Press Release

Sprouts Farmers Market, Inc. Reports Third Quarter 2018 Results

Company Release - 11/1/2018 9:00 AM ET

PHOENIX, Nov. 01, 2018 (GLOBE NEWSWIRE) -- Sprouts Farmers Market, Inc. (Nasdaq: SFM) today reported results for the 13-week third quarter ended September 30, 2018. 

Third Quarter Highlights:

  • Net sales of $1.3 billion; a 10% increase from the same period in 2017
  • Comparable store sales growth of 1.5% and two-year comparable store sales growth of 6.1%
  • Net income of $38 million; a 19% increase from the same period in 2017
  • Diluted earnings per share of $0.29; a 26% increase from the same period in 2017
  • Excluding the one-time income tax benefit of $3 million, diluted earnings per share of $0.27; a 17% increase from the same period in 2017
  • Raised the low-end of 2018 net sales and EPS guidance and tightened the comparable store sales growth range

“Robust new store productivity, continued product innovation and strong operations drove a double digit increase in net sales in the third quarter,” said Amin Maredia, chief executive officer of Sprouts Farmers Market. “During this time, we introduced Sprouts’ unique model of health, value and service to two new states where very strong sales demonstrated that our brand continues to resonate well in communities from coast to coast and is firmly positioned for long-term growth.” 

Third Quarter 2018 Financial Results

Net sales for the third quarter of 2018 were $1.3 billion, a 10% increase compared to the same period in 2017. Net sales growth was driven by strong performance in new stores opened and a 1.5% increase in comparable store sales.

Gross profit for the quarter increased 10% to $382 million, resulting in a gross profit margin of 28.8%, an increase of five basis points compared to the same period in 2017. This leverage was primarily driven by higher merchandise margins partially offset by increased occupancy costs.

Direct store expense (“DSE”) for the quarter increased 12% to $281 million, or 21.2% of sales, compared to 20.7% in the same period in 2017. This deleverage was primarily driven by planned wage investments funded by savings from the Tax Cuts and Jobs Act, as well as increased healthcare costs and higher depreciation expense.

Selling, general and administrative expenses (“SG&A”) for the quarter increased 10% to $44 million, or 3.3% of sales, flat as compared to the same period in 2017. This primarily reflects increased strategic investments and advertising expenses offset by lower bonus and stock-based compensation expense.

Net income for the quarter was $38 million and diluted earnings per share was $0.29. During the third quarter of 2018, the company recorded a $3 million discrete income tax benefit from the adoption of a tax calculation method change in conjunction with the Tax Cuts and Jobs Act. Excluding this benefit, adjusted net income was $35 million, an 11% increase compared to net income for the same period in 2017 and diluted earnings per share was $0.27, an increase of $0.04 or 17%, as compared to diluted earnings per share for the same period in 2017. This increase was driven by a lower effective tax rate due to the Tax Cuts and Jobs Act, higher sales, and fewer shares outstanding due to our repurchase program, partially offset by higher planned wage investments.

Fiscal Year-to-Date Financial Results

For the 39-week period ended September 30, 2018, net sales were $3.9 billion, a 12% increase compared to the same period in 2017. Growth was driven by solid performance in new stores opened and a 2.0% increase in comparable store sales. Net income was $146 million and diluted earnings per share was $1.12. Excluding the $3 million discrete income tax benefit discussed above, adjusted net income was $143 million, a 21% increase compared to net income for the same period in 2017 and diluted earnings per share was $1.10, an increase of $0.24 or 28%, compared to diluted earnings per share of $0.86 for the same period in 2017.

Growth and Development

During the third quarter of 2018, we opened 12 new stores: three in California, two in Nevada and one each in Arizona, Oklahoma, Maryland, North Carolina, Texas and our first stores in the states of Pennsylvania and Washington. Two additional stores have been opened in the fourth quarter, resulting in a total of 315 stores in 19 states as of November 1, 2018.

Leverage and Liquidity

We generated cash from operations of $235 million year-to-date through September 30, 2018 and invested $129 million in capital expenditures net of landlord reimbursement, primarily for new stores. We ended the quarter with a $435 million balance on our revolving credit facility, $27 million of letters of credit outstanding under the facility, $17 million in cash and cash equivalents, and $283 million available under our current share repurchase authorization. Year-to-date through October 29, 2018, we have repurchased 8.4 million shares of common stock for a total investment of $193 million.

