Sprouts Farmers Market, Inc. Reports Second Quarter 2014 Results

Sprouts Farmers Market, Inc. Reports Second Quarter 2014 Results  PHOENIX, Aug. 7, 2014 (GLOBE NEWSWIRE) -- Sprouts Farmers Market, Inc. (the "Company") (Nasdaq:SFM) today reported results for its 13-week second quarter ended June 29, 2014.  Second Quarter Highlights:    *Net sales of $743.8 million; a 20% increase from the same period in 2013   *Comparable store sales growth of 9.5% and two-year combined pro forma     comparable store sales growth of 20.3%   *Net income increased to $30.2 million with diluted earnings per share of     $0.20   *Adjusted net income increased 68% to $30.2 million; compared to $18.0     million from the same period in 2013   *Adjusted diluted earnings per share increased 43% to $0.20; compared to     $0.14 from the same period in 2013   *Adjusted EBITDA of $69.1 million; a 31% increase from adjusted EBITDA from     the same period in 2013   *Increased the Company's guidance for 2014  "We are very proud of our continuing strong sales growth during the quarter and ability to leverage those sales into outstanding earnings improvement," said Doug Sanders, president and chief executive officer of Sprouts Farmers Market. "These results give us confidence to increase our financial outlook for the year. During the quarter, we opened our first store in the Southeast with tremendous response from customers. The early positive reception reinforces the broad appeal of our healthy, value-focused model and demonstrates our ability to deliver on our growth strategy."  In order to aid understanding of 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 adjusted net income, adjusted diluted earnings per share and adjusted EBITDA, which are non-GAAP measures that are explained and reconciled to the comparable GAAP measures in the tables included in this release. Where applicable, the numbers below are first presented on a GAAP basis and then on an adjusted basis.  Second Quarter 2014 Financial Results  Net sales in the second quarter of 2014 were $743.8 million, or a 20% increase compared to the same period in 2013. Net sales growth was driven by strong performance in new stores opened, including the Company's first new store in the Atlanta market, and a 9.5% increase in comparable store sales growth.  Gross profit for the quarter increased 20% to $224.0 million resulting in a gross profit margin of 30.1% of sales, consistent with the same period in 2013. Leverage in occupancy, utilities and buying costs were offset by lower merchandise margins from increased promotional activities and higher inflation in certain categories.  Direct store expenses as a percentage of sales for the quarter decreased 60 basis points to 19.2% compared to the same period in 2013. This was primarily due to leverage in labor and depreciation, and also a decrease in insurance expense.  Selling, general and administrative expenses as a percentage of sales for the quarter decreased 20 basis points to 3.1% compared to the same period in 2013. This was primarily due to leverage in advertising.  Net income for the quarter was $30.2 million, or diluted earnings per share of $0.20, up $17.7 million from the same period in 2013. Net income for the second quarter of 2013 included a pre-tax loss on extinguishment of debt of $8.2 million. Excluding adjustments for the quarter, adjusted net income increased 68% to $30.2 million, compared to $18.0 million in the same period in 2013, and adjusted EBITDA totaled $69.1 million, up $16.4 million, or 31%, from the same period in 2013. These increases were driven by higher sales and operating leverage. In addition, net income benefited from lower interest expense due to a lower principal balance on our term loan and a decrease of interest expense from our April 2013 refinancing. Adjusted diluted earnings per share was $0.20, a 43% increase from adjusted diluted earnings per share of $0.14 from the same period in 2013.  Fiscal Year-to-Date Financial Results  For the 26-week period ended June 29, 2014, net sales were $1.5 billion, or a 23% increase compared to the same period in 2013. Growth was driven by an 11.1% increase in comparable store sales growth and strong performance in new stores opened. Net income was $63.9 million, up $33.3 million from the same period in 2013. Net income year-to-date included $1.4 million pre-tax secondary offering expenses; $0.3 million pre-tax store closure and exit costs; and $1.0 million pre-tax loss on disposal of assets. Net income for 2013 included $1.7 million pre-tax store closure and exit costs, and a pre-tax loss on extinguishment of debt of $8.2 million. Excluding these items, adjusted net income increased 79% to $65.6 million compared to $36.5 million in the same period in 2013.Adjusted EBITDA totaled $146.6 million, up $41.8 million or 40% from the same period in 2013. Adjusted diluted earnings per share was $0.43, a 54% increase from adjusted diluted earnings per share of $0.28 from the same period in 2013.  Growth and Development  During the second quarter of 2014, the Company opened six new stores – two in Nevada, and one each in Arizona, California, Colorado and Georgia.Five additional stores, including the Company's second store in Atlanta, have been opened in the third quarter to date, bringing 2014 new store openings to 15 for a total of 182 stores in ten states as of August 7, 2014.The Company expects to open a total of 24 stores during 2014.  Leverage and Liquidity  The Company generated cash from operations of $137.9 million year-to-date through June 29, 2014 and invested $57.8 million in capital expenditures, primarily for new stores. The Company ended the quarter with a principal balance on its term loan of $314.8 million, $184.3 million in cash and cash equivalents and $52.6 million available under its revolving credit facility.   