Sprouts Farmers Market 2015 Annual Report Download - page 30

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experienced volatility due to uncertainties related to energy prices, credit availability, difficulties in the
banking and financial services sectors, decreases in home values and retirement accounts, instability in
foreign markets, high unemployment and falling consumer confidence. As a result, consumers are more
cautious and could shift their spending to lower-priced competition, such as warehouse membership
clubs, dollar stores or extreme value formats, which could have a material and adverse effect on our
operating results and financial condition.
In addition, inflation or deflation can impact our business. Food deflation, particularly in produce,
could reduce sales growth and earnings if our competitors react by lowering their retail pricing, while food
inflation, when combined with reduced consumer spending, could reduce sales and gross profit margins.
As a result, our operating results and financial condition could be materially adversely affected.
Higher wage and benefit costs could adversely affect our business.
Changes in federal and state minimum wage laws and other laws relating to employee benefits,
including the Patient Protection and Affordable Care Act, could cause us to incur additional wage and
benefit costs. Increased labor costs brought about by changes in minimum wage laws, other regulations
or prevailing market conditions would increase our expenses and have an adverse impact on our
profitability.
The current geographic concentration of our stores creates an exposure to local or regional
downturns or catastrophic occurrences.
As of January 3, 2016, we operated 82 stores in California, making California our largest market
representing 38% of our total stores and 42% of our net sales in Fiscal 2015. We also have store
concentration in Texas, Arizona and Colorado, operating 37, 29 and 27 stores in those states,
respectively, and representing 42% in the aggregate of our net sales in the Fiscal 2015. In addition, we
source a large portion of our produce from California, ranging from approximately 40% to approximately
70% depending on the time of year. As a result, our business is currently more susceptible to regional
conditions than the operations of more geographically diversified competitors, and we are vulnerable to
economic downturns in those regions. Any unforeseen events or circumstances that negatively affect
these areas in which we have stores or from which we obtain products could materially adversely affect
our revenues and profitability. These factors include, among other things, changes in demographics,
population and employee bases, wage increases, changes in economic conditions, severe weather
conditions and other catastrophic occurrences. Such conditions may result in reduced customer traffic
and spending in our stores, physical damage to our stores, loss of inventory, closure of one or more of
our stores, inadequate work force in our markets, temporary disruption in the supply of products, delays in
the delivery of goods to our stores and a reduction in the availability of products in our stores. Any of
these factors may disrupt our business and materially adversely affect our financial condition and results
of operations.
Increased commodity prices and availability may impact profitability.
Many products we sell include ingredients such as wheat, corn, oils, milk, sugar, cocoa and other
key commodities. Many commodity prices worldwide have been increasing. Any increase in prices of
such key ingredients may cause our vendors to seek price increases from us. We cannot assure you that
we will be able to mitigate vendor efforts to increase our costs, either in whole or in part. In the event we
are unable to continue mitigating potential vendor price increases, we may in turn consider raising our
prices, and our customers may be deterred by any such price increases. Our profitability may be
impacted through increased costs to us which may impact gross margins, or through reduced revenue as
a result of a decline in the number and average size of customer transactions.