在2022年3月，公司的董事會通過了Sprouts Farmers Market, Inc. 2022年綜合激勵補償計劃（「2022激勵計劃」），該計劃於2022年5月25日經公司股東批准後生效。2022激勵計劃爲公司的團隊成員、爲公司提供服務的某些顧問和顧問，以及公司董事會的非員工成員提供了獲得股權獎勵的機會，包括股票期權、限制性股票單位（RSUs）、績效股票獎勵（PSAs）和其他基於股票的獎勵。2022激勵計劃取代了2013激勵計劃（如下所述）。
PSAs granted in 2022 are subject to the Company achieving certain EBIT performance targets for the 2024 fiscal year. The criteria is based on a range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (March 2025).
PSAs granted in 2023 are subject to the Company achieving certain EBIT performance targets for the 2025 fiscal year. The criteria is based on a range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (March 2026).
PSAs granted in 2024 are subject to the Company achieving certain EBIT performance targets for the 2026 fiscal year. The criteria is based on a range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (March 2027).
The Company presents share-based compensation expense in selling, general and administrative expenses on the Company’s consolidated statements of income. The amount recognized was as follows:
Thirteen weeks ended
Thirty-nine weeks ended
September 29, 2024
October 1, 2023
September 29, 2024
October 1, 2023
Share-based compensation expense
$
6,659
$
5,270
$
19,925
$
14,731
The following share-based awards were outstanding under the 2022 and 2013 Incentive Plans as of September 29, 2024 and October 1, 2023:
As of
September 29, 2024
October 1, 2023
(in thousands)
Options
Vested
454
567
Unvested
317
469
RSUs
618
897
PSAs
370
471
As of September 29, 2024, total unrecognized compensation expense and remaining weighted average recognition period related to outstanding share-based awards were as follows:
Unrecognized compensation expense
Remaining weighted average recognition period
Options
$
4,037
1.7
RSUs
21,131
1.6
PSAs
10,530
1.4
Total unrecognized compensation expense at September 29, 2024
$
35,698
During the thirty-nine weeks ended September 29, 2024 and October 1, 2023, the Company received $4.7 million and $8.8 million, respectively, in cash proceeds from the exercise of options.
11. Goodwill
The Company’s goodwill balance was $381.8 million and $381.7 million as of September 29, 2024 and December 31, 2023, respectively. As of September 29, 2024 and December 31, 2023, the Company had no accumulated goodwill impairment losses. The goodwill was related to the acquisitions of Henry’s Farmers Market and Sunflower Farmers Market in 2011 and 2012, respectively, and the acquisition of Ronald Cohn, Inc. in 2023. For further details, see Note 13, "Business Combination".
In February 2023, the Company's board of directors approved the closing of 11 stores, all of which were closed during 2023. These stores, on average, were approximately 30% larger than the Company's current prototype format and were underperforming financially. The closure of these stores resulted in a charge of $27.8 million during the thirty-nine weeks ended October 1, 2023 related to the impairment of leasehold improvements and right-of-use assets and was reflected in Store closure and other costs, net on the consolidated statements of income. The impairment charge represented the excess of the carrying value over the estimated fair value of each store's asset group. Accelerated depreciation on the closed stores' assets during 2023 was $5.9 million, and was reflected in Depreciation and amortization on the consolidated statements of income. Severance expense during 2023 was immaterial.
13. Business Combination
On March 20, 2023, the Company completed its acquisition of Ronald Cohn, Inc., a corporation that owned two stores located in California operating under the ‘Sprouts Farmers Market’ name pursuant to a legacy trademark license arrangement. The aggregate consideration paid in the transaction consisted of 0.6 million of the Company’s common shares valued at $18.1 million using the closing price of the Company's common stock on March 20, 2023 and cash consideration of $13.0 million.
The Company accounted for this transaction as a business combination in accordance with the acquisition method of accounting, which requires that the purchase price be allocated to the assets and liabilities acquired based on their estimated fair values as of the acquisition date. Acquisition-related costs were immaterial and were expensed as incurred. The financial results of the acquired stores have been included in the Company’s consolidated financial statements from the date of acquisition. The acquired stores' results of operations were not material to the Company's consolidated results.
