What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-03-02 compared with 2022-02-24 · 403 added, 355 removed, 1093 unchanged (41% of the section changed)

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Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our operating results, financial condition, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.

Our Amended and Restated Credit Agreement contains covenants that we must satisfy in order to pay cash dividends.

Our Credit Agreement contains covenants that we must satisfy in order to pay cash dividends.

Issuer Purchases of Equity Securities

The following table provides information about our share repurchase activity during the thirteen weeks ended January 1, 2023.

Total number of

shares purchased

as part of publicly

part of publicly

announced plans

or programs (2)

Approximate dollar

value of shares

of shares that

purchased under

Oct 4, 2021 - Oct 31, 2021

Nov 1, 2021 - Nov 28, 2021

Nov 29, 2021 - Jan 2, 2022

October 3, 2022 - October 30, 2022

October 31, 2022 - November 27, 2022

November 28, 2022 - January 1, 2023

(1) Periodic information is presented by reference to our fiscal periods during the fourth quarter of fiscal year 2022.

(2) On March 2, 2022, our board of directors authorized a $600 million share repurchase program of our common stock.

The shares may be purchased on a discretionary basis from time to time through March 3, 2024, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans.

The shares may be purchased on a discretionary basis from time to time through December 31, 2023, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans.

Performance Graph

The graph set forth below compares the cumulative total stockholder return on our common stock between January 1, 2017 and January 2, 2022, with the cumulative total return of (i) the Nasdaq Composite Index and (ii) the S&P Food Retail Index, over the same period.

The graph set forth below compares the cumulative total stockholder return on our common stock between December 31, 2017 and January 1, 2023, with the cumulative total return of (i) the NASDAQ Composite Index and (ii) the S&P Food Retail Index, over the same period.

The comparison assumes that $100.00 was invested in our common stock, the NASDAQ Composite Index and the S&P Food Retail Index, and assumes reinvestment of dividends, if any.

The graph assumes the initial value of our common stock on January 1, 2017 was the closing sale price on that day of $18.92 per share.

The graph assumes the initial value of our common stock on December 29, 2017 (the last trading day prior to the beginning of fiscal 2018) was the closing sale price on that day of $24.35 per share.

The performance shown on the graph below is based on historical results and is not intended to suggest future performance.

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We continue to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and gluten-free.

Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability.

Headquartered in Phoenix with 386 stores in 23 states as of January 1, 2023, we are one of the largest and fastest growing specialty retailers of fresh, natural and organic food in the United States.

In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona.

From our founding in 2002 through January 2, 2022, we have grown rapidly, significantly increasing our sales, store count and profitability, including successfully rebranding 43 Henry’s Farmers Market and 39 Sunflower Farmers Market stores added in 2011 and 2012, respectively, through acquisitions to the Sprouts banner.

From our founding in 2002 through January 1, 2023, we have grown rapidly, significantly increasing our sales, store count and profitability, including successfully rebranding 43 Henry’s Farmers Market and 39 Sunflower Farmers Market stores added in 2011 and 2012, respectively, to the Sprouts banner through acquisitions.

These three businesses all trace their lineage back to Henry’s Farmers Market and were built with similar store formats and operations including a strong emphasis on value, produce and service in smaller, convenient locations.

In 2020, we announced the initial steps of our new long-term growth strategy that we believe will transform our company and drive profitable growth.

We are executing on this strategy, focusing on the following areas:

Since 2020, we have focused on our long-term growth strategy that we believe is transforming our company and driving profitable growth.

We continue to execute on this strategy, focusing on the following areas :

Win with Target Customers .

We are focusing attention on our target customers, identified through research as ‘health enthusiasts’

and ‘experience seekers’, where there is ample opportunity to gain share within these customer segments.

and ‘selective shoppers’, where there is ample opportunity to gain share within these customer segments.

We believe our business can continue to grow by leveraging existing strengths in a unique assortment of better-for-you, quality products and by providing a full omnichannel offering through delivery or pickup via our website or the Sprouts app.

Update Format and Expand in Select Markets.

We are beginning to deliver unique smaller stores with expectations of stronger returns, while maintaining the approachable, fresh-focused farmer’s market heritage Sprouts is known for.

In 2021, we opened three stores and remodeled one store featuring our new format.

We are delivering unique smaller stores with expectations of stronger returns, while maintaining the approachable, fresh-focused farmer’s market heritage Sprouts is known for.

In 2021, we opened three stores and remodeled one store featuring our new format, and in 2022, we opened nine new format stores.

Our geographic store expansion and new store placement will intersect where our target customers live, in markets with growth potential and supply chain support, which we believe will provide a long runway of at least 10% annual unit growth beginning in 2024.

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We believe our network of fresh distribution centers can drive efficiencies across the chain and support growth plans.

To further deliver on our fresh commitment and reputation, as well as to improve financial results, we will aspire to ultimately position fresh distribution centers within a 250-mile radius of stores.

To further deliver on our fresh commitment and reputation, as well as to increase our local offerings and improve financial results, we aspire to ultimately position fresh distribution centers within a 250-mile radius of stores.

With the opening of two fresh distribution centers in 2021, we now have more than 85% of our stores within 250 miles of a distribution center.

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We believe we are elevating our national brand recognition and positioning by telling our unique brand story rooted in product innovation and differentiation.

We are investing savings from removing our print ad into increasing customer engagement through digital and social connections, driving additional sales growth and loyalty.

We are investing savings from largely removing our weekly promotional print ad into increasing engagement and personalization with our target customers through digital and social connections, driving additional sales growth and loyalty.

Inspire and Engage Our Talent to Create a Best Place to Work.

Subsequent to the initial launch of our long-term growth strategy, we have added the focus area of inspiring and engaging our talent through our culture, acquisition and development and total rewards program to attract and retain the talent we believe we need to execute on our strategic goals and transform our company into a premier place to work.

Deliver on Financial Targets and Box Economics.

We are measuring and reporting on the success of this strategy against a number of long-term financial and operational targets.

With the implementation of our strategy, we have significantly improved our margin structure above our 2019 baseline.

With the implementation of our strategy beginning in 2020, we have significantly improved our margin structure above our 2019 baseline.

Components of Operating Results

We report our results of operations on a 52- or 53-week fiscal year ending on the Sunday closest to December 31, with each fiscal quarter generally divided into three periods consisting of two four-week periods and one five-week period.

Fiscal 2021 was a 52-week year ending on January 2, 2022.

Fiscal 2022 and fiscal 2021 were 52-week years ending on January 1, 2023 and January 2, 2022, respectively.

Fiscal 2020 was a 53-week year ending on January 3, 2021.

Fiscal 2019 was a 52-week year ending on December 29, 2019.

We recognize sales revenue at the point of sale, with discounts provided to customers reflected as a reduction in sales revenue.

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This practice may differ from the methods that other retailers use to calculate similar measures.

To account for the 53rd week in fiscal 2020, when computing comparable store sales growth, we shifted each week back one week, thereby ignoring the first week of fiscal 2020 to better align holidays for comparable purposes.

Historically, our net sales have increased as a result of new store openings and comparable store sales growth.

However, as we cycled periods of 2020 where our results benefitted from the initial onset of the COVID-19 pandemic, we reported declines in 2021 year over year net sales and comparable store sales growth.

Additional factors that influence comparable store sales growth and other sales trends include:

general economic conditions and trends, including levels of disposable income and consumer confidence;

product price inflation or deflation;

our competition, including competitive store openings in the vicinity of our stores and competitor pricing and merchandising strategies;

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Cost of sales and gross profit

Cost of sales also includes depreciation and amortization expense for distribution centers and supply chain-related assets.

Cost of sales includes the cost of inventory sold during the period, including direct costs of purchased merchandise (net of discounts and allowances), distribution and supply chain costs, and depreciation and amortization expense for distribution centers and supply chain-related assets.

Merchandise incentives received from vendors, which are reflected in the carrying value of inventory when earned or as progress is made toward earning the rebate or allowance, and are reflected as a component of cost of sales as the inventory is sold.

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Store closure and other costs, net

Store closure and other costs, net primarily reflects costs incurred related to store closures, including impairment charges of long-lived assets, severance and any exit costs associated with closing a store.

Store closure and other costs, net primarily reflects impairment charges of long-lived assets and costs incurred related to store closures, including severance and any exit costs associated with closing a store, in addition to occupancy costs associated with closed store locations.

One-time disaster recovery and executive severance costs are also included here.

Factors Affecting Comparability of Results of Operations

COVID-19 Pandemic

Our results of operations for the year ended January 3, 2021 were impacted by increased demand from our customers initially stockpiling groceries and wellness products at the onset of the COVID-19 pandemic and continuing to consume more food at home throughout the year as restaurants were not fully reopened to pre-pandemic levels, and we in turn made significant investments in compensation, benefits and personal protective equipment for our front-line store team members, as well as enhanced store sanitation procedures.

We also incurred increased ecommerce fees as consumers increasingly used online shopping alternatives to purchase our products during the pandemic.

Conversely, as we cycled periods of 2020 where our results benefited from the initial onset of the COVID-19 pandemic, our results of operations for the year ended January 2, 2022 reflect declines in year over year net sales and comparable store sales growth as stockpiling behaviors declined and state economies reopened to pre-pandemic levels throughout the country during the year.

Additional Week in 2020

Fiscal 2020 consisted of 53 weeks.

The 53rd week resulted in additional sales and expenses as further discussed in “—Comparison of Fiscal 2021 to Fiscal 2020”

Results of Operations for Fiscal 2022, 2021 and 2020

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The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

Fiscal 2021 and Fiscal 2019 consisted of 52 weeks, while Fiscal 2020 consisted of 53 weeks.

Fiscal 2022 and 2021 consisted of 52 weeks, while Fiscal 2020 consisted of 53 weeks.

(in thousands, except per share data)

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Income tax provision

Weighted average shares outstanding - basic

Dilutive effect of equity-based awards

Weighted average shares and equivalent shares outstanding - diluted

Diluted net income per share

Other Operating Data:

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Stores at end of period

(1) Stores opened is exclusive of one store relocation during fiscal 2021 and 2019.

Comparison of Fiscal 2021 to Fiscal 2020

Selling square feet at the end of the period

Average store size at the end of the period (selling square feet)

(1) Stores opened is exclusive of one store relocation during fiscal 2021.

Comparison of Fiscal 2022 to 2021

(dollars in thousands)

Comparable store sales growth

Net sales during 2021 totaled $6.1 billion, decreasing 6% over the prior fiscal year.

The sales decrease was primarily due to a 6.7% decrease in comparable store sales as a result of cycling the elevated demand driven by the COVID-19 pandemic in the prior year, as well as the 53 rd week in 2020.

These decreases were partially offset by sales from new stores.

Comparable stores contributed approximately 97% of total sales for 2021 and approximately 92% for the prior fiscal year.

Net sales during 2022 totaled $6.4 billion, increasing 5%, over the prior fiscal year.

The sales increase was primarily due to a 2.2% increase in comparable store sales as well as sales from new stores opened since the prior year.

The increase in comparable store sales was due in part to an increase in basket value due to retail price inflation, partially offset by a slight reduction in the number of items per basket.

Comparable store sales contributed approximately 97% of total sales for both 2022 and 2021.

Cost of sales and gross profit

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Cost of sales

Gross profit decreased during 2021 compared to 2020 by $170.1 million to $2.2 billion.

