S-1/A 1 d530104ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
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As filed with the Securities and Exchange Commission on July 19, 2013

Registration No. 333-188493

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

TO

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  

Number of

Shares to be
Registered(1)

 

Proposed Maximum

Offering Price

per Share

  Proposed Maximum
Aggregate Offering
Price(2)
  Amount of
Registration Fee(3)

Common Stock, $0.001 par value per share

 

21,275,000

  $16.00   $340,400,000.00   $46,430.56

 

 

 

(1) Includes 2,775,000 additional shares the underwriters have the option to purchase. See “Underwriting.”
(2) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) Of this amount, $41,000.00 was previously paid and $5,430.56 is being paid in connection herewith.

 

 

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. In the corporate conversion, each unit of Sprouts Farmers Markets, LLC will be converted into 11 shares of common stock of Sprouts Farmers Market, Inc., and each option to purchase units of Sprouts Farmers Markets, LLC will be converted into an option to purchase 11 shares of common stock of Sprouts Farmers Market, Inc. Shares of common stock of Sprouts Farmers Market, Inc. are being offered by the accompanying prospectus.

For the convenience of the reader, except as disclosed in the accompanying prospectus, all information included in the prospectus is presented giving effect to the corporate conversion.


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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 July 19, 2013.

PRELIMINARY PROSPECTUS

18,500,000 Shares

 

LOGO

Common Stock

 

 

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

We are offering 17,702,215 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 797,785 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 $14.00 and $16.00. We have applied to list our common stock on the NASDAQ Global Select Market under the symbol “SFM.”

We have reserved up to 5% of the shares of common stock offered by this prospectus for sale, at the initial public offering price, to our directors, officers, team members and other individuals associated with us and members of their respective families. See “Underwriting—Directed Share Program.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 16 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 2,775,000 shares from us 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
Guggenheim Securities    Wolfe Research Securities

 

 

Prospectus dated                 , 2013.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     16   

Special Note Regarding Forward-Looking Statements

     38   

Use of Proceeds

     40   

Dividend Policy

     40   

Corporate Conversion

     41   

Capitalization

     42   

Dilution

     44   

Selected Consolidated Historical and Pro Forma Financial and Other Data

     46   

Unaudited Pro Forma Condensed Consolidated Financial Information

     53   

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

     67   

Business

     102   

Management

     120   

Executive Compensation

     129   

Certain Relationships and Related Party Transactions

     148   

Principal and Selling Stockholders

     151   

Description of Capital Stock

     158   

Shares Eligible for Future Sale

     162   

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

     165   

Underwriting

     170   

Conflicts of Interest

     175   

Legal Matters

     176   

Experts

     176   

Where You Can Find Additional Information

     176   

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 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. 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 “pro forma comparable store sales growth” for fiscal 2008 through fiscal 2012 and for the thirteen weeks ended April 1, 2012 and March 31, 2013. We compute pro forma 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 pro forma comparable store sales growth for fiscal 2008 through fiscal 2012 and for the thirteen weeks ended April 1, 2012 and March 31, 2013.

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

We believe pro forma 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 and the thirteen weeks ended April 1, 2012 and March 31, 2013 gives pro forma effect to:

 

  Ÿ  

the Sunflower Transaction and the related financing (in the case of fiscal 2012 and the thirteen weeks ended April 1, 2012 only);

 

  Ÿ  

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

 

  Ÿ  

the issuance of 16,509,408 shares of common stock in this offering (excluding the remaining 1,192,807 shares of common stock being issued in this offering, which are deemed to have been used to pay underwriting discounts and offering expenses) and the application of $247.6 million of the proceeds to us from the sale of such shares by us to repay certain indebtedness as described in “Use of Proceeds” (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 March 31, 2013 gives pro forma effect to the April 2013 Refinancing and the Pro Forma Offering as if both had occurred on March 31, 2013. 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

 

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Analysis of Financial Condition and Results of Operations—Unaudited Supplemental Fiscal 2011 Pro 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 and the thirteen weeks ended April 1, 2012 and March 31, 2013 under the caption “Unaudited Pro Forma Condensed Consolidated Financial Information,” as described under “Pro Forma Information” above. For fiscal 2012 and the thirteen weeks ended April 1, 2012 and March 31, 2013, we present the foregoing non-GAAP measures on a pro forma basis derived from such pro forma information for fiscal 2012 and the thirteen weeks ended April 1, 2012 and March 31, 2013. 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. In the corporate conversion, each unit of Sprouts Farmers Markets, LLC will be converted into 11 shares of common stock of Sprouts Farmers Market, Inc., and each option to purchase units of Sprouts Farmers Markets, LLC will be converted into an option to purchase 11 shares of common stock of Sprouts Farmers Market, Inc. For the convenience of the reader, except as the context otherwise requires, all information included in this prospectus is presented giving effect to the corporate conversion.

