Press Release

Sprouts Farmers Market, Inc. Reports Second Quarter 2016 Results

Company Release - 8/4/2016 9:00 AM ET

PHOENIX, Aug. 04, 2016 (GLOBE NEWSWIRE) -- Sprouts Farmers Market, Inc. (Nasdaq:SFM) today reported results for the 13-week second quarter ended July 3, 2016. 

Second Quarter Highlights:

  • Net sales of $1.0 billion; a 14% increase from the same period in 2015
  • Comparable store sales growth of 4.1% and two-year comparable store sales growth of 8.9%
  • Net income of $37 million and diluted earnings per share of $0.25
  • Net income increased 19% from the same period in 2015, and 6% from adjusted net income
  • Diluted earnings per share increased 25% from the same period in 2015, and 14% from adjusted diluted earnings per share

“Sprouts’ healthy living for less business continues to resonate with customers as we grow coast to coast,” said Amin Maredia, chief executive officer of Sprouts Farmers Market.  “Despite the deflationary environment, our team continues to produce solid comparable store sales growth through improved traffic of 3.5% and increased tonnage. We remain laser-focused on our strategic priorities to drive performance today while continuing to invest in team members, technology and infrastructure for sustainable long-term growth.”

In order to aid in understanding the company’s business performance, it has presented results in conformity with accounting principles generally accepted in the United States (“GAAP”) and has also presented certain non-GAAP measures which are explained and reconciled to the GAAP measures in the tables included in this release. For 2016 and 2015, the company has presented EBITDA and adjusted EBITDA, respectively. In addition, for 2015, the company has presented adjusted net income and adjusted earnings per share.  In each case, the “adjusted” measure excludes the after-tax impact of disposal of assets, store closure and exit costs, secondary offering expenses and loss on extinguishment of debt.  For the first half of 2016, such adjustments would be immaterial.  Accordingly, the company has presented net income, earnings per share and EBITDA for 2016 without adjustment and has provided comparisons of such measures to the corresponding adjusted measures from 2015. Where applicable, results are first presented on a GAAP basis and then on an adjusted basis.

Second Quarter 2016 Financial Results

Net sales for the second quarter of 2016 were $1.0 billion, a 14% increase compared to the same period in 2015.   Net sales growth was driven by a 4.1% increase in comparable store sales and solid performance in new stores opened.

Gross profit for the quarter increased 16% to $306 million, resulting in a gross profit margin of 29.6%, an increase of 40 basis points compared to the same period in 2015.  This increase reflects higher margins in certain categories primarily due to deflation and improved shrink.

Direct store expenses (“DSE”) as a percentage of sales for the quarter increased 40 basis points to 20.1% compared to the same period in 2015.  This was primarily due to higher payroll expense from planned wage increases and increased training costs.

Selling, general and administrative expenses (“SG&A”) as a percentage of sales for the quarter increased 40 basis points to 3.0%, compared to the same period in 2015. This was primarily driven by higher stock compensation costs due to executive changes in 2015, higher bonus expense accrual versus the prior year, and higher corporate overhead as we continue to build out infrastructure to support our growth.

Net income for the quarter was $37 million, up $6 million from the same period in 2015.  Excluding the after-tax impact of the loss on disposal of assets, the store closure and exit costs and loss on extinguishment of debt in the second quarter of 2015, net income for the quarter increased 6% compared to adjusted net income of $35 million for the same period in 2015.  Diluted earnings per share was $0.25, a 25% increase from diluted earnings per share of $0.20 and a 14% increase from adjusted diluted earnings per share of $0.22, for the same period in 2015.  These increases were driven by higher sales and margins, the benefit from lower interest expense due to a voluntary pay-down on our revolving credit facility and fewer shares outstanding due to our repurchase program.

