Sprouts Farmers Market, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the 2024 fiscal year, filed on February 20, 2025 (“Form 10-K”) with the Securities and Exchange Commission. All dollar amounts included below are in thousands, unless otherwise noted. Business Overview Sprouts Farmers Market offers a unique specialty grocery experience featuring an open layout with fresh produce at the heart of the store. Sprouts inspires wellness naturally with a carefully curated assortment of better-for-you products paired with purpose-driven people. We continue to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and gluten-free. From our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. Headquartered in Phoenix with 443 stores in 24 states as of March 30, 2025, we are one of the largest and fastest growing specialty retailers of fresh, natural and organic food in the United States. Our Growth Strategy 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 . We are focusing attention on our target customers, identified through research as ‘health enthusiasts’ and ‘selective shoppers’, where there is ample opportunity to gain share within these customer segments. We believe our business can continue to grow by leveraging existing strengths in a unique assortment of better-for-you, quality products and by providing a full omnichannel offering through delivery or pickup via our website or the Sprouts app. • 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 March 30, 2025, we have opened 78 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 Supply Chain. We believe our network of distribution centers can drive efficiencies across the chain and support our 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. 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 March 30, 2025. • 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. We are increasing our use of data analytics and insights. We believe this data-driven intelligence will increase customer engagement through personalization efforts with digital and social connections to drive additional sales growth and loyalty. • Inspire and Engage Our Talent to Make Sprouts a Best Place to Work . Subsequent to the initial launch of our long-term growth strategy, we have added the focus area of inspiring and engaging our talent through our culture, acquisition and development and total rewards program to attract and retain the talent we believe we need to execute on our strategic goals and transform our company into a premier place to work. • 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. 18 Table of Contents • 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. Since the implementation of our strategy beginning in 2020, we have significantly improved our margin structure above our 2019 baseline. Results of Operations for Thirteen Weeks Ended March 30, 2025 and March 31, 2024 The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted. Thirteen weeks ended March 30, 2025 March 31, 2024 Unaudited Quarterly Consolidated Statement of Income Data: Net sales $ 2,236,436 $ 1,883,808 Cost of sales 1,350,073 1,161,495 Gross profit 886,363 722,313 Selling, general and administrative expenses 623,226 539,771 Depreciation and amortization (exclusive of depreciation included in cost of sales) 35,099 32,232 Store closure and other costs, net 1,706 2,044 Income from operations 226,332 148,266 Interest (income) expense, net (924) 818 Income before income taxes 227,256 147,448 Income tax provision 47,230 33,348 Net income $ 180,026 $ 114,100 Weighted average shares outstanding - basic 98,537 101,071 Diluted effect of equity-based awards 1,182 953 Weighted average shares and equivalent shares outstanding - diluted 99,719 102,024 Diluted net income per share $ 1.81 $ 1.12 Thirteen weeks ended March 30, 2025 March 31, 2024 Other Operating Data: Comparable store sales growth 11.7 % 4.0 % Stores at beginning of period 440 407 Closed — — Opened 3 7 Stores at end of period 443 414 19 Table of Contents Comparison of Thirteen Weeks Ended March 30, 2025 to Thirteen Weeks Ended March 31, 2024 Net sales Thirteen weeks ended March 30, 2025 March 31, 2024 Change % Change Net sales $ 2,236,436 $ 1,883,808 $ 352,628 19 % Comparable store sales growth 11.7 % 4.0 % Net sales during the thirteen weeks ended March 30, 2025 totaled $2.2 billion, an increase of $352.6 million or 19%, compared to the thirteen weeks ended March 31, 2024. The sales increase was driven by sales from new stores opened in the last twelve months and a 11.7% increase in comparable store sales. Comparable stores contributed approximately 93% of total sales for the thirteen weeks ended March 30, 2025 and approximately 94% of total sales for the thirteen weeks ended March 31, 2024. Cost of sales and gross profit Thirteen weeks ended March 30, 2025 March 31, 2024 Change % Change Net sales $ 2,236,436 $ 1,883,808 $ 352,628 19 % Cost of sales 1,350,073 1,161,495 188,578 16 % Gross profit 886,363 722,313 164,050 23 % Gross margin 39.6 % 38.3 % 1.3 % Gross profit totaled $886.4 million during the thirteen weeks ended March 30, 2025, an increase of $164.1 million or 23%, compared to the thirteen weeks ended March 31, 2024, driven by increased sales volume. Gross margin increased by 1.3% to 39.6% for the thirteen weeks ended March 30, 2025, compared to 38.3% for the thirteen weeks ended March 31, 2024, primarily driven by improved inventory management. Selling, general and administrative expenses Thirteen weeks ended March 30, 2025 