Press Release

Sprouts Farmers Market, Inc. Reports Third Quarter 2017 Results

Company Release - 11/2/2017 9:00 AM ET

PHOENIX, Nov. 02, 2017 (GLOBE NEWSWIRE) -- Sprouts Farmers Market, Inc. (Nasdaq:SFM) today reported results for the 13-week third quarter ended October 1, 2017. 

Third Quarter Highlights:

  • Net sales of $1.2 billion; a 16% increase from the same period in 2016
  • Comparable store sales growth of 4.6% and two-year comparable store sales growth of 5.9%
  • Net income of $31 million; a 32% increase from the same period in 2016
  • Diluted earnings per share of $0.23; a 44% increase from the same period in 2016
  • Increased full-year sales, comps and EPS guidance for 2017

“Sprouts is pleased to report strong top-line growth and demonstrate our ability to leverage those sales into exceptional earnings growth for the quarter. Sprouts’ hallmark of fresh, healthy, affordable products continues to resonate with our customers and positions us as a leader in the industry,” said Amin Maredia, chief executive officer of Sprouts Farmers Market. “We’ll continue to accelerate strategic priorities that will enhance our business – from product assortment to the digital experience to customer service. These, coupled with our technology investments to drive efficiencies, will provide the flexibility to make future investments where needed to ensure Sprouts is well-positioned for the future.”

Third Quarter 2017 Financial Results

Net sales for the third quarter of 2017 were $1.2 billion, a 16% increase compared to the same period in 2016. Net sales growth was driven by a 4.6% increase in comparable store sales and strong performance in new stores opened.

Gross profit for the quarter increased 19% to $346 million, resulting in a gross profit margin of 28.7%, an increase of 60 basis points compared to the same period in 2016.  This improvement was primarily driven by cycling a heightened promotional environment in the third quarter of 2016, in addition to leverage from increased comparable store sales.

Direct store expense (“DSE”) for the quarter increased 15% to $250 million, or 20.7% of sales, compared to 20.9% in the same period in 2016.  This leverage is primarily driven by improved comparable store sales, as well as operating efficiencies, partially offset by higher benefit costs.

Selling, general and administrative expenses (“SG&A”) for the quarter increased 35% to $40 million, or 3.3% of sales, compared to 2.9% in the same period in 2016. This primarily reflects higher bonus expense due to improved performance and other corporate costs versus the prior year.

Net income for the quarter was $31 million, a 32% increase compared to net income for the same period in 2016. Diluted earnings per share was $0.23, an increase of $0.07 or 44%, as compared to diluted earnings per share of $0.16 for the same period in 2016. This increase was driven by higher sales and margins, fewer shares outstanding due to our repurchase program and a lower effective tax rate.

Fiscal Year-to-Date Financial Results

For the 39-week period ended October 1, 2017, net sales were $3.5 billion, a 15% increase compared to the same period in 2016.  Growth was driven by a 2.4% increase in comparable store sales and solid performance in new stores opened.  Net income was $119 million, an 11% increase compared to net income for the same period in 2016. Diluted earnings per share was $0.86, an increase of $0.15 or 21%, compared to diluted earnings per share of $0.71 for the same period in 2016.

Growth and Development

During the third quarter of 2017, we opened 8 new stores: one each in Arizona and Florida, and two each in California, Nevada and Tennessee.  Three additional stores have been opened in the fourth quarter to date, resulting in a total of 32 new stores opened year-to-date for a total of 285 stores in 15 states as of November 2, 2017.

Leverage and Liquidity

We generated cash from operations of $259 million year-to-date through October 1, 2017 and invested $151 million in capital expenditures net of landlord reimbursement, primarily for new stores. In addition, we repurchased 3.2 million shares of common stock for a total investment of $72 million during the third quarter. We ended the quarter with a $349 million balance on our revolving credit facility, $25 million of letters of credit outstanding under the facility, $19 million in cash and cash equivalents, and $138 million available under our current share repurchase authorization.  Year-to-date through October 31, 2017, we have repurchased 9.1 million shares of common stock for a total investment of $192 million.

