Sprouts Farmers Market, Inc. 10-Q

Item 1. Financial Statements SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) March 31, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 312,276 $ 201,794 Accounts receivable, net 36,306 30,313 Inventories 316,202 323,198 Prepaid expenses and other current assets 32,710 48,467 Total current assets 697,494 603,772 Property and equipment, net of accumulated depreciation 809,481 798,707 Operating lease assets, net 1,363,341 1,322,854 Intangible assets 208,060 208,060 Goodwill 381,750 381,741 Other assets 12,289 12,294 Total assets $ 3,472,415 $ 3,327,428 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 201,434 $ 179,927 Accrued liabilities 190,217 164,887 Accrued salaries and benefits 57,084 74,752 Accrued income tax 8,869 — Current portion of operating lease liabilities 127,255 126,271 Current portion of finance lease liabilities 1,089 1,032 Total current liabilities 585,948 546,869 Long-term operating lease liabilities 1,441,068 1,399,676 Long-term debt and finance lease liabilities 133,375 133,685 Other long-term liabilities 37,557 36,270 Deferred income tax liability 63,440 62,381 Total liabilities 2,261,388 2,178,881 Commitments and contingencies (Note 7) 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, 100,802,152 shares issued and outstanding, March 31, 2024; 101,211,984 shares issued and outstanding, December 31, 2023 101 101 Additional paid-in capital 783,593 774,834 Retained earnings 427,333 373,612 Total stockholders’ equity 1,211,027 1,148,547 Total liabilities and stockholders’ equity $ 3,472,415 $ 3,327,428 The accompanying notes are an integral part of these consolidated financial statements. 4 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Thirteen weeks ended March 31, 2024 April 2, 2023 Net sales $ 1,883,808 $ 1,733,310 Cost of sales 1,161,495 1,083,248 Gross profit 722,313 650,062 Selling, general and administrative expenses 539,771 486,195 Depreciation and amortization (exclusive of depreciation included in cost of sales) 32,232 34,068 Store closure and other costs, net 2,044 28,277 Income from operations 148,266 101,522 Interest expense, net 818 2,220 Income before income taxes 147,448 99,302 Income tax provision 33,348 23,142 Net income $ 114,100 $ 76,160 Net income per share: Basic $ 1.13 $ 0.73 Diluted $ 1.12 $ 0.73 Weighted average shares outstanding: Basic 101,071 103,827 Diluted 102,024 104,876 The accompanying notes are an integral part of these consolidated financial statements. 5 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS) For the thirteen weeks ended March 31, 2024 Shares Common Stock Additional Paid In Capital Retained Earnings Total Stockholders’ Equity Balances at December 31, 2023 101,211,984 $ 101 $ 774,834 $ 373,612 $ 1,148,547 Net income — — — 114,100 114,100 Issuance of shares under stock plans 547,948 1 2,282 — 2,283 Repurchase and retirement of common stock, including excise tax ( 957,780 ) ( 1 ) — ( 60,379 ) ( 60,380 ) Share-based compensation — — 6,477 — 6,477 Balances at March 31, 2024 100,802,152 $ 101 $ 783,593 $ 427,333 $ 1,211,027 For the thirteen weeks ended April 2, 2023 Shares Common Stock Additional Paid In Capital Retained Earnings Total Stockholders’ Equity Balances at January 1, 2023 105,072,756 $ 105 $ 726,345 $ 320,012 $ 1,046,462 Net income — — — 76,160 76,160 Issuance of shares under stock plans 882,014 1 5,487 — 5,488 Repurchase and retirement of common stock, including excise tax ( 3,038,411 ) ( 3 ) — ( 99,168 ) ( 99,171 ) Share-based compensation — — 3,852 — 3,852 Issuance of shares for acquisition 554,358 1 18,138 — 18,139 Balances at April 2, 2023 103,470,717 $ 104 $ 753,822 $ 297,004 $ 1,050,930 The accompanying notes are an integral part of these consolidated financial statements. 6 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) Thirteen weeks ended March 31, 2024 April 2, 2023 Operating activities Net income $ 114,100 $ 76,160 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 34,522 34,912 Operating lease asset amortization 32,303 30,696 Impairment of assets — 27,845 Share-based compensation 6,477 3,852 Deferred income taxes 1,072 ( 386 ) Other non-cash items 496 14 Changes in operating assets and liabilities, net of effects from acquisition: Accounts receivable 8,601 6,241 Inventories 6,996 5,400 Prepaid expenses and other current assets 14,691 9,528 Other assets 924 2,609 Accounts payable 28,899 27,006 Accrued liabilities 17,642 ( 2,024 ) Accrued salaries and benefits ( 17,667 ) ( 13,712 ) Accrued income tax 8,869 5,456 Operating lease liabilities ( 36,580 ) ( 33,956 ) Other long-term liabilities ( 1,650 ) 179 Cash flows from operating activities 219,695 179,820 Investing activities Purchases of property and equipment ( 51,241 ) ( 47,044 ) Payments for acquisition, net of cash acquired — ( 