Sprouts Farmers Market 2013 Annual Report Download - page 53

Table of Contents
Store pre-opening costs
Store pre-opening costs include rent expense during construction 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.
Store closure and exit costs
We recognize a reserve for future operating lease payments associated with facilities that are no longer being utilized in our
current operations. The reserve is recorded based on the present value of the remaining non-cancelable lease payments after the
cease use date less an estimate of subtenant income. If subtenant income is expected to be higher than the lease payments, no
accrual is recorded. Lease payments included in the closed store reserve are expected to be paid over the remaining terms of the
respective leases. Our assumptions about subtenant income are based on our experience and knowledge of the area in which the
closed property is located, guidance received from local brokers and agent and existing economic conditions. Adjustments to the
closed store reserve relate primarily to changes in actual or estimated subtenant income and changes in actual lease payments
from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known,
considering timing of new information regarding market, subleases or other lease updates. Changes in reserve estimates are
classified as store closure and exit costs in the consolidated statements of operations. Store closure and exit costs in fiscal 2011
and fiscal 2012 consisted primarily of reserves to close redundant store locations and facilities following the Transactions. Store
closure and exit costs in fiscal 2012 and fiscal 2013 also include adjustments to estimates recorded in fiscal 2012 and 2011.
Benefit (provision) for income taxes
Prior to the Henry’s Transaction, Henry’s was included in the consolidated federal and certain state income tax groups of its
previous parent for income tax reporting purposes. Henry’s was not a separate taxpaying entity before the Henry’s Transaction.
However, for the periods presented through the Henry’s Transaction, 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 of the
Henry’s Transaction, for tax purposes, Henry’s was acquired in a taxable asset acquisition. The purchase price was allocated to all
identifiable assets with the residual assigned to tax deductible goodwill. The resulting basis differences between the new tax values
and historical amounts resulted in a deferred tax asset of $47.6 million being recorded through stockholders’ equity. See Note 18 to
our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of the tax
deductibility of goodwill.
Since the Henry’s Transaction, our income tax (provision) benefit has been based on the new tax return filing group. Although
we were structured as a limited liability company, we elected to be taxed as a corporation for income tax purposes. We are subject
to federal income tax as well as state income tax in 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 “—Factors Affecting Comparability of Result of Operations—Corporate Conversion.” The
corporate conversion has not had a material impact on our results of operations, financial position or cash flows since we were
treated as a corporation for income tax purposes prior to the conversion.
In September 2013, the Internal Revenue Service issued final regulations related to tangible property, which govern when a
taxpayer must capitalize or deduct expenses for acquiring, maintaining, repairing and replacing tangible property. The regulations
are effective for tax years beginning January 1, 2014; however, early adoption is permitted. We have analyzed the impacts of the
tangible property regulations, and have determined we are in compliance with the regulations. The adoption of the regulations will
not have a significant effect on our consolidated financial statements.
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