Sprouts Farmers Market, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stoc kholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock began trading on the NASDAQ Global Select Market under the symbol “SFM” on August 1, 2013. The number of stockholders of record of our common stock as of February 28, 2023 was 26. This number excludes stockholders whose stock is held in nominee or street name by brokers. Dividend Policy Although we regularly evaluate our capital structure and opportunities to create value for our stockholders, since we became a publicly traded company on August 1, 2013, we have not declared or paid, and do not anticipate declaring or paying in the near future, any cash dividends on our capital stock. 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 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. Period (1) Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced plans or programs Approximate dollar value of shares that may yet be purchased under the plans or programs (2) October 3, 2022 - October 30, 2022 516,534 $ 27.61 516,534 $ 442,504,000 October 31, 2022 - November 27, 2022 436,669 $ 31.01 436,669 $ 428,964,000 November 28, 2022 - January 1, 2023 506,825 $ 33.71 506,825 $ 411,877,000 Total 1,460,028 1,460,028 (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 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. 36 Table of Contents Performance Graph 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 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. This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that section, and shall not be deemed to be incorporated by reference into any filing of Sprouts Farmers Market, Inc. under the Securities Act or the Exchange Act. 37 Table of Contents Item 6. [R eserved] 38 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K as well as "Part II—Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 filed with the SEC on February 24, 2022, which provides comparisons of fiscal 2021 and fiscal 2020, and which is incorporated by reference herein. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Annual Report on Form 10-K. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.” Business Overview Sprouts Farmers Market offers a unique grocery experience featuring an open layout with fresh produce at the heart of the store. Sprouts inspires wellness naturally with a carefully curated assortment of better-for-you products paired with purpose-driven people. We continue to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and gluten-free. 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. Our Heritage In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. 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. 39 Table of Contents Outlook 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 ‘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 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. • Create an Advantaged Fresh Supply Chain. 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 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. • Refine Brand and Marketing Approach. 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 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 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 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. 40 Table of Contents Net Sales We recognize sales revenue at the point of sale, with discounts provided to customers reflected as a reduction in sales revenue. Proceeds from sales of gift cards are recorded as a liability at the time of sale and recognized as sales when they are redeemed by the customer. See Note 3, “Significant Accounting Policies” for additional information on revenue recognition related to gift cards. We do not include sales taxes in net sales. We monitor our comparable store sales growth to evaluate and identify trends in our sales performance. Our practice is to include sales from a store in comparable store sales beginning on the first day of the 61st week following the store’s opening and to exclude sales from a closed store from comparable store sales on the day of closure. This practice may differ from the methods that other retailers use to calculate similar measures. Historically, our net sales have increased as a result of new store openings 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; • our competition, including competitive store openings in the vicinity of our stores and competitor pricing and merchandising strategies; • consumer preferences and buying trends; • our ability to identify market trends, and to source and provide product offerings that promote customer traffic and growth in average ticket; • the number of customer transactions and average ticket; • the prices of our products, including the effects of factors beyond our control, such as inflation, deflation and tariffs; • opening new stores in the vicinity of our existing stores; and • advertising, in-store merchandising and other marketing activities. Cost of sales and gross profit 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. Inflation and deflation in the prices of food and other products we sell may periodically affect our gross profit and gross margin. The short-term impact of inflation and deflation is largely dependent on whether or not we pass the effects through to our customers, which will largely depend upon competitive market conditions. Our cost of sales and gross profit are correlated to sales volumes. As sales increase, gross margin is affected by the relative mix of products sold, pricing and promotional strategies, inventory shrinkage and leverage of fixed costs of sales. Selling, general and administrative expenses Selling, general and administrative expenses primarily consist of salaries, wages and benefits costs, share-based compensation, store occupancy costs (including rent, property taxes, utilities, common area maintenance and insurance), advertising costs, buying costs, pre-opening and other administrative costs. 41 Table of Contents Depreciation and Amortization Depreciation and amortization (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment. Store closure and other costs, net 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. Results of Operations for Fiscal 2022, 2021 and 2020 The following tables set forth our results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. Fiscal 2022 and 2021 consisted of 52 weeks, while Fiscal 2020 consisted of 53 weeks. Fiscal 2022 Fiscal 2021 Fiscal 2020 (in thousands, except per share data) Consolidated Statement of Income Data: Net sales $ 6,404,223 $ 6,099,869 $ 6,468,759 Cost of sales 4,055,659 3,890,657 4,089,470 Gross profit 2,348,564 2,209,212 2,379,289 Selling, general and administrative expenses 1,855,649 1,748,205 1,863,869 Depreciation and amortization (exclusive of depreciation included in cost of sales) 123,530 122,258 124,124 Store closure and other costs, net 11,025 4,673 (369 ) Income from operations 358,360 334,076 391,665 Interest expense, net 9,047 11,684 14,787 Income before income taxes 349,313 322,392 376,878 Income tax provision 88,149 78,235 89,428 Net income $ 261,164 $ 244,157 $ 287,450 Weighted average shares outstanding - basic 108,232 115,377 117,821 Dilutive effect of equity-based awards 907 700 403 Weighted average shares and equivalent shares outstanding - diluted 109,139 116,077 118,224 Diluted net income per share $ 2.39 $ 2.10 $ 2.43 Fiscal 2022 Fiscal 2021 Fiscal 2020 Other Operating Data: Comparable store sales growth 2.2 % (6.7 )% 6.9 % Stores at beginning of period 374 362 340 Opened (1) 16 12 22 Closed (4 ) — — Stores at end of period 386 374 362 Selling square feet at the end of the period 10,894,396 10,625,686 10,344,669 Average store size at the end of the period (selling square feet) 28,224 28,411 28,576 (1) Stores opened is exclusive of one store relocation during fiscal 2021. 42 Table of Contents Comparison of Fiscal 2022 to 2021 Net sales Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Net sales $ 6,404,223 $ 6,099,869 $ 304,354 5 % Comparable store sales growth 2.2 % (6.7 )% 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 Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Net sales $ 6,404,223 $ 6,099,869 $ 304,354 5 % Cost of sales 4,055,659 3,890,657 165,002 4 % Gross profit 2,348,564 2,209,212 139,352 6 % Gross margin 36.7 % 36.2 % 0.5 % 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 Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Selling, general and administrative expenses $ 1,855,649 $ 1,748,205 $ 107,444 6 % Percentage of net sales 29.0 % 28.7 % 0.3 % 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. 43 Table of Contents Depreciation and amortization Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Depreciation and amortization $ 123,530 $ 122,258 $ 1,272 1 % Percentage of net sales 1.9 % 2.0 % (0.1 )% 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. Store closure and other costs, net Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Store closure and other costs, net $ 11,025 $ 4,673 $ 6,352 136 % Percentage of net sales 0.2 % 0.1 % 0.1 % 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 Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Long-term debt $ 7,930 $ 4,601 $ 3,329 72 % Capital and financing leases 852 906 (54 ) (6 )% Deferred financing costs 800 564 236 42 % Interest rate hedge and other (535 ) 5,613 (6,148 ) (110 )% Total interest expense, net $ 9,047 $ 11,684 $ (2,637 ) (23 )% 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” and Note 22, “Derivative Financial Instruments.” Income tax provision Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Income tax provision $ 88,149 $ 78,235 $ 9,914 13 % Effective income tax rate 25.2 % 24.3 % 0.9 % 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"). 44 Table of Contents Net income Fiscal 2022 Fiscal 2021 Change % Change (dollars in thousands) Net income $ 261,164 $ 244,157 $ 17,007 7 % Percentage of net sales 4.1 % 4.0 % 0.1 % 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 Fiscal 2022 Fiscal 2021 Change % Change (shares in thousands) Diluted earnings per share $ 2.39 $ 2.10 $ 0.29 14 % Diluted weighted average shares outstanding 109,139 116,077 (6,938 ) 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. 45 Table of Contents Return on Invested Capital In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we provide information regarding Return on Invested Capital (“ROIC”) as additional information about our operating results. ROIC is a non-GAAP financial measure and should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital and provides a meaningful measure of the effectiveness of our capital allocation over time. 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. 