2014 Outlook  The following provides updated information on the Company's guidance for 2014:                                                           Q3 2014                                                          Guidance Comparable store sales growth                             8.5% to 9.5% Two-year combined pro forma comparable store sales growth 18.5% to 19.5%                                                                                                       Full-year 2014   Full-year 2014                                           Current Guidance Prior Guidance Net sales growth                           19% to 20%       18% to 20% Unit growth                                24 new stores    23 to 24 new sores Comparable store sales growth             8.5% to 9.5%     8.5% to 9.5% Adjusted EBITDA growth                     25% to 27%       23% to 25% Adjusted net income growth                 45% plus         40% plus Adjusted diluted earnings per share ^(1)   $0.65 to $0.67   $0.63 to $0.65 Adjusted diluted earnings per share growth 35% to 40%       31% to 35% ^(1) Capital expenditures                      $110M to $120M   $110M to $120M (net of landlord reimbursements)                            The Company's adjusted diluted earnings per share, adjusted net income and adjusted EBITDA guidance for the year do not include charges and costs which are expected to be similar to those charges and costs excluded from adjusted diluted earnings per share, adjusted net income and adjusted EBITDA in prior periods. Please see the explanation and reconciliation of these non-GAAP measures to the comparable GAAP measures for the thirteen weeks ended June 29, 2014 and June 30, 2013 in the tables included below.  ^(1) Based on a weighted average share count of approximately 154 million shares for 2014.  Second Quarter 2014 Conference Call  The Company will hold a conference call at 2 p.m. Pacific Daylight Time (5 p.m. Eastern Daylight Time) on Thursday, August 7, 2014, during which Sprouts' executives will further discuss the Company's second quarter 2014 financial results.  A webcast of the conference call will be available through Sprouts' investor webpage located at http://investors.sprouts.com. For those participating via teleconference, the phone number for the call is 1-877-398-9481 (U.S.) or 1-408-337-0130 (international), and the passcode is 70930427.Participants are encouraged to dial in 10 minutes early.A replay of the event will remain available for two weeks and can be accessed by dialing 1-855-859-2056 (toll-free) or 1-404-537-3406 (international) and entering the confirmation code: 70930427. An archive of the webcast will be available for one year at http://investors.sprouts.com, under "Events and Presentations."  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 to the effect that the Company believes that the early positive reception to its expansion reinforces the broad appeal of the Company's healthy, value-focused model and demonstrates its ability to deliver on its growth strategy, the Company's expected new store openings and the Company's guidance and outlook for 2014. 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.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. We offer a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, baked goods, dairy products, frozen foods, natural body care and household items catering to consumers' growing interest in health and wellness. Recently named one of the top five supermarket chains by Consumer Reports and headquartered in Phoenix, Arizona, Sprouts employs more than 17,000 team members and operates more than 180 stores in ten states. 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        Twenty-Six Weeks Ended                       June 29, 2014 June 30, 2013 June 29, 2014 June 30, 2013                                                               Net sales              $743,810    $622,367    $1,466,416  $1,196,061 Cost of sales, buying  519,762      435,340      1,018,509    835,114 and occupancy Gross profit           224,048      187,027      447,907      360,947 Direct store expenses  143,155      122,985      281,386      237,646 Selling, general and administrative         23,100       20,728       45,579       37,452 expenses Store pre-opening      2,420        2,303        3,367        4,017 costs Store closure and exit (200)        933          333          1,708 costs Income from operations 55,573       40,078       117,242      80,124                                                               Interest expense       (6,520)      (11,391)     (12,987)     (21,556) Other income           100          111          196          244 Loss on extinguishment -            (8,175)      -            (8,175) of debt Income before income   49,153       20,623       104,451      50,637 taxes Income tax provision   (19,002)     (8,155)      (40,567)     (20,052) Net income             $30,151     $12,468     $63,884     $30,585 Net income per share:                                          Basic                  $0.20       $0.10       $0.43       $0.24 Diluted                $0.20       $0.10       $0.42       $0.24 Weighted average                                               shares outstanding: Basic                  149,681      125,958      148,720      125,963 Diluted                154,039      129,716      153,670      129,438   SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)                                                     June 29,     