S-1 1 d530104ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on May 9, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

Sprouts Farmers Markets, LLC

(to be converted into Sprouts Farmers Market, Inc.)

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5411   32-0331600

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

11811 N. Tatum Boulevard

Suite 2400

Phoenix, Arizona 85028

(480) 814-8016

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Brandon F. Lombardi, Esq.

Chief Legal Officer and Corporate Secretary

Sprouts Farmers Markets, LLC

11811 N. Tatum Boulevard

Suite 2400

Phoenix, Arizona 85028

(480) 814-8016

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Howard A. Kenny, Esq.

Robert G. Robison, Esq.

Morgan, Lewis & Bockius LLP

101 Park Avenue

New York, NY 10178

(212) 309-6000

 

Richard D. Truesdell, Jr., Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   þ  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered   

Proposed Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(3)

Common Stock, $0.001 par value per share

   $300,000,000   $40,920

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes offering price of any additional shares that the underwriters have the option to purchase. See “Underwriting.”
(3) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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EXPLANATORY NOTE

Sprouts Farmers Markets, LLC, the registrant whose name appears on the cover of this registration statement, is a Delaware limited liability company. Prior to the effectiveness of this registration statement, Sprouts Farmers Markets, LLC will be converted into a Delaware corporation pursuant to a statutory conversion and be renamed Sprouts Farmers Market, Inc. As a result of the statutory conversion, which we refer to as the “corporate conversion,” the members of Sprouts Farmers Markets, LLC will become holders of shares of common stock of Sprouts Farmers Market, Inc., and holders of options to purchase units of Sprouts Farmers Markets, LLC will become holders of options to purchase shares of common stock of Sprouts Farmers Market, Inc. Except as disclosed in the accompanying prospectus, the consolidated financial statements and selected historical consolidated financial data and other financial information included in this registration statement are those of Sprouts Farmers Markets, LLC and its subsidiaries and do not give effect to the corporate conversion. Shares of common stock of Sprouts Farmers Market, Inc. are being offered by the accompanying prospectus.


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated May 9, 2013.

PRELIMINARY PROSPECTUS

             Shares

 

LOGO

Common Stock

 

 

This is an initial public offering of shares of common stock of Sprouts Farmers Market, Inc.

We are offering              of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional              shares. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $         and $        . We intend to apply to list our common stock on the NASDAQ Global Select Market under the symbol “SFM.”

We have reserved up to              shares of common stock offered by this prospectus for sale at the initial public offering price to directors, officers, team members and related persons of Sprouts Farmers Market, Inc. See “Underwriting—Directed Share Program.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 13 for a discussion of factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $         $     

Proceeds, before expenses, to Sprouts Farmers Market, Inc.

   $         $     

Proceeds, before expenses, to the selling stockholders

   $         $     

 

(1)

We have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting.”

The underwriters have the option to purchase up to an additional              shares from the selling stockholders at the initial public offering price less the underwriting discount. They may exercise that option for 30 days.

 

 

The underwriters expect to deliver the shares of common stock against payment in New York, New York on or about                     , 2013.

 

Goldman, Sachs & Co.    Credit Suisse

BofA Merrill Lynch

 

Apollo Global Securities    Barclays    Deutsche Bank Securities    UBS Investment Bank

 

 

Prospectus dated                 , 2013.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     34   

Use of Proceeds

     36   

Dividend Policy

     36   

Corporate Conversion

     37   

Capitalization

     38   

Dilution

     40   

Selected Consolidated Historical and Pro Forma Financial and Other Data

     43   

Unaudited Pro Forma Condensed Consolidated Financial Information

     49   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     58   

Business

     87   

Management

     105   

Executive Compensation

     114   

Certain Relationships and Related Party Transactions

     133   

Principal and Selling Stockholders

     135   

Description of Capital Stock

     138   

Shares Eligible for Future Sale

     143   

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Common Stock

     146   

Underwriting

     151   

Conflicts of Interest

     156   

Legal Matters

     157   

Experts

     157   

Where You Can Find Additional Information

     157   

Index to Financial Statements

     F-1   

 

 

Neither we, the selling stockholders, nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of common stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Through and including                     , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Persons who come into possession of this prospectus and any such free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

 

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BASIS OF PRESENTATION

We report our results of operations on a 52- or 53-week fiscal year ending on the Sunday closest to December 31, with each fiscal quarter generally divided into three periods consisting of two four-week periods and one five-week period. Our last three completed fiscal years ended on January 2, 2011, January 1, 2012 and December 30, 2012. For ease of reference, we identify our fiscal years in this prospectus by reference to the calendar year ending closest to the last day of such fiscal year. For example, we refer to our fiscal years ended January 2, 2011, January 1, 2012 and December 30, 2012 as “fiscal 2010,” “fiscal 2011” and “fiscal 2012,” respectively.

TRADEMARKS AND TRADE NAMES

This prospectus includes our trademarks and service marks, SPROUTS FARMERS MARKET®, SPROUTS® and HEALTHY LIVING FOR LESS!®, which are protected under applicable intellectual property laws and are the property of Sprouts. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

MARKET, INDUSTRY AND OTHER DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate is based on information from independent industry and research organizations, such as The Buxton Company, and other third-party sources (including the Nutrition Business Journal, the Progressive Grocer’s 80th Annual Report of the Grocery Industry (referred to as “Progressive Grocer”), and other industry publications, surveys and forecasts), and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of our industry and markets, which we believe to be reasonable. Although we believe the data from these third-party sources are reliable, we have not independently verified any third-party information. In addition, projections, assumptions and estimates of the future performance of our industry and our future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

RECENT TRANSACTIONS

In 2002, Sprouts Farmers Markets, LLC, an Arizona limited liability company (referred to as “Sprouts Arizona”) opened the first Sprouts Farmers Market store in Chandler, Arizona. In 2011, we were formed when Sprouts Arizona combined with Henry’s Holdings, LLC (referred to as “Henry’s”), which operated 35 Henry’s Farmers Markets stores and eight Sun Harvest Market stores (referred to as the “Henry’s Transaction”). The Henry’s Transaction was led by investment funds affiliated with, and co-investment vehicles managed by, Apollo Management VI, L.P. (referred to as the “Apollo Funds”). The Apollo Funds are affiliates of Apollo Global Management, LLC (together with its subsidiaries, referred to as “Apollo”). In May 2012, we acquired Sunflower Farmers Market, Inc., which operated 37 Sunflower Farmers Market stores (referred to as “Sunflower”). We refer to this as the “Sunflower Transaction.” The Henry’s Transaction and the Sunflower Transaction are collectively referred to as the “Transactions.”

 

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COMPARABLE STORE SALES

As used in this prospectus, the term “comparable store sales growth” refers to the percentage change in our comparable store sales as compared to the prior comparable period. Our practice is to include sales from a store in comparable store sales beginning on the first day of the 61st week following the store’s opening and to exclude sales from a closed store from comparable store sales beginning on the day of closure. We include sales from an acquired store in comparable store sales on the later of (i) the day of acquisition or (ii) the first day of the 61st week following the store’s opening. This practice may differ from the methods that other retailers use to calculate comparable store sales.

In this prospectus we discuss our “combined comparable store sales growth” for fiscal 2008 through fiscal 2012. We compute combined comparable store sales growth giving effect to (i) the 2011 combination of Sprouts Arizona with Henry’s in the Henry’s Transaction, and (ii) our 2012 acquisition of Sunflower in the Sunflower Transaction, in each case as if such Transactions occurred on the first day of fiscal 2007. Stores acquired in these transactions have been rebranded as Sprouts Farmers Market stores. See “Selected Consolidated Historical and Pro Forma Financial and Other Data” for a reconciliation of historical sales to pro forma net sales and a presentation of combined comparable store sales growth for fiscal 2008 through fiscal 2012.

In addition, in this prospectus we refer to combined comparable store sales growth on a “two-year stacked basis,” which is computed by adding the combined comparable store sales growth of the period referenced and the combined comparable store sales growth of the same fiscal period ended twelve months prior.

We believe combined comparable store sales growth provides investors with helpful information with respect to our operating performance.

PRO FORMA INFORMATION

This prospectus contains unaudited pro forma financial information prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed consolidated statement of operations for fiscal 2012 gives pro forma effect to:

 

  Ÿ  

the Sunflower Transaction and the related financing;

 

  Ÿ  

the April 2013 Refinancing, as defined and described in “Prospectus Summary—April 2013 Refinancing;” and

 

  Ÿ  

the corporate conversion, as defined and discussed in “Corporate Conversion,” and the issuance of              shares of common stock in this offering and the application of $         million of the net proceeds to us from the sale of such shares to repay certain indebtedness as described in “Use of Proceeds” (excluding the remaining              shares of common stock being issued in this offering) (referred to collectively as the “Pro Forma Offering”);

in each case as if such transactions had been consummated on January 2, 2012, the first day of fiscal 2012. The unaudited pro forma condensed consolidated balance sheet as of December 30, 2012 gives pro forma effect to the April 2013 Refinancing and the Pro Forma Offering as if both had occurred on December 30, 2012, the last day of fiscal 2012. See “Unaudited Pro Forma Condensed Consolidated Financial Information.”

In addition, this prospectus also contains an unaudited supplemental pro forma condensed consolidated statement of operations for fiscal 2011 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Unaudited Supplemental Fiscal 2011 Pro

 

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Forma Information.” This supplemental pro forma information gives effect to the Transactions as if they were consummated on the first day of fiscal 2011.

NON-GAAP FINANCIAL MEASURES

To supplement our financial information presented in accordance with U.S. generally accepted accounting principles (referred to as “GAAP”), we use the following additional measures to clarify and enhance an understanding of past performance:

 

  Ÿ  

Adjusted EBITDA, which is defined as earnings (net income or loss) before interest, taxes, depreciation, amortization and accretion, further adjusted to eliminate the effects of items management does not consider in assessing our ongoing performance;

 

  Ÿ  

Adjusted EBIT, which is defined as earnings (net income or loss) before interest and taxes, further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance; and

 

  Ÿ  

Adjusted net income, which is defined as net income (loss) adjusted to eliminate the effects of items management does not consider in assessing ongoing performance.

This prospectus contains pro forma information for fiscal 2012 under the caption “Unaudited Pro Forma Condensed Consolidated Financial Information,” as described under “Pro Forma Information” above. For fiscal 2012, we present the foregoing non-GAAP measures on a pro forma basis derived from such pro forma fiscal 2012 information. See “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data” and “Selected Consolidated Historical and Pro Forma Financial and Other Data” for further discussion and a reconciliation of pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income to pro forma net income.

Pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These non-GAAP measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. We also use pro forma adjusted EBITDA, as further adjusted for additional items defined in our Credit Facility (as defined below), for board of director and bank compliance reporting.

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 our business, or as a measure of cash that will be available to meet our 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 our results as reported under GAAP.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should read this entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes.

Prior to the effectiveness of the registration statement of which this prospectus forms a part, we will complete a corporate conversion pursuant to which Sprouts Farmers Markets, LLC will be converted into a Delaware corporation and be renamed Sprouts Farmers Market, Inc. as described under “Corporate Conversion.” As used in this prospectus, unless the context otherwise requires, references to the “company,” “Sprouts,” “we,” “us” and “our” refer to Sprouts Farmers Markets, LLC and after the corporate conversion, to Sprouts Farmers Market, Inc. and, where appropriate, its subsidiaries. Unless the context otherwise requires, the consolidated financial statements and selected historical consolidated financial data and other financial and operating data in this prospectus reflect the consolidated business and operations of Sprouts Farmers Markets, LLC and its consolidated subsidiaries prior to the corporate conversion, and do not give effect to the corporate conversion. In addition, unless the context otherwise requires, references in this prospectus to our capitalization and other matters pertaining to our equity relate to the capitalization and equity of Sprouts Farmers Markets, LLC.

Who We Are

Sprouts Farmers Market is a high-growth, differentiated, specialty retailer of natural and organic food focusing on health and wellness at great value. We offer a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, grocery, meat and seafood, bakery, dairy, frozen foods, body care and natural household items catering to consumers’ growing interest in eating and living healthier. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. With pro forma fiscal 2012 net sales of $2.0 billion and 157 stores in eight states as of May 1, 2013, we are one of the largest specialty retailers of natural and organic food in the United States. According to research conducted for us by The Buxton Company, a customer analytics research firm, we have significant growth opportunities in existing and new markets across the United States with the potential for approximately 1,200 locations operating under our current format.

The cornerstones of our business are fresh, natural and organic products at compelling prices, an attractive and differentiated shopping experience, and knowledgeable team members who we believe provide best-in-class customer service and product education. These attributes have positioned us to deliver strong financial results, as evidenced by the following:

 

  Ÿ  

Stores under our management have achieved positive comparable store sales growth for 23 consecutive quarters, including throughout the recent economic downturn;

 

  Ÿ  

Combined comparable store sales growth of 9.7% in fiscal 2012 and 5.1% in fiscal 2011, or 14.8% on a two-year stacked basis through fiscal 2012;

 

  Ÿ  

Pro forma net sales of $2.0 billion in fiscal 2012, representing an increase of 16% from pro forma net sales of $1.7 billion in fiscal 2011;

 

  Ÿ  

Pro forma adjusted EBITDA of $147.3 million in fiscal 2012; and

 

  Ÿ  

Net income of $19.5 million in fiscal 2012, an increase from a loss of $27.4 million in fiscal 2011, and pro forma adjusted net income of $         million in fiscal 2012.

 

 

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Healthy Living for Less.    We offer high-quality, natural and organic products at attractive prices in every department. Consistent with our farmers market heritage, our offering begins with fresh produce, which we source, warehouse and distribute in-house and sell at prices we believe to be significantly below those of other food retailers. In addition, our scale, operating structure and deep industry relationships position us to consistently deliver “Healthy Living for Less” throughout the store. We believe we attract a broad customer base, including conventional supermarket customers, and appeal to a much wider demographic than other specialty retailers of natural and organic food. We believe that over time, our compelling prices and product offering converts many “trial” customers into loyal “lifestyle” customers who shop Sprouts with greater frequency and across an increasing number of departments.

Attractive, Differentiated Shopping Experience.    In a convenient, small-box format (average store size of 27,500 sq. ft.), our stores have a farmers market feel, with a bright, open-air atmosphere to create a comfortable and engaging in-store experience. We strive to be our customers’ everyday market. We feature fresh produce and bulk foods at the center of the store surrounded by a complete grocery offering, including vitamins and supplements, grocery, meat and seafood, bakery, dairy, frozen foods, beer and wine, body care and natural household items. Consistent with our natural and organic offering, we choose not to carry most of the traditional, national branded consumer packaged goods generally found at conventional grocery retailers (e.g., Doritos, Tide and Lucky Charms). Instead, we offer high-quality alternatives that emphasize our focus on fresh, natural and organic products at great values.

Customer Service & Education.    We are dedicated to our mission of “Healthy Living for Less,” and we attract team members who share our passion for educating and serving our customers with the goal of making healthy eating easier and more accessible. We believe our well-trained and engaged team members help our customers increasingly understand that they can purchase a wide selection of high-quality, healthy and great tasting food for themselves and their families at attractive prices by shopping at Sprouts.

Our Industry

We operate in the $600 billion U.S. supermarket industry and believe we are capturing significant market share from conventional supermarkets and other food retailers. According to the Nutrition Business Journal, interest in healthy eating, an increasing focus on preventative health measures, and the rising costs of healthcare have driven significant growth in natural and organic food consumption. Spending on natural and organic food experienced a compound annual growth rate (referred to as “CAGR”) of 12% from 1997 to 2011, reaching $43 billion in the United States, and is expected to continue to grow at a CAGR of 10% through 2020.

What Makes Us Different

We believe the following competitive strengths position Sprouts to capitalize on two powerful, long-term consumer trends—a growing interest in health and wellness and a focus on value:

Comprehensive natural and organic product offering at great value.    We feature an expansive offering of high-quality, natural and organic products at compelling value. In particular, we position Sprouts to be a value leader in fresh produce in order to drive trial visits to our stores by new customers. We believe that, over time, our differentiated product offering and strong value proposition converts many trial customers into loyal, lifestyle customers.

 

 

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Resilient business model with strong financial performance.    We achieved positive, combined comparable store sales growth of 9.0%, 2.6%, 2.3%, 5.1% and 9.7% in fiscal 2008, 2009, 2010, 2011 and 2012, respectively. We believe the consistency of our performance over time, even through the recent economic downturn from 2008 to 2010, and across geographies and vintages is the result of a number of factors, including our distinctive value positioning and merchandising strategies, product innovation and a well-trained staff focused on customer education and service. In addition, we believe our high volume and low-cost store model enhance our ability to consistently offer competitive prices on a complete assortment of natural and organic products.

Proven and replicable economic store model.    We believe that our store model, combined with our rigorous store selection process and a growing interest in health and wellness, contribute to our attractive new store returns on investment. Our typical store requires an average new store cash investment of approximately $2.8 million, including store buildout (net of contributions from landlords), inventory (net of payables) and cash pre-opening expenses. Based on historical performance, we target pre-tax cash-on-cash returns of 35-40% within three to four years after opening. We believe the consistent performance of our store portfolio across geographies and vintages supports the portability of the Sprouts brand and store model into a wide range of markets.

Significant new store growth opportunity supported by broad demographic appeal.    We believe that our broad product offering and value proposition appeals to a wider demographic than other leading competitors, including higher-priced health food and gourmet food retailers. Sprouts has been successful across a variety of urban, suburban and rural locations in diverse geographies, from California to Oklahoma, underscoring the heightened interest in eating healthy across markets. Based on research conducted for us, we believe that the U.S. market can support approximately 1,200 Sprouts Farmers Market stores operating under our current format, including 300 in states in which we currently operate. We expect to achieve 12% or more annual new store growth over at least the next five years, balanced among existing, adjacent and new markets.

 

Current Store Locations    Store Count

LOGO

  

LOGO

Passionate and experienced management team with proven track record.    Since inception, we have been dedicated to delivering “Healthy Living for Less.” Our passion and commitment is shared by team members throughout the entire organization, from our stores to our corporate office. Our executive management team has extensive grocery and food retail industry experience, and deep roots in organic, natural and specialty food retail. With recent investments in people, systems and other infrastructure, we believe we are well positioned to achieve our future growth plans.

 

 

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Growing Our Business

We are pursuing a number of strategies to continue our growth and strong financial performance, including:

Expand our store base.    We intend to continue expanding our store base by pursuing new store openings in existing markets, expanding into adjacent markets, and penetrating new markets. From our founding in 2002 through the first quarter of 2013, we opened 78 new stores while successfully rebranding 43 Henry’s and 39 Sunflower stores to the Sprouts banner. On a combined basis, Sprouts, Henry’s and Sunflower opened an average of 16 stores per year from fiscal 2008 through fiscal 2012. We have 19 openings planned for fiscal 2013 and approximately 20 store openings planned for fiscal 2014, and we expect to achieve 12% or more annual new store growth over at least the next five years.

Increase comparable store sales.    For 23 consecutive quarters, including throughout the recent economic downturn from 2008 to 2010, stores under our management have achieved positive comparable store sales growth. We believe we can continue to grow the number of customer transactions by enhancing our core value proposition and distinctive customer-oriented shopping experience. We aim to grow our average ticket by continuing to expand and refine our fresh, natural and organic product offering, our targeted and personalized marketing efforts and our in-store education. We believe these factors, combined with the continued strong growth in natural and organic food consumption, will allow Sprouts to gain new customers, increase customer loyalty and, over time, convert single-department trial customers into core, lifestyle customers who shop Sprouts with greater frequency and across an increasing number of departments.

Continue to enhance our operating margins.    We believe we can continue to enhance our operating margins though efficiencies of scale, improved systems, continued cost discipline and enhancements to our merchandise offerings. We have made significant investments in management, information technology systems, training, marketing, compliance and other infrastructure to enable us to pursue our growth plans, which we believe will also enhance our margins over time. Furthermore, we expect to achieve economies of scale in sourcing and distribution as we add new stores.

Grow the Sprouts Farmers Market brand.    We are committed to supporting our stores, product offerings and brand through a variety of marketing programs, private label offerings and corporate partnerships. In addition, we will continue our community outreach and charity programs to more broadly connect with our local communities with the aim of promoting our brand and educating consumers on healthy choices. We will also continue to expand our innovative marketing and promotional strategy through print, digital and social media platforms, all of which promote our mission of “Healthy Living for Less.”

April 2013 Refinancing

Effective as of April 23, 2013, we entered into a credit agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and certain lenders (referred to as the “Credit Facility”). The Credit Facility provides for a $700 million senior secured term loan (the “Term Loan”), with an interest rate of LIBOR (with a 1.00% floor with respect to Eurodollar borrowings), subject to certain adjustments, plus a margin of 3.50%, and a $60 million senior secured revolving credit facility (the “Revolving Credit Facility”). The interest rate margins on the Credit Facility will be reduced by 50 basis points if, at any time after we complete this offering, we either achieve a specified reduction in our net first lien leverage ratio or receive an upgrade in credit ratings. We currently expect to reduce our leverage ratio sufficiently to obtain the margin reduction upon the consummation of this offering and the application of the net proceeds as described in “Use of Proceeds.”

 

 

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A portion of the proceeds of the Term Loan was used to repay in full the outstanding balance of $403.1 million under our prior revolving credit facility (referred to as the “Former Revolving Credit Facility”) and our prior term loan facility (referred to as the “Former Term Loan” and, together with the Former Revolving Credit Facility, the “Former Credit Facilities”) that we entered into on April 18, 2011. We used the remaining proceeds of the Term Loan, together with cash on hand, to make a distribution to our equity holders, to make payments to vested option holders and to pay transaction fees and expenses.

We refer to the transactions through which we entered into the Credit Facility and applied the proceeds as described above as the “April 2013 Refinancing.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Long-term Debt and Former Credit Facilities—April 2013 Refinancing.”

Risks To Consider

Investing in our common stock involves a high degree of risk. You should carefully consider the risks highlighted in the section entitled “Risk Factors” following this prospectus summary before making an investment decision. These risks include, among others, the following:

 

  Ÿ  

we face intense competition in our industry, and our failure to compete successfully may have a material adverse effect on our business;

 

  Ÿ  

we may be unable to successfully open new stores;

 

  Ÿ  

we may be unable to maintain levels of comparable store sales or generate operating levels in our new stores consistent with our mature stores;

 

  Ÿ  

we may be unable to maintain or improve our operating margins;

 

  Ÿ  

we may be unable to identify and react to trends and consumer preferences;

 

  Ÿ  

product supply disruptions may have an adverse effect on our profitability and operating results;

 

  Ÿ  

actual or perceived food safety and labeling concerns and related unfavorable publicity may adversely affect us;

 

  Ÿ  

unfavorable changes in or our failure to comply with governmental regulation could harm our business; and

 

  Ÿ  

general economic conditions that impact consumer spending could adversely affect our business.

Corporate Information

Our principal executive offices are located at 11811 N. Tatum Boulevard, Suite 2400, Phoenix, Arizona 85028, and our telephone number is (480) 814-8016. Our website address is www.sprouts.com. The information contained on our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.

 

 

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The Offering

 

Common stock offered by Sprouts

  

            shares

Common stock offered by the selling stockholders

  

            shares

Common stock to be outstanding after this offering

  

            shares

Option to purchase additional shares

   The underwriters have the option to purchase up to                  additional shares from the selling stockholders at the initial public offering price less the underwriting discount. They may exercise that option for 30 days.

Use of proceeds

   We estimate that our net proceeds from this offering will be approximately $        million, assuming an initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us. We will not receive any net proceeds from the sale by the selling stockholders of shares in this offering.
   We intend to use approximately $         million of the net proceeds from this offering to repay borrowings under our Credit Facility. We intend to use the remaining net proceeds from this offering for general corporate purposes. See “Use of Proceeds” for additional information.

Risk factors

   See “Risk Factors” beginning on page 13 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Directed Share Program

   At our request, the underwriters have reserved up to                  of the shares of common stock offered by this prospectus for sale, at the initial public offering price, to directors, officers, team members and certain persons otherwise related to us. If purchased by these persons, these shares will be subject to the 180-day lock-up restriction described in “Underwriting.” The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.

 

 

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Conflicts of Interest

   Apollo Global Securities, LLC, an underwriter of this offering, is an affiliate of Apollo, our controlling stockholder. Since Apollo beneficially owns more than 10% of our outstanding common stock, a “conflict of interest” is deemed to exist under Rule 5121(f)(5)(B) of the Conduct Rules of the Financial Industry Regulation Authority (referred to as “FINRA”). Rule 5121 permits Apollo Global Securities, LLC to participate in the offering notwithstanding this conflict of interest because Goldman, Sachs & Co. and Credit Suisse Securities (USA) LLC, the underwriters primarily responsible for managing this offering, satisfy the criteria required by Rule 5121(f)(12)(E) and neither Goldman, Sachs & Co. nor Credit Suisse Securities (USA) LLC nor their respective affiliates have a conflict of interest with us. In accordance with Rule 5121, Apollo Global Securities, LLC will not sell our common stock to a discretionary account without receiving written approval from the account holder. See “Underwriting—Conflicts of Interest.”

Proposed NASDAQ Global Select Market symbol

  

“SFM”

Unless otherwise indicated, all information in this prospectus reflects and assumes the following:

 

  Ÿ  

the conversion of Sprouts Farmers Markets, LLC from a Delaware limited liability company to a Delaware corporation prior to the effective date of the registration statement of which this prospectus forms a part and the conversion of membership interests in the form of Class A and Class B units of Sprouts Farmers Markets, LLC into an aggregate of            shares of our common stock, assuming the corporate conversion occurred on                    , 2013; and

 

  Ÿ  

no exercise of the underwriters’ option to purchase up to an additional            shares of common stock from the selling stockholders.

The number of shares of common stock to be outstanding after this offering is based on                  shares of our common stock outstanding immediately prior to the closing of this offering, and excludes the following:

 

  Ÿ  

            shares of common stock issuable upon the exercise of stock options granted under our Sprouts Farmers Markets, LLC Option Plan (referred to as the “2011 Option Plan”) and outstanding immediately prior to the closing of this offering, at a weighted average exercise price of $        per share; and

 

  Ÿ  

            shares of common stock reserved for future issuance under our new 2013 Incentive Compensation Plan, which will replace the 2011 Option Plan upon completion of this offering (referred to as the “2013 Incentive Plan,” the 2011 Option Plan and the 2013 Incentive Plan are collectively referred to as the “Incentive Plans”).

 

 

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Summary Consolidated Historical and Pro Forma Financial and Other Data

The following tables summarize our consolidated historical and pro forma financial and other data and should be read together with “Selected Consolidated Historical and Pro Forma Financial and Other Data,” “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the consolidated statements of operations data for fiscal 2010, fiscal 2011 and fiscal 2012, and the summary balance sheet data as of December 30, 2012, from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results set forth below are not necessarily indicative of results to be expected for any future period.

In 2002, Sprouts Arizona opened the first Sprouts Farmers Market store in Chandler, Arizona. In 2011, Sprouts Arizona combined with Henry’s, which operated 35 Henry’s Farmers Market stores and eight Sun Harvest Market stores, as a part of the Henry’s Transaction led by the Apollo Funds. As a result of Apollo’s controlling financial interest in Henry’s former parent, Henry’s was determined to be the accounting acquirer in the Henry’s Transaction and, accordingly, our consolidated financial statements for fiscal 2010 and for the period from January 3, 2011 through April 17, 2011 reflect only the historic results of Henry’s prior to the Henry’s Transaction. Commencing on April 18, 2011, our consolidated financial statements also include the financial position, results of operations and cash flows of Sprouts Arizona.

In May 2012, we acquired Sunflower in the Sunflower Transaction. Commencing on May 29, 2012, our consolidated financial statements also include the financial position, results of operations and cash flows of Sunflower.

The Sunflower Transaction had, and the April 2013 Refinancing is expected to have, a material impact on our results of operations. Accordingly, we have included fiscal 2012 pro forma information which gives effect to these transactions, as more fully described in the notes below. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for unaudited pro forma information for fiscal 2012. In addition, see “Management’s Discussion and Analysis and Financial Condition and Results of Operations—Unaudited Supplemental Fiscal 2011 Pro Forma Information” for unaudited supplemental pro forma information for fiscal 2011 prepared to give effect to the Transactions as if they had been consummated on the first day of fiscal 2011.

 

 

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                Fiscal 2012  
    Fiscal
2010(1)
    Fiscal
2011(1)
    Actual (2)     Pro Forma
for Sunflower
Transaction(3)
    Pro Forma for
Sunflower
Transaction
and April 2013
Refinancing(4)
    Pro Forma
Sprouts
Farmers
Market,
Inc.(5)
 
    (dollars in thousands, except per LLC unit and share data)  

Statements of Operations Data:

           

Net sales

  $ 516,816      $ 1,105,879      $ 1,794,823      $ 1,990,963      $ 1,990,963     

Cost of sales, buying and occupancy

    366,947        794,905        1,264,514        1,403,158        1,403,158      $                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    149,869        310,974        530,309        587,805        587,805     

Direct store expenses

    114,463        238,245        368,323        403,731        403,731     

Selling, general and administrative expenses

    23,277        58,528        86,364        91,611        91,611     

Amortization of Henry’s trade names and capitalized software

    867        32,202                          

Store pre-opening costs

    2,341        1,338        2,782        5,218        5,218     

Store closure and exit costs

    354        6,382        2,155        2,214        2,214     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    8,567        (25,721     70,685        85,031        85,031     

Interest expense

    (681     (19,813     (35,488     (40,250     (47,537  

Other income

    295        358        562        649        649     

Loss on extinguishment of debt

                  (992     (992     (992  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    8,181        (45,176     34,767        44,438        37,151     

Income tax (provision) benefit

    (3,320     17,731        (15,267     (19,912     (17,070  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 4,861      $ (27,445   $ 19,500      $ 24,526      $ 20,081      $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per LLC Unit and Share Data:

           

Net income (loss) per LLC unit—basic

  $ 0.83      $ (3.11   $ 1.80      $ 2.15      $ 1.76     

Net income (loss) per LLC unit—diluted

  $ 0.83      $ (3.11   $ 1.76      $ 2.11      $ 1.73     

Weighted average LLC units outstanding—basic

    5,850        8,814        10,857        11,410        11,410     

Weighted average LLC units outstanding—diluted

    5,850        8,814        11,071        11,624        11,578     

Pro forma net income per share—basic(6)

            $     

Pro forma net income per share—diluted(6)

            $     

Pro forma weighted average shares outstanding—basic(6)

           

Pro forma weighted average shares outstanding—diluted(6)

           

Pro Forma Financial Measures:

           

Pro forma adjusted EBITDA(7)

        $ 147,340        147,340      $     

Pro forma adjusted EBIT(7)

        $ 106,967        106,967      $     

Pro forma adjusted net income(7)

        $ 39,996        35,551      $     
    Fiscal 2010     Fiscal 2011     Fiscal 2012                    

Combined comparable store sales growth(8)

    2.3     5.1     9.7      

Other Operating Data:

           

Stores at beginning of period

    40        43        103         

Opened

    3        7        9         

Acquired(9)

           56        37         

Closed

           (3     (1      

Stores at end of period

    43        103        148         

Gross square feet at end of period

    1,035,841        2,721,430        4,064,888         

Average store size at end of period (gross square feet)

    24,089        26,422        27,465         

 

 

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Balance Sheet Data:

        
     As of December 30, 2012  
     Actual      Pro Forma for
April 2013
Refinancing (10)
     Pro Forma
Sprouts Farmers

Market, Inc.(11)
 
     (in thousands)  

Cash and cash equivalents

   $ 67,211       $ 51,283       $     

Total assets

     1,103,236         1,089,144      

Total capital and finance lease obligations, including current portion

     107,639         107,639      

Total long-term debt, including current portion

     426,544         717,905      

Total membership equity

     386,755         86,925      

Total stockholders’ equity

     n/a         n/a      

 

(1) The results of operations for fiscal 2010 and for the period from January 3, 2011 through April 18, 2011 reflect the sales and expenses directly attributable to Henry’s operations and include allocations of expenses from Henry’s previous parent company. These expenses were allocated to Henry’s on the basis that was considered to reflect fairly or reasonably the utilization of the services provided to, or the benefit obtained by, Henry’s. Historical financial statements for Henry’s prior to April 18, 2011 do not reflect the interest expense or debt Henry’s might have incurred if it had been a stand-alone entity. Additionally, we would have expected to incur other expenses, not reflected in our historical financial statements prior to April 18, 2011, if Henry’s had operated as a stand-alone entity. Commencing on April 18, 2011, our consolidated financial statements also include the financial position, results of operations and cash flows of Sprouts Arizona.
(2) Commencing on May 29, 2012, our consolidated financial statements include the financial position, results of operations and cash flows of Sunflower.
(3) The Pro Forma for Sunflower Transaction information includes the pre-combination results of operations of Sunflower and pro forma adjustments for acquisition accounting and the related acquisition financing, as if the Sunflower Transaction and related financing had been consummated on the first day of fiscal 2012. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data for fiscal 2012.
(4) The Pro Forma for Sunflower Transaction and April 2013 Refinancing information includes the pro forma for Sunflower Transaction information described in note 3 above, and also gives effect to pro forma adjustments to reflect our April 2013 Refinancing as if such transactions had occurred on the first day of fiscal 2012. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data for fiscal 2012.
(5) The Pro Forma information includes the pro forma for Sunflower Transaction and April 2013 Refinancing information described in note 4 above, and also gives effect to pro forma adjustments to reflect (i) the corporate conversion, and (ii) the issuance of            shares of common stock in this offering and the application of $         million of the net proceeds to us from the sale of such shares to repay indebtedness under our Credit Facility as described in “Use of Proceeds” (excluding the remaining            shares of common stock being issued in this offering) as if these events had occurred on the first day of fiscal 2012. This assumes net proceeds of this offering to us of $         million, based on an initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data for fiscal 2012.

 

   A $1.00 increase in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) would have resulted in pro forma net income of $        , and pro forma net income per share-basic of $        , and a $1.00 decrease in the assumed initial public offering price of $         per share would have resulted in pro forma net income of $         and pro forma net income per share-basic of $        , in each case, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, a decrease of one million shares in the number of shares offered by us, as set forth on the cover of this prospectus, would have resulted in pro forma net income of $        , and pro forma net income per share-basic of $        , assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated expenses. An increase in the number of shares offered by us, assuming no change in the assumed initial public offering price of $         per share, would not result in any change in pro forma net income or pro forma net income per share-basic.

 

(6) Pro forma net income per share (basic and diluted) gives effect to the items described in notes 3, 4 and 5 above, as applicable, as if they had occurred on the first day of fiscal 2012. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data for fiscal 2012.
(7)

Pro forma adjusted EBITDA is a non-GAAP measure defined as pro forma earnings (pro forma net income (loss)) before interest, taxes, depreciation, amortization and accretion, further adjusted to eliminate the effects of items management does not consider in assessing our ongoing performance. Pro forma adjusted EBIT is a non-GAAP measure defined as pro forma earnings (pro forma net income (loss)) before interest and taxes, further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. Pro forma adjusted net income is a non-GAAP measure defined as pro forma net income (loss) adjusted to eliminate the effects of items management does not consider

 

 

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in assessing ongoing performance. Pro forma net income gives effect to the items described in notes 3, 4 or 5 above, as applicable, as if they had occurred on the first day of fiscal 2012.

 

   Pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These non-GAAP measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. We also use pro forma adjusted EBITDA, as further adjusted for additional items defined in our Credit Facility, for board of director and bank compliance reporting.

 

   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 our business, or as a measure of cash that will be available to meet our 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 our results as reported under GAAP.

 

   The following table shows a reconciliation of pro forma adjusted net income, pro forma adjusted EBIT and pro forma adjusted EBITDA to pro forma net income for fiscal 2012:

 

     Fiscal 2012  
     Pro Forma for
Sunflower
Transaction
    Pro Forma for
Sunflower
Transaction and
April 2013
Refinancing
    Pro Forma
Sprouts
Farmers
Market,  Inc.
 
     (dollars in thousands)  

Pro forma net income(a)

   $ 24,526      $ 20,081      $                

Add: Pro forma income tax provision

     19,912        17,070     
  

 

 

   

 

 

   

 

 

 

Pro forma net income before income taxes

     44,438        37,151     

Adjustments:

      

Costs associated with integration(b)

     17,120        17,120     

Loss on extinguishment of debt(c)

     992        992     

Store closure and exit costs(d)

     2,214        2,214     

Loss on disposal of assets(e)

     1,953        1,953     

Pro forma adjusted income tax provision(f)

     (26,721     (23,879  
  

 

 

   

 

 

   

 

 

 

Pro forma adjusted net income

     39,996        35,551     

Pro forma interest expense, net

     40,250        47,537     

Pro forma adjusted income tax provision(f)

     26,721        23,879     
  

 

 

   

 

 

   

 

 

 

Pro forma adjusted EBIT

     106,967        106,967     

Pro forma depreciation, amortization and accretion

     40,373        40,373     
  

 

 

   

 

 

   

 

 

 

Pro forma adjusted EBITDA

   $ 147,340      $ 147,340      $     
  

 

 

   

 

 

   

 

 

 

 

  (a) See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a reconciliation of pro forma net income to net income for fiscal 2012.
  (b) Costs associated with integration represent the costs to integrate the combined businesses resulting from the Transactions. These expenses include professional fees and severance, which we exclude from our pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income to provide period-to-period comparability of our operating results because management believes these costs do not directly reflect the ongoing performance of our store operations. We do not expect to incur material expenses associated with integration of the Transactions in fiscal 2013.
  (c) Loss on extinguishment of debt represents the amount recorded in fiscal 2012 as a result of the renegotiation of a store lease that was classified as a financing lease obligation. We exclude losses on extinguishment of debt from our pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income to provide period-to-period comparability of our operating results because management believes these costs do not directly reflect the ongoing performance of our store operations.
  (d)

Store closure and exit costs in fiscal 2012 include the costs to close one store and a Sunflower administrative facility following the Sunflower Transaction, as well as revised estimates for store closure costs recorded in fiscal 2011. We

 

 

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exclude store closure and exit costs from our pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income to provide period-to-period comparability of our operating results because management believes these costs do not directly reflect the ongoing performance of our store operations.

  (e) Loss on disposal of assets in fiscal 2012 represents the loss recorded in connection with the disposal of property and equipment. We exclude gains and losses on disposals of assets from our pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income to provide period-to-period comparability of our operating results because management believes these costs do not directly reflect the ongoing performance of our store operations.
  (f) Pro forma adjusted income tax provision represents pro forma income tax provision plus the tax effect of the adjustments described in notes (b) through (e) above based on statutory tax rates for the period. This amount was further adjusted to reflect a $1.9 million reduction in pro forma income tax provision for the effects of certain items related to the Sunflower Transaction during fiscal 2012. Of the adjustment, $2.3 million relates to the tax effects of $3.3 million and $2.9 million of non-deductible transaction costs incurred by us and Sunflower, respectively, based on statutory tax rates for the period. This adjustment was partially offset by a $0.4 million adjustment related to tax benefits from Sunflower stock option exercises. We have excluded these items from our pro forma adjusted income tax provision because management believes they do not directly reflect the ongoing performance of our store operations and are not reflective of our ongoing income tax provision.

 

(8) Combined comparable store sales growth reflects comparable store sales growth calculated as if the Transactions had been consummated on the first day of fiscal 2007. Our practice is to include net sales from a store in comparable store sales beginning on the first day of the 61st week following the store’s opening and to exclude net sales from a closed store from comparable store sales on the day of closure. We include net sales from an acquired store in comparable store sales on the later of (i) the day of acquisition or (ii) the first day of the 61st week following the store’s opening. We use pro forma comparable store sales to calculate combined comparable store sales growth. See “Selected Consolidated Historical and Pro Forma Financial and Other Data” for a reconciliation of pro forma net sales to net sales and a presentation of combined comparable store sales growth for fiscal 2008 through fiscal 2012.
(9) As a result of a change in reporting entity from Henry’s to us in fiscal 2011, we acquired 56 Sprouts Arizona stores in the Henry’s Transaction. We acquired 37 Sunflower stores in the Sunflower Transaction in fiscal 2012.
(10) The Pro Forma for April 2013 Refinancing Transaction balance sheet data as of December 30, 2012 gives effect to pro forma adjustments to reflect our April 2013 Refinancing as if such transactions had occurred on the last day of fiscal 2012. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such unaudited pro forma condensed consolidated balance sheet data.
(11) The Pro Forma balance sheet data as of December 30, 2012 includes the pro forma for April 2013 Refinancing information described in note 10 above, and also gives effect to pro forma adjustments to reflect (i) the corporate conversion and (ii) the issuance of            shares of common stock in this offering and the application of $         million of the net proceeds to us from the sale of such shares to repay indebtedness under our Credit Facility as described in “Use of Proceeds” (excluding the remaining            shares of common stock being issued in this offering), as if these events had occurred on the last day of fiscal 2012. This assumes net proceeds of this offering to us of $         million, based on an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriter discounts and commissions and estimated offering expenses. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such unaudited pro forma condensed consolidated balance sheet data.

 

   A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) would increase (decrease) each of cash and cash equivalents, total assets, total long-term debt and total stockholders’ equity by $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would result in an increase (decrease) each of cash and cash equivalents, total assets, total long-term debt and total stockholders’ equity by $        million, assuming the assumed initial public offering price of $        per share (the midpoint of the price range set forth on the cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. Any of the following 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.

Risks Related to Our Business and Industry

Competition in our industry is intense, and our failure to compete successfully may adversely affect our revenues and profitability.

We operate in the highly competitive retail food industry. Our competitors include supermarkets, natural food stores, mass or discount retailers, warehouse membership clubs, online retailers, and specialty stores. These retailers compete with us for products, customers and locations. We compete on a combination of factors, primarily product selection and quality, customer service, store format, location and price. Our success depends on our ability to offer products that appeal to our customers’ preferences, and our failure to offer such products could lead to a decrease in our sales. To the extent that our competitors lower prices, our ability to maintain profit margins and sales levels may be negatively impacted. In addition, some competitors are aggressively expanding their number of stores or their product offerings or increasing the space allocated to perishable and specialty foods, including natural and organic foods. Some of these competitors may have been in business longer or may have greater financial or marketing resources than we do and may be able to devote greater resources to sourcing, promoting and selling their products. As competition in certain areas intensifies or competitors open stores within close proximity to our stores, our results of operations may be negatively impacted through a loss of sales, decrease in market share, reduction in margin from competitive price changes or greater operating costs.

Our continued growth depends on new store openings, and our failure to successfully open new stores could negatively impact our business and stock price.

Our continued growth depends, in large part, on our ability to open new stores and to operate those stores successfully. Successful implementation of this strategy depends upon a number of factors, including our ability to effectively find suitable sites for new store locations; negotiate and execute leases on acceptable terms; secure and manage the inventory necessary for the launch and operation of our new stores; hire, train and retain skilled store personnel; promote and market new stores; and address competitive merchandising, distribution and other challenges encountered in connection with expansion into new geographic areas and markets. If we are ineffective in performing these activities, then our efforts to open and operate new stores may be unsuccessful or unprofitable, and we may be unable to execute our growth strategy.

Although we believe, based on research conducted for us by a third-party research firm, that the U.S. market can support approximately 1,200 Sprouts Farmers Market stores operating under our current format, we anticipate that it will take years to grow our store count to that number. We cannot assure you that we will grow our store count to approximately 1,200 stores. We have 19 openings planned for 2013 and approximately 20 store openings planned for 2014, and we expect to achieve 12% or more annual new store growth over at least the next five years. However, we cannot assure you that we will achieve this expected level of new store growth. We may not have the level of cash flow or financing necessary to support our growth strategy. Additionally, our proposed expansion will place increased demands on our operational, managerial and administrative resources. These

 

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increased demands could cause us to operate our existing business less effectively, which in turn could cause deterioration in the financial performance of our existing stores. Further, new store openings in markets where we have existing stores may result in reduced sales volumes at our existing stores in those markets. If we experience a decline in performance, we may slow or discontinue store openings, or we may decide to close stores that we are unable to operate in a profitable manner. If we fail to successfully implement our growth strategy, including by opening new stores, our financial condition and operating results may be adversely affected.

On many of our projects, including build-to-suit and existing repurposed locations, we have received landlord contributions for leasehold improvements and other build-out costs. We cannot guarantee that we will be able to continue to receive landlord contributions at the same levels or at all. Any reductions of landlord contributions could have an adverse impact on our new store cash-on-cash returns and our operating results.

We may be unable to maintain or increase comparable store sales, which could negatively impact our business and stock price.

We may not be able to maintain or improve the levels of comparable store sales that we have experienced in the past. Our comparable store sales growth could be lower than our historical average for many reasons, including:

 

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general economic conditions;

 

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slowing in the natural and organic retail sector;

 

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the impact of new and acquired stores entering into the comparable store base;

 

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the opening of new stores that cannibalize store sales in existing areas;

 

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increased competitive activity;

 

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price changes in response to competitive factors;

 

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possible supply shortages;

 

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consumer preferences, buying trends and spending levels;

 

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product price inflation and deflation;

 

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the number and dollar amount of customer transactions in our stores;

 

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cycling against any year of above-average sales results;

 

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our ability to provide product offerings that generate new and repeat visits to our stores; and

 

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the level of customer service that we provide in our stores.

These factors may cause our comparable store sales results to be materially lower than in recent periods, which could harm our business and result in a decline in the price of our common stock.

Our newly opened stores may negatively impact our financial results in the short-term, and may not achieve sales and operating levels consistent with our more mature stores on a timely basis or at all.

We have actively pursued new store growth and plan to continue doing so in the future. We cannot assure you that our new store openings will be successful or reach the sales and profitability levels of our existing stores. New store openings may negatively impact our financial results in the short-term due to the effect of store opening costs and lower sales and contribution to overall

 

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profitability during the initial period following opening. New stores build their sales volume and their customer base over time and, as a result, generally have lower margins and higher operating expenses, as a percentage of net sales, than our more mature stores. New stores may not achieve sustained sales and operating levels consistent with our more mature store base on a timely basis or at all. This may have an adverse effect on our financial condition and operating results.

In addition, we may not be able to successfully integrate new stores into our existing store base and those new stores may not be as profitable as our existing stores. Further, we have experienced in the past, and expect to experience in the future, some sales volume transfer from our existing stores to our new stores as some of our existing customers switch to new, closer locations. If our new stores are less profitable than our existing stores, or if we experience sales volume transfer from our existing stores, our financial condition and operating results may be adversely affected.

We may be unable to maintain or improve our operating margins, which could adversely affect our financial condition and ability to grow.

If we are unable to successfully manage the potential difficulties associated with store growth, we may not be able to capture the efficiencies of scale that we expect from expansion. If we are not able to continue to capture efficiencies of scale, improve our systems, continue our cost discipline, and maintain appropriate store labor levels and disciplined product selection, our operating margins may stagnate or decline, which could have a material adverse effect on our business, financial condition and results of operations and adversely affect the price of our common stock.

We rely heavily on sales of fresh produce, and product supply disruptions may have an adverse effect on our profitability and operating results.

We have a significant focus on perishable products, including fresh produce. Sales of produce accounted for approximately 25% of our pro forma net sales in fiscal 2012. Although we have not experienced difficulty in maintaining the supply of our produce to date, there is no assurance that quality fresh produce will be available to meet our needs in the future. Produce is vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes, hurricanes and pestilences. Adverse weather conditions and natural disasters can lower crop yields and reduce crop size and quality, which in turn could reduce the available supply of, or increase the price of, fresh produce. In addition, we could suffer significant produce inventory losses in the event of disruption of our distribution network or extended power outages in our distribution centers. If we are unable to maintain produce inventory levels suitable for our business needs, it would materially adversely affect our financial condition and results of operations.

If we are unable to successfully identify market trends and react to changing consumer preferences in a timely manner, our sales may decrease.

We believe our success depends, in substantial part, on our ability to:

 

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anticipate, identify and react to natural and organic grocery and dietary supplement trends and changing consumer preferences in a timely manner;

 

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translate market trends into appropriate, saleable product and service offerings in our stores before our competitors; and

 

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develop and maintain vendor relationships that provide us access to the newest merchandise on reasonable terms.

 

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Consumer preferences often change rapidly and without warning, moving from one trend to another among many product or retail concepts. Our performance is impacted by trends regarding healthy lifestyles, dietary preferences, natural and organic products, and vitamins and supplements. Consumer preferences towards supplements or natural and organic food products might shift as a result of, among other things, economic conditions, food safety perceptions and the cost of these products. Our store offerings currently include natural and organic products and dietary supplements. A change in consumer preferences away from our offerings would have a material adverse effect on our business. Additionally, negative publicity over the safety of any such items may adversely affect demand for our products, and could result in lower customer traffic, sales and results of operations.

If we are unable to anticipate and satisfy consumer preferences in the regions where we operate, our sales may decrease, which could have a material adverse effect on our business, financial condition and results of operations.

Real or perceived quality or food safety concerns could have an adverse effect on our sales and reputation.

We could be materially adversely affected if consumers lose confidence in the safety and quality of products we sell. We are a fresh, natural and organic retailer, and we believe that many customers choose to shop our stores because of their interest in health, nutrition and food safety. As a result, we believe that our customers hold us to a high food safety standard. Concerns regarding the safety of our food products or the safety and quality of our food supply chain could cause shoppers to avoid shopping with us, even if the basis for the concern is outside of our control. In addition, adverse publicity about these concerns, whether or not ultimately based on fact, and whether or not involving products sold at our stores, could discourage consumers from buying products we sell and have an adverse effect on our sales. Any lost confidence on the part of our customers would be difficult and costly to reestablish. Any such adverse effect could be exacerbated by our position in the market as a natural and organic food retailer, and could significantly reduce our brand value. Issues regarding the quality or safety of any food items sold by us, regardless of the cause, could have a substantial and adverse effect on our sales and operating results.

Products we sell could cause unexpected side effects, illness, injury or death that could result in their discontinuance or expose us to lawsuits, either of which could result in unexpected costs and damage to our reputation.

There is increasing governmental scrutiny of and public awareness regarding food safety. Unexpected side effects, illness, injury, or death caused by products we sell could result in the discontinuance of sales of these products or prevent us from achieving market acceptance of the affected products. Such side effects, illnesses, injuries and death could also expose us to product liability or negligence lawsuits. Any claims brought against us may exceed our existing or future insurance policy coverage or limits. Any judgment against us that is in excess of our policy limits would have to be paid from our cash reserves, which would reduce our capital resources. Further, we may not have sufficient capital resources to pay a judgment, in which case our creditors could levy against our assets. The real or perceived sale of contaminated or harmful products would cause negative publicity regarding our company, brand, or products, which could in turn harm our reputation and net sales, and could have a material adverse effect on our business, results of operations or financial condition.

If we fail to maintain our reputation and the value of our brand, our sales may decline.

We believe our continued success depends on our ability to maintain and grow the value of the Sprouts brand. Maintaining, promoting and positioning our brand and reputation will depend largely on

 

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the success of our marketing and merchandising efforts and our ability to provide a consistent, high- quality customer experience. Brand value is based in large part on perceptions of subjective qualities, and even isolated incidents can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation. Our brand could be adversely affected if we fail to achieve these objectives, or if our public image or reputation were to be tarnished by negative publicity. Our reputation could also suffer from real or perceived issues involving the labeling or marketing of products we sell as “natural.”

Although the Food and Drug Administration (referred to as the “FDA”) and the U.S. Department of Agriculture (referred to as the “USDA”) have each issued statements regarding the appropriate use of the word “natural,” there is no single, U.S. government-regulated definition of the term “natural” for use in the food industry. The resulting uncertainty has led to consumer confusion, distrust and legal challenges. Plaintiffs have commenced legal actions against a number of food companies that market “natural” products, asserting false, misleading and deceptive advertising and labeling claims, including claims related to genetically modified ingredients. In limited circumstances, the FDA has taken regulatory action against products labeled “natural” that nonetheless contain synthetic ingredients or components. Should we become subject to similar claims, consumers may avoid purchasing products from us or seek alternatives, even if the basis for the claim is unfounded. Adverse publicity about these matters may discourage consumers from buying our products. The cost of defending against any such claims could be significant. Any loss of confidence on the part of consumers in the truthfulness of our labeling or ingredient claims would be difficult and costly to overcome and may significantly reduce our brand value. Any of these events could adversely affect our reputation and brand and decrease our sales, which would have a material adverse effect on our business, financial condition and results of operations.

The current geographic concentration of our stores creates an exposure to local or regional downturns or catastrophic occurrences.

As of December 30, 2012, we operated 68 stores in California, making California our largest market representing 46% of our total stores and 45% of our pro forma net sales in fiscal 2012. We also have store concentration in Arizona, Colorado and Texas, operating 23, 21 and 23 stores in those states, respectively, and representing 46% in the aggregate of our pro forma net sales in fiscal 2012. In addition, we source a large portion of our produce from California, ranging from approximately 40% to approximately 70% depending on the time of year. As a result, our business is currently more susceptible to regional conditions than the operations of more geographically diversified competitors, and we are vulnerable to economic downturns in those regions. Any unforeseen events or circumstances that negatively affect these areas in which we have stores or from which we obtain products could materially adversely affect our revenues and profitability. These factors include, among other things, changes in demographics, population and employee bases, wage increases, changes in economic conditions, severe weather conditions and other catastrophic occurrences. Such conditions may result in reduced customer traffic and spending in our stores, physical damage to our stores, loss of inventory, closure of one or more of our stores, inadequate work force in our markets, temporary disruption in the supply of products, delays in the delivery of goods to our stores and a reduction in the availability of products in our stores. Any of these factors may disrupt our business and materially adversely affect our financial condition and results of operations.

Disruption of significant supplier relationships could negatively affect our business.

Nature’s Best, Inc. (referred to as “NB”) is our primary supplier of dry grocery and frozen food products, accounting for approximately 17% of our total purchases in fiscal 2012. We also have commitments in place with NB to order certain amounts of our distribution-sourced organic and natural produce from NB, and to maintain certain minimum average annual store purchase volumes, including

 

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for any new stores we open. Our current contractual relationship with NB continues through April 2018. Due to this concentration of purchases from a single third-party supplier, the cancellation of our distribution arrangement or the disruption, delay or inability of NB to deliver product to our stores may materially and adversely affect our operating results while we establish alternative distribution channels. Another 4% of our total purchases in fiscal 2012 were made through our secondary supplier, United Natural Foods Inc. (referred to as “UNFI”). Our current contractual relationship with UNFI continues through December 2, 2014 (subject to automatic renewal for successive one-year periods unless either we or UNFI elect not to renew). There is no assurance UNFI or other distributors will be able to fulfill our needs on favorable terms or at all. In addition, if NB, UNFI or any of our other suppliers fail to comply with food safety or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. We cannot assure you that we would be able to find replacement suppliers on commercially reasonable terms, which would have a material adverse effect on our financial condition and results of operations.

Any significant interruption in the operations of our distribution centers could disrupt our ability to deliver our produce in a timely manner.

We self-distribute our produce through our two distribution centers located in Arizona and Texas and a third-party distribution center in California. Any significant interruption in the operation of our distribution center infrastructure, such as disruptions due to fire, severe weather or other catastrophic events, power outages, labor disagreements, or shipping problems, could adversely impact our ability to distribute produce to our stores. Such interruptions could result in lost sales and a loss of customer loyalty to our brand. While we maintain business interruption and property insurance, if the operation of our distribution centers were interrupted for any reason causing delays in shipment of produce to our stores, our insurance may not be sufficient to cover losses we experience, which could have a material adverse effect on our business, financial condition and results of operations.

We, as well as our vendors, are subject to numerous laws and regulations and our compliance with these laws and regulations, as they currently exist or as modified in the future, may increase our costs, limit or eliminate our ability to sell certain products, raise regulatory enforcement risks not present in the past, or otherwise adversely affect our business, results of operations and financial condition.

As a retailer of food, vitamins and supplements and a seller of many of our private label products, we are subject to numerous health and safety laws and regulations. Our suppliers and contract manufacturers are also subject to such laws and regulations. These laws and regulations apply to many aspects of our business, including the manufacturing, packaging, labeling, distribution, advertising, sale, quality and safety of products we sell, as well as the health and safety of our team members and the protection of the environment. We are subject to regulation by various government agencies, including the FDA, the USDA, the Federal Trade Commission (referred to as the “FTC”), the Occupational Safety and Health Administration, the Consumer Product Safety Commission and the Environmental Protection Agency, as well as various state and local agencies.

We are also subject to the USDA’s Organic Rule, which facilitates interstate commerce and the marketing of organically produced food, and provides assurance to our customers that such products meet consistent, uniform standards. Compliance with the USDA’s Organic Rule also places a significant burden on some of our suppliers, which may cause a disruption in some of our product offerings. In addition, the USDA’s Food Safety Inspection Service (referred to as “FSIS”) conducts regular, mandatory on-site inspections of processing and manufacturing facilities. When violations occur, the agency has broad discretion to withhold FSIS inspection services, shut down processing facilities and take civil or criminal actions against violators of applicable statutes and regulations.

 

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As a retailer of supplements, our sales of vitamins and supplements are regulated under the Dietary Supplement Health and Education Act of 1994 (referred to as “DSHEA”), a statute which is administered by the FDA as part of its responsibilities under the federal Food, Drug and Cosmetic Act (referred to as “FDCA”). DSHEA expressly permits vitamins and supplements to bear statements describing how a product affects the structure, function and/or general well-being of the body. However, no statement may expressly or implicitly represent that a supplement will diagnose, cure, mitigate, treat or prevent a disease.

New or revised government laws and regulations, such as the FDA Food Safety Modernization Act (referred to as “FSMA”), passed in January 2011, which grants the FDA greater authority over the safety of the national food supply, as well as increased enforcement by government agencies, could result in additional compliance costs and civil remedies. Specifically, the FSMA requires the FDA to issue regulations mandating that risk-based preventive controls be observed by the majority of food producers. This authority applies to all domestic food facilities and, by way of imported food supplier verification requirements, to all foreign facilities that supply food products. In addition, the FSMA requires the FDA to establish science-based minimum standards for the safe production and harvesting of produce, requires the FDA to identify “high risk” foods and “high risk” facilities and instructs the FDA to set goals for the frequency of FDA inspections of such high risk facilities as well as non-high risk facilities and foreign facilities from which food is imported into the United States.

With respect to both food and dietary supplements, the FSMA meaningfully augments the FDA’s ability to access a producer’s records and a supplier’s records. This increased access could permit the FDA to identify areas of concern it had not previously considered to be problematic either for us or for our suppliers. The FSMA is also likely to result in enhanced tracking and tracing of food requirements and, as a result, added recordkeeping burdens upon our suppliers. In addition, under the FSMA, the FDA has the authority to inspect certifications and therefore evaluate whether foods and ingredients from our suppliers are compliant with the FDA’s regulatory requirements. Such inspections may delay the supply of certain products or result in certain products being unavailable to us for sale in our stores.

DSHEA established that no notification to the FDA is required to market a dietary supplement if it contains only dietary ingredients that were present in the U.S. food supply prior to DSHEA’s enactment. However, for a dietary ingredient not present in the food supply prior to DSHEA’s enactment, the manufacturer is required to provide the FDA with information supporting the conclusion that the ingredient will reasonably be expected to be safe at least 75 days before introducing a new dietary ingredient into interstate commerce. As required by the FSMA, the FDA issued draft guidance in July 2011, which attempts to clarify when an ingredient will be considered a “new dietary ingredient,” the evidence needed to document the safety of a new dietary ingredient, and appropriate methods for establishing the identity of a new dietary ingredient. In particular, the guidance may cause dietary supplement products available in the market before DSHEA to now be classified to include a new dietary ingredient if the dietary supplement product was produced using manufacturing processes different from those used in 1994. Accordingly, the adoption of the draft FDA guidance or similar guidance could materially adversely affect the availability of dietary supplement products.

The FDA has broad authority to enforce the provisions of the FDCA applicable to the safety, labeling, manufacturing and promotion of foods and dietary supplements, including powers to issue a public warning letter to a company, publicize information about illegal products, institute an administrative detention of food, request or order a recall of illegal products from the market, and request the Department of Justice to initiate a seizure action, an injunction action or a criminal prosecution in the U.S. courts. Pursuant to the FSMA, the FDA also has the power to refuse the import of any food or dietary supplement from a foreign supplier that is not appropriately verified as in compliance with all FDA laws and regulations. Moreover, the FDA has the authority to administratively suspend the registration of any facility producing food, including supplements, deemed to present a reasonable probability of causing serious adverse health consequences.

 

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In connection with the marketing and advertisement of products we sell, we could be the target of claims relating to false or deceptive advertising, including under the auspices of the FTC and the consumer protection statutes of some states. Furthermore, in recent years, the FDA has been aggressive in enforcing its regulations with respect to nutrient content claims (e.g., “low fat,” “good source of,” “calorie free,” etc.), unauthorized “health claims” (claims that characterize the relationship between a food or food ingredient and a disease or health condition), and other claims that impermissibly suggest therapeutic benefits for certain foods or food components. These events could interrupt the marketing and sales of products in our stores, including our private label products, severely damage our brand reputation and public image, increase the cost of products in our stores, result in product recalls or litigation, and impede our ability to deliver merchandise in sufficient quantities or quality to our stores, which could result in a material adverse effect on our business, financial condition and results of operations.

We are also subject to laws and regulations more generally applicable to retailers, including labor and employment, taxation, zoning and land use, environmental protection, workplace safety, public health, community right-to-know and alcoholic beverage sales. Our stores are subject to unscheduled inspections on a regular basis, which, if violations are found, could result in the assessment of fines, suspension of one or more needed licenses and, in the case of repeated “critical” violations, closure of the store until a re-inspection demonstrates that we have remediated the problem. Further, our new store openings could be delayed or prevented or our existing stores could be impacted by difficulties or failures in our ability to obtain or maintain required approvals or licenses. In addition, we are subject to environmental laws pursuant to which we could be held responsible for all of the costs relating to any contamination at our or our predecessors’ past or present facilities and at third-party waste disposal sites, regardless of our knowledge of, or responsibility for, such contamination.

As is common in our industry, we rely on our suppliers and contract manufacturers to ensure that the products they manufacture and sell to us comply with all applicable regulatory and legislative requirements. In general, we seek certifications of compliance, representations and warranties, indemnification and/or insurance from our suppliers and contract manufacturers. However, even with adequate insurance and indemnification, any claims of non-compliance could significantly damage our reputation and consumer confidence in our products. In order to comply with applicable statutes and regulations, our suppliers and contract manufacturers have from time to time reformulated, eliminated or relabeled certain of their products and we have revised certain provisions of our sales and marketing program.

We cannot predict the nature of future laws, regulations, interpretations or applications, or determine what effect either additional government regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory schemes would have on our business in the future. They could, however, increase our costs or require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional recordkeeping, expanded documentation of the properties of certain products, expanded or different labeling and/or scientific substantiation. Any or all of such requirements could have a material adverse effect on our business, financial condition and results or operation.

Our nutrition-oriented educational activities may be impacted by government regulation or our inability to secure adequate liability insurance.

We provide nutrition-oriented education to our customers, and these activities may be subject to state and federal regulation, and oversight by professional organizations. In the past, the FDA has expressed concerns regarding summarized health and nutrition-related information that (i) does not, in the FDA’s view, accurately present such information, (ii) diverts a consumer’s attention and focus from FDA-required nutrition labeling and information or (iii) impermissibly promotes drug-type disease-related

 

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benefits. If our team members or third parties we engage to provide this information do not act in accordance with regulatory requirements, we may become subject to penalties that could have a material adverse effect on our business. We believe we are currently in compliance with relevant regulatory requirements, and we maintain professional liability insurance in order to mitigate risks associated with this nutrition-oriented education. However, we cannot predict the nature of future government regulation and oversight, including the potential impact of any such regulation on this activity. Furthermore, the availability of professional liability insurance or the scope of such coverage may change, or our insurance coverage may prove inadequate, which may adversely impact the ability of our customer educators to provide some information to our customers. The occurrence of any such developments could negatively impact the perception of our brand, our sales and our ability to attract new customers.

General economic conditions that impact consumer spending could adversely affect our business.

The retail food business is sensitive to changes in general economic conditions. Recessionary economic cycles, increases in interest rates, higher prices for commodities, fuel and other energy, inflation, high levels of unemployment and consumer debt, depressed home values, high tax rates and other economic factors that affect consumer spending and confidence or buying habits may materially adversely affect the demand for products we sell in our stores. In recent years, the U.S. economy has experienced volatility due to uncertainties related to energy prices, credit availability, difficulties in the banking and financial services sectors, decreases in home values and retirement accounts, high unemployment and falling consumer confidence. As a result, consumers are more cautious and could shift their spending to lower-priced competition, such as warehouse membership clubs, dollar stores or extreme value formats, which could have a material and adverse effect on our operating results and financial condition.

In addition, inflation or deflation can impact our business. Food deflation could reduce sales growth and earnings, while food inflation, combined with reduced consumer spending, could reduce gross profit margins. As a result, our operating results and financial condition could be materially adversely affected.

A widespread health epidemic could materially impact our business.

Our business could be severely impacted by a widespread regional, national or global health epidemic. A widespread health epidemic may cause customers to avoid public gathering places such as our stores or otherwise change their shopping behaviors. Additionally, a widespread health epidemic could also adversely impact our business by disrupting production and delivery of products to our stores and by impacting our ability to appropriately staff our stores.

Increased commodity prices and availability may impact profitability.

Many products we sell include ingredients such as wheat, corn, oils, milk, sugar, cocoa and other commodities. Commodity prices worldwide have been increasing. Any increase in commodity prices may cause our vendors to seek price increases from us. We cannot assure you that we will be able to mitigate vendor efforts to increase our costs, either in whole or in part. In the event we are unable to continue mitigating potential vendor price increases, we may in turn consider raising our prices, and our customers may be deterred by any such price increases. Our profitability may be impacted through increased costs to us which may impact gross margins, or through reduced revenue as a result of a decline in the number and average size of customer transactions.

 

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Energy costs are an increasingly significant component of our operating expenses and increasing energy costs, unless offset by more efficient usage or other operational responses, may impact our profitability.

We utilize natural gas, water, sewer and electricity in our stores and use gasoline and diesel in trucks that deliver products to our stores. We may also be required to pay certain adjustments or other amounts pursuant to our supply and delivery contracts in connection with increases in fuel prices. Increases in energy costs, whether driven by increased demand, decreased or disrupted supply or an anticipation of any such events will increase the costs of operating our stores. Our shipping costs have also increased recently due to rising fuel and freight prices, and these costs may continue to increase. We may not be able to recover these rising costs through increased prices charged to our customers, and any increased prices may exacerbate the risk of customers choosing lower-cost alternatives. In addition, if we are unsuccessful in attempts to protect against these increases in energy costs through long-term energy contracts, improved energy procurement, improved efficiency and other operational improvements, the overall costs of operating our stores will increase, which would impact our profitability, financial condition and results of operations.

Increases in certain costs affecting our marketing, advertising and promotions may adversely impact our ability to advertise effectively and reduce our profitability.

Postal rate increases, and increasing paper and printing costs affect the cost of our promotional mailings. In response to any future increase in mailing costs, we may consider reducing the number and size of certain promotional pieces. In addition, we rely on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting by zip code and carrier routes. We are not party to any long-term contracts for the supply of paper. Future increases in costs affecting our marketing, advertising and promotions could adversely impact our ability to advertise effectively and our profitability.

Disruptions to, or security breaches involving, our information technology systems could harm our ability to run our business.

We rely extensively on information technology systems for point of sale processing in our stores, supply chain, financial reporting, human resources and various other processes and transactions. Our information technology systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, including breaches of our transaction processing or other systems that could result in the compromise of confidential customer data, catastrophic events, and usage errors by our team members. In January 2013, we discovered sophisticated malware installed on certain credit card “pin pads” in a limited number of our stores designed to illegally access our customers’ credit card information. We discovered the malware shortly after it was planted and promptly shut down its access to our systems, but it is possible that our customers’ credit card information was compromised. We have implemented numerous additional security protocols since the attack in order to further tighten security, but there can be no assurance similar breaches will not occur in the future. Our information technology systems may also fail to perform as we anticipate, and we may encounter difficulties in adapting these systems to changing technologies or expanding them to meet the future needs of our business. If our systems are breached, damaged or cease to function properly, we may have to make significant investments to fix or replace them, suffer interruptions in our operations, incur liability to our customers and others, face costly litigation, and our reputation with our customers may be harmed. Various third parties, such as our suppliers and payment processors, also rely heavily on information technology systems, and any failure of these systems could also cause significant interruptions to our business. Any material interruption in the information technology systems we rely on may have a material adverse effect on our operating results and financial condition.

 

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We may be unable to adequately protect our intellectual property rights, which could harm our business.

We rely on a combination of trademark, trade secret, copyright and domain name law and internal procedures and nondisclosure agreements to protect our intellectual property. In particular, we believe our trademarks, including SPROUTS FARMERS MARKET®, SPROUTS® and HEALTHY LIVING FOR LESS!®, and our domain names, including sprouts.com, are valuable assets. However, there can be no assurance that our intellectual property rights will be sufficient to distinguish our products and services from those of our competitors and to provide us with a competitive advantage. From time to time, third parties may use names and logos similar to ours, may apply to register trademarks or domain names similar to ours, and may infringe or otherwise violate our intellectual property rights. There can be no assurance that our intellectual property rights can be successfully asserted against such third parties or will not be invalidated, circumvented or challenged. Asserting or defending our intellectual property rights could be time consuming and costly and could distract management’s attention and resources. If we are unable to prevent our competitors from using names, logos and domain names similar to ours, consumer confusion could result, the perception of our brand and products could be negatively affected, and our sales and profitability could suffer as a result. We also license the SPROUTS FARMERS MARKETS trademark to a third party for use in operating two grocery stores. If the licensee fails to maintain the quality of the goods and services used in connection with this trademark, our rights to, and the value of, this and similar trademarks could potentially be harmed. Negative publicity relating to the licensee could also be incorrectly associated with us, which could harm the business. Failure to protect our proprietary information could also have a material adverse effect on our business.

We may also be subject to claims that our activities or the products we sell infringe, misappropriate or otherwise violate the intellectual property rights of others. Any such claims can be time consuming and costly to defend and may distract management’s attention and resources, even if the claims are without merit. Such claims may also require us to enter into costly settlement or license agreements (which could, for example, prevent us from using our trademarks in certain geographies or in connection with certain products and services), pay costly damage awards, and face a temporary or permanent injunction prohibiting us from marketing or providing the affected products and services, any of which could have a material adverse effect on our business.

Changes in accounting standards may materially impact reporting of our financial condition and results of operations.

Accounting principles generally accepted in the United States and related accounting pronouncements, implementation guidelines, and interpretations for many aspects of our business, such as accounting for inventories, goodwill and intangible assets, store closures, leases, insurance, income taxes, stock-based compensation and accounting for mergers and acquisitions, are complex and involve subjective judgments. Changes in these rules or their interpretation may significantly change or add significant volatility to our reported earnings without a comparable underlying change in cash flow from operations. As a result, changes in accounting standards may materially impact our reported financial condition and results of operations.

Specifically, proposed changes to financial accounting standards could require such leases to be recognized on our balance sheet. In addition to our indebtedness, we have significant obligations relating to our current operating leases. All of our existing stores are subject to leases, which have average remaining terms of nine years and, as of December 30, 2012, we had undiscounted operating lease commitments of approximately $696.3 million, scheduled through 2032, related primarily to our stores, including stores that are not yet open. These commitments represent the minimum lease payments due under our operating leases, excluding common area maintenance, insurance and taxes related to our operating lease obligations, and do not reflect fair market value rent reset provisions in

 

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the leases. These leases are classified as operating leases and disclosed in Note 20 to our consolidated financial statements included elsewhere in this prospectus, but are not reflected as liabilities on our consolidated balance sheets. During fiscal 2012, our rent expense charged under operating leases was approximately $54.2 million.

In August 2010, the Financial Accounting Standards Board (referred to as “FASB”) and the International Accounting Standards Board (referred to as “IASB”) issued a joint discussion paper highlighting proposed changes to financial accounting standards for leases. Currently, Accounting Standards Codification 840 (referred to as “ASC 840”), Leases (formerly Statement of Financial Accounting Standards 13, Accounting for Leases) requires that operating leases are classified as an off-balance sheet transaction and only the current year operating lease expense is accounted for in the income statement. In order to determine the proper classification of our stores as either operating leases or capital leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a capital lease. A majority of our store leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases. Additionally, operating leases are not reflected in our consolidated balance sheets, which means that neither a leased asset nor an obligation for future lease payments is reflected in our consolidated balance sheets. The proposed changes to ASC 840 would require that substantially all operating leases be recognized as assets and liabilities on our balance sheet. The right to use the leased property would be capitalized as an asset and the present value of future lease payments would be accounted for as a liability. The proposed changes are currently being reviewed by FASB, IASB and others. The timeline for finalization and effectiveness has not yet been determined, but the standard may require retrospective adoption. While we have not quantified the impact this proposed standard would have on our financial statements, if our current operating leases are instead recognized on the balance sheet, it will result in a significant increase in the liabilities and assets reflected on our balance sheets and in the interest expense and depreciation and amortization expense reflected in our income statement, while reducing the amount of rent expense.

Legal proceedings could materially impact our business, financial condition and results of operations.

Our operations, which are characterized by a high volume of customer traffic and by transactions involving a wide variety of product selections, carry a higher exposure to consumer litigation risk when compared to the operations of companies operating in some other industries. Consequently, we may be a party to individual personal injury, product liability, intellectual property, employment-related and other legal actions in the ordinary course of our business, including litigation arising from food-related illness. The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. While we maintain insurance, insurance coverage may not be adequate, and the cost to defend against future litigation may be significant. There may also be adverse publicity associated with litigation that may decrease consumer confidence in our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may materially adversely affect our business, financial condition, and results of operations.

Claims under our insurance plans may differ from our estimates, which could materially impact our results of operations.

We use a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’ compensation, general liability (including, in connection with legal proceedings described

 

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under “—Legal proceedings could materially impact our business, financial condition and results of operations” above), property insurance, director and officers’ liability insurance, vehicle liability and team member health-care benefits. Liabilities associated with the risks that are retained by us are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Our results could be materially impacted by claims and other expenses related to such plans if future occurrences and claims differ from these assumptions and historical trends.

Our high level of fixed lease obligations could adversely affect our financial performance.

Our high level of fixed lease obligations will require us to use a significant portion of cash generated by our operations to satisfy these obligations, and could adversely impact our ability to obtain future financing to support our growth or other operational investments. We will require substantial cash flows from operations to make our payments under our operating leases, all of which provide for periodic increases in rent. If we are not able to make the required payments under the leases, the lenders or owners of the relevant stores, distribution centers or administrative offices may, among other things, repossess those assets, which could adversely affect our ability to conduct our operations. In addition, our failure to make payments under our operating leases could trigger defaults under other leases or under agreements governing our indebtedness, which could cause the counterparties under those agreements to accelerate the obligations due thereunder.

Our lease obligations may require us to continue paying rent for store locations that we no longer operate.

We are subject to risks associated with our current and future store, distribution center and administrative office real estate leases. We generally cannot cancel our leases, so if we decide to close or relocate a location, we may nonetheless be committed to perform our obligations under the applicable lease, including paying the base rent for the remaining lease term. In addition, as our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or any terms at all, which could materially adversely affect our business, results of operations or financial condition.

The loss of key management could negatively affect our business.

We are dependent upon a number of key management and other team members. If we were to lose the services of a significant number of key team members within a short period of time, this could have a material adverse effect on our operations as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which may cause our stock price to decline. We do not maintain key person insurance on any team member.

If we are unable to attract, train and retain team members, we may not be able to grow or successfully operate our business.

The food retail industry is labor intensive. Our continued success is dependent upon our ability to attract and retain qualified team members who understand and appreciate our culture and are able to represent our brand effectively and establish credibility with our business partners and consumers. We face intense competition for qualified team members, many of whom are subject to offers from competing employers. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force in the markets in which we are located, unemployment levels within those markets, unionization of the available work force, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. In the event of increasing

 

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wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our customer service to suffer, while increasing our wages could cause our earnings to decrease. If we are unable to hire and retain team members capable of meeting our business needs and expectations, our business and brand image may be impaired. Any failure to meet our staffing needs or any material increase in turnover rates of our team members or team member wages may adversely affect our business, results of operations or financial condition.

Higher wage and benefit costs could adversely affect our business.

Changes in federal and state minimum wage laws and other laws relating to employee benefits, including the Patient Protection and Affordable Care Act, could cause us to incur additional wage and benefit costs. Increased labor costs would increase our expenses and have an adverse impact on our profitability.

Union attempts to organize our team members could negatively affect our business.

None of our team members are currently subject to a collective bargaining agreement. As we continue to grow and enter different regions, unions may attempt to organize all or part of our team member base at certain stores or within certain regions. Responding to such organization attempts may distract management and team members and may have a negative financial impact on individual stores, or on our business as a whole.

We may require additional capital to fund the expansion of our business, and our inability to obtain such capital could harm our business.

To support our expanding business, we must have sufficient capital to continue to make significant investments in our new and existing stores and advertising. We cannot assure you that cash generated by our operations will be sufficient to allow us to fund such expansion. If cash flows from operations are not sufficient, we may need additional equity or debt financing to provide the funds required to expand our business. If such financing is not available on satisfactory terms or at all, we may be unable to expand our business or to develop new business at the rate desired and our operating results may suffer. Debt financing increases expenses, may contain covenants that restrict the operation of our business, and must be repaid regardless of operating results. Equity financing, or debt financing that is convertible into equity, could result in additional dilution to our existing stockholders.

Our inability to obtain adequate capital resources, whether in the form of equity or debt, to fund our business and growth strategies may require us to delay, scale back or eliminate some or all of our operations or the expansion of our business, which may have a material adverse effect on our business, operating results, financial condition or prospects.

We may be unable to generate sufficient cash flow to satisfy our debt service obligations, which could adversely impact our business.

As of December 30, 2012, on a pro forma basis, after giving effect to the application of the net proceeds of this offering as described in “Use of Proceeds,” we would have had outstanding indebtedness of approximately $         million. We may incur additional indebtedness in the future, including borrowings under our Credit Facility. We will continue to have significant debt service obligations following the completion of this offering. Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do

 

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not know whether we will be able to take any of such actions on a timely basis, on terms satisfactory to us or at all.

The fact that a substantial portion of our cash flow from operations could be needed to make payments on this indebtedness could have important consequences, including the following:

 

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reducing our ability to execute our growth strategy, including new store development;

 

  Ÿ  

impacting our ability to continue to execute our operational strategies in existing stores;

 

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increasing our vulnerability to general adverse economic and industry conditions;

 

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reducing the availability of our cash flow for other purposes;

 

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limiting our flexibility in planning for, or reacting to, changes in our business and the market in which we operate, which would place us at a competitive disadvantage compared to our competitors that may have less debt;

 

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limiting our ability to borrow additional funds; and

 

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failing to comply with the covenants in our debt agreements could result in all of our indebtedness becoming immediately due and payable.

Our ability to obtain necessary funds through borrowing will depend on our ability to generate cash flow from operations. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us under our Credit Facility or otherwise in amounts sufficient to enable us to fund our liquidity needs, our operating results and financial condition may be adversely affected. Our inability to make scheduled payments on our debt obligations in the future would require us to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures, or seek additional equity investment.

Covenants in our debt agreements restrict our operational flexibility.

The agreement governing our Credit Facility contains usual and customary restrictive covenants relating to our management and the operation of our business, including the following:

 

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incurring additional indebtedness;

 

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making certain investments;

 

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merging, dissolving, liquidating, consolidating, or disposing of all or substantially all of our assets;

 

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paying dividends, making distributions, or redeeming capital stock;

 

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entering into transactions with our affiliates; and

 

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granting liens on our assets.

Our Credit Facility also requires us to maintain a specified financial ratio at the end of any fiscal quarter at any time the Revolving Credit Facility is drawn. Our ability to meet this financial ratio, if applicable, could be affected by events beyond our control. Failure to comply with any of the covenants under our Credit Facility could result in a default under the facility, which could cause our lenders to accelerate the timing of payments and exercise their lien on substantially all of our assets, which would have a material adverse effect on our business, operating results, and financial condition.

We will incur increased costs as a result of being a public company.

We will incur significant legal, accounting, and other expenses as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934,

 

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as amended (referred to as the “Exchange Act”), and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act of 2002 (referred to as the “Sarbanes-Oxley Act”), the Dodd-Frank Act of 2010, and the listing requirements of NASDAQ Global Select Market. Our management and other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements. The reporting requirements, rules, and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Any changes that we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.

Our management has limited experience managing a public company, and our current resources may not be sufficient to fulfill our public company obligations.

Following the completion of this offering, we will be subject to various regulatory requirements, including those of the Securities and Exchange Commission (referred to as the “SEC”) and NASDAQ Global Select Market. These requirements include record keeping, financial reporting and corporate governance rules and regulations. Our management team has limited experience in managing a public company and, historically, has not had the resources typically found in a public company. Our internal infrastructure may not be adequate to support our increased reporting obligations, and we may be unable to hire, train or retain necessary staff and may initially be reliant on engaging outside consultants or professionals to overcome our lack of experience. Our business could be adversely affected if our internal infrastructure is inadequate, we are unable to engage outside consultants, or are otherwise unable to fulfill our public company obligations.

If we are unable to implement and maintain effective internal control over financial reporting in the future, we may fail to prevent or detect material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with our 2014 annual report on Form 10-K to be filed in 2015, we will be required to file a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which is a time-consuming, costly and complicated process. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our 2014 annual report on Form 10-K to be filed in 2015.

In connection with the audit of the financial statements for Sprouts Arizona for fiscal 2010 and our financial statements for fiscal 2011, material weaknesses were identified. We have taken steps to remediate these items by hiring additional finance and accounting personnel and by establishing and formalizing accounting policies and procedures.

In connection with the audit of our financial statements for fiscal 2012, a material weakness related to internal controls with respect to costing of inventories was identified. We previously valued our non-perishable products at the lower of cost or market with costs determined based on replacement costs before discounts. We later determined that replacement costs before discounts was not an acceptable method under GAAP. As a result, we restated our fiscal 2011 financial statements to correct for this error and we changed our inventory method for non-perishable products to the lower of cost or market using weighted-average costs. The correction of this error also resulted in an audit adjustment in fiscal 2012. As a result, it was determined that a material weakness in our internal control over financial reporting existed related to our failure to design and maintain effective controls

 

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with respect to the application of an appropriate GAAP method in determining inventory costs for non-perishable products. We are currently recording our inventory costs for non-perishable inventory using weighted-average costs that include statistical and other estimation methods which we believe provide a reasonable basis to value our non-perishable inventory. We are currently addressing this material weakness in the development of our internal control over financial reporting processes. However we cannot at this time estimate how long it will take to remediate this material weakness.

If we are unsuccessful in our efforts to remediate any material weakness in our internal control over financial reporting, if we identify any additional material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. In addition, we could become subject to investigations by NASDAQ Global Select Market, the SEC, or other regulatory authorities, which could require additional financial and management resources.

If our goodwill becomes impaired, we may be required to record a significant charge to earnings.

We have a significant amount of goodwill. As of December 30, 2012, we had goodwill of approximately $368.1 million, which represented approximately 33% of our total assets as of such date. Goodwill is reviewed for impairment on an annual basis in the fourth fiscal quarter or whenever events occur or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. Fair value is determined based on the discounted cash flows and comparable market values of our single reporting unit. If the fair value of the reporting unit is less than its carrying value, the fair value of the implied goodwill is calculated as the difference between the fair value of our reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. In the event an impairment to goodwill is identified, an immediate charge to earnings in an amount equal to the excess of the carrying value over the implied fair value would be recorded, which would adversely affect our operating results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates—Goodwill and Intangible Assets.”

Determining market values using a discounted cash flow method requires that we make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate market rates. Our judgments are based on historical experience, current market trends and other information. In estimating future cash flows, we rely on internally generated forecasts for operating profits and cash flows, including capital expenditures. Based on our annual impairment test during fiscal 2010, 2011 and 2012, no goodwill impairment charge was required to be recorded. Changes in estimates of future cash flows caused by items such as unforeseen events or changes in market conditions could negatively affect our reporting unit’s fair value and result in an impairment charge. Factors that could cause us to change our estimates of future cash flows include a prolonged economic crisis, successful efforts by our competitors to gain market share in our core markets, our inability to compete effectively with other retailers or our inability to maintain price competitiveness. An impairment of a significant portion of our goodwill could materially adversely affect our financial condition and results of operations.

 

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Risks Related to this Offering and Ownership of our Common Stock

Our stock price may be volatile, and you may not be able to resell your shares at or above the offering price or at all.

Prior to this offering, there has been no public market for our common stock. An active public market for our common stock may not develop or be sustained after this offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of our common stock at a price that is attractive to you, or at all. The price of our common stock in any such market may be higher or lower than the price that you pay in this offering. If you purchase shares of our common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay the price that we and the selling stockholders negotiated with the representatives of the underwriters, which may not be indicative of prices that will prevail in the trading market.

There is no guarantee that our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. The trading price of our common stock may be volatile and subject to wide price fluctuations in response to various factors, many of which are beyond our control, including the following:

 

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actual or anticipated fluctuations in our quarterly or annual financial results;

 

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the financial guidance we may provide to the public, any changes in such guidance, or our failure to meet such guidance;

 

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failure of industry or securities analysts to maintain coverage of our company, changes in financial estimates by any industry or securities analysts that follow our company, or our failure to meet such estimates;

 

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various market factors or perceived market factors, including rumors, whether or not correct, involving us or our competitors;

 

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fluctuations in stock market prices and trading volumes of securities of similar companies;

 

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sales, or anticipated sales, of large blocks of our stock;

 

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short selling of our common stock by investors;

 

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additions or departures of key personnel;

 

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new store openings or entry into new markets by us or by our competitors;

 

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regulatory or political developments;

 

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changes in accounting principles or methodologies;

 

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litigation and governmental investigations;

 

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acquisitions by us or by our competitors; and

 

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general financial market conditions or events.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the price or liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our

 

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stockholders were to bring a lawsuit against us, we could incur substantial costs defending the lawsuit or paying for settlements or damages. Such a lawsuit could also divert the time and attention of our management from our business.

The large number of shares eligible for public sale could depress the market price of our common stock.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, and the perception that these sales could occur may depress the market price. We will have              shares of common stock outstanding after this offering. Of these shares, the common stock sold in this offering will be freely tradable, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933, as amended (referred to as the “Securities Act”). The holders of substantially all of the remaining shares of common stock will agree with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the 180-day period beginning on the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. and Credit Suisse Securities (USA) LLC. The 180-day restricted period referred to in the preceding sentence may be extended under the circumstances described in the “Underwriting” section of this prospectus.

In addition, the Stockholders Agreement to be entered into by our current equity holders in connection with the corporate conversion will limit the ability of current equity holders (other than the Apollo Funds) to sell their shares until January 1, 2015 (subject to a potential extension up to March 31, 2015). However, the Apollo Funds will have the ability to require us to register shares of our common stock held by them for resale (subject to the restrictions during the 180-day restricted period referred to above), and our stockholders party to the Stockholders Agreement will also have the ability to participate in such registered offerings. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.” Subject to the foregoing, after the expiration of the restricted period, these shares may be sold in the public market, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance with the volume restrictions of Rule 144.

We also intend to register all shares of common stock that we may issue under our Incentive Plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up arrangement described above.

Sales of common stock as restrictions end may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

You will incur immediate and substantial dilution in your investment because our earlier investors paid substantially less than the initial public offering price when they purchased their shares.

If you purchase shares in this offering, you will incur immediate and substantial dilution of $         in net tangible book value per share, based on an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, because the price that you pay will be substantially greater than the net tangible book value per share of the shares acquired. This dilution arises because our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. Furthermore, there will be options to purchase shares of common stock outstanding upon the closing of this offering that have exercise prices below the initial public offering price. To the extent such options are exercised in the future, there may be further dilution to new investors. See “Dilution.”

 

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Our principal stockholders will continue to have substantial control over us after this offering and will be able to influence corporate matters.

Upon the closing of this offering, our directors, executive officers, and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate, approximately      % of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares from the selling stockholders. In particular, the Apollo Funds will beneficially own, in the aggregate, approximately     % of our outstanding common stock. These amounts compare to approximately     % of our outstanding common stock represented by the shares sold in this offering, also assuming no exercise of the underwriters’ option to purchase additional shares from the selling stockholders. As a result, these stockholders, acting together, or the Apollo Funds acting alone, will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

Certain underwriters are affiliates of our controlling stockholder and have interests in this offering beyond customary underwriting discounts and commissions.

Apollo Global Securities, LLC, an underwriter of this offering, is an affiliate of Apollo, our controlling stockholder. Since Apollo beneficially owns more than 10% of our outstanding common stock, a “conflict of interest” is deemed to exist under Rule 5121(f)(5)(B) of the Conduct Rules of FINRA. Accordingly, we intend that this offering will be made in compliance with the applicable provisions of Rule 5121. In particular, pursuant to Rule 5121, the appointment of a qualified independent underwriter is not necessary because Apollo Global Securities, LLC is not primarily responsible for managing this offering, and the underwriters that are primarily responsible for managing this offering (Goldman, Sachs & Co. and Credit Suisse Securities (USA) LLC) satisfy the criteria required by Rule 5121(f)(12)(E) and do not have a conflict of interest with us. However, in accordance with Rule 5121, Apollo Global Securities, LLC will not sell our common stock to a discretionary account without receiving written approval from the account holder. See “Underwriting—Conflicts of Interest.”

Anti-takeover provisions could impair a takeover attempt and adversely affect existing stockholders.

Certain provisions of our certificate of incorporation and bylaws that will be in effect upon the closing of this offering and applicable provisions of Delaware law may have the effect of rendering more difficult, delaying, or preventing an acquisition of our company, even when this would be in the best interest of our stockholders. Our corporate governance documents will include the following provisions:

 

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creating a classified board of directors whose members serve staggered three-year terms;

 

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authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock;

 

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limiting the liability of, and providing indemnification to, our directors and officers;

 

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limiting the ability of our stockholders to call and bring business before special meetings;

 

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requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

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controlling the procedures for the conduct and scheduling of board and stockholder meetings;

 

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providing the board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings;

 

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  Ÿ  

permitting newly created directorships resulting from an increase in the authorized number of directors or vacancies on our board of directors to be filled only by a majority of our remaining directors, even if less than a quorum is then in office, or by a sole remaining director; and

 

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providing that our board of directors is expressly authorized to make, repeal, alter, or amend our bylaws.

In addition, Delaware law imposes conditions on the voting of “control shares” and on certain business combination transactions with “interested stockholders.”

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they adversely change their recommendations regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If we do not establish and maintain adequate research coverage, or if any of the analysts who may cover us downgrade our stock or publish inaccurate or unfavorable research about our business or provide relatively more favorable recommendations about our competitors, our stock price could decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering to in ways that increase the value of your investment. We expect to use the net proceeds from this offering to pay down indebtedness and for general corporate purposes. We have not allocated these net proceeds for any specific purposes. Our management might not be able to generate a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use the net proceeds from this offering.

Since we do not expect to pay any cash dividends for the foreseeable future, investors in this offering may be forced to sell their stock in order to obtain a return on their investment.

We do not anticipate declaring or paying in the foreseeable future any cash dividends on our capital stock. Instead, we plan to retain any earnings to finance our operations and growth plans discussed elsewhere in this prospectus. In addition, our Credit Facility contains covenants that would restrict our ability to pay cash dividends. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future operating results and financial position, business strategy, and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar expressions.

The forward-looking statements contained in this prospectus reflect our views as of the date of this prospectus about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, without limitation, those factors described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Some of the key factors that could cause actual results to differ from our expectations include the following:

 

  Ÿ  

the competitive nature of the industry in which we conduct our business;

 

  Ÿ  

our ability to open new stores;

 

  Ÿ  

our ability to increase comparable store sales;

 

  Ÿ  

the potential for our newly opened stores to negatively impact our financial results in the short or long term;

 

  Ÿ  

our ability to maintain or improve operating margins;

 

  Ÿ  

produce or supply chain disruptions;

 

  Ÿ  

our ability to identify market trends and react to changing consumer preferences;

 

  Ÿ  

the impact of quality or food safety concerns;

 

  Ÿ  

our exposure to lawsuits relating to the products we sell;

 

  Ÿ  

our ability to maintain our brand value and reputation;

 

  Ÿ  

the geographic concentration of our stores;

 

  Ÿ  

disruption of significant supplier relationships;

 

  Ÿ  

significant interruptions in the operations of our distribution centers;

 

  Ÿ  

the effects of government regulation;

 

  Ÿ  

liabilities arising out of our nutrition-oriented educational activities;

 

  Ÿ  

general economic conditions affecting consumer spending;

 

  Ÿ  

the occurrence of a widespread health epidemic;

 

  Ÿ  

increased commodity prices and lack of availability;

 

  Ÿ  

increased energy costs;

 

  Ÿ  

increases in the cost of our marketing, advertising, and promotional activities;

 

  Ÿ  

the failure of our information technology systems;

 

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  Ÿ  

our inability to protect our intellectual property;

 

  Ÿ  

changes in accounting standards;

 

  Ÿ  

the outcome of litigation against us;

 

  Ÿ  

our ability to accurately estimate claims under our insurance plans;

 

  Ÿ  

our high level of fixed lease obligations;

 

  Ÿ  

our ability to satisfy our lease obligations;

 

  Ÿ  

the retention of key management;

 

  Ÿ  

our ability to attract, train and retain store team members;

 

  Ÿ  

the effect of increased labor costs;

 

  Ÿ  

union organization activities;

 

  Ÿ  

our ability to raise additional capital to finance the growth of our business;

 

  Ÿ  

our ability to service our debt obligations;

 

  Ÿ  

restrictions in our debt agreements;

 

  Ÿ  

increased costs as the result of being a public company;

 

  Ÿ  

the limited experience of our management in managing a public company;

 

  Ÿ  

our ability to maintain effective internal control over financial reporting; and

 

  Ÿ  

the potential for our goodwill to become impaired.

Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this prospectus are based on information available to us on the date of this prospectus. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as otherwise required by law.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of our common stock in this offering will be approximately $         million, assuming an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us. We will not receive any proceeds from the sale by the selling stockholders of shares in this offering.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by $         million, assuming the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, remained the same and after deducting the underwriting discount and estimated offering expenses payable by us.

We intend to use approximately $         million of the net proceeds from this offering to repay borrowings under the Term Loan portion of our Credit Facility. As of April 30, 2013, the interest rate on the Term Loan, which is scheduled to mature on April 23, 2020, was 4.5%. A portion of the proceeds of the Term Loan were used to repay in full the outstanding balance of $403.1 million under our Former Credit Facilities. We used the remaining proceeds of the Term Loan, together with cash on hand, to make a distribution to our equity holders, to make payments to vested option holders, and to pay transaction fees and expenses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Long-term Debt and Former Credit Facilities” for more information.

We intend to use the remaining net proceeds from this offering for general corporate purposes. We will have broad discretion in the way we use the net proceeds.

Affiliates of Goldman, Sachs & Co., Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc., underwriters in this offering, are lenders under our Credit Facility and therefore will receive a portion of the net proceeds of this offering. See “Underwriting.”

DIVIDEND POLICY

We do not anticipate declaring or paying in the foreseeable future, any cash dividends on our capital stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our operating results, financial condition, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant. Our Credit Facility contains covenants that would restrict our ability to pay cash dividends.

 

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CORPORATE CONVERSION

Prior to the effectiveness of the registration statement of which this prospectus forms a part, we will convert Sprouts Farmers Markets, LLC from a Delaware limited liability company to Sprouts Farmers Market, Inc., a Delaware corporation. In order to consummate the corporate conversion, a certificate of conversion will be filed with the Secretary of State of the State of Delaware. As part of the corporate conversion:

 

  Ÿ  

holders of our Class A and Class B units will receive              shares of our common stock for each unit held immediately prior to the corporate conversion; and

 

  Ÿ  

options to purchase our Class B units will become options to purchase              shares of our common stock for each unit underlying such options immediately prior to the corporate conversion, at the same aggregate exercise price in effect prior to the corporate conversion.

Assuming the effectiveness of the corporate conversion as of December 30, 2012:

 

  Ÿ  

11,435,611 outstanding Class A units and 15,000 Class B units of Sprouts Farmers Markets, LLC will convert into an aggregate of              shares of our common stock; and

 

  Ÿ  

outstanding options to purchase 1,052,090 Class B units of Sprouts Farmers Markets, LLC will become options to purchase an aggregate of              shares of our common stock, with exercise prices ranging from $         to $        .

In connection with the corporate conversion, Sprouts Farmers Market, Inc. will continue to hold all assets of Sprouts Farmers Markets, LLC and will assume all of the debts and obligations of Sprouts Farmers Markets, LLC. Sprouts Farmers Market, Inc. will be governed by a certificate of incorporation filed with the Delaware Secretary of State and bylaws, the material portions of which are described in “Description of Capital Stock.” On the effective date of the corporate conversion, the members of the board of managers of Sprouts Farmers Markets, LLC will become the members of the board of directors of Sprouts Farmers Market, Inc. and the officers of Sprouts Farmers Markets, LLC will become the officers of Sprouts Farmers Market, Inc.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 30, 2012:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to reflect the April 2013 Refinancing; and

 

  Ÿ  

on a pro forma as adjusted basis to further reflect to reflect (i) the corporate conversion and, in connection therewith, the conversion of all outstanding units into an aggregate of              shares of our common stock, and the conversion of all outstanding options to purchase units into options to purchase an aggregate of              shares of our common stock, (ii) the sale by us of              shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us, and (iii) the application of the net proceeds received by us as described under “Use of Proceeds.”

You should read this table together with “Selected Consolidated Historical and Pro Forma Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of December 30, 2012  
     Actual      Pro Forma for
April 2013
Refinancing(1)
     Pro Forma
As Adjusted(2)
 
     (in thousands, except share data)  

Cash and cash equivalents

   $ 67,211       $ 51,283       $                
  

 

 

    

 

 

    

 

 

 

Capital and finance lease obligations, including current portion

   $ 107,639       $ 107,639       $     

Long-term debt, including current portion

     426,544         717,905      

Total membership equity

     386,755         86,925      

Stockholders’ equity:

        

Undesignated preferred stock, $0.001 par value; no shares authorized, issued and outstanding, actual and pro forma for April 2013 Refinancing;              shares authorized, no shares issued and outstanding, pro forma as adjusted

                  

Common stock, $0.001 par value; no shares authorized, issued and outstanding, actual and pro forma for April 2013 Refinancing;              shares authorized and              shares issued and outstanding, pro forma as adjusted

                  

Additional paid-in capital

                  

Retained earnings

                  

Total stockholders’ equity

                  
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 920,938       $ 912,469       $                
  

 

 

    

 

 

    

 

 

 

 

(1) See “Unaudited Pro Forma Condensed Consolidated Financial Information.”
(2)

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) each of cash and cash equivalents, additional paid-in capital, and total capitalization by $        , and increase (decrease) total stockholders’ equity by $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remained the

 

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same and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, and total capitalization by $        , and increase (decrease) total stockholders’ equity by $            , assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) remained the same and after deducting the underwriting discount and estimated offering expenses payable by us.

The outstanding as adjusted share information in the table above is based on              shares of our common stock outstanding as of December 30, 2012, assuming the corporate conversion occurred on December 30, 2012, and excludes the following:

 

  Ÿ  

            shares of common stock issuable upon the exercise of stock options outstanding as of December 30, 2012 at a weighted average exercise price of $         per share; and

 

  Ÿ  

            shares of common stock reserved for future issuance under our Incentive Plans.

 

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DILUTION

If you invest in our common stock, your interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

The historical net tangible book value of our common stock as of December 30, 2012 was $ million, or $         per share. Historical net tangible book value is the amount of our total tangible assets less our total liabilities. Historical net tangible book value per share is our historical net tangible book value, divided by the number of outstanding shares, after giving effect to the conversion of all outstanding units into an aggregate of              shares of our common stock and the conversion of all outstanding options to purchase units into options to purchase an aggregate of              shares of our common stock in the corporate conversion.

The pro forma net tangible book value of our common stock as of December 30, 2012 was approximately $         million, or approximately $         per share. Pro forma net tangible book value and pro forma net tangible book value per share give effect to (i) the corporate conversion and (ii) the April 2013 Refinancing.

Pro forma as adjusted net tangible book value gives effect to (i) the corporate conversion, (ii) the April 2013 Refinancing, (iii) the sale by us of              shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us, and (iv) the application of the net proceeds received by us as described under “Use of Proceeds.” As of December 30, 2012, our pro forma as adjusted net tangible book value would have been approximately $         million, or approximately $         per share. This represents an immediate increase in pro forma net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

     $               

Historical net tangible book value per share as of December 30, 2012

  

Pro forma increase in net tangible book value per share attributable to the April 2013 Refinancing

  

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares in this offering

  

Pro forma as adjusted net tangible book value per share after this offering

  

Dilution per share to new investors purchasing shares in this offering

   $                
  

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the pro forma as adjusted net tangible book value after this offering by $         per share and the dilution to new investors by $         per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the underwriting discount and estimated offering expenses payable by us.

Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value (deficit) after this offering by approximately $         per share and decrease (increase) the

 

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dilution in pro forma to investors participating in this offering by approximately $         per share, assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) remained the same and after deducting the underwriting discount and estimated offering expenses payable by us.

The table below summarizes as of December 30, 2012, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration, and the average price per share (i) paid to us by our existing stockholders and (ii) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discount and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number    Percent     Amount      Percent    

Existing stockholders

            $                          $                

New investors

                    
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100.0   $           100.0  
  

 

  

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) total consideration paid by new investors by $         and increase (decrease) the percent of total consideration paid by new investors by     %, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and before deducting the underwriting discount and estimated offering expenses payable by us.

Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) total consideration paid by new investors by $         and increase (decrease) the percent of total consideration paid by new investors by     %, assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) remained the same and before deducting the underwriting discount and estimated offering expenses payable by us.

If the underwriters’ option to purchase additional shares in this offering is exercised in full, the percentage of shares of our common stock held by existing stockholders will be reduced to     % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors will increase to              shares, or     % of the total number of shares of our common stock outstanding after this offering.

The discussion and tables above are based on              shares of our common stock outstanding as of December 30, 2012, assuming the corporate conversion occurred on December 30, 2012, and exclude the following:

 

  Ÿ  

            shares of common stock issuable upon the exercise of stock options outstanding as of December 30, 2012 at a weighted average exercise price of $         per share; and

 

  Ÿ  

            shares of common stock reserved for future issuance under our Incentive Plans.

 

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If all of these options were exercised, then our existing stockholders, including the holders of these options, would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon the closing of this offering. In such event, the total consideration paid by our existing stockholders, including the holders of these options, would be approximately $         million, or     %, the total consideration paid by our new investors would be $         million, or     %, the average price per share paid by our existing stockholders would be $        , and the average price per share paid by our new investors would be $         .

 

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SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA

The following tables set forth our selected historic financial and other data, as well as certain pro forma information. You should read the selected historical and pro forma financial and other data in conjunction with the information included under the heading “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results set forth below are not necessarily indicative of results to be expected for any future period.

The historical balance sheet data as of January 1, 2012 and December 30, 2012 and the historical statements of operations data for fiscal 2010, fiscal 2011 and fiscal 2012 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The historical balance sheet data as of January 3, 2010 and January 2, 2011 and the historical statement of operations data for fiscal 2009 have been derived from our audited consolidated financial statements, which are not included in this prospectus. The historical balance sheet data as of January 4, 2009 and the historical statement of operations data for fiscal 2008 have been derived from our unaudited consolidated financial statements, which are not included in this prospectus.

In 2002, Sprouts Arizona opened the first Sprouts Farmers Market store in Chandler, Arizona. In 2011, Sprouts Arizona combined with Henry’s, which operated 35 Henry’s Farmers Market stores and eight Sun Harvest Market stores, as a part of the Henry’s Transaction led by the Apollo Funds. As a result of Apollo’s controlling financial interest in Henry’s former parent, Henry’s was determined to be the accounting acquirer in the Henry’s Transaction and, accordingly, our consolidated financial statements for fiscal 2008, fiscal 2009 and fiscal 2010 and for the period from January 3, 2011 through April 17, 2011 reflect only the historic results of Henry’s prior to the Henry’s Transaction. Commencing on April 18, 2011, our consolidated financial statements also include the financial position, results of operations and cash flows of Sprouts Arizona.

In May 2012, we acquired Sunflower in the Sunflower Transaction. Commencing on May 29, 2012, our consolidated financial statements also include the financial position, results of operations and cash flows of Sunflower.

The Sunflower Transaction had, and the April 2013 Refinancing is expected to have, a material impact on our results of operations. Accordingly, we have included fiscal 2012 pro forma information which gives effect to these transactions as more fully described in the notes below. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for unaudited pro forma information for fiscal 2012. In addition, see “Management’s Discussion and Analysis and Financial Condition and Results of Operations—Unaudited Supplemental Fiscal 2011 Pro Forma Information” for unaudited supplemental pro forma information for fiscal 2011 prepared to reflect the Transactions as if they had been consummated on the first day of fiscal 2011.

 

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                            Fiscal 2012  
    Fiscal
2008(1)
    Fiscal
2009(1)
    Fiscal
2010(1)
    Fiscal
2011(1)
    Actual(2)     Pro Forma for
Sunflower
Transaction(3)
    Pro Forma for
Sunflower
Transaction
and April 2013
Refinancing(4)
    Pro
Forma
Sprouts
Farmers
Market,
Inc.(5)
 
    (dollars in thousands, except per LLC unit data)  

Statements of Operations Data:

               

Net sales

  $ 441,056      $ 487,693      $ 516,816      $ 1,105,879      $ 1,794,823      $ 1,990,963      $ 1,990,963      $                

Cost of sales, buying and occupancy

    315,527        346,310        366,947        794,905        1,264,514        1,403,158        1,403,158     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    125,529        141,383        149,869        310,974        530,309        587,805        587,805     

Direct store expenses

    92,207        106,373        114,463        238,245        368,323        403,731        403,731     

Selling, general and administrative expenses

    26,520        23,506        23,277        58,528        86,364        91,611        91,611     

Amortization of Henry’s trade names and capitalized software

                  867        32,202                          

Store pre-opening costs

    780        2,647        2,341        1,338        2,782        5,218        5,218     

Store closure and exit costs

    133        299        354        6,382        2,155        2,214        2,214     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    5,889        8,558        8,567        (25,721     70,685        85,031        85,031     

Interest expense

    (202     (582     (681     (19,813     (35,488     (40,250     (47,537  

Other income

    444        343        295        358        562        649        649     

Loss on extinguishment of debt

                                (992     (992     (992  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    6,131        8,319        8,181        (45,176     34,767        44,438        37,151     

Income tax (provision) benefit

    (2,466     (3,346     (3,320     17,731        (15,267     (19,912     (17,070  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 3,665      $ 4,973      $ 4,861      $ (27,445   $ 19,500      $ 24,526      $ 20,081      $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per LLC Unit and Share Data:

               

Net income (loss) per LLC unit—basic

  $ 0.63      $ 0.85      $ 0.83      $ (3.11   $ 1.80      $ 2.15      $ 1.76     

Net income (loss) per LLC unit—diluted

  $ 0.63      $ 0.85      $ 0.83      $ (3.11   $ 1.76      $ 2.11      $ 1.73     

Weighted average LLC units outstanding—basic

    5,850        5,850        5,850        8,814        10,857        11,410        11,410     

Weighted average LLC units outstanding—diluted

    5,850        5,850        5,850        8,814        11,071        11,624        11,578     

Pro forma net income per share—basic(6)

                $     

Pro forma net income per share—diluted(6)

                $     

Pro forma weighted average shares outstanding—basic(6)

               

Pro forma weighted average shares outstanding—diluted(6)

               

Pro Forma Financial Measures:

               

Pro forma adjusted EBITDA(7)

            $ 147,340      $ 147,340      $     

Pro forma adjusted EBIT(7)

            $ 106,967      $ 106,967      $     

Pro forma adjusted net income(7)

            $ 39,996      $ 35,551      $     

 

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    Fiscal
2008(1)
    Fiscal
2009(1)
    Fiscal
2010(1)
    Fiscal
2011(1)
    Fiscal
2012(2)
 

Combined comparable store sales growth(8)

    9.0     2.6     2.3     5.1     9.7

Other Operating Data:

         

Stores at beginning of period

    36        36        40        43        103   

Opened

           4        3        7        9   

Acquired(9)

                         56        37   

Closed

                         (3     (1

Stores at end of period

    36        40        43        103        148   

Gross square feet at end of period

    837,630        949,627        1,035,841        2,721,430        4,064,888   

Average store size at end of period (gross square feet)

    23,268        23,741        24,089        26,422        27,465   

 

    As of  
    January 4,
2009(1)
    January 3,
2010(1)
    January 2,
2011(1)
    January 1,
2012
    December 30, 2012  
                            Actual     Pro Forma for
April 2013
Refinancing
(10)
    Pro Forma
Sprouts
Farmers
Market,
Inc. (11)
 
    (in thousands)  

Balance Sheet Data

             

Cash and cash equivalents

  $ 3,921      $ 6,232      $ 4,918      $ 14,542      $ 67,211      $ 51,283      $                

Total assets

    191,653        220,818        232,636        761,646        1,103,236        1,089,144     

Total capital and finance lease obligations, including current portion

    5,311        7,967        8,248        75,409        107,639        107,639     

Total long-term debt, including current portion

                         294,764        426,544        717,905     

Total membership equity

    140,300        157,932        156,660        267,453        386,755        86,925     

Total stockholders’ equity

    n/a        n/a        n/a        n/a        n/a        n/a     

 

(1) Fiscal 2008, fiscal 2009, fiscal 2010 and the period from January 3, 2011 through April 18, 2011 reflect the sales and expenses directly attributable to Henry’s operations and include allocations of expenses from Henry’s previous parent company. These expenses were allocated to Henry’s on the basis that was considered to reflect fairly or reasonably the utilization of the services provided to, or the benefit obtained by, Henry’s. Historical financial statements for Henry’s prior to April 18, 2011 do not reflect the interest expense or debt Henry’s might have incurred if it had been a stand-alone entity. Additionally, we would have expected to incur other expenses, not reflected in our historical financial statements prior to April 18, 2011, if Henry’s had operated as a stand-alone entity. Commencing on April 18, 2011, our consolidated financial statements include the financial position, results of operations and cash flows of Sprouts Arizona.
(2) Commencing on May 29, 2012, our consolidated financial statements include the financial position, results of operations and cash flows of Sunflower.
(3) The Pro Forma for Sunflower Transaction information includes the pre-combination results of operations of Sunflower and pro forma adjustments for acquisition accounting and the related acquisition financing, as if the Sunflower Transaction and related financing had been consummated on the first day of fiscal 2012. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data for fiscal 2012.
(4) The Pro Forma for Sunflower Transaction and April 2013 Refinancing information includes the pro forma for Sunflower Transaction information described in note 3 above, and also gives effect to pro forma adjustments to reflect our April 2013 Refinancing as if such transactions had occurred on the first day of fiscal 2012. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data for fiscal 2012.
(5) The Pro Forma information includes the pro forma for Sunflower Transaction and April 2013 Refinancing information described in note 4 above, and also gives effect to (i) the corporate conversion and (ii) pro forma adjustments to reflect the issuance of              shares of common stock in this offering and the application of $         million of the net proceeds to us from the sale of such shares to repay indebtedness under our Credit Facility as described in “Use of Proceeds” (excluding the remaining              shares of common stock being issued in this offering) as if these events had occurred on the first day of fiscal 2012. This assumes net proceeds of this offering to us of $         million, based on an initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriter discounts and commissions and estimated offering expenses. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data for fiscal 2012.

A $1.00 increase in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would have resulted in pro forma net income of $        , and pro forma net income per share-basic of $        , and a $1.00 decrease in the assumed initial public offering price of $         per share would have resulted in pro forma net income of $         and pro forma net income per share-basic of $        , in each case, assuming that

 

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the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, a decrease of one million shares in the number of shares offered by us, as set forth on the cover of this prospectus would have resulted in pro forma net income of $        , and pro forma net income per share-basic of $        , assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated expenses. An increase in the number of shares offered by us, assuming no change in the assumed initial public offering price of $             per share, would not result in any change in pro forma net income or pro forma net income per share-basic.

(6) Pro forma net income per share (basic and diluted) gives effect to the items described in notes 3, 4 and 5 above, as applicable, as if they had occurred on the first day of fiscal 2012. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data for fiscal 2012.
(7)

Pro forma adjusted EBITDA is a non-GAAP measure defined as pro forma earnings (pro forma net income (loss)) before interest, taxes, depreciation, amortization and accretion, further adjusted to eliminate the effects of items management does not consider in assessing our ongoing performance. Pro forma adjusted EBIT is a non-GAAP measure defined as pro forma earnings (pro forma net income (loss)) before interest and taxes, further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. Pro forma adjusted net income is a non-GAAP measure defined as pro forma net income adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. Pro forma net income gives effect to the items described in notes 3, 4 or 5 above, as applicable, as if they had occurred on the first day of fiscal 2012.

Pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These non-GAAP measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. We also use pro forma adjusted EBITDA, as further adjusted for additional items defined in our Credit Facility, for board of director and bank compliance reporting.

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 our business, or as a measure of cash that will be available to meet our 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 our results as reported under GAAP.

The following table shows a reconciliation of pro forma adjusted net income, pro forma adjusted EBIT and pro forma adjusted EBITDA to pro forma net income for fiscal 2012:

 

     Fiscal 2012  
     Pro Forma for
Sunflower
Transaction
    Pro Forma for
Sunflower
Transaction and
April 2013
Refinancing
    Pro Forma
Sprout
Farmers
Market,
Inc.
 
     (dollars in thousands)  

Pro forma net income(a)

   $ 24,526      $ 20,081      $                

Add: Pro forma income tax provision

     19,912        17,070     
  

 

 

   

 

 

   

 

 

 

Pro forma net income before income taxes

     44,438        37,151     

Adjustments:

      

Costs associated with integration(b)

     17,120        17,120     

Loss on extinguishment of debt(c)

     992        992     

Store closure and exit costs(d)

     2,214        2,214     

Loss on disposal of assets(e)

     1,953        1,953     

Pro forma adjusted income tax provision(f)

     (26,721     (23,879  
  

 

 

   

 

 

   

 

 

 

Pro forma adjusted net income

     39,996        35,551     

Pro forma interest expense, net

     40,250        47,537     

Pro forma adjusted income tax provision(f)

     26,721        23,879     
  

 

 

   

 

 

   

 

 

 

Pro forma adjusted EBIT

     106,967        106,967     

Pro forma depreciation, amortization and accretion

     40,373        40,373     
  

 

 

   

 

 

   

 

 

 

Pro forma adjusted EBITDA

   $ 147,340      $ 147,340      $     
  

 

 

   

 

 

   

 

 

 

 

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  (a) See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a reconciliation of pro forma net income to net income for fiscal 2012.
  (b) Costs associated with integration represent the costs to integrate the combined businesses resulting from the Transactions. These expenses include professional fees and severance, which we exclude from our pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income to provide period-to-period comparability of our operating results because management believes these costs do not directly reflect the ongoing performance of our store operations. We do not expect to incur material expenses associated with integration of the Transactions in fiscal 2013.
  (c) Loss on extinguishment of debt represents the amount recorded in fiscal 2012 as a result of the renegotiation of a store lease that was classified as a financing lease obligation. We exclude losses on extinguishment of debt from our pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income to provide period-to-period comparability of our operating results because management believes these costs do not directly reflect the ongoing performance of our store operations.
  (d) Store closure and exit costs in fiscal 2012 include the costs to close one store and a Sunflower administrative facility following the Sunflower Transaction, as well as revised estimates for store closure costs recorded in fiscal 2011. We exclude store closure and exit costs from our pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income to provide period-to-period comparability of our operating results because management believes these costs do not directly reflect the ongoing performance of our store operations.
  (e) Loss on disposal of assets in fiscal 2012 represents the loss recorded in connection with the disposal of property and equipment. We exclude gains and losses on disposals of assets from our pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income to provide period-to-period comparability of our operating results because management believes these costs do not directly reflect the ongoing performance of our store operations.
  (f) Pro forma adjusted income tax provision represents pro forma income tax provision plus the tax effect of the adjustments described in notes (b) through (e) above based on statutory tax rates for the period. This amount was further adjusted to reflect a $1.9 million reduction in pro forma income tax provision for the effects of certain items related to the Sunflower Transaction during fiscal 2012. Of the adjustment, $2.3 million relates to the tax effect of $3.3 million and $2.9 million of non-deductible transaction costs incurred by us and Sunflower, respectively, based on statutory tax rates for the period. This adjustment was partially offset by a $0.4 million adjustment related to tax benefits from Sunflower stock option exercises. We have excluded these items from our pro forma adjusted income tax provision because management believes they do not directly reflect the ongoing performance of our store operations and are not reflective of our ongoing income tax provision.
(8) Combined comparable store sales growth reflects comparable store sales growth calculated as if the Transactions had been consummated on the first day of fiscal 2007. Our practice is to include net sales from a store in comparable store sales beginning on the first day of the 61st week following the store’s opening and to exclude net sales from a closed store from comparable store sales on the day of closure. We include net sales from an acquired store in comparable store sales on the later of (i) the day of acquisition or (ii) the first day of the 61st week following the store’s opening. We use pro forma comparable store sales to calculate combined comparable store sales growth. A reconciliation of pro forma net sales to net sales and a presentation of combined comparable store sales growth are as follows for the periods indicated:

Supplemental Pro Forma Data—Net Sales

 

     Fiscal
2008
    Fiscal
2009
    Fiscal
2010
    Fiscal
2011
    Fiscal
2012
 
     (dollars in thousands)  

Net sales—actual

   $ 441,056      $ 487,693      $ 516,816      $ 1,105,879      $ 1,794,823   

Pro forma adjustments(a)

     617,732        751,677        973,543        616,776        196,140   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net sales

   $ 1,058,788      $ 1,239,370      $ 1,490,359      $ 1,722,655      $ 1,990,963   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined comparable store sales growth(b)

     9.0     2.6     2.3     5.1     9.7

 

  (a) Pro forma adjustments reflect the net sales of Sprouts Arizona and Sunflower, as if the Transactions had been consummated on the first day of fiscal 2008.
  (b) Combined comparable store sales growth is calculated as if the Transactions had been consummated on the first day of fiscal 2007.

 

(9) As a result of a change in reporting entity from Henry’s to us in connection with the Henry’s Transaction in fiscal 2011, we acquired 56 Sprouts Arizona stores in the Henry’s Transaction. We also acquired 37 stores in connection with the Sunflower Transaction in fiscal 2012.
(10)

The Pro Forma for April 2013 Refinancing Transaction balance sheet data as of December 30, 2012 gives effect to pro forma adjustments to reflect our April 2013 Refinancing as if such transactions had occurred on the last day of fiscal

 

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2012. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such unaudited pro forma condensed consolidated balance sheet data.

(11) The Pro Forma balance sheet data as of December 30, 2012 includes the pro forma for the April 2013 Refinancing information described in note 10 above, and also gives effect to pro forma adjustments to reflect (i) the corporate conversion and (ii) the issuance of              shares of common stock in this offering and the application of $         million of the net proceeds to us from the sale of such shares to repay indebtedness under our Credit Facility as described in “Use of Proceeds” (excluding the remaining              shares of common stock being issued in this offering) as if these events had occurred on the last day of fiscal 2012. This assumes net proceeds of this offering to us of $         million, based on an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriter discounts and commissions and estimated offering expenses. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such unaudited pro forma condensed consolidated balance sheet data.

 

  A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) would increase (decrease) each of cash and cash equivalents, total assets, total long-term debt and total stockholders’ equity by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would result in an increase (decrease) each of cash and cash equivalents, total assets, total long-term debt and total stockholders’ equity by $         million, assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated financial information presents the unaudited pro forma condensed consolidated statement of operations for fiscal 2012 and unaudited pro forma condensed consolidated balance sheet as of December 30, 2012 after giving effect to the transactions and adjustments as described in the accompanying notes.

The unaudited pro forma condensed consolidated financial information includes our historical results of operations and the results of operations of Sunflower, after giving pro forma effect to:

 

  Ÿ  

the Sunflower Transaction and the related financing (presented as “Pro Forma for Sunflower Transaction” in the unaudited pro forma condensed consolidated statement of operations);

 

  Ÿ  

our April 2013 Refinancing (together with “Pro Forma for Sunflower Transaction,” presented as “Pro Forma for Sunflower Transaction and April 2013 Refinancing” in the unaudited pro forma condensed consolidated statement of operations and “Pro Forma for April 2013 Refinancing” in the unaudited pro forma condensed consolidated balance sheet); and

 

  Ÿ  

(i) the corporate conversion and (ii) the issuance of              shares of common stock in this offering and the application of $         million of the net proceeds to us from the sale of such shares to repay certain indebtedness as described in “Use of Proceeds” (excluding the remaining              shares of common stock being issued in this offering) (referred to collectively the “Pro Forma Offering” and, together with “Pro Forma for Sunflower Transaction and April 2013 Refinancing,” presented as “Pro Forma Sprouts Farmers Market, Inc.” in the unaudited pro forma condensed consolidated financial information).

The unaudited pro forma condensed consolidated statement of operations for fiscal 2012 reflects the Sunflower Transaction, April 2013 Refinancing and the Pro Forma Offering as if they occurred on January 2, 2012, the first day of fiscal 2012. The unaudited pro forma condensed consolidated balance sheet gives pro forma effect to the April 2013 Refinancing and the Pro Forma Offering as if both had occurred on December 30, 2012, the last day of fiscal 2012.

The historical financial information has been adjusted to give pro forma effect to events that are directly attributable to the Sunflower Transaction and other transactions described above, have an ongoing effect on our statement of operations and are factually supportable. Our unaudited pro forma condensed consolidated financial information and explanatory notes present how our financial statements may have appeared had the business actually been combined and had our capital structure reflected the above transactions as of the dates noted above. The unaudited pro forma condensed consolidated statement of operations shows the impact on the combined statement of operations of the acquisition method of accounting under Financial Accounting Standards Board ASC 805, Business Combinations. Under the acquisition method of accounting, the total purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The excess purchase price over the amounts assigned to tangible and intangible assets acquired and liabilities assumed is recognized as goodwill.

The unaudited pro forma condensed consolidated financial information was prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial information. The following unaudited pro forma condensed consolidated financial information is presented for illustrative purposes only and does not purport to reflect the results the consolidated company may achieve in future periods or the historical results that would have been obtained had the above transactions been completed as of January 2, 2012 or December 30, 2012, as the case may be. The unaudited pro forma condensed consolidated financial information also does not give effect to the potential impact of current financial conditions, any

 

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anticipated synergies, operating efficiencies or cost savings that may result from the Sunflower Transaction. Furthermore, the unaudited pro forma condensed consolidated statement of operations does not include certain nonrecurring charges and the related tax effects which result directly from the Sunflower Transaction, the April 2013 Refinancing and the Pro Forma Offering as described in the notes to the unaudited pro forma condensed consolidated financial information.

The unaudited pro forma condensed consolidated financial information is derived from and should be read in conjunction with our historical financial statements and related notes included elsewhere in this prospectus.

 

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SPROUTS FARMERS MARKETS, LLC

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Fiscal Year Ended December 30, 2012

(in thousands, except per unit and per share amounts)

 

    Historical
Sprouts
Farmers
Markets,
LLC(1)
    Historical
Sunflower(1)
    Pro Forma Adjustments for     Notes     Pro Forma for
Sunflower
Transaction(2)
    Pro Forma
Adjustment for
April 2013
Refinancing(3)
    Notes     Pro Forma for
Sunflower
Transaction
and April 2013
Refinancing(3)
    Pro Forma
Adjustment for
Pro Forma
Offering(4)
    Notes     Pro Forma
Sprouts
Farmers
Market, Inc.(4)
 
        Sunflower
Fiscal
Period
Alignment(2)
    Sunflower
Transaction(2)
                 

Net sales

  $ 1,794,823      $ 197,612      $ (1,472   $        $ 1,990,963      $        $ 1,990,963      $                 $                

Cost of sales, buying and occupancy

    1,264,514        138,880        (1,011     775        (2)(a)        1,403,158                 1,403,158         
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Gross profit

    530,309        58,732        (461     (775       587,805                 587,805         

Direct store expenses

    368,323        35,956        (287     (261     (2)(b)        403,731                 403,731         

Selling, general and administrative expenses

    86,364        13,386        (90     (8,049     (2)(c)        91,611                 91,611         

Store pre-opening costs

    2,782        2,450        (14              5,218                 5,218         

Store closure and exit costs

    2,155        59                        2,214                 2,214         
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Income from operations

    70,685        6,881        (70     7,535          85,031                 85,031         

Interest expense

    (35,488     (2,019     14        (2,757     (2)(d)        (40,250     (7,287     (3)(a)        (47,537       (4)(a)     

Other income

    562        88        (1              649                 649         

Loss on extinguishment of debt

    (992                            (992              (992      
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Income before income taxes

    34,767        4,950        (57     4,778          44,438        (7,287       37,151         

Income tax (provision) benefit

    (15,267     (2,796     14        (1,863     (2)(e)        (19,912     2,842        (3)(b)        (17,070       (4)(b)     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Net income

  $ 19,500      $ 2,154      $ (43   $ 2,915        $ 24,526      $ (4,445     $ 20,081      $          $     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Per LLC Unit and Share Information:

                       

Net income—basic

  $ 1.80              (2)(f)      $ 2.15          (3)(c)      $ 1.76          (4)(c)      $     

Net income—diluted

  $ 1.76              (2)(f)      $ 2.11          (3)(c)      $ 1.73          (4)(c)      $     

Weighted Average LLC Units and Shares:

                       

Basic

    10,857              (2)(f)        11,410          (3)(c)        11,410          (4)(c)     

Diluted

    11,071              (2)(f)        11,624          (3)(c)        11,578          (4)(c)     

 

The accompanying notes are an integral part of, and should be read together with, this unaudited pro forma condensed consolidated financial information.

 

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SPROUTS FARMERS MARKETS, LLC

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

As of December 30, 2012

(in thousands)

 

    Historical
Sprouts
Farmers
Markets, LLC(1)
    Pro Forma
Adjustments
for April 2013
Refinancing(3)
    Notes     Pro Forma for
April 2013
Refinancing(3)
    Pro Forma
Adjustments
for Pro Forma
Offering(4)
  Notes     Pro Forma
Sprouts
Farmers
Market, Inc.(4)
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 67,211      $ (15,928     3(aa   $ 51,283          $     

Accounts receivable, net

    8,415                 8,415         

Inventories

    98,382                 98,382         

Prepaid expenses and other current assets

    4,521        (31     3(bb     4,490         

Deferred income taxes

    24,592        1,012        3(cc     25,604         
 

 

 

   

 

 

     

 

 

   

 

   

 

 

 

Total current assets

    203,121        (14,947       188,174         

Property, plant and equipment, net of accumulated depreciation

    303,166                 303,166         

Intangible assets, net of accumulated amortization

    196,772                 196,772         

Goodwill

    368,078                 368,078         

Other assets

    9,521        855        3(dd     10,376          (4)(aa)     

Deferred income tax asset

    22,578                 22,578         
 

 

 

   

 

 

     

 

 

   

 

   

 

 

 

Total assets

  $ 1,103,236      $ (14,092     $ 1,089,144          $     
 

 

 

   

 

 

     

 

 

   

 

   

 

 

 

LIABILITIES AND MEMBERSHIP/STOCKHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

  $ 82,721      $        $ 82,721          $     

Accrued salaries and benefits

    21,397                 21,397         

Other accrued liabilities

    27,561        (5,623     3(ee     21,938         

Current portion of capital and financing lease obligations

    3,379                 3,379         

Current portion of long-term debt

    1,788        923        3(ff     2,711          (4)(bb)     
 

 

 

   

 

 

     

 

 

   

 

   

 

 

 

Total current liabilities

    136,846        (4,700       132,146         

Long-term capital and financing lease obligations

    104,260                 104,260         

Long-term debt

    424,756        290,438        3(gg     715,194          (4)(cc)     

Other long-term liabilities

    50,619                 50,619         
 

 

 

   

 

 

     

 

 

   

 

   

 

 

 

Total liabilities

    716,481        285,738          1,002,219         

Commitments and contingences

             

Membership equity:

             

Membership interest

    386,755        (299,830     3(hh     86,925         
 

 

 

   

 

 

     

 

 

       

Total membership equity

    386,755        (299,830       86,925         

Stockholders’ equity:

             

Common stock

              (4)(dd)     

Additional paid-in capital

              (4)(dd)     

Retained earnings

              (4)(dd)     
         

 

   

 

 

 

Total stockholders’ equity

             
         

 

   

 

 

 

Total liabilities and membership / stockholders’ equity

  $ 1,103,236      $ (14,092     $ 1,089,144          $            
 

 

 

   

 

 

     

 

 

   

 

   

 

 

 

The accompanying notes are an integral part of, and should be read in conjunction with, this unaudited pro forma condensed consolidated financial information.

 

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SPROUTS FARMERS MARKETS, LLC

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

1. Basis of Presentation and Description of Transactions

Effective May 29, 2012, we acquired all of the outstanding common and preferred stock of Sunflower in the Sunflower Transaction, a transaction accounted for as a business combination, which was financed through the issuance of debt and 1.35 million of our Class A units. Additionally, in April 2013, we completed the April 2013 Refinancing, which consisted of a refinancing of our debt, a distribution to members of Sprouts Farmers Markets, LLC of approximately $282 million and payments to vested option holders of approximately $13.9 million. For further information about the Sunflower Transaction, see Note 4 to our audited consolidated financial statements included elsewhere in this prospectus. For further information about the April 2013 Refinancing, see Note 26 to our audited consolidated financial statements included elsewhere in this prospectus. In conjunction with our initial public offering, we will effect the corporate conversion and use proceeds received in the offering to repay $         of our existing indebtedness, which is further reflected in these unaudited pro forma condensed consolidated financial statements.

The historical Sprouts Farmers Markets, LLC results of operations for fiscal 2012 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The historical Sunflower results of operations for the period January 1, 2012 to May 28, 2012, were derived from the Sunflower pre-combination unaudited financial statements not included in this prospectus. Certain amounts from the Sunflower pre-combination unaudited financial statements have been reclassified to conform to our presentation.

2. Pro Forma for Sunflower Transaction

The historical results of operations have been adjusted to give pro forma effect to events that are (i) directly attributable to the Sunflower Transaction, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results, as if the Sunflower Transaction occurred on the first day of fiscal 2012 (referred to as “Pro Forma Adjustments for Sunflower Transaction”).

Sunflower’s fiscal 2012 commenced one day earlier than our fiscal 2012. Pro forma adjustments for Sunflower Fiscal Period Alignment reflect the pro forma impact of deducting one day from the historical Sunflower results of operations. Additional pro forma adjustments for the Sunflower Transaction consist of the following:

(a) Reflects pro forma adjustments attributable to the application of acquisition accounting to the Sunflower Transaction comprised of (i) a $0.7 million increase in rent expense, resulting principally from straight-line adjustments to rent expense as a result of the new basis in the acquired Sunflower leases as of the acquisition date and (ii) a $0.1 million net increase in amortization expense related to the fair value of favorable lease intangible assets and unfavorable lease liabilities recognized in the Sunflower Transaction. Management has assumed a weighted average useful life of 11.6 years for amortization of favorable and unfavorable leases in arriving at the pro forma amortization adjustment.

(b) Reflects pro forma adjustments to historical Sunflower depreciation related to the fair values of acquired buildings, leasehold improvements and furniture, fixtures and equipment, which are being amortized and depreciated over their estimated useful lives on a straight-line basis. Management has assumed weighted average useful lives of 38.4 years, 7.6 years and 4.7 years for buildings, leasehold improvements and furniture, fixtures and equipment, respectively, in arriving at the pro forma depreciation adjustments.

(c) Reflects costs associated with the Sunflower Transaction, which have been excluded from pro forma results due to the absence of a continuing effect on our business. The costs consist of (i)

 

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$3.2 million of transaction expenses we incurred in 2012 in connection with the Sunflower Transaction, consisting primarily of professional fees, (ii) $3.5 million of transaction expenses, consisting primarily of professional fees, recorded in Sunflower’s historical pre-combination financial statements, and (iii) $1.1 million of share-based compensation expense associated with a change in control as a result of our acquisition of Sunflower recorded in Sunflower’s historical pre-combination financial statements. Additionally, the pro forma adjustment includes (i) a $0.3 million decrease to historical Sunflower depreciation related to the fair value of acquired furniture and fixtures used for general and administrative purposes, which are being depreciated over their estimated useful lives on a straight-line basis and (ii) a $0.1 million increase to historical amortization expense associated with the Sunflower trade name. Management has assumed weighted average useful lives of 0.4 years for the acquired furniture and fixtures and 10 years for the Sunflower trade name in arriving at the pro forma depreciation and amortization amounts.

(d) In May 2012, we borrowed an additional $100.0 million, net of $0.5 million in financing fees and $2.7 million of issue discount, under our Former Term Loan and received net proceeds of $35.0 million from the issuance of our 10% Senior Subordinated Promissory Notes due 2019 (referred to as the “Notes”) to finance the Sunflower Transaction. The pro forma adjustment represents (i) the incremental interest expense of $4.0 million from our variable rate Former Term Loan and Notes, including amortization of issue discount and deferred financing fees, based on an interest rate of 6% in effect for the Former Term Loan and 10% for the Notes, (ii) the reversal of historical Sunflower interest expense of $0.9 million, as the pre-combination Sunflower debt was paid off in connection with the Sunflower Transaction, and (iii) a decrease in interest of $0.3 million resulting from the new basis in Sunflower finance and capital lease obligations acquired in the Sunflower Transaction. A one-eighth percentage change in the interest rate would increase or decrease interest expense by $0.1 million for the year ended December 30, 2012.

(e) The pro forma adjustment to income tax (provision) benefit is derived by applying a blended federal and state statutory tax rate of 39.0% to the above pro forma adjustments.

(f) Pro forma net income per weighted average basic and diluted LLC units outstanding reflects the issuance of 1,354,373 units to finance the Sunflower Transaction, as if the Sunflower Transaction occurred on the first day of fiscal 2012.

3. Pro Forma for Sunflower Transaction and April 2013 Refinancing

In April 2013, we refinanced the Former Credit Facilities by entering into the Credit Facility. The Credit Facility provides for the $700 million Term Loan and the $60 million Revolving Credit Facility. The proceeds of $700 million from the Term Loan were used to repay in full the outstanding balance as of April 23, 2013 of $403.1 million under our Former Credit Facilities. The remaining proceeds of the Term Loan, together with cash on hand, were used to make a distribution to equity holders of approximately $282 million, to make payments to vested option holders of approximately $13.9 million, and to pay transaction fees and expenses.

All amounts outstanding under the Credit Facility will bear interest, at our option, at a rate per annum equal to LIBOR (with a 1.00% floor with respect to Eurodollar borrowings under the Term Loan), adjusted for statutory reserves, plus margin equal to 3.50%, or an alternative base rate, plus a margin equal to 2.50%, as set forth in the Credit Facility.

Unaudited Pro Forma Condensed Consolidated Statement of Operations

The Pro Forma for Sunflower Transaction and April 2013 Refinancing condensed consolidated statement of operations data for fiscal 2012 includes Pro Forma for Sunflower Transaction information

 

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with pro forma adjustments to reflect our April 2013 Refinancing as if that transaction occurred on the first day of fiscal 2012 (referred to as “Pro Forma Adjustment for April 2013 Refinancing” in the unaudited pro forma condensed consolidated statement of operations), as follows:

(a) As noted above, all of our borrowings under the Former Credit Facilities were refinanced in connection with the April 2013 Refinancing. The pro forma adjustment to interest expense represents (i) the pro forma interest of $35.9 million on the Credit Facility, including amortization of issue discount and deferred financing fees of $3.1 million, based on an interest rate of 4.5% in effect for the Term Loan, net of (ii) the reversal of our pro forma interest expense of $28.6 million on our Former Term Loan, as discussed in note 2(d) above. A one-eighth percentage increase (decrease) in the interest rate on our Term Loan would increase (decrease) pro forma interest expense by $0.9 million for fiscal 2012.

(b) The pro forma adjustment to income tax (provision) benefit is derived by applying a blended federal and state statutory tax rate of 39.0% to the pro forma adjustment to interest expense described above.

(c) As a result of the April 2013 Refinancing, the exercise price of the unvested options of the Company was reduced by $24.63. The pro forma adjustment to weighted average diluted LLC units outstanding reflects the dilutive impact relating to the modification of the unvested awards, as if such modification occurred on the first day of fiscal 2012.

No adjustment has been made to the unaudited pro forma condensed consolidated statement of operations to reflect an $9.0 million loss on early extinguishment of debt. This amount represents a non-recurring charge incurred as a result of the April 2013 Refinancing.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

The Pro Forma for April 2013 Refinancing condensed consolidated balance sheet data for fiscal 2012 includes our historical balance sheet with pro forma adjustments to reflect our April 2013 Refinancing as if it occurred on the last day of fiscal 2012 (referred to as “Pro Forma Adjustment for April 2013 Refinancing” in the Unaudited Pro Forma Condensed Consolidated Balance Sheet), as follows:

(aa) The pro forma adjustment to cash relates to (i) the $13.9 million payment made to option holders and $0.3 million of related payroll taxes in connection with the April 2013 Refinancing, and (ii) $2.0 million of debt repayments made between December 31, 2012 and the April 2013 Refinancing, net of (iii) $0.3 million of cash proceeds remaining after repayment of our Former Credit Facilities, distribution to equity holders and payment of transaction expenses.

(bb) The pro forma adjustment to prepaid expenses and other current assets is the net change in the current portion of deferred financing fees resulting from the refinancing.

(cc) The pro forma adjustment to deferred income taxes – current is the deferred tax impact of the payment to option holders described in note 3(aa) above.

(dd) The pro forma adjustment to other assets, net, relates to deferred financing fees, consisting of (i) deferred financing fees of $2.6 million associated with our Credit Facility, net of (ii) write-off of $1.7 million of deferred financing fees associated with our Former Credit Facilities.

(ee) Pro forma adjustments to other accrued liabilities relate to (i) a reduction in accrued interest payable of $1.2 million at December 30, 2012, which was paid off in connection with the April 2013 Refinancing and (ii) a reduction of $4.4 million to income taxes payable as a result of the payment to option holders described in note 3(aa) above.

 

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(ff) Pro forma adjustments to current portion of long-term debt represent (i) the current portion of additional indebtedness incurred in connection with the April 2013 Refinancing, (ii) the net impact to original issue discount as a result of the refinancing and (iii) repayments of the current portion of amounts outstanding under our Former Credit Facilities, which was refinanced in connection with the April 2013 Refinancing, determined as follows (in thousands):

 

Current portion of Credit Facility

   $ 5,250   

Payoff of current portion of Former Credit Facilities

     (4,100 )* 

Original issue discount, net of write-off

     (227
  

 

 

 

Total adjustment to current portion of long-term debt

   $ 923   
  

 

 

 

 

* Includes $2.0 million in payments made on our Former Credit Facilities after December 30, 2012 and before the April 2013 Refinancing

(gg) Pro forma adjustments to long-term debt represent (i) the additional indebtedness incurred in connection with the April 2013 Refinancing, (ii) the net impact to original issue discount as a result of the refinancing and (iii) repayments of amounts outstanding under our Former Credit Facilities, which was refinanced in connection with the April 2013 Refinancing, determined as follows (in thousands):

 

Credit Facility, net of current portion

   $ 694,750   

Payoff of Former Credit Facilities, net of current portion

     (401,000

Original issue discount, net of write-off

     (3,312
  

 

 

 

Total adjustment to long-term debt

   $ 290,438   
  

 

 

 

(hh) Pro forma adjustments to membership equity represent the membership distribution and payments to vested option holders in connection with the April 2013 Refinancing, and loss on extinguishment of debt, as follows (in thousands):

 

Payment of distribution

   $ (282,029

Payment to option holders, net of tax

     (8,779

Loss on early extinguishment of debt

     (9,022
  

 

 

 

Total adjustment to membership interest

   $ (299,830
  

 

 

 

4. Pro Forma Sprouts Farmers Market, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Operations

The Pro Forma Sprouts Farmers Market, Inc. condensed consolidated statement of operations data for fiscal 2012 includes the Pro Forma for Sunflower Transaction and April 2013 Refinancing information and further reflects the pro forma effect of (i) the corporate conversion, and (ii) the issuance of              shares of common stock in this offering and the application of $         million of the net proceeds to us from the sale of such shares to repay certain indebtedness as described in “Use of Proceeds” (excluding the remaining              shares of common stock being issued in this offering) as if these events had occurred on the first day of fiscal 2012, as follows:

(a) The pro forma adjustment to interest expense represents the decrease to pro forma interest expense on the Credit Facility, as discussed in note 3(a) above, related to the repayment on our Credit Facility. The pro forma adjustment of $         million is based on an effective interest rate of     % as discussed above.

 

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(b) The pro forma adjustment to income tax (provision) benefit is derived by applying a blended federal and state statutory tax rate of 39.0% to the pro forma adjustment to interest expense described above.

(c) Pro forma net income per weighted average basic and diluted shares outstanding gives effect to (i) the conversion of all of our outstanding units into shares of our common stock and all of our outstanding options to purchase our Class B units into options to purchase          shares of our common stock for each unit underlying such options immediately prior to the corporate conversion, and (ii) the issuance of              shares of common stock in this offering to fund the debt repayment discussed above. The conversion and issuance of shares in this offering are calculated based on an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

No adjustment has been made to the unaudited pro forma condensed consolidated statement of operations to reflect the $         million loss on early extinguishment of debt, as this amount is a non-recurring charge incurred as a result of the Credit Facility repayment.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

The Pro Forma Sprouts Farmers Market, Inc. condensed consolidated balance sheet data for fiscal 2012 includes Pro Forma April 2013 Refinancing information and further reflects the pro forma effect of (i) the corporate conversion and (ii) the issuance of              shares of common stock in this offering and the application of $         million of the net proceeds to us from the sale of such shares to repay certain indebtedness as described in “Use of Proceeds” (excluding the remaining              shares of common stock being issued in this offering) as if these events had occurred on the last day of fiscal 2012, as follows:

(aa) The pro forma adjustment to other assets, net, is the $         of deferred financing fees associated with our Credit Facility written off in connection with the repayment.

(bb) Pro forma adjustments to current portion of long-term debt represent (i) repayments of the current portion of debt outstanding under our Credit Facility and (ii) the write-off of original issue discount as a result of the repayments.

(cc) Pro forma adjustments to long-term debt represent (i) repayments of long-term debt outstanding under our Credit Facility and (ii) the write-off of original issue discount as a result of the repayments.

(dd) Pro forma adjustments to stockholders’ equity represent (i) the creation of share capital, paid in capital and retained earnings upon the corporate conversion and the elimination of the historical membership equity, (ii) the issuance of              shares of common stock in this offering to fund the debt repayment discussed above, and (iii) the impact to retained earnings for the loss on early extinguishment of debt incurred as a result of the Credit Facility repayment.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Consolidated Historical and Pro Forma Financial and Other Data,” “Unaudited Pro Forma Condensed Consolidated Financial Information” and the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this prospectus. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”

Business Overview

Sprouts Farmers Market is a high-growth, differentiated, specialty retailer of natural and organic food focusing on health and wellness at great value. We offer a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, grocery, meat and seafood, bakery, dairy, frozen foods, body care and natural household items catering to consumers’ growing interest in eating and living healthier. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. With pro forma fiscal 2012 net sales of $2.0 billion and 157 stores in eight states as of May 1, 2013, we are one of the largest specialty retailers of natural and organic food in the United States. According to research conducted for us by The Buxton Company, a customer analytics research firm, we have significant growth opportunities in existing and new markets across the United States with the potential for approximately 1,200 locations operating under our current format.

The cornerstones of our business are fresh, natural and organic products at compelling prices (which we refer to as “Healthy Living for Less”), an attractive and differentiated shopping experience, and knowledgeable team members who we believe provide best-in-class customer service and product education.

Our History

In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. In 2010, we had 54 stores and reached over $620 million in net sales and approximately 3,700 team members. In April 2011, we partnered with the Apollo Funds, and added 43 stores by merging with Henry’s and its Sun Harvest-brand stores. Our merger with Henry’s brought us to 103 total stores located in Arizona, California, Colorado and Texas as of the end of 2011. In May 2012, we added another 37 stores through our acquisition of Sunflower and extended our footprint into New Mexico, Nevada, Oklahoma and Utah.

Outlook

We are pursuing a number of strategies designed to continue our growth, including expansion of our store base, driving comparable store sales growth, enhancing our operating margins and growing the Sprouts brand. We intend to continue expanding our store base by pursuing new store openings in our existing markets, expanding into adjacent markets and penetrating new markets. We have 19 openings planned for 2013 and approximately 20 openings planned for 2014. We expect to achieve 12% or more annual new store growth for at least the next five years.

 

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We also believe we can continue to improve our comparable store sales growth by enhancing our core value proposition and distinctive customer-oriented shopping experience, as well as through expanding and refining our fresh, natural and organic product offerings, our targeted and personalized marketing efforts and our in-store education. We believe our operating margins will continue to benefit from scale efficiencies, information technology systems, continued cost discipline and enhancements to our merchandise offerings. We are committed to growing the Sprouts brand by supporting our stores, product offerings and corporate partnerships, including the expansion of innovative marketing and promotional strategies through print, digital and social media platforms, all of which promote our mission of “Healthy Living for Less.”

Components of Operating Results

We report our results of operations on a 52- or 53-week fiscal year ending on the Sunday closest to December 31, with each fiscal quarter generally divided into three periods consisting of two four-week periods and one five-week period. Fiscal 2010, 2011 and 2012 were 52-week years ending on January 2, 2011, January 1, 2012 and December 30, 2012, respectively.

Net Sales

We recognize sales revenue at the point of sale, with discounts provided to customers reflected as a reduction in sales revenue. Proceeds from sales of gift cards are recorded as a liability at the time of sale, and recognized as sales when they are redeemed by the customer. We do not include sales taxes in net sales.

We monitor our combined comparable store sales growth to evaluate and identify trends in our sales performance. Combined comparable store sales growth reflects comparable store sales growth calculated as if the Transactions had occurred on the first day of fiscal 2007. Our practice is to include sales from a store in comparable store sales beginning on the first day of the 61st week following the store’s opening and to exclude sales from a closed store from comparable store sales beginning on the day of closure. We include sales from an acquired store in comparable store sales on the later of (i) the day of acquisition or (ii) the first day of the 61st week following the store’s opening. This practice may differ from the methods that other retailers use to calculate similar measures. We use pro forma comparable store sales to calculate combined comparable store sales growth. See “Selected Consolidated Historical and Pro Forma Financial and Other Data” for a reconciliation of historical net sales to pro forma net sales and a presentation of combined comparable store sales growth for fiscal 2008 through fiscal 2012.

Our net sales have increased substantially as a result of the Transactions. Net sales are also affected by store openings and closings and comparable store sales growth. Factors that influence comparable store sales growth and other sales trends include:

 

  Ÿ  

general economic conditions and trends, including levels of disposable income and consumer confidence;

 

  Ÿ  

consumer preferences and buying trends;

 

  Ÿ  

our ability to identify market trends, and to source and provide product offerings that promote customer traffic and growth in average ticket;

 

  Ÿ  

the number of customer transactions and average ticket;

 

  Ÿ  

the prices of our products, including the effects of inflation and deflation;

 

  Ÿ  

opening new stores in the vicinity of our existing stores;

 

  Ÿ  

advertising, in-store merchandising and other marketing activities; and

 

  Ÿ  

our competition, including competitive store openings in the vicinity of our stores and competitor pricing and merchandising strategies.

 

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Cost of sales, buying and occupancy and gross profit

Cost of sales includes the cost of inventory sold during the period, including direct costs of purchased merchandise (net of discounts and allowances), distribution and supply chain costs, buying costs and supplies. Merchandise incentives received from vendors are reflected in the carrying value of inventory when earned or as progress is made toward earning the rebate or allowance, and are reflected as a component of cost of sales as the inventory is sold. Inflation and deflation in the prices of food and other products we sell may periodically affect our gross profit and gross margin. The short-term impact of inflation and deflation is largely dependent on whether or not we pass the effects through to our customers, which will depend upon competitive market conditions. In the first half of fiscal 2012, we experienced produce price deflation, which contributed to higher gross margins in our business during that period and the full fiscal year.

Occupancy costs include store rental, property taxes, utilities, common area maintenance, amortization of favorable and unfavorable leasehold interests and property insurance. Occupancy costs do not include building depreciation, which is classified as a direct store expense.

Our cost of sales, buying and occupancy and gross profit are correlated to sales volumes. As sales increase, gross margin is affected by the relative mix of products sold, pricing strategies, inventory shrinkage and improved leverage of fixed costs of sales, buying and occupancy.

Direct store expenses

Direct store expenses consist of store-level expenses such as salaries and benefits, related equity-based compensation, supplies, depreciation and amortization for buildings, store leasehold improvements, equipment and other store specific costs. As sales increase, direct store expenses generally decline as a percentage of sales.

Selling, general and administrative expenses

Selling, general and administrative expenses primarily consist of salaries and benefits costs, equity-based compensation, advertising, acquisition-related costs and corporate overhead.

We charge third-parties to place advertisements in our in-store guide and newspaper circulars. We record consideration received from vendors in connection with cooperative advertising programs as a reduction to advertising costs when the allowance represents reimbursement of a specific and identifiable cost. Advertising costs are expensed as incurred.

Store pre-opening costs

Store pre-opening costs include rent expense during construction of new stores and costs related to new store openings, including costs associated with hiring and training personnel and other miscellaneous costs. Store pre-opening costs are expensed as incurred.

Store closure and exit costs

We recognize a reserve for future operating lease payments associated with facilities that are no longer being utilized in our current operations. The reserve is recorded based on the present value of the remaining noncancelable lease payments after the cease use date less an estimate of subtenant income. If subtenant income is expected to be higher than the lease payments, no accrual is recorded. Lease payments included in the closed store reserve are expected to be paid over the remaining terms of the respective leases. Our assumptions about subtenant income are based on our experience and knowledge of the area in which the closed property is located, guidance received from local brokers and agents and existing economic conditions. Adjustments to the closed store reserve relate primarily

 

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to changes in actual or estimated subtenant income and changes in actual lease payments from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known, considering timing of new information regarding market, subleases or other lease updates. Changes in reserves are classified as store closure and exit costs in the consolidated statements of operations. Store closure and exit costs in fiscal 2011 and fiscal 2012 consisted primarily of reserves to close redundant store locations and facilities following the Transactions. Store closure and exit costs in fiscal 2012 also include adjustments to estimates recorded in fiscal 2011.

Benefit (provision) for income taxes

Prior to the Henry’s Transaction, Henry’s was included in the consolidated federal and certain state income tax groups of its previous parent for income tax reporting purposes. Henry’s was not a separate taxpaying entity before the Henry’s Transaction. However, for the periods presented through the Henry’s Transaction, the consolidated financial statements have been prepared on the basis as if Henry’s prepared its tax returns and accounted for income taxes on a separate company basis. As a result of the Henry’s Transaction, for tax purposes, Henry’s was acquired in a taxable asset acquisition. The purchase price was allocated to all identifiable assets with the residual assigned to tax deductible goodwill. The resulting basis differences between the new tax values and historical amounts resulted in a deferred tax asset of $47.6 million being recorded through membership equity. See Note 18 to our audited consolidated financial statements included elsewhere in this prospectus for a discussion of the tax deductibility of goodwill.

Since the Henry’s Transaction, our income tax (provision) benefit has been based on the new tax return filing group. Although we are structured as a limited liability company, we elected to be taxed as a corporation for income tax purposes. We are subject to federal income tax as well as state income tax in various jurisdictions of the United States in which we conduct business. Income taxes are accounted for under the asset and liability method.

Prior to the effectiveness of the registration statement of which this prospectus forms a part, we will convert Sprouts Farmers Markets, LLC from a Delaware limited liability company to Sprouts Farmers Market, Inc., a Delaware corporation. See “—Factors Affecting Comparability of Result of Operations—Corporate Conversion.” We do not expect this corporate conversion to have a material impact on our results of operations, financial position or cash flows since we previously made an election to be taxed as a corporation.

Factors Affecting Comparability of Results of Operations

Henry’s Transaction

Entities affiliated with Apollo held a controlling financial interest in the former parent company of Henry’s prior to the Henry’s Transaction and also held a controlling financial interest in us on April 18, 2011. As a result, Henry’s was determined to be the accounting acquirer. The results of operations for fiscal 2010 and for the period from January 3, 2011 through April 18, 2011 reflect the sales and expenses directly attributable to Henry’s operations and allocations of direct expenses from Henry’s previous parent company. These expenses were allocated to Henry’s on the basis that was considered to reflect fairly or reasonably the utilization of the services provided to, or the benefit obtained by, Henry’s. Historical financial statements for Henry’s prior to April 18, 2011 do not reflect the interest expense Henry’s might have incurred if it had been a stand-alone entity. Additionally, we would have expected to incur other expenses, not reflected in our historical financial statements prior to April 18, 2011, if Henry’s were to operate as a stand-alone entity. Commencing on April 18, 2011, our consolidated financial statements also include the financial position, results of operations and cash flows of Sprouts Arizona.

 

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Sunflower Transaction

In May 2012, we acquired Sunflower in the Sunflower Transaction. Commencing on May 29, 2012, our consolidated financial statements also include the financial position, results of operations and cash flows of Sunflower.

Pro Forma Information

The effects of the Transactions have a material effect on the comparability of our results of operations. Consequently, we have supplemented the comparative discussion of our results of operations for fiscal 2012 and fiscal 2011 with a comparative discussion of our historical results of operations on a pro forma basis for those periods. In this discussion, pro forma statement of operations information for fiscal 2011 gives pro forma effect to the Transactions as if they were consummated on the first day of fiscal 2011, as set out in “—Unaudited Supplemental Fiscal 2011 Pro Forma Information” below. The unaudited supplemental pro forma information for fiscal 2011 was prepared in a manner comparable to the requirements of Article 11 of Regulation S-X, but does not comply with Article 11 in that Rule 11-02(c) of Article 11 does not allow for the presentation of pro forma condensed statements of operations prior to the most recent year. The unaudited supplemental pro forma information for fiscal 2011 reflects the impact of the Transactions using the assumptions set forth in the notes to the unaudited supplemental pro forma information for fiscal 2011. Pro forma statement of operations information for fiscal 2012 gives effect to the Sunflower Transaction as if it was consummated on the first day of fiscal 2012 as set out under “Pro Forma for the Sunflower Transaction” in “Unaudited Pro Forma Condensed Consolidated Financial Information.” This fiscal 2012 pro forma information presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” does not include the impact of the April 2013 Refinancing or the Pro Forma Offering since these transactions do not affect the comparability of our historical results of operations.

April 2013 Refinancing

In April 2013, we completed the April 2013 Refinancing, a transaction in which we refinanced our debt and made a distribution to members of Sprouts Farmers Markets, LLC, as further discussed in “—Liquidity and Capital Resources” below. The April 2013 Refinancing resulted in an increase in borrowings and reduction in interest rate commencing in April 2013. Based on our new borrowings over a full year, we expect interest expense to increase in fiscal 2013 as compared to fiscal 2012.

Corporate Conversion

Prior to the effectiveness of the registration statement of which this prospectus forms a part, Sprouts Farmers Markets, LLC will convert from a Delaware limited liability company to Sprouts Farmers Market, Inc., a Delaware corporation. As part of the corporate conversion, holders of our membership interests in the form of Class A and Class B units will receive              shares of our common stock for each unit held immediately prior to the corporate conversion, and options to purchase units will become options to purchase              shares of our common stock for each unit underlying options outstanding immediately prior to the corporate conversion, at the same aggregate exercise price in effect prior to the corporate conversion.

We do not expect a material impact on the comparability of our results of operation as a result of the corporate conversion, since we have been treated as a corporation for income tax purposes.

 

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Results of Operations

The following tables set forth our results of operations, unaudited supplemental pro forma information 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.

 

     Fiscal 2010     Fiscal 2011     Fiscal 2012  
     (in thousands)  

Consolidated Statement of Operations Data:

      

Net sales

   $ 516,816      $ 1,105,879      $ 1,794,823   

Cost of sales, buying and occupancy

     366,947        794,905        1,264,514   
  

 

 

   

 

 

   

 

 

 

Gross profit

     149,869        310,974        530,309   

Direct store expenses

     114,463        238,245        368,323   

Selling, general and administrative expenses

     23,277        58,528        86,364   

Amortization of Henry’s trade names and capitalized software

     867        32,202          

Store pre-opening costs

     2,341        1,338        2,782   

Store closure and exit costs

     354        6,382        2,155   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     8,567        (25,721     70,685   

Interest expense

     (681     (19,813     (35,488

Other income

     295        358        562   

Loss on extinguishment of debt

                   (992
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     8,181        (45,176     34,767   

Income tax (provision) benefit

     (3,320     17,731        (15,267
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,861      $ (27,445   $ 19,500   
  

 

 

   

 

 

   

 

 

 

 

     Fiscal 2011     Fiscal 2012  
     (in thousands)  

Unaudited Supplemental Pro Forma Information(1):

    

Net sales

   $ 1,722,655      $ 1,990,963   

Cost of sales, buying and occupancy

     1,234,166        1,403,158   
  

 

 

   

 

 

 

Gross profit

     488,489        587,805   

Direct store expenses

     360,437        403,731   

Selling, general and administrative expenses

     83,077        91,611   

Amortization of Henry’s trade names and capitalized software

     32,202          

Store pre-opening costs

     5,009        5,218   

Store closure and exit costs

     7,009        2,214   
  

 

 

   

 

 

 

Income from operations

     755        85,031   

Interest expense

     (40,436     (40,250

Other income

     643        649   

Loss on extinguishment of debt

            (992
  

 

 

   

 

 

 

Income (loss) before income taxes

     (39,038     44,438   

Income tax (provision) benefit

     8,163        (19,912
  

 

 

   

 

 

 

Net income (loss)

   $ (30,875   $ 24,526   
  

 

 

   

 

 

 

 

(1)

Unaudited supplemental pro forma information for fiscal 2011 gives effect to the Transactions as if they were consummated on the first day of fiscal 2011. See “—Unaudited Supplemental Fiscal 2011 Pro Forma Information below. Unaudited supplemental pro forma information for fiscal 2012 gives effect to the Sunflower Transaction as if it were consummated on the first day of fiscal 2012 (but does not give effect to the April 2013 Refinancing or the Pro Forma Offering). See

 

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“Unaudited Pro Forma Condensed Consolidated Financial Information” for pro forma information for fiscal 2012 presented as “Pro Forma for Sunflower Transaction.”

 

     Fiscal 2010     Fiscal 2011     Fiscal 2012  

Other Operating Data:

      

Combined comparable store sales growth

     2.3     5.1     9.7

Stores at beginning of period

     40        43        103   

Opened

     3        7        9   

Acquired

            56        37   

Closed

            (3     (1

Stores at end of period

     43        103        148   

Comparison of Fiscal 2012 to Fiscal 2011

Net Sales

 

     Fiscal 2011     Fiscal 2012     Change      % Change  
     (dollars in thousands)  

Net sales

   $ 1,105,879      $ 1,794,823      $ 688,944         62

Pro forma net sales

     1,722,655        1,990,963        268,308         16

Combined comparable store sales growth

     5.1     9.7     

Net sales increased during fiscal 2012 primarily as a result of (i) stores added through the Sunflower Transaction in fiscal 2012 (net of closures), (ii) incremental sales from stores added through the Henry’s Transaction in fiscal 2011 as a result of operating for a full year in fiscal 2012, (iii) new store openings and (iv) sales growth at stores operated prior to fiscal 2011.

Stores added through the Transactions contributed $514.7 million, or 75%, of the increase in net sales during fiscal 2012. Stores acquired in the Sunflower Transaction contributed $280.3 million in net sales during fiscal 2012 and stores acquired in the Henry’s Transaction contributed an incremental $234.4 million in net sales during fiscal 2012 compared to fiscal 2011.

New store openings during fiscal 2012 contributed $52.2 million, or 8%, of the increase in net sales during fiscal 2012. New store openings during fiscal 2011 contributed an incremental $49.6 million, or 7%, of the increase in net sales during fiscal 2012 compared to fiscal 2011. The remaining $72.4 million, or 10%, of the increase in net sales during fiscal 2012 resulted from net sales growth at stores operated prior to fiscal 2011.

On a pro forma basis, net sales increased during fiscal 2012 primarily as a result of fiscal 2012 combined comparable store sales growth and new store openings during fiscal 2012. Combined comparable store sales growth of 9.7% during fiscal 2012 contributed $161.7 million, or 60%, of the increase in pro forma net sales during fiscal 2012. New store openings during fiscal 2012 contributed $64.9 million, or 24%, of the increase in pro forma net sales during fiscal 2012. The remaining $41.7 million, or 16%, of the increase in pro forma net sales during fiscal 2012 was attributable to new store openings during fiscal 2011 not yet reflected in combined comparable store sales growth.

 

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Cost of sales, buying and occupancy and gross profit

 

     Fiscal 2011     Fiscal 2012     Change     % Change  
     (dollars in thousands)  

As reported:

        

Net sales

   $ 1,105,879      $ 1,794,823      $ 688,944        62

Cost of sales, buying and occupancy

     794,905        1,264,514        469,609        59

Gross profit

     310,974        530,309        219,335        71

Gross margin

     28.1     29.5     1.4  

Pro forma:

        

Net sales

   $ 1,722,655      $ 1,990,963      $ 268,308        16

Cost of sales, buying and occupancy

     1,234,166        1,403,158        168,992        14

Gross profit

     488,489        587,805        99,316        20

Gross margin

     28.4     29.5     1.1  

Cost of sales, buying and occupancy increased during fiscal 2012 primarily due to the increase in sales following the Transactions, new store openings and sales growth, as discussed above. The effects of increased sales volume were partially offset by (i) produce cost deflation in the first half of 2012, (ii) synergies from integration of the Transactions, including consolidation of certain buying costs, and (iii) improved leverage of occupancy costs, principally resulting from comparable store sales growth. These factors contributed to an increase in gross margin and, together with the increase in sales volume, resulted in an increase in gross profit.

On a pro forma basis, cost of sales, buying and occupancy increased during fiscal 2012 primarily due to the increase in pro forma net sales, driven by combined comparable store sales growth and new store openings. The effects of increased pro forma net sales volume were partially offset by produce cost deflation, synergies realized following the Transactions and improved leverage of occupancy costs as a result of combined comparable store sales growth, which resulted in an improvement in pro forma gross margin. Pro forma gross profit increased as a result of increases in pro forma net sales and pro forma gross margin.

Direct store expenses

 

     Fiscal 2011     Fiscal 2012     Change     % Change  
     (dollars in thousands)  

As reported:

        

Direct store expenses

   $ 238,245      $ 368,323      $ 130,078        55

Percentage of net sales

     21.5     20.5     (1.0 )%   

Pro forma:

        

Direct store expenses

   $ 360,437      $ 403,731      $ 43,294        12

Percentage of net sales

     20.9     20.3     (0.6 )%   

Direct store expenses increased during fiscal 2012 primarily due to the additional stores we operated during 2012 following the Transactions (net of closures) and new store openings. As a percentage of net sales, direct store expenses decreased during fiscal 2012 primarily due to (i) the alignment of store payroll and benefit policies following the Transactions, (ii) economies of scale with respect to certain benefit costs and (iii) improved leverage of store payroll expenses resulting from comparable store sales growth. These factors were partially offset by a $2.7 million loss on asset disposals during fiscal 2012.

On a pro forma basis, direct store expenses increased during fiscal 2012 primarily due to new store openings. As a percentage of pro forma net sales, pro forma direct store expenses decreased during fiscal 2012 primarily as a result of the post-combination effects of the factors discussed above.

 

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Selling, general and administrative expenses

 

     Fiscal 2011     Fiscal 2012     Change     % Change  
     (dollars in thousands)  

As reported:

        

Selling, general and administrative expenses

   $ 58,528      $ 86,364      $ 27,836        48

Percentage of net sales

     5.3     4.8     (0.5 )%   

Pro forma:

        

Selling, general and administrative expenses

   $ 83,077      $ 91,611      $ 8,534        10

Percentage of net sales

     4.8     4.6     (0.2 )%   

The increase in selling, general and administrative expenses during fiscal 2012 includes (i) a $10.1 million increase in transaction and acquisition integration costs to $20.4 million, (ii) a $2.7 million legal settlement related to a trade name dispute, (iii) a $0.6 million loss on disposal of assets related to the disposal of equipment purchased in the Sunflower Transaction and (iv) incremental operating expenses following the Transactions. These factors were partially offset by synergies achieved from integration of the Transactions.

Selling, general and administrative expenses decreased as a percentage of net sales during fiscal 2012 primarily due to improved leverage of fixed selling, general and administrative expenses, primarily as a result of comparable store sales growth, new store openings and synergies achieved from integration of the Transactions. These factors were partially offset by the $10.1 million increase in acquisition integration costs and the $2.7 million legal settlement in fiscal 2012.

On a pro forma basis, selling, general and administrative expenses increased during fiscal 2012 primarily due to (i) a $12.5 million increase in acquisition integration costs to $17.1 million, (ii) a $2.7 million legal settlement in fiscal 2012 and (iii) a $0.6 million loss on disposal of assets related to the disposal of equipment purchased in the Sunflower Transaction, partially offset by synergies achieved from integration of the Transactions and a $1.2 million write-off of capitalized software that was recorded in fiscal 2011. Pro forma selling, general and administrative expenses decreased as a percentage of pro forma net sales during fiscal 2012 primarily due to improved leverage of fixed selling, general and administrative expenses as a result of combined comparable store sales growth and synergies achieved from integration of the Transactions. These factors were partially offset by the $12.5 million increase in acquisition integration costs and the $2.7 million legal settlement in fiscal 2012.

We expect our selling, general and administrative expenses will increase in future periods as a result of incremental share-based compensation, legal, accounting and other compliance-related expenses associated with being a public company and increases resulting from growth in the number of our stores.

Amortization of Henry’s trade names and capitalized software

In connection with the Henry’s Transaction and planned re-branding of Henry’s stores, the estimated useful lives of the Henry’s trade names and certain capitalized software were re-evaluated and amortization was accelerated. Amortization of Henry’s trade names and capitalized software totaled $32.2 million in fiscal 2011 and the assets were fully amortized by January 1, 2012.

 

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Store pre-opening costs

 

     Fiscal 2011      Fiscal 2012      Change      % Change  
     (dollars in thousands)  

As reported:

           

Store pre-opening costs

   $ 1,338       $ 2,782       $ 1,444         108

Number of openings

     7         9         

Avg. pre-opening cost per store opened

   $ 191       $ 309         

Pro forma:

           

Store pre-opening costs

   $ 5,009       $ 5,218       $ 209         4.2

Number of openings, as reported

     7         9         

Pre-combination openings

     6         2         
  

 

 

    

 

 

       

Pro forma openings

     13         11         

Avg. pre-opening cost per store opened

   $ 385       $ 474         

Store pre-opening costs increased to $2.8 million during fiscal 2012 from $1.3 million during fiscal 2011. We opened nine stores in fiscal 2012 compared to seven stores in fiscal 2011, resulting in average store pre-opening costs of approximately $309,000 per store in fiscal 2012 compared to $191,000 per store in fiscal 2011. Average store pre-opening costs increased in fiscal 2012 primarily because a portion of fiscal 2011 store pre-opening costs were incurred by Sprouts Arizona prior to the Henry’s Transaction.

On a pro forma basis, store pre-opening costs increased to $5.2 million, or $474,000 per opening, during fiscal 2012 from $5.0 million, or $385,000 per opening, during fiscal 2011. Pro forma store pre-opening costs for fiscal 2011 and fiscal 2012 reflect the higher store pre-opening rent incurred by Sunflower prior to the Sunflower Transaction due to early commencement dates for pre-combination Sunflower leases.

Store closure and exit costs

Store closure and exit costs decreased to $2.2 million during fiscal 2012 from $6.4 million during fiscal 2011, primarily as a result of (i) a $2.0 million favorable adjustment to our store closure reserve resulting from sublease rents in excess of original estimates, (ii) a $1.3 million favorable adjustment resulting from a lessor’s voluntary termination of a lease obligation previously reserved and (iii) a reduction in closures. One store and Sunflower’s corporate office were closed following the Sunflower Transaction in fiscal 2012 and three stores and the Henry’s corporate office were closed following the Henry’s Transaction in fiscal 2011.

On a pro forma basis, store closure and exit costs decreased to $2.2 million during fiscal 2012 from $7.0 million during fiscal 2011, primarily for the same factors noted above, as well as a decrease in Sunflower’s pre-combination store closure and exit costs from $627,000 in fiscal 2011 to $59,000 in fiscal 2012.

Interest expense

Interest expense increased to $35.5 million during fiscal 2012 from $19.8 million in fiscal 2011, primarily as a result of (i) incremental borrowings associated with the Sunflower Transaction, (ii) the effect of a full year of borrowings associated with the Henry’s Transaction in fiscal 2012 and (iii) interest on financing leases associated with leases acquired in the Transactions and new store openings.

In April 2011, we borrowed $310.0 million, net of $2.7 million in financing fees and $14.0 million of issue discount under the Former Term Loan to finance the Henry’s Transaction. In May 2012, we

 

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borrowed an additional $100.0 million, net of $0.5 million in financing fees and $2.7 million of issue discount under the Former Term Loan, and received proceeds of $35.0 million from the issuance of Notes to finance the Sunflower Transaction. We also borrowed and repaid $23.0 million and $3.0 million under our Former Revolving Credit Facility in fiscal 2011 and fiscal 2012, respectively. See “—Liquidity and Capital Resources.”

On a pro forma basis, interest expense decreased to $40.3 million during fiscal 2012 from $40.4 million during fiscal 2011.

In April 2013, we completed the April 2013 Refinancing, which resulted in an increase in borrowings and reduction in interest rate commencing in April 2013. Based on our new borrowings over a full year, we expect interest expense to increase in fiscal 2013 as compared to fiscal 2012.

Loss on extinguishment of debt

We recorded a $1.0 million loss on extinguishment of debt in fiscal 2012 as a result of the renegotiation of a store lease that was classified as a financing lease obligation.

Income tax (provision) benefit

Income tax provision was $15.3 million during fiscal 2012 compared to an income tax benefit of $17.7 million during fiscal 2011, primarily as a result of income before tax during fiscal 2012 compared to a loss before tax during fiscal 2011. Our effective income tax rate increased to 43.9% during fiscal 2012 from 39.2% during fiscal 2011, primarily as a result of non-deductible transaction costs during fiscal 2012.

On a pro forma basis, income tax provision was $19.9 million during fiscal 2012 compared to a pro forma income tax benefit of $8.2 million during fiscal 2011, primarily as a result of pro forma income before tax during fiscal 2012 compared to a pro forma loss before tax during fiscal 2011. Our pro forma effective income tax rate increased to 44.8% during fiscal 2012 from 20.9% in fiscal 2011, reflecting non-deductible transaction costs incurred by us and Sunflower during fiscal 2012, and no tax benefit resulting from pre-combination losses incurred by Sprouts Arizona during fiscal 2011 as a result of Sprouts Arizona pass-through status prior to the Henry’s Transaction.

Net income (loss)

 

     Fiscal 2011     Fiscal 2012     Change     % Change  
     (dollars in thousands)  

As reported:

        

Net income (loss)

   $ (27,445   $ 19,500      $ 46,945        171

Percentage of sales

     (2.5 )%      1.1     3.6  

Pro forma:

        

Net income (loss)

   $ (30,875   $ 24,526      $ 55,401        179

Percentage of sales

     (1.8 )%      1.2     3.0  

We reported net income of $19.5 million during fiscal 2012 compared to a net loss of $27.4 million in fiscal 2011. This improvement in net income was primarily due to (i) the accelerated amortization of Henry’s trade names and capitalized software recorded in fiscal 2011, which did not recur in fiscal 2012, (ii) increased net sales and gross profit attributable to the Transactions, new store openings and comparable store sales growth, (iii) synergies achieved from the Transactions, and (iv) gross margin improvements in the first half of the fiscal year as a result of produce deflation. These factors were

 

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partially offset by increases in direct store expenses, selling, general and administrative expenses, interest expense and income tax provision for the reasons discussed above.

On a pro forma basis, net income increased to $24.5 million during fiscal 2012 compared to a net loss of $30.9 million in fiscal 2011. This improvement in net income was primarily due to (i) the accelerated amortization of Henry’s trade names and capitalized software recorded in fiscal 2011, which did not recur in fiscal 2012, and (ii) increased sales and gross profit attributable to new store openings, comparable store sales growth, synergies achieved following the Transactions and gross margin improvements in the first half of the fiscal year as a result of produce cost deflation. These factors were partially offset by increases in direct store expenses, selling, general and administrative expenses, interest expense and income tax provision for the reasons discussed above.

Comparison of Fiscal 2011 to Fiscal 2010

Net Sales

 

     Fiscal 2010     Fiscal 2011     Change      % Change  
     (dollars in thousands)  

Net sales

   $ 516,816      $ 1,105,879      $ 589,063         114

Combined comparable store sales growth

     2.3     5.1     

Net sales increased during fiscal 2011 primarily as a result of the Henry’s Transaction (net of closures), new store openings and net sales growth at stores operated prior to fiscal 2011. Stores added through the Henry’s Transaction contributed $513.0 million, or 87%, of the increase in net sales during fiscal 2011. New store openings during fiscal 2011 contributed $43.0 million, or 7%, of the increase in net sales during fiscal 2011. The remaining $33.1 million, or 6%, of the increase resulted from net sales growth at stores operated prior to fiscal 2011.

Cost of sales, buying and occupancy and gross profit

 

     Fiscal 2010     Fiscal 2011     Change     % Change  
     (dollars in thousands)  

Net sales

   $ 516,816      $ 1,105,879      $ 589,063        114

Cost of sales, buying and occupancy

     366,947        794,905        427,958        117

Gross profit

     149,869        310,974        161,105        107

Gross margin

     29.0     28.1     (0.9 )%   

Cost of sales, buying and occupancy and gross profit increased during fiscal 2011 primarily due to the increase in sales following the Henry’s Transaction, new store openings and net sales growth, as discussed