What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-20 compared with 2024-02-22 · 90 added, 1078 removed, 305 unchanged (79% of the section changed)

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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 1, 2023 filed with the SEC on March 2, 2023, which provides comparisons of fiscal 2022 and fiscal 2021.

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 December 31, 2023 filed with the SEC on February 22, 2024, which provides comparisons of fiscal 2023 and fiscal 2022.

This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties.

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Headquartered in Phoenix with 440 stores in 24 states as of December 29, 2024, we are one of the largest and fastest growing specialty retailers of fresh, natural and organic food in the United States.

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 :

We continue to execute on our long-term growth strategy that we believe is transforming our company and driving profitable growth, focusing on the following areas:

• Win with Target Customers .

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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.

• Market Expansion.

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.

From 2021 through 2023, we have opened 42 new stores and remodeled one store featuring our new format.

From 2021 through 2024, we have opened 75 new stores and remodeled one store featuring our updated format.

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 approximately 10% annual unit growth.

• Create an Advantaged Fresh Supply Chain.

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

• Create an Advantaged Supply Chain.

We believe our network of 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.

Following the opening of two fresh distribution centers in fiscal 2021 and the relocation of our Southern California distribution center, closure of our Georgia distribution center and partnership with a third-party fresh distribution center in the Northeast in fiscal 2023, we are better leveraging our existing distribution center capacity, and approximately 80% of our stores were within 250 miles of a distribution center as of December 29, 2024.

• Refine Brand and Marketing Approach.

• Customer Engagement and Personalization.

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

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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.

• Invest in Technology for Growth .

We continue to make investments in technology in support of our strategy, with a focus on enhancing efficiency, scalability, and customer experience.

While we are showing positive outcomes on our strategic investments in inventory management and customer personalization, we believe that ongoing investments in our technology foundation will allow us to streamline operations and improve decision making to execute on our strategy.

• Deliver on Key Financial Metrics.

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.

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

As a step to improve our fresh supply chain, we are currently in the process of transitioning from our primary meat and seafood distributor that accounted for approximately 14% of our total purchases in each of fiscal 2024 and 2023.

We expect to initially transition to an intermediary third-party distributor and ultimately to a self-distribution model under which we will deal directly with our suppliers.

As with complex transitions of this magnitude, there are associated short-term risks, including in particular, potential product supply disruptions resulting in lost sales at our stores and transition-related expenses that exceed our expectations.

See “Business—Sourcing and Distribution” and “Risk Factors—Disruption of significant supplier relationships could negatively affect our business.”

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 2023, fiscal 2022 and fiscal 2021 were 52-week years ending on December 31, 2023, January 1, 2023 and January 2, 2022, respectively.

Fiscal 2024, fiscal 2023 and fiscal 2022 were 52-week years ending on December 29, 2024, December 31, 2023 and January 1, 2023, respectively.

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

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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.

Tariffs, such as those recently proposed by the U.S.

government on goods imported from Mexico, Canada, China and certain other countries, may result in cost increases on products such as produce that we import from impacted countries, as well as products containing ingredients imported from these countries.

While we are still evaluating the potential impact of these tariffs, the short-term impact of tariffs, 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.

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Each of fiscal 2024, 2023 and 2022 consisted of 52 weeks.

Fiscal 2024 Fiscal 2023 Fiscal 2022

(in thousands, except per share data)

Consolidated Statement of Income Data:

Net sales $ 7,719,290 $ 6,837,384 $ 6,404,223

Cost of sales 4,777,799 4,315,543 4,055,659

Selling, general and administrative

Depreciation and amortization (exclusive

of depreciation included in cost of sales)

Gross profit 2,941,491 2,521,841 2,348,564

Selling, general and administrative expenses 2,291,350 2,000,437 1,855,649

Depreciation and amortization (exclusive of depreciation included in cost of sales) 132,748 131,893 123,530

Store closure and other costs, net 12,896 39,280 11,025

Income from operations 504,497 350,231 358,360

Interest expense, net

Interest (income) expense, net (2,201) 6,491 9,047

Income before income taxes 506,698 343,740 349,313

Income tax provision 126,097 84,884 88,149

Net income $ 380,601 $ 258,856 $ 261,164

Weighted average shares outstanding - basic 100,363 102,479 108,232

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Diluted net income per share $ 3.75 $ 2.50 $ 2.39

Fiscal 2024 Fiscal 2023 Fiscal 2022

Other Operating Data:

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Stores at beginning of period 407 386 374

Closed — (11) (4)

Acquired — 2 —

Stores at end of period 440 407 386

Total square feet at the end of the period (2)

12,123,032 11,322,798 10,894,396

Average square feet per store at the end of the period 27,552 27,820 28,224

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

(1) Stores opened is exclusive of two store relocations during fiscal 2024.

(2) Total square feet at the end of the period includes the square footage for all stores that were open as of the end of the fiscal year presented and excludes any vacant or subleased space.

Comparison of Fiscal 2024 to 2023

Fiscal 2024 Fiscal 2023 Change % Change

(dollars in thousands)

Net sales $ 7,719,290 $ 6,837,384 $ 881,906 13 %

Comparable store sales growth 7.6 % 3.4 %

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Cost of sales and gross profit

Fiscal 2024 Fiscal 2023 Change % Change

(dollars in thousands)

Net sales $ 7,719,290 $ 6,837,384 $ 881,906 13 %

Cost of sales 4,777,799 4,315,543 462,256 11 %

Gross profit 2,941,491 2,521,841 419,650 17 %

Gross margin 38.1 % 36.9 % 1.2 %

Gross profit increased during 2024 compared to 2023 by $419.7 million to $2.9 billion driven by increased sales volume for the reasons discussed above.