December 29,                                                      2014        2013 ASSETS                                                            Current assets:                                                   Cash and cash equivalents                            $184,273   $77,652 Accounts receivable, net                             11,283      9,524 Inventories                                          134,655     118,256 Prepaid expenses and other current assets            2,523       8,049 Deferred income tax asset                            8,038       18,146 Total current assets                                 340,772     231,627 Property and equipment, net of accumulated           399,328     348,830 depreciation Intangible assets, net of accumulated amortization   194,821     195,467 Goodwill                                             368,078     368,078 Deferred income tax asset                            14,349      15,267 Other assets                                         13,580      13,135 Total assets                                         $1,330,928 $1,172,404                                                                  LIABILITIES AND STOCKHOLDERS' EQUITY                              Accounts payable                                     $159,267   $111,159 Accrued salaries and benefits                        23,146      22,287 Other accrued liabilities                            33,552      32,958 Current portion of capital and financing lease       5,097       3,395 obligations Current portion of long-term debt                    5,837       5,822 Total current liabilities                            226,899     175,621 Long-term capital and financing lease obligations    119,130     116,177 Long-term debt                                       302,495     305,418 Other long-term liabilities                          70,754      61,417 Total liabilities                                    719,278     658,633 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, 149,743,668 and 147,616,560 shares       149         147 issued and outstanding, June 29, 2014 and December 29, 2013, respectively Additional paid-in capital                           513,120     479,127 Retained earnings                                    98,381      34,497 Total stockholders' equity                           611,650     513,771 Total liabilities and stockholders' equity           $1,330,928 $1,172,404   SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)                                                   Twenty-Six Weeks Ended                                                   June 29, 2014 June 30, 2013 Cash flows from operating activities                             Net income                                         $63,884     $30,585 Adjustments to reconcile net income to net cash                  provided by operating activities: Depreciation and amortization expense              26,071       22,639 Accretion of asset retirement obligation           83           71 Amortization of financing fees and debt issuance   785          1,479 costs Loss on disposal of property and equipment         994          8 Gain on sale of intangible assets                  -            (19) Equity-based compensation                          2,995        2,665 Non-cash loss on extinguishment of debt            -            7,976 Deferred income taxes                              11,025       14,070 Changes in operating assets and liabilities:                     Accounts receivable                                (1,860)      (792) Inventories                                        (16,399)     (10,761) Prepaid expenses and other current assets          5,524        922 Other assets                                       (636)        163 Accounts payable                                   34,012       28,383 Accrued salaries and benefits                      859          (2,404) Other accrued liabilities                          594          (4,939) Other long-term liabilities                        9,958        6,503 Net cash provided by operating activities          137,889      96,549                                                                 Cash flows from investing activities                             Purchases of property and equipment                (57,793)     (51,676) Proceeds from sale of intangible assets            -            172 Proceeds from sale of property and equipment       115          2 Net cash used in investing activities              (57,678)     (51,502)                                                                 Cash flows from financing activities                             Borrowings on term loan, net of financing costs    -            688,127 Payments on term loan                              (3,500)      (405,100) Payments on senior subordinated notes              -            (35,000) Payments on capital lease obligations              (244)        (243) Payments on financing lease obligations            (1,423)      (1,398) Payments on deferred financing costs               -            (1,370) Payments on prepaid IPO costs                      -            (970) Cash from landlords related to financing lease     577          881 obligations Payment to stockholders and optionholders          -            (295,921) Excess tax benefit for exercise of stock options   26,214       4,402 and antidilution payment to optionholders Repurchase of shares                               -            (113) Proceeds from the exercise of stock options        4,786        75 Net cash provided by (used in) financing           26,410       (46,630) activities Net increase (decrease) in cash and