What changed in this filing

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Item 7. Management’s Discussion and Analysis

2026-02-19 compared with 2025-02-20 · 48 added, 54 removed, 341 unchanged (23% of the section changed)

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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.

As a step to improve our fresh supply chain, in 2025 we began the transition to a self-distribution model for meat and seafood through our fresh distribution centers.

As a result, 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 28, 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 are increasing our use of data analytics and insights, including through the nationwide launch of our Sprouts Rewards loyalty program in 2025.

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.

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

Fiscal 2025, fiscal 2024 and fiscal 2023 were 52-week years ending on December 28, 2025, December 29, 2024 and December 31, 2023, respectively.

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

Proceeds from sales of gift cards are recorded as a liability at the time of sale and recognized as sales when they are redeemed by the customer.

See Note 3, “Significant Accounting Policies” to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K for additional information on revenue recognition related to gift cards.

During 2025, we implemented a customer loyalty program.

As a customer earns points, we allocate a portion of the transaction price to a deferred loyalty liability.

We do not include sales taxes in net sales.

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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.

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.

Tariffs 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.

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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Net sales during 2025 totaled $8.8 billion, increasing 14%, over the prior fiscal year.

The sales increase was driven by a 7.6% increase in comparable store sales, in part due to an increase in basket value due to retail price inflation, in addition to sales from new stores opening since the prior year, partially offset by a slight reduction in the number of items per basket and the impact of store closures.

See "Impact of Inflation and Deflation." Comparable store sales contributed approximately 94% of total sales in 2024 and 95% of total sales in 2023.

The sales increase was primarily due to new stores opened since the prior year and a 7.3% increase in comparable store sales.

Comparable store sales contributed approximately 93% of total sales in 2025 and 94% of total sales in 2024.

Cost of sales and gross profit

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Gross margin 38.8 % 38.1 % 0.7 %

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 profit increased during 2025 compared to 2024 by $474.9 million to $3.4 billion driven by increased sales volume.

Gross margin increased by 0.7% to 38.8% compared to 38.1%.

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.

The increase was a result of improved shrink and our investments in inventory management.

Selling, general and administrative expenses

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Percentage of net sales 29.2 % 29.7 % (0.5) %

Selling, general and administrative expenses increased $290.9 million, or 15%, compared to 2023 due to the net increase in new stores opened since the prior year and higher payroll and incentive compensation costs.

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

Selling, general and administrative expenses increased $283.3 million, or 12%, compared to 2024.

The increase was primarily driven by the increase in new stores opened since the prior year.

As a percentage of net sales, selling, general, and administrative expenses improved as a result of sales leverage from strong performance early in the year as well as lower incentive compensation.

Depreciation and amortization

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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 for new stores as well as remodel initiatives in older stores.

Depreciation and amortization in 2023 was inclusive of $5.9 million in accelerated depreciation in connection with the closing of certain underperforming stores during 2023.

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

Store closure and other costs, net

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Store closure and other costs, net decreased by $7.3 million to $5.6 million in 2025 compared to $12.9 million in 2024.

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.

Store closure and other costs, net in 2025 and 2024 was primarily related to ongoing occupancy costs incurred in connection with our closed store locations.

Interest (income) expense, net

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(dollars in thousands)

Long-term debt $ 4,259 $ 11,815 $ (7,556) (64) %

Finance leases 747 816 (69) (8) %

Long-term debt interest expense $ 826 $ 4,259 $ (3,433) (81) %

Finance lease interest expense 943 747 196 26 %

Deferred financing costs 890 772 118 15 %

Interest income and other (5,285) (7,979) 2,694 34 %

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

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.

Total interest income, net $ (2,626) $ (2,201) $ (425) (19) %

The increase in interest income, net was primarily due to lower average debt outstanding.

See Note 12, “Long-Term Debt and Other Finance Obligations” to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.

Income tax provision

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Effective income tax rate 24.0 % 24.9 % (0.9) %

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.

Income tax provision increased by $39.0 million to $165.1 million for 2025 from $126.1 million for 2024, and the effective income tax rate decreased to 24.0% in 2025 from 24.9% in 2024.

The decrease in the effective tax rate was primarily due to an increase in the benefit for stock-based compensation and benefit for purchase discount for transferable tax credits in the current year, partially offset by an increase in the rate detriment in the current year for nondeductible executive compensation.

Fiscal 2025 Fiscal 2024 Change % Change

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

Interest expense, net of tax (3)

Interest (income) expense, net of tax (3)

(1,997) (1,654) 4,882

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

(2) Special items related to store closure, supply chain transition costs related to our new and recently expanded distribution centers and acquisition related charges net of tax.