March 31, 2024 Change % Change Selling, general and administrative expenses $ 623,226 $ 539,771 $ 83,455 15 % Percentage of net sales 27.9 % 28.7 % (0.8) % Selling, general and administrative expenses increased $83.5 million or 15%, compared to the thirteen weeks ended March 31, 2024. The increase was primarily due to the increase in new stores opened since the comparable period last year. As a percentage of net sales, selling, general and administrative expenses improved slightly as a result of leverage gained from store compensation and occupancy costs. Depreciation and amortization Thirteen weeks ended March 30, 2025 March 31, 2024 Change % Change Depreciation and amortization $ 35,099 $ 32,232 $ 2,867 9 % Percentage of net sales 1.6 % 1.7 % (0.1) % Depreciation and amortization expense (exclusive of depreciation included in cost of sales) was $35.1 million for the thirteen weeks ended March 30, 2025, compared to $32.2 million for the thirteen weeks ended March 31, 2024. Depreciation and amortization expense primarily consists of depreciation and amortization for 20 Table of Contents buildings, store leasehold improvements, and equipment for new stores as well as remodel initiatives in older stores. Store closure and other costs, net Thirteen weeks ended March 30, 2025 March 31, 2024 Change % Change Store closure and other costs, net $ 1,706 $ 2,044 $ (338) (17) % Percentage of net sales 0.1 % 0.1 % — % Store closure and other costs, net for the thirteen weeks ended March 30, 2025 of $1.7 million primarily related to disaster recovery charges from the California wildfires as well as ongoing occupancy costs associated with our closed locations. Store closure and other costs, net for the thirteen weeks ended March 31, 2024 of $2.0 million primarily related to ongoing occupancy costs associated with our closed store locations. See Note 12, “Store Closures” of our unaudited consolidated financial statements. Interest (income) expense, net Thirteen weeks ended March 30, 2025 March 31, 2024 Change % Change Long-term debt $ 210 $ 2,202 $ (1,992) (90) % Finance leases 176 196 (20) (10) % Deferred financing costs 193 193 — 0 % Interest income and other (1,503) (1,773) 270 (15) % Total interest (income) expense, net $ (924) $ 818 $ (1,742) (213) % The decrease in interest (income) expense, net for the thirteen weeks ended March 30, 2025 compared to the thirteen weeks ended March 31, 2024 was primarily due to lower average debt outstanding. See Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements. Income tax provision Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following: Thirteen weeks ended March 30, 2025 March 31, 2024 Federal statutory rate 21.0 % 21.0 % Change in income taxes resulting from: State income taxes, net of federal benefit 5.0 % 5.0 % Enhanced charitable contributions (0.9) % (1.0) % Federal credits (0.2) % (0.4) % Share-based payment awards (5.6) % (3.0) % Return to Provision — % — % Non-deductible Executive Compensation 1.4 % 1.0 % Other, net 0.1 % — % Effective tax rate 20.8 % 22.6 % The effective tax rate decreased to 20.8% for the thirteen weeks ended March 30, 2025 from 22.6% for the thirteen weeks ended March 31, 2024. The decrease in the effective tax rate was primarily due to an 21 Table of Contents increase in benefit from current year stock-based compensation partially offset by an increase in non-deductible executive compensation. Net income Thirteen weeks ended March 30, 2025 March 31, 2024 Change % Change Net income $ 180,026 $ 114,100 $ 65,926 58 % Percentage of net sales 8.0 % 6.1 % 1.9 % Net income increased $65.9 million primarily due to higher gross profit, partially offset by higher selling, general and administrative expenses for the reasons discussed above. Diluted earnings per share Thirteen weeks ended March 30, 2025 March 31, 2024 Change % Change Diluted earnings per share $ 1.81 $ 1.12 $ 0.69 62 % Diluted weighted average shares outstanding 99,719 102,024 (2,305) The increase in diluted earnings per share of $0.69 was driven by higher net income and fewer diluted shares outstanding compared to the prior year, due primarily to the share repurchase program. Return on Invested Capital In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we provide information regarding Return on Invested Capital (referred to as “ROIC”) as additional information about our operating results. ROIC is a non-GAAP financial measure and should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital and provides a meaningful measure of the effectiveness of our capital allocation over time. We define ROIC as net operating profit after tax (referred to as “NOPAT”), including the effect of capitalized operating leases, divided by average invested capital. Operating lease interest represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as a finance lease. The assumed ownership and associated interest expense are calculated using the discount rate for each lease as recorded as a component of rent expense within selling, general and administrative expenses. Invested capital reflects a trailing four-quarter average. As numerous methods exist for calculating ROIC, our method may differ from methods used by other companies to calculate their ROIC. It is important to understand the methods and the differences in those methods used by other companies to calculate their ROIC before comparing our ROIC to that of other companies. 