Fiscal Year-to-Date Financial Results

For the 26-week period ended July 3, 2016, net sales were $2.0 billion, or a 15% increase compared to the same period in 2015.  Growth was driven by a 4.4% increase in comparable store sales and solid performance in new stores opened.  Net income was $83 million, up $15 million from the same period in 2015. Excluding the after-tax impact of the loss on extinguishment of debt, store closure and exit costs, secondary offering expenses and loss on disposal of assets in the first half of 2015, net income increased 13% compared to adjusted net income of $74 million for the same period in 2015. Diluted earnings per share was $0.55, a 25% increase from diluted earnings per share of $0.44 and a 17% increase from adjusted diluted earnings per share of $0.47, for the same period in 2015.

Growth and Development

During the second quarter of 2016, we opened 12 new stores: one each in Alabama, Colorado, Georgia, Kansas, Oklahoma, Nevada and Texas; two in Arizona; and three in California.  Three additional stores have been opened in the third quarter, resulting in 26 stores opened year-to-date and a total of 243 stores in 13 states as of August 4, 2016. The company expects to open a total of 36 stores in 2016 representing a 17% increase in total store count.

Leverage and Liquidity

We generated cash from operations of $148 million year-to-date through July 3, 2016 and invested $79 million in capital expenditures net of landlord reimbursement, primarily for new stores. In addition, we purchased $65 million of our common stock in the second quarter, fully utilizing our $150 million share repurchase authorization. We ended the quarter with a $160 million balance on our revolving credit facility, $2 million of letters of credit outstanding under the facility, and $78 million in cash and cash equivalents.

2016 Outlook

We have adjusted our 2016 guidance, primarily due to the deflationary environment. The following provides information on our guidance for 2016:

 Q3 2016 
 Guidance 
Comparable store sales growth3.0% to 4.0% 
   
   Full-Year 2016 Guidance
 52-week to 52-week53-week to 52-week
Net sales growth15.5% to 16.5%13% to 14%
Unit growth36 new stores36 new stores
Comparable store sales growth (1)3.5% to 4.5%3.5% to 4.5%
Diluted earnings per share (2) $0.92 to $0.94$0.92 to $0.94
EPS growth (3)10% to 12%7% to 9%
EBITDA growth (3)8% to 10%5% to 7%
Capital expenditures$155M to $165M$155M to $165M
(net of landlord reimbursements)  
   
(1) Comparable store sales growth is on an equal 52-week to 52-week basis.
(2) Based on a weighted average share count of approximately 151 million shares for 2016.
(3) Compared to adjusted measures in 2015.
 

Please see the explanation and reconciliation of EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share to the comparable GAAP measures for the 13 and 26 weeks ended July 3, 2016 and June 28, 2015, as applicable, in the tables included below.

Second Quarter 2016 Conference Call

We will hold a conference call at 7 a.m. Pacific Daylight Time (10 a.m. Eastern Daylight Time) on Thursday, August 4, 2016, during which Sprouts executives will further discuss our second quarter 2016 financial results. 

A webcast of the conference call will be available through Sprouts’ investor webpage located at investors.sprouts.com. Participants should register on the website approximately 10 minutes prior to the start of the webcast.

The conference call will be available via the following dial- in numbers:

  • U.S. Participants: 877-398-9481
  • International Participants: Dial +1-408-337-0130
  • Conference ID: 44772153

The audio replay will remain available for 72 hours and can be accessed by dialing 855-859-2056 (toll-free) or 404-537-3406 (international) and entering the confirmation code: 44772153.

Important Information Regarding Outlook

There is no guarantee that Sprouts will achieve its projected financial expectations, which are based on management estimates, currently available information and assumptions that management believes to be reasonable.   These expectations are inherently subject to significant economic, competitive and other uncertainties and contingencies, many of which are beyond the control of management.  See “Forward-Looking Statements” below.