(2) Special items related to store closure, supply chain transition and acquisition related charges net of tax.

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

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Cash flows from operating activities increased $70.8 million to $716.0 million in 2025 compared to $645.2 million in 2024.

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.

The increase in cash flows from operating activities was primarily a result of higher net income adjusted for non-cash items of $171.4 million and a $2.3 million reduction in payments on our operating lease liabilities partially offset by changes in working capital of $97.7 million.

Cash flows provided by operating activities from changes in working capital were $14.6 million in 2025, compared to $112.3 million in 2024.

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 $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 a $9.3 million change in inventories primarily due to inflationary cost increases in the prior year.

This $97.7 million decrease in cash flow from changes in working capital was primarily attributable to the following factors, each of which had a negative impact on working capital:

(i) a $63.6 million change in inventories primarily due to improving on-shelf availability in certain departments;

(ii) a $30.9 million change in accounts payable and accrued liabilities, primarily due to timing differences of payments for goods and services;

(iii) a $25.2 million change in accrued salaries and benefits due to decreased incentive compensation accruals in the current year and (iv) a $2.8 million change in accounts receivable driven by the timing of collections.

These decreases were partially offset by a $24.8 million change in prepaid expenses and other current assets primarily due our timing of tax payments and purchased federal tax credits.

Investing Activities

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Cash flows used in investing activities were $248.3 million and $230.4 million for 2025 and 2024, respectively.

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.

See Note 27, "Business Combination" to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.

We expect capital expenditures to be in the range of $230 - $250 million in 2025, net of estimated landlord tenant improvement allowances, primarily to fund investments in new stores, remodels, maintenance capital expenditures and corporate capital expenditures.

in purchases of property and equipment was primarily due to more stores under construction in 2025 as compared to 2024 and heavier investment in upgraded equipment to support our initiatives.

We expect capital expenditures to be in the range of $280 million to $310 million in 2026, net of estimated landlord tenant improvement allowances, primarily to fund investments in new stores, remodels, maintenance capital expenditures and corporate capital expenditures.

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

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Cash flows used in financing activities were $474.1 million for 2025 compared to $351.5 million for 2024.

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 2025, cash flows used in financing activities primarily consisted of approximately $471.9 million for share repurchases and $2.1 million for payments of excise tax on share repurchases partially offset by $2.6 million in proceeds from the exercise of stock options.

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 Former Credit Facility, $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.

Long-term Debt and Credit Facilities

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.

The Company had no long-term debt outstanding as of December 28, 2025 and December 29, 2024.

See Note 12, “Long-Term Debt and Other Finance Obligations” to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K for a description of our Credit Agreement.

Share Repurchase Program

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May 22, 2024 May 22, 2027 $ 600,000 $ 457,408 $ —

August 13, 2025 N/A $ 1,000,000 $ 163,995 $ 836,005

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 29, 2024 December 31, 2023

December 28, 2025 December 29, 2024 December 31, 2023

Number of common shares acquired 3,955,324 2,656,058 5,864,246

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We can currently borrow under our Credit Agreement up to an initial aggregate commitment of $600.0 million, which may be increased from time to time pursuant to an expansion feature set forth in the Credit Agreement.

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

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

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We were in compliance with all applicable covenants under the Credit Agreement as of December 28, 2025.

Our Credit Agreement is defined and more fully described in 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.

Our Credit Agreement is defined and more fully described in Note 12, “Long-Term Debt and Other Finance Obligations” to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.

Contractual Obligations

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

See Note 7, "Leases," Note 13, “Long-Term Debt and Finance Lease Liabilities,” Note 15, "Self-Insurance Programs" and Note 18, "Commitments and Contingencies" to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K for more information on the nature and timing of these obligations.

See Note 7, "Leases," Note 12, “Long-Term Debt and Other Finance Obligations,” Note 14, "Self-Insurance Programs" and Note 17, "Commitments and Contingencies" to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K for more information on the nature and timing of these obligations.

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

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.

Interest and fee payments through the July 25, 2030 maturity date of our Credit Agreement based on the outstanding amounts as of December 28, 2025 and interest rates in effect at the time of this filing, are estimated to be approximately $3.6 million.

These payments are estimated to be approximately $0.8 million in 2026 and approximately $2.8 million thereafter.

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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 29, 2024 and December 31, 2023.

We believe that all inventories are sellable and no allowances or reserves for obsolescence were recorded as of December 28, 2025 and December 29, 2024.

Lease Assumptions

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Application of alternative assumptions and definitions could produce significantly different results.

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

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

No impairment was recorded during fiscal 2025.

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

See Note 3, “Significant Accounting Policies,” Note 6,

“Property and Equipment" and Note 23, "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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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