The net purchase price was allocated to the net tangible assets of ($4.9) million and a reacquired right intangible asset of $23.1 million based on their fair values on the acquisition date. The remaining unallocated net purchase price of $12.9 million was recorded as goodwill. Goodwill represents the future economic benefits to the Company from the acquisition, which include the Company's ability to fully control the Sprouts Farmers Market brand by termination of the legacy trademark license agreement and allowing further expansion opportunities in Southern California. The goodwill is not expected to be deductible for tax purposes. The final allocation of the purchase price consideration to the assets acquired and liabilities assumed has been completed and included an immaterial amount of measurement period adjustments.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the 2023 fiscal year, filed on February 22, 2024 (“Form 10-K”) with the Securities and Exchange Commission. All dollar amounts included below are in thousands, unless otherwise noted.
Business Overview
Sprouts Farmers Market offers a unique specialty grocery experience featuring an open layout with fresh produce at the heart of the store. Sprouts inspires wellness naturally with a carefully curated assortment of better-for-you products paired with purpose-driven people. We continue to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and gluten-free. From our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. Headquartered in Phoenix with 428 stores in 23 states as of September 29, 2024, we are one of the largest and fastest growing specialty retailers of fresh, natural and organic food in the United States.
Our Growth Strategy
We continue to execute on our long-term growth strategy that we believe is transforming our company and driving profitable growth, focusing on the following areas:
•Win with Target Customers. We are focusing attention on our target customers, identified through research as ‘health enthusiasts’ and ‘selective shoppers’, where there is ample opportunity to gain share within these customer segments. We believe our business can continue to grow by leveraging existing strengths in a unique assortment of better-for-you, quality products and by providing a full omnichannel offering through delivery or pickup via our website or the Sprouts app.
•Update Format and Expand in Select Markets. We are delivering unique smaller stores with expectations of stronger returns, while maintaining the approachable, fresh-focused farmer’s market heritage Sprouts is known for. From 2021 through September 29, 2024, we opened 63 new stores and remodeled one store featuring our new format. Our geographic store expansion and new store placement will intersect where our target customers live, in markets with growth potential and supply chain support, which we believe will provide a long runway of approximately 10% annual unit growth.
•Create an Advantaged Fresh Supply Chain. We believe our network of fresh distribution centers can drive efficiencies across the chain and support our growth plans. To further deliver on our fresh commitment and reputation, as well as to increase our local offerings and improve financial results, we aspire to ultimately position fresh distribution centers within a 250-mile radius of stores. Following the opening of two fresh distribution centers in fiscal 2021 and the relocation of our Southern California distribution center, closure of our Georgia distribution center and partnership with a third-party fresh distribution center in the Northeast in fiscal 2023, we are better leveraging our existing distribution center capacity, and approximately 80% of our stores were within 250 miles of a distribution center as of September 29, 2024.
•Refine Brand and Marketing Approach. We believe we are elevating our national brand recognition and positioning by telling our unique brand story rooted in product innovation and differentiation. We are increasing our use of data analytics and insights. We believe this data-driven intelligence will increase customer engagement through personalization efforts with digital and social connections to drive additional sales growth and loyalty.
•Inspire and Engage Our Talent to Create a Best Place to Work. Subsequent to the initial launch of our long-term growth strategy, we have added the focus area of inspiring and engaging our talent through our culture, acquisition and development and total rewards program to attract and retain the talent we believe we need to execute on our strategic goals and transform our company into a premier place to work.
•Deliver on Financial Targets and Box Economics. We are measuring and reporting on the success of this strategy against a number of long-term financial and operational targets. With the implementation of our strategy beginning in 2020, we have significantly improved our margin structure above our 2019 baseline.
Results of Operations for Thirteen Weeks Ended September 29, 2024 and October 1, 2023
The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted.