Gross margin decreased by 0.6% to 36.2%, compared to 36.8%.

The decreases were primarily driven by the decreased sales volume resulting from cycling elevated demand in the prior year period due to the COVID-19 pandemic.

The impact of the 53 rd week in the prior year on gross margin was insignificant.

Gross profit increased during 2022 compared to 2021 by $139.4 million to $2.3 billion driven by increased sales volume for the reasons discussed above.

Gross margin increased by 0.5% to 36.7% compared to 36.2%.

The increase was a result of strategic initiatives to improve shrink, less promotional activity and better management of prices in line with inflationary product cost increases.

Selling, general and administrative expenses

(dollars in thousands)

Selling, general and administrative

Selling, general and administrative expenses

Percentage of net sales

Selling, general, and administrative expenses decreased $115.7 million or 6% as compared to 2020 due to lower compensation and other COVID-19 driven costs in the current year and reduced costs from the 53rd week in 2020 , partially offset by new stores opened since the comparable period in the prior year.

Selling, general and administrative expenses increased $107.4 million, or 6%, compared to 2021 due to the net increase in new stores opened since the prior year as well as inflationary conditions driving increases in store costs including wages, utilities and supplies.

In addition, we experienced the effects of higher credit card fees as more consumers shifted to credit compared to the prior year and higher ecommerce costs resulting from an increase in ecommerce sales compared to the prior year.

Depreciation and amortization

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Percentage of net sales

Depreciation and amortization expense (exclusive of depreciation included in cost of sales) was $123.5 million in 2022, compared to $122.3 million in 2021.

Depreciation and amortization expenses (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment for new stores as well as remodel initiatives in older stores.

As a percentage of net sales, depreciation and amortization expenses (exclusive of depreciation included in cost of sales) increased slightly to 2.0% from 1.9% as a result of sales deleverage.

The impact of the 53 rd week in 2020 on depreciation and amortization was insignificant.

Store closure and other costs, net

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Percentage of net sales

Store closure and other costs, net in 2021 of $4.7 million includes $4.8 million of impairment losses related to the write-down of leasehold improvements and right-of-use assets.

Store closure and other costs, net in 2020 primarily represented a recognized gain on the assignment of the lease for one of our closed locations in the first quarter of 2020, partially offset by ongoing activity associated with our closed store locations .

Store closure and other costs, net in 2022 of $11.0 million primarily consisted of $8.1 million of impairment losses related to the write-down of leasehold improvements and right-of-use assets, in addition to inventory loss and expenses incurred by several of our stores impacted by Hurricane Ian and costs associated with the closing of four stores.

Store closure and other costs, net in 2021 of $4.7 million primarily included $4.8 million of impairment losses related to the write-down of leasehold improvements and right-of-use assets.

Interest expense, net

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Total interest expense, net

The decrease in interest expense, net was primarily due to the decrease in the average balance outstanding under the Amended and Restated Credit Agreement.

This was partially offset by the interest expense paid as a result of an unfavorable interest rate swap.

The decrease in interest expense, net was primarily due to higher interest income and lower credit facility fees.

See Note 13, “Long-Term Debt and Finance Lease Liabilities”

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Income tax provision

Effective tax rate

Income tax provision decreased by $11.2 million to $78.2 million for 2021 from $89.4 million for 2020, primarily related to a decrease in income before income taxes.

The effective income tax rate increased to 24.3% in 2021 from 23.7% in 2020 primarily due to benefits recognized from amended returns in 2020, partially offset by increased charitable contribution deductions in 2021.

Effective income tax rate

Income tax provision increased by $9.9 million to $88.1 million for 2022 from $78.2 million for 2021, primarily related to an increase in income before income taxes.

The effective income tax rate increased to 25.2% in 2022 from 24.3% in 2021 primarily due to decreased charitable contribution deductions in 2022 from the lapsing of benefits initially provided for in the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act").

(dollars in thousands)

Percentage of net sales

Net income decreased $43.3 million primarily due to decreased net sales and unfavorable margin impact, partially offset by lower selling, general and administrative expenses.

Net income growth was also negatively impacted by the benefit of the 53 rd week in 2020.

Net income increased $17.0 million primarily due to increased net sales and favorable margin impact, partially offset by higher selling, general and administrative expenses and a higher effective tax rate for the reasons discussed above.

Diluted earnings per share

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Diluted weighted average shares outstanding

The decrease in diluted earnings per share of $0.33 was driven by lower net income, partially offset by fewer diluted shares outstanding compared to the prior year, due primarily to the share repurchase program.

The increase in diluted earnings per share of $0.29 was driven by higher net income, in addition to fewer diluted shares outstanding compared to the prior year, due to our repurchase of approximately 6.9 million shares for a total cost of $200.0 million under our share repurchase program.

Return on Invested Capital

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We define ROIC as net operating profit after-tax (“NOPAT”), including the effect of operating leases, divided by average invested capital.

Operating lease interest represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as a finance lease (capital lease prior to adoption of ASC 842).

The assumed ownership and associated interest expense are calculated using the discount rate for each lease as recorded as a component of rent expense within selling, general and administrative expenses.

Invested capital reflects a trailing twelve-month average.

Invested capital reflects a trailing four-quarter average.

As numerous methods exist for calculating ROIC, our method may differ from methods used by other companies to calculate their ROIC.

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(3) 2020 special items include professional fees related to our strategic initiatives.

2019 special items include the direct costs associated with store closure.

(4) Net of tax amounts are calculated using the normalized effective tax rate for the periods presented.

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(6) 2022, 2021 and 2020 average operating leases represents the average net present value of outstanding lease obligations over the trailing four quarters.

2019 average operating leases represents the net present value of outstanding operating lease obligations.

Liquidity and Capital Resources

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Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures primarily for opening new stores, remodels and maintenance, repurchases of our common stock and debt service.

Our principal contractual obligations and commitments consist of obligations under our Amended and Restated Credit Agreement, interest on our Amended and Restated Credit Agreement, operating and finance leases, purchase commitments and self-insurance liabilities.

Our principal contractual obligations and commitments consist of obligations under our Credit Agreement, interest on our Credit Agreement, operating and finance leases, purchase commitments and self-insurance liabilities.

We believe that our existing cash, cash equivalents and restricted cash, and cash anticipated to be generated from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months.

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Operating Activities

Cash flows from operating activities decreased $129.2 million to $364.8 million in 2021 compared to $494.0 million in 2020.

The decrease in cash flows from operating activities is primarily a result of changes in working capital in addition to a decrease in net income.

The decrease in net income is primarily due to decreased net sales and unfavorable margin impact related to COVID-19, as well as the benefit of the 53 rd week in the prior year.

Cash flows (used in)/ from operating activities from changes in working capital were ($13.2 million) in 2021, compared to $83.4 million in 2020.

The decrease was primarily driven by the payout of incentive compensation amounts earned in the prior year and inventory stock recovery in the current year after levels were depleted during the height of the pandemic in the prior year.

Cash flows from operating activities increased $6.5 million to $371.3 million in 2022 compared to $364.8 million in 2021.

The increase in cash flows from operating activities was primarily a result of higher net income, partially offset by changes in working capital.

The increase in net income was primarily due to increased net sales and favorable margin impact.

Cash flows used in operating activities from changes in working capital were $28.6 million in 2022, compared to $13.2 million in 2021.

The increase was primarily driven by higher inventories impacted by inflationary cost increases on our purchases in the current year and higher prepaid expenses and other current assets primarily due to the timing of marketing spend, partially offset by the higher payout of COVID related incentive compensation amounts earned in 2020 and paid in 2021.

Investing Activities

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Cash flows used in investing activities were $124.0 million and $102.4 million for 2022 and 2021, respectively.

The decrease in cash flows used in investing activities is primarily due to fewer stores under construction in 2021 as compared to 2020.

We expect capital expenditures to be in the range of $150 - $170 million in 2022, including expenditures incurred to date, net of estimated landlord tenant improvement allowances, primarily to fund investments in new stores, remodels, maintenance capital expenditures and corporate capital expenditures.

The increase in cash flows used in investing activities was primarily due to more stores under construction in 2022 as compared to 2021.

We expect capital expenditures to be in the range of $210 - $230 million in 2023, net of estimated landlord tenant improvement allowances, primarily to fund investments in new stores, remodels, maintenance capital expenditures and corporate capital expenditures.

We expect to fund our capital expenditures with cash on hand and cash generated from operating activities.

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Cash flows used in financing activities were $199.1 million for 2022 compared to $186.9 million for 2021.

During 2022, cash flows used in financing activities primarily consisted of approximately $200 million for share repurchases and $3.4 million in debt issuance costs in connection with our Credit Agreement, partially offset by $5.0 million in proceeds from the exercise of stock options.

During 2021, cash flows used in financing activities primarily consisted of $188.3 million for share repurchases.

During 2020, cash flows used in financing activities primarily consisted of $288.0 million of payments on the Amended and Restated Credit Agreement.

Long-term Debt and Credit Facilities

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See Note 13, “Long-Term Debt and Finance Lease Liabilities”

for a description of our Amended and Restated Credit Agreement and our Former Credit Facility (as defined therein).

for a description of our Credit Agreement and our Former Credit Facility (as defined therein).

Share Repurchase Program

On March 3, 2021, the Company’s board of directors authorized a $300 million share repurchase program for its common stock.

The shares under the Company’s repurchase program may be purchased on a discretionary basis from time to time through March 3, 2024, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans.

The board’s authorization of the share repurchase programs does not obligate our company to acquire any particular amount of common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time.

We have used borrowings under our Former Credit Facility and Amended and Restated Credit Agreement to assist with the repurchase programs.

See Note 13, “Long-Term Debt and Finance Lease Liabilities”

of our audited consolidated financial statements, contained elsewhere in this Annual Report on Form 10-K, for more details.

Our board of directors from time to time authorizes share repurchase programs for our common stock.

The following table outlines the share repurchase programs authorized by our board, and the related repurchase activity and available authorization as of January 1, 2023.

Effective date

Expiration date

Authorization

March 3, 2021

March 2, 2022

December 31, 2023

The shares under our current repurchase program may be purchased on a discretionary basis from time to time through the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans.

Our board’s authorization of the share repurchase program does not obligate us to acquire any particular amount of common stock, and the repurchase program may be commenced, suspended, or discontinued at any time.

Share repurchase activity under our repurchase programs for the periods indicated was as follows (total cost in thousands):

January 1, 2023

January 2, 2022

Number of common shares acquired

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Shares purchased under our repurchase programs were subsequently retired and the excess of the repurchase price over par value was charged to retained earnings.

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law.

Among other provisions, the IRA includes a 1% excise tax on stock repurchases made after December 31, 2022.

The IRA is not expected to have a material impact on our consolidated financial statements.

Subsequent to January 1, 2023 and through February 28, 2023, we repurchased an additional 2.0 million shares of common stock for $64.0 million.

Factors Affecting Liquidity

We can currently borrow under our Amended and Restated Credit Agreement, up to an initial aggregate commitment of $700.0 million, which may be increased from time to time pursuant to an expansion feature set forth in the Amended and Restated Credit Agreement.

We have previously utilized borrowings under our Amended and Restated Credit Agreement to fund our share repurchase program as described above.

The interest rate we pay on our borrowings increases as our leverage ratio increases.

The Amended and Restated Credit Agreement contains financial, affirmative and negative covenants.