2017 Outlook

The following provides information on our guidance for 2017:

 Full-Year 2017
Current Guidance
  Full-Year 2017
Prior Guidance
Net sales growth14.5% to 15%  13% to 14%
Unit growth32 new stores  32 new stores
Comparable store sales growth2.5% to 3.0%  1.5% to 2.0%
Diluted earnings per share$0.98 to $0.99(1)  $0.88 to $0.92
Capital expendituresApproximately $170M  $155M to $165M
(net of landlord reimbursements)    
     
(1) Guidance includes an estimated effective tax rate of 32.5% for 2017. The lower effective tax rate is due to the 2017 change in accounting standards related to the recognition of excess tax benefits for stock-based compensation and the associated effect of actual and estimated option exercises for the year.

Third Quarter 2017 Conference Call

We will hold a conference call at 7 a.m. Pacific Daylight Time (10 a.m. Eastern Daylight Time) on Thursday, November 2, 2017, during which Sprouts executives will further discuss our third quarter 2017 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: 97150787

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: 97150787.

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 future investments and positioning. 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. specializes in fresh, natural and organic products at prices that appeal to everyday grocery shoppers. Based on the belief that healthy food should be affordable, Sprouts’ welcoming environment and knowledgeable team members continue to drive its growth. Sprouts offers a complete shopping experience that includes an array of fresh produce in the heart of the store, a deli with prepared entrees and side dishes, The Butcher Shop, The Fish Market, an expansive vitamins and supplements department and more. Headquartered in Phoenix, Arizona, Sprouts employs more than 27,000 team members and operates more than 280 stores in 15 states from coast to coast. For more information, visit 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
 Thirty-nine
Weeks Ended
 Thirty-nine
Weeks Ended
  October 1,
2017
 October 2,
2016
 October 1,
2017
 October 2,
2016
         
Net sales $  1,206,059  $  1,035,801  $  3,520,679  $  3,060,685 
Cost of sales, buying and occupancy    859,650     744,288     2,494,998     2,156,857 
Gross profit    346,409     291,513     1,025,681     903,828 
Direct store expenses    250,191     216,932     715,336     617,817 
Selling, general and administrative expenses    39,955     29,664     110,312     91,482 
Store pre-opening costs    2,456     3,446     10,055     11,625 
Store closure and other costs    803     24     992     159 
Income from operations    53,004     41,447     188,986     182,745 
Interest expense    (5,609)    (3,723)    (15,447)    (10,985)
Other income    162     135     388     326 
Income before income taxes    47,557     37,859     173,927     172,086 
Income tax provision    (16,071)    (13,974)    (55,186)    (64,785)
Net income $  31,486  $  23,885  $  118,741  $  107,301 
Net income per share:        
Basic $  0.23  $  0.16  $  0.87  $  0.72 
Diluted $  0.23  $  0.16  $  0.86  $  0.71 
Weighted average shares outstanding:        
Basic    134,320     147,743     136,063     149,202 
Diluted    136,770     150,024     138,860     151,568 


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
 
  October 1, 2017 January 1, 2017
ASSETS  (Unaudited)  
Current assets:    
Cash and cash equivalents $  18,892 $  12,465
Accounts receivable, net    23,231    25,228
Inventories    222,216    204,464
Prepaid expenses and other current assets    25,594    21,869
Total current assets    289,933    264,026
Property and equipment, net of accumulated depreciation    690,763    604,660
Intangible assets, net of accumulated amortization    196,556    197,608
Goodwill    368,078    368,078
Other assets    5,886    5,521
Total assets $  1,551,216 $  1,439,893
LIABILITIES AND STOCKHOLDERS' EQUITY    
Current liabilities:    
Accounts payable $  179,482 $  157,550
Accrued salaries and benefits    41,219    32,859
Other accrued liabilities    60,683    56,376
Current portion of capital and financing lease obligations    8,776    12,370
Total current liabilities    290,160    259,155
Long-term capital and financing lease obligations    126,806    117,366
Long-term debt    349,000    255,000
Other long-term liabilities    126,127    116,200
Deferred income tax liability    42,508    19,263
Total liabilities    934,601    766,984
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, 133,070,570 and 140,256,313 shares issued and outstanding, October 1, 2017 and January 1, 2017, respectively    133    140
Additional paid-in capital    614,232    597,269
Retained earnings    2,250    75,500
Total stockholders' equity    616,615    672,909
Total liabilities and stockholders' equity $  1,551,216 $  1,439,893


