Sprouts Farmers Market 2013 Annual Report Download - page 52

Table of Contents
Cost of sales, buying and occupancy and gross profit
Cost of sales includes the cost of inventory sold during the period, including direct costs of purchased merchandise (net of
discounts and allowances), distribution and supply chain costs, buying costs and supplies. Merchandise incentives received from
vendors are reflected in the carrying value of inventory when earned or as progress is made toward earning the rebate or
allowance, and are reflected as a component of cost of sales as the inventory is sold. Inflation and deflation in the prices of food
and other products we sell may periodically affect our gross profit and gross margin. The short-
term impact of inflation and deflation
is largely dependent on whether or not we pass the effects through to our customers, which will depend upon competitive market
conditions. In the first half of fiscal 2012, we experienced produce price deflation, which contributed to higher gross margins in our
business during that period and the full fiscal year.
Occupancy costs include store rental, property taxes, utilities, common area maintenance, amortization of favorable and
unfavorable leasehold interests and property insurance. Occupancy costs do not include building depreciation, which is classified
as a direct store expense.
Our cost 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 store expenses consist of store-level expenses such as salaries and benefits, related equity-based compensation,
supplies, depreciation and amortization for buildings, store leasehold improvements, equipment and other store specific costs. As
sales increase, direct store expenses generally decline as a percentage of sales.
Selling, general and administrative expenses
Selling, general and administrative expenses primarily consist of salaries and benefits costs, equity-based compensation,
advertising, acquisition-related costs and corporate overhead.
We charge third-parties to place advertisements in our in-store guide and newspaper circulars. We record consideration
received from vendors in connection with cooperative advertising programs as a reduction to advertising costs when the allowance
represents reimbursement of a specific and identifiable cost. Advertising costs are expensed as incurred.
We expect our selling, general and administrative expenses will increase in future periods as a result of incremental share-
based compensation, legal, accounting and other compliance-related expenses associated with being a public company and
increases resulting from growth in the number of our stores.
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• the number of customer transactions and average ticket;
•
the prices of our products, including the effects of inflation and deflation;
• opening new stores in the vicinity of our existing stores;
• advertising, in-store merchandising and other marketing activities; and
• our competition, including competitive store openings in the vicinity of our stores and competitor pricing and
merchandising strategies.