13,042 ) Cash flows used in investing activities ( 51,241 ) ( 60,086 ) Financing activities Payments on revolving credit facilities — ( 25,000 ) Payments on finance lease liabilities ( 253 ) ( 219 ) Repurchase of common stock ( 60,000 ) ( 98,349 ) Proceeds from exercise of stock options 2,283 5,488 Cash flows used in financing activities ( 57,970 ) ( 118,080 ) Increase in cash, cash equivalents, and restricted cash 110,484 1,654 Cash, cash equivalents, and restricted cash at beginning of the period 203,870 295,192 Cash, cash equivalents, and restricted cash at the end of the period $ 314,354 $ 296,846 Supplemental disclosure of cash flow information Cash paid for interest $ 2,411 $ 3,641 Cash refunded for income taxes 151 54 Supplemental disclosure of non-cash activities Property and equipment in accounts payable and accrued liabilities $ 23,599 $ 20,924 Issuance of shares for acquisition — 18,139 Excise tax accrued on repurchase of common stock 2,146 822 Leased assets obtained in exchange for new operating lease liabilities 72,791 138,662 The accompanying notes are an integral part of these consolidated financial statements. 7 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation Sprouts Farmers Market, Inc., a Delaware corporation, through its subsidiaries, offers a unique specialty 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 March 31, 2024, the Company operated 414 stores in 23 states. For convenience, the “Company” is used to refer collectively to Sprouts Farmers Market, Inc. and unless the context otherwise requires, its subsidiaries. The Company’s store operations are conducted by its subsidiaries. The accompanying unaudited consolidated financial statements include the accounts of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission in instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company's financial position, results of operations and cash flows for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The information included in these consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2023 (“fiscal year 2023”) included in the Company’s Annual Report on Form 10-K, filed on February 22, 2024. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. The fiscal year ending December 29, 2024 (“fiscal year 2024”) and fiscal year 2023 are 52-week years. The Company reports its results of operations on a 13-week quarter, except for 53-week fiscal years (in which the fourth quarter has 14 weeks). All dollar amounts are in thousands, unless otherwise noted. 8 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. Summary of Significant Accounting Policies 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: Thirteen weeks ended March 31, 2024 April 2, 2023 Beginning Balance $ 10,566 $ 10,906 Gift cards issued during the period but not redeemed (1) 1,166 1,222 Revenue recognized from beginning liability ( 2,532 ) ( 2,582 ) Ending Balance $ 9,200 $ 9,546 (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 March 31, 2024. 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 $ 2.1 million as of March 31, 2024 and December 31, 2023. These balances are included in prepaid expenses and other current assets in the consolidated balance sheets. Recently Issued Accounting Pronouncements Not Yet Adopted Segment Reporting – Improvements to Reportable Segment Disclosures In November 2023, the FASB issued ASU no. 2023-07, “Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures." The amendments in this update increase required disclosures about a public entity's reportable segments, primarily through enhanced disclosures about significant segment expenses that are regularly provided to the Company’s chief operating decision maker (“CODM”). In addition, ASU 2023-07 will require the Company to disclose the title and position of its CODM. The guidance will be effective for the Company for its fiscal year 2024 and for interim periods starting in the first quarter of its fiscal year 2025. Early adoption is permitted, and the guidance is required to be applied retrospectively. The Company is currently evaluating the potential impact of this ASU on its consolidated financial statements and disclosures. 9 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Income Taxes – Improvements to Income Tax Disclosures In December 2023, the FASB issued ASU no. 2023-09, “Income Taxes (Topic 740) Improvements to Income Tax Disclosures." The amendments in this update enhance a public entity's annual income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The guidance will be effective for the Company for its fiscal year 2025. Early adoption is permitted, and the guidance should be applied prospectively, with an option to apply it retrospectively. The Company is currently evaluating the potential impact of this ASU on its consolidated financial statements and disclosures. No other new accounting pronouncements issued or effective during the thirteen weeks ended March 31, 2024 had, or are expected to have, a material impact on the Company’s consolidated financial statements. 