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
 Thirty-nine
Weeks Ended
 Thirty-nine
Weeks Ended
 October 1, 2017 October 2, 2016
Cash flows from operating activities   
 $  118,741  $  107,301 
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization expense   70,875     59,997 
Accretion of asset retirement obligation and closed store reserve   168     237 
Amortization of financing fees and debt issuance costs   347     347 
Loss on disposal of property and equipment   820     226 
Equity-based compensation   10,325     10,322 
Deferred income taxes   23,245     20,119 
Changes in operating assets and liabilities:   
Accounts receivable   1,660     (1,336)
Inventories   (17,752)    (29,784)
Prepaid expenses and other current assets   (3,734)    (1,212)
Other assets   (702)    (1,480)
Accounts payable   31,669     24,050 
Accrued salaries and benefits   8,360     (4,959)
Other accrued liabilities and income taxes payable   4,288     (2,762)
Other long-term liabilities   10,659     14,971 
Cash flows from operating activities   258,969     196,037 
    
Cash flows used in investing activities   
Purchases of property and equipment   (158,459)    (142,571)
Proceeds from sale of property and equipment   30     662 
Purchase of leasehold interests    -     (491)
Cash flows used in investing activities   (158,429)    (142,400)
    
Cash flows used in financing activities   
Proceeds from revolving credit facility   134,000     45,000 
Payments on revolving credit facility   (40,000)    - 
Payments on capital and financing lease obligations    (3,053)    (3,144)
Cash from landlord related to financing lease obligations   300     - 
Repurchase of common stock   (192,000)    (187,836)
Proceeds from exercise of stock options   6,640     2,616 
Excess tax benefit for exercise of stock options   -     3,948 
Cash flows used in financing activities   (94,113)    (139,416)
Increase / (Decrease) in cash and cash equivalents   6,427     (85,779)
Cash and cash equivalents at beginning of the period   12,465     136,069 
Cash and cash equivalents at the end of the period$  18,892  $  50,290 

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with accounting principles generally accepted in the United States (“GAAP”), the company has referenced EBITDA. This measure is not in accordance with, and is not intended as an alternative to, GAAP. The company's management believes that this presentation provides 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 this measure for reviewing the financial results of the company and as a component of incentive compensation. The company defines EBITDA as net income before interest expense, provision for income tax, and depreciation, amortization and accretion.

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, non-GAAP measures should not be considered as a measure of discretionary cash available to use to reinvest in the growth of the company’s business, or as a measure of cash that will be available to meet the company’s obligations. Each non-GAAP measure 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 thirty-nine weeks ended October 1, 2017 and October 2, 2016:

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NON-GAAP MEASURE RECONCILIATION
(UNAUDITED)
(IN THOUSANDS)
          
  Thirteen
Weeks Ended
 Thirteen
Weeks Ended
 Thirty-nine
Weeks Ended
 Thirty-nine
Weeks Ended
 
  October 1,
2017
 October 2,
2016
 October 1,
2017
 October 2,
2016
 
          
Net income $  31,486 $  23,885 $  118,741 $  107,301 
Income tax provision    16,071    13,974    55,186    64,785 
Interest expense, net    5,608    3,723    15,447    10,985 
Earnings before interest and taxes (EBIT)    53,165    41,582    189,374    183,071 
Depreciation, amortization and accretion    24,808    21,245    71,043    60,234 
Earnings before interest, taxes, depreciation and amortization (EBITDA) $  77,973 $  62,827 $  260,417 $  243,305 
          


   
Investor Contact: Media Contact: 
Susannah LivingstonDonna Egan                                                                                                       
(602) 682-1584(602) 682-3152 
susannahlivingston@sprouts.com media@sprouts.com 

Source: Sprouts Farmers Market