We can currently borrow under our Credit Agreement, up to an initial aggregate commitment of $700.0 million, which may be increased from time to time pursuant to an expansion feature set forth in the Credit Agreement.

We have previously utilized borrowings under our Credit Agreement to fund our share repurchase program as described above.

The interest rate we pay on our borrowings increases as our net leverage ratio increases and may increase or decrease based upon the achievement of certain diversity and sustainability-linked metric thresholds.

The Credit Agreement contains financial, affirmative and negative covenants.

The negative covenants include, among other things, limitations on our ability to:

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Each of these covenants is subject to customary and other agreed-upon exceptions.

In addition, the Amended and Restated Credit Agreement requires that we and our subsidiaries maintain a maximum total net leverage ratio not to exceed 3.25 to 1.00 and minimum interest coverage ratio not to be less than 1.75 to 1.00.

In addition, the Credit Agreement requires that we and our subsidiaries maintain a maximum total net leverage ratio not to exceed 3.75 to 1.00, which ratio may be increased from time to time in connection with certain permitted acquisitions pursuant to conditions as set forth in the Credit Agreement, and a minimum interest coverage ratio not to be less than 3.00 to 1.00.

Each of these covenants is tested on the last day of each fiscal quarter, starting with the fiscal quarter ended April 3, 2022.

We were in compliance with all applicable covenants under the Amended and Restated Credit Agreement as of January 2, 2022.

Our Amended and Restated Credit Agreement is defined and more fully described in Note 13, “Long-Term Debt and Finance Lease Liabilities”

We were in compliance with all applicable covenants under the Credit Agreement as of January 1, 2023.

Our Credit Agreement is defined and more fully described in Note 13, “Long-Term Debt and Finance Lease Liabilities”

of our audited consolidated financial statements contained elsewhere in this Annual Report on Form 10-K.

Contractual Obligations

See Note 13, “Long-Term Debt and Finance Lease Liabilities,”

Note 7, "Leases," Note 18, "Commitments and Contingencies" and Note 15, "Self-Insurance Programs" to our consolidated financial statements located elsewhere in this Annual Report on Form 10-K for more information on the nature and timing of these obligations.

See Note 7, "Leases," Note 13, “Long-Term Debt and Finance Lease Liabilities,”

Note 15, "Self-Insurance Programs" and Note 19, "Commitments and Contingencies" to our consolidated financial statements located elsewhere in this Annual Report on Form 10-K for more information on the nature and timing of these obligations.

The future amount and timing of interest payments are expected to vary with the outstanding amounts and then prevailing contractual interest rates, net of interest rate swaps.

Interest payments through the March 27, 2023 maturity date of our Amended and Restated Credit Agreement based on the outstanding amounts as of January 2, 2022 and LIBOR rates in effect at the time of this filing, are estimated to be approximately $12.0 million.

These payments are $10.3 million in 2022 and approximately $1.7 million thereafter.

Real estate obligations, including legally binding minimum lease payments for leases executed but not yet commenced, were $451.5 million as of January 2, 2022.

These obligations are $4.1 million in 2022 and $447.4 million thereafter.

Our purchase commitments under noncancelable service and supply contracts that are enforceable and legally binding totaled $14.3 million as of January 2, 2022.

These commitments are $7.9 million in 2022 and $6.4 million thereafter.

Interest payments through the March 25, 2027 maturity date of our Credit Agreement based on the outstanding amounts as of January 1, 2023 and interest rates in effect at the time of this filing, are estimated to be approximately $52.5 million.

These payments are estimated to be approximately $15.2 million in 2023 and approximately $37.3 million thereafter.

Real estate obligations, consisting of legally binding minimum lease payments for leases executed but not yet commenced, were $504.5 million as of January 1, 2023, including $7.2 million in 2023 and $497.3 million thereafter through 2044.

Our purchase commitments under noncancelable service and supply contracts that are enforceable and legally binding totaled $19.8 million as of January 1, 2023, including $9.8 million in 2023 and $10.0 million thereafter through 2027.

Obligations under contracts that we can cancel without a significant penalty are not included in purchase commitments.

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Food inflation, when combined with reduced consumer spending, could also reduce sales, gross profit margins and comparable store sales.

Inflationary pressures on compensation, utilities, commodities, equipment and supplies may also impact our profitability.

Food deflation across multiple categories, particularly in produce, could reduce sales growth and earnings if our competitors react by lowering their retail pricing and expanding their promotional activities, which can lead to retail deflation higher than cost deflation that could reduce our sales, gross profit margins and comparable store sales.

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Food inflation and deflation is affected by a variety of factors and our determination of whether to pass on the effects of inflation or deflation to our customers is made in conjunction with our overall pricing and marketing strategies, as well as our competitors’

Although we may experience periodic effects on sales, gross profit, gross margins and cash flows as a result of changing prices, including most recently from inflationary pressures due primarily to supply chain disruptions complicated by the COVID-19 pandemic, we do not expect the effect of inflation or deflation to have a material impact on our ability to execute our long-term business strategy.

Although we may experience periodic effects on sales, gross profit, gross margins and cash flows as a result of changing prices, including pressures we experienced in fiscal 2022 due to product cost inflation which we largely passed along to retail pricing, we do not expect the effect of inflation or deflation to have a material impact on our ability to execute our long-term business strategy.

Critical Accounting Estimates

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We believe that of our significant accounting policies, which are described in Note 3, “Significant Accounting Policies”

to the audited consolidated financial statements included in this Annual Report on Form 10-K, the following accounting policies involve the most difficult, complex or subjective judgements:

to the audited consolidated financial statements included in this Annual Report on Form 10-K, the following accounting policies involve the most difficult, complex or subjective judgments:

inventories, lease assumptions, self-insurance reserves, goodwill and intangible assets, impairment of long-lived assets, and income taxes.

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We are self-insured for costs related to workers’

compensation, general liability and employee health benefits up to certain stop-loss limits.

compensation, general liability and employee health benefits up to certain self-insured retentions and stop-loss limits.

As of January 1, 2023, the consolidated self-insurance reserve balance was $47.6 million, of which a majority of the balance related to workers' compensation and general liability reserves.

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See Note 3, “Significant Accounting Policies”

and Note 6, “Property and Equipment”.

and Note 6, “Property and Equipment".

Income taxes are accounted for under the asset and liability method.

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As described in Note 13, “Long-Term Debt and Finance Lease Liabilities”

to our accompanying audited consolidated financial statements located elsewhere in this Annual Report on Form 10-K, we have an Amended and Restated Credit Agreement that bears interest at a rate based in part on LIBOR.

to our accompanying audited consolidated financial statements located elsewhere in this Annual Report on Form 10-K, we have a Credit Agreement that bears interest at a rate based in part on SOFR.

Accordingly, we could be exposed to fluctuations in interest rates.

Based solely on the $250.0 million principal outstanding under our Amended and Restated Credit Agreement as of January 2, 2022, each hundred basis point change in LIBOR would result in a change in interest expense by $2.5 million annually.

We entered into an interest rate swap agreement in December 2017 to manage our cash flow associated with variable interest rates.

The notional dollar amount of the one outstanding swap at January 2, 2022 and the two outstanding swaps at January 3, 2021 was $250.0 million, respectively, under which we pay a fixed rate and receive a variable rate of interest (cash flow swap).

Taking into account the interest rate swaps, based on the $250.0 million principal outstanding under our Amended and Restated Credit Agreement as of January 2, 2022, each hundred basis point change in LIBOR would result in no change in interest expense annually.

Based on the $250.0 million principal outstanding under our Credit Agreement as of January 1, 2023, each hundred basis point change in SOFR would result in a corresponding increase or decrease in interest expense by $2.5 million annually.

This sensitivity analysis assumes our mix of financial instruments and all other variables will remain constant in future periods.

These assumptions are made in order to facilitate the analysis and are not necessarily indicative of our future intentions.

These assumptions are made in order to facilitate the sensitivity analysis and are not necessarily indicative of our future intentions.

We do not enter into derivative financial instruments for trading purposes (see Note 22, “Derivative Financial Instruments”).

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Consolidated Balance Sheets as of January 1, 2023 and January 2, 2022

Consolidated Statements of Income for the fiscal years ended January 2, 2022, January 3, 2021, and December 29, 2019

Consolidated Statements of Comprehensive Income for the fiscal years ended January 2, 2022, January 3, 2021, and December 29, 2019

Consolidated Statements of Income for the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021

Consolidated Statements of Comprehensive Income for the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021

Consolidated Statements of Stockholders’

Equity for the fiscal years ended January 2, 2022, January 3, 2021, and December 29, 2019

Consolidated Statements of Cash Flows for the fiscal years ended January 2, 2022, January 3, 2021, and December 29, 2019

Equity for the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021

Consolidated Statements of Cash Flows for the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021

Notes to Consolidated Financial Statements

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

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Phoenix, Arizona

February 24, 2022

March 2, 2023

We have served as the Company’s auditor since 2011.

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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

January 1, 2023

January 2, 2022

Current assets:

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Additional paid-in capital

Accumulated other comprehensive loss

Accumulated other comprehensive income (loss)

Retained earnings

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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

January 1, 2023

January 2, 2022

January 3, 2021

Cost of sales

Selling, general and administrative expenses

Depreciation and amortization (exclusive of depreciation included in cost of sales)

Depreciation and amortization (exclusive

of depreciation included in cost of

Store closure and other costs, net

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(IN THOUSANDS)

January 1, 2023

January 2, 2022

January 3, 2021

Other comprehensive income (loss), net of tax

Unrealized gains (losses) on cash flow hedging

activities, net of income tax of $ 3,116 , ($ 205 ), and ($ 2,078 )

Reclassification of net gains (losses) on cash flow

hedges to net income, net of income tax of ($ 1,485 ), ($ 1,107 ),

Unrealized gains (losses) on cash flow

hedging activities, net of income tax of

$ 1,819 , $ 3,116 and ($ 205 )

Reclassification of net gains (losses) on

cash flow hedges to net income, net

of income tax of ($ 520 ), ($ 1,485 ) and ($ 1,107 )

Total other comprehensive income (loss)

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Issuance of shares under stock plans

Repurchase and retirement of common stock

Share-based compensation

Impact of adoption of ASC 842 related to leases

Balances at December 29, 2019

Balances at January 3, 2021

Other comprehensive income (loss)

Issuance of shares under stock plans

Repurchase and retirement of common stock

Share-based compensation

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(IN THOUSANDS)

January 1, 2023

January 2, 2022

January 3, 2021

Operating activities

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Payments on finance lease liabilities

Payments of deferred financing costs

Repurchase of common stock

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All dollar amounts are in thousands, unless otherwise indicated.

Certain prior period amounts have been reclassified to conform with the current year presentation.

Significant Accounting Policies

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Fiscal year 2021 ended on January 2, 2022 and included 52 weeks.

Fiscal year 2019 ended on December 29, 2019 and included 52 weeks.

Fiscal year 2020 ended on January 3, 2021 and included 53 weeks.

Fiscal years 2022, 2021 and 2020 are referred to as 2022, 2021 and 2020, respectively.

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The amounts due from banks for these transactions at each reporting date were as follows:

January 1, 2023

January 2, 2022

Due from banks for debit and credit card transactions

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Restricted cash relates to the Company’s defined benefit plan forfeitures and the Company’s healthcare, general liability and workers’

compensation plan benefits of approximately $ 1.7 million as of January 2, 2022 and January 3, 2021, and is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.

compensation plan benefits of approximately $ 2.0 million and $ 1.7 million as of January 1, 2023 and January 2, 2022 , respectively, and is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.

