Sprouts Farmers Market, Inc. — Q3 2021 Form 10-Q
Reporting period: 13 weeks ended October 3, 2021; year-to-date figures cover 39 weeks. Comparisons are with the corresponding periods ended September 27, 2020. Sprouts operated 366 stores in 23 states at quarter-end. Amounts below are in millions except per-share data and percentages.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Net sales | $1,509.6 | $1,577.6 | $4,607.1 | $4,866.9 |
| Comparable-store sales growth | (5.4)% | 4.2% | (8.4)% | 8.0% |
| Gross profit / gross margin | $539.7 / 35.8% | $584.8 / 37.1% | $1,676.0 / 36.4% | $1,791.3 / 36.8% |
| Operating income | $85.8 | $78.4 | $282.7 | $298.7 |
| Net income | $63.9 | $60.2 | $207.9 | $219.1 |
| Diluted EPS | $0.56 | $0.51 | $1.77 | $1.85 |
- Q3 SG&A was $423.4 million, or 28.0% of sales, versus $475.1 million, or 30.1%. Lower pandemic-related payroll and bonus costs, marketing, and e-commerce fees helped offset lower sales and gross margin.
- For the 39 weeks, operating cash flow was $296.7 million, down from $410.3 million; capital spending was $70.0 million, versus $95.9 million. Cash provided by operations less capital spending was approximately $226.6 million.
- Cash and cash equivalents were $260.2 million at October 3, 2021; cash, cash equivalents, and restricted cash totaled $262.0 million. Current assets were $586.9 million and current liabilities $507.2 million.
- Debt under the revolving credit agreement was $250.0 million, unchanged from year-end; finance lease liabilities were $9.9 million. The $250.0 million debt balance was fully fixed through interest-rate swaps. Operating lease liabilities totaled approximately $1,231.0 million on the balance sheet.
- The company repurchased 5.36 million shares for $137.5 million year to date. Shares outstanding fell to 113.2 million from 118.0 million at January 3, 2021.
Material changes versus the prior period
- Sales and comparable-store sales declined as Sprouts cycled unusually strong pandemic-related demand in 2020; new-store sales partly offset the decline.
- Q3 gross margin fell 1.3 percentage points, reflecting the comparison with prior-year elevated demand and the balance between cost inflation and retail pricing. Year-to-date gross margin declined 0.4 percentage points, also reflecting prior-year exceptionally low shrink.
- Q3 net income increased 6% despite lower sales, mainly because SG&A declined; diluted EPS rose 10%, helped by fewer shares following repurchases. Year-to-date net income declined 5% and diluted EPS declined 4%.
- Year-to-date operating cash flow decreased primarily because of working-capital movements, including payout of prior-year incentive compensation and rebuilding inventory after pandemic-period depletion.
Outlook, commentary, and risks
- Management said existing cash and expected operating cash generation should fund anticipated needs for at least 12 months. It expected 2021 capital expenditures of $95–$105 million, net of estimated landlord allowances.
- The longer-term strategy emphasizes target customers, smaller updated store formats, fresh supply-chain investment, brand and marketing, and store economics. Management described a runway for at least 10% annual unit growth beginning in 2023. Two fresh distribution centers opened in 2021, bringing more than 85% of stores within 250 miles of a distribution center.
- Six planned Q4 2021 store openings were expected to shift to 2022 because of equipment supply delays. Pandemic-related supply disruptions and inflation affected sourcing and pricing; vaccine mandates and testing requirements could add costs or disrupt workforce availability. Management said the pandemic’s future effects remained difficult to estimate.
- The company reported compliance with its credit covenants. The $700 million revolving facility, with $250 million drawn, was scheduled to mature March 27, 2023; $28.3 million of letters of credit were outstanding. The facility limits additional debt and other actions and requires specified leverage and interest-coverage ratios.
- Legal exposures include ordinary-course claims and self-insurance obligations. An appeal in the Proposition 65 coffee case remained pending; the company said it could not estimate a potential loss and recorded no contingency. The IRS was examining the federal tax return for fiscal 2017.
- Management identified inflation, supply-chain disruption, pandemic developments, store-opening delays, and litigation/self-insurance estimates as matters that could affect results. No formal earnings guidance was provided in the supplied filing text.
Investor facts to verify
- Whether comparable-store sales and margins stabilize as pandemic-related comparisons ease, and how inflation, promotions, and shrink affect gross margin.
- Whether delayed openings proceed in 2022 and the company remains on track for its stated longer-term unit-growth plans and capital expenditure range.
- Operating cash flow and working-capital trends, including inventory rebuilding and incentive-compensation payments.
- Debt refinancing or repayment plans ahead of the March 2023 facility maturity, covenant headroom, and the cost or duration of interest-rate hedges.
- Repurchase pace and remaining authorization: $162.5 million was available at October 3; an additional $20.0 million of shares was repurchased through November 4, 2021.
- Developments in supply availability, labor costs and workforce availability, the Proposition 65 appeal, and the IRS examination.