Gross margin increased by 1.2% to 38.1% compared to 36.9%.

The increase was a result of favorable product mix and continued promotional optimization, partially offset by higher distribution costs resulting from our new and recently expanded distribution centers in California and Texas, respectively.

The increase was a result of favorable shrink, continued promotional optimization, and positive results from our selling, general and administrative expense investments we have made over the past few years.

Selling, general and administrative expenses

Fiscal 2024 Fiscal 2023 Change % Change

(dollars in thousands)

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Depreciation and amortization

Fiscal 2024 Fiscal 2023 Change % Change

(dollars in thousands)

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Store closure and other costs, net

Fiscal 2024 Fiscal 2023 Change % Change

(dollars in thousands)

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Percentage of net sales 0.2 % 0.6 % (0.4) %

Store closure and other costs, net increased by $28.3 million to $39.3 million in 2023 compared to $11.0 million in 2022.

Store closure and other costs, net decreased by $26.4 million to $12.9 million in 2024 compared to $39.3 million in 2023.

Store closure and other costs, net in 2024 was primarily related to ongoing occupancy costs incurred in connection with our closed store locations.

Store closure and other costs, net in 2023 primarily consisted of $30.5 million of impairment losses related to the write-down of leasehold improvements and right-of-use assets, of which $27.8 million was incurred in association with the decision to close 11 underperforming stores.

See Note 26, "Store Closures" to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.

Additionally, other costs incurred as a result of the closures and ongoing occupancy costs at our closed store locations contributed to the increase from the prior year.

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.

Interest expense, net

Interest (income) expense, net

Fiscal 2024 Fiscal 2023 Change % Change

(dollars in thousands)

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Total interest expense, net $ (2,201) $ 6,491 $ (8,692) (134) %

The decrease in interest expense, net was primarily due to higher interest income earned as a result of higher interest rates and lower credit facility fees due to lower average debt outstanding, partially offset by higher interest rates.

The decrease in interest (income) expense, net was primarily due to higher interest income earned as a result of higher interest rates and lower credit facility fees due to lower average debt outstanding.

See Note 13, “Long-Term Debt and Finance Lease Liabilities” to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.

Income tax provision

Fiscal 2024 Fiscal 2023 Change % Change

(dollars in thousands)

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Effective income tax rate 24.9 % 24.7 % 0.2 %

Income tax provision decreased by $3.3 million to $84.9 million for 2023 from $88.1 million for 2022, and the effective income tax rate decreased to 24.7% in 2023 from 25.2% in 2022 primarily due to excess tax benefits related to the exercise or vesting of share-based awards, partially offset by an increase in nondeductible executive compensation.

Income tax provision increased by $41.2 million to $126.1 million for 2024 from $84.9 million for 2023, and the effective income tax rate increased to 24.9% in 2024 from 24.7% in 2023 primarily due to a reduction in federal credits and reduced impact of other permanent items due to higher pre-tax income, offset by a reduction in state taxes due to a state valuation allowance recorded in the prior year.

Fiscal 2024 Fiscal 2023 Change % Change

(dollars in thousands)

Net income $ 380,601 $ 258,856 $ 121,745 47 %

Percentage of net sales 4.9 % 3.8 % 1.1 %

Net income decreased $2.3 million primarily due to higher selling, general and administrative expenses and store closure and other costs, net, partially offset by increased net sales and favorable margin impact as well as a lower effective tax rate for the reasons discussed above.

Net income increased $121.7 million primarily due to higher gross profit and lower store closure and other costs, partially offset by higher selling, general and administrative expenses for the reasons discussed above.

Diluted earnings per share

Fiscal 2024 Fiscal 2023 Change % Change

(shares in thousands)

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Diluted weighted average shares outstanding 101,379 103,390 (2,011)

The increase in diluted earnings per share of $0.11 was driven by fewer diluted shares outstanding compared to the prior year, due to our repurchase of approximately 5.9 million shares for a total cost of $205.3 million under our share repurchase program, partially offset by lower net income.

The increase in diluted earnings per share of $1.25 was driven by higher net income as well as fewer diluted shares outstanding compared to the prior year, due to our repurchase of approximately 2.7 million shares for a total cost of $240.6 million, including excise tax of 1%, under our share repurchase program.

Return on Invested Capital

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Our calculation of ROIC for the fiscal years indicated was as follows:

2024 2023 2022

(dollars in thousands)

Net income (1)

$ 380,601 $ 258,856 $ 261,164

Special items, net of tax (2), (3)

Interest expense, net of tax (3)

(1,654) 4,882 6,764

Net operating profit after-tax (NOPAT) $ 378,947 $ 298,010 $ 267,928

Total rent expense, net of tax (3)

189,896 175,592 154,626

Estimated depreciation on operating leases, net of tax (3)

(105,570) (98,535) (87,775)

Estimated interest on operating leases, net of tax (3), (4)

84,326 77,057 66,851

NOPAT, including effect of operating leases $ 463,273 $ 375,067 $ 334,779

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Average operating leases (5)

1,603,777 1,423,077 1,259,362

Average invested capital, including operating leases $ 3,127,054 $ 2,897,969 $ 2,707,778

ROIC, including operating leases 14.8 % 12.9 % 12.4 %

___________________________________________

(1) Net income amounts represent total net income for the past four trailing quarters.