Thirteen weeks ended
September 29, 2024
October 1, 2023
Unaudited Quarterly Consolidated Statement of Income Data:
Net sales
$
1,945,735
$
1,713,282
Cost of sales
1,204,812
1,087,848
Gross profit
740,923
625,434
Selling, general and administrative expenses
580,332
502,801
Depreciation and amortization (exclusive of depreciation included in cost of sales)
34,408
31,802
Store closure and other costs, net
3,732
3,176
Income from operations
122,451
87,655
Interest (income) expense, net
(1,061)
1,698
Income before income taxes
123,512
85,957
Income tax provision
31,902
20,644
Net income
$
91,610
$
65,313
Weighted average shares outstanding - basic
100,148
101,881
Diluted effect of equity-based awards
877
822
Weighted average shares and equivalent shares outstanding - diluted
Comparison of Thirteen Weeks Ended September 29, 2024 to Thirteen Weeks Ended October 1, 2023
Net sales
Thirteen weeks ended
September 29, 2024
October 1, 2023
Change
% Change
Net sales
$
1,945,735
$
1,713,282
$
232,453
14
%
Comparable store sales growth
8.4
%
3.9
%
Net sales during the thirteen weeks ended September 29, 2024 totaled $1.9 billion, an increase of $232.5 million or 14%, compared to the thirteen weeks ended October 1, 2023. The sales increase was driven by sales from new stores opened in the last twelve months and a 8.4%increase in comparable store sales. Comparable stores contributed approximately 94% of total sales for the thirteen weeks ended September 29, 2024 and approximately 95% of total sales for the thirteen weeks ended October 1, 2023.
Cost of sales and gross profit
Thirteen weeks ended
September 29, 2024
October 1, 2023
Change
% Change
Net sales
$
1,945,735
$
1,713,282
$
232,453
14
%
Cost of sales
1,204,812
1,087,848
116,964
11
%
Gross profit
740,923
625,434
115,489
18
%
Gross margin
38.1
%
36.5
%
1.6
%
Gross profit totaled $740.9 million during the thirteen weeks ended September 29, 2024, an increase of $115.5 million or 18%, compared to the thirteen weeks ended October 1, 2023, driven by increased sales volume. Gross margin increased by 1.6% to 38.1% for the thirteen weeks ended September 29, 2024, compared to 36.5% for the thirteen weeks ended October 1, 2023, primarily driven by improved inventory management and robust sales.
Selling, general and administrative expenses
Thirteen weeks ended
September 29, 2024
October 1, 2023
Change
%Change
Selling, general and administrative expenses
$
580,332
$
502,801
$
77,531
15
%
Percentage of net sales
29.8
%
29.3
%
0.5
%
Selling, general and administrative expenses increased $77.5 million or 15%, compared to the thirteen weeks ended October 1, 2023. The increase was primarily due to the increase in new stores opened since the comparable period last year. As a percentage of net sales, selling, general and administrative expenses increased slightly as a result of higher incentive compensation costs and ecommerce fees due to strong sales performance and higher professional fees and other costs incurred related to strategic initiatives.
Depreciation and amortization expense (exclusive of depreciation included in cost of sales) was $34.4 million for the thirteen weeks ended September 29, 2024, compared to $31.8 million for the thirteen weeks ended October 1, 2023. Depreciation and amortization expense primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment for new stores as well as remodel initiatives in older stores.
Store closure and other costs, net
Thirteen weeks ended
September 29, 2024
October 1, 2023
Change
% Change
Store closure and other costs, net
$
3,732
$
3,176
$
556
18
%
Percentage of net sales
0.2
%
0.2
%
—
%
Store closure and other costs, net for the thirteen weeks ended September 29, 2024 of $3.7 million and for the thirteen weeks ended October 1, 2023 of $3.2 million was primarily related to ongoing occupancy costs associated with our closed store locations. See Note 12, “Store Closures” of our unaudited consolidated financial statements.
Interest (income) expense, net
Thirteen weeks ended
September 29, 2024
October 1, 2023
Change
%Change
Long-term debt
$
208
$
2,688
$
(2,480)
(92)
%
Finance leases
183
192
(9)
(5)
%
Deferred financing costs
193
193
—
0
%
Interest income and other
(1,645)
(1,375)
(270)
20
%
Total interest (income) expense, net
$
(1,061)
$
1,698
$
(2,759)
(162)
%
The decrease in interest (income) expense, net for the thirteen weeks ended September 29, 2024 compared to the thirteen weeks ended October 1, 2023 was primarily due to lower average debt outstanding and higher interest income driven by higher interest rates. See Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements.
Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:
Thirteen weeks ended
September 29, 2024
October 1, 2023
Federal statutory rate
21.0
%
21.0
%
Change in income taxes resulting from:
State income taxes, net of federal benefit
5.2
%
5.0
%
Enhanced charitable contributions
(1.0)
%
(1.4)
%
Federal credits
(0.3)
%
(0.5)
%
Share-based payment awards
(1.4)
%
(1.3)
%
Return to Provision
0.2
%
(0.9)
%
Non-deductible Executive Compensation
1.9
%
1.6
%
Other, net
0.2
%
0.5
%
Effective tax rate
25.8
%
24.0
%
The effective tax rate increased to 25.8% for the thirteen weeks ended September 29, 2024 from 24.0% for the thirteen weeks ended October 1, 2023. The increase in the effective tax rate was primarily due to an increase in non-deductible executive compensation, an unfavorable current year return-to-provision true-up compared to the favorable prior year period true-up, and the increase in pre-tax income outpacing the increase to the benefit from enhanced inventory donations deductions.
Net income
Thirteen weeks ended
September 29, 2024
October 1, 2023
Change
% Change
Net income
$
91,610
$
65,313
$
26,297
40
%
Percentage of net sales
4.7
%
3.8
%
0.9
%
Net income increased $26.3 million primarily due to higher gross profit, partially offset by higher selling, general and administrative expenses for the reasons discussed above.
Diluted earnings per share
Thirteen weeks ended
September 29, 2024
October 1, 2023
Change
% Change
Diluted earnings per share
$
0.91
$
0.64
$
0.27
42
%
Diluted weighted average shares outstanding
101,025
102,703
(1,678)
The increase in diluted earnings per share of $0.27 was driven by higher net income and fewer diluted shares outstanding compared to the prior year, due primarily to the share repurchase program.
Results of Operations for Thirty-nine Weeks Ended September 29, 2024 and October 1, 2023
The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted.
Thirty-nine weeks ended
September 29, 2024
October 1, 2023
Unaudited Quarterly Consolidated Statement of Income Data:
Net sales
$
5,723,062
$
5,138,839
Cost of sales
3,541,461
3,237,371
Gross profit
2,181,601
1,901,468
Selling, general and administrative expenses
1,676,470
1,486,961
Depreciation and amortization (exclusive of depreciation included in cost of sales)
98,129
99,834
Store closure and other costs, net
8,968
33,880
Income from operations
398,034
280,793
Interest (income) expense, net
(382)
6,058
Income before income taxes
398,416
274,735
Income tax provision
97,417
65,928
Net income
$
300,999
$
208,807
Weighted average shares outstanding - basic
100,560
102,844
Diluted effect of equity-based awards
909
914
Weighted average shares and equivalent shares outstanding - diluted
101,469
103,758
Diluted net income per share
$
2.97
$
2.01
Thirty-nine weeks ended
September 29, 2024
October 1, 2023
Other Operating Data:
Comparable store sales growth
6.4
%
3.4
%
Stores at beginning of period
407
386
Closed
—
(11)
Opened
21
24
Acquired
—
2
Stores at end of period
428
401
Comparison of Thirty-nine Weeks Ended September 29, 2024 to Thirty-nine Weeks Ended October 1, 2023
Net sales during the thirty-nine weeks ended September 29, 2024 totaled $5.7 billion, an increase of $584.2 million, or 11%, over the same period of the prior fiscal year. The sales increase was primarily due to new stores opened in the last twelve months and a 6.4% increase in comparable store sales. Comparable stores contributed approximately 94% of total sales for the thirty-nine weeks ended September 29, 2024 and approximately 96% of total sales for the thirty-nine weeks ended October 1, 2023.
Cost of sales and gross profit
Thirty-nine weeks ended
September 29, 2024
October 1, 2023
Change
% Change
Net sales
$
5,723,062
$
5,138,839
$
584,223
11
%
Cost of sales
3,541,461
3,237,371
304,090
9
%
Gross profit
2,181,601
1,901,468
280,133
15
%
Gross margin
38.1
%
37.0
%
1.1
%
Gross profit totaled $2.2 billion during the thirty-nine weeks ended September 29, 2024, an increase of $280.1 million, or 15%, compared to the thirty-nine weeks ended October 1, 2023, driven by increased sales volume. Gross margin increased to 38.1% for the thirty-nine weeks ended September 29, 2024, compared to 37.0%for the thirty-nine weeks ended October 1, 2023, due to improved inventory management and continued promotional optimization efforts as well as leverage on our supply chain from higher sales.