2018 Outlook

As previously communicated, we are investing $10 million, or approximately one third of our savings from the Tax Cuts and Jobs Act (1) in team member wages and benefits in 2018. The following provides information on our guidance for 2018:

   
 Full-Year 2018
Current Guidance
Full-Year 2018
Prior Guidance
Net sales growth11% to 11.5%10.5% to 11.5%
Unit growth30 storesApproximately 30 stores
Comparable store sales growth1.7% to 2.0%1.5% to 2.5%
Diluted earnings per share$1.28 to $1.30 (1)$1.24 to $1.28
Effective tax rateApproximately 18% (2)19% to 20% (2)
Capital expenditures$160M to $165M$165M to $170M
(net of landlord reimbursements)  
 
Footnotes
 
(1) Including the one-time income tax benefit of $3 million, or $0.02 EPS, from the adoption of a tax calculation method change in conjunction with the Tax Cuts and Jobs Act.
(2) The lower effective tax rate is due to the Tax Cuts and Jobs Act and the tax accounting method change noted above.
 

Third Quarter 2018 Conference Call

We will hold a conference call at 7 a.m. Pacific Daylight Time (10 a.m. Eastern Daylight Time) on Thursday, November 1, 2018, during which Sprouts executives will further discuss our third quarter 2018 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: 8892508

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: 8892508.

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 opportunities. 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 28,000 team members and operates more than 300 stores in 19 states from coast to coast. Visit about.sprouts.com for more information.

 
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
  Thirteen Weeks Ended  Thirty-nine Weeks Ended 
  September 30,
2018
  October 1,
2017
  September 30,
2018
  October 1,
2017
 
Net sales $1,329,109  $1,206,059  $3,937,998  $3,520,679 
Cost of sales, buying and occupancy  946,734   859,650   2,788,159   2,494,998 
Gross profit  382,375   346,409   1,149,839   1,025,681 
Direct store expenses  281,365   250,191   816,933   715,336 
Selling, general and administrative expenses  43,944   39,955   128,828   110,312 
Store pre-opening costs  3,819   2,456   9,414   10,055 
Store closure and other costs  461   803   497   992 
Income from operations  52,786   53,004   194,167   188,986 
Interest expense  (7,419)  (5,609)  (20,028)  (15,447)
Other income     162   325   388 
Income before income taxes  45,367   47,557   174,464   173,927 
Income tax provision  (7,867)  (16,071)  (28,631)  (55,186)
Net income $37,500  $31,486  $145,833  $118,741 
Net income per share:                
Basic $0.30  $0.23  $1.13  $0.87 
Diluted $0.29  $0.23  $1.12  $0.86 
Weighted average shares outstanding:                
Basic  126,855   134,320   129,572   136,063 
Diluted  127,627   136,770   130,537   138,860 


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
 
  September 30,
2018
  December 31,
2017
 
ASSETS        
Current assets:        
Cash and cash equivalents $17,175  $19,479 
Accounts receivable, net  34,631   25,893 
Inventories  253,045   229,542 
Prepaid expenses and other current assets  37,523   24,593 
Total current assets  342,374   299,507 
Property and equipment, net of accumulated depreciation  773,348   713,031 
Intangible assets, net of accumulated amortization  195,154   196,205 
Goodwill  368,078   368,078 
Other assets  16,010   4,782 
Total assets $1,694,964  $1,581,603 
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Accounts payable and other accrued liabilities $245,928  $244,853 
Accrued salaries and benefits  43,433   45,623 
Current portion of capital and financing lease obligations  7,398   9,238 
Total current liabilities  296,759   299,714 
Long-term capital and financing lease obligations  120,670   125,489 
Long-term debt  435,000   348,000 
Other long-term liabilities  144,401   130,640 
Deferred income tax liability  56,839   27,066 
Total liabilities  1,053,669   930,909 
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,
  127,603,836 shares issued and outstanding, September 30, 2018;
  132,823,981 shares issued and outstanding, December 31, 2017
  127   132 
Additional paid-in capital  653,509   620,788 
Accumulated other comprehensive income (loss)  4,567   (784)
(Accumulated deficit) retained earnings  (16,908)  30,558 
Total stockholders' equity  641,295   650,694 
Total liabilities and stockholders' equity $1,694,964  $1,581,603 


SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
 
  Thirty-nine Weeks Ended 
  September 30,
2018
  October 1,
2017
 
Cash flows from operating activities        
Net income $145,833  $118,741 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization expense  81,959   70,875 
Accretion of asset retirement obligation and closed store reserve  219   168 
Amortization of financing fees and debt issuance costs  658   347 
Loss on disposal of property and equipment  404   820 
Equity-based compensation  11,673   10,325 
Deferred income taxes  29,773   23,245 
Changes in operating assets and liabilities:        
Accounts receivable  (10,299)  1,660 
Inventories  (23,503)  (17,752)
Prepaid expenses and other current assets  (13,758)  (3,734)
Other assets  (3,945)  (702)
Accounts payable and other accrued liabilities  3,240   35,957 
Accrued salaries and benefits  (2,130)  8,360 
Other long-term liabilities  15,342   10,659 
Cash flows from operating activities  235,466   258,969 
Cash flows used in investing activities        
Purchases of property and equipment  (148,433)  (158,459)
Proceeds from sale of property and equipment  1   30 
Cash flows used in investing activities  (148,432)  (158,429)
Cash flows used in financing activities        
Proceeds from revolving credit facilities  180,000   134,000 
Payments on revolving credit facilities  (93,000)  (40,000)
Payments on capital and financing lease obligations  (3,349)  (3,053)
Payments of deferred financing costs  (2,131)   
Cash from landlords related to capital and financing lease obligations  2,113   300 
Repurchase of common stock  (193,307)  (192,000)
Proceeds from exercise of stock options  21,051   6,640 
Other  (59)   
Cash flows used in financing activities  (88,682)  (94,113)
(Decrease) increase in cash, cash equivalents, and restricted cash  (1,648)  6,427 
Cash, cash equivalents and restricted cash at beginning of the period  19,479   12,465 
Cash, cash equivalents and restricted cash at the end of the period $17,831  $18,892 
 

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with accounting principles generally accepted in the United States (“GAAP”), the company presents 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 and net income excluding a one-time tax benefit(1) to net income for the thirteen and thirty-nine weeks ended September 30, 2018 and October 1, 2017:

 
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NON-GAAP MEASURE RECONCILIATION
(UNAUDITED)
(IN THOUSANDS)
 
  Thirteen Weeks Ended  Thirty-nine Weeks Ended 
  September
30, 2018
  October 1,
2017
  September
30, 2018
  October 1,
2017
 
Net income $37,500  $31,486  $145,833  $118,741 
Income tax provision  7,867   16,071   28,631   55,186 
Interest expense, net  7,411   5,608   20,015   15,447 
Earnings before interest and taxes (EBIT)  52,778   53,165   194,479   189,374 
Depreciation, amortization and accretion  28,202   24,808   82,178   71,043 
Earnings before interest, taxes, depreciation and
   amortization (EBITDA)
 $80,980  $77,973  $276,657  $260,417 
                 
Net income $37,500  $31,486  $145,833  $118,741 
Plus: One time tax benefit (1)  (2,573)  -   (2,573)  - 
Net income excluding one time tax benefit $34,927  $31,486  $143,260  $118,741 
                 
Diluted earnings per share excluding one time tax benefit $0.27  $0.23  $1.10  $0.86 
                 
Diluted Weighted Average Shares Outstanding  127,627   136,770   130,537   138,860 
 
(1) During the quarter ended September 30, 2018 the company adopted a tax calculation method change for the accelerated deduction of certain items, resulting in a discrete tax benefit of $3 million that was recognized in the third quarter of 2018.
 

Source: Sprouts Farmers Market, Inc.
Phoenix, AZ
11/1/18

  
  
Investor Contact: Media Contact:
Susannah Livingston 
(602) 682-1584(602) 682-3173
susannahlivingston@sprouts.commedia@sprouts.com

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Source: Sprouts Farmers Market