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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):

Cash, cash equivalents and restricted cash at

end of period

Fiscal 2024 Fiscal 2023 Fiscal 2022

Cash, cash equivalents and restricted cash at end of period $ 267,213 $ 203,870 $ 295,192

Cash from operating activities $ 645,214 $ 465,068 $ 371,329

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Cash flows from operating activities increased $180.1 million to $645.2 million in 2024 compared to $465.1 million in 2023.

The increase in cash flows from operating activities was primarily a result of higher net income adjusted for non-cash items of $35.4 million and favorable changes in working capital of $60.0 million.

Cash flows provided by/(used in) operating activities from changes in working capital were $31.4 million in 2023, compared to ($28.6 million) in 2022.

The increase in cash flows from operating activities was primarily a result of higher net income adjusted for non-cash items of $130.3 million and favorable changes in working capital of $80.9 million, partially offset by higher payments on our operating lease liabilities of $29.7 million due to growth.

Cash flows provided by operating activities from changes in working capital were $112.3 million in 2024, compared to $31.4 million in 2023.

This $80.9 million increase in cash flow from changes in working capital was primarily attributable to the following factors, each of which had a positive impact on working capital:

(i) a $34.3 million change in inventories primarily due to inflationary cost increases in the prior year;

(ii) a $20.7 million change in prepaid expenses and other current assets primarily due to timing differences of marketing expenditures;

(i) a $26.8 million change in accounts receivable driven by the timing of collections as well as a $43.3 million change in accounts payable and accrued liabilities, primarily due to timing differences of payments for goods and services (ii) a $9.7 million change in prepaid expenses and other current assets primarily due to timing differences of tax payments;

and (iii) a $10.4 million change in accrued salaries and benefits due to increased incentive compensation accruals in the current year.

These increases were partially offset by a ($10.2 million) change in accounts receivable driven by the timing of collections.

Certain other items combined to result in an additional $5.2 million net increase in cash flows from changes in working capital.

These increases were partially offset by a a $9.3 million change in inventories primarily due to inflationary cost increases in the prior year.

Investing Activities

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Cash flows used in investing activities were $230.4 million and $238.3 million for 2024 and 2023, respectively.

The increase in cash flows used in investing activities was primarily due to more stores under construction in 2023 as compared to 2022 and heavier investment in upgraded equipment to support our initiatives.

The increase in purchases of property and equipment was primarily due to more stores under construction in 2024 as

compared to 2023 and heavier investment in upgraded equipment to support our initiatives.

Cash flows used in investing activities in 2023 also included our acquisition of Ronald Cohn, Inc.

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Cash flows used in financing activities were $351.5 million for 2024 compared to $318.0 million for 2023.

During 2024, cash flows used in financing activities primarily consisted of approximately $228.5 million for share repurchases and $125.0 million in payments on our Credit Agreement, $1.8 million for payments of excise tax on share repurchases partially offset by $4.9 million in proceeds from the exercise of stock options.

During 2023, cash flows used in financing activities primarily consisted of approximately $203.5 million for share repurchases and $125.0 million in payments on our Credit Agreement, partially offset by $11.5 million in proceeds from the exercise of stock options.

During 2022, cash flows used in financing activities primarily consisted of $200.0 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.

Long-term Debt and Credit Facilities

Long-term debt outstanding was $125.0 million and $250.0 million as of December 31, 2023 and January 1, 2023, respectively.

The Company had no long-term debt outstanding as of December 29, 2024.

Long-term debt outstanding as of December 31, 2023 was $125.0 million.

See Note 13, “Long-Term Debt and Finance Lease Liabilities” to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K for a description of our Credit Agreement.

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The following table outlines the share repurchase programs authorized by our board, and the related repurchase activity and available authorization as of December 29, 2024:

Effective date

Expiration date

Authorization

March 2, 2022

December 31, 2024

Effective date Expiration date Amount

authorized Cost of

repurchases Authorization

March 2, 2022 December 31, 2024 $ 600,000 $ 480,715 $ —

May 22, 2024 May 22, 2027 $ 600,000 $ 149,377 $ 450,623

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.

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

December 31, 2023

January 1, 2023

December 29, 2024 December 31, 2023

Number of common shares acquired 2,656,058 5,864,246

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

The cost of common shares repurchased during fiscal 2023 included the 1% excise tax imposed as part of the Inflation Reduction Act of 2022.

The cost of common shares repurchased included the 1% excise tax imposed as part of the Inflation Reduction Act of 2022.

Subsequent to December 29, 2024 and through February 18, 2025, the Company repurchased an additional 0.7 million shares of common stock for $93.7 million, excluding excise tax.

Factors Affecting Liquidity

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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 2, 2023.

Each of these covenants is tested on the last day of each fiscal quarter, starting with the fiscal quarter ended March 31, 2024.

We were in compliance with all applicable covenants under the Credit Agreement as of December 29, 2024.

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

Interest payments through the March 25, 2027 maturity date of our Credit Agreement based on the outstanding amounts as of December 31, 2023 and interest rates in effect at the time of this filing, are estimated to be approximately $22.4 million.