3. 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 impairment analysis of goodwill, intangible assets and long-lived assets. The following tables present the fair value hierarchy for the Company’s financial liabilities measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023: March 31, 2024 Level 1 Level 2 Level 3 Total Long-term debt $ — $ 125,000 $ — $ 125,000 Total financial liabilities $ — $ 125,000 $ — $ 125,000 December 31, 2023 Level 1 Level 2 Level 3 Total Long-term debt $ — $ 125,000 $ — $ 125,000 Total financial liabilities $ — $ 125,000 $ — $ 125,000 The determination of fair values of certain tangible and intangible assets for purposes of the Company’s goodwill or long-lived asset impairment evaluation 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. Cash, cash equivalents, 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 March 31, 2024 and December 31, 2023. 10 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. 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 March 31, 2024 December 31, 2023 Senior secured debt $ 700.0 million Credit Agreement March 25, 2027 Variable $ 125,000 $ 125,000 Finance lease liabilities Various n/a 8,375 8,685 Long-term debt and finance lease liabilities $ 133,375 $ 133,685 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, were recorded to prepaid expenses and other current assets and other assets in the consolidated balance sheets and are being amortized on a straight-line basis to interest expense over the five-year term of the Credit Agreement. The Credit Agreement provides for a $ 70.0 million letter of credit sub-facility (the "Letter of Credit Sub-Facility") and a $ 50.0 million swingline facility. Letters of credit issued under the Credit Agreement reduce the capacity of Intermediate Holdings to borrow under the Revolving Credit Facility. Letters of credit totaling $ 21.3 million have been issued as of March 31, 2024 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 Loans 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. 11 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 March 31, 2024, loans outstanding under the Credit Agreement bore interest at Term SOFR (as defined in the Credit Agreement) plus a 0.10 % SOFR adjustment and 0.95 % per annum. As of March 31, 2024, outstanding letters of credit issued under the Credit Agreement were subject to a participation fee of 0.95 % 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 the thirteen weeks ended March 31, 2024, the Company made no additional borrowings or principal payments, resulting in total outstanding debt under the Credit Agreement of $ 125.0 million as of March 31, 2024. During 2023, the Company made no additional borrowings and made principal payments of $ 125.0 million, resulting in total outstanding debt under the Credit Agreement of $ 125.0 million as of December 31, 2023. 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 certain debt or other material agreements; and • change its fiscal year. Each of these covenants is subject to customary and other agreed-upon exceptions. 12 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 as of the last day of each fiscal quarter. The Company was in compliance with all applicable covenants under the Credit Agreement as of March 31, 2024. 5. Income Taxes The Company’s effective tax rate decreased to 22.6 % for the thirteen weeks ended March 31, 2024, compared to 23.3 % for the thirteen weeks ended April 2, 2023. The decrease in the effective tax rate was primarily due to an increase in excess tax benefits associated with share-based payment awards. The income tax effect resulting from excess tax benefits of share-based payment awards was $ 4.5 million and $ 2.6 million for the thirteen weeks ended March 31, 2024 and April 2, 2023, respectively. 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. 6. Related Party Transactions During the thirteen weeks ended March 31, 2024, the Company did not have any material related party transactions. On May 24, 2022, the Company appointed a new member to its board of directors who served as an executive officer of a company that is a supplier of nutrition bars and related products to the Company for resale. The director departed employment from this supplier on February 28, 2023. The cost of sales recognized from this supplier during the thirteen weeks ended April 2, 2023 was immaterial. 