Sprouts Farmers Market 2013 Annual Report Download - page 40

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Table of Contents
If we are unable to maintain effective internal control over financial reporting in the future, we may fail to prevent or detect
material misstatements in our financial statements, in 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 Form 10-K to be filed in 2015, pursuant to Section 404 of the Sarbanes-Oxley Act, we will be required to file a
report by management on the effectiveness of our internal control over financial reporting, and our independent registered public
accounting firm will be required to attest to the effectiveness of our internal control over financial reporting.
In connection with the audit of our financial statements for fiscal 2012, we identified a material weakness related to our failure
to design and maintain effective internal controls with respect to the application of an appropriate GAAP method in determining
inventory costs for non-perishable products. In fiscal 2012, we implemented a weighted-average costing methodology in
accordance with GAAP that utilizes statistical sampling and other estimation methods to value our non-perishable inventory.
Additionally, we have continued to develop and implement an automated solution for the calculation of weighted-average cost on a
per unit basis that is designed to replace our statistical sampling method in the future. We will continue to use statistical sampling
and other estimation methods until we believe that the automated solution is in place for a sufficient period of time and can be relied
upon. Accordingly, as of December 29, 2013, we continued to have a material weakness related to our internal controls with
respect to costing of non-perishable inventories.
If we are unable to maintain effective internal control over financial reporting, if we identify any material weaknesses therein, if
we are unsuccessful in our efforts to remediate any such material weakness, including the material weakness related to our non
-
perishable inventories described above, if our management is unable to report that our internal control over financial reporting is
effective when required, or if our independent registered public accounting firm is unable to express an opinion as to the
effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and
completeness of our financial reports and the market price of our common stock could be negatively affected. In addition, we could
become subject to investigations by NASDAQ Global Select Market, the SEC, or other regulatory authorities, which could require
additional financial and management resources.
If our goodwill becomes impaired, we may be required to record a significant charge to earnings.
We have a significant amount of goodwill. As of December 29, 2013, we had goodwill of approximately $368.1 million, which
represented 31% of our total assets as of such date. Goodwill is reviewed for impairment on an annual basis in the fourth fiscal
quarter or whenever events occur or circumstances change that would more likely than not reduce the fair value of our reporting
unit below its carrying amount. Fair value is determined based on the discounted cash flows and comparable market values of our
single reporting unit. If the fair value of the reporting unit is less than its carrying value, the fair value of the implied goodwill is
calculated as the difference between the fair value of our reporting unit and the fair value of the underlying assets and liabilities,
excluding goodwill. In the event an impairment to goodwill is identified, an immediate charge to earnings in an amount equal to the
excess of the carrying value over the implied fair value would be recorded, which would adversely affect our operating results. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates—
Goodwill and Intangible Assets.”
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