Sprouts Farmers Market, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The quarter covered 13 weeks ended April 2, 2023, compared with the 13 weeks ended April 3, 2022. Sprouts operated 395 stores in 23 states at quarter-end and reported one operating and reportable segment.
Financial performance
| Metric | Q1 2023 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1.733 billion | $1.641 billion | Up 6% |
| Comparable-store sales | 3.1% | 1.6% | Improved |
| Gross profit / margin | $650.1 million / 37.5% | $611.7 million / 37.3% | Margin up 0.2 percentage points |
| Operating income | $101.5 million | $119.6 million | Down 15% |
| Net income | $76.2 million | $88.3 million | Down 14% |
| Diluted EPS | $0.73 | $0.79 | Down 8% |
| Operating cash flow | $179.8 million | $153.0 million | Up $26.8 million |
Gross margin benefited from promotional optimization and favorable product mix. Sales growth reflected new stores and higher comparable sales; management attributed part of the comparable-sales increase to inflation-driven basket value, partly offset by slightly fewer items per basket. SG&A rose 6% to $486.2 million, mainly due to new stores, higher wages and utilities, and increased e-commerce costs. Operating margin was approximately 5.9%, versus 7.3% a year earlier; the decline included substantial store impairment costs.
Cash used in investing was $60.1 million, including $47.0 million of property and equipment purchases and $13.0 million for the acquisition. Cash used in financing was $118.1 million, including $98.3 million of share repurchases and $25.0 million of debt repayments. Cash, cash equivalents and restricted cash totaled $296.8 million at quarter-end. Cash from operations less property-and-equipment purchases was approximately $132.8 million; this is a simple calculation, not a company-reported free-cash-flow measure.
Long-term borrowings were $225.0 million, down from $250.0 million at fiscal year-end; the company made a further $25.0 million payment after quarter-end, leaving $200.0 million outstanding as of May 1. The revolving facility commitment is $700 million, with $21.6 million of letters of credit outstanding. The company reported compliance with its debt covenants. Operating lease liabilities were $1.390 billion in total, including current liabilities. Management said available cash and expected operating cash generation should meet anticipated needs for at least the next 12 months.
Material changes and unusual items
- The board approved closure of 11 underperforming stores during 2023; these locations were, on average, about 30% larger than the current prototype. The quarter included $27.8 million of impairment charges and $4.0 million of accelerated depreciation associated with the closures. Approximately $6.0 million of accelerated depreciation was expected in total.
- Sprouts acquired Ronald Cohn, Inc., which owned two California stores operating under the Sprouts name, for approximately $18.1 million in stock and $13.0 million in cash, subject to customary adjustments. The acquired stores’ results were not material. Purchase accounting remained preliminary; the filing recorded $12.9 million of goodwill and a $23.1 million reacquired-right intangible asset based on preliminary estimates.
- The company repurchased 3.04 million shares for $99.2 million at an average $32.64 per share, versus 1.48 million shares for $45.7 million in the prior-year quarter. An additional 0.5 million shares were repurchased for $16.0 million after quarter-end through the filing date.
- The effective tax rate decreased to 23.3% from 24.3%, primarily due to higher excess tax benefits from share-based awards.
Outlook, commentary and risks
- Management expected 2023 capital expenditures of $210–$230 million, net of estimated landlord allowances, funded with cash on hand and operating cash flow. No earnings or sales guidance was provided in the supplied filing text.
- The company said its strategy targets at least 10% annual unit growth beginning in 2024, supported by smaller-format stores and selected markets. It had opened 20 stores in the new format and remodeled one through April 2, 2023.
- Management cited continuing product-cost inflation in fiscal 2023, largely passed through to retail prices. It cautioned that inflation, reduced consumer spending, or deflation and competitor pricing responses could affect sales, margins and comparable-store results.
- Variable-rate debt creates SOFR exposure: based on $225 million outstanding, a 100-basis-point rate change would alter annual interest expense by approximately $2.3 million, all else equal.
- Ordinary-course claims, self-insurance obligations and litigation remain contingencies. In a California Proposition 65 coffee-warning case, the state Supreme Court denied review, but the filing said the matter was not yet dismissed and any potential loss could not be estimated; no loss contingency was recorded.
- The filing disclosed a nonmaterial prior-period cash-flow presentation error for Q1 2022 revolving-facility proceeds and repayments. The correction did not change total cash flows or the previously reported balance sheet or income statement.
Important facts for investors to verify
- Whether comparable-sales growth and basket trends persist as inflation and consumer demand change.
- The realized financial effects, timing and total costs of closing 11 stores, including impairment and accelerated depreciation.
- Progress against the stated store-growth strategy and the $210–$230 million 2023 capital-spending range.
- Debt repayment plans, variable-rate exposure, covenant headroom and the distinction between funded debt and substantial operating lease obligations.
- Share-repurchase pace and remaining authorization: $313.5 million remained at April 2, 2023, under a program expiring December 31, 2023.
- Final purchase-price allocation for the Ronald Cohn acquisition and any subsequent changes to its preliminary asset and goodwill estimates.
- Developments in self-insurance and litigation matters, including dismissal status of the Proposition 65 case.