Forward-Looking Statements

Certain statements in this press release are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not statements of historical fact (including, but not limited to, statements to the effect that Sprouts Farmers Market or its management "anticipates," "plans," "estimates," "expects," or "believes," or the negative of these terms and other similar expressions) should be considered forward-looking statements, including, without limitation, statements regarding the company’s guidance, outlook and new store openings for 2016. These statements involve certain risks and uncertainties that may cause actual results to differ materially from expectations as of the date of this release.  These risks and uncertainties include, without limitation, risks associated with the company’s ability to successfully compete in its intensely competitive industry; the company’s ability to successfully open new stores; the company’s ability to manage its rapid growth; the company’s ability to maintain or improve its operating margins; the company’s ability to identify and react to trends in consumer preferences; product supply disruptions; general economic conditions; and other factors as set forth from time to time in the company’s Securities and Exchange Commission filings, including, without limitation, the company’s Annual Report on Form 10-K.  The company intends these forward-looking statements to speak only as of the time of this release and does not undertake to update or revise them as more information becomes available, except as required by law.

Corporate Profile

Sprouts Farmers Market, Inc. is a healthy grocery store offering fresh, natural and organic foods at great prices. Sprouts offer a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, natural body care and household items catering to consumers’ growing interest in health and wellness. Headquartered in Phoenix, Arizona, Sprouts employs more than 23,000 team members and operates more than 240 stores in thirteen states from coast to coast. For more information, visit www.sprouts.com or @sproutsfm on Twitter.

 
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
   Thirteen Weeks
Ended
 Thirteen Weeks
Ended
 Twenty-Six Weeks
Ended
 Twenty-Six Weeks
Ended
   July 3, 2016 June 28, 2015 July 3, 2016 June 28, 2015
          
Net sales $  1,031,643  $  902,153  $  2,024,884  $  1,759,659 
Cost of sales, buying and occupancy    725,841     638,514     1,412,569     1,238,227 
 Gross profit    305,802     263,639     612,315     521,432 
Direct store expenses    207,107     177,381     400,885     340,571 
Selling, general and administrative expenses    30,922     23,390     61,818     47,417 
Store pre-opening costs    4,213     2,507     8,179     5,280 
Store closure and exit costs    98     315     135     1,544 
 Income from operations    63,462     60,046     141,298     126,620 
Interest expense    (3,661)    (4,437)    (7,262)    (10,305)
Other income    90     112     191     174 
Loss on extinguishment of debt    -     (5,481)    -     (5,481)
 Income before income taxes    59,891     50,240     134,227     111,008 
Income tax provision    (22,682)    (18,918)    (50,811)    (42,219)
 Net income $  37,209  $  31,322  $  83,416  $  68,789 
Net income per share:        
 Basic $  0.25  $  0.20  $  0.56  $  0.45 
 Diluted $  0.25  $  0.20  $  0.55  $  0.44 
Weighted average shares outstanding:        
 Basic    149,170     153,393     149,931     152,814 
 Diluted    151,498     155,949     152,322     155,728 

 

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
 
   July 3,
 2016
 January 3,
 2016
ASSETS    
Current assets:    
 Cash and cash equivalents $  78,444  $  136,069 
 Accounts receivable, net    17,719     20,424 
 Inventories    189,165     165,434 
 Prepaid expenses and other current assets    19,954     23,288 
Total current assets    305,282     345,215 
Property and equipment, net of accumulated depreciation    549,726     494,067 
Intangible assets, net of accumulated amortization    198,309     198,601 
Goodwill    368,078     368,078 
Other assets    23,734     19,003 
Deferred income tax asset    -      1,400 
 Total assets $1,445,129  $1,426,364 
      
LIABILITIES AND STOCKHOLDERS' EQUITY    
Current liabilities:    
 Accounts payable $  175,235  $  134,480 
 Accrued salaries and benefits    28,679     30,717 
 Other accrued liabilities    43,189     50,253 
 Current portion of capital and financing lease obligations    6,286     14,972 
Total current liabilities    253,389     230,422 
Long-term capital and financing lease obligations    115,881     115,500 
Long-term debt    160,000     160,000 
Other long-term liabilities    109,461     97,450 
Deferred income tax liability    12,190     - 
 Total liabilities    650,921     603,372 
Commitments and contingencies    
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, 148,424,200 and 152,577,884 shares issued and outstanding, July 3, 2016 and January 3, 2016    148     153 
 Additional paid-in capital    589,458     577,393 
 Retained earnings    204,602     245,446 
Total stockholders' equity    794,208     822,992 
 Total liabilities and stockholders' equity $1,445,129  $1,426,364 