Selling, general and administrative expenses
Thirty-nine weeks ended
September 29, 2024
October 1, 2023
Change
% Change
Selling, general and administrative expenses
$
1,676,470
$
1,486,961
$
189,509
13
%
Percentage of net sales
29.3
%
28.9
%
0.4
%
Selling, general and administrative expenses increased by $189.5 million, or 13%, compared to the thirty-nine weeks ended October 1, 2023. The increase was primarily driven by the increase in new stores opened since the prior year period. As a percentage of net sales, selling, general and administrative expenses increased due to higher incentive compensation costs and ecommerce fees driven by strong sales performance and higher professional fees and other costs incurred related to strategic initiatives.
Depreciation and amortization
Thirty-nine weeks ended
September 29, 2024
October 1, 2023
Change
% Change
Depreciation and amortization
$
98,129
$
99,834
$
(1,705)
(2)
%
Percentage of net sales
1.7
%
1.9
%
(0.2)
%
Depreciation and amortization expense (exclusive of depreciation included in cost of sales) was $98.1 million for the thirty-nine weeks ended September 29, 2024, compared to $99.8 million for the thirty-nine weeks ended October 1, 2023. Depreciation and amortization expenses (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment. Depreciation and amortization for the thirty-nine weeks ended October 1, 2023 was inclusive of $5.9 million in accelerated depreciation in connection with the closing of certain underperforming stores during 2023. See Note 12, “Store Closures” of our unaudited consolidated financial statements.
Store closure and other costs, net decreased $24.9 million to $9.0 million, compared to $33.9 million for the thirty-nine weeks ended October 1, 2023. Store closure and other costs, net during the thirty-nine weeks ended September 29, 2024 was primarily related to ongoing occupancy costs associated with our closed store locations. Store closure and other costs, net during the thirty-nine weeks ended October 1, 2023 primarily consisted of $27.8 million of impairment losses related to the write-down of leasehold improvements and right-of-use assets as well as other costs incurred in association with the closing of 11 underperforming stores during 2023. See Note 12, “Store Closures” of our unaudited consolidated financial statements.
Interest (income) expense, net
Thirty-nine weeks ended
September 29, 2024
October 1, 2023
Change
%Change
Long-term debt
$
4,051
$
9,488
$
(5,437)
(57)
%
Finance leases
569
604
(35)
(6)
%
Deferred financing costs
579
579
—
0
%
Interest income and other
(5,581)
(4,613)
(968)
21
%
Total interest (income) expense, net
$
(382)
$
6,058
$
(6,440)
(106)
%
Interest (income) expense, net decreased to $0.4 million for the thirty-nine weeks ended September 29, 2024, compared to $6.1 million for the thirty-nine weeks ended October 1, 2023 primarily due to lower average debt outstanding and higher interest income earned as a result of higher interest rates. See Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements.
Income tax provision
Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:
The effective tax rate increased to 24.5% for the thirty-nine weeks ended September 29, 2024 from 24.0% for the thirty-nine weeks ended October 1, 2023. The increase in the effective tax rate was primarily due to an unfavorable current year return-to-provision true-up compared to the favorable prior year period true-up, a prior period refund of interest from amended returns, and the increase in pre-tax income outpacing the increase to the benefit from enhanced inventory donations deductions, partially offset by an increase in excess tax benefits associated with share-based payment awards.
Net income
Thirty-nine weeks ended
September 29, 2024
October 1, 2023
Change
% Change
Net income
$
300,999
$
208,807
$
92,192
44
%
Percentage of net sales
5.3
%
4.1
%
1.2
%
Net income increased $92.2 million primarily due to higher gross profit and lower store closure and other costs, partially offset by higher selling, general and administrative expenses for the reasons discussed above.
Diluted earnings per share
Thirty-nine weeks ended
September 29, 2024
October 1, 2023
Change
% Change
Diluted earnings per share
$
2.97
$
2.01
$
0.96
48
%
Diluted weighted average shares outstanding
101,469
103,758
(2,289)
The increase in diluted earnings per share of $0.96 was driven by higher net income and fewer diluted shares outstanding compared to the prior year due primarily to the share repurchase program.