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 four-quarter average. As numerous methods exist for calculating ROIC, our method may differ from methods used by other companies to calculate their ROIC. It is important to understand the methods and the differences in those methods used by other companies to calculate their ROIC before comparing our ROIC to that of other companies. Our calculation of ROIC for the fiscal years indicated was as follows: 2022 2021 2020 (1) (dollars in thousands) Net income (2) $ 261,164 $ 244,157 $ 287,450 Special items, net of tax (3), (4) — — 6,565 Interest expense, net of tax (4) 6,764 8,848 11,272 Net operating profit after-tax (NOPAT) $ 267,928 $ 253,005 $ 305,287 Total rent expense, net of tax (4) 154,626 150,047 146,630 Estimated depreciation on operating leases, net of tax (4) (87,775 ) (88,015 ) (80,944 ) Estimated interest on operating leases, net of tax (4), (5) 66,851 62,032 65,686 NOPAT, including effect of operating leases $ 334,779 $ 315,037 $ 370,973 Average working capital 271,604 193,900 101,622 Average property and equipment 704,786 712,496 735,651 Average other assets 568,609 568,744 567,188 Average other liabilities (96,583 ) (101,339 ) (100,531 ) Average invested capital $ 1,448,416 $ 1,373,801 $ 1,303,930 Average operating leases (6) 1,259,362 1,222,513 1,196,822 Average invested capital, including operating leases $ 2,707,778 $ 2,596,314 $ 2,500,752 ROIC, including operating leases 12.4 % 12.1 % 14.8 % 46 Table of Contents (1) Fiscal 2020 includes 53 weeks. (2) Net income amounts represent total net income for the past four trailing quarters. (3) 2020 special items include professional fees related to our strategic initiatives. (4) Net of tax amounts are calculated using the normalized effective tax rate for the periods presented. (5) 2022, 2021 and 2020 estimated interest on operating leases is calculated by multiplying operating leases by the 7.1%, 6.7% and 7.2% discount rate, respectively, for each lease recorded as rent expense within direct store expense. (6) 2022, 2021 and 2020 average operating leases represents the average net present value of outstanding lease obligations over the trailing four quarters. Liquidity and Capital Resources The following table sets forth the major sources and uses of cash for each of the periods set forth below, as well as our cash, cash equivalents and restricted cash at the end of each period (in thousands): Fiscal 2022 Fiscal 2021 Fiscal 2020 Cash, cash equivalents and restricted cash at end of period $ 295,192 $ 247,004 $ 171,441 Cash from operating activities $ 371,329 $ 364,799 $ 494,035 Cash used in investing activities $ (124,010 ) $ (102,378 ) $ (121,968 ) Cash used in financing activities $ (199,131 ) $ (186,858 ) $ (287,411 ) We have generally financed our operations principally through cash generated from operations and borrowings under our credit facilities. 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 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. Our future capital requirements will depend on many factors, including new store openings, remodel and maintenance capital expenditures at existing stores, store initiatives and other corporate capital expenditures and activities. Our cash, cash equivalents and restricted cash position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale. Operating Activities 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. 47 Table of Contents Investing Activities Cash flows used in investing activities consist primarily of capital expenditures in new stores, including leasehold improvements and store equipment, capital expenditures to maintain the appearance of our stores, sales enhancing initiatives and other corporate investments. Cash flows used in investing activities were $124.0 million and $102.4 million for 2022 and 2021, respectively. 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. We do not have any material contractual commitments for future capital expenditures as of January 1, 2023. Financing Activities 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. Long-term Debt and Credit Facilities Long-term debt outstanding was $250.0 million as of January 1, 2023 and January 2, 2022. See Note 13, “Long-Term Debt and Finance Lease Liabilities” for a description of our Credit Agreement and our Former Credit Facility (as defined therein). Share Repurchase Program 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 Amount authorized Cost of repurchases Authorization available March 3, 2021 March 2, 2022 $ 300,000 $ 200,200 $ — March 2, 2022 December 31, 2023 $ 600,000 $ 188,123 $ 411,877 48 Table of Contents 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): Year Ended January 1, 2023 January 2, 2022 Number of common shares acquired 6,897,082 7,416,357 Average price per common share acquired $ 28.99 $ 25.40 Total cost of common shares acquired $ 199,980 $ 188,343 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 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: • incur additional indebtedness; • grant additional liens; • enter into sale-leaseback transactions; • make loans or investments; • merge, consolidate or enter into acquisitions; • pay dividends or distributions; • enter into transactions with affiliates; • enter into new lines of business; • modify the terms of debt or other material agreements; and • change our fiscal year. Each of these covenants is subject to customary and other agreed-upon exceptions. 49 Table of Contents 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 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 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. 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 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. We periodically make other commitments and become subject to other contractual obligations that we believe to be routine in nature and incidental to the operation of the business. Management believes that such routine commitments and contractual obligations do not have a material impact on our business, financial condition or results of operations. 50 Table of Contents Impact of Inflation and Deflation Inflation and deflation in the prices of food and other products we sell may periodically affect our sales, gross profit and gross margin. 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. The short-term impact of inflation and deflation is largely dependent on whether or not the effects are passed through to our customers, which is subject to competitive market conditions. 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’ responses. 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. 51 Table of Contents Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. 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 judgments: inventories, lease assumptions, self-insurance reserves, goodwill and intangible assets, impairment of long-lived assets, and income taxes. Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations. Inventories We value our inventory at the lower of cost or net realizable value. The significant estimate used in inventory valuation is the estimate of inventory shrinkage. Shrink expense is accrued as a percentage of sales based on historical shrink trends. We perform physical inventories regularly, and our shrink accrual represents the loss estimate since the last physical inventory date through the reporting date. Actual physical inventory losses could vary significantly from our estimates due to changes in market conditions and other internal or external factors. We believe that all inventories are saleable and no allowances or reserves for obsolescence were recorded as of January 1, 2023 and January 2, 2022. Lease Assumptions The most significant estimates used by management in accounting for leases and the impact of those estimates are as follows: Expected lease term —Our expected lease term includes both contractual lease periods and option periods that are determined to be reasonably certain. The expected lease term is used in determining whether the lease is accounted for as an operating lease or a finance lease. An increase in the expected lease term will increase the probability that a lease will be considered a finance lease and will generally result in higher interest and depreciation expense for a leased property recorded on our balance sheets. Incremental borrowing rate —The incremental borrowing rate is primarily used in determining whether the lease is accounted for as an operating lease or a finance lease. An increase in the incremental borrowing rate decreases the net present value of the minimum lease payments and reduces the probability that a lease will be considered a finance lease. For finance leases, the incremental borrowing rate is also used in allocating our rental payments between interest expense and a reduction of the outstanding obligation. Fair market value of the leased asset —The fair market value of leased retail property is generally estimated based on comparable market data provided by third-party sources and evaluated using the experience of our development staff. Fair market value is used in determining whether the lease is accounted for as an operating lease or a finance lease. 52 Table of Contents Self-Insurance Reserves We are self-insured for costs related to workers’ 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. Liabilities for self-insurance reserves are estimated based on independent actuarial estimates, which are based on historical information and assumptions about future events. We utilize various techniques, including analysis of historical trends and actuarial valuation methods, to estimate the cost to settle reported claims and claims incurred but not yet reported as of the balance sheet date. The actuarial valuation methods consider loss development factors, which include the development time frame and expected claim reporting and settlement patterns, and expected loss costs, which include the expected frequency and severity of claim activity. We believe our assumptions are reasonable, but the estimated reserves for these liabilities could be affected materially by future events or claims experiences that differ from historical trends and assumptions. Goodwill and Intangible Assets Goodwill represents the cost of acquired businesses in excess of the fair value of assets and liabilities acquired. Our indefinite-lived intangible assets consist of trade names related to “Sprouts Farmers Market” and liquor licenses. Goodwill and indefinite-lived intangible assets are evaluated for impairment on an annual basis during the fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Our 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. If this qualitative assessment indicates it is more likely than not the estimated fair value of a reporting unit exceeds its carrying value, no further analysis is required, and goodwill is not impaired. Our qualitative assessment considers factors including changes in the competitive market, budget-to-actual performance, trends in market capitalization for us and our peers, turnover in key management personnel and overall changes in macroeconomic environment. Our impairment evaluation for our indefinite-lived intangible assets consists of a qualitative assessment similar to that for goodwill. If our qualitative assessment indicates it is more likely than not that the estimated fair value of an indefinite-lived intangible asset exceeds its carrying value, no further analysis is required, and the asset is not impaired. If our qualitative assessments indicate that it is more likely than not that the estimated fair value is less than carrying value, we compare the estimated fair value of the reporting unit or asset to its carrying amount with an impairment loss recognized for the amount, if any, by which carrying value exceeds estimated fair value. There are significant judgments and estimates in determining the estimated fair value of the reporting unit or asset; it is therefore possible that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. As of January 1, 2023, our consolidated goodwill balance was $368.9 million, and our consolidated indefinite-lived intangible assets balance was $185.0 million. No impairment of goodwill or indefinite-lived intangible assets was recorded during fiscal 2022, 2021 or 2020 because the fair value of those assets was substantially above carrying value. 