Accounts Receivable

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Property and equipment are stated at cost, net of accumulated depreciation and amortization.

Expenditures for major additions and improvements to facilities are capitalized, while maintenance and repairs are charged to expense as incurred.

Expenditures for major additions and improvements to facilities as well as significant component replacements are capitalized.

All other maintenance and repairs are charged to expense as incurred.

When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of income.

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The Company’s impairment evaluation of goodwill consists of a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

The Company’s qualitative assessment considered factors including changes in the competitive market, budget-to-actual performance, trends in market capitalization for the Company and its peers, turnover in key management personnel and overall changes in macroeconomic environment.

If this qualitative assessment indicates it is more likely than not that the estimated fair value of a reporting unit exceeds its carrying value, no further analysis is required, and goodwill is not impaired.

Otherwise, we compare the estimated fair value of the reporting unit to its carrying amount with an impairment loss recognized for the amount, if any, by which carrying value exceeds estimated fair value.

Otherwise, the Company compares the estimated fair value of the reporting unit to its carrying amount with an impairment loss recognized for the amount, if any, by which carrying value exceeds estimated fair value.

The impairment evaluation for the Company’s indefinite-lived intangible assets consists of a qualitative assessment similar to that for goodwill.

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The fair value of the asset group is estimated based on the discounted future cash flows using a discount rate commensurate with the related risk or comparable market values, if available.

The Company recorded an impairment loss of $ 4.8 million in 2021 as part of the normal course of business primarily related to the write-down of right-of-use assets and leasehold improvements.

The Company recorded an impairment loss of $ 8.1 million and $ 4.8 million in 2022 and 2021 , respectively, as part of the normal course of business primarily related to the write-down of right-of-use assets and leasehold improvements.

There were no impairment charges in 2020.

In 2019, the Company recorded an impairment loss of $ 4.1 million as part of the normal course of business primarily related to the write-down of leasehold improvements.

These charges are recorded as a component of Store closure and other costs, net in the accompanying consolidated statements of income.

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Deferred financing costs are amortized to interest expense over the term of the debt using the effective interest method.

For the Amended and Restated Credit Agreement and Former Credit Facility (as defined in Note 13, “Long-Term Debt and Finance Lease Liabilities”), deferred financing costs are amortized on a straight-line basis over the term of the facility.

For the Credit Agreement and Former Credit Facility (as defined in Note 13, “Long-Term Debt and Finance Lease Liabilities”), deferred financing costs are amortized on a straight-line basis over the term of the facility.

Upon prepayment, redemption or conversion of debt, the Company accelerates the recognition of an appropriate amount of financing costs as loss on extinguishment of debt.

The current and noncurrent portions of deferred financing costs are included in prepaid expenses and other current assets and other assets, respectively, in the accompanying consolidated balance sheets.

The Company leases all stores, distribution centers, and administrative offices.

The Company leases its stores, distribution centers, and administrative offices.

The Company determines if an arrangement is a lease at inception.

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The Company accounts for the lease and non-lease components as a single lease component for all current classes of leases.

Most of the Company’s lease agreements include variable payments related to pass-through costs for maintenance, taxes, and insurance.

Most of the Company’s lease agreements include variable payments related to pass-through costs for common area maintenance ("CAM"), property taxes, and insurance.

Additionally, some of the Company’s lease agreements include rental payments based on a percentage of retail sales over contractual levels.

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The Company subleases certain real estate to third parties, which have all been classified as operating leases.

The Company recognized sublease income on a straight-line basis.

The Company recognizes sublease income on a straight-line basis.

Fair Value Measurements

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Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the valuation of derivative instruments, impairment analysis of goodwill, intangible assets, and long-lived assets.

Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the valuation of derivative instruments and the impairment analysis of goodwill, intangible assets, and long-lived assets.

Impairment losses related to store-level assets are calculated using significant unobservable inputs including the present value of future cash flows expected to be generated using a risk-adjusted market based weighted-average cost of capital, comparable store sales growth assumptions, and third party property appraisal data.

Therefore, these inputs are classified as a level 3 measurement in the fair value hierarchy.

Cash, cash equivalents and restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued salaries and benefits and other accrued liabilities approximate fair value because of the short maturity of those instruments .

Derivative Financial Instruments

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The Company does not enter into derivative financial instruments for trading or speculative purposes, and it monitors the financial stability and credit standing of its counterparties in these transactions.

The Company had no active derivative financial instruments as of January 1, 2023 .

Share-Based Compensation

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Application of alternative assumptions could produce different estimates of the fair value of share-based compensation and, consequently, the related amounts recognized in the accompanying consolidated statements of income.

The grant date fair value of restricted stock units (“RSUs”), performance share awards (“PSAs”), and restricted stock awards (“RSAs”) is based on the closing price per share of the Company’s stock on the grant date.

The Company recognizes compensation expense for time-based awards on a straight-line basis and for performance-based awards on the graded-vesting method over the vesting period of the awards.

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Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions and was not material in any period presented.

Balance as of January 3,

Gift Cards Issued During Current Period But Not Redeemed (1)

A summary of the activity and balances in the gift card liability, net is as follows :

January 1, 2023

January 2, 2022

January 3, 2021

Balance, beginning of year

Gift cards issued during the period but not redeemed (1)

Revenue recognized from beginning liability

Balance as of January 2,

Gift card liability, net

Balance, end of year

(1) net of estimated breakage

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Cost of Sales

Cost of sales includes the cost of inventory sold during the period, including the direct costs of purchased merchandise (net of discounts and allowances), distribution and supply chain costs, supplies and depreciation and amortization for distribution centers and supply chain related assets.

Cost of sales includes the cost of inventory sold during the period, including the direct costs of purchased merchandise (net of discounts and allowances), distribution and supply chain costs, and depreciation and amortization for distribution centers and supply chain related assets.

The Company recognizes vendor allowances and merchandise volume related rebate allowances as a reduction of inventories during the period when earned and reflects the allowances as a component of cost of sales as the inventory is sold.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses primarily consist of salaries, wages and benefits costs, share-based compensation, occupancy costs (including rent, property taxes, utilities, common area maintenance and insurance), advertising costs, buying costs, pre-opening and other administrative costs.

Selling, general and administrative expenses primarily consist of salaries, wages and benefits costs, share-based compensation, occupancy costs (including rent, property taxes, utilities, CAM and insurance), advertising costs, buying costs, pre-opening and other administrative costs.

The Company charges certain vendors to place advertisements in the Company’s in-store guide and circulars under a cooperative advertising program.

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The Company’s tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three years, following the tax year to which those filings relate.

The Company’s U.S.

federal income tax returns for the fiscal years ended December 31, 2017, and January 1, 2017, are currently under examination by the Internal Revenue Service.

The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained.

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Shares retired become part of the pool of authorized but unissued shares.

The Company has elected to record purchase price of the retired shares in excess of par value directly as a reduction of retained earnings.

The Company has elected to record the purchase price of the retired shares in excess of par value directly as a reduction of retained earnings.

Net Income per Share

4 unchanged sentences

Recently Adopted Accounting Pronouncements

Reference Rate Reform

In March 2020 and January 2021, the FASB issued ASU no.

2020-04, “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting”

and ASU 2021-01, “Reference Rate Reform (Topic 848):

Scope,”

respectively.

The amendments in these updates provide optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationships, and other transactions affected by reference rate reform.

During 2022, the Company adopted certain optional expedients provided under Topic 848 that permitted its hedging relationships to continue without de-designation upon changes due to reference rate reform.

The adoption of this guidance resulted in no material impact to the Company’s consolidated financial statements.

See Note 22, “Derivative Financial Instruments”

for more information on our hedging activities.

Income Taxes –Accounting for Income Taxes

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Among other things, the amendment removes certain exceptions for periods with operating losses, and reduces the complexity surrounding franchise tax, step up in tax basis of goodwill in conjunction with a business combination, and timing of enacting changes in tax laws during interim periods.

The Company adopted this standard effective January 4, 2021 on a prospective

The Company adopted this standard effective January 4, 2021 on a prospective basis.

There was no impact on the Company’s consolidated financial statements.

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There was no impact on the Company’s disclosure in its consolidated financial statements.

In February 2016, the FASB issued ASU No.

2016-02, “Leases (ASC 842).”

2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than twelve months.

Recognition, measurement and presentation of expenses will depend on classification as a financing or operating lease.

T he Company adopted the standard as of December 31, 2018 , the first day of fiscal year 2019.

The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, permits companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs.

The Company did not elect the hindsight practical expedient.

The adoption of the standard resulted in the recognition of operating lease assets and liabilities of approximately $ 1.0 billion and $ 1.1 billion, respectively, as of December 31, 2018, including recognition of operating lease assets and liabilities for certain third-party operated distribution center locations.

Included in the measurement of the new lease assets and liabilities is the reclassification of balances historically recorded as deferred rent and unfavorable and favorable leasehold interests.

Additionally, the Company recognized a cumulative effect adjustment, which increased retained earnings by $ 11.4 million, net of tax.

This adjustment was driven by the derecognition of approximately $ 114.0 million of lease obligations and $ 102.6 million of net assets related to leases that had been classified as financing lease obligations under the former failed-sale leaseback guidance, and are now classified as operating leases as of the transition date.

This reclassification also resulted in the recognition of rent expense beginning December 31, 2018, which was previously reported as interest expense under the former failed sale-leaseback guidance.

Lastly, the adoption of this standard resulted in a change in naming convention for leases classified historically as capital leases.

These leases are now referred to as finance leases.

The adoption of this standard did not have any impact on the Company’s liquidity or cash flows.

Refer to Note 7, “Leases”, for additional information related to the Company’s leases.

Recently Issued Accounting Pronouncements Not Yet Adopted

Reference Rate Reform

In March 2020 and January 2021, the FASB issued ASU no.

2020-04, “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting”

and ASU 2021-01, “Reference Rate Reform (Topic 848):

Scope,”

respectively.

Generally, the guidance allows contract modifications related to reference rate reform to be considered events that do not require remeasurements or reassessments of previous accounting determinations at the modification date.

These updates only apply to modifications made prior to December 31, 2022.

No such modifications occurred in the year ending January 2, 2022.

The Company expects to utilize this optional guidance but does not expect it to have a material impact on its consolidated financial statements.

No other new accounting pronouncements issued or effective during fiscal 2021 had, or are expected to have, a material impact on the Company’s consolidated financial statements.

No other new accounting pronouncements issued or effective during 2022 had, or are expected to have, a material impact on the Company’s consolidated financial statements.

Accounts Receivable

A summary of accounts receivable is as follows:

January 1, 2023

January 2, 2022

The Company recorded allowances for certain vendor receivables of $ 1.4 million and $ 0.7 million at January 1, 2023 and January 2, 2022 , respectively.