Return on Invested Capital
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we provide information regarding Return on Invested Capital (referred to as “ROIC”) as additional information about our operating results. ROIC is a non-GAAP financial measure and should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital and provides a meaningful measure of the effectiveness of our capital allocation over time.
We define ROIC as net operating profit after tax (referred to as “NOPAT”), including the effect of capitalized operating leases, divided by average invested capital. Operating lease interest represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as a finance lease. The assumed ownership and associated interest expense are calculated using the discount rate for each lease as recorded as a component of rent expense within selling, general and administrative expenses. Invested capital reflects a trailing four-quarter average.
As numerous methods exist for calculating ROIC, our method may differ from methods used by other companies to calculate their ROIC. It is important to understand the methods and the differences in those methods used by other companies to calculate their ROIC before comparing our ROIC to that of other companies.
Our calculation of ROIC for the fiscal periods indicated was as follows:
Rolling Four Quarters Ended
September 29, 2024
October 1, 2023
(dollars in thousands)
Net income (1)
$
351,048
$
253,928
Special items, net of tax (2), (3)
—
34,272
Interest expense, net of tax (3)
39
5,637
Net operating profit after tax (NOPAT)
$
351,087
$
293,837
Total rent expense, net of tax (3)
188,585
168,150
Estimated depreciation on operating leases, net of tax (3)
(103,803)
(94,696)
Estimated interest on operating leases, net of tax (3), (4)
84,782
73,454
NOPAT, including effect of operating leases
$
435,869
$
367,291
Average working capital
192,891
251,985
Average property and equipment
813,743
728,689
Average other assets
602,865
589,132
Average other liabilities
(98,692)
(97,620)
Average invested capital
$
1,510,807
$
1,472,186
Average operating leases (5)
1,567,876
1,368,562
Average invested capital, including operating leases
$
3,078,683
$
2,840,748
ROIC, including operating leases
14.2
%
12.9
%
(1)Net income amounts represent total net income for the past four trailing quarters.
(2)Special items related to store closure, supply chain transition and acquisition related charges net of tax.
(3)Net of tax amounts are calculated using the normalized effective tax rate for the periods presented.
(4)2024 and 2023 estimated interest on operating leases is calculated by multiplying operating leases by the 7.2% and 7.1% discount rate, respectively, for each lease recorded as rent expense within direct store expense.
(5)Average operating leases represents the average net present value of outstanding lease obligations over the past four trailing quarters.
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash for each of the periods set forth below, as well as our cash, cash equivalents and restricted cash at the end of each period (in thousands):
Thirty-nine weeks ended
September 29, 2024
October 1, 2023
Cash, cash equivalents and restricted cash at end of period
We have generally financed our operations principally through cash generated from operations and borrowings under our credit facilities. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures primarily for opening new stores, remodels and maintenance, repurchases of our common stock and debt service. Our principal contractual obligations and commitments consist of obligations under our Credit Agreement, interest on our Credit Agreement, operating and finance leases, purchase commitments and self-insurance liabilities. Our operating and finance leases for the rental of land, buildings, and for rental of facilities and equipment expire or become subject to renewal clauses at various dates through 2048. We believe that our existing cash, cash equivalents and restricted cash, and cash anticipated to be generated from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including new store openings, remodel and maintenance capital expenditures at existing stores, store initiatives and other corporate capital expenditures and activities. Our cash, cash equivalents and restricted cash position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.
Operating Activities
Cash flows from operating activities increased $111.4 million to $520.4 million for the thirty-nine weeks ended September 29, 2024 compared to $409.0 million for the thirty-nine weeks ended October 1, 2023. The increase in cash flows from operating activities was primarily a result of higher net income adjusted for non-cash items of $91.6 million and favorable changes in working capital of $43.4 million, partially offset by higher payments on our operating lease liabilities of $18.9 million due to growth.
Cash flows provided by operating activities from changes in working capital were $114.2 million in the thirty-nine weeks ended September 29, 2024 compared to $70.8 million in the thirty-nine weeks ended October 1, 2023. This $43.4 million increase in cash flows from changes in working capital was primarily attributable to a $20.2 million change in accounts receivable driven by the timing of collections as well as $17.0 million change in accounts payable and accrued liabilities, primarily due to timing differences of payments for goods and services. Certain other immaterial items combined to result in an additional $6.2 million net increase in cash flows from changes in working capital.