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
 
    Twenty-Six
Weeks Ended
 Twenty-Six
Weeks Ended
    July 3, 2016 June 28, 2015
Cash flows from operating activities   
Net income  $  83,416  $  68,789 
Adjustments to reconcile net income to net cash provided by operating activities:   
 Depreciation and amortization expense   38,813     32,816 
 Accretion of asset retirement obligation and closed facility reserve   176     178 
 Amortization of financing fees and debt issuance costs   231     501 
 Loss on disposal of property and equipment   57     405 
 Equity-based compensation   6,325     2,434 
 Loss on extinguishment of debt   -     5,481 
 Deferred income taxes   13,590     1,620 
 Changes in operating assets and liabilities:   
  Accounts receivable   3,015     (4,874)
  Inventories   (23,731)    (15,386)
  Prepaid expenses and other current assets   3,334     2,220 
  Other assets   (4,961)    (6,149)
  Accounts payable   24,768     26,527 
  Accrued salaries and benefits   (2,038)    (7,694)
  Other accrued liabilities   (7,395)    (2,079)
  Other long-term liabilities   12,340     16,151 
   Cash flows from operating activities   147,940     120,940 
       
Cash flows from investing activities   
Purchases of property and equipment   (85,081)    (74,541)
Proceeds from sale of property and equipment   662     2 
Purchase of leasehold interests    (491)    - 
   Cash flows used in investing activities   (84,910)    (74,539)
       
Cash flows from financing activities   
Proceeds from revolving credit facility   -     260,000 
Payments on revolving credit facility   -     (100,000)
Payments on term loan   -     (261,250)
Payments on capital lease obligations   (350)    (316)
Payments on financing lease obligations   (1,780)    (1,700)
Payments of deferred financing costs   -     (1,896)
Repurchase of common stock   (124,265)    - 
Excess tax benefit for exercise of stock options   3,687     19,288 
Proceeds from the exercise of stock options   2,053     6,218 
   Cash flows used in financing activities   (120,655)    (79,656)
   Decrease in cash and cash equivalents   57,625     (33,255)
Cash and cash equivalents at beginning of the period   136,069     130,513 
Cash and cash equivalents at the end of the period$  78,444  $  97,258 
        

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with GAAP, the company has presented EBITDA for 2016 and for 2015, adjusted net income, adjusted earnings per share and adjusted EBITDA. These measures are not in accordance with, and are not intended as an alternative to, GAAP. The company's management believes that these presentations provide useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses these measures for reviewing the financial results of the company, and they are a component of incentive compensation. The company defines EBITDA as net income before interest expense, provision for income tax, and depreciation, amortization and accretion, and defines adjusted EBITDA as EBITDA as further adjusted to exclude store closure and exit costs, gains and losses from disposal of assets, expenses incurred by the company in its secondary public offerings and employment taxes paid by the company in connection with options exercised in those offerings (“Public Offering Expenses”) and the loss on extinguishment of debt. The company defines adjusted net income as net income excluding, gain and losses from disposal of assets, store closure and exit costs, Public Offering Expenses, the loss on extinguishment of debt and the related tax impact of those adjustments. For the thirteen and twenty-six weeks ended July 3, 2016, such further adjustments to net income and EBITDA were immaterial; thus only EBITDA is presented.

These non-GAAP measures are intended to provide additional information only and do not have any standard meanings prescribed by GAAP. Use of these terms may differ from similar measures reported by other companies. Because of their limitations, none of these non-GAAP measures should be considered as a measure of discretionary cash available to use to reinvest in growth of the company’s business, or as a measure of cash that will be available to meet the company’s obligations. Each of these non-GAAP measures has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of the company’s results as reported under GAAP.