22 Table of Contents Our calculation of ROIC for the fiscal periods indicated was as follows: Rolling Four Quarters Ended March 30, 2025 March 31, 2024 (dollars in thousands) Net income (1) $ 446,527 $ 296,797 Special items, net of tax (2), (3) — 7,751 Interest (income) expense, net of tax (3) (3,003) 3,852 Net operating profit after tax (NOPAT) $ 443,524 $ 308,400 Total rent expense, net of tax (3) 195,944 181,856 Estimated depreciation on operating leases, net of tax (3) (108,504) (101,175) Estimated interest on operating leases, net of tax (3), (4) 87,440 80,681 NOPAT, including effect of operating leases $ 530,964 $ 389,081 Average working capital 171,007 217,750 Average property and equipment 858,191 767,059 Average other assets 603,576 602,634 Average other liabilities (105,772) (98,576) Average invested capital $ 1,527,002 $ 1,488,867 Average operating leases (5) 1,640,730 1,480,590 Average invested capital, including operating leases $ 3,167,732 $ 2,969,457 ROIC, including operating leases 16.8 % 13.1 % (1) Net income amounts represent total net income for the past four trailing quarters. (2) Special items related to store closure and supply chain transition, net of tax. (3) Net of tax amounts are calculated using the normalized effective tax rate for the periods presented. (4) 2025 and 2024 estimated interest on operating leases is calculated by multiplying operating leases by the 7.0% and 7.2% discount rate, respectively, for each lease recorded as rent expense within direct store expense. (5) Average operating leases represents the average net present value of outstanding lease obligations over the past four trailing quarters. Liquidity and Capital Resources The following table sets forth the major sources and uses of cash for each of the periods set forth below, as well as our cash, cash equivalents and restricted cash at the end of each period (in thousands): Thirteen weeks ended March 30, 2025 March 31, 2024 Cash, cash equivalents and restricted cash at end of period $ 287,735 $ 314,354 Cash flows from operating activities $ 299,089 $ 219,695 Cash flows used in investing activities $ (59,479) $ (51,241) Cash flows used in financing activities $ (219,088) $ (57,970) 23 Table of Contents We have generally financed our operations principally through cash generated from operations and borrowings under our credit facilities. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures primarily for opening new stores, remodels and maintenance, repurchases of our common stock and debt service. Our principal contractual obligations and commitments consist of obligations under our Credit Agreement, interest on our Credit Agreement, operating and finance leases, purchase commitments and self-insurance liabilities. Our operating and finance leases for the rental of land, buildings, and for rental of facilities and equipment expire or become subject to renewal clauses at various dates through 2048. We believe that our existing cash, cash equivalents and restricted cash, and cash anticipated to be generated from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including new store openings, remodel and maintenance capital expenditures at existing stores, store initiatives and other corporate capital expenditures and activities. Our cash, cash equivalents and restricted cash position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale. Operating Activities Cash flows from operating activities increased $79.4 million to $299.1 million for the thirteen weeks ended March 30, 2025 compared to $219.7 million for the thirteen weeks ended March 31, 2024. The increase in cash flows from operating activities was primarily a result of higher net income adjusted for non-cash items of $75.3 million and favorable changes in working capital of $9.9 million, partially offset by higher payments on our operating lease liabilities of $4.7 million due to growth. Cash flows provided by operating activities from changes in working capital were $77.9 million in the thirteen weeks ended March 30, 2025 compared to $68.0 million in the thirteen weeks ended March 31, 2024. This $9.9 million increase in cash flows from changes in working capital was primarily attributable to $25.1 million change in accrued income taxes, $13.6 million change in accounts payable and accrued liabilities primarily due to timing differences of payments for goods and services and $2.2 million change in accounts receivable driven by the timing of collections. These increases were partially offset by $14.9 million change in prepaid expenses and other current assets primarily driven by switching from a new prepaid tax position to a net payable position and $12.1 million change in accrued salaries and benefits primarily driven by increased corporate bonuses. Certain other immaterial items combined to result in an additional $4.0 million net increase in cash flows from changes in working capital. Investing Activities Cash flows used in investing activities consist primarily of capital expenditures in new stores, including leasehold improvements and store equipment, capital expenditures to maintain the appearance of our stores, sales enhancing initiatives and other corporate investments as well as cash outlays for acquisitions. Cash flows used in investing activities were $59.5 million and $51.2 million, for the thirteen weeks ended March 30, 2025 and thirteen weeks ended March 31, 2024, respectively. We expect capital expenditures to be in the range of $230 - 250 million in 2025, including expenditures incurred to date, net of estimated landlord tenant improvement allowances, primarily to fund investments in new stores, remodels, maintenance capital expenditures and corporate capital expenditures. We expect to fund our capital expenditures with cash on hand and cash generated from operating activities. Financing Activities Cash flows used in financing activities were $219.1 million for the thirteen weeks ended March 30, 2025 compared to $58.0 million for the thirteen weeks ended March 31, 2024. During the thirteen weeks ended March 30, 2025, cash flows used in financing activities primarily consisted of $218.8 million for stock repurchases. During the thirteen weeks ended March 31, 2024, cash flows used in financing activities primarily consisted of $60.0 million for stock repurchases, partially offset by $2.3 million in proceeds from the exercise of stock options. 