Sprouts Farmers Market, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 30, 2018 (52 weeks). The filing is an annual report, not a standalone quarterly filing; selected fourth-quarter data are included below. Sprouts operated 313 stores in 19 states at year-end, increasing to 318 stores by February 18, 2019. Its business is specialty grocery retail focused on fresh, natural and organic products.
Key financial results
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $5.207 billion | $4.665 billion | +12% |
| Comparable-store sales growth | 2.1% | 2.9% | Down 0.8 percentage points |
| Gross profit / gross margin | $1.747 billion / 33.6% | $1.567 billion / 33.6% | Gross profit +12%; margin unchanged |
| Income from operations | $222.9 million | $226.1 million | Down $3.2 million |
| Net income / diluted EPS | $158.5 million / $1.22 | $158.4 million / $1.15 | Net income nearly flat; EPS +6% |
| Cash from operating activities | $294.4 million | $309.6 million | Down $15.2 million |
| Capital expenditures | $177.1 million | $198.6 million | Down $21.5 million |
| Long-term debt | $453.0 million | $348.0 million | Up $105.0 million |
FY2018 SG&A was $1.404 billion, or 27.0% of sales, compared with 26.7% in FY2017. Net margin was 3.0%, versus 3.4%. The effective tax rate was 19.0%, including $12.4 million of excess tax benefits on share-based compensation and a $2.6 million discrete tax benefit.
Fourth quarter: Sales were $1.269 billion, operating income was $28.8 million and net income was $12.7 million (diluted EPS $0.10). In the year-earlier quarter, sales were $1.144 billion, operating income was $37.1 million and net income was $39.7 million (diluted EPS $0.29). FY2018 fourth-quarter results included $8.0 million of non-cash store-closure and asset-disposal charges and $3.6 million of CEO severance expense; the prior-year net income also benefited from the Tax Act.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash were $2.2 million at year-end, down from $19.5 million. Operating cash flow was below investing outflows; investing activities used $177.1 million, primarily for stores and other capital spending.
- The $453.0 million revolving-credit balance was under a $700.0 million facility maturing March 27, 2023. The company reported compliance with its financial covenants at year-end. About 55% of outstanding debt was effectively fixed through interest-rate swaps; management estimated that a 100-basis-point LIBOR change would affect annual interest expense by about $2.0 million after swaps.
- FY2018 financing cash outflows included $258.3 million of share repurchases; net borrowings of $105.0 million helped fund repurchases. The company had $218.3 million remaining under its $350 million repurchase authorization at year-end and repurchased another 0.9 million shares for $20.3 million through February 18, 2019.
- Contractual obligations included $1.744 billion of operating lease payments and $123.1 million of capital and financing lease obligations. The company expected to have sufficient cash and operating cash generation for anticipated needs over the next 12 months. Lease accounting adoption was expected to recognize approximately $1.0–$1.2 billion of operating lease assets and liabilities, without a material liquidity or cash-flow impact.
Changes, outlook and material matters
- Sales growth was mainly driven by recently opened stores; new stores contributed to higher SG&A and depreciation. Gross margin held at 33.6%, while comparable-store growth slowed to 2.1% from 2.9%.
- Sprouts opened 30 stores and closed two underperforming locations in 2018. Management expected approximately 30 new stores annually in the near term; its 2019 plan called for about 28 openings and one relocation. Expected 2019 capital expenditures were $170–$175 million, net of estimated landlord allowances.
- Former CEO Amin Maredia resigned effective December 30, 2018. CFO Brad Lukow and President/COO Jim Nielsen became interim co-CEOs while the board searched for a permanent successor.
- The company voluntarily reclassified certain occupancy and buying costs to SG&A and separately presented depreciation and amortization, applying the presentation retrospectively. The change did not affect sales, operating income, net income, EPS or equity. Adoption of ASC 606 also had no reported financial-statement impact.
- Key disclosed risks include intense grocery competition and pricing pressure; dependence on KeHE, which represented about 34% of purchases; produce and supply-chain exposure, including geographic concentration in California; labor and wage costs; food-safety and product-labeling regulation; cybersecurity; lease obligations; and debt service and covenant requirements.
- Contingencies include securities litigation over alleged disclosures regarding produce deflation, for which a settlement had preliminary court approval and was expected to be funded by D&O insurance if finalized. A California Proposition 65 coffee warning case remained unresolved; the company could not estimate a potential loss. Separate class actions concern a 2016 phishing incident involving team-member information; potential liability was not estimable.
Important facts for investors to verify
- Whether comparable-store sales and store-level profitability can sustain growth as new-store contribution remains important and competition pressures pricing.
- How cash generation, capital expenditures and lease payments evolve while the company continues debt-funded repurchases; verify leverage, interest costs and covenant headroom.
- Whether planned store openings achieve expected returns, and whether the CEO search and leadership transition affect execution.
- The final status and financial exposure of the Proposition 65 matter and phishing-related litigation, as well as final approval and insurance coverage for the securities settlement.
- The effect of the new lease-accounting presentation on reported assets, liabilities and operating metrics; the filing says it will materially increase recognized lease balances.