Sprouts Farmers Market 2013 Annual Report Download - page 109

Table of Contents
distribution costs, economies of scale 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:
Sales and net income of Sunflower totaling $297.8 million and $8.6 million respectively are included in the consolidated results
of operations for the year ended December 30, 2012.
Valuations
The Company engaged an independent valuation firm to assist management with the valuations of acquired inventory,
personal property, real estate, favorable and unfavorable leasehold interests and intangible assets for the Henry’s and Sunflower
Transactions. Acquired inventory was recorded at net realizable value, with significant estimates relating to the time expected to
dispose of inventory, disposal costs and commensurate profit. Personal property, consisting primarily of leasehold improvements
and furniture, fixtures and equipment, were valued using the cost method, which requires significant estimates related to
replacement costs of acquired personal property, as well as estimates of physical deterioration. Real estate was valued through a
combination of income and market approaches and significant estimates underlying these valuations include market comparable
pricing and capitalization rates, which the independent valuation firm assisted management in determining.
The value of the Sprouts trade name and trademarks was determined using an income approach, utilizing a relief from royalty
method in conjunction with a profit split methodology. The relief from royalty method estimates the theoretical royalty savings
resulting from ownership of the Sprouts trade name and trademarks. Significant estimates used in this valuation method include
discount rate, royalty rates, growth rates and sales projections. The discount rate used was the Company’s weighted average cost
of capital, the royalty rate was a base
rate determined by reference to comparable market royalty rate agreements and growth rates
and projected sales were determined using forecasts prepared by management.
The Sunflower trade name was accounted for as a “defensive intangible asset” with an estimated useful life of 10 years from
the date of the Sunflower Transaction. Acquired liquor licenses were valued using a cost approach.
Unaudited supplemental pro forma information
The following table presents unaudited supplemental pro forma consolidated results of operations information for 2012 and
2011. The unaudited supplemental pro forma consolidated results of operations information gives effect to certain adjustments,
including depreciation and amortization of the assets acquired and liabilities assumed based on their estimated fair values and
changes in
104
Trade name (10 year useful life)
$
1,800
Liquor licenses (indefinite-lived)
1,070
Favorable leasehold interests (12.3 years weighted average useful life)
4,546
Total intangible assets
$
7,416