1 unchanged sentence

A summary of prepaid expenses and other current assets is as follows:

January 1, 2023

January 2, 2022

Prepaid expenses

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A summary of property and equipment, net is as follows:

January 1, 2023

January 2, 2022

Land and finance lease assets

14 unchanged sentences

January 2, 2022

December 29, 2019

January 3, 2021

Operating lease cost

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January 2, 2022

December 29, 2019

January 3, 2021

Cash paid for amounts included in measurement of lease liabilities:

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Lease assets obtained in exchange for lease liabilities:

Finance leases

Operating leases

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A summary of the activity and balances in intangible assets is as follows:

Balance at December 29, 2019

Balance at January 3, 2021

Adjustments/Transfers

Balance at January 2, 2022

Gross Intangible Assets

Indefinite-lived trade names

Indefinite-lived liquor licenses

Finite-lived trade names

Total intangible assets (1)

Accumulated Amortization

Finite-lived trade names

Total accumulated amortization

Balance at January 2, 2022

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(1) Excludes the original cost and accumulated amortization of fully-amortized finite-lived intangible assets.

There was no amortization expense in 2021.

Amortization expense was ($ 0.4 ) million and $ 0.2 million for 2020 and 2019, respectively.

There was no amortization expense in 2022 and 2021 .

Amortization expense was ($ 0.4 ) million in 2020.

The Company’s goodwill balance was $ 368.9 million as of January 1, 2023 and January 2, 2022.

1 unchanged sentence

The goodwill was related to the acquisition of Sunflower Farmers Market stores and Henry’s Farmers Market stores.

As of January 2, 2022 and January 3, 2021, other assets of $ 13.5 million and $ 14.7 million, respectively, primarily consisted of deferred software as a service, capitalized durable supplies, sublease deferred rent, and miscellaneous other assets.

As of January 1, 2023 and January 2, 2022 , other assets of $ 14.0 million and $ 13.5 million, respectively, primarily consisted of deferred software as a service, deferred financing costs, capitalized durable supplies, utilities deposits and miscellaneous other assets.

Accrued Liabilities

A summary of accrued liabilities is as follows:

January 1, 2023

January 2, 2022

Self-insurance reserves

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A summary of accrued salaries and benefits is as follows:

January 1, 2023

January 2, 2022

Severance and other

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Interest Rate

January 1, 2023

January 2, 2022

Senior secured debt

1 unchanged sentence

March 25, 2027

Finance lease liabilities

(see Note 7, "Leases")

Former Credit Facility

March 27, 2023 (1)

Finance lease liabilities (see Note 7, "Leases")

Long-term debt and finance lease liabilities

(1) In connection with the execution of the Credit Agreement on March 25, 2022, the Company's obligations as borrower under the Former Credit Facility were prepaid and terminated.

A summary of maturities of long-term debt is as follows:

$700 million Credit Agreement

Senior Secured Revolving Credit Facility

March 2018 Refinancing

On March 27, 2018, the Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), as borrower, entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) to amend and restate the Company’s existing senior secured credit facility, dated April 17, 2015 (the “Former Credit Facility”).

The Amended and Restated Credit Agreement provides for a revolving credit facility with an initial aggregate commitment of $ 700.0 million, an increase from $ 450.0 million from the Former Credit Facility, which may be increased from time to time pursuant to an expansion feature set forth in the Amended and Restated Credit Agreement.

Concurrently with the closing of the Amended and Restated Credit Agreement, all commitments under the Former Credit Facility were terminated, resulting in a $ 0.3 million loss on early extinguishment of debt, recorded in interest expense during the first quarter of fiscal year 2018.

The loss was due to the write-off of a proportional amount of deferred financing costs associated with the Former Credit Facility as the result of certain banks exiting the Amended and Restated Credit Agreement in connection with the refinancing.

No amounts were outstanding under the Former Credit Facility as of January 2, 2022.

The Company capitalized debt issuance costs of $ 2.1 million related to the refinancing which combined with the remaining $ 0.7 million debt issuance costs for the Former Credit Facility, are being amortized on a straight-line basis to interest expense over the five-year term of the Amended and Restated Credit Agreement.

The Amended and Restated Credit Agreement also provides for a letter of credit subfacility and a $ 15.0 million swingline facility.

Letters of credit issued under the Amended and Restated Credit Agreement reduce its borrowing capacity.

Letters of credit totaling $ 28.0 million have been issued as of January 2, 2022, primarily to support the Company’s insurance programs.

On March 6, 2019, Intermediate Holdings entered into an amendment to the Amended and Restated Credit Agreement intended to align the treatment of certain lease accounting terms with the Company’s adoption of ASC 842.

This amendment had no impact on borrowing capacity, interest rate, or maturity.

Obligations under the Amended and Restated Credit Agreement are guaranteed by the Company and all of its current and future wholly-owned material domestic subsidiaries (other than the borrower) and are secured by first-priority security interests in substantially all of the assets of the Company and its subsidiary guarantors, including, without limitation, a pledge by the Company of its equity interest in Intermediate Holdings.

New Credit Agreement

The Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), is the borrower under a credit agreement entered into on March 25, 2022 (the “Credit Agreement”).

The Credit Agreement provides for a revolving credit facility (the "Revolving Credit Facility") with an initial aggregate commitment of $ 700.0 million.

Amounts outstanding under the Credit Agreement may be increased from time to time in accordance with an expansion feature set forth in the Credit Agreement.

The Company capitalized debt issuance costs of $ 3.4 million related to the Credit Agreement, which, combined with the remaining $ 0.5 million debt issuance costs in respect of that certain amended and restated credit agreement entered into on March 27, 2018, by and among the Company, Intermediate Holdings, certain lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (the “Former Credit Facility”), which remained outstanding as of the time of Intermediate Holdings’

entry into the Credit Agreement, are being amortized on a straight-line basis to interest expense over the five-year term of the Credit Agreement.

The Credit Agreement provides for a $ 70.0 million letter of credit sub-facility (the "Letter of Credit Sub-Facility") and a $ 50.0 million swingline facility.

Letters of credit issued under the Credit Agreement reduce the capacity of Intermediate Holdings to borrow under the Revolving Credit Facility.

Letters of credit totaling $ 24.8 million have been issued as of January 1, 2023 under the Letter of Credit Sub-Facility, primarily to support the Company’s insurance programs.

Obligations under the Credit Agreement are guaranteed by the Company and substantially all of its existing and future wholly-owned material domestic subsidiaries, and are secured by first-priority security interests in substantially all of the assets of the Company, Intermediate Holdings, and the subsidiary guarantors, including, without limitation, a pledge by the Company of its equity interest in Intermediate Holdings.

Interest and Fees

Loans under the Amended and Restated Credit Agreement initially bore interest at LIBOR plus 1.50 % per annum or prime plus 0.5 %.

The interest rate margins are subject to adjustment pursuant to a pricing grid based on the Company’s total net leverage ratio, as set forth in the Amended and Restated Credit Agreement.

Under the terms of the Amended and Restated Credit Agreement, the Company is obligated to pay a commitment fee on the available unused amount of the commitments between 0.15 % to 0.30 % per annum, also pursuant to a pricing grid based on the Company’s total net leverage ratio.

As of January 2, 2022, loans under the Amended and Restated Credit Agreement bore interest at LIBOR plus 1.25 % per annum or prime plus 0.25 %.

The interest rate on 100 % of outstanding debt under the Amended and Restated Credit Agreement is fixed as of January 2, 2022, reflecting the effects of floating to fixed interest rate swaps (see Note 21, “Derivative Financial Instruments”).

As of January 2, 2022, outstanding letters of credit under the Amended and Restated Credit Agreement were subject to a participation fee of 1.25 % per annum and an issuance fee of 0.125 % per annum.

L oans under the Credit Agreement will initially bear interest, at the Company's option, either at the Term SOFR (with a floor of 0.00%) plus a 0.10 % SOFR adjustment and 1.00 % per annum or base rate (with a floor of 0.00%) plus 0.00 % per annum .

The interest rate margins are subject to upward adjustments pursuant to a pricing grid based on the Company’s total net leverage ratio as set forth in the Credit Agreement and to upward or downward adjustments of up to 0.05 % based upon the achievement of certain diversity and sustainability-linked metric thresholds, as set forth in the Credit Agreement.

Under the terms of the Credit Agreement, the Company is obligated to pay a commitment fee on the available unused amount of the commitments, which commitment fee ranges between 0.10 % to 0.225 % per annum, pursuant to a pricing grid based on the Company’s total net leverage ratio.

The commitment fees are subject to upward or downward adjustments of up to 0.01 % based upon the achievement of certain diversity and sustainability-linked metric thresholds, as set forth in the Credit Agreement.

As of January 1, 2023 , loans outstanding under the Credit Agreement bore interest at Term SOFR (as defined in the Credit Agreement) plus a 0.10 % SOFR adjustment and 1.00 % per annum.

As of January 1, 2023 , outstanding letters of credit issued under the Credit Agreement were subject to a participation fee of 1.00 % per annum and an issuance fee of 0.125 % per annum.

Payments and Borrowings

The Amended and Restated Credit Agreement is scheduled to mature, and the commitments thereunder will terminate on March 27, 2023 , subject to extensions as set forth therein.

The Company may prepay loans and permanently reduce commitments under the Amended and Restated Credit Agreement at any time in agreed-upon minimum principal amounts, without premium or penalty (except LIBOR breakage costs, if applicable).

During fiscal year 2021, the Company made no additional borrowings or payments, resulting in total outstanding debt under the Amended and Restated Credit Agreement of $ 250.0 million as of January 2, 2022.

During fiscal year 2020, the Company made no additional borrowings and made a total of $ 288.0 million of principal payments, resulting in total outstanding debt under the Amended and Restated Credit Agreement of $ 250.0 million as of January 3, 2021.

The Amended and Restated Credit Agreement contains financial, affirmative and negative covenants.

The Credit Agreement is scheduled to mature, and the commitments thereunder will terminate on March 25, 2027 , subject to extensions as set forth therein.

The Company may prepay loans and permanently reduce commitments under the Credit Agreement at any time in agreed-upon minimum principal amounts, without premium or penalty (except SOFR breakage costs, if applicable).

In connection with the execution of the Credit Agreement, the Company's obligations under the Former Credit Facility were prepaid and terminated.

During 2022 , the Company made no additional borrowings or principal payments, other than the net change of $ 62.5 million in the composition of the lending syndicate associated with a modification of the Company's revolving credit facility on March 25, 2022, resulting in total outstanding debt under the Credit Agreement of $ 250.0 million as of January 1, 2023.

Subsequent to January 1, 2023 , the Company made a $ 25.0 million principal payment, resulting in total outstanding debt under the Credit Agreement of $ 225.0 million as of February 28, 2023.

The Credit Agreement contains financial, affirmative and negative covenants.

The negative covenants include, among other things, limitations on the Company’s ability to:

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Each of these covenants is subject to customary and other agreed-upon exceptions.

In addition, the Amended and Restated Credit Agreement requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed 3.25 to 1.00 and minimum interest coverage ratio not to be less than 1.75 to 1.00.

Each of these covenants is tested on the last day of each fiscal quarter, starting with the fiscal quarter ended April 1, 2018.

The Company was in compliance with all applicable covenants under the Amended and Restated Credit Agreement as of January 2, 2022.

In addition, the Credit Agreement requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed 3.75 to 1.00, which ratio may be increased from time to time in connection with certain permitted acquisitions pursuant to conditions as set forth in the Credit Agreement, and a minimum interest coverage ratio not to be less than 3.00 to 1.00.

Each of these covenants is tested on the last day of each fiscal quarter.

The Company was in compliance with all applicable covenants under the Credit Agreement as of January 1, 2023.

Former Credit Facility

On March 27, 2018, Intermediate Holdings, as borrower, entered into the Former Credit Facility that provided for a revolving credit facility with an initial aggregate commitment of $ 700.0 million, subject to an expansion feature set forth therein.

