Sprouts Farmers Market reported results for the 13-week second quarter

OREANDA-NEWS. 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 growth	3.0% to 4.0%
	Full-Year 2016 Guidance
	52-week to 52-week	53-week to 52-week
Net sales growth	15.5% to 16.5%	13% to 14%
Unit growth	36 new stores	36 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. 

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