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 163 stores in eight states as of July 19, 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 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 25 consecutive quarters, including throughout the recent economic downturn;

 

  Ÿ  

Pro forma 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, and pro forma comparable store sales growth of 8.0% for the thirteen weeks ended March 31, 2013 and 10.1% for the thirteen weeks ended April 1, 2012, or 18.1% on a two-year stacked basis for the thirteen weeks ended March 31, 2013;

 

  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;

 

 

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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 $44.7 million in fiscal 2012.

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. Based on our experience, 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, based on our industry experience, we believe we are capturing significant market share from conventional supermarkets and other food retailers. We believe 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. According to the Nutrition Business Journal, 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

 

 

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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.

Resilient business model with strong financial performance.    We achieved positive, pro forma comparable store sales growth of 9.0%, 2.6%, 2.3%, 5.1%, 9.7% and 8.0% in fiscal 2008, 2009, 2010, 2011, 2012, and the thirteen weeks ended March 31, 2013, 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, based on our experience, 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 intend to achieve 12% or more annual new store growth over at least the next five years, balanced among existing, adjacent and new markets.

The below diagram shows our current store footprint, by state, as of July 19, 2013.

 

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

 

 

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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.

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 July 19, 2013, we opened 87 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 intend to achieve 12% or more annual new store growth over at least the next five years.

Increase comparable store sales.    For 25 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 $700.0 million senior secured term loan (referred to as the “Term Loan”), with an interest rate of LIBOR (with a 1.00% floor with respect to Eurodollar borrowings), subject to

 

 

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certain adjustments, plus a margin of 3.50%, and a $60.0 million senior secured revolving credit facility (referred to as 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.”

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.”

Preliminary Second Quarter Results

Set forth below are selected preliminary, unaudited financial results for the thirteen weeks ended June 30, 2013. These financial results are unaudited and should be considered preliminary and subject to change.

We expect to report net sales of approximately $622 million for the thirteen weeks ended June 30, 2013, an increase of approximately $192 million, or approximately 45%, as compared to net sales of $430 million for the thirteen weeks ended July 1, 2012, primarily as a result of (i) stores added through the Sunflower Transaction as of May 29, 2012, (ii) new store openings and (iii) sales growth at existing stores. Net sales for the thirteen weeks ended June 30, 2013 increased approximately $113 million, or approximately 22%, as compared to net sales of $509 million for the thirteen weeks ended July 1, 2012, on a pro forma basis giving effect to the Sunflower Transaction.

We expect to report pro forma comparable store sales growth of approximately 10.8% during the thirteen weeks ended June 30, 2013 as compared to 10.2% for the thirteen weeks ended July 1, 2012. We expect to report pro forma comparable store sales growth for the thirteen weeks ended June 30, 2013 of approximately 21.0% on a two-year stacked basis, as compared to 13.1% for the thirteen weeks ended July 1, 2012.

We expect to report a gross margin of approximately 30.0% for the thirteen weeks ended June 30, 2013, a decrease of approximately 40 basis points as compared to 30.4% for the thirteen weeks ended July 1, 2012. The decrease reflects a decrease in margin in the produce and meat departments driven by inflation in certain commodity items and lower margins in the vitamin and supplement and body care departments due to broader promotional activity and temporary product mark downs in connection with merchandise alignment across Sprouts and former Henry’s and Sunflower stores in the thirteen weeks ended June 30, 2013. The decrease in margin in these departments was partially offset by lower buying and occupancy costs as a percentage of net sales.