Interest and fee payments through the March 25, 2027 maturity date of our Credit Agreement based on the outstanding amounts as of December 29, 2024 and interest rates in effect at the time of this filing, are estimated to be approximately $1.9 million.

These payments are estimated to be approximately $0.8 million in 2025 and approximately $1.1 million thereafter.

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Food inflation and deflation is affected by a variety of factors and our determination of whether to pass on the effects of inflation or deflation to our customers is made in conjunction with our overall pricing and marketing strategies, as well as our competitors’ 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 beginning in fiscal 2022 and continuing into 2023 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.

Although we may experience periodic effects on sales, gross profit, gross margins and cash flows as a result of changing prices, we do not expect the effect of inflation or deflation to have a material impact on our ability to execute our long-term business strategy.

Critical Accounting Estimates

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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 December 31, 2023 and January 1, 2023.

We believe that all inventories are saleable and no allowances or reserves for obsolescence were recorded as of December 29, 2024 and December 31, 2023.

Lease Assumptions

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As of December 29, 2024, the consolidated self-insurance reserve balance was $53.2 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.

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.

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As of December 29, 2024, our consolidated goodwill balance was $381.8 million, and our consolidated indefinite-lived intangible assets balance was $208.1 million.

No impairment of goodwill or indefinite-lived intangible assets was recorded during fiscal 2023, 2022 or 2021 because our qualitative assessments indicated that it was more likely than not that the estimated fair values of the reporting unit and the indefinite-lived intangible assets exceeded their carrying value.

No impairment of goodwill or indefinite-lived intangible assets was recorded during fiscal 2024, 2023 and 2022 because our qualitative assessments indicated that it was more likely than not that the estimated fair values of the reporting unit and the indefinite-lived intangible assets exceeded their carrying value.

Impairment of Long-Lived Assets

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We recorded an impairment loss of $0.4 million, $30.5 million and $8.1 million in fiscal 2024, 2023 and 2022, respectively.

See Note 3, “Significant Accounting Policies,” Note 6, “Property and Equipment" and Note 27, "Store Closures" to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.

See Note 3, “Significant Accounting Policies,” Note 6, “Property and Equipment" and Note

26, "Store Closures" to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.

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

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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.

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 consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K, we have a Credit Agreement that bears interest at a rate based in part on SOFR.

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

Based solely on the $125.0 million principal outstanding under our Credit Agreement as of December 31, 2023, each hundred basis point change in SOFR would result in a corresponding increase or decrease in interest expense by $1.25 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” to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K).

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 )

Consolidated Balance Sheets as of December 31, 2023 and January 1, 2023

Consolidated Statements of Income for the fiscal years ended December 31, 2023, January 1, 2023 and January 2, 2022

Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2023, January 1, 2023 and January 2, 2022

Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 31, 2023, January 1, 2023 and January 2, 2022

Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2023, January 1, 2023 and January 2, 2022

Notes to Consolidated Financial Statements

REPOR T OF INDEPENDENT REGISTERED 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 December 31, 2023 and January 1, 2023, 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 December 31, 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 December 31, 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 December 31, 2023 and January 1, 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 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 December 31, 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.

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 General Liability and Workers’ Compensation 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 December 31, 2023, the Company’s recorded amounts for general liability, workers’ compensation and team member health benefit liabilities was $47.8 million, of which a significant portion is related to the general liability and workers’ compensation 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 the general liability and workers’ compensation self-insurance reserves is a critical audit matter are (i) the significant judgment by management when developing the estimates of the general liability and workers’ compensation self-insurance reserves ;

(ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions 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.

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 management’s valuation of the general liability and workers’ compensation self-insurance reserves, including controls over the significant assumptions.

These procedures also included, among others (i) reading management’s general liability and workers’ compensation self-insurance program agreements and (ii) testing the completeness and accuracy of the underlying historical claims data used in management’s estimates.

Professionals with specialized skill and knowledge were used to assist in testing management’s process for estimating the valuation of the general liability and workers’ compensation self-insurance reserves, including (i) evaluating the appropriateness of the actuarial valuation methods used by management and (ii) evaluating the reasonableness of significant assumptions used by management related to loss development factors and expected loss costs by considering (a) current and past claim and settlement activity and (b) whether the assumptions were consistent with evidence obtained in other areas of the audit.

/s/ PricewaterhouseCoopers LLP

Phoenix, Arizona

February 22, 2024

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

SPROUTS FARMERS MARKET, INC.

AND SUBSIDIARIES

CONSOLIDATED BA LANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

December 31, 2023

January 1, 2023

Current assets:

Cash and cash equivalents

Accounts receivable, net

Prepaid expenses and other current assets

Total current assets

Property and equipment, net of accumulated depreciation

Operating lease assets, net

Intangible assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

Accrued liabilities

Accrued salaries and benefits

Current portion of operating lease liabilities

Current portion of finance lease liabilities

Total current liabilities

Long-term operating lease liabilities

Long-term debt and finance lease liabilities

Other long-term liabilities

Deferred income tax liability

Total liabilities

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,

101,211,984 shares issued and outstanding, December 31, 2023;

105,072,756 shares issued and outstanding, January 1, 2023

Additional paid-in capital

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of these consolidated financial statements.