7. Commitments and 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 judgment and actual claim settlements and associated expenses may differ from the Company’s current provisions for loss. 8. Stockholders’ Equity Share Repurchases On March 2, 2022, the Company's board of directors authorized a new $ 600 million share repurchase program for its common stock. This 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 program authorized by the Company’s board of directors and the related repurchase activity and available authorization as of March 31, 2024: Effective date Expiration date Amount authorized Cost of repurchases Authorization available March 2, 2022 December 31, 2024 $ 600,000 $ 451,619 $ 148,381 13 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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): Thirteen weeks ended March 31, 2024 April 2, 2023 Number of common shares acquired 957,780 3,038,411 Average price per common share acquired $ 63.04 $ 32.64 Total cost of common shares acquired $ 60,380 $ 99,171 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. The cost of common shares repurchased included the 1% excise tax imposed as part of the Inflation Reduction Act of 2022. Subsequent to March 31, 2024 and through the date of this filing, the Company repurchased an additional 0.3 million shares of common stock for $ 21.5 million, excluding excise tax . 9. 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 and unvested restricted stock units ("RSUs"). Performance share awards ("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): Thirteen weeks ended March 31, 2024 April 2, 2023 Basic net income per share: Net income $ 114,100 $ 76,160 Weighted average shares outstanding - basic 101,071 103,827 Basic net income per share $ 1.13 $ 0.73 Diluted net income per share: Net income $ 114,100 $ 76,160 Weighted average shares outstanding - basic 101,071 103,827 Dilutive effect of share-based awards: Assumed exercise of options to purchase shares 404 395 RSUs 549 481 PSAs — 173 Weighted average shares and equivalent shares outstanding - diluted 102,024 104,876 Diluted net income per share $ 1.12 $ 0.73 14 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the thirteen weeks ended March 31, 2024, the Company had 0.1 million options, 0.3 million RSUs and 0.4 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 thirteen weeks ended April 2, 2023, the Company had 0.4 million options, 0.4 million RSUs and 0.5 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. 10. Segments The Company has one operating segment and, therefore, one reportable segment: healthy grocery stores. The Company categorizes the varieties of products it sells as perishable and non-perishable. Perishable product categories include produce, meat and meat alternatives, 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. In accordance with ASC 606, the following table represents a disaggregation of revenue for the thirteen weeks ended March 31, 2024 and April 2, 2023: Thirteen weeks ended March 31, 2024 April 2, 2023 Perishables $ 1,069,730 56.8 % $ 999,575 57.7 % Non-Perishables 814,078 43.2 % 733,735 42.3 % Net Sales $ 1,883,808 100.0 % $ 1,733,310 100.0 % 11. 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). Awards Granted under the 2022 Incentive Plan During the thirteen weeks ended March 31, 2024, the Company granted the following share-based compensation awards under the 2022 Incentive Plan: Grant Date RSUs PSAs Options March 19, 2024 272,855 103,584 135,783 Total 272,855 103,584 135,783 Weighted-average grant date fair value $ 61.15 $ 61.15 $ 23.50 Weighted-average exercise price $ — $ — $ 61.15 15 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. 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 March 31, 2024, there were 1,134,570 stock awards outstanding and 5,517,416 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. Stock Options The Company uses the Black-Scholes option pricing model to estimate the fair value of options at grant date. Options vest in accordance with the terms set forth in the grant letter. Time-based options vest annually over a period of three years . RSUs The fair value of RSUs is based on the closing price of the Company’s common stock on the grant date. RSUs generally vest annually over a period of two or three years from the grant date. PSAs PSAs granted in 2020 were subject to the Company achieving certain earnings before taxes (“EBT”) performance targets for the 2022 fiscal year. The criteria was 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 2022 EBT 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 2023). There were no outstanding 2020 PSAs as of March 31, 2024. PSAs granted in 2021 were subject to the Company achieving certain earnings before interest and taxes ("EBIT") performance targets for the 2023 fiscal year. The criteria was 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 2023 EBIT were deemed not to have been met. Accordingly, no PSAs vested on the third anniversary of the grant date (March 2024). There were no outstanding 2021 PSAs as of March 31, 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). PSAs granted in 2023 are subject to the Company achieving certain EBIT performance targets for the 2025 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 2026). 