The Former Credit Facility also provided for a letter of credit subfacility and a $ 15.0 million swingline facility.

The Former Credit Facility was scheduled to mature, and the commitments thereunder were scheduled to terminate, on March 27, 2023.

Loans under the Former Credit Facility bore interest at LIBOR plus a spread between 1.25 % and 2.00 % per annum or prime plus a spread between 0.25 % and 1.00 %.

The interest rate spreads were subject to adjustment pursuant to a pricing grid based on the Company’s total net leverage ratio, as defined in the Former Credit Facility.

Under the terms of the Former Credit Facility, the Company was obligated to pay a commitment fee on the available unused amount of the commitments between 0.15 % to 0.30 % per annum, also pursuant to a pricing grid based on the Company’s total net leverage ratio.

Outstanding letters of credit were subject to a participation fee between 1.25 % and 2.00 % per annum pursuant to a pricing grid based on the Company's total net leverage ratio and an issuance fee of 0.125 % per annum.

Other Long-Term Liabilities

A summary of other long-term liabilities is as follows:

January 1, 2023

January 2, 2022

Long-term portion of self-insurance reserves

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The Company is self-insured for costs related to workers’

compensation, general liability and employee health benefits up to certain stop-loss limits.

compensation, general liability and employee health benefits up to certain self-insured retentions and stop-loss limits.

The Company establishes reserves for the ultimate obligation of reported and incurred but not reported (“IBNR”) claims.

IBNR claims are estimated using various techniques, including analysis of historical trends and actuarial valuation methods.

The Company purchases coverage from third-party insurers for exposures in excess of certain stop-loss limits and recorded receivables of $ 1.6 million and a $ 1.0 million from its insurance carriers for payments expected to be made in excess of self-insured retentions at January 2, 2022 and January 3, 2021, respectively.

The Company purchases coverage from third-party insurers for exposures in excess of certain stop-loss limits and recorded receivables of $ 1.2 million and $ 1.6 million from its insurance carriers for payments expected to be made in excess of self-insured retentions at January 1, 2023 and January 2, 2022 , respectively.

The Company recorded amounts for general liability, workers' compensation and team member health benefit liabilities of $ 47.6 million and $ 50.5 million at January 1, 2023 and January 2, 2022, respectively.

See Note 11, “Accrued Liabilities”

for current amounts recorded for general liability, workers’

compensation and team member health benefit liabilities.

The following table summarizes the changes in the Company's self-insurance reserves through January 1, 2023:

January 1, 2023

January 2, 2022

January 3, 2021

Beginning Balance

Expenses, net of actuarial adjustments

Claim Payments

Ending Balance

Current portion

Long-term portion

The current portion of the self-insurance reserves is included in "Accrued Liabilities" and the long-term portion is included in "Other Long-Term Liabilities" in the accompanying consolidated balance sheets.

Defined Contribution Plan

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Total expense recorded for the matching under the Plan:

January 1, 2023

January 2, 2022

January 3, 2021

Income Tax Provision

The income tax provision consists of the following:

January 1, 2023

January 2, 2022

January 3, 2021

Federal—current

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federal income tax rate to pre-tax income as a result of the following:

January 1, 2023

January 2, 2022

January 3, 2021

Federal statutory rate

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Enhanced charitable contribution impact

Change in uncertain tax position reserves

Amended returns

Benefit of federal tax credit

Effective tax rate

Effective income tax rate

The effective income tax rate increased to 25.2 % in 2022 from 24.3 % in 2021 primarily due to decreased charitable contribution deductions in 2022 from the lapsing of benefits initially provided for in the CARES Act.

The effective income tax rate increased to 24.3 % in 2021 from 23.7 % in 2020 primarily due to benefits recognized from amended returns in 2020, partially offset by increased charitable contribution deductions in 2021.

The effective income tax rate was 23.7 % in 2020 and 2019.

The effective income tax rate in 2020 was primarily affected by a decrease in federal tax credits and prior year release of uncertain tax positions, partially offset by an increase in charitable contribution deductions and the benefit recognized from amended returns.

Excess tax benefits or detriments associated with share-based payment awards are recognized as income tax benefits or expense in the income statement.

The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur.

The income tax benefit resulting from share-based awards was $ 0.2 million for 2021 and is reflected as a reduction to the 2021 income tax provision.

The income tax detriment resulting from share-based awards were $ 0.5 million and $ 1.6 million for 2020 and 2019, respectively, and are reflected as increases to the 2020 and 2019 income tax provisions.

The income tax benefit resulting from share-based awards was $ 1.7 million and $ 0.2 million for 2022 and 2021, respectively, and is reflected as a reduction to the 2022 and 2021 income tax provision.

The income tax detriment resulting from share-based awards was $ 0.5 million for 2020 and is reflected as an increase to the 2020 income tax provision.

Deferred Taxes

Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows:

January 1, 2023

January 2, 2022

Deferred tax assets

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Total gross deferred tax assets

Valuation Allowance

Total deferred tax assets, net of valuation allowance

Deferred tax liabilities

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Total gross deferred tax liabilities

Net deferred tax (liability) / asset

(1) The deferred tax assets and liabilities disclosure at January 3, 2021 has been adjusted to reflect the gross deferred asset retirement asset and related gross deferred asset retirement obligation.

Net deferred tax liability

A valuation allowance is established for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that the realization of future deductions is uncertain.

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The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

The Company has evaluated all available positive and negative evidence and believes it is probable that the deferred tax assets will be realized and has not recorded a valuation allowance against the Company’s deferred tax assets as of January 2, 2022 and January 3, 2021.

The valuation allowance was $ 0.9 million as of January 1, 2023, related to contribution carryforwards that management does not believe will ultimately be realized.

There was no valuation allowance as of January 2, 2022.

The Company has evaluated all available positive and negative evidence and believes it is probable that all other the deferred tax assets will be realized and has not recorded any other valuation allowance against the Company’s deferred tax assets as of January 1, 2023 and January 2, 2022.

The Company applies the authoritative accounting guidance under ASC 740 for the recognition, measurement, classification and disclosure of uncertain tax positions taken or expected to be taken in a tax return.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

January 1, 2023

January 2, 2022

January 3, 2021

Beginning balance

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Additions based on tax positions related to prior years

Reductions for settlements with taxing authorities

Reductions for tax positions for prior years

Ending balance

The Company had unrecognized tax benefits (tax effected) of $ 1.8 million as of January 2, 2022 and January 3, 2021.

The Company had unrecognized tax benefits (tax effected) of $ 1.1 million and $ 1.8 million as of January 1, 2023 and January 2, 2022, respectively.

These would impact the effective tax rate if recognized.

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The general statute of limitations for income tax examinations remains open for federal tax returns for tax years 2017 through 2021 and state tax returns for the tax years 2018 through 2021 .

The Company’s U.S.

federal income tax returns for the fiscal years ended December 31, 2017, and January 1, 2017, are currently under examination by the Internal Revenue Service.

Related Party Transactions

On May 24, 2022, the Company appointed a new member to its board of directors who is an executive officer of a company that is a supplier of nutrition bars and related products to the Company for resale.

Since the beginning of the second quarter of 2022, the cost of sales recognized from this supplier was $ 3.4 million.

The Company did not enter into any material related party transactions during 202 1.

Commitments and Contingencies

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for more information.

Securities Action

On March 4, 2016, a complaint was filed in the Superior Court for the State of Arizona against the Company and certain of its directors and officers on behalf of a purported class of purchasers of shares of the Company’s common stock in its underwritten secondary public offering which closed on March 10, 2015 (the “March 2015 Offering”).

The complaint purported to state claims under Sections 11, 12 and 15 of the Securities Act of 1933, as amended, based on an alleged failure by the Company to disclose adequate information about produce price deflation in the March 2015 Offering documents.

The complaint sought damages on behalf of the purported class in an unspecified amount, rescission, and an award of reasonable costs and attorneys’

On August 4, 2018, the Company reached an agreement in principle to settle these claims.

The parties’

settlement agreement was approved by the court on May 31, 2019 and the complaint was subsequently dismissed.

The settlement was funded from the Company’s directors and officers liability insurance policy and did not have a material impact on the consolidated financial statements.

“Phishing”

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“Exposures to listed chemicals in coffee created by and inherent in the processes of roasting coffee beans or brewing coffee do not pose a significant risk of cancer.”

The proposed regulation has been finalized with an effective date of October 1, 2019.

The defendants have amended their answers to assert the regulation as an affirmative defense.

On August 25, 2020, the court granted the defense motion for summary judgment on the affirmative defense, and the case was dismissed.

The proposed regulation was finalized with an effective date of October 1, 2019.

The defendants amended their answers to assert the regulation as an affirmative defense.

On August 25, 2020, the trial court granted the defense motion for summary judgment on the affirmative defense, and the case was dismissed.

On November 20, 2020, CERT filed a notice of appeal to appeal the ruling on the defense motion for summary judgment.

The case is currently being briefed, with a decision expected in 2022.

stage of the proceedings, the Company is unable to predict or reasonably estimate any potential loss or

effect on the Company or its operations.

On October 26, 2022, the appellate court affirmed the trial court's decision.

In December 2022, CERT appealed this ruling to the Supreme Court of the State of California, which denied the petition for review in February 2023.

Until the case is dismissed by the trial court, the Company is unable to predict or reasonably estimate any potential loss or effect on the Company or its operations.

Accordingly, no loss contingency was recorded for this matter .

Capital Stock

As of January 2, 2022, 111,114,374 shares of the Company’s common stock were issued and outstanding after repurchase and retirement of 7,416,357 shares during 2021, as described below.

As of January 1, 2023 , 105,072,756 shares of the Company’s common stock were issued and outstanding after the repurchase and retirement of 6,897,082 shares during 2022, as described below.

As of January 1, 2023, 6,623,638 shares of common stock are reserved for issuance under the 2022 Incentive Plan (see Note 26, “Share-Based Compensation”).

The following table outlines the options exercised in exchange for the issuance of shares of common stock during 2022, 2021 and 2020.

January 1, 2023

January 2, 2022

January 3, 2021

Options exercised

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Share Repurchases

On February 20, 2018, the Company’s board of directors authorized a $ 350 million common stock share repurchase program, replacing the previous share repurchase program which was completed in the second quarter of 2018.

Upon this authorization’s December 31, 2019 expiration, $ 42.0 million remained unused.

On March 3, 2021, the Company’s board of directors authorized a new $ 300 million share

repurchase program for its common stock.

On March 2, 2022, the Company's board of directors authorized a new $ 600 million share repurchase program for its common stock.

The new authorization replaced the Company's then-existing share repurchase authorization of $ 300 million that was due to expire on March 3, 2024, of which $ 99.8 million remained available upon its replacement.

No further shares may be repurchased under the $ 300 million authorization.

The following table outlines the common stock share repurchase programs authorized by the Company’s board of directors and the related repurchase activity and available authorization as of January 1, 2023:

Effective date

Expiration date

Authorization

March 3, 2021

March 2, 2022

December 31, 2023

The shares under the Company’s repurchase programs may be purchased on a discretionary basis from time to time through the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans.

The board’s authorization of the share repurchase programs does not obligate the Company to acquire any particular amount of common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time.

The Company has used borrowings under its Former Credit Facility and Amended and Restated Credit Agreement to assist with the repurchase programs (see Note 13, “Long-Term Debt and Finance Lease Liabilities”).