SPROUTS FARMERS MARKET, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEME NTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

December 31, 2023

January 1, 2023

January 2, 2022

Cost of sales

Selling, general and administrative expenses

Depreciation and amortization (exclusive

of depreciation included in cost of

Store closure and other costs, net

Income from operations

Interest expense, net

Income before income taxes

Income tax provision

Net income per share:

Weighted average shares outstanding:

The accompanying notes are an integral part of these consolidated financial statements.

SPROUTS FARMER S MARKET, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN THOUSANDS)

December 31, 2023

January 1, 2023

January 2, 2022

Other comprehensive income, net of tax

Unrealized gains on cash flow

hedging activities, net of income tax of

$ 1,819 and $ 3,116 in fiscal 2022 and fiscal 2021

Reclassification of net losses on

cash flow hedges to net income, net of income

tax of ($ 520 ) and ($ 1,485 ) in fiscal 2022 and fiscal 2021

Total other comprehensive income

Comprehensive income

The accompanying notes are an integral part of these consolidated financial statements.

SPROUTS FARMERS MARKET, INC.

AND SUBSIDIARIES

CONSOLIDATE D STATEMENTS OF STOCKHOLDERS’ EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Comprehensive

Stockholders’

Balances at January 3, 2021

Other comprehensive income

Issuance of shares under stock plans

Repurchase and retirement of common stock

Share-based compensation

Balances at January 2, 2022

Other comprehensive income

Issuance of shares under stock plans

Repurchase and retirement of common stock

Share-based compensation

Balances at January 1, 2023

Issuance of shares under stock plans

Repurchase and retirement of common stock, including excise tax

Share-based compensation

Issuance of shares for acquisition

Balances at December 31, 2023

The accompanying notes are an integral part of these consolidated financial statements.

SPROUTS FARMERS MARKET, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEME NTS OF CASH FLOWS

(IN THOUSANDS)

December 31, 2023

January 1, 2023

January 2, 2022

Operating activities

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization expense

Operating lease asset amortization

Impairment of assets

Share-based compensation

Deferred income taxes

Other non-cash items

Changes in operating assets and liabilities, net of effects from acquisition:

Accounts receivable

Prepaid expenses and other current assets

Accounts payable

Accrued liabilities

Accrued salaries and benefits

Operating lease liabilities

Other long-term liabilities

Cash flows from operating activities

Investing activities

Purchases of property and equipment

Payments for acquisition, net of cash acquired

Cash flows used in investing activities

Financing activities

Proceeds from revolving credit facilities

Payments on revolving credit facilities

Payments on finance lease liabilities

Payments of deferred financing costs

Repurchase of common stock

Proceeds from exercise of stock options

Cash flows used in financing activities

(Decrease)/Increase in cash, cash equivalents, and restricted cash

Cash, cash equivalents, and restricted cash at beginning of the period

Cash, cash equivalents, and restricted cash at the end of the period

Supplemental disclosure of cash flow information

Cash paid for interest

Cash paid for income taxes

Supplemental disclosure of non-cash activities

Property and equipment in accounts payable and accrued liabilities

Issuance of shares for acquisition

Excise tax accrued on repurchase of common stock

Leased assets obtained in exchange for new operating lease liabilities

Leased assets obtained in exchange for new finance lease liabilities

The accompanying notes are an integral part of these consolidated financial statements.

SPROUTS FARMERS MARKET, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Organization and Description of Business

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 December 31, 2023 , the Company operated 407 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.

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 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.

The following is a breakdown of the Company’s perishable and non-perishable sales mix:

Non-Perishables

All dollar amounts are in thousands, unless otherwise indicated.

Significant Accounting Policies

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 2023 ended on December 31, 2023 and included 52 weeks.

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 years 2023, 2022 and 2021 are referred to as 2023, 2022 and 2021, 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.

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:

December 31, 2023

January 1, 2023

Due from banks for debit and credit card transactions

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 $ 2.1 million and $ 2.0 million as of December 31, 2023 and January 1, 2023 , 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 from ecommerce partners, billings to landlords for tenant allowances and receivables for manufacturer coupons.

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 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 December 31, 2023 and January 1, 2023 .

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.

The following table includes the estimated useful lives of certain of the Company’s asset classes:

Computer hardware and software

Furniture, fixtures and equipment

7 to 20 years

Leasehold improvements

up to 15 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,” liquor licenses and reacquired rights recognized in connection with the acquisition of Ronald Cohn, Inc.

See Note 28, “Business Combination” for more information on this acquisition.

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 the 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 the 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 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.

The Company has determined its business consists of a single reporting unit.

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 $ 30.5 million in 2023 , of which $ 27.8 million was in connection with the decision to close certain underperforming stores (see Note 27, "Store Closures") and $ 2.7 million was in the normal course of business primarily related to the write-down of right-of-use assets and leasehold improvements.

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

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.

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.

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:

Quoted prices for identical instruments in active markets.

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.

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.

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.

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 December 31, 2023 or 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”) and performance share awards (“PSAs”) 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.

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 :

December 31, 2023

January 1, 2023

January 2, 2022

Beginning Balance

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

Revenue recognized from beginning liability

Ending Balance

(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 December 31, 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 47 %, 45 % and 44 % of total purchases during 2023, 2022 and 2021, 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 $ 45.8 million, $ 49.2 million and $ 45.9 million for 2023, 2022 and 2021, 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.

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.