16 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PSAs granted in 2024 are subject to the Company achieving certain EBIT performance targets for the 2026 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 2027). 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: Thirteen weeks ended March 31, 2024 April 2, 2023 Share-based compensation expense $ 6,477 $ 3,852 The following share-based awards were outstanding under the 2022 and 2013 Incentive Plans as of March 31, 2024 and April 2, 2023: As of March 31, 2024 April 2, 2023 (in thousands) Options Vested 567 740 Unvested 338 481 RSUs 669 1,156 PSAs 395 471 As of March 31, 2024, 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 $ 5,458 2.2 RSUs 28,551 2.0 PSAs 13,600 1.9 Total unrecognized compensation expense at March 31, 2024 $ 47,609 During the thirteen weeks ended March 31, 2024 and April 2, 2023, the Company received $ 2.3 million and $ 5.5 million, respectively, in cash proceeds from the exercise of options. 12. Goodwill The Company’s goodwill balance was $ 381.8 million and $ 381.7 million as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024 and December 31, 2023, the Company had no accumulated goodwill impairment losses. The goodwill was related to the acquisitions of Henry’s Farmers Market and Sunflower Farmers Market in 2011 and 2012, respectively, and the acquisition of Ronald Cohn, Inc. in 2023. For further details, see Note 14, "Business Combination". 17 Table of Contents SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 13. Store Closures In February 2023, the Company's board of directors approved the closing of 11 stores, all of which were closed during 2023. These stores, on average, were approximately 30 % larger than the Company's current prototype format and were underperforming financially. The closure of these stores resulted in a charge of $ 27.8 million during the thirteen weeks ended April 2, 2023 related to the impairment of leasehold improvements and right-of-use assets and was reflected in Store closure and other costs, net on the consolidated statements of income. The impairment charge represented the excess of the carrying value over the estimated fair value of each store's asset group. Accelerated depreciation on the closed stores' assets during 2023 was $ 5.9 million, of which $ 4.0 million was incurred during the thirteen weeks ended April 2, 2023 and was reflected in Depreciation and amortization on the consolidated statements of income. Severance expense during 2023 was immaterial. 14. Business Combination On March 20, 2023, the Company completed its acquisition of Ronald Cohn, Inc., a corporation that owned two stores located in California operating under the ‘Sprouts Farmers Market’ name pursuant to a legacy trademark license arrangement. The aggregate consideration paid in the transaction consisted of 0.6 million of the Company’s common shares valued at $ 18.1 million using the closing price of the Company's common stock on March 20, 2023 and cash consideration of $ 13.0 million. The Company accounted for this transaction as a business combination in accordance with the acquisition method of accounting, which requires that the purchase price be allocated to the assets and liabilities acquired based on their estimated fair values as of the acquisition date. Acquisition-related costs were immaterial and were expensed as incurred. The financial results of the acquired stores have been included in the Company’s consolidated financial statements from the date of acquisition. The acquired stores' results of operations were not material to the Company's consolidated results. The net purchase price was allocated to the net tangible assets of ($ 4.9 ) million and a reacquired right intangible asset of $ 23.1 million based on their fair values on the acquisition date. The remaining unallocated net purchase price of $ 12.9 million was recorded as goodwill. Goodwill represents the future economic benefits to the Company from the acquisition, which include the Company's ability to fully control the Sprouts Farmers Market brand by termination of the legacy trademark license agreement and allowing further expansion opportunities in Southern California. The goodwill is not expected to be deductible for tax purposes. The final allocation of the purchase price consideration to the assets acquired and liabilities assumed has been completed and included an immaterial amount of measurement period adjustments. 18 Table of Contents