cash           106,621      (1,583) equivalents Cash and cash equivalents at beginning of the      77,652       67,211 period Cash and cash equivalents at the end of the period $184,273    $65,628  Non-GAAP Financial Measures  In addition to reporting financial results in accordance with GAAP, the Company has presented 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 adjusted net income as net income excluding store closure and exit costs, one-time costs associated with its combination with Henry's Holdings, LLC (the "Henry's Transaction") and its acquisition of Sunflower Farmers Market, Inc. (the "Sunflower Transaction," and together with the Henry's Transaction, the "Transactions"), gain and losses from disposal of assets and the loss of extinguishment of debt. The Company defines adjusted diluted earnings per share as adjusted net income divided by the weighted average diluted shares outstanding. The Company defines EBITDA as net income before interest expense, provision for income tax, and depreciation and amortization, and defines adjusted EBITDA as EBITDA excluding store closure and exit costs, one-time costs associated with the Transactions, gains and losses from disposal of assets and the loss on extinguishment of debt.  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 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 29, 2014 and net income for the thirteen and twenty-six weeks ended June 30, 2013:                            Thirteen Weeks Ended    Twenty-Six Weeks Ended                           June 29, 2014 June 30,  June 29, 2014 June 30, 2013                                          2013                                                               Net income                 $30,151     $12,468 $63,884     $30,585 Income tax provision       19,002       8,155    40,567       20,052 Net income before income   49,153       20,623   104,451      50,637 taxes Store closure and exit     (200)        933      333          1,708 costs (a) Costs associated with acquisitions and           -            -        -            (16) integration Loss/(gain) on disposal of 267          (2)      994          6 assets (b) Secondary offering expenses including         42           -        1,446        - employment taxes on options exercises (c) Loss on extinguishment of  -            8,175    -            8,175 debt (d) Adjusted income tax        (19,044)     (11,756) (41,644)     (23,962) provision (e) Adjusted net income        30,218       17,973   65,580       36,548 Interest expense, net      6,520        11,390   12,987       21,550 Adjusted income tax        19,044       11,756   41,644       23,962 provision (e) Adjusted earnings before   55,782       41,119   120,211      82,060 interest and taxes (EBIT) Depreciation, amortization 13,322       11,598   26,357       22,710 and accretion Adjusted earnings before interest, taxes,           $69,104     $52,717 $146,568    $104,770 depreciation and amortization (EBITDA)                                                                                                                             Adjusted Net Income Per                                        Share                                                               Net income per share -     $0.20       $0.10   $0.43       $0.24 basic Per share impact of net    $-          $0.04   $0.01       $0.05 income adjustments Adjusted net income per    $0.20       $0.14   $0.44       $0.29 share - basic                                                               Net income per share -     $0.20       $0.10   $0.42       $0.24 diluted Per share impact of net    $-          $0.04   $0.01       $0.04 income adjustments Adjusted net income per    $0.20       $0.14   $0.43       $0.28 share - diluted  (a) Store closure and exit costs have been excluded from adjusted EBITDA, and from adjusted net income. For the thirteen weeks ended June 29, 2014 these costs included the benefit of a write-off of a liability related to our former warehouse and ongoing expenses related to prior closures.For the twenty-six weeks ended June 29, 2014, these costs included relocation of one store, the benefit of the write-off of a liability related to our former warehouse and ongoing expenses related to prior closures. For the thirteen and twenty-six weeks ended June 30, 2013 these consist primarily of the costs to close a former Sunflower warehouse following the Sunflower Transaction and adjustments to sublease estimates for stores and facilities already closed.  (b)Loss/(gain) on disposal of assets represents the gains and losses recorded in connection with the disposal of property and equipment.The Company excludes 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 believes these costs do 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 has excluded these items 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.  (d)Loss on extinguishment of debt represents expenses the Company recorded in connection with its April 2013 refinancing including write-off of deferred financing costs and original issue discounts associated with 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 has excluded these items from its adjusted income tax provision because management believes they do not directly reflect the ongoing performance of its store operations and are not reflective of its ongoing income tax provision.  CONTACT: Investor Contact:          Susannah Livingston          (602) 682-1584          susannahlivingston@sprouts.com                   Media Contact:          Donna Egan          (602) 682-3152          donnaegan@sprouts.com  Sprouts Farmers Market Logo  
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