Business context and reporting period
Sprouts Farmers Market, Inc. operates specialty grocery stores focused on fresh, natural and organic products. This unaudited Form 10-Q covers the 13 weeks ended April 3, 2022; comparisons are with the 13 weeks ended April 4, 2021. The company operated 379 stores in 23 states at quarter-end, versus 362 a year earlier.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1,641.2 million | $1,575.4 million | Up 4% |
| Comparable-store sales | Up 1.6% | Down 9.4% | Improved |
| Gross profit / margin | $611.7 million / 37.3% | $586.2 million / 37.2% | Profit up 4%; margin up 0.1 percentage point |
| Operating income / margin | $119.6 million / approximately 7.3% | $113.2 million / approximately 7.2% | Operating income up 6% |
| Net income / margin | $88.3 million / 5.4% | $83.0 million / 5.3% | Up 6% |
| Diluted EPS | $0.79 | $0.70 | Up 13% |
| Operating cash flow | $153.0 million | $105.4 million | Up $47.6 million |
| Capital expenditures | $27.2 million | $16.6 million | Up $10.6 million |
Gross-margin improvement was primarily attributed to lower shrink. SG&A rose 5% to $459.9 million, or 28.0% of sales, from 27.9%; management cited new stores, inflation-related utility and supply costs, partly offset by marketing-spend timing. Net income growth reflected higher sales and gross profit, partly offset by higher SG&A. Diluted share count declined to 111.8 million from 118.6 million, supporting EPS growth.
At April 3, cash and cash equivalents were $324.3 million; cash, cash equivalents and restricted cash totaled $326.1 million. Current assets were $640.7 million and current liabilities $523.7 million. Long-term debt was $250.0 million, with $9.4 million in finance lease liabilities; operating lease liabilities totaled approximately $1,260.2 million. The company entered a new $700 million revolving credit agreement maturing in 2027, replacing its former facility. It had $250 million drawn and $24.8 million of letters of credit outstanding. The company reported compliance with its financial covenants. An interest-rate swap covered the outstanding debt during the period.
Material changes versus the prior period
- Sales increased 4%, driven by new stores opened over the prior 12 months and 1.6% comparable-store growth.
- Operating cash flow improved, largely because working-capital changes provided $28.6 million of cash versus using $16.0 million in the prior-year quarter; management cited prior-year COVID-related incentive payments and marketing-spend timing.
- Share repurchases were $45.7 million, versus $3.2 million a year earlier. The board authorized a new $600 million program in March, replacing the prior authorization; $566.1 million remained available at quarter-end. An additional $20.0 million of repurchases occurred through May 2.
- Trailing-four-quarter ROIC, a company-defined non-GAAP measure including operating leases, was 12.2%, compared with 14.3%.
Outlook, commentary and risks
- The filing gives no specific quarterly or full-year sales or earnings guidance. Management expects 2022 capital expenditures of $150–$170 million, net of estimated landlord allowances.
- The company is pursuing smaller-format stores, targeted-market expansion and fresh-distribution efficiencies. Management cited a potential runway for at least 10% annual unit growth beginning in 2023; this is a strategic expectation, not a formal financial forecast.
- Inflation and supply disruptions continued to affect sourcing and operating costs; delays in obtaining equipment may also delay planned store openings. Management said inflation and deflation can affect sales, margins and cash flow depending on pricing and competitive responses.
- Management stated that cash on hand and expected operating cash flow should cover anticipated needs for at least the next 12 months. A 100-basis-point SOFR movement would change annual interest expense by $2.5 million before the swap; the company estimated no annual expense change after taking the swap into account.
- The company is defending an appeal in a California Proposition 65 coffee-warning case and said potential loss could not be reasonably estimated; no loss contingency was recorded. Federal tax returns for fiscal years ended December 31, 2017 and January 1, 2017 were under IRS examination.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing said there were no material changes to the risk factors in the prior annual report.
Important facts for investors to verify
- Whether comparable sales and margins remain resilient as inflation, sourcing constraints and consumer responses to pricing evolve.
- Whether new-format openings, the distribution network and the stated long-term unit-growth ambition deliver expected returns and timing.
- Actual capital spending versus the $150–$170 million 2022 estimate, and the effects on cash generation and liquidity.
- Future use of the $600 million repurchase authorization, considering store investment needs and debt and lease obligations.
- Developments in the Proposition 65 appeal, IRS examinations and self-insurance or other ordinary-course claims.