The cost of common shares repurchased includes a 1% excise tax imposed as part of the Inflation Reduction Act of 2022.

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 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.

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.

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.

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 2023 had, or are expected to have, a material impact on the Company’s consolidated financial statements.

Accounts Receivable

A summary of accounts receivable is as follows:

December 31, 2023

January 1, 2023

The Company recorded allowances for certain vendor receivables of $ 1.3 million and $ 1.4 million at December 31, 2023 and January 1, 2023 , respectively.

Prepaid Expenses and Other Current Assets

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

December 31, 2023

January 1, 2023

Prepaid expenses

Restricted cash

Income tax receivable

Other current assets

Property and Equipment

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

December 31, 2023

January 1, 2023

Land and finance lease assets

Furniture, fixtures and equipment

Leasehold improvements

Construction in progress

Total property and equipment

Accumulated depreciation and amortization

Property and equipment, net

Depreciation expense was $ 136.6 million, $ 125.7 million and $ 124.1 million for 2023, 2022 and 2021, respectively.

Depreciation expense is primarily reflected in Depreciation and amortization on the consolidated statements of income.

Impairment expense was $ 30.5 million, $ 8.1 million and $ 4.8 million for 2023, 2022 and 2021, respectively.

Impairment expense is reflected in Store closure and other costs, net on the consolidated statements of income.

Lease cost includes both the fixed and variable expenses recorded for leases.

The components of lease cost are as follows:

Classification

December 31, 2023

January 1, 2023

January 2, 2022

Operating lease cost

Selling, general and administrative expenses (1), (2)

Finance lease cost:

Amortization of Property

and Equipment

Depreciation and amortization

Interest on lease liabilities

Interest expense

Variable lease cost

Selling, general and administrative expenses (1), (2)

Sublease income

Selling, general and administrative expenses

Total net lease cost

(1) Supply chain-related amounts of $ 18.2 million, $ 12.4 million and $ 10.6 million were included in cost of sales for 2023, 2022 and 2021, respectively.

(2) Lease cost related to closed store locations of $ 6.3 million, $ 1.3 million and $ 0.7 million were included in Store closure and other costs, net for 2023, 2022 and 2021, respectively.

Supplemental balance sheet information related to leases is as follows:

Classification

December 31, 2023

January 1, 2023

Operating lease assets

Property and equipment, net

Total lease assets

Current portion of operating lease liabilities

Current portion of finance lease liabilities

Long-term operating lease liabilities

Long-term debt and finance lease liabilities

Total lease liabilities

Weighted average remaining lease term (years):

Operating leases

Finance leases

Weighted average discount rate:

Operating leases

Finance leases

Supplemental cash flow and other information related to leases is as follows:

December 31, 2023

January 1, 2023

January 2, 2022

Cash paid for amounts included in measurement of lease liabilities:

Operating cash flows for operating leases

Operating cash flows for finance leases

Lease assets obtained in exchange for lease liabilities:

Finance leases

Operating leases

A summary of maturities of lease liabilities is as follows:

Operating Leases (1), (2)

Finance Leases

Total lease payments

Imputed interest

Total lease liabilities

Current portion

Long-term lease liabilities

(1) Operating lease payments include $ 62.5 million related to periods covered by options to extend lease terms that are reasonably certain of being exercised and exclude $ 584.1 million of legally binding minimum lease payments for leases executed but not yet commenced.

(2) These amounts include rental income related to subtenant agreements under which we will receive $ 1.1 million in 2024, $ 0.9 million in 2025, $ 0.8 million in 2026, $ 0.7 million in 2027, $ 0.3 million in 2028 and $ 0.1 million thereafter.

Intangible Assets

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

Balance at January 2, 2022

Additions/Adjustments

Balance at January 1, 2023

Indefinite-lived trade names

Indefinite-lived liquor licenses

Total intangible assets

Balance at January 1, 2023

Additions/Adjustments

Balance at December 31, 2023

Indefinite-lived trade names

Indefinite-lived reacquired rights

Indefinite-lived liquor licenses

Total intangible assets

There was no amortization expense in 2023, 2022 and 2021.

The Company’s goodwill balance was $ 381.7 million and $ 368.9 million as of December 31, 2023 and January 1, 2023, respectively.

As of December 31, 2023 and January 1, 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.

For further details, see Note 28, "Business Combination."

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

Balance at January 1, 2023

Balance at December 31, 2023

As of December 31, 2023 and January 1, 2023 , other assets of $ 12.3 million and $ 14.0 million, respectively, primarily consisted of deferred software as a service, capitalized durable supplies, deferred financing costs, utilities deposits and miscellaneous other assets.

Accrued Liabilities

A summary of accrued liabilities is as follows:

December 31, 2023

January 1, 2023

Self-insurance reserves

Accrued occupancy related (CAM, property taxes, etc.)

Gift cards, net of breakage

Accrued sales, use and excise tax

Other accrued liabilities

Accrued Salaries and Benefits

A summary of accrued salaries and benefits is as follows:

December 31, 2023

January 1, 2023

Severance and other

Long-Term Debt and Finance Lease Liabilities

A summary of long-term debt and finance lease liabilities is as follows:

Interest Rate

December 31, 2023

January 1, 2023

Senior secured debt

$ 700.0 million Credit Agreement

March 25, 2027

Finance lease liabilities

Long-term debt and finance lease liabilities

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

$700 million Credit Agreement

Credit Agreement

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

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

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

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

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

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

Letters of credit totaling $ 21.5 million have been issued as of December 31, 2023 under the Letter of Credit Sub-Facility, primarily to support the Company’s insurance programs.

