Sprouts Farmers Market, Inc. — FY2015 Form 10-K
Business context and reporting period. Sprouts operates specialty grocery stores focused on fresh, natural and organic products. This 10-K covers the 53-week fiscal year ended January 3, 2016; the final fiscal quarter was 14 weeks. The company operated 217 stores in 13 states at year-end and 224 stores by February 25, 2016.
Key financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $3.593 billion | $2.967 billion |
| Comparable-store sales growth | 5.8% | 9.9% |
| Gross profit / gross margin | $1.052 billion / 29.3% | $885.2 million / 29.8% |
| Operating income | $228.8 million | $199.7 million |
| Net income / diluted EPS | $129.0 million / $0.83 | $107.7 million / $0.70 |
| Operating cash flow | $239.9 million | $181.2 million |
| Cash and cash equivalents at year-end | $136.1 million | $130.5 million |
| Long-term debt at year-end | $160.0 million | $256.4 million |
Revenue increased 21%; net income increased 20%. FY2015 operating and net margins were approximately 6.4% and 3.6%, respectively. Current assets were $345.2 million and current liabilities were $230.4 million. Cash provided by operations funded most investing needs; investing activities used $128.3 million, while financing activities used $106.0 million. The company reported $154.9 million of capital and financing lease obligations and $1.345 billion of undiscounted operating lease commitments.
Fourth-quarter results were net sales of $930.3 million, gross profit of $268.7 million, operating income of $47.7 million, net income of $28.2 million and diluted EPS of $0.18. The quarter contained 14 weeks, so comparison with the prior-year quarter requires care.
Material changes versus prior period
- Comparable-store sales growth slowed to 5.8% from 9.9%, while sales also benefited from 27 store openings and an additional fiscal week. The 53rd week contributed $68.1 million of sales.
- Gross margin declined 0.5 percentage point. Management attributed the decrease primarily to price investments and produce supply tightness related to adverse weather and West Coast port strikes, against a strong prior-year produce season.
- Operating cash flow rose $58.7 million. Capital expenditures and other investing uses were broadly similar year over year; the 2015 investing total included purchases of four leases in the Haggen bankruptcy auction.
- Debt fell following the April 2015 refinancing and $100 million of principal payments. Interest expense declined to $17.7 million from $25.1 million, partly reflecting lower balances and borrowing rates.
- The company repurchased 1.07 million shares for $25.7 million during FY2015 under a $150 million authorization. It disclosed further repurchases of 2.43 million shares for $59.3 million after year-end.
Outlook, risks and unusual items
- Management planned 36 new store openings in FY2016, seven of which were open by the filing date, and reiterated a goal of 14% annual new-store growth for at least five years. Expected FY2016 capital expenditures were $145–$155 million, net of estimated landlord allowances.
- Management stated that cash on hand and anticipated operating cash flow were expected to cover needs for at least the next 12 months. The $450 million revolving credit facility matures in April 2020; $160 million was drawn at year-end. The company reported compliance with its debt covenants.
- Key risks include dependence on major distributors (Nature’s Best/KeHE represented about 24% of purchases), produce availability and food safety, intense grocery competition, labor and commodity costs, concentrated exposure to California and other regional markets, and substantial fixed lease commitments. California accounted for 42% of FY2015 net sales.
- FY2015 included a $5.5 million loss on extinguishment of debt from refinancing. Management reported no goodwill impairment; goodwill was $368.1 million. The company changed non-perishable inventory counting procedures and recorded a $2.8 million shrink reserve.
- A related-party transaction involved the purchase of an airplane from a board member for $7.5 million. Ordinary-course litigation was disclosed; management did not expect pending matters to have a material adverse effect, while noting outcomes are uncertain. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of sales and earnings growth reflects the extra fiscal week, new stores and mature-store performance, and whether comparable-store growth stabilizes.
- Whether price investments and produce supply pressures continue to weigh on gross margin, and the earnings contribution and returns of recent and planned stores.
- Liquidity and capital allocation after planned expansion, lease obligations, debt service and the remaining share-repurchase authorization.
- Nature’s Best/KeHE supply terms and the company’s alternatives if service or contract conditions change.
- The filing’s gift-card breakage disclosures differ: MD&A cites $0.7 million related to prior-period sales, while the financial-statement note reports $1.0 million recognized in FY2015; verify the reconciliation.