Sprouts Farmers Market 2014 Annual Report Download - page 67

October 31, 2012: We based the value of our equity underlying these awards using the same factors
described above for the July-August 2012 grants.
December 21, 2012: We granted 258,500 options to team members on December 21, 2012.
Significant factors in determining the fair value of our common equity underlying these awards were the
following:
• Successful re-branding and integration of Henry’s, Sprouts Arizona and Sunflower operations
achieved by the end of fiscal 2012;
• Our operating and financial performance and forecasts as a combined company;
• New store openings and planned openings;
• Market valuations of comparable publicly traded grocers;
• The applicability of a discount to reflect a lack of marketability for our equity;
• General capital market conditions in the U.S.; and
• Our view that an initial public offering was feasible by the end of fiscal 2013.
As a result of these factors, we determined an increase in the valuation of our common equity was
justified. In order to estimate the fair value of our common equity underlying the December 21, 2012 option
grants prior to our IPO, we estimated the business enterprise value (referred to as “BEV”) using the market
approach, which we believe is most reflective of our BEV after taking into account our successful
integrations of Henry’s, Sprouts Arizona and Sunflower.
Under the market approach, we estimated our BEV by deriving multiples of equity or invested capital
to EBITDA for selected publicly traded comparable companies. We also estimated our BEV using the
income approach as a benchmark to assess the BEV derived under the market approach and determined
the two methods yielded similar BEV conclusions.
When selecting comparable companies, consideration was given to industry similarities, product
offerings and market positioning, financial data availability and capital structure. In applying the market
approach, we also estimated a discount for lack of marketability, primarily by reference to the discounts
applied to equity values in the Transactions.
January-March 2013: We based the value of our equity underlying these awards using the same
factors described above for the December 21, 2012 grants.
April-June 2013: We based the value of our equity underlying these awards using the same factors
described above for the December 21, 2012 grants.
August 1, 2013: We based the value of our equity underlying these awards on our IPO pricing of
$18.00 as the awards issued during this period were issued concurrent with the IPO.
There are significant estimates and judgments inherent in the determination of these valuations. These
judgments and estimates include assumptions about our future performance, including the growth in the
number of our stores, as well as the determination of the appropriate valuation methods at each valuation
date. If we had made different assumptions, our equity-based compensation expense could have been
different. We have not used the foregoing valuation methods since our IPO. Following our IPO, we base
our equity valuations on the trading price of our common stock.
Inventories
Inventories consist of merchandise purchased for resale, which are stated at the lower of cost or
market. The cost method is used for warehouse perishable and store perishable department inventories by
assigning costs to each of these items based on a first-in, first-out (referred to as “FIFO”) basis (net of
vendor discounts).
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