Sprouts Farmers Market, Inc. — Q1 2015 Form 10-Q
Reporting period: Thirteen weeks ended March 29, 2015; comparisons are with the thirteen weeks ended March 30, 2014, unless noted. Sprouts operated 200 stores in 12 states at quarter-end. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $857.5M | $722.6M | +19% |
| Comparable-store sales growth | 4.8% | 12.8% | Down 8.0 percentage points |
| Gross profit / gross margin | $257.8M / 30.1% | $223.9M / 31.0% | Profit +15%; margin down 0.9 points |
| Operating income | $66.6M | $61.7M | +8% |
| Net income | $37.5M | $33.7M | +11% |
| Diluted EPS | $0.24 | $0.22 | +9% |
| Operating cash flow | $68.1M | $76.3M | Down $8.2M |
| Capital expenditures, cash basis | $33.8M | $18.2M | Up $15.6M |
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $177.7M at March 29, up from $130.5M at December 28, 2014. Current assets were $402.0M and current liabilities $229.5M.
- Quarter-end debt was $254.9M, including $7.8M current; the $60M revolving facility had no borrowings and $57.5M available after letters of credit. Capital and financing lease obligations totaled approximately $124.7M on the balance sheet.
- Operating cash flow less cash purchases of property and equipment was approximately $34.3M. Cash increased $47.2M during the quarter, including $12.2M of excess tax benefits from stock-option exercises in financing cash flow.
- Disclosed future lease payments were $1.386B in total, including $1.238B of operating leases, before subtenant rentals.
Material changes and drivers
- Sales rose $134.9M. New stores opened after the prior-year quarter contributed $97.8M, or 72%, of the increase; the balance reflected comparable-store growth and prior-year openings not yet included in comps. Sprouts opened 10 stores and closed one during the quarter, versus four openings in the prior-year quarter.
- Gross margin fell from 31.0% to 30.1%. Management attributed the decline to produce supply constraints from adverse weather and West Coast port strikes, a lower-margin mix from the timing of openings, and continued price investments.
- Net income increased despite lower gross margin, supported by sales growth, new-store performance, lower interest expense and lower secondary-offering expenses. The effective tax rate declined to 38.3% from 39.0%, primarily due to increased tax credits and enhanced charitable food contribution deductions.
- Operating cash flow declined primarily because of increased working capital. Investing cash use rose with capital spending for new stores, sales initiatives, the support office, remodels and maintenance.
Outlook, risks, and notable items
- Management planned 27 store openings in fiscal 2015, with 15 open as of the filing date, and stated an objective of 14% annual new-store growth for at least five years. Expected fiscal 2015 capital expenditures were approximately $110M, net of estimated landlord allowances. The company said cash on hand and anticipated operating cash flow should cover needs for at least 12 months.
- Management cited continued expansion, comparable-store sales growth, margin improvement through scale and cost discipline, and brand development as strategies. No numerical sales or earnings guidance was provided in the filing.
- On April 17, 2015, after quarter-end, Sprouts refinanced its existing facilities with a five-year $450M revolving credit facility. It initially drew $260M to repay the prior term loan and transaction costs; $2.5M of letters of credit remained outstanding. Initial drawn pricing was LIBOR plus 1.75%, versus LIBOR plus 3.00% on the prior term loan. Management estimated the refinancing would reduce annual interest expense by $5M at then-current rates; $5.5M of deferred financing costs and original issue discount was to be written off in Q2.
- On March 10, certain stockholders sold 15.85M shares in a secondary offering; Sprouts sold no shares and received no proceeds. The company reported compliance with credit-facility covenants at quarter-end and effective disclosure controls.
- Risks and contingencies include variable-rate debt exposure, ordinary-course litigation, and self-insurance claims for which actual settlements may differ from reserves. The company reported no material change to the risk factors in its 2014 Form 10-K. It also noted that actual results may differ from estimates and that interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether the 4.8% comparable-store sales growth and lower gross margin continued in subsequent quarters, and how much margin recovery management achieved.
- Actual store openings, fiscal 2015 capital expenditures, and the returns and cash requirements associated with the expansion plan.
- The refinancing’s realized interest savings, facility usage, and any effects of the $5.5M write-off on reported second-quarter earnings.
- Working-capital trends, cash conversion, and the scale and timing of lease commitments relative to operating cash generation.
- Potential changes in produce availability, competitive pricing, food inflation or deflation, and self-insurance or litigation outcomes.