24 Table of Contents Long-Term Debt and Credit Facilities The Company had no long-term debt outstanding as of March 30, 2025 and December 29, 2024. See Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements for a description of our Credit Agreement and our Former Credit Facility (each as defined therein). Share Repurchase Program Our board of directors from time to time authorizes share repurchase programs for our common stock. The following table outlines the share repurchase program authorized by our board, and the related repurchase activity and available authorization as of March 30, 2025: Effective date Expiration date Amount authorized Cost of repurchases Authorization available March 2, 2022 December 31, 2024 $ 600,000 $ 480,715 $ — May 22, 2024 May 22, 2027 $ 600,000 $ 368,238 $ 231,762 The shares under our current repurchase program may be purchased on a discretionary basis from time to time through the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. Our board’s authorization of the share repurchase program does not obligate our Company to acquire any particular amount of common stock, and the repurchase program may be commenced, suspended, or discontinued at any time. Share repurchase activity under our repurchase program for the periods indicated was as follows (total cost in thousands): Thirteen weeks ended March 30, 2025 March 31, 2024 Number of common shares acquired 1,568,017 957,780 Average price per common share acquired $ 140.68 $ 63.04 Total cost of common shares acquired $ 220,594 $ 60,380 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 included the 1% excise tax imposed as part of the Inflation Reduction Act of 2022. Subsequent to March 30, 2025 and through April 28, 2025, we repurchased an additional 0.3 million shares of common stock for $53.0 million, excluding excise tax. Contractual Obligations Our principal contractual obligations and commitments arising in the normal course of business consist of obligations under our Credit Agreement, interest on our Credit Agreement, operating and finance leases, purchase commitments and self-insurance liabilities. Except as otherwise disclosed in Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements, there have been no material changes outside the normal course of business as of March 30, 2025 in our contractual obligations and commitments from those reported in our Annual Report on Form 10-K for the fiscal year ended December 29, 2024. 25 Table of Contents Impact of Inflation and Deflation Inflation and deflation in the prices of food and other products we sell may periodically affect our sales, gross profit and gross margin. Food inflation, when combined with reduced consumer spending, could also reduce sales, gross profit margins and comparable store sales. Inflationary pressures on compensation, utilities, commodities, equipment and supplies may also impact our profitability. Food deflation or declining levels of inflation across multiple categories, particularly in produce, could reduce sales growth and earnings, particularly if our competitors react by lowering their retail pricing and expanding their promotional activities, which can lead to retail deflation higher than cost deflation that could reduce our sales, gross profit margins and comparable store sales. The short-term impact of inflation and deflation is largely dependent on whether or not the effects are passed through to our customers, which is subject to competitive market conditions. Food inflation and deflation is affected by a variety of factors and our determination of whether to pass on the effects of inflation or deflation to our customers is made in conjunction with our overall pricing and marketing strategies, as well as our competitors’ responses. Although we may experience periodic effects on sales, gross profit, gross margins and cash flows as a result of changing prices, 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 Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. Our critical accounting estimates include inventories, lease assumptions, self-insurance reserves, goodwill and intangible assets, impairment of long-lived assets, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. There have been no substantial changes to these estimates, or the policies related to them during the thirteen weeks ended March 30, 2025. For a full discussion of these estimates and policies, see “Critical Accounting Estimates” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 29, 2024. Recently Issued Accounting Pronouncements See Note 2, “Summary of Significant Accounting Policies” to our accompanying unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.