The following table shows a reconciliation of EBITDA to net income for the thirteen and twenty-six weeks ended June 28, 2015 and July 3, 2016:

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NON-GAAP MEASURE RECONCILIATION
(UNAUDITED)
(IN THOUSANDS)
 
  Thirteen Weeks
Ended
 Thirteen Weeks
Ended
 Twenty-Six Weeks
Ended
 Twenty-Six Weeks
Ended
  July 3, 2016 June 28, 2015 July 3, 2016 June 28, 2015
         
Net income $  37,209  $  31,322  $  83,416  $  68,789 
Income tax provision    22,682     18,918     50,811     42,219 
Interest expense, net    3,661     4,437     7,261     10,305 
Earnings before interest and taxes (EBIT)    63,552     54,677     141,488     121,313 
Depreciation, amortization and accretion    20,077     17,062     38,989     32,994 
Earnings before interest, taxes, depreciation and amortization (EBITDA) $  83,629  $  71,739  $  180,477  $  154,307 
                 

The following table shows a reconciliation of adjusted net income and adjusted EBITDA to net income, and adjusted earnings per share to net income per share, for the thirteen and twenty-six weeks ended June 28, 2015:

     
  Thirteen Weeks
Ended
 Twenty-Six
Weeks Ended
  June 28, 2015 June 28, 2015
     
Net income $  31,322  $  68,789 
Income tax provision    18,918     42,219 
Net income before income taxes    50,240     111,008 
Store closure and exit costs (a)    315     1,544 
Loss on disposal of assets (b)    133     405 
Secondary offering expenses including employment taxes on options exercises (c)    -     335 
Loss on extinguishment of debt (d)    5,481     5,481 
Adjusted income tax provision (e )    (21,151)    (45,172)
Adjusted net income    35,018     73,601 
Interest expense, net    4,434     10,297 
Adjusted income tax provision (e )    21,151     45,172 
Adjusted earnings before interest and taxes (EBIT)    60,603     129,070 
Depreciation, amortization and accretion    16,966     32,840 
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) $  77,569  $  161,910 
     
     
Adjusted Net Income Per Share    
     
Net income per share - basic $  0.20  $  0.45 
Per share impact of net income adjustments $  0.03  $  0.03 
Adjusted net income per share - basic $  0.23  $  0.48 
     
Net income per share - diluted $  0.20  $  0.44 
Per share impact of net income adjustments $  0.02  $  0.03 
Adjusted net income per share - diluted $  0.22  $  0.47 
         

(a) Store closure and exit costs represents reserves established for closed stores and facilities, adjustments to those reserves for changes in expectations for sublease or actual subleases or settlements with landlords. Ongoing expenses related with the closed facilities are also included. The company excluded store closure and exit costs from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believed these costs did not directly reflect the ongoing performance of its store operations.
(b) Loss on disposal of assets represents the losses recorded in connection with the disposal of property and equipment.  The company excluded losses on disposals of assets from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believed these costs did not directly reflect the ongoing performance of its store operations.
(c) Secondary offering expenses including employment taxes on options exercises represents expenses the company incurred in its secondary public offerings and employment taxes paid by the company in connection with options exercised in those offerings. The company excluded these items from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believed these costs did not directly reflect the ongoing performance of its store operations.
(d) Loss on extinguishment of debt represents expenses the Company recorded in connection with its April 2015 refinancing, including write-off of deferred financing costs and original issue discounts associated with the former credit agreement.  The Company has excluded this item from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believes these costs do not directly reflect the performance of its store operations.
(e) Adjusted income tax provision for all periods presented represents the income tax provision plus the tax effect of the adjustments described in notes (a) through (d) above based on statutory tax rates for the period. The company excluded these items from its adjusted income tax provision because management believed they did not directly reflect the ongoing performance of its store operations and were not reflective of its ongoing income tax provision.

Investor Contact:
Susannah Livingston
(602) 682-1584
susannahlivingston@sprouts.com

Media Contact:
Donna Egan
(602) 682-3152
donnaegan@sprouts.com

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Source: Sprouts Farmers Market