Sprouts Farmers Market, Inc. — Q2 2021 Form 10-Q
Reporting period: The 13 weeks ended July 4, 2021; comparative quarter ended June 28, 2020. Unless indicated otherwise, amounts below are in millions of dollars. Sprouts operated 363 stores in 23 states at quarter-end.
Financial performance
| Metric | Q2 2021 | Q2 2020 | 26 weeks 2021 | 26 weeks 2020 |
|---|---|---|---|---|
| Net sales | $1,522.0 | $1,642.8 | $3,097.4 | $3,289.3 |
| Comparable-store sales growth | (10.0)% | 9.1% | (9.7)% | 9.9% |
| Gross profit / margin | $550.1 / 36.1% | $612.7 / 37.3% | $1,136.3 / 36.7% | $1,206.5 / 36.7% |
| Operating income | $83.7 | $92.8 | $196.9 | $220.4 |
| Net income | $61.0 | $67.0 | $144.1 | $158.8 |
| Diluted EPS | $0.52 | $0.57 | $1.22 | $1.35 |
Q2 net sales fell 7% and net income fell 9% year over year; six-month sales fell 6% and net income fell 9%. Management attributed the sales declines primarily to comparisons against pandemic-driven demand in 2020. Q2 gross margin contracted 1.2 percentage points, with management citing prior-year opportunistic produce purchases and exceptionally low shrink. Six-month gross margin held at 36.7%, which management attributed in part to strategic initiatives. Q2 SG&A declined 11% to $436.4 million, reflecting lower COVID-related payroll, bonus and ecommerce costs; as a share of sales it fell to 28.7% from 29.8%. Six-month SG&A declined 5%, but rose to 28.3% of sales from 28.1% due to sales deleverage.
Cash flow, liquidity and capital
- For the first 26 weeks, operating cash flow was $177.3 million, down from $393.3 million; management attributed the decline primarily to working-capital changes and elevated accrual balances in the prior-year period.
- Investing cash outflow was $39.4 million, versus $64.6 million. Financing cash outflow was $86.6 million, mainly reflecting $87.5 million of share repurchases; prior-year financing outflow mainly reflected $87.0 million of credit-facility repayments.
- Cash and cash equivalents were $220.9 million at July 4, 2021; cash, cash equivalents and restricted cash totaled $222.8 million. Management said available cash and expected operating cash generation should cover anticipated needs for at least 12 months.
- Long-term debt was $250.0 million under a $700 million revolving credit facility, with maturity scheduled for March 27, 2023. The company reported compliance with its covenants. All outstanding debt was fixed-rate after interest-rate swaps; the filing estimates no annual interest-expense sensitivity to a 100-basis-point LIBOR change after swaps.
- Operating lease liabilities totaled about $1,220.0 million and finance lease liabilities about $10.1 million. Contractual operating lease obligations were $1,857.5 million, presented gross of subtenant rentals.
- First-half capital expenditures were $39.4 million. Full-year 2021 capital expenditures were expected to be $110–$125 million, net of estimated landlord tenant-improvement allowances.
Outlook, commentary and notable items
- Long-term strategy focuses on target customers, smaller updated store formats, selected-market expansion, fresh-supply-chain investment, brand and marketing, and store economics. Management cited a goal of at least 10% annual unit growth beginning in 2022.
- Two fresh distribution centers opened in 2021; management said more than 85% of stores were then within 250 miles of a distribution center.
- Supply-chain delays, including difficulty obtaining equipment, could push approximately seven planned Q4 2021 store openings into 2022. The filing cautions that the pandemic’s future effects remain uncertain, including from variants, vaccination and consumer or government responses.
- Q2 store closure and other costs were a $0.4 million credit, primarily from insurance recovery related to a store fire. First-half costs were $1.6 million, reflecting winter-storm inventory losses and expenses, net of insurance recovery, and fire-related costs.
- The board authorized a $300 million repurchase program in March 2021. Through July 4, the company repurchased 3.28 million shares for $87.5 million, leaving $212.5 million authorized. It repurchased a further 1.0 million shares for $25.0 million through August 5.
- The appeal in the California Proposition 65 coffee litigation was pending; the company said it could not estimate a potential loss. Self-insurance claims and ordinary-course litigation are also contingencies. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales and comparable-store trends stabilize as pandemic-era comparisons ease, and how much results reflect traffic, pricing or basket changes.
- Whether gross-margin performance and operating costs hold up amid inflation, supply disruptions and changing customer demand.
- Whether the planned store-opening delays affect the 2021 pipeline or the stated 2022 unit-growth ambition, and whether capital spending stays within guidance.
- Progress on the repurchase program, cash generation and debt refinancing or repayment ahead of the March 2023 facility maturity.
- Developments in the Proposition 65 appeal, self-insurance estimates and other litigation or contingency exposures.