53 Table of Contents Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. This evaluation is performed at the lowest level of identifiable cash flows independent of other assets. An impairment loss would be recognized when estimated undiscounted future cash flows from the operation and/or disposition of the assets are less than their carrying amount. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent opinions of value, as appropriate. Our estimates of cash flows used to assess impairment involve significant judgment and are based upon assumptions on variables such as sales growth rate, gross margin, payroll and other controllable expenses. Application of alternative assumptions and definitions could produce significantly different results. We recorded an impairment loss of $8.1 million and $4.8 million in 2022 and 2021, respectively, during the normal course of business. No impairment was recorded in 2020. See Note 3, “Significant Accounting Policies” and Note 6, “Property and Equipment". Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits as part of income tax expense. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax settlement is uncertain. Under applicable accounting guidance, we are required to evaluate the realizability of our deferred tax assets. The realization of our deferred tax assets is dependent on future earnings. Applicable accounting guidance requires that a valuation allowance be recognized when, based on available evidence, it is more likely than not that all or a portion of deferred tax assets will not be realized due to the inability to generate sufficient taxable income in future periods. In circumstances where there is significant negative evidence, establishment of a valuation allowance must be considered. A pattern of sustained profitability is considered significant positive evidence when evaluating a decision to reverse a valuation allowance. Further, in those cases where a pattern of sustained profitability exists, projected future taxable income may also represent positive evidence, to the extent that such projections are determined to be reliable given the current economic environment. Accordingly, our assessment of our valuation allowances requires considerable judgment and could have a significant negative or positive impact on our current and future earnings. 54 Table of Contents Item 7A. Quantitative and Qualitat ive Disclosures about Market Risk Interest Rate Sensitivity 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 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 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 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”). 55 Table of Contents Item 8. Financial Statemen ts and Supplementary Data INDEX TO FINANCIAL STATEMENTS Consolidated Financial Statements for Sprouts Farmers Market, Inc. and Subsidiaries: Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 57 Consolidated Balance Sheets as of January 1, 2023 and January 2, 2022 60 Consolidated Statements of Income for the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021 61 Consolidated Statements of Comprehensive Income for the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021 62 Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021 63 Consolidated Statements of Cash Flows for the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021 64 Notes to Consolidated Financial Statements 65 56 Table of Contents REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Sprouts Farmers Market, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Sprouts Farmers Market, Inc. and its subsidiaries (the “Company”) as of January 1, 2023 and January 2, 2022, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended January 1, 2023 including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 1, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 1, 2023 and January 2, 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 1, 2023 in conformity with accounting principles generally accepted in the United States of America. 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. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 57 Table of Contents Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of Self-Insurance Reserves As described in Notes 3 and 15 to the consolidated financial statements, the Company is self-insured for costs related to workers’ compensation, general liability and employee health benefits up to certain stop-loss limits. As of January 1, 2023, the Company’s recorded amounts for general liability, workers’ compensation and team member health benefit liabilities was $47.6 million, with the most significant portion of the reserve balance related to workers’ compensation and general liability self-insurance reserves. Management estimates the self-insurance reserves based on independent actuarial estimates, which are based on historical information and assumptions about future events. Management utilizes various techniques, including analysis of historical trends and actuarial valuation methods, to estimate the cost to settle reported claims and claims incurred but not yet reported as of the balance sheet date. When estimating the self-insurance reserves, several factors are considered by management, including (i) loss development factors, which include the development time frame and expected claim reporting and settlement patterns, and (ii) expected loss costs, which include the expected frequency and severity of claim activity. The principal considerations for our determination that performing procedures relating to the valuation of self-insurance reserves is a critical audit matter are (i) the significant judgment by management when estimating the self-insurance reserves due to the use of various techniques to estimate the cost to settle reported claims and claims incurred but not yet reported; (ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the loss development factors and expected loss costs; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. 58 Table of Contents Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of self-insurance reserves, including controls over the historical information and assumptions about future events used in the actuarial valuation methods. These procedures also included, among others (i) evaluating management’s self-insurance program agreements and (ii) testing the completeness and accuracy of the underlying historical claims data used in management’s assessment. Professionals with specialized skill and knowledge were used to assist in testing management’s process for estimating the valuation of the self-insurance reserves, including evaluating (i) the appropriateness of the actuarial valuation methods and (ii) the reasonableness of significant assumptions related to loss development factors and expected loss costs by considering (i) current and past claim and settlement activity and (ii) whether the assumptions were consistent with evidence obtained in other areas of the audit. /s/ PricewaterhouseCoopers LLP Phoenix, Arizona March 2, 2023 We have served as the Company’s auditor since 2011. 59 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED BA LANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) January 1, 2023 January 2, 2022 ASSETS Current assets: Cash and cash equivalents $ 293,233 $ 245,287 Accounts receivable, net 16,108 21,574 Inventories 310,545 265,387 Prepaid expenses and other current assets 53,918 35,468 Total current assets 673,804 567,716 Property and equipment, net of accumulated depreciation 722,241 716,029 Operating lease assets, net 1,106,524 1,072,019 Intangible assets, net of accumulated amortization 184,960 184,960 Goodwill 368,878 368,878 Other assets 13,973 13,513 Total assets $ 3,070,380 $ 2,923,115 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 172,904 $ 145,901 Accrued liabilities 151,306 155,996 Accrued salaries and benefits 61,574 58,743 Current portion of operating lease liabilities 135,584 151,755 Current portion of finance lease liabilities 1,012 1,078 Total current liabilities 522,380 513,473 Long-term operating lease liabilities 1,145,173 1,095,909 Long-term debt and finance lease liabilities 258,902 259,656 Other long-term liabilities 36,340 36,306 Deferred income tax liability 61,123 57,895 Total liabilities 2,023,918 1,963,239 Commitments and contingencies (Note 19) Stockholders’ equity: Undesignated preferred stock; $ 0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding — — Common stock, $ 0.001 par value; 200,000,000 shares authorized, 105,072,756 shares issued and outstanding, January 1, 2023; 111,114,374 shares issued and outstanding, January 2, 2022 105 111 Additional paid-in capital 726,345 704,701 Accumulated other comprehensive income (loss) — ( 3,758 ) Retained earnings 320,012 258,822 Total stockholders’ equity 1,046,462 959,876 Total liabilities and stockholders’ equity $ 3,070,380 $ 2,923,115 The accompanying notes are an integral part of these consolidated financial statements. 60 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEME NTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Net sales $ 6,404,223 $ 6,099,869 $ 6,468,759 Cost of sales 4,055,659 3,890,657 4,089,470 Gross profit 2,348,564 2,209,212 2,379,289 Selling, general and administrative expenses 1,855,649 1,748,205 1,863,869 Depreciation and amortization (exclusive of depreciation included in cost of sales) 123,530 122,258 124,124 Store closure and other costs, net 11,025 4,673 ( 369 ) Income from operations 358,360 334,076 391,665 Interest expense, net 9,047 11,684 14,787 Income before income taxes 349,313 322,392 376,878 Income tax provision 88,149 78,235 89,428 Net income $ 261,164 $ 244,157 $ 287,450 Net income per share: Basic $ 2.41 $ 2.12 $ 2.44 Diluted $ 2.39 $ 2.10 $ 2.43 Weighted average shares outstanding: Basic 108,232 115,377 117,821 Diluted 109,139 116,077 118,224 The accompanying notes are an integral part of these consolidated financial statements. 