Sprouts Farmers Market 2014 Annual Report Download - page 35

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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. Pursuant to
Section 404 of the Sarbanes-Oxley Act, we are required to file a report by management on the
effectiveness of our internal control over financial reporting, and our independent registered public
accounting firm is required to attest to the effectiveness of our internal control over financial reporting.
In connection with management’s assessment of the effectiveness of our disclosure controls and
procedures for the year ended December 29, 2013, we concluded a material weakness existed related to
our internal controls with respect to the costing of non-perishable inventories. During the fiscal year ended
December 28, 2014, we implemented additional controls and procedures to address this material
weakness and management determined that this material weakness was remediated as of December 28,
2014.
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, 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 28, 2014, we had goodwill of approximately
$368.1 million, which represented 27% 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.”
Determining market values using a discounted cash flow method requires that we make significant
estimates and assumptions, including long-term projections of cash flows, market conditions and
appropriate market rates. Our judgments are based on historical experience, current market trends and
other information. In estimating future cash flows, we rely on internally generated forecasts for operating
profits and cash flows, including capital expenditures. Based on our annual impairment test during fiscal
2012, 2013 and 2014, no goodwill impairment charge was required to be recorded. Changes in estimates
of future cash flows caused by items such as unforeseen events or changes in market conditions could
negatively affect our reporting unit’s fair value and result in an impairment charge. Factors that could cause
us to change our estimates of future cash flows include a prolonged economic crisis, successful efforts by
our competitors to gain market share in our core markets, our inability to compete effectively with other
retailers or our inability to maintain price competitiveness. An impairment of a significant portion of our
goodwill could materially adversely affect our financial condition and results of operations.
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