Sprouts Farmers Market, Inc. — Q1 2019 Form 10-Q
Business context and period. Sprouts operates healthy grocery stores. This unaudited report covers the 13 weeks ended March 31, 2019; comparisons are with the 13 weeks ended April 1, 2018. The company had 321 stores in 19 states at quarter-end.
Financial and operating performance
| Metric | Q1 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,413.9 million | $1,287.2 million | +10% |
| Comparable-store sales growth | 1.4% | 2.7% | Down 1.3 percentage points |
| Gross profit / margin | $484.3 million / 34.3% | $444.6 million / 34.5% | Profit +9%; margin down 0.2 points |
| Operating income | $79.6 million | $79.7 million | Approximately flat |
| Net income | $56.4 million | $66.6 million | Down 15% |
| Diluted EPS | $0.46 | $0.50 | Down 8% |
| Operating cash flow | $112.6 million | $104.5 million | Up $8.1 million |
| Cash used for capital expenditures | $30.1 million | $44.2 million | Down $14.0 million |
Gross margin pressure reflected cost inflation not fully passed through to retail prices and product-mix changes. SG&A increased 11% to $374.8 million, or 26.5% of sales versus 26.3%, with new-store costs, lease-accounting effects, and planned wage, benefit, and training investments. Net income fell largely because the prior-year quarter included substantially greater share-based compensation tax benefits: the effective tax rate was 24.4%, versus 9.8%.
Balance sheet, liquidity, and capital allocation
- At March 31, cash and cash equivalents were $19.5 million; cash, cash equivalents, and restricted cash totaled $21.0 million. Total current assets were $333.2 million and current liabilities $377.7 million.
- Credit-facility debt was $500.0 million, up $47.0 million from year-end. The $700 million revolving facility matures in March 2023; $26.9 million of letters of credit had been issued. The company was in compliance with its financial covenants.
- Adoption of ASC 842 brought $1.024 billion of operating lease assets and $1.142 billion of operating lease liabilities onto the balance sheet; finance lease liabilities were $12.6 million. Adoption increased retained earnings by $21 million, net of tax, and management said it did not materially affect liquidity or cash flows. Comparisons with 2018 are affected because prior periods were not recast.
- Share repurchases used $111.9 million to buy and retire 4.89 million shares at an average $22.88. Net credit-facility borrowings were $47.0 million. From April 1 through April 29, the company repurchased another 2.4 million shares for $51.4 million.
- Management said existing cash and expected operating cash flow should cover anticipated needs for at least 12 months. Cash flow from operations less cash capital expenditures was approximately $82.5 million for the quarter.
Outlook, commentary, and risks
- Management expected to open approximately 30 stores annually in the near term; nine had opened through April 29, 2019. The company had 322 stores by that date. Fiscal 2019 capital expenditures were projected at $170–$175 million, net of estimated landlord tenant-improvement allowances.
- Management sought continued positive comparable-store sales through value, product offerings, marketing, and customer engagement, but did not provide a numerical comparable-sales or earnings forecast in this filing.
- Management cited competitive pricing and food-cost inflation or deflation as factors that could pressure sales, gross profit, margins, and comparable-store sales. A 100-basis-point LIBOR change was estimated to affect annual interest expense by $2.5 million after interest-rate swaps.
- Material legal matters included a securities class action settlement awaiting final court approval, phishing-related individual arbitration demands, and a California Proposition 65 coffee case. The company could not estimate potential exposure in the phishing or coffee matters; it recorded no loss contingency for the coffee case.
- The company adopted a new company-wide ERP system on April 29, 2019; management reported no material impact on internal controls during the quarter. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether comparable-store sales and gross margin stabilize after slowing sales growth and cost inflation pressure.
- How continued buybacks, including the post-quarter repurchases, affect debt, liquidity, share count, and covenant headroom.
- The full economic burden and cash-payment profile of operating leases, alongside reported debt.
- Progress toward the store-opening and capital-expenditure plans, and whether new stores deliver expected returns.
- Final court approval and potential financial or operating consequences of the disclosed legal matters.