Investing Activities
Cash flows used in investing activities consist primarily of capital expenditures in new stores, including leasehold improvements and store equipment, capital expenditures to maintain the appearance of our stores, sales enhancing initiatives and other corporate investments as well as cash outlays for acquisitions. Cash flows used in investing activities were $161.7 million and $178.0 million, for the thirty-nine weeks ended September 29, 2024 and thirty-nine weeks ended October 1, 2023, respectively. Cash flows used in investing activities during the thirty-nine weeks ended October 1, 2023 included our acquisition of Ronald Cohn, Inc. See Note 13, "Business Combination" of our unaudited consolidated financial statements.
We expect capital expenditures to be in the range of $205 - 215 million in 2024, including expenditures incurred to date, net of estimated landlord tenant improvement allowances, primarily to fund investments in new stores, remodels, maintenance capital expenditures and corporate capital expenditures. We expect to fund our capital expenditures with cash on hand and cash generated from operating activities.
Financing Activities
Cash flows used in financing activities were $250.8 million for the thirty-nine weeks ended September 29, 2024 compared to $272.3 million for the thirty-nine weeks ended October 1, 2023. During the thirty-nine weeks ended September 29, 2024, cash flows used in financing activities primarily consisted of $125.0 million in payments on our Credit Agreement and $129.7 million for stock repurchases, partially offset by $4.7 million in proceeds from the exercise of stock options.
During the thirty-nine weeks ended October 1, 2023, cash flows used in financing activities primarily consisted of $180.4 million for stock repurchases and $100.0 million in payments on our Credit Agreement, partially offset by $8.8 million in proceeds from the exercise of stock options.
The Company had no long-term debt outstanding as of September 29, 2024. Long-term debt outstanding as of December 31, 2023 was $125.0 million.
See Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements for a description of our Credit Agreement and our Former Credit Facility (each as defined therein).
Share Repurchase Program
Our board of directors from time to time authorizes share repurchase programs for our common stock. The following table outlines the share repurchase program authorized by our board, and the related repurchase activity and available authorization as of September 29, 2024:
Effective date
Expiration date
Amount authorized
Cost of repurchases
Authorization available
March 2, 2022
December 31, 2024
$
600,000
$
480,715
$
—
May 22, 2024
May 22, 2027
$
600,000
$
40,602
$
559,398
The shares under our current repurchase program may be purchased on a discretionary basis from time to time through the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans.Our board’s authorization of the share repurchase program does not obligate our Company to acquire any particular amount of common stock, and the repurchase program may be commenced, suspended, or discontinued at any time.
Share repurchase activity under our repurchase program for the periods indicated was as follows (total cost in thousands):
Thirteen weeks ended
Thirty-nine weeks ended
September 29, 2024
October 1, 2023
September 29, 2024
October 1, 2023
Number of common shares acquired
264,135
831,416
1,861,453
5,307,759
Average price per common share acquired
$
96.60
$
38.89
$
70.22
$
34.28
Total cost of common shares acquired
$
25,516
$
32,333
$
130,708
$
181,974
Shares purchased under our repurchase programs were subsequently retired and the excess of the repurchase price over par value was charged to retained earnings. The cost of common shares repurchased included the 1% excise tax imposed as part of the Inflation Reduction Act of 2022.
Subsequent to September 29, 2024 and through the date of this filing, we repurchased an additional 0.1 million shares of common stock for $5.6 million, excluding excise tax.
Contractual Obligations
Our principal contractual obligations and commitments arising in the normal course of business consist of obligations under our Credit Agreement, interest on our Credit Agreement, operating and finance leases, purchase commitments and self-insurance liabilities. Except as otherwise disclosed in Note 4, “Long-Term Debt and Finance Lease Liabilities” of our unaudited consolidated financial statements, there have been no material changes outside the normal course of business as of September 29, 2024 in our contractual obligations and commitments from those reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Inflation and deflation in the prices of food and other products we sell may periodically affect our sales, gross profit and gross margin. Food inflation, when combined with reduced consumer spending, could also reduce sales, gross profit margins and comparable store sales. Inflationary pressures on compensation, utilities, commodities, equipment and supplies may also impact our profitability. Food deflation or declining levels of inflation across multiple categories, particularly in produce, could reduce sales growth and earnings, particularly if our competitors react by lowering their retail pricing and expanding their promotional activities, which can lead to retail deflation higher than cost deflation that could reduce our sales, gross profit margins and comparable store sales. The short-term impact of inflation and deflation is largely dependent on whether or not the effects are passed through to our customers, which is subject to competitive market conditions.
