Sprouts Farmers Market, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended January 1, 2017 (52 weeks). Comparisons are with FY2015, which included 53 weeks. The company operates healthy-grocery stores focused on fresh, natural and organic products; it had 253 stores in 13 states at year-end and 256 in 14 states by February 23, 2017.
Financial results and liquidity
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Net sales | $4.046 billion | $3.593 billion | Up 13%; growth was driven primarily by new stores |
| Comparable-store sales | 2.7% | 5.8% | Growth moderated |
| Gross profit / margin | $1.182 billion / 29.2% | $1.052 billion / 29.3% | Margin down 0.1 percentage point |
| Operating income | $212.9 million | $228.8 million | Operating margin approximately 5.3%, versus 6.4% |
| Net income / diluted EPS | $124.3 million / $0.83 | $129.0 million / $0.83 | Net income down 4%; EPS was flat, including a stated $0.03 benefit from repurchases |
| Cash from operations | $254.4 million | $239.9 million | Up $14.5 million |
| Cash and cash equivalents | $12.5 million | $136.1 million | Down substantially, in part reflecting repurchases and investment |
| Long-term debt | $255.0 million | $160.0 million | Net borrowings increased to support repurchases |
- Net cash used in investing was $180.8 million, including $181.0 million of property and equipment purchases. Net cash used in financing was $197.2 million.
- Current assets were $264.0 million and current liabilities $259.2 million at year-end. The company said cash on hand and anticipated operating cash flow should cover expected needs for at least 12 months.
- Balance-sheet capital and financing lease obligations totaled $129.7 million. Undiscounted operating lease commitments were approximately $1.45 billion, with average remaining lease terms of about nine years.
Material changes and notable items
- Sales rose with store expansion: Sprouts opened 36 stores in FY2016, versus 27 in FY2015. Comparable-store sales growth slowed by 3.1 percentage points.
- Gross margin eased amid the comparison with FY2015’s extra week and deflation-related margin benefits, as well as higher occupancy costs. Direct store expenses rose to 20.5% of sales from 19.7%, reflecting lower sales leverage, wage increases and training costs.
- FY2015’s 53rd week contributed $68.1 million of sales and an estimated $4.1 million of net income; management said FY2016 net income was flat excluding that week’s benefit.
- FY2016 included $3.0 million in payments related to the Executive Chairman’s retirement and $4.9 million of increased stock-compensation costs, primarily associated with executive changes.
- The company repurchased 13.2 million shares for $294.3 million during FY2016, retiring the shares. It borrowed $105 million and repaid $10 million under its credit facility during the year.
Outlook, risks and contingencies
- Management planned 32 new store openings in FY2017, including initial expansion into Florida and North Carolina; three had opened by February 23, 2017. It expected approximately 30 openings annually over the near term and forecast FY2017 capital expenditures of $155–$165 million, net of estimated landlord allowances.
- Management expected continued positive comparable-store sales, but provided no numerical comparable-sales or earnings guidance in the filing. The company cited its value proposition, merchandising, marketing and customer engagement as drivers of future growth.
- KeHE accounted for approximately 33% of total purchases in FY2016; UNFI accounted for approximately 4%. A disruption or unfavorable change in these supplier relationships could affect product availability and costs.
- Key risks include intense grocery competition and pricing pressure, slower comparable-store growth, food-supply and food-safety disruptions, labor and wage costs, regional concentration, execution of store expansion, and cybersecurity. A 2016 phishing incident exposed team members’ 2015 W-2 information; four purported class actions were pending. A separate securities action alleges inadequate disclosure of produce price deflation in 2015 offering documents. The company said outcomes and potential liabilities could not then be reasonably estimated.
- The credit facility matures in April 2020 and includes leverage and interest-coverage covenants; the company reported compliance at year-end. Each 100-basis-point change in LIBOR was estimated to affect annual interest expense by $2.6 million at the year-end debt balance.
- After year-end, Sprouts repurchased another 4.1 million shares for $80 million and reported $305 million of credit-facility debt as of February 22, 2017. A new $250 million repurchase authorization was approved February 20, 2017. The filing reported no goodwill or long-lived-asset impairment in FY2016 and an unmodified audit opinion.
Important facts for investors to verify
- Whether comparable-store sales and store-level expense trends improved after FY2016, and how much growth comes from new stores versus mature locations.
- How the company funds expansion and repurchases while maintaining low cash balances, servicing debt and meeting credit covenants.
- The scale and economics of lease obligations, including how forthcoming lease-accounting requirements affect reported assets and liabilities.
- Whether supplier concentration, food-safety, cybersecurity and pending litigation risks have changed, and whether any related costs or liabilities become material.
- Whether the FY2017 opening and capital-spending plans were achieved and whether new stores deliver returns consistent with management’s expectations.