61 Table of Contents SPROUTS FARMER S MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Net income $ 261,164 $ 244,157 $ 287,450 Other comprehensive income (loss), net of tax Unrealized gains (losses) on cash flow hedging activities, net of income tax of $ 1,819 , $ 3,116 and ($ 205 ) 5,259 9,009 ( 592 ) Reclassification of net gains (losses) on cash flow hedges to net income, net of income tax of ($ 520 ), ($ 1,485 ) and ($ 1,107 ) ( 1,501 ) ( 4,293 ) ( 3,200 ) Total other comprehensive income (loss) 3,758 4,716 ( 3,792 ) Comprehensive income $ 264,922 $ 248,873 $ 283,658 The accompanying notes are an integral part of these consolidated financial statements. 62 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATE D STATEMENTS OF STOCKHOLDERS’ EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Shares Common Stock Additional Paid-in Capital (Accumulated Deficit) Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Balances at December 29, 2019 117,452,918 $ 117 $ 670,966 $ ( 84,449 ) $ ( 4,682 ) $ 581,952 Net income — — — 287,450 — 287,450 Other comprehensive income (loss) — — — — ( 3,792 ) ( 3,792 ) Issuance of shares under stock plans 500,517 1 1,343 — — 1,344 Share-based compensation — — 14,339 — — 14,339 Balances at January 3, 2021 117,953,435 118 686,648 203,001 ( 8,474 ) 881,293 Net income — — — 244,157 — 244,157 Other comprehensive income (loss) — — — — 4,716 4,716 Issuance of shares under stock plans 577,296 — 2,170 — — 2,170 Repurchase and retirement of common stock ( 7,416,357 ) ( 7 ) — ( 188,336 ) — ( 188,343 ) Share-based compensation — — 15,883 — — 15,883 Balances at January 2, 2022 111,114,374 111 704,701 258,822 ( 3,758 ) 959,876 Net income — — — 261,164 — 261,164 Other comprehensive income (loss) — — — — 3,758 3,758 Issuance of shares under stock plans 855,464 — 5,041 — — 5,041 Repurchase and retirement of common stock ( 6,897,082 ) ( 6 ) — ( 199,974 ) — ( 199,980 ) Share-based compensation — — 16,603 — — 16,603 Balances at January 1, 2023 105,072,756 $ 105 $ 726,345 $ 320,012 $ — $ 1,046,462 The accompanying notes are an integral part of these consolidated financial statements. 63 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEME NTS OF CASH FLOWS (IN THOUSANDS) Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Operating activities Net income $ 261,164 $ 244,157 $ 287,450 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 127,067 125,541 126,507 Operating lease asset amortization 117,315 108,517 99,276 Store closure and other costs, net 8,066 4,762 ( 321 ) Share-based compensation 16,603 15,883 14,339 Deferred income taxes 3,228 ( 178 ) 3,717 Other non-cash items 672 1,167 3,683 Changes in operating assets and liabilities: Accounts receivable 13,381 16,928 25,977 Inventories ( 45,158 ) ( 11,417 ) 21,754 Prepaid expenses and other current assets ( 18,467 ) ( 5,879 ) ( 14,970 ) Other assets 2,039 ( 1,782 ) ( 5,461 ) Accounts payable 13,362 4,523 20,184 Accrued liabilities 5,416 610 4,296 Accrued salaries and benefits 2,831 ( 17,951 ) 28,116 Accrued income tax — — ( 2,005 ) Operating lease liabilities ( 132,889 ) ( 120,483 ) ( 120,085 ) Other long-term liabilities ( 3,301 ) 401 1,578 Cash flows from operating activities 371,329 364,799 494,035 Investing activities Purchases of property and equipment ( 124,010 ) ( 102,378 ) ( 121,968 ) Cash flows used in investing activities ( 124,010 ) ( 102,378 ) ( 121,968 ) Financing activities Proceeds from revolving credit facilities 62,500 — — Payments on revolving credit facilities ( 62,500 ) — ( 288,000 ) Payments on finance lease liabilities ( 819 ) ( 685 ) ( 754 ) Payments of deferred financing costs ( 3,373 ) — — Repurchase of common stock ( 199,980 ) ( 188,343 ) — Proceeds from exercise of stock options 5,041 2,170 1,343 Cash flows used in financing activities ( 199,131 ) ( 186,858 ) ( 287,411 ) Increase in cash, cash equivalents, and restricted cash 48,188 75,563 84,656 Cash, cash equivalents, and restricted cash at beginning of the period 247,004 171,441 86,785 Cash, cash equivalents, and restricted cash at the end of the period $ 295,192 $ 247,004 $ 171,441 Supplemental disclosure of cash flow information Cash paid for interest $ 11,132 $ 11,431 $ 14,786 Cash paid for income taxes 93,419 82,888 94,767 Leased assets obtained in exchange for new operating lease liabilities 157,269 139,349 118,075 Supplemental disclosure of non-cash investing and financing activities Property and equipment in accounts payable and accrued liabilities $ 36,177 $ 25,166 $ 10,869 The accompanying notes are an integral part of these consolidated financial statements. 64 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business Sprouts Farmers Market, Inc., a Delaware corporation, through its subsidiaries, offers a unique grocery experience featuring an open layout with fresh produce at the heart of the store. The Company continues to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and gluten-free. As of January 1, 2023 , the Company operated 386 stores in 23 states. For convenience, the “Company” is used to refer collectively to Sprouts Farmers Market, Inc. and, unless the context requires otherwise, its subsidiaries. The Company’s store operations are conducted by its subsidiaries. 2. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All material intercompany accounts and transactions have been eliminated in consolidation. The Company has one reportable and one operating segment, healthy grocery stores. The Company categorizes the varieties of products it sells as perishable and non-perishable. Perishable product categories include produce, meat, seafood, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care. The following is a breakdown of the Company’s perishable and non-perishable sales mix: 2022 2021 2020 Perishables 58.0 % 57.7 % 57.2 % Non-Perishables 42.0 % 42.3 % 42.8 % All dollar amounts are in thousands, unless otherwise indicated. 3. Significant Accounting Policies Fiscal Years The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. Fiscal year 2022 ended on January 1, 2023 and included 52 weeks. Fiscal year 2021 ended on January 2, 2022 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. Significant Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s critical accounting estimates include inventories, lease assumptions, self-insurance reserves, goodwill and intangible assets, impairment of long-lived assets, and income taxes. Actual results could differ from those estimates. 65 Table of Contents Cash and Cash Equivalents The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents are maintained at financial institutions in the United States of America. Deposits in transit include sales through the end of the period, the majority of which were paid with credit and debit cards and settle within a few days of the sales transactions. The amounts due from banks for these transactions at each reporting date were as follows: As Of January 1, 2023 January 2, 2022 Due from banks for debit and credit card transactions $ 77,665 $ 78,558 Restricted Cash 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 $ 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 Accounts receivable primarily represents billings to vendors for scan, advertising and other rebates, receivables for ecommerce sales and billings to landlords for tenant allowances. Accounts receivable also includes receivables from the Company’s insurance carrier for payments expected to be made in excess of self-insured retentions. The Company provides an allowance for doubtful accounts when a specific account is determined to be uncollectible. Inventories Inventories consist of merchandise purchased for resale, which are stated at the lower of cost or net realizable value. The cost method is used for distribution center and store perishable department inventories by assigning costs to each of these items based on a first-in, first-out (FIFO) basis (net of vendor discounts). The Company’s non-perishable inventory is valued at the lower of cost or net realizable value using weighted averaging, the use of which approximates the FIFO method. Inventories are reduced for estimated losses related to shrinkage. The Company believes that all inventories are saleable and no allowances or reserves for obsolescence were recorded as of January 1, 2023 and January 2, 2022 . Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization. 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. Depreciation expense, which includes the amortization of assets recorded as finance leases, is computed using the straight-line method over the estimated useful lives of the individual assets. Terms of leases used in the determination of estimated useful lives may include renewal options if the exercise of the renewal option is determined to be reasonably certain. 66 Table of Contents The following table includes the estimated useful lives of certain of the Company’s asset classes: Computer hardware and software 3 to 5 years Furniture, fixtures and equipment 7 to 20 years Leasehold improvements up to 15 years Buildings 40 years Store development costs, which include costs associated with the selection and procurement of real estate sites, are also included in property and equipment. These costs are included in leasehold improvements and are amortized over the remaining lease term of the successful sites with which they are associated. Self-Insurance Reserves The Company uses a combination of insurance and self-insurance programs to provide for costs associated with general liability, workers’ compensation and team member health benefits. Liabilities for self-insurance reserves are estimated based on independent actuarial estimates, which are based on historical information and assumptions about future events. The Company utilizes various techniques, including analysis of historical trends and actuarial valuation methods, to estimate the cost to settle reported claims and claims incurred but not yet reported as of the balance sheet date. The actuarial valuation methods consider loss development factors, which include the development time frame and expected claim reporting and settlement patterns, and expected loss costs, which include the expected frequency and severity of claim activity. Amounts expected to be recovered from insurance companies are included in the liability, with a corresponding amount recorded in accounts receivable. Goodwill and Intangible Assets Goodwill represents the cost of acquired businesses in excess of the fair value of assets and liabilities acquired. The Company’s indefinite-lived intangible assets consist of trade names related to “Sprouts Farmers Market” and liquor licenses. The Company also held intangible assets with finite useful lives consisting of the “Sunflower Farmers Market” trade name. The trade name related to “Sunflower Farmers Market” met the definition of a defensive intangible asset and is fully amortized. Goodwill and indefinite-lived intangible assets are evaluated for impairment on an annual basis during the fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. 