Sprouts Farmers Market, Inc. — FY2013 Form 10-K
Business context and reporting period. Sprouts operates specialty grocery stores focused on natural and organic foods and value. This 10-K covers the 52-week fiscal year ended December 29, 2013; it is an annual filing, not a standalone fourth-quarter report. The company had 167 stores in eight states at year-end and 170 stores in nine states by the filing date. Comparisons are affected by the 2012 Sunflower acquisition and the company’s 2013 IPO.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $2,437.9 million | $1,794.8 million |
| Gross profit / margin | $725.3 million / 29.7% | $530.3 million / 29.5% |
| Operating income | $139.5 million | $70.7 million |
| Net income | $51.3 million | $19.5 million |
| Diluted EPS | $0.37 | $0.16 |
| Cash from operations | $160.6 million | $84.4 million |
| Cash used in investing | $86.3 million | $166.7 million |
| Cash and cash equivalents at year-end | $77.7 million | $67.2 million |
At December 29, 2013, total assets were $1,172.4 million and stockholders’ equity was $513.8 million. Long-term debt was $311.2 million net of discount, equivalent to $318.3 million gross principal; capital and financing lease obligations totaled $119.6 million on the balance sheet. The company had no revolving borrowings and $52.6 million available under its $60 million revolver. Management said cash and expected operating cash flow should cover anticipated needs for at least 12 months.
Fourth-quarter results and changes versus comparable periods
In the 13 weeks ended December 29, 2013, sales were $608.2 million, gross profit $174.2 million, operating income $22.7 million and net income $9.3 million; diluted EPS was $0.06. In the 13 weeks ended December 30, 2012, those figures were $478.9 million, $136.4 million, $15.5 million, $3.3 million and $0.03, respectively.
Full-year reported sales rose 36%; on a pro forma basis including Sunflower for the comparable period, sales increased 22%. Pro forma comparable-store sales growth accelerated to 10.7% from 9.7%. Management attributed growth to the acquired stores, existing-store sales gains and new openings. Gross margin improved 20 basis points, reflecting leverage in occupancy, promotional and buying costs, partly offset by produce commodity inflation versus 2012 and lower margins from merchandise realignment in vitamins, supplements and body care. Net income growth also reflected operating leverage and reduced interest expense on a pro forma comparison.
Outlook, risks and unusual items
- Management planned 22–24 store openings in fiscal 2014, with three already opened at filing, and targeted annual new-store growth of at least 12% for at least five years. Planned 2014 capital expenditures were $110–$120 million, net of estimated landlord contributions. No specific earnings or sales guidance was provided.
- Management expects scale, improved systems, cost discipline and merchandise initiatives to support margin improvement. It also cites growth in comparable sales, brand awareness and new markets as priorities.
- Key risks include intense grocery competition and pricing pressure; execution, site selection and financing of expansion; possible cannibalization; produce availability, weather and food-safety exposure; geographic concentration; and dependence on Nature’s Best, which represented about 23% of purchases in 2013. Regulatory changes, labor and energy costs, and substantial lease commitments are additional risks.
- Operating lease commitments were $915.5 million, with average remaining lease terms of about nine years; 2013 rent expense was $64.7 million. Total contractual obligations, including debt, interest and leases, were $1.50 billion.
- FY2013 included an $18.7 million loss on extinguishment of debt, primarily from refinancing and debt repayments, as well as IPO-related bonuses and secondary-offering expenses. The company also made $295.9 million in dividend and anti-dilution payments to equity and option holders; it does not expect to pay cash dividends in the foreseeable future.
- Management and the auditor identified a continuing material weakness in controls over costing non-perishable inventory; management concluded disclosure controls were not effective at year-end. The company was developing an automated costing system. Separately, it disclosed malware on card terminals at a limited number of stores in January 2013; the terminals were replaced and additional security measures implemented.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported no goodwill impairment in 2013; goodwill was $368.1 million, about 31% of total assets.
Important facts for investors to verify
- Reconcile reported growth with pro forma results and assess whether 10.7% comparable-store growth is sustainable.
- Track remediation and independent testing of the non-perishable inventory costing weakness, including any effect on reported inventory or earnings.
- Review debt repayment capacity, variable-rate exposure and lease obligations; each 100-basis-point LIBOR increase above the loan floor would raise annual interest expense by about $3.2 million.
- Monitor execution of the 2014 opening and capital-spending plans, new-store returns, and potential cannibalization.
- Assess supplier concentration, produce sourcing and food-safety controls, and the financial or reputational consequences of future disruptions.