Sprouts Farmers Market, Inc. — Q3 2022 Form 10-Q
Business context and reporting period
For the 13 weeks ended October 2, 2022, and year-to-date 39 weeks, compared with the periods ended October 3, 2021. Sprouts operated 379 stores in 23 states and reported one operating segment: healthy grocery stores.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 39 weeks 2022 | 39 weeks 2021 |
|---|---|---|---|---|
| Net sales | $1,591.0 million (+5%) | $1,509.6 million | $4,827.7 million (+5%) | $4,607.1 million |
| Comparable-store sales growth | 2.4% | (5.4%) | 2.0% | (8.4%) |
| Gross profit / margin | $583.7 million / 36.7% | $539.7 million / 35.8% | $1,775.8 million / 36.8% | $1,676.0 million / 36.4% |
| Operating income | $90.3 million | $85.8 million | $296.5 million | $282.7 million |
| Net income | $65.7 million | $63.9 million | $216.0 million | $207.9 million |
| Diluted EPS | $0.61 | $0.56 | $1.97 | $1.77 |
Q3 gross margin improved primarily because of fewer promotions; year-to-date improvement also reflected better shrink. Q3 SG&A was $460.8 million, or 29.0% of sales, versus $423.4 million, or 28.0%. Year-to-date SG&A was $1,382.9 million, or 28.6% of sales, versus $1,299.5 million, or 28.2%. Higher wages and other inflation-related costs, new stores, marketing, credit-card fees and e-commerce costs contributed to expense growth. Q3 net margin was 4.1%, versus 4.2%; year-to-date net margin was 4.5% in both periods.
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was $306.8 million, compared with $296.7 million. Capital expenditures were $80.7 million, compared with $70.0 million; financing cash outflow was $155.0 million, mainly share repurchases.
- Cash, cash equivalents and restricted cash totaled $318.1 million at October 2, 2022; balance-sheet cash and equivalents were $316.0 million. Cash and equivalents were $245.3 million at January 2, 2022.
- Debt outstanding was $250.0 million. The new revolving credit facility has $700 million of commitments and matures March 25, 2027; $24.8 million of letters of credit had been issued. The company reported compliance with its covenants.
- The company had $1.25 billion of operating lease liabilities and $9.0 million of finance lease liabilities. A $250 million interest-rate swap fixed the rate on all outstanding debt at the reporting date.
Changes, outlook, risks and unusual items
- Sales growth reflected new stores and higher comparable-store basket value, primarily from retail price inflation; management also noted a slight reduction in items per basket. Buybacks reduced diluted weighted-average shares, contributing to EPS growth.
- Management expected 2022 capital expenditures of $120–$135 million, net of estimated landlord allowances. It described a long-term runway of approximately 10% annual unit growth beginning in 2024. No specific earnings or sales guidance was provided in the supplied filing text.
- Management said operations had generally stabilized after the pandemic but cited continuing product-cost inflation, supply-chain delays, equipment availability issues and possible new-store opening delays. It said it was largely passing product inflation through to retail prices and considered inflation and deflation potential risks to sales and margins.
- Q3 store-closure and other costs were $2.2 million, primarily inventory loss and expenses at stores affected by Hurricane Ian. Year-to-date costs were $3.0 million and also included costs from four store closures.
- The effective tax rate rose to 25.6% in Q3 from 23.0%, mainly due to lower enhanced charitable contribution benefits after CARES Act provisions expired and higher nondeductible executive compensation.
- The company repurchased $155.1 million of shares year-to-date under a $600 million authorization, with $456.8 million remaining at quarter-end. It repurchased a further $17.8 million through November 4, 2022.
- In a Proposition 65 coffee case, an appellate court affirmed dismissal on October 26, 2022; Sprouts expected a further appeal and said potential loss could not be estimated, so no loss contingency was recorded. Management reported no material changes to the risk factors in its prior annual report.
Important facts for investors to verify
- Whether comparable-sales gains are sustained through unit growth rather than inflation-driven basket increases, and how basket size evolves.
- Whether gross-margin improvement can offset wage, utility, supply and other operating-cost inflation.
- Progress on the 2022 capital-spending plan, store-opening schedule and targeted unit growth beginning in 2024.
- Available borrowing capacity, interest-rate swap status and covenant compliance as conditions change.
- Share repurchase pace and remaining authorization relative to cash needs, capital expenditures and growth investment.
- Resolution of the coffee litigation appeal and developments in self-insurance or other ordinary-course claims.