Share repurchase activity under the Company’s repurchase programs for the periods indicated was as follows (total cost in thousands):

January 1, 2023

January 2, 2022

Number of common shares acquired

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The computation of basic net income per share is based on the number of weighted average shares outstanding during the period.

The computation of diluted net income per share includes the dilutive effect of share equivalents consisting of incremental shares deemed outstanding from the assumed exercise of options, unvested restricted stock units and unvested restricted stock awards.

Performance share awards are included in the computation of diluted net income per share only to the extent that the underlying performance conditions are satisfied prior to the end of the reporting period or would be satisfied if the end of the reporting period were the end of the related performance period, and if the effect would be dilutive .

PSAs are included in the computation of diluted net income per share only to the extent that the underlying performance conditions are satisfied prior to the end of the reporting period or would be satisfied if the end of the reporting period were the end of the related performance period, and if the effect would be dilutive .

A reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is as follows (in thousands, except per share amounts):

January 1, 2023

January 2, 2022

January 3, 2021

Basic net income per share:

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Weighted average shares outstanding -

Dilutive effect of equity-based awards:

Assumed exercise of options to purchase

Restricted Stock Units

Restricted Stock Awards

Performance Share Awards

Weighted average shares and equivalent

shares outstanding

Dilutive effect of share-based awards:

Assumed exercise of options to purchase shares

Weighted average shares and

equivalent shares outstanding

Diluted net income per share

For the year ended January 1, 2023 , the Company had 0.2 million options and 0.3 million PSAs outstanding which were excluded from the computation of diluted net income per share as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met.

For the year ended January 2, 2022 the Company had 0.5 million options and 0.3 million PSAs outstanding which were excluded from the computation of diluted net income per share as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met.

For the year ended January 3, 2021 , the Company had 0.2 million options, 0.1 million RSUs and 0.3 million PSAs outstanding which were excluded from the computation of diluted net income per share as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met.

For the year ended December 29, 2019, the Company had 0.5 million options and 0.3 million PSAs outstanding which were excluded from the computation of diluted net income per share as those awards would have been antidilutive or were performance awards with performance conditions not yet deemed met.

Derivative Financial Instruments

The Company entered into an interest rate swap agreement in December 2017 to manage its cash flow associated with variable interest rates.

This forward contract has been designated and qualifies as a cash flow hedge, and its change in fair value is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the forecasted transaction occurs.

The forward contract consisted of five cash flow hedges, of which one remains outstanding as of January 2, 2022.

This forward contract was designated and qualified as a cash flow hedge, and its change in fair value was recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods in which the forecasted transaction occurred.

The forward contract consisted of five cash flow hedges, of which no ne remained outstanding as of January 1, 2023.

To qualify as a hedge, the Company needs to formally document, designate and assess the effectiveness of the transactions that receive hedge accounting.

The notional dollar amount of the one outstanding swap was $ 250.0 million at January 2, 2022, under which the Company pays a fixed rate and receives a variable rate of interest (cash flow swap).

The cash flow swap hedges the change in interest rates on debt related to fluctuations in interest rates and has a length of one year , maturing in 2022 .

This interest rate swap has been designated and qualifies as a cash flow hedge and has met the requirements to assume zero ineffectiveness.

The Company reviews the effectiveness of its hedging instruments on a quarterly basis.

The counterparties to these derivative financial instruments are major financial institutions.

The Company evaluates the credit ratings of the financial institutions and believes that credit risk is at an acceptable level.

The notional dollar amount of the one outstanding swap at January 2, 2022 was $ 250.0 million, under which the Company paid a fixed rate and received a variable rate of interest (cash flow swap).

The cash flow swap hedged the change in interest rates on debt related to fluctuations in interest rates, had a length of one year and matured in 2022 .

This interest rate swap had been designated and qualified as a cash flow hedge and had met the requirements to assume zero ineffectiveness.

The Company reviewed the effectiveness of its hedging instruments on a quarterly basis.

During the first quarter of 2022, the Company elected to apply certain hedge accounting optional expedients allowed under Topic 848.

The expedients allowed the Company to continue the method of assessing effectiveness as documented in the original hedge documentation and allowed the reference rate on the hypothetical derivative to match the reference rate on the hedging instrument.

The counterparties to these derivative financial instruments were major financial institutions.

The Company evaluated the credit ratings of the financial institutions and believed that credit risk was at an acceptable level.

The following table summarizes the fair value of the Company’s derivative instruments:

Balance at January 2, 2022

Balance at January 3, 2021

Balance Sheet Location

January 1, 2023

January 2, 2022

Interest rate swaps

Accrued liabilities

Interest rate swaps

Other long-term liabilities

The gain or loss on these derivative instruments is recognized in other comprehensive income, net of tax, with the portion related to current period interest payments reclassified to interest expense, net on the consolidated statements of income.

The following table summarizes these losses (gains) for 2021, 2020 and 2019:

The gain or loss on these derivative instruments was recognized in other comprehensive income, net of tax, with the portion related to current period interest payments reclassified to interest expense, net on the consolidated statements of income.

The following table summarizes these losses for 2022, 2021 and 2020:

January 1, 2023

January 2, 2022

December 29, 2019

Consolidated Statements of Income Classification

Interest expense (income), net

January 3, 2021

Consolidated Statements of

Income Classification

Interest expense, net

Comprehensive Income

The following table presents the changes in accumulated other comprehensive income (loss) for the year ended January 1, 2023:

Balance at December 29, 2019

Balance at January 3, 2021

Other comprehensive income (loss), net of tax

Unrealized losses on cash flow hedging activities, net of income tax of ($ 205 )

Unrealized gains on cash flow hedging activities, net of income tax of $ 3,116

Reclassification of net losses on cash flow hedges to net income, net of income

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Balance at January 1, 2023

Amounts reclassified from accumulated other comprehensive income (loss) to net income are included within interest expense, net on the consolidated statement of income.

The estimated amount expected to be reclassified from accumulated other comprehensive income (loss) to net income within the next twelve months, based on interest rates at January 2, 2022, is a loss of $ 5.1 million.

Amounts reclassified from accumulated other comprehensive income (loss) to net income are included within interest expense, net on the consolidated statements of income.

Fair Value Measurements

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Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The following tables present the Company’s fair value hierarchy for the Company’s financial assets and liabilities measured at fair value on a recurring basis as of January 1, 2023 and January 2, 2022:

1 unchanged sentence

Long-term debt

Interest rate swap liability

Total liabilities

Total financial liabilities

January 2, 2022

1 unchanged sentence

Interest rate swap liability

Total liabilities

Total financial liabilities

The Company’s interest rate swaps are considered Level 2 in the hierarchy and are valued using an income approach.

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The Company has one reportable and one operating segment, healthy grocery stores.

In accordance with ASC 606, the following table represents a disaggregation of revenue for fiscal 2021, 2020 and 2019.

In accordance with ASC 606, the following table represents a disaggregation of revenue for 2022, 2021 and 2020.

January 1, 2023

January 2, 2022

December 29, 2019

January 3, 2021

Non-Perishables

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2022 Incentive Plan

The Company’s board of directors adopted, and its shareholders approved, the Sprouts Farmers Market, Inc.

2013 Incentive Plan (the “2013 Incentive Plan”).

The 2013 Incentive Plan became effective July 31, 2013 in connection with the Company’s initial public offering and replaced the Sprouts Farmers Markets, LLC Option Plan .

The 2013 Incentive Plan serves as the umbrella plan for the Company’s share-based and cash-based incentive compensation programs for its directors, officers and other team members.

On May 1, 2015, the Company’s stockholders approved the material terms of the performance goals under the 2013 Incentive Plan for purposes of Section 162(m) of the Internal Revenue Code.

The Company granted to certain officers, directors and team members the following awards during 2021 and 2020, under the 2013 Incentive Plan:

In March 2022, the Company’s board of directors adopted the Sprouts Farmers Market, Inc.

2022 Omnibus Incentive Compensation Plan (the “2022 Incentive Plan”), which became effective May 25, 2022, upon approval by the Company’s stockholders.

The 2022 Incentive Plan provides team members of the Company, certain consultants and advisors who perform services for the Company, and non-employee members of the Company's board of directors with the opportunity to receive grants of equity awards, including stock options, RSUs, PSAs, and other stock-based awards.

The 2022 Incentive Plan replaced the 2013 Incentive Plan (as described below).

Awards Granted under the 2022 Incentive Plan

The Company granted the following awards during 2022 under the 2022 Incentive Plan:

September 7, 2022

October 10, 2022

Weighted-average grant date fair value

Weighted-average exercise price

The aggregate number of shares of common stock that may be issued to team members and directors under the 2022 Incentive Plan may not exceed 6,600,000 , subject to the following adjustments.

If any awards granted under the 2022 Incentive Plan, terminate, expire, or are cancelled, forfeited, exchanged, or surrendered without having been exercised, vested or paid in shares, the shares will again be available for purposes of the 2022 Incentive Plan.

In addition, the number of shares subject to outstanding awards under the Sprouts Farmers Market, Inc.

2013 Incentive Plan (the “2013 Incentive Plan”) that terminate, expire, are paid in cash, or are cancelled, forfeited, exchanged, or surrendered without having been exercised, vested, or paid in shares under the 2013 Incentive Plan after the effective date of the 2022 Incentive Plan will be available for issuance under the 2022 Incentive Plan.

As of January 1, 2023 , there were 86,161 stock awards outstanding and 6,623,638 shares remaining available for issuance under the 2022 Incentive Plan.

2013 Incentive Plan

Prior to the adoption of the 2022 Incentive Plan, the 2013 Incentive Plan served as the umbrella plan for the Company’s share-based and cash-based incentive compensation programs for its directors, officers and other team members.

Upon stockholder approval of the 2022 Incentive Plan on May 25, 2022, no further awards will be granted under the 2013 Incentive Plan, but awards outstanding under the 2013 Incentive Plan will remain outstanding in accordance with their terms and the terms of the 2013 Incentive Plan.

Awards Granted under the 2013 Incentive Plan

The Company granted the following awards during 2022 and 2021 under the 2013 Incentive Plan:

March 15, 2022

March 21, 2022

Weighted-average grant date fair value

Weighted-average exercise price

March 16, 2021

September 7, 2021

September 20, 2021

The RSUs generally vest either one-third each year for three years or one-half each year for two years for team members.

RSUs granted to independent members of the Company’s board of directors cliff vest in one year.

The options expire seven years from grant date.

The PSAs are described below.

March 9, 2020

August 10, 2020

Weighted-average grant date fair value

Weighted-average exercise price

The RSUs generally vest either one-third each year for three years or one-half each year for two years for team members.

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The PSAs are described below.

The aggregate number of shares of common stock that may be issued to team members and directors under the 2013 Incentive Plan may not exceed 10,089,072 .

Shares subject to awards granted under the 2013 Incentive Plan which are subsequently forfeited, expire unexercised or are otherwise not issued will not be treated as having been issued for purposes of the share limitation.

As of January 2, 2022, there were 2,724,308 stock awards outstanding and 3,680,083 shares remaining available for issuance under the 2013 Incentive Plan.

Stock Options

In the event of a change in control as defined in the award agreements issued under the 2013 Incentive Plan, all options and awards issued prior to 2015 become immediately vested and exercisable.

For grants issued in and subsequent to 2015, the options and awards only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the grants are not continued or assumed by the acquirer on a substantially equivalent basis.