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

Interest and Fees

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 December 31, 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 0.95 % per annum.

As of December 31, 2023 , 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 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 .

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.

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;

• 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 December 31, 2023 .

Other Long-Term Liabilities

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

December 31, 2023

January 1, 2023

Long-term portion of self-insurance reserves

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 $ 1.3 million and $ 1.2 million from its insurance carriers for payments expected to be made in excess of self-insured retentions at December 31, 2023 and January 1, 2023 , respectively.

The Company recorded amounts for general liability, workers' compensation and team member health benefit liabilities of $ 47.8 million and $ 47.6 million at December 31, 2023 and January 1, 2023, respectively.

The following table summarizes the changes in the Company's self-insurance reserves through December 31, 2023:

December 31, 2023

January 1, 2023

January 2, 2022

Beginning Balance

Expenses, net of actuarial adjustments

Claim Payments

Ending Balance

Current portion

Long-term portion

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

Defined Contribution Plan

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.

The following table outlines the t otal expense recorded for the matching under the Plan, which is reflected in Selling, general and administrative expenses on the consolidated statements of income:

December 31, 2023

January 1, 2023

January 2, 2022

Income Tax Provision

The income tax provision consists of the following:

December 31, 2023

January 1, 2023

January 2, 2022

Federal—current

Federal—deferred

Federal—total

State—current

State—deferred

Total provision

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:

December 31, 2023

January 1, 2023

January 2, 2022

Federal statutory rate

Increase (decrease) in income taxes resulting from:

State income taxes, net of federal benefit

Enhanced charitable contribution impact

Non-deductible Executive Compensation

Benefit of federal tax credit

Excess tax benefits from share based payments

Effective income tax rate

The effective income tax rate decreased to 24.7 % in 2023 from 25.2 % in 2022 primarily due to excess tax benefits related to the exercise or vesting of share-based awards partially offset by an increase in nondeductible executive compensation 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.

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 $ 5.0 million, $ 1.7 million and $ 0.2 million for 2023, 2022 and 2021, respectively, and is reflected as a reduction to the 2023, 2022 and 2021 income tax provision.

Deferred Taxes

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

December 31, 2023

January 1, 2023

Deferred tax assets

Employee benefits

Operating leases

Other lease related

Other accrued liabilities

Charitable contribution carryforward

Inventories and other

Total gross deferred tax assets

Valuation Allowance

Total deferred tax assets, net of valuation allowance

Deferred tax liabilities

Depreciation and amortization

Intangible assets

Operating leases

Asset retirement obligations

Total gross deferred tax liabilities

Net deferred tax liability

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

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 $ 3.3 million and $ 0.9 million as of December 31, 2023 and January 1, 2023, respectively, related to contribution carryforwards that management does not believe will ultimately be realized.

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 December 31, 2023 and January 1, 2023.

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:

December 31, 2023

January 1, 2023

January 2, 2022

Beginning balance

Additions based on tax positions related to the

Additions based on tax positions related to prior years

Reductions for settlements with taxing authorities

Reduction due to lapse of applicable statute of limitations

Reductions for tax positions for prior years

Ending balance

The Company had unrecognized tax benefits (tax effected) of $ 0.5 million and $ 1.1 million as of December 31, 2023 and January 1, 2023, 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 anticipates a decrease in the total amount of unrecognized tax benefits in the amount of $ 0.2 million during the next twelve months related to the passing of the applicable statute of limitations for a tax position taken for executive compensation.

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 2022 and state tax returns for the tax years 2018 through 2022 .

Related Party Transactions

During 2023 , the Company did no t 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 was $ 3.4 million from the beginning of the second quarter of 2022 through January 1, 2023.

Commitments and Contingencies

Real estate obligations, which include legally binding minimum lease payments for leases executed but not yet commenced, were $ 584.1 million as of December 31, 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 December 31, 2023 , total future purchase commitments under noncancelable service and supply contracts were $ 28.6 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.

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.

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 October 1, 2019, before the court tried damages, remedies and attorneys' fees, California’s Office of Environmental Health Hazard Assessment adopted a regulation that exempted “Exposures to listed chemicals in coffee created by and inherent in the processes of roasting coffee beans or brewing coffee” from Proposition 65’s warning requirement.

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, concluding the matter.

Capital Stock

As of December 31, 2023 , 101,211,984 shares of the Company’s common stock were issued and outstanding after the repurchase and retirement of 5,864,246 shares during 2023, as described below.

As of December 31, 2023 , 5,874,286 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 2023, 2022 and 2021:

December 31, 2023

January 1, 2023

January 2, 2022

Options exercised

Other share issuances under stock plans

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 December 31, 2023:

Effective date

Expiration date

Authorization

March 2, 2022

December 31, 2024

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):

December 31, 2023

January 1, 2023

Number of common shares acquired

Average price per common share acquired

Total cost of common shares acquired

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 during 2023 included the 1% excise tax imposed as part of the Inflation Reduction Act of 2022.

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.

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 RSUs.

