Sprouts Farmers Market, Inc. — Q2 2022 Form 10-Q
Reporting period: 13 weeks ended July 3, 2022; comparisons are with the 13 weeks ended July 4, 2021. Year-to-date figures cover 26 weeks. Sprouts operated 378 stores in 23 states at quarter-end and reports one operating and reportable segment: healthy grocery stores.
Key financial results
| Metric | Q2 2022 | Q2 2021 | 26 weeks 2022 | 26 weeks 2021 |
|---|---|---|---|---|
| Net sales | $1,595.5 million | $1,522.0 million | $3,236.6 million | $3,097.4 million |
| Comparable-store sales growth | 2.0% | (10.0)% | 1.8% | (9.7)% |
| Gross profit / gross margin | $580.4 million / 36.4% | $550.1 million / 36.1% | $1,192.1 million / 36.8% | $1,136.3 million / 36.7% |
| Operating income | $86.5 million | $83.7 million | $206.2 million | $196.9 million |
| Net income | $62.0 million | $61.0 million | $150.3 million | $144.1 million |
| Diluted EPS | $0.57 | $0.52 | $1.36 | $1.22 |
- Q2 SG&A was $462.1 million, or 29.0% of sales, versus $436.4 million, or 28.7%. For the first half, SG&A was $922.0 million, or 28.5% of sales, versus $876.1 million, or 28.3%.
- Cash from operations for the first half was $209.0 million, compared with $177.3 million. Capital expenditures were $53.1 million versus $39.4 million; operating cash flow less capital expenditures was approximately $155.9 million.
- Cash and cash equivalents at July 3 were $289.0 million; cash, cash equivalents and restricted cash totaled $290.8 million. Current liabilities were $515.3 million.
- Long-term debt was $250.0 million, with $9.2 million of finance lease liabilities. Operating lease liabilities totaled approximately $1,254.8 million, including current and long-term portions. The $700 million revolving facility matures in March 2027; $24.8 million of letters of credit were outstanding. The company reported covenant compliance.
Material changes and drivers
- Q2 sales increased 5%; first-half sales increased 4%. Management attributed growth to positive comparable sales and sales from stores opened in the prior 12 months.
- Q2 gross margin improved 0.3 percentage points, primarily from improved shrink. First-half gross margin rose 0.1 points, which management attributed to strategic initiatives.
- Higher SG&A reflected new stores, inflation-related costs—including payroll, utilities and supplies—and, in Q2, higher credit-card fees and e-commerce costs.
- Q2 net income rose 2%, while diluted EPS increased 10%; first-half net income rose 4% and diluted EPS 11%. The company cited fewer diluted shares, primarily from repurchases, as a contributor to EPS growth.
- First-half repurchases totaled $111.1 million. The board authorized a new $600 million program in March; $500.8 million remained available at July 3. A further 0.5 million shares costing $14.1 million were repurchased through August 1.
Outlook, risks and unusual items
- Management expects 2022 capital expenditures of $130–$150 million, net of estimated landlord allowances, funded from cash on hand and operating cash flow. It believes available cash and expected operating cash flow can meet anticipated needs for at least 12 months.
- The company’s long-term strategy emphasizes target customers, smaller-format stores, fresh supply-chain investment, brand development and financial returns. Management described a potential runway of approximately 10% annual unit growth beginning in 2024; this is a long-term strategic expectation, not near-term earnings guidance.
- Management reported ongoing inflation and product-sourcing obstacles, as well as possible higher costs and delays in new-store openings from equipment availability and supply-chain pressures. It cautioned that inflation or deflation, competitive pricing and changes in consumer spending could affect sales and margins.
- The outstanding $250 million debt was subject to a floating-rate benchmark but was fully hedged by an interest-rate swap at quarter-end. The swap was due to mature in 2022. The filing estimates that, without the swap, a 100-basis-point SOFR change would alter annual interest expense by $2.5 million.
- A California Proposition 65 coffee-warning lawsuit had been dismissed, but an appeal remained pending; management said the potential loss could not be reasonably estimated and recorded no contingency. The company also disclosed ordinary-course litigation and self-insurance exposure.
- The effective tax rate rose to 26.1% in Q2 and 25.0% for the first half, primarily due to reduced enhanced charitable-contribution benefits and higher nondeductible executive compensation; first-half share-based payment benefits partly offset the increase.
Investor verification points
- Assess the source and durability of comparable-sales growth; the filing does not separately quantify the effects of pricing, traffic and basket size.
- Track whether gross-margin gains offset inflationary pressure on store expenses and whether sourcing or equipment delays affect openings and capital spending.
- Review execution against the smaller-store strategy and the stated potential for approximately 10% annual unit growth beginning in 2024.
- Monitor the swap’s maturity and subsequent interest-rate exposure, as well as debt-facility availability and covenant compliance.
- Evaluate the pace and returns of share repurchases alongside store investment, and follow the pending coffee-action appeal and self-insurance claims.