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 the 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, 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. If the qualitative assessment indicates it is more likely than not that the estimated fair value of an indefinite-lived intangible asset exceeds its carrying value, no further analysis is required, and the asset is not impaired. Otherwise, the Company compares the estimated fair value of the asset to its carrying amount with an impairment loss recognized for the amount, if any, by which carrying value exceeds estimated fair value. 67 Table of Contents The Company has determined its business consists of a single reporting unit, healthy grocery stores. The Company has had no goodwill impairment charges for the past three fiscal years. See Note 8, “Intangible Assets” and Note 9, “Goodwill” for further discussion. Impairment of Long-Lived Assets The Company assesses its long-lived assets, including property and equipment and right-of-use assets, for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. These events primarily include current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in the market value of an asset or a decision to close or relocate a store. The Company groups and evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which independent identifiable cash flows are available. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the future undiscounted cash flows expected to be generated by that asset group. The Company’s impairment analysis contains management assumptions about key variables including sales growth rate, gross margin, payroll and other controllable expenses. If impairment is indicated, a loss is recognized for any excess of the carrying value over the estimated fair value of the asset group. 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 $ 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. These charges are recorded as a component of Store closure and other costs, net in the accompanying consolidated statements of income. Deferred Financing Costs The Company capitalizes certain fees and costs incurred in connection with the issuance of debt. Deferred financing costs are amortized to interest expense over the term of the debt using the effective interest method. 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. Leases The Company leases its stores, distribution centers, and administrative offices. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease assets, current portion of operating lease liabilities and noncurrent portion of operating lease liabilities in the accompanying consolidated balance sheets. Finance leases are included in property, plant, equipment, net, current portion of finance lease liabilities, and long-term debt and finance lease liabilities in the accompanying consolidated balance sheets. Operating lease payments are charged on a straight-line basis to rent expense, a component of selling, general and administrative expenses, over the lease term and finance lease payments are charged to interest expense and depreciation and amortization expense using a debt model over the lease term. 68 Table of Contents The Company’s lease assets represent a right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease assets and liabilities and the related rent expense are recognized at the lease commencement date (date on which the Company gains access to the property) based on the estimated present value of lease payments over the lease term, net of landlord allowances expected to be received. 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 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. These variable payments are not included in the measurement of the lease liability or asset and are expensed as incurred. As most of the Company’s lease agreements do not provide an implicit rate, the Company uses an estimated incremental borrowing rate, which is derived from third-party information available at the lease commencement date, in determining the present value of lease payments. The rate used is for a secured borrowing of a similar term as the lease. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to twenty years or more. The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less (“short-term leases”) are not recorded on the balance sheet. The Company does not currently have any material short-term leases. Additionally, the Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants. The Company subleases certain real estate to third parties, which have all been classified as operating leases. The Company recognizes sublease income on a straight-line basis. Fair Value Measurements The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with ASC 820. This framework establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value: Level 1: Quoted prices for identical instruments in active markets. Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3: 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 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. 69 Table of Contents Derivative Financial Instruments The Company records derivatives at fair value. The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the Company reflects the change in fair value of the derivative instrument in its financial statements. A derivative qualifies for hedge accounting if, at inception, the derivative is expected to be highly effective in offsetting the underlying hedged cash flows, and the Company fulfills the hedge documentation standards at the time it enters into the derivative contract. The Company designates its hedge based on the exposure it is hedging. For qualifying cash flow hedges, the Company records changes in fair value in other comprehensive income (“OCI”). The Company releases the derivative’s gain or loss from OCI to match the timing of the underlying hedged item’s effect on earnings. The Company reviews the effectiveness of its hedging instruments quarterly. The Company recognizes changes in the fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. The Company discontinues hedge accounting for any hedge that is no longer evaluated to be highly effective. 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 The Company measures share-based compensation cost at the grant date based on the fair value of the award and recognizes share-based compensation cost as expense over the vesting period. As share-based compensation expense recognized in the consolidated statements of income is based on awards ultimately expected to vest, the amount of expense has been reduced for actual forfeitures as they occur. The Company uses the Black-Scholes option-pricing model to determine the grant date fair value for each option grant. See Note 26, “Share-Based Compensation” for a discussion of assumptions used in the calculation of fair values. 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 common 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. 70 Table of Contents Revenue Recognition The Company’s performance obligations are satisfied upon the transfer of goods to the customer, which occurs at the point of sale, and payment from customers is also due at the time of sale. Proceeds from the sale of gift cards are recorded as a liability at the time of sale and recognized as sales when they are redeemed by the customer and the performance obligation is satisfied by the Company. The Company’s gift cards do not expire. 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. A summary of the activity and balances in the gift card liability, net is as follows : Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Balance, beginning of year $ 12,586 $ 15,888 $ 15,902 Gift cards issued during the period but not redeemed (1) 4,291 5,711 9,895 Revenue recognized from beginning liability ( 5,971 ) ( 9,013 ) ( 9,909 ) Balance, end of year $ 10,906 $ 12,586 $ 15,888 (1) net of estimated breakage The nature of goods the Company transfers to customers at the point of sale are inventories, consisting of merchandise purchased for resale. The Company does not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current period from performance obligations satisfied in previous periods, any contract performance obligations, or any material costs to obtain or fulfill a contract as of January 1, 2023 . 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, 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. The Company’s largest supplier accounted for approximately 45 %, 44 % and 42 % of total purchases during 2022, 2021 and 2020, respectively. 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, 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. The Company records rebates received from vendors in connection with cooperative advertising programs as a reduction to advertising costs when the allowance represents a reimbursement of a specific incremental and identifiable cost. Advertising costs are expensed as incurred. Advertising expense, net of rebates, was $ 49.2 million, $ 45.9 million and $ 54.4 million for 2022, 2021 and 2020, respectively. Depreciation and amortization Depreciation and amortization expense (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment. 71 Table of Contents Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company’s deferred tax assets are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. Realization of the deferred tax assets is principally dependent upon achievement of projected future taxable income offset by deferred tax liabilities. Changes in recognition or measurement are reflected in the period in which the judgment occurs. The Company files income tax returns for federal purposes and in many states. 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 recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 % likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits as part of income tax expense. Share Repurchases The Company has elected to retire shares repurchased to date. Shares retired become part of the pool of authorized but unissued shares. 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 Basic net income per share is calculated by dividing net income by the weighted average number of shares outstanding during the fiscal period. Diluted net income per share is based on the weighted average number of shares outstanding, plus, where applicable, shares that would have been outstanding related to dilutive options, PSAs, RSAs, and RSUs. Comprehensive Income Comprehensive income consists of net income and the unrealized gains or losses on derivative instruments that qualify for and have been designated as cash flow hedges, for all periods presented. 