Outstanding options only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the grants are not continued or assumed by the acquirer on a substantially equivalent basis.

If the options and awards continue or are assumed on a substantially equivalent basis, but employment is terminated by the Company or an acquirer without cause or by the team member for good reason (as such terms are defined in the applicable team member award agreement) within 24 months following the change in control, such options or awards will become immediately vested upon such termination.

1 unchanged sentence

Shares issued for option exercises are newly issued shares.

The estimated weighted average fair values of options granted during 2021, 2020, and 2019 are $ 7.66 , $ 4.94 and $ 7.63 , respectively, and were calculated using the following assumptions in the table below:

The estimated weighted average fair values of options granted during 2022, 2021 and 2020 were $ 10.58 , $ 7.66 and $ 4.94 , respectively, and were calculated using the following assumptions in the table below:

Dividend yield

4 unchanged sentences

The grant date weighted average fair value of the 1.1 million options issued but not vested as of January 2, 2022 was $ 5.81 .

The grant date weighted average fair value of the 0.1 million options issued but not vested as of December 29, 2019 was $ 7.63 .

The grant date weighted average fair value of the 1.1 million options issued but not vested as of January 3, 2021 was $ 5.00 .

The following table summarizes grant date weighted average fair value of options granted and options forfeited:

January 1, 2023

January 2, 2022

January 3, 2021

Grant date weighted average fair value of options granted

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Vested/Expected to vest—January 1, 2023

In the event of a change in control as defined in the award agreements issued under the 2013 Incentive Plan, all RSUs granted prior to 2015 become immediately vested.

RSUs granted in and subsequent to 2015 only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the awards are not continued or assumed by the acquirer on a substantially equivalent basis.

Outstanding RSUs only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the awards are not continued or assumed by the acquirer on a substantially equivalent basis.

If the awards continue or are assumed on a substantially equivalent basis, but employment is terminated by the Company or an acquirer without cause or by the team member for good reason (as such terms are defined in the applicable team member award agreement) within 24 months following the change in control, such awards will become immediately vested upon such termination.

4 unchanged sentences

The following table summarizes the weighted average grant date fair value of RSUs awarded during 2022, 2021 and 2020:

January 1, 2023

January 2, 2022

January 3, 2021

The following table summarizes RSU activity during 2022:

1 unchanged sentence

Outstanding at January 1, 2023

PSAs granted in March 2017 were subject to the Company achieving certain earnings per share performance targets during 2017.

The criteria is based on a range of performance targets in which grantees may earn between 10 % and 150 % of the base number of awards granted.

The performance conditions with respect to 2017 earnings per share were deemed to have been met, and the PSAs vested 50 % on the second anniversary of the grant date (March 2019) and the remaining 50 % vested on the third anniversary of the grant date (March 2020).

During the year ended January 3, 2021, 35,697 of the 2017 PSAs vested.

There were no outstanding 2017 PSAs as of January 2, 2022.

PSAs granted in March 2018 were subject to the Company achieving certain earnings before interest and taxes ("EBIT") performance targets for the 2020 fiscal year.

3 unchanged sentences

There were no outstanding 2018 PSAs as of January 1, 2023.

PSA’s granted in 2019 are subject to the Company achieving certain EBIT performance targets for the 2021 fiscal year.

PSAs granted in 2019 were subject to the Company achieving certain EBIT performance targets for the 2021 fiscal year.

The criteria is based on a range of performance targets in which grantees may earn 0 % to 200 % of the base number of awards granted.

If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (March 2022).

Based on 2021 performance, the Company has accrued at the maximum pay out level.

PSAs granted in 2020 are subject to the Company achieving certain earnings before taxes (“EBT”) performance targets for the 2022 fiscal year.

The performance conditions with respect to fiscal year 2021 EBIT were deemed to have been met, and the PSAs vested at the maximum pay out level on the third anniversary of the grant date (March 2022).

During the year ended January 1, 2023 , 208,172 of the 2019 PSAs vested.

There were no outstanding 2019 PSAs as of January 1, 2023.

PSAs granted in 2020 were subject to the Company achieving certain earnings before taxes (“EBT”) performance targets for the 2022 fiscal year.

The criteria is based on a range of performance targets in which grantees may earn 0 % to 200 % of the base number of awards granted.

If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (March 2023).

Subsequent to January 1, 2023, the performance conditions with respect to 2022 EBT were deemed to have been met, and the PSAs will vest at the maximum pay out level on the third anniversary of the grant date (March 2023).

PSAs granted in 2021 are subject to the Company achieving certain EBIT performance targets for the 2023 fiscal year.

1 unchanged sentence

If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (March 2024).

PSAs granted in 2022 are subject to the Company achieving certain EBIT performance targets for

the 2024 fiscal year.

The criteria is based on a range of performance targets in which grantees may earn

0 % to 200 % of the base number of awards granted.

If performance conditions are met, the applicable

number of performance shares will vest on the third anniversary of the grant date (March 2025).

The PSAs only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the awards are not continued or assumed by the acquirer on a substantially equivalent basis.

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Shares issued for PSA vesting are newly issued shares.

The fair value for performance stock awards is calculated based on the closing stock price on the date of grant.

The total grant date fair value of PSAs granted or earned during 2021 was $ 4.8 million.

The fair value for PSAs is calculated based on the closing stock price on the date of grant.

The total grant date fair value of PSAs granted during 2022 was $ 5.1 million.

The total grant date fair value of PSAs vested during 2022 was $ 4.1 million.

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The total grant date fair value of the 0.5 million PSAs issued but not released as of January 1, 2023 was $ 11.1 million.

The total grant date fair value of PSAs granted or earned during 2020 was $ 3.3 million.

The total grant date fair value of PSAs granted during 2021 was $ 4.8 million.

The total grant date fair value of PSAs vested during 2021 was $ 0.8 million.

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The total grant date fair value of the 0.4 million PSAs issued but not released as of January 2, 2022 was $ 8.9 million.

The total grant date fair value of PSAs granted or earned during 2019 was $ 3.7 million.

The total grant date fair value of PSAs granted during 2020 was $ 3.3 million.

The total grant date fair value of PSAs vested during 2020 was $ 0.6 million.

The total grant date fair value of performance shares forfeited or not earned during 2020 was $ 0.3 million.

The total grant date fair value of the 0.2 million PSAs issued but not released as of December 29, 2019 was $ 3.4 million.

The total grant date fair value of the 0.3 million PSAs issued but not released as of January 3, 2021 was $ 5.8 million.

The following table summarizes PSA activity during 2022:

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The fair value of RSAs is based on the closing price of the Company’s common stock on the grant date.

RSAs either vested ratably over a seven quarter period beginning on December 31, 2016, cliff vested on June 30, 2018, or vest annually over three years .

The RSAs only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the awards are not continued.

If the awards continue, but employment is terminated by the Company or an acquirer without cause or by the team member for good reason (as such terms are defined in the applicable team member award agreement) within 24 months following the change in control, such awards will become immediately vested upon such termination.

Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable team member award agreement.

Shares issued for RSA vesting are newly issued shares.

The fair value for restricted stock awards is calculated based on the closing stock price on the date of grant.

RSAs either vested ratably over a seven quarter period beginning on December 31, 2016, cliff vested on June 30, 2018, or vested annually over three years .

Shares issued for RSA vesting were newly issued shares.

The fair value for restricted stock awards was calculated based on the closing stock price on the date of grant.

There were no RSAs granted during 2022, 2021 or 2020.

There were no RSAs released in 2021, and the total grant date fair value of shares of restricted stock released upon vesting during 2020 and 2019 was $ 1.0 million and $ 1.6 million, respectively.

There were no RSAs forfeited in 2021 or 2020, and the total grant date fair value of shares of restricted stock forfeited during 2019 was $ 0.3 million.

There were no outstanding RSAs as of January 2, 2022.

There were no RSAs released in 2022 or 2021 .

The total grant date fair value of shares of restricted stock released upon vesting during 2020 was $ 1.0 million.

There were no RSAs forfeited in 2022, 2021 or 2020.

T here were no outstanding RSAs as of January 1, 2023.

Share-Based Compensation Expense

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The amount recognized was as follows:

January 1, 2023

January 2, 2022

January 3, 2021

Share-based compensation expense

before income taxes

Income tax benefit

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During 2022, 2021 and 2020, the Company received $ 5.0 million, $ 2.2 million and $ 1.3 million in cash proceeds from the exercise of options, respectively.

The Company recorded tax benefits of $ 0.2 million during 2021, and recorded tax detriments of $ 0.5 million and $ 1.6 million during 2020 and 2019, respectively, resulting from share-based awards.

Share Award Restructuring

During the year ended December 29, 2019, certain stock options and awards were modified pursuant to a separation agreement with the Company’s former President and Chief Operating Officer.

A total of 216,044 options and awards (RSUs, PSAs, and RSAs) were modified such that they were permitted to vest in March 2020 , which is subsequent to the former President and Chief Operating Officer’s separation date.

These options and awards expired three months after vesting, consistent with the other modified options and awards.

These modifications resulted in an incremental expense, net of $ 1.0 million of stock compensation reversals, of $ 0.2 million during the year ended December 29, 2019.

All other unvested options and awards were forfeited.

This expense was presented in store closure and other costs, net on the Company’s consolidated statements of income.

The Company recorded tax benefits of $ 1.7 million and $ 0.2 million during 2022 and 2021 , respectively, and recorded tax detriments of $ 0.5 million during 2020, resulting from share-based awards.

Quarterly Financial Data (Unaudited)

There were no material retrospective changes to any quarters in the two most recent fiscal years that would require this disclosure.

The Company identified an error in the financing activities section of its consolidated statements of cash flows for the thirteen weeks ended April 3, 2022, the twenty-six weeks ended July 3, 2022, and the thirty-nine weeks ended October 2, 2022, related to the presentation of proceeds from and repayments of borrowings associated with a modification of the Company's revolving credit facility on March 25, 2022.

The correction did not have any impact on the previously reported consolidated balance sheets, statements of income, or statements of comprehensive income for any of the impacted periods, nor did it have any impact on total cash flows from operating activities, or used in investing or financing activities for any of the impacted periods.

Although the Company has determined that the item did not have a material impact on its previously issued consolidated financial statements, the Company will revise its 2022 quarterly financial statements in conjunction with the issuance of its quarterly filings on Form 10-Q for the thirteen, twenty-six, and thirty-nine week periods ended April 2, 2023, July 2, 2023, and October 1, 2023, respectively.

The revised quarterly financial statements will reflect the proceeds from borrowings under the revolving credit facility of $ 62.5 million as a cash inflow from financing activities and the repayments of borrowings under the revolving credit facility of $ 62.5 million as a cash outflow from financing activities.

Subsequent Events

In February 2023, the Company's board of directors approved the closing of 11 stores.

The closure of these stores will result in an estimated charge in the range of $ 30 million to $ 40 million in total, the majority of which will relate to the impairment of leasehold improvements and right-of-use assets and will be reflected in the Company's consolidated financial statements for the first quarter of fiscal 2023.

Other associated costs including accelerated depreciation, severance and exit costs are included in that estimate and will be primarily recognized in the first half of fiscal 2023.

See Note 13, “Long-Term Debt and Finance Lease Liabilities”

and Note 20, “Capital Stock" for information on additional subsequent events.

Changes In and Disagreements with Acc ountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity