SPROUTS FARMERS MARKET, INC. REPORTS FOURTH QUARTER AND FULL YEAR 2018 RESULTS
PHOENIX, Ariz. – (Globe Newswire) – February 21, 2019 – Sprouts Farmers Market, Inc. (Nasdaq: SFM) today reported results for the 13-week fourth quarter and 52-week year ended December 30, 2018.
Fourth Quarter Highlights:
|•||Net sales of $1.3 billion; an 11% increase from the same period in 2017|
|•||Comparable store sales growth of 2.3% and two-year comparable store sales growth of 6.9%|
|•||Net income of $13 million, compared to $40 million from the same period in 2017|
|•||Adjusted net income(1) of $24 million; compared to $21 million from the same period in 2017|
|•||Diluted earnings per share of $0.10; compared to $0.29 from the same period in 2017|
|•||Adjusted diluted earnings per share(1) of $0.19; compared to $0.16 from the same period in 2017|
Fiscal Year 2018 Highlights:
|•||Net sales of $5.2 billion; a 12% increase from 2017|
|•||Comparable store sales growth of 2.1% and two-year comparable store sales growth of 5.0%|
|•||Net income of $159 million; compared to $158 million in 2017|
|•||Adjusted net income(1) of $168 million; compared to $140 million in 2017|
|•||Diluted earnings per share of $1.22; compared to $1.15 in 2017|
|•||Adjusted diluted earnings per share(1) of $1.29; compared to $1.01 in 2017|
|•||Repurchased 11.1 million common shares in fiscal 2018 for a total investment of $258 million|
“Sprouts delivered 12% net sales growth for the year in a competitive and evolving industry, demonstrating the strength of our differentiated model and brand,” said Brad Lukow, interim co-chief executive officer and chief financial officer of Sprouts Farmers Market. “Through our solid operating cash flows, we continue to self-fund our store unit growth and strategic initiatives and in keeping with our capital structure strategy, returned more than $250 million to our shareholders through share repurchases in 2018.”
“Our focus on health, value, selection and service continues to produce solid financial returns, supporting our ongoing expansion that allows Sprouts to reach new customers and markets, positioning us well for long-term growth,” said Jim Nielsen, interim co-chief executive officer, president and chief operating officer of Sprouts Farmers Market. “We remain focused on building upon our strategic initiatives in people, systems and product innovation to drive continued enhancements to our experience, reinforcing Sprouts as a trusted brand for health and value.”
|1||Adjusted net income and adjusted diluted earnings per share, non-GAAP financial measures, exclude the impact of certain special items. See the “Non-GAAP Financial Measures” section of this release for additional information about these items.|
Reclassification of Certain Income Statement Items
In the fourth quarter of fiscal 2018, we made a voluntary change to our consolidated statements of income presentation as follows:
|•||Reclassified occupancy costs and buying costs from cost of sales to selling, general and administrative expenses (“SG&A”);|
|•||Reclassified depreciation and amortization (exclusive of depreciation related to supply chain which continues to be included in cost of sales) to a separate financial statement line item; and|
|•||Combined direct stores expense (“DSE”) and store pre-opening costs with SG&A.|
These reclassifications had no impact on sales, income from operations, net income or earnings per share. We made this voluntary change in presentation because we believe that the exclusion of occupancy and buying costs from cost of sales provides a more meaningful presentation of our gross margin. The changes also enhance the comparability of our financial statements with those of many of our industry peers and align with how we internally manage and review costs and margin. These changes in presentation have been retrospectively applied to all periods presented in this earnings release. A table reflecting the effects of the reclassification is included at the end of this release. (see “Reclassification of Certain Income Statement Items”)
Fourth Quarter 2018 Financial Results
Net sales for the fourth quarter of 2018 were $1.3 billion, an 11% increase compared to the same period in 2017. Net sales growth was driven by a 2.3% increase in comparable store sales and strong performance in new stores opened.
Gross profit for the quarter increased 11% to $421 million, resulting in a gross profit margin of 33.2%, a decrease of 15 basis points compared to the same period in 2017. This was primarily driven by promotional activity which slightly pressured margins, as well as rising distribution and transportation costs.
SG&A for the quarter increased 11% to $353 million, or 27.8% of sales, compared to 27.9% in the same period in 2017. This improvement primarily reflects lower workers compensation expenses and a payroll tax benefit for California team members, partially offset by planned wage investments and higher occupancy and advertising costs.
Depreciation and amortization for the quarter increased 11% to $28 million, or 2.2% of sales, flat compared to the same period in 2017. Store closure and other costs for the quarter increased to $12 million compared to $0.1 million in the same period in 2017, related to noncash charges of $8 million associated with the closure of two stores, as well as one-time severance costs of $4 million associated with the resignation of our former Chief Executive Officer (“CEO”).
Net income for the quarter was $13 million and diluted earnings per share was $0.10, compared with $40 million and $0.29, respectively, in 2017. Adjusted net income was $24 million, a 16% increase compared to the same period in 2017, and adjusted diluted earnings per share was $0.19, an increase of $0.03 or 19%, as compared to the same period in 2017. The increase in adjusted earnings per share was driven by higher sales, a lower effective tax rate, excluding special items, of 26.3% compared to 33.5% in the same period last year, and fewer shares outstanding due to our repurchase program. (see “Non-GAAP Financial Measures”)
Fiscal Year 2018 Financial Results
Net sales for the fiscal year 2018 were $5.2 billion, a 12% increase compared to 2017. Net sales growth was driven by a 2.1% increase in comparable store sales and strong performance in new stores opened.
Gross profit for the year increased 12% to $1.7 billion, resulting in a gross profit margin of 33.6%, flat compared to 2017. This primarily reflects the benefit of our strategic initiatives and merchandising strategies offsetting the promotional environment.
SG&A for the year increased 13% to $1.4 billion, or 27.0% of sales, compared to 26.7% in 2017. This deleverage primarily reflects our planned investments in team member wages and benefits, as well as increased occupancy and advertising costs.
Depreciation and amortization for the year increased 15% to $108 million, or 2.1% of sales, compared to 2.0% in 2017. This primarily reflects higher square footage and capitalized costs associated with recent new store vintages. Store closure and other costs for the year increased to $12 million compared to $1 million in 2017, related to noncash charges of $8 million associated with the closure of two stores, as well as one-time severance costs of $4 million associated with the resignation of our former CEO.
Net income for the year was $159 million and diluted earnings per share was $1.22, compared with $158 million and $1.15 respectively, in 2017. Adjusted net income was $168 million, a 20% increase compared to 2017 and adjusted diluted earnings per share was $1.29, an increase of $0.28 or 28%, as compared to 2017. The increase in adjusted earnings per share was driven by higher sales and margins, a lower effective tax rate, excluding special items, of 19.2% compared to 32.0% in 2017, and fewer shares outstanding due to our repurchase program. (see “Non-GAAP Financial Measures”)
Growth and Development
During the fourth quarter of 2018, we opened 2 new stores, one each in Florida and Nevada. For fiscal 2018, we opened 30 new stores and closed two stores which resulted in a total of 313 stores in 19 states as of December 30, 2018.
Leverage and Liquidity
We generated cash from operations of $294 million in fiscal 2018 and invested $154 million in capital expenditures net of landlord reimbursement, primarily for new stores. In addition, we repurchased 11.1 million shares of common stock for a total investment of $258 million in fiscal 2018. We ended the year with a $453 million balance on our revolving credit facility, $27 million of letters of credit outstanding under the facility, $2 million in cash and cash equivalents, and $218 million available under our current share repurchase authorization. Subsequent to the end of the year and through February 18, 2019, we have repurchased 850 thousand shares of common stock for a total investment of $20 million.
The following provides information on our guidance for 2019:
|Full-Year 2019Current Guidance|
|Net sales growth||9% to 10.5%|
|Unit growth||Approximately 28 stores|
|Comparable store sales growth||1.5% to 3.0%|
|Diluted earnings per share2||$1.16 to $1.24|
|Effective tax rate||Approximately 26%|
|Capital expenditures||$170M to $175M|
|(net of landlord reimbursements)|
2 We expect adoption of the new lease accounting standards will result in net incremental noncash rent expense of approximately $7 million pre-tax (or approximately $0.04 decrease in diluted earnings per share) for 2019.
Fourth Quarter 2018 Conference Call
We will hold a conference call at 8 a.m. Mountain Standard Time (10 a.m. Eastern Standard Time) on Thursday, February 21, 2019, during which Sprouts executives will further discuss our fourth quarter and fiscal year 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: 1398294|
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: 1398294.
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.
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, growth 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; the company’s ability to manage its transition to a new CEO; accounting standard changes including the new lease accounting guidance; 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.
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 30,000 team members and operates in more than 300 stores in 19 states from coast to coast. Visit about.sprouts.com for more information.