Sprouts Farmers Market, Inc. annual report, FY2021

Sprouts Farmers Market, Inc. — FY2021 Form 10-K

Business context and reporting period. Sprouts operates specialty grocery stores focused on fresh, natural and organic products. This annual report covers the 52-week fiscal year ended January 2, 2022; the comparison year ended January 3, 2021 included 53 weeks. The company had 374 stores in 23 states at year-end.

Financial performance

MetricFY2021FY2020
Net sales$6.100 billion$6.469 billion
Comparable-store sales growth(6.7%)6.9%
Gross profit / margin$2.209 billion / 36.2%$2.379 billion / 36.8%
Operating income$334.1 million$391.7 million
Net income$244.2 million$287.5 million
Diluted EPS$2.10$2.43
Cash from operations$364.8 million$494.0 million
Capital expenditures$102.4 million$122.0 million

Sales fell 6%, principally reflecting the reversal of pandemic-driven demand and the prior year’s extra week, partly offset by new-store sales. Gross margin declined 0.6 percentage points, and net income fell 15%. SG&A declined 6% to $1.748 billion, while SG&A as a share of sales was nearly flat at 28.7%. Operating cash flow decreased $129.2 million, reflecting lower earnings and working-capital changes, including incentive compensation payments and inventory rebuilding. Year-end cash and restricted cash was $247.0 million, up from $171.4 million. Operating cash flow less reported capital expenditures was approximately $262.4 million.

Long-term debt was $250 million, unchanged year over year; the revolving credit facility had a $700 million commitment and matured March 27, 2023. The company reported compliance with its debt covenants. Recognized lease liabilities totaled approximately $1.258 billion. Current assets were $567.7 million and current liabilities $513.5 million. The company said cash on hand and expected operating cash generation should cover anticipated needs for at least 12 months. A $300 million repurchase authorization was approved in March 2021; the company repurchased 7.4 million shares for $188.3 million during FY2021.

Strategy, outlook and risks

  • Growth plans: Management planned approximately 15–20 store openings in FY2022 and targeted at least 10% annual unit growth beginning in 2023, subject to supply-chain constraints. FY2021 included 12 openings; seven planned fourth-quarter openings were delayed to 2022 by equipment and supply-chain delays.
  • Investment: Planned FY2022 capital expenditures were $150–$170 million, net of estimated landlord allowances, for new stores, remodels, maintenance and corporate needs. Management reported that more than 85% of stores were within 250 miles of a distribution center after two centers opened in 2021.
  • Operating strategy: The company is focusing on health-conscious and experience-seeking customers, smaller-format stores, fresh-distribution efficiencies, digital marketing and omnichannel sales. New-format stores generally target 21,000–25,000 square feet; three such stores opened and one was remodeled in 2021.
  • Key risks: COVID-19 effects, labor availability and wage costs, inflation and product sourcing disruptions, intense grocery competition, produce availability and weather exposure, supplier concentration, cyber and food-safety risks, and execution of store growth. KeHE represented approximately 44% of purchases in FY2021. Stores and produce sourcing are geographically concentrated, particularly in California.
  • Other items: FY2021 included $4.8 million of long-lived asset impairment losses. The auditor issued an unqualified opinion and concluded internal control over financial reporting was effective; valuation of $50.5 million in self-insurance reserves was identified as a critical audit matter. A pending appeal in a California Proposition 65 coffee case had no recorded loss contingency because the company said it could not reasonably estimate potential loss.

Investor verification priorities

  • Track comparable-store sales, traffic and average ticket as pandemic-related comparisons normalize.
  • Verify whether gross-margin performance and profitability improve amid inflation, promotional competition and labor costs.
  • Monitor execution of the 2022 opening and capital-spending plans, delayed projects, and the targeted 2023 unit-growth rate.
  • Review liquidity, share repurchases and the refinancing or repayment plan for the $250 million facility maturing in March 2023.
  • Assess supplier and distribution resilience, particularly dependence on KeHE and geographic concentration in California.