72 Table of Contents 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 In December 2019, the FASB issued ASU no. 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.” 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 basis. There was no impact on the Company’s consolidated financial statements. Financial Instruments – Credit Losses In June 2016, the FASB issued ASU no. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this update introduce a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Subsequent to the initial standards, the FASB has also issued several ASUs to clarify specific topics. The Company adopted ASU 2016-13 effective December 30, 2019 , using the modified retrospective approach. There was no impact to opening retained earnings as of December 30, 2019 or on the Company’s consolidated financial statements. Compensation – Fair Value Disclosures In August 2018, the FASB issued ASU No. 2018-13, “Fair value measurement (Topic 820) – Disclosure framework – Changes to the disclosure requirements for fair value measurement.” The amendments in this update improve the effectiveness of fair value measurement disclosures. The Company adopted this standard effective December 30, 2019 . There was no impact on the Company’s disclosure in its consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted 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. 73 Table of Contents 4. Accounts Receivable A summary of accounts receivable is as follows: As Of January 1, 2023 January 2, 2022 Landlords $ 232 $ 4,856 Vendors 3,544 4,191 Insurance 2,320 2,161 Ecommerce 6,988 4,857 Other 3,024 5,509 Total $ 16,108 $ 21,574 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. 5. Prepaid Expenses and Other Current Assets A summary of prepaid expenses and other current assets is as follows: As Of January 1, 2023 January 2, 2022 Prepaid expenses $ 33,034 $ 21,548 Restricted cash 1,959 1,717 Income tax receivable 18,155 11,639 Other current assets 770 564 Total $ 53,918 $ 35,468 6. Property and Equipment A summary of property and equipment, net is as follows: As Of January 1, 2023 January 2, 2022 Land and finance lease assets $ 15,753 $ 15,753 Furniture, fixtures and equipment 850,357 797,169 Leasehold improvements 679,880 665,237 Construction in progress 110,106 58,621 Total property and equipment 1,656,096 1,536,780 Accumulated depreciation and amortization ( 933,855 ) ( 820,751 ) Property and equipment, net $ 722,241 $ 716,029 Depreciation expense was $ 125.7 million, $ 124.1 million and $ 125.6 million for 2022, 2021 and 2020, respectively. Depreciation expense is primarily reflected in depreciation and amortization on the consolidated statements of income. Impairment expense was $ 8.1 million and $ 4.8 million for 2022 and 2021 , respectively. There was no impairment expense recognized in 2020. 74 Table of Contents 7. Leases Lease cost includes both the fixed and variable expenses recorded for leases. The components of lease cost are as follows: Year Ended Classification January 1, 2023 January 2, 2022 January 3, 2021 Operating lease cost Selling, general and administrative expenses (1) $ 204,559 $ 196,602 $ 191,279 Finance lease cost: Amortization of Property and Equipment Depreciation and amortization 966 966 966 Interest on lease liabilities Interest expense 852 906 970 Variable lease cost Selling, general and administrative expenses (1) 65,979 60,763 57,789 Sublease income Selling, general and administrative expenses ( 833 ) ( 839 ) ( 1,192 ) Total net lease cost $ 271,523 $ 258,398 $ 249,812 (1) Supply chain-related amounts of $ 12.4 million, $ 10.6 million and $ 7.8 million were included in cost of sales for 2022, 2021 and 2020, respectively. Supplemental balance sheet information related to leases is as follows: As of Classification January 1, 2023 January 2, 2022 Assets Operating Operating lease assets $ 1,106,524 $ 1,072,019 Finance Property and equipment, net 7,285 8,251 Total lease assets $ 1,113,809 $ 1,080,270 Liabilities Current Operating Current portion of operating lease liabilities $ 135,584 $ 151,755 Finance Current portion of finance lease liabilities 1,012 1,078 Noncurrent Operating Long-term operating lease liabilities 1,145,173 1,095,909 Finance Long-term debt and finance lease liabilities 8,902 9,656 Total lease liabilities $ 1,290,671 $ 1,258,398 2022 2021 2020 Weighted average remaining lease term (years) Operating leases 9.4 9.6 9.8 Finance leases 7.8 8.8 9.7 Weighted average discount rate Operating leases 7.1 % 6.7 % 7.2 % Finance leases 8.4 % 8.4 % 8.4 % 75 Table of Contents Supplemental cash flow and other information related to leases is as follows: Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Cash paid for amounts included in measurement of lease liabilities: Operating cash flows for operating leases $ 207,516 $ 182,926 $ 186,280 Operating cash flows for finance leases 852 906 970 Lease assets obtained in exchange for lease liabilities: Operating leases $ 157,269 $ 139,349 $ 118,075 A summary of maturities of lease liabilities is as follows: Operating Leases (1), (2) Finance Leases Total 2023 $ 202,017 $ 1,556 $ 203,573 2024 223,817 1,734 225,551 2025 224,534 1,904 226,438 2026 192,101 1,758 193,859 2027 176,190 1,845 178,035 Thereafter 910,418 4,959 915,377 Total lease payments 1,929,077 13,756 1,942,833 Less: Imputed interest ( 648,320 ) ( 3,842 ) ( 652,162 ) Total lease liabilities 1,280,757 9,914 1,290,671 Less: Current portion ( 135,584 ) ( 1,012 ) ( 136,596 ) Long-term lease liabilities $ 1,145,173 $ 8,902 $ 1,154,075 (1) Operating lease payments include $ 67.5 million related to periods covered by options to extend lease terms that are reasonably certain of being exercised and exclude $ 504.5 million of legally binding minimum lease payments for leases executed but not yet commenced. (2) We have subtenant agreements under which we will receive $ 1.0 million in 2023, $ 1.0 million in 2024, $ 0.9 million in 2025, $ 0.7 million in 2026, $ 0.6 million in 2027 and $ 0.4 million thereafter. 76 Table of Contents 8. Intangible Assets A summary of the activity and balances in intangible assets is as follows: Balance at January 3, 2021 Adjustments/Transfers Balance at January 2, 2022 Indefinite-lived trade names $ 182,937 $ — $ 182,937 Indefinite-lived liquor licenses 2,023 — 2,023 Total intangible assets (1) $ 184,960 $ — $ 184,960 Balance at January 2, 2022 Adjustments/Transfers Balance at January 1, 2023 Indefinite-lived trade names $ 182,937 $ — $ 182,937 Indefinite-lived liquor licenses 2,023 — 2,023 Total intangible assets (1) $ 184,960 $ — $ 184,960 (1) Excludes the original cost and accumulated amortization of fully-amortized finite-lived intangible assets. There was no amortization expense in 2022 and 2021 . Amortization expense was ($ 0.4 ) million in 2020. 9. Goodwill The Company’s goodwill balance was $ 368.9 million as of January 1, 2023 and January 2, 2022. As of January 1, 2023 and January 2, 2022 , the Company had no accumulated goodwill impairment losses. The goodwill was related to the acquisition of Sunflower Farmers Market stores and Henry’s Farmers Market stores. 10. 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. 11. Accrued Liabilities A summary of accrued liabilities is as follows: As Of January 1, 2023 January 2, 2022 Self-insurance reserves $ 23,954 $ 27,136 Accrued occupancy related (CAM, property taxes, etc.) 24,981 20,649 Gift cards, net of breakage 10,906 12,586 Accrued sales and use tax 13,820 12,327 Other accrued liabilities 77,645 83,298 Total $ 151,306 $ 155,996 77 Table of Contents 12. Accrued Salaries and Benefits A summary of accrued salaries and benefits is as follows: As Of January 1, 2023 January 2, 2022 Bonuses $ 23,679 $ 24,292 Payroll 19,873 18,065 Vacation 16,732 15,302 Severance and other 1,290 1,084 Total $ 61,574 $ 58,743 13. Long-Term Debt and Finance Lease Liabilities A summary of long-term debt and finance lease liabilities is as follows: As of Facility Maturity Interest Rate January 1, 2023 January 2, 2022 Senior secured debt $ 700.0 million Credit Agreement March 25, 2027 Variable $ 250,000 $ — Former Credit Facility March 27, 2023 (1) Variable — 250,000 Finance lease liabilities (see Note 7, "Leases") Various n/a 8,902 9,656 Long-term debt and finance lease liabilities $ 258,902 $ 259,656 (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 2023 $ — 2024 — 2025 — 2026 — 2027 250,000 Thereafter — Total $ 250,000 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. 78 Table of Contents 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. Guarantees 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 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 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. 79 Table of Contents Covenants The Credit Agreement contains financial, affirmative and negative covenants. The negative covenants include, among other things, limitations on the Company’s ability to: • incur additional indebtedness; • grant additional liens; • enter into sale-leaseback transactions; • make loans or investments; • merge, consolidate or enter into acquisitions; • pay dividends or distributions; • enter into transactions with affiliates; • enter into new lines of business; • modify the terms of debt or other material agreements; and • change its fiscal year. Each of these covenants is subject to customary and other agreed-upon exceptions. 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. 80 Table of Contents 14. Other Long-Term Liabilities A summary of other long-term liabilities is as follows: As Of January 1, 2023 January 2, 2022 Long-term portion of self-insurance reserves $ 23,658 $ 23,393 Other 12,682 12,913 Total $ 36,340 $ 36,306 15. Self-Insurance Programs The Company is self-insured for costs related to workers’ 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 $ 1.2 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. The following table summarizes the changes in the Company's self-insurance reserves through January 1, 2023: Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Beginning Balance $ 50,529 $ 48,518 $ 46,863 Expenses, net of actuarial adjustments 76,720 85,892 86,786 Claim Payments ( 79,637 ) ( 83,881 ) ( 85,131 ) Ending Balance 47,612 50,529 48,518 Less: Current portion ( 23,954 ) ( 27,136 ) ( 25,227 ) Long-term portion $ 23,658 $ 23,393 $ 23,291 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. 