Sprouts Farmers Market 2015 Annual Report Download - page 73

65
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 and store perishable department inventories by assigning
costs to each of these items based on a first-in, first-out (FIFO) basis (net of vendor discounts).
The Company’s non-perishable inventory is valued at the lower of cost or market using weighted
averaging and other estimation techniques, the use of which approximates the FIFO method.
The Company believes that all inventories are saleable and no allowances or reserves for
obsolescence were recorded as of January 3, 2016 and December 28, 2014. During 2015, the Company
changed its store inventory count procedure with respect to non-perishable inventories and no longer
counts all inventory in every store at the end of the every quarter. Previously, the Company had counted
all inventory at every store at or near the balance sheet date and therefore recorded no estimate for
shrink. The Company now counts non-perishable store inventories on a rotational basis and perishable
store inventories at the end of every quarter. The change in timing necessitates making an estimate for
non-perishable inventory shrink between the count date and the reporting date. Accordingly, the inventory
balance in the accompanying Consolidated Balance Sheets include a $2.8 million inventory shrink
reserve as of January 3, 2016.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization.
Expenditures for major additions and improvements to facilities are capitalized, while maintenance and
repairs are charged to expense as incurred. When property is retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is
reflected in the consolidated statements of operations. Depreciation expense, which includes the
amortization of assets recorded under capital and financing leases, is computed using the straight-line
method over the estimated useful lives of the individual assets. Leasehold improvements and assets under
capital and financing leases are amortized over the shorter of the lease term to which they relate, or the
estimated useful life of the asset. Terms of leases used in the determination of estimated useful lives may
include renewal options if the exercise of the renewal option is determined to be reasonably assured.
The following table includes the estimated useful lives of certain of our asset classes:
Software and used equipment 3 years
Computer hardware 5 years
Furniture, fixtures and equipment 7 years
Leasehold improvements up to 15 years
Buildings 40 years
Store development costs, which include costs associated with the selection and procurement of real
estate sites, are also included in property and equipment. These costs are included in leasehold
improvements and are amortized over the remaining lease term of the successful sites with which they
are associated. Certain project costs, including general site selection costs that cannot be identified with a
specific store location, are charged to direct store expenses in the accompanying consolidated
statements of operations.
Asset Retirement Obligations
The Company’s asset retirement obligations (“ARO”) are related to the Company’s commitment to
return leased facilities to the landlord in an agreed-upon condition. This may require actions ranging from
cleaning to removal of leasehold improvements. The obligation is recorded as a liability with an offsetting
capital asset at the inception of the lease term based upon the estimated fair market value of costs to
meet the commitment. The liability, included in other long-term liabilities in the consolidated balance