Food inflation and deflation is affected by a variety of factors and our determination of whether to pass on the effects of inflation or deflation to our customers is made in conjunction with our overall pricing and marketing strategies, as well as our competitors’ responses. Although we may experience periodic effects on sales, gross profit, gross margins and cash flows as a result of changing prices, we do not expect the effect of inflation or deflation to have a material impact on our ability to execute our long-term business strategy.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. Our critical accounting estimates include inventories, lease assumptions, self-insurance reserves, goodwill and intangible assets, impairment of long-lived assets, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
There have been no substantial changes to these estimates, or the policies related to them during the thirteen and thirty-nine weeks ended September 29, 2024. For a full discussion of these estimates and policies, see “Critical Accounting Estimates” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Recently Issued Accounting Pronouncements
See Note 2, “Summary of Significant Accounting Policies” to our accompanying unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As described in Note 4, “Long-Term Debt and Finance Lease Liabilities” to our unaudited consolidated financial statements located elsewhere in this Quarterly Report on Form 10-Q, our Credit Agreement bears interest at a rate based in part on SOFR. Accordingly, we could be exposed to fluctuations in interest rates. As of September 29, 2024, we had no outstanding borrowings under our Credit Agreement.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures under the Exchange Act as of September 29, 2024, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the quarterly period ended September 29, 2024, there were no changes in our internal controls over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
From time to time we are a party to legal proceedings, including matters involving personnel and employment issues, product liability, personal injury, intellectual property and other proceedings arising in the ordinary course of business, which have not resulted in any material losses to date. Although management does not expect that the outcome in these proceedings will have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we could incur judgments or enter into settlements of claims that could materially impact our results.
Item 1A. Risk Factors.
Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should carefully consider the risks and uncertainties referenced below, together with all of the other information in this Quarterly Report on Form 10-Q, including our consolidated financial statements and related notes. Any of those risks could materially and adversely affect our business, operating results, financial condition, or prospects and cause the value of our common stock to decline, which could cause you to lose all or part of your investment.
There have been no material changes to the Risk Factors described under “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table provides information about our share repurchase activity during the thirteen weeks ended September 29, 2024.
Period (1)
Total number of shares purchased
Average
price paid
per share(2)
Total number of shares purchased as part of publicly announced plans or programs
Approximate
dollar value
of shares that
may yet be
purchased under
the plans or
programs (3)
July 1, 2024 - July 28, 2024
88,638
$
82.87
88,638
$
577,262,000
July 29, 2024 - August 25, 2024
25,316
$
95.36
25,316
$
574,848,000
August 26, 2024 - September 29, 2024
150,181
$
102.88
150,181
$
559,398,000
Total
264,135
264,135
(1)Periodic information is presented by reference to our fiscal periods during the third quarter of fiscal year 2024.
(2)Average price paid per share includes costs associated with the purchases, but excludes the excise tax on share repurchases imposed as part of the Inflation Reduction Act of 2022.
(3)On May 22, 2024, our board of directors authorized a new $600 million share repurchase program of our common stock. The shares may be purchased on a discretionary basis from time to time through May 22, 2027, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans.
On August 30, 2024, Timmi Zalatoris, our Chief Human Resources Officer, adopted a written plan for the sale of our common stock that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act (a “Rule 10b5-1 Trading Plan”). The Rule 10b5-1 Trading Plan provides for the sale of up to 9,230 shares of our common stock beginning January 2, 2025 through December 31, 2025.
On September 11, 2024, Jack Sinclair, our Chief Executive Officer and member of our board of directors, adopted a Rule 10b5-1 Trading Plan that provides for the sale of up to 35,000 shares of our common stock beginning January 15, 2025 through June 13, 2025.
During the third quarter of 2024, except as described above, none of our other directors or executive officers adopted or terminated a Rule 10b5-1 Trading Plan, or a “non-Rule 10b5-1 trading arrangement” (as defined in Item 408(c) of Regulation S-K).
The following financial information from the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2024, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Stockholders' Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements
104
Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
