Sprouts Farmers Market, Inc. — FY2022 Form 10-K
Business context and reporting period. Sprouts operates specialty grocery stores focused on fresh, natural and organic foods. This 10-K covers the 52-week fiscal year ended January 1, 2023; it is an annual report, not a report for Q4 alone. At year-end, the company had 386 stores in 23 states. FY2021 was also 52 weeks; FY2020 included 53 weeks.
Key financial results
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $6,404.2 million | $6,099.9 million | Up 5% |
| Comparable-store sales | Up 2.2% | Down 6.7% | — |
| Gross profit / gross margin | $2,348.6 million / 36.7% | $2,209.2 million / 36.2% | Margin up 0.5 percentage point |
| Operating income | $358.4 million | $334.1 million | Up 7% |
| Net income | $261.2 million | $244.2 million | Up 7% |
| Diluted EPS | $2.39 | $2.10 | Up 14% |
| Operating cash flow | $371.3 million | $364.8 million | Up $6.5 million |
| Capital expenditures | $124.0 million | $102.4 million | Up $21.6 million |
Sales growth reflected higher comparable-store sales and new-store contributions. Comparable-store growth was supported partly by retail price inflation, while items per basket declined slightly. Management attributed improved gross margin to shrink initiatives, reduced promotions and pricing aligned with product-cost inflation. SG&A rose 6% to $1,855.6 million, or 29.0% of sales, driven by new stores and inflation-related wages, utilities and supplies, as well as higher credit-card and e-commerce costs.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash were $295.2 million at year-end, versus $247.0 million a year earlier. Cash from operations was $371.3 million; investing used $124.0 million and financing used $199.1 million.
- Year-end borrowings under the revolving credit agreement were $250.0 million. The company reported compliance with its credit covenants; the facility has a $700 million initial commitment and matures March 25, 2027. Borrowings carry variable interest rates.
- Operating lease liabilities totaled approximately $1,280.8 million, in addition to $9.9 million of finance lease liabilities. The filing reports $504.5 million of minimum lease payments for executed leases not yet commenced.
- Management said cash on hand and expected operating cash flows should cover anticipated needs for at least the next 12 months. It estimated 2023 capital expenditures of $210 million to $230 million, net of expected landlord allowances.
Material changes, outlook and notable items
- Sprouts opened 16 stores and closed four during FY2022, ending the year with 386 stores. It expected approximately 30 openings in FY2023 and targeted at least 10% annual unit growth beginning in 2024. Management noted that supply-chain delays had postponed openings.
- In February 2023, the company approved closing 11 stores, described as underperforming and, on average, about 30% larger than its current format. It estimated total charges of $30 million to $40 million, primarily in FY2023.
- The board authorized a $600 million share-repurchase program in March 2022. The company repurchased approximately 6.9 million shares for $200.0 million during FY2022 and another 2.0 million shares for $64.0 million through February 28, 2023. The filing states that it does not anticipate paying cash dividends in the near future.
- The company identified and plans to revise a presentation error in quarterly FY2022 cash flow statements: $62.5 million of revolving-credit proceeds and $62.5 million of repayments were not separately presented in financing activities. The company said the error did not affect total cash flows or the previously reported balance sheets, income statements or comprehensive income statements.
- FY2022 included $11.0 million of store-closure and other costs, including $8.1 million of long-lived asset impairment, Hurricane Ian-related losses and expenses, and costs from four store closures. No goodwill or indefinite-lived intangible-asset impairment was recorded.
Risks and contingencies
- Management cited inflation, changing consumer spending, competitive pricing and potential food deflation as risks to sales and margins. It said FY2022 product-cost inflation was largely passed through to retail prices.
- Supply and distribution risks include dependence on fresh produce, weather and climate exposure, geographic concentration, and reliance on KeHE, which represented approximately 45% of purchases in FY2022. Labor availability and wage inflation, food safety, cybersecurity and regulatory compliance are also identified risks.
- Self-insurance reserves were $47.6 million at year-end; their valuation relies on actuarial assumptions. PwC identified valuation of self-insurance reserves as a critical audit matter. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
- The company disclosed ordinary-course litigation and contingencies. In a long-running California Proposition 65 coffee case, the appellate court affirmed dismissal in October 2022; the California Supreme Court denied review in February 2023. The filing reported no loss accrual for that matter while the case remained pending in the trial court.
Important facts for investors to verify
- Whether comparable-store sales and gross-margin gains persist after the inflation-driven price increases and against changing consumer demand.
- Whether planned store openings, the smaller-store format and the targeted unit-growth rate deliver expected returns, especially after the 11-store closure decision.
- How the planned closures’ estimated $30 million to $40 million charge affects FY2023 results and cash needs.
- Debt costs and covenant headroom as variable rates change, alongside lease obligations and the planned repurchase pace.
- Completion and presentation of the quarterly cash-flow revisions, and the assumptions underlying the $47.6 million self-insurance reserve.