81 Table of Contents 16. Defined Contribution Plan The Company maintains the Sprouts Farmers Market, Inc. Employee 401(k) Savings Plan (the “Plan”), which is a defined contribution plan covering all eligible team members. Under the provisions of the Plan, participants may direct the Company to defer a portion of their compensation to the Plan, subject to the Internal Revenue Code limitations. The Company provides for an employer matching contribution equal to 50 % of each dollar contributed by the participants up to 6 % of their eligible compensation. Total expense recorded for the matching under the Plan: Year Ended January 1, 2023 January 2, 2022 January 3, 2021 $ 7,820 $ 7,517 $ 6,588 17. Income Taxes Income Tax Provision The income tax provision consists of the following: Year Ended January 1, 2023 January 2, 2022 January 3, 2021 U.S. Federal—current $ 66,398 $ 60,329 $ 63,957 U.S. Federal—deferred 1,028 ( 1,663 ) 3,725 U.S. Federal—total 67,426 58,666 67,682 State—current 19,823 19,715 20,442 State—deferred 900 ( 146 ) 1,304 State—total 20,723 19,569 21,746 Total provision $ 88,149 $ 78,235 $ 89,428 Tax Rate Reconciliation Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pre-tax income as a result of the following: Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Federal statutory rate 21.0 % 21.0 % 21.0 % Increase (decrease) in income taxes resulting from: State income taxes, net of federal benefit 4.7 4.8 4.6 Enhanced charitable contribution impact ( 0.9 ) ( 1.5 ) ( 1.0 ) Amended returns — ( 0.2 ) ( 1.0 ) Benefit of federal tax credit ( 0.5 ) ( 0.4 ) ( 0.9 ) Other, net 0.9 0.6 1.0 Effective income tax rate 25.2 % 24.3 % 23.7 % 82 Table of Contents 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. 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 $ 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. 83 Table of Contents Deferred Taxes Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows: As Of January 1, 2023 January 2, 2022 Deferred tax assets Employee benefits $ 16,052 $ 17,543 Tax credits 166 228 Operating leases 329,154 320,650 Other lease related 5,740 5,881 Other accrued liabilities 4,004 4,283 Charitable contribution carryforward 2,819 1,781 Inventories and other 2,605 3,206 Total gross deferred tax assets 360,540 353,572 Less: Valuation Allowance ( 917 ) — Total deferred tax assets, net of valuation allowance 359,623 353,572 Deferred tax liabilities Depreciation and amortization ( 83,091 ) ( 88,970 ) Intangible assets ( 52,413 ) ( 45,978 ) Operating leases ( 284,377 ) ( 275,509 ) Asset retirement obligations ( 865 ) ( 1,010 ) Total gross deferred tax liabilities ( 420,746 ) ( 411,467 ) Net deferred tax liability $ ( 61,123 ) $ ( 57,895 ) 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. Management performs an assessment over future taxable income to analyze whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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 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. 84 Table of Contents 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: As Of January 1, 2023 January 2, 2022 January 3, 2021 Beginning balance $ 1,770 $ 1,803 $ 1,343 Additions based on tax positions related to the current year 43 16 16 Additions based on tax positions related to prior years — 31 647 Reductions for settlements with taxing authorities ( 694 ) — — Reductions for tax positions for prior years — ( 80 ) ( 203 ) Ending balance $ 1,119 $ 1,770 $ 1,803 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. The Company’s policy is to recognize accrued interest and penalties as a component of income tax expense. The Company does no t anticipate a decrease in the total amount of unrecognized tax benefits during the next twelve months. The Company files income tax returns with federal and state tax authorities within the United States. 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 . 18. 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. 19. Commitments and Contingencies Commitments Real estate obligations, which include legally binding minimum lease payments for leases executed but not yet commenced, were $ 504.5 million as of January 1, 2023. In addition to its lease obligations, the Company maintains certain purchase commitments with various vendors to ensure its operational needs are fulfilled. As of January 1, 2023 , total future purchase commitments under noncancelable service and supply contracts were $ 19.8 million. Commitments related to the Company’s business operations cover varying periods of time and are not individually significant. These commitments are expected to be fulfilled with no adverse consequences to the Company’s operations or financial conditions. 85 Table of Contents Contingencies The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters that are believed to best serve the interests of the Company’s stakeholders. The Company’s primary contingencies are associated with self-insurance obligations and litigation matters. Self-insurance liabilities require significant judgments, and actual claim settlements and associated expenses may differ from the Company’s current provisions for loss. See Note 15, “Self-Insurance Programs” for more information. “Phishing” Scam Actions In April 2016, four complaints were filed, two in the federal courts of California, one in the Superior Court of California and one in the federal court in the District of Colorado, each on behalf of a purported class of the Company’s current and former team members whose personally identifiable information (“PII”) was inadvertently disclosed to an unauthorized third party that perpetrated an email “phishing” scam against one of the Company’s team members. The complaints alleged the Company failed to properly safeguard the PII in accordance with applicable law. The complaints sought damages on behalf of the purported class in unspecified amounts, attorneys’ fees and litigation expenses. On March 1, 2019, a number of individual plaintiffs filed arbitration demands. On May 15, 2019, certain other plaintiffs filed a second amended class action complaint in the District of Arizona, alleging that certain subclasses of team members are not subject to the Company’s arbitration agreement and attempted to pursue those team members’ claims in federal court. In late August 2019, the Company reached an agreement in principle to settle the majority of these claims, which were funded in the fourth quarter of 2019. Primary funding for the settlement came from the Company’s cyber insurance policy, and the settlement did not have a material impact on the consolidated financial statements. Following the group settlement, three (3) individual claimants planned to proceed with arbitration of their claims. The three individual arbitrations were settled in late June and early July 2020, with immaterial settlement amounts fully funded by the Company’s cyber insurance policy. Proposition 65 Coffee Action On April 13, 2010, an organization named Council for Education and Research on Toxics (“CERT”) filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against nearly 80 defendants who manufacture, package, distribute or sell brewed coffee, including the Company. CERT alleged that the defendants failed to provide warnings for their coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986, better known as Proposition 65. CERT seeks equitable relief, i ncluding providing warnings to consumers of coffee products, as well as civil penalties. The Company, as part of a joint defense group, asserted multiple defenses against the lawsuit. On May 7, 2018, the trial court issued a ruling adverse to defendants on these defenses to liability. On June 15, 2018, before the court tried damages, remedies and attorneys' fees, California’s Office of Environmental Health Hazard Assessment (“OEHHA”) published a proposal to amend Proposition 65’s implementing regulations by adding a stand-alone sentence that reads as follows: “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 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. 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 . 86 Table of Contents 20 . Capital Stock Common stock 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. Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Options exercised 218,509 115,123 59,561 Other share issuances under stock plans 636,955 462,173 440,956 Share Repurchases 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 Amount authorized Cost of repurchases Authorization available March 3, 2021 March 2, 2022 $ 300,000 $ 200,200 $ — March 2, 2022 December 31, 2023 $ 600,000 $ 188,123 $ 411,877 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. Share repurchase activity under the Company’s repurchase programs for the periods indicated was as follows (total cost in thousands): Year Ended January 1, 2023 January 2, 2022 Number of common shares acquired 6,897,082 7,416,357 Average price per common share acquired $ 28.99 $ 25.40 Total cost of common shares acquired $ 199,980 $ 188,343 Shares purchased under the Company’s repurchase programs were subsequently retired and the excess of the repurchase price over par value was charged to retained earnings. 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. 87 Table of Contents Preferred Stock The Company’s board of directors is authorized, subject to limitations prescribed by Delaware law, to issue up to 10,000,000 shares of the Company’s preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the designation, powers, preferences, and rights of the shares of each series and any of its qualifications, limitations, or restrictions, in each case without further action by the Company’s stockholders. The Company’s board of directors can also increase or decrease the number of shares of any series of preferred stock, but not below the number of shares of that series then outstanding. The Company’s board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring, or preventing a change in control of the Company and might adversely affect the market price of the Company’s common stock and the voting and other rights of the holders of the Company’s common stock. The Company has no current plan to issue any shares of preferred stock. 21. Net Income per Share 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 RSUs and unvested RSAs. 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): Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Basic net income per share: Net income $ 261,164 $ 244,157 $ 287,450 Weighted average shares outstanding 108,232 115,377 117,821 Basic net income per share $ 2.41 $ 2.12 $ 2.44 Diluted net income per share: Net income $ 261,164 $ 244,157 $ 287,450 Weighted average shares outstanding - basic 108,232 115,377 117,821 Dilutive effect of share-based awards: Assumed exercise of options to purchase shares 337 215 16 RSUs 394 390 341 RSAs — — 9 PSAs 176 95 37 Weighted average shares and equivalent shares outstanding 109,139 116,077 118,224 Diluted net income per share $ 2.39 $ 2.10 $ 2.43 88 Table of Contents 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. 22. 