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):

December 31, 2023

January 1, 2023

January 2, 2022

Basic net income per share:

Weighted average shares outstanding - basic

Basic net income per share

Diluted net income per share:

Weighted average shares outstanding - basic

Dilutive effect of share-based awards:

Assumed exercise of options to purchase shares

Weighted average shares and

equivalent shares outstanding - diluted

Diluted net income per share

For the year ended December 31, 2023 , the Company had 0.2 million options 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 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.

Derivative Financial Instruments

The Company did no t have any outstanding interest rate swap agreements as of December 31, 2023 and January 1, 2023.

In December 2017, the Company entered into an interest rate swap agreement 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 with a notional dollar amount of $ 250.0 million, and each had a length of one year and matured annually from 2018 to 2022 .

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 classified on the consolidated statements of income:

December 31, 2023

January 1, 2023

January 2, 2022

Consolidated Statements of

Income Classification

Interest expense, net

Comprehensive Income

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

Balance at January 2, 2022

Other comprehensive income, net of tax

Unrealized gains on cash flow hedging activities, net of income tax of $ 1,819

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

tax of ($ 520 )

Total other comprehensive income

Balance at January 1, 2023

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

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:

Quoted prices for identical instruments in active markets.

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.

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 Company’s fair value hierarchy for the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 and January 1, 2023:

December 31, 2023

Long-term debt

Total financial liabilities

January 1, 2023

Long-term debt

Total financial liabilities

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 December 31, 2023 and January 1, 2023 .

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 2023, 2022 and 2021:

December 31, 2023

January 1, 2023

January 2, 2022

Non-Perishables

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

The Company granted the following awards during 2023 and 2022 under the 2022 Incentive Plan:

March 14, 2023

September 5, 2023

September 11, 2023

October 30, 2023

Weighted-average grant date fair value

Weighted-average exercise price

September 7, 2022

October 10, 2022

Weighted-average grant date fair value

Weighted-average exercise price

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

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

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

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

As of December 31, 2023 , there were 855,911 stock awards outstanding and 5,874,286 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.

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

March 15, 2022

March 21, 2022

Weighted-average grant date fair value

Weighted-average exercise price

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

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.

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 2023, 2022 and 2021 were $ 12.63 , $ 10.58 and $ 7.66 , respectively, and were calculated using the following assumptions in the table below:

Dividend yield

Expected volatility

Risk free interest rate

Expected term, in years

The grant date weighted average fair value of the 0.4 million options issued but not vested as of December 31, 2023 was $ 10.84 .

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

December 31, 2023

January 1, 2023

January 2, 2022

Grant date weighted average fair value of options granted

Grant date weighted average fair value of options forfeited

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 $ 12.2 million, $ 1.8 million, and $ 0.7 million for 2023, 2022 and 2021, respectively.

The following table summarizes option activity during 2023:

Life (In Years)

Outstanding at January 1, 2023

Outstanding at December 31, 2023

Exercisable—December 31, 2023

Vested/Expected to vest—December 31, 2023

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 2023, 2022 and 2021 was $ 13.3 million, $ 9.2 million and $ 8.8 million, respectively.

The following table summarizes the weighted average grant date fair value of RSUs awarded during 2023, 2022 and 2021:

December 31, 2023

January 1, 2023

January 2, 2022

The following table summarizes RSU activity during 2023:

Outstanding at January 1, 2023

Outstanding at December 31, 2023

PSAs granted in 2019 were subject to the Company achieving certain earnings before interest and taxes ("EBIT") performance targets for the 2021 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 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 December 31, 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 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).

During the year ended December 31, 2023 , 268,699 of the 2020 PSAs vested.

There were no outstanding 2020 PSAs as of December 31, 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.

Subsequent to December 31, 2023, the performance conditions with respect to 2023 EBIT were deemed not to have been met.

Accordingly, no 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).

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).

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.

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 2023 was $ 5.7 million.

The total grant date fair value of PSAs vested during 2023 was $ 4.5 million.

The total grant date fair value of performance shares forfeited or not earned during 2023 was $ 1.1 million.

The total grant date fair value of the 0.4 million PSAs issued but not released as of December 31, 2023 was $ 12.9 million.

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.

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 following table summarizes PSA activity during 2023:

Outstanding at January 1, 2023

PSAs not earned

Outstanding at December 31, 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:

December 31, 2023

January 1, 2023

January 2, 2022

Share-based compensation expense

Income tax benefit

Net share-based compensation expense

As of December 31, 2023, total unrecognized compensation expense and remaining weighted average recognition period related to outstanding share-based awards were as follows:

Total unrecognized compensation expense at December 31, 2023

During 2023, 2022 and 2021, the Company received $ 11.5 million, $ 5.0 million and $ 2.2 million in cash proceeds from the exercise of options, respectively.

The Company recorded tax benefits of $ 5.0 million, $ 1.7 million and $ 0.2 million during 2023, 2022 and 2021, respectively, resulting from share-based awards.

Store Closures

I n 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 in 2023 related to the impairment of leasehold improvements and right-of-use assets and is 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, and is reflected in Depreciation and amortiz ation on the consolidated statements of income.

Severance expense was immaterial.

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, subject to customary post-closing adjustments.

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 during the fiscal year ended December 31, 2023.

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 preliminary 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.

There have been no material changes to the purchase price allocation originally recorded in the first quarter of 2023.

The provisional fair value estimates are subject to adjustment as additional information is obtained within the measurement period, which may not exceed twelve months from the acquisition date.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis