores. Additionally, 2013 includes the full impact of the acquired Sunflower stores. In addition to the increase in the number of stores we operate, we leveraged fixed direct store expenses through comparable store sales growth and...

  • Page 75
    ... openings. During 2012, we opened nine stores, acquired 37 stores in the Sunflower Transaction and closed one store. In addition to an increase in the number of stores we operate, during 2012 we improved our gross margin, leveraged fixed direct store expenses through comparable store sales growth...

  • Page 76
    .... Long-term Debt and Former Credit Facilities April 2013 Refinancing Effective as of April 23, 2013 (referred to as the "April 2013 Refinancing Closing Date"), a subsidiary of the Company (referred to as "Intermediate Holdings"), as borrower, refinanced the Former Revolving Credit Facility...

  • Page 77
    ... the continuation of a payment default, we will be required to pay interest at a default rate unless waived. Debt Repayment in Connection with IPO. On August 6, 2013, we used $340.0 million of the net proceeds from our IPO to make a partial repayment of the Term Loan. Such repayment resulted in...

  • Page 78
    ... as of December 29, 2013, and the effect such obligations are expected to have on our liquidity and cash flow in future periods: Payments Due by Period Less Than 1-3 4-5 1 Year Years Years (in thousands) More Than 5 Years Total Term Loan, including current portion(1) Interest payments on...

  • Page 79
    ... the prices of food and other products we sell may periodically affect our sales, gross profit and gross margin. 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...

  • Page 80
    ... to grant a variety of stock-based and cash-based awards. The 2013 Incentive Plan serves as the umbrella plan for our stock-based and cash-based incentive compensation programs for our directors, officers and other team members. Under the provisions of ASC 718, equity-based compensation expense is...

  • Page 81
    ...99 and $1.12 in 2013, 2012 and 2011, respectively. Unrecognized compensation cost relating to outstanding awards was $4.3 million at December 29, 2013, with a weighted average remaining recognition period of 1.1 years. Valuation. We have used the Black-Scholes option pricing model to calculate the...

  • Page 82
    ...and integration of Henry's, Sprouts Arizona and Sunflower operations achieved by the end of fiscal 2012; Our operating and financial performance and forecasts as a combined company; New store openings and planned openings; Market valuations of comparable publicly traded grocers; The applicability of...

  • Page 83
    ... our equity valuations on the trading price of our common stock. Inventories Inventories consist of merchandise purchased for resale, which are stated at the lower of cost or market. The cost method is used for warehouse perishable and store perishable department inventories by assigning costs to...

  • Page 84
    ... the cost of acquired businesses in excess of the fair value of assets and liabilities acquired. Our indefinite-lived intangible assets consist of trade names related to "Sprouts Farmers Market" and liquor licenses. We also hold intangible assets with finite useful lives, consisting of favorable and...

  • Page 85
    ...the event that our estimates or assumptions change in the future, we may be required to record a long-lived asset impairment charge. We did not record any impairment loss during fiscal 2013, 2012 or, 2011. Income Taxes Until the closing date of the Henry's Transaction, Henry's was not a separate tax...

  • Page 86
    ... in estimate in the period in which the change becomes known, considering timing of new information regarding market, subleases or other lease updates. Adjustments in the closed store reserves are recorded in store closure and exit costs in the consolidated statements of operations. Recently Issued...

  • Page 87
    ... about Market Risk Interest...million principal outstanding under our Term Loan as of December 29, 2013, each hundred basis point change in LIBOR, once LIBOR exceeds the...annually. This sensitivity analysis assumes our mix of financial instruments and all other variables will remain constant in future...

  • Page 88
    Table of Contents Item 8. Financial Statements and Supplementary Data 83

  • Page 89
    ... Financial Statements for Sprouts Farmers Market, Inc. and Subsidiaries: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 29, 2013 and December 30, 2012 Consolidated Statements of Operations for the fiscal years ended December 29, 2013, December 30...

  • Page 90
    ...of Sprouts Farmers Market, Inc. and its subsidiaries at December 29, 2013 and December 30, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2013 in conformity with accounting principles generally accepted in the United States...

  • Page 91
    ... of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) December 29, 2013 December 30, 2012 ASSETS Current assets: Cash and cash equivalents Accounts receivable, net Inventories Prepaid expenses and other current assets Deferred...

  • Page 92
    ... of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended December 30, 2012 January 1, 2012 December 29, 2013 Net sales Cost of sales, buying and occupancy Gross profit Direct store expenses Selling, general...

  • Page 93
    Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (Accumulated Additional Common Shares Stock Paid-in Capital Deficit) / Retained Earnings S&F Equity Total Stockholders' Equity Balances at January 2, ...

  • Page 94
    ...SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) December 29, 2013 Year Ended... other current assets ...sale of intangible assets Payments for business combinations, net of cash acquired Net cash used... Cash from landlord related to financing lease ...

  • Page 95
    ..., offering a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, grocery, meat and seafood, bakery, dairy, frozen foods, body care and natural household items catering to consumers' growing interest in eating and living healthier. As of December 29, 2013...

  • Page 96
    ..., 2013, Sprouts Farmers Markets, LLC, a Delaware limited liability company, converted into Sprouts Farmers Market, Inc., a Delaware corporation (the "Corporate Conversion"). As a result of the corporate conversion, the members holding interests in Class A and Class B units of Sprouts Farmers Markets...

  • Page 97
    ... seafood, deli and bakery. Non-perishable product categories include grocery, vitamins and supplements, bulk items, dairy and dairy alternatives, frozen foods, beer and wine, and natural health and body care. The following is a breakdown of the Company's perishable and non-perishable sales mix: 2013...

  • Page 98
    ... Inventories consist of merchandise purchased for resale, which are stated at the lower of cost or market. The cost method is used for warehouse perishable and store perishable department inventories by assigning costs to each of these items based on a first-in, first-out (FIFO) basis (net...

  • Page 99
    ... 29, 2013 December 30, 2012 Beginning balance Additions for new facilities ARO liability from business combination Accretion expense Adjustments Ending balance Closed Store Reserve $ $ 2,362 54 - 322 (163) 2,575 $ $ 1,236 132 784 237 (27) 2,362 The Company recognizes a reserve for future...

  • Page 100
    ... of acquired businesses in excess of the fair value of assets and liabilities acquired. The Company's indefinite-lived intangible assets consist of trade names related to "Sprouts Farmers Market" and liquor licenses. The Company also holds intangible assets with finite useful lives, consisting of...

  • Page 101
    ..." for further discussion. The trade name related to "Sunflower Farmers Market" meets the definition of a defensive intangible asset and is amortized on a straight line basis over an estimated useful life of 10 years from the date of its acquisition by the Company. Favorable and unfavorable leasehold...

  • Page 102
    ... average cost of capital was estimated using information from comparable companies and management's judgment related to the risk associated with the operations of the stores. Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued salaries...

  • Page 103
    ... the time of sale are recognized as a reduction in sales as the discounted products are sold. Sales taxes are not included in revenue. 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. The Company has...

  • Page 104
    ...of new stores and costs related to new store openings, including costs associated with hiring and training personnel and other miscellaneous costs. Store pre-opening costs are expensed as incurred. Loss on Extinguishment of Debt In 2013, the Company recorded a loss on extinguishment of debt totaling...

  • Page 105
    ... federal and certain state income tax groups for income tax reporting purposes. For the period through April 17, 2011, the consolidated financial statements have been prepared on the basis as if Henry's prepared its tax returns and accounted for income taxes on a separate-company basis. As a result...

  • Page 106
    ... reasons for these transactions were to build a larger portfolio of stores under the Sprouts Farmers Market banner and to derive synergies from the combined operations of the companies. In a business combination, the purchase price is allocated to assets acquired and liabilities assumed based on...

  • Page 107
    ... to be achieved from the combined operations of Henry's and Sprouts Arizona, primarily related to buying and distribution costs, economies of scale for certain direct store expenses and savings on marketing-related selling costs and corporate overhead. Goodwill recorded in the Henry's Transaction...

  • Page 108
    ... Sales and net loss of SFM totaling $556.0 million and $44.5 million, respectively, are included in the consolidated results of operations for the year ended January 1, 2012. Sunflower Transaction As described in Note 1, "Organization and Description of Business," effective May 29, 2012 the Company...

  • Page 109
    ... for certain direct store expenses and savings on marketing-related selling costs and corporate overhead. Goodwill recorded in the Sunflower Transaction is not expected to be deductible for tax purposes. Identifiable intangible assets consist of the following: Trade name (10 year useful life) Liquor...

  • Page 110
    ...is as follows: As Of December 29, 2013 December 30, 2012 Vendor Medical insurance receivable Other Total $ $ 5,183 1,089 3,252 9,524 $ $ 5,602 1,287 1,526 8,415 Medical insurance receivables relate to amounts receivable from the Company's health insurance carrier for claims in excess of stop...

  • Page 111
    ... receivable and current portion of deferred financing costs. 7. Property and Equipment A summary of property and equipment, net is as follows: As Of December 29, 2013 December 30, 2012 Buildings Furniture, fixtures and equipment Leasehold improvements Construction in progress Total property and...

  • Page 112
    ...and capitalized software including acceleration. In connection with the Henry's Transaction, the Henry's stores were rebranded as Sprouts Farmers Market. The estimated useful lives related to the Henry's trade names and capitalized software were reevaluated and it was determined that amortization of...

  • Page 113
    ... 1,292 1,044 967 967 4,945 $10,507 The weighted-average amortization period of leasehold interests acquired total 12.3 years. The amortization period of the finite-lived trade name is 9.5 years. 9. Goodwill A summary of the activity and balances in goodwill is as follows: Balance at January 1, 2012...

  • Page 114
    ... 29, 2013 December 30, 2012 Gift cards Sales and use tax liabilities Workers' compensation / general liability reserves Medical insurance claim reserves Accrued occupancy related (CAM, property taxes, etc.) Unamortized lease incentives Closed store reserves Interest Other Total 109 $ 7,629...

  • Page 115
    ...Notes Total Debt Less current portion Long-term debt, net of current ...Gross principal Less: discount Total debt at December 29, 2013 Senior Secured Credit Facilities April 2013 Refinancing On April 23, 2013, the Company's subsidiary, Sprouts Farmers Markets Holdings, LLC ("Intermediate Holdings...

  • Page 116
    ... all assets of Intermediate Holdings and the subsidiary guarantors, in each case, subject to permitted liens and certain exceptions. Term Loan and Partial Repayment in IPO On August 6, 2013, the Company used $340.0 million of the net proceeds from its IPO to make a partial repayment of the...

  • Page 117
    ...50 to 1.00) of excess cash flow (as defined in the Credit Facility) at the end of each fiscal year, (ii) 100% of the net cash proceeds from certain non-ordinary course asset sales by the Company or any subsidiary guarantor (subject to certain exceptions and reinvestment provisions) and (iii) 100% of...

  • Page 118
    ... for the year ended December 29, 2013. The Former Term Loan required quarterly principal payments, totaling 1.00% per annum, with the balance payable on the final maturity date. The Company capitalized total debt issuance costs (financing fees) between 2011 and 2012 of $1.8 million related to the...

  • Page 119
    ... annually for the first three years, increasing by 1.0% each year thereafter. On May 31, 2013, the Company ...2013 December 30, 2012 Unamortized lease incentives Workers' compensation / general liability reserves Unfavorable lease liability Deferred rent Closed store reserves ARO liability Other Total...

  • Page 120
    ... the Sprouts Farmers Market, Inc. Employee 401(k) Savings Plan (the "Plan"), which is a defined contribution plan covering all eligible team members. Under the provisions of the Plan, participants may direct the Company to defer a portion of their compensation to the Plan, subject to the Internal...

  • Page 121
    ...the Company had elected to be taxed as a corporation for income tax purposes. Income Tax (Provision) Benefit Income tax (provision) benefit consists of the following: Year Ended December 30, 2012 December 29, 2013 January 1, 2012 U.S. Federal-current U.S. Federal-deferred U.S. Federal-total State...

  • Page 122
    ...follows: As Of December 29, 2013 December 30, 2012 Deferred tax assets Employee benefits Net operating loss carryforwards and tax credits Lease related Other accrued liabilities Intangible assets Charitable contribution carryforward Inventories and other Total gross deferred tax assets Deferred tax...

  • Page 123
    ...these items will either expire before the Company is able to realize their benefits, or that the realization of future deductions...annually and any unused limitation in a given year may be carried forward to the next year. In September 2013 the Internal Revenue Service issued final regulations related...

  • Page 124
    ... stores, case volume shipped or number of employees in relation to totals for S&F. Allocated corporate costs relate to real estate management, store design and construction, distribution services and general corporate services. Costs amounting to $2.6 million allocated to Henry's for the year ended...

  • Page 125
    ... planning services to S&F. The Management Services Agreement was for a ten-year term starting in 2007 and S&F was obligated to pay the Apollo affiliate an annual ...to be effectively settled for cash at the time the transaction was recorded. The total net effect of the settlement of these intercompany...

  • Page 126
    ... due from this vendor related to vendor rebates. As of December 29, 2013 and December 30, 2012, the Company had recorded accounts payable due to this vendor of $0.7 million and $0.4 million, respectively. On August 30, 2007, Sprouts Arizona entered into a services agreement with an outsourced...

  • Page 127
    ..., LLC, another affiliate of Apollo, was an underwriter of our IPO and secondary offering that closed on December 2, 2013, and received fees of approximately $0.9 million and $1.0 million, respectively. 20. Commitments and Contingencies Operating Lease Commitments The Company's leases include stores...

  • Page 128
    ... settled a trademark dispute for $2.7 million. 21. Capital stock Common stock On August 6, 2013, the Company completed its initial public offering of 21,275,000 shares of common stock of Sprouts Farmers Market, Inc., including 2,775,000 shares of common stock issued as a result of the exercise...

  • Page 129
    ... the market price of the Company's common stock and the voting and other rights of the holders of the Company's common stock. The Company has no current plan to issue any shares of preferred stock. 22. Net Income (Loss) per Share The computation of net income (loss) per share is based on the number...

  • Page 130
    ... the year ended January 1, 2012 the computation of diluted loss per share does not include 6,366,932 options as there was a net loss per share. 23. Equity-Based Compensation 2013 Incentive Plan The Company's board of directors adopted, and its equity holders approved, the Sprouts Farmers Market, Inc...

  • Page 131
    ...issuance under the 2013 Incentive Plan. 2011 Option Plan In May 2011, the Company adopted the Sprouts Farmers Markets, LLC Option Plan (the "2011 Option Plan") to provide team members or directors of the Company with options to acquire shares of the Company ("options"). The Company had authorized 12...

  • Page 132
    ...estimated at zero as the Company does not anticipate making regular future distributions to stockholders. The following table summarizes option activity: Weighted Number of Options Average Exercise Price Weighted Average Remaining Contractual Life (In Years) Aggregate Intrinsic Value Outstanding at...

  • Page 133
    ... of Contents Equity-based compensation expense was as follows: Year Ended December 30, 2012 December 29, 2013 January 1, 2012 Cost of sales, buying and occupancy Direct store expenses Selling, general and administrative expenses Total equity-based compensation expense $ $ 672 104 5,004 5,780...

  • Page 134
    ... of the SEC for newly public companies. Changes in Internal Control Over Financial Reporting During the quarterly period ended December 29, 2013, we further refined internal control procedures to address the previously identified material weakness related to our internal controls with respect to...

  • Page 135
    ...is ongoing. CEVA will file a further report with OFAC after completing its review. The internal review indicates that, in February 2013, CEVA Freight Holdings (Malaysia) SDN BHD ("CEVA Malaysia") provided customs brokerage for export and local haulage services for a shipment of polyethylene resin to...

  • Page 136
    ...will provide disclosure of future updates, amendments or waivers from the Code by posting them to our investor relations website located at http://investors.sprouts.com. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K. Item 11. Executive...

  • Page 137
    ... Post-Closing Merger Sub, LLC, Sunflower Farmers Markets, Inc. and KMCP Grocery Investors, LLC, as Representative (2) Credit Agreement, dated as of April 23, 2013, among Sprouts Farmers Markets, LLC, Sprouts Farmers Markets Holdings, LLC, the several lenders from time to time parties thereto...

  • Page 138
    ... Farmers Market, Inc. and its directors and officers (2) Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan (5) List of subsidiaries Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm Consent of Buxton Company Certification of...

  • Page 139
    ...13 or 15(d) 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. SPROUTS FARMERS MARKET, INC. Date: February 27, 2014 By: /s/ J. Douglas Sanders Name: J. Douglas Sanders Title: President and Chief...

  • Page 140
    ... Post-Closing Merger Sub, LLC, Sunflower Farmers Markets, Inc. and KMCP Grocery Investors, LLC, as Representative (2) Credit Agreement, dated as of April 23, 2013, among Sprouts Farmers Markets, LLC, Sprouts Farmers Markets Holdings, LLC, the several lenders from time to time parties thereto...

  • Page 141
    ..., to Nature's Best Distribution Agreement (4) Stockholders Agreement dated as of July 29, 2013 (1) Form of Indemnification Agreement by and between Sprouts Farmers Market, Inc. and its directors and officers (2) Form of Stock Option Agreement under Sprouts Farmers Market, Inc. 2013 Incentive Plan...

  • Page 142
    ... Sprouts Farmers Markets Holdings, LLC Sunflower Farmers Markets, LLC SFM, LLC SFM Logistics, LLC SFM Manager, LLC SF Market Texas, LLC Henry's Holdings LLC Sprouts Farmers Market Texas, LP SH Markets, Inc. SFM Beverages, Inc. Delaware Delaware Delaware Arizona Texas Delaware Delaware Texas Texas...

  • Page 143
    ... to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-190920) of Sprouts Farmers Market, Inc. of our report dated February 27, 2014 relating to the financial statements, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Phoenix, Arizona February 27, 2014

  • Page 144
    Exhibit 23.2 CONSENT OF BUXTON COMPANY We hereby consent to the use of our name and other references to us and our reports by Sprouts Farmers Market, Inc. in its filings with the Securities and Exchange Commission during 2014. BUXTON COMPANY By Name: Title: Date: /s/ David Glover David Glover Chief ...

  • Page 145
    ...J. Douglas Sanders, certify that: 1. I have reviewed this Annual Report on Form 10-K 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...

  • Page 146
    ...I, Amin N. Maredia, certify that: 1. I have reviewed this Annual Report on Form 10-K 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...

  • Page 147
    ... the annual report of Sprouts Farmers Market, Inc., (the "Company") on Form 10-K for the fiscal year ended December 29, 2013 as filed...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...

  • Page 148
    ... the annual report of Sprouts Farmers Market, Inc., (the "Company") on Form 10-K for the fiscal year ended December 29, 2013 as filed...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...