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 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 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: As Of Balance Sheet Location January 1, 2023 January 2, 2022 Interest rate swaps Accrued liabilities $ — $ 5,107 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: Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Consolidated Statements of Income Classification Interest expense, net $ 2,021 $ 5,778 $ 4,307 89 Table of Contents 23. Comprehensive Income The following table presents the changes in accumulated other comprehensive income (loss) for the year ended January 1, 2023: Cash Flow Hedges Balance at January 3, 2021 $ ( 8,474 ) Other comprehensive income (loss), net of tax Unrealized gains on cash flow hedging activities, net of income tax of $ 3,116 9,009 Reclassification of net losses on cash flow hedges to net income, net of income tax of ($ 1,485 ) ( 4,293 ) Total other comprehensive income (loss) 4,716 Balance at January 2, 2022 $ ( 3,758 ) Other comprehensive income (loss), net of tax Unrealized gains on cash flow hedging activities, net of income tax of $ 1,819 5,259 Reclassification of net losses on cash flow hedges to net income, net of income tax of ($ 520 ) ( 1,501 ) Total other comprehensive income (loss) 3,758 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 statements of income. 24. Fair Value Measurements The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with GAAP. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value: Level 1: Quoted prices for identical instruments in active markets. Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3: 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 and the impairment analysis of goodwill, intangible assets, and long-lived assets. 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: January 1, 2023 Level 1 Level 2 Level 3 Total Long-term debt $ — $ 250,000 $ — $ 250,000 Total financial liabilities $ — $ 250,000 $ — $ 250,000 January 2, 2022 Level 1 Level 2 Level 3 Total Long-term debt $ — $ 250,000 $ — $ 250,000 Interest rate swap liability — 5,107 — 5,107 Total financial liabilities $ — $ 255,107 $ — $ 255,107 90 Table of Contents The Company’s interest rate swaps are considered Level 2 in the hierarchy and are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of the yield curve on floating interest rates, which is readily available on public markets. The determination of fair values of certain tangible and intangible assets for purposes of the Company’s goodwill or long-lived asset impairment evaluation as described above is based upon Level 3 inputs. When necessary, the Company uses third party market data and market participant assumptions to derive the fair value of its asset groupings, which primarily include right-of-use lease assets and property and equipment. For further details, see Note 3, “Significant Accounting Policies – Impairment of Long-lived Assets”. Cash, cash equivalents, and restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities, and accrued salaries and benefits approximate fair value because of the short maturity of those instruments. Based on comparable open market transactions, the fair value of the long-term debt approximated carrying value as of January 1, 2023 and January 2, 2022 . 25. Segments 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 2022, 2021 and 2020. Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Perishables $ 3,717,642 58.0 % $ 3,518,181 57.7 % $ 3,700,878 57.2 % Non-Perishables 2,686,581 42.0 % 2,581,688 42.3 % 2,767,881 42.8 % Net Sales $ 6,404,223 100.0 % $ 6,099,869 100.0 % $ 6,468,759 100.0 % The Company categorizes the varieties of products it sells as perishable and non-perishable. Perishable product categories include produce, meat, seafood, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care. 26. Share-Based Compensation 2022 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). 91 Table of Contents Awards Granted under the 2022 Incentive Plan The Company granted the following awards during 2022 under the 2022 Incentive Plan: Grant Date RSUs PSAs Options June 7, 2022 58,057 — — September 7, 2022 21,598 — — October 10, 2022 6,506 — — Total 86,161 — — Weighted-average grant date fair value $ 27.74 $ — $ — 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: Grant Date RSUs PSAs Options March 15, 2022 370,177 147,846 211,352 March 21, 2022 104,913 14,260 20,270 Total 475,090 162,106 231,622 Weighted-average grant date fair value $ 31.60 $ 31.52 $ 10.58 Weighted-average exercise price — — $ 31.52 Grant Date RSUs PSAs Options March 16, 2021 356,503 178,780 404,016 June 9, 2021 50,839 — 6,493 September 7, 2021 25,579 — 11,128 September 20, 2021 168,137 — — Total 601,058 178,780 421,637 Weighted-average grant date fair value $ 24.11 $ 24.42 $ 7.66 Weighted-average exercise price — — $ 24.45 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. 92 Table of Contents Stock Options 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. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable award agreement. Shares issued for option exercises are newly issued shares. 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: 2022 2021 2020 Dividend yield 0.00 % 0.00 % 0.00 % Expected volatility 36.59 % 36.35 % 34.80 % Risk free interest rate 2.12 % 0.83 % 0.46 % Expected term, in years 4.50 4.50 4.50 The grant date weighted average fair value of the 1.0 million options issued but not vested as of January 1, 2023 was $ 6.66 . 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 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: Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Grant date weighted average fair value of options granted $ 10.58 $ 7.66 $ 4.94 Grant date weighted average fair value of options forfeited $ 8.66 $ 7.10 $ 8.94 Expected volatility for option grants and modifications are calculated based upon the Company’s historical volatility data over a time frame consistent with the expected life of the awards. The expected term is estimated based on the expected period that the options are anticipated to be outstanding after initial grant until exercise or expiration based upon various factors including the contractual terms of the awards and vesting schedules. The expected risk-free rate is based on the U.S. Treasury yield curve rates in effect at the time of the grant using the term most consistent with the expected life of the award. Dividend yield was estimated at zero as the Company does not anticipate making regular future distributions to stockholders. The total intrinsic value of options exercised was $ 1.8 million, $ 0.7 million, and $ 0.2 million for 2022, 2021 and 2020, respectively. 93 Table of Contents The following table summarizes option activity during 2022: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (In Years) Aggregate Intrinsic Value Outstanding at January 2, 2022 1,362,907 $ 19.81 Granted 231,622 31.52 Forfeited ( 57,862 ) 28.79 Exercised ( 218,509 ) 23.08 $ 1,828 Outstanding at January 1, 2023 1,318,158 20.93 4.73 $ 13,295 Exercisable—January 1, 2023 271,632 19.35 4.38 $ 3,142 Vested/Expected to vest—January 1, 2023 1,318,158 $ 20.93 4.73 $ 13,295 RSUs 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. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable award agreement. Shares issued for RSU vesting are newly issued shares. The fair value for restricted stock units is calculated based on the closing stock price on the date of grant. The total grant date fair value of RSUs vested during 2022, 2021 and 2020 was $ 9.2 million, $ 8.8 million and $ 7.8 million, respectively. The following table summarizes the weighted average grant date fair value of RSUs awarded during 2022, 2021 and 2020: Year Ended January 1, 2023 January 2, 2022 January 3, 2021 RSUs awarded $ 31.01 $ 24.11 $ 18.01 The following table summarizes RSU activity during 2022: Number of RSUs Weighted Average Grant Date Fair Value Outstanding at January 2, 2022 928,672 $ 21.89 Awarded 561,251 31.01 Vested ( 428,783 ) 21.46 Forfeited ( 88,557 ) 26.62 Outstanding at January 1, 2023 972,583 $ 26.94 94 Table of Contents PSAs 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. 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. The performance conditions with respect to 2020 EBIT were deemed to have been met, and the PSAs vested on the third anniversary of the grant date (March 2021). During the year ended January 2, 2022, 31,544 of the 2018 PSAs vested. There were no outstanding 2018 PSAs as of January 1, 2023. 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. 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. 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. 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 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. 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. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable team member award agreement. Shares issued for PSA vesting are newly issued shares. 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. The total grant date fair value of performance shares forfeited or not earned during 2022 was $ 0.8 million. 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. 95 Table of Contents 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. The total grant date fair value of performance shares forfeited or not earned during 2021 was $ 1.0 million. 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 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 0.3 million PSAs issued but not released as of January 3, 2021 was $ 5.8 million. The following table summarizes PSA activity during 2022: Number of PSAs Weighted Average Grant Date Fair Value Outstanding at January 2, 2022 432,729 $ 20.51 Awarded 162,106 31.52 Vested ( 208,172 ) 19.85 Forfeited ( 30,643 ) 26.76 PSAs earned 104,086 19.85 PSAs not earned — — Outstanding at January 1, 2023 460,106 $ 24.12 RSAs 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 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 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 The Company presents share-based compensation expense in selling, general and administrative expenses on the Company’s consolidated statements of income. The amount recognized was as follows: Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Share-based compensation expense $ 16,603 $ 15,883 $ 14,339 Income tax benefit ( 2,495 ) ( 2,450 ) ( 2,662 ) Net share-based compensation expense $ 14,108 $ 13,433 $ 11,677 96 Table of Contents As of January 1, 2023, total unrecognized compensation expense and remaining weighted average recognition period related to outstanding share-based awards were as follows: Unrecognized compensation expense Remaining weighted average recognition period Options $ 3,014 0.8 RSUs 15,992 1.5 PSAs 2,112 1.2 Total unrecognized compensation expense at January 1, 2023 $ 21,118 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 $ 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. 27. Quarterly Financial Data (Unaudited) 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. 28. 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. 97 Table of Contents Item 9. Changes In and Disagreements with Acc ountants on Accounting and Financial Disclosure None.