These results are preliminary and unaudited and do not present all information necessary for an understanding of our financial condition as of June 30, 2013 and our results of operations for the thirteen weeks ended June 30, 2013. They have been prepared by and are the responsibility of our management. The preliminary estimated results presented are subject to the completion of our financial closing procedures. Accordingly, these results are subject to change. PricewaterhouseCoopers LLP has not

 

 

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audited, reviewed, compiled or performed any procedures with respect to the accompanying preliminary financial data. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto.

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 manage our rapid growth in opening or acquiring new stores as a result of new store opening costs, lower sales from new or acquired stores or difficulties integrating such stores into our existing store base;

 

  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;

 

  Ÿ  

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

 

  Ÿ  

we may be unable to generate sufficient cash flow to meet our fixed payment obligations, including fixed store leases and debt service obligations; and

 

  Ÿ  

covenant restrictions contained in our debt agreements that restrict our operational flexibility may adversely affect our business, results of operations and financial condition.

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

17,702,215 shares

 

Common stock offered by the selling stockholders

797,785 shares

 

Common stock to be outstanding after this offering

143,658,944 shares

 

Option to purchase additional shares

The underwriters have the option to purchase up to 2,775,000 additional shares from us 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 $247.6 million (or $287.0 million if the underwriters’ option to purchase additional shares is exercised in full), assuming an initial public offering price of $15.00 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 $247.6 million of the net proceeds from this offering to repay borrowings under our Credit Facility. We intend to use any 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 16 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 5% of the shares of common stock offered by this prospectus for sale, at the initial public offering price, to our directors, officers, team members and other individuals associated with us and members of their respective families. The sales will be made by UBS Financial Services Inc., a selected dealer affiliated with UBS Securities LLC, an underwriter of this offering, through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock. Participants in the directed share program who purchase more than $1.0 million of common stock will be subject to a 25-day lock-up restriction with respect to any

 

 

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shares sold to them pursuant to the directed share program. This lock-up will have similar restrictions and an identical extension provision to the 180-day lock-up restrictions described in “Underwriting.” Any shares of common stock sold to our directors, executive officers or selling stockholders pursuant to the directed share program will be subject to the 180-day lock-up restrictions described in “Underwriting.”

 

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 125,969,096 shares of our common stock, assuming the corporate conversion occurred on March 31, 2013; and

 

  Ÿ  

no exercise of the underwriters’ option to purchase up to an additional 2,775,000 shares of common stock.

The number of shares of common stock to be outstanding after this offering is based on 125,956,729 shares of our common stock outstanding immediately prior to the closing of this offering, and excludes the following:

 

  Ÿ  

11,628,177 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 $3.01 per share; and

 

  Ÿ  

10,089,072 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 from our audited consolidated financial statements included elsewhere in this prospectus. Consolidated statements of operations data for the thirteen weeks ended April 1, 2012 and March 31, 2013 and summary balance sheet data as of March 31, 2013 are derived from our unaudited consolidated financial statements for the periods then ended, also included elsewhere in this prospectus. These statements, in the opinion of management, include all adjustments (inclusive of normal recurring adjustments) necessary for a fair statement. 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. Apollo held a controlling interest in Henry’s former parent prior to the Henry’s Transaction and continued to hold a controlling interest in the Company afterwards. Due to Apollo’s continued controlling interest, the Henry’s Transaction resulted in Henry’s financial statements becoming the financial statements of the Company, followed immediately by the acquisition by the Company of the Sprouts Farmers Market business. As a result, the Company was determined to be the accounting acquirer, effective April 18, 2011. 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 pro forma information for fiscal 2012 and the thirteen weeks ended April 1, 2012 and March 31, 2013 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 and the thirteen weeks ended April 1, 2012 and March 31, 2013. 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.(6)
 
    (dollars in thousands, except per share data)  

Statements of Operations Data:

           

Net sales

  $ 516,816      $ 1,105,879      $ 1,794,823      $ 1,990,963      $ 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        1,403,158   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

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

Direct store expenses

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

Selling, general and administrative expenses

    23,277        58,528        86,364        91,611        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        5,218   

Store closure and exit costs

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

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

Interest expense

    (681     (19,813     (35,488     (40,250     (46,935     (32,460

Other income

    295        358        562        649        649        649   

Loss on extinguishment of debt

                  (992     (992     (992     (992
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    8,181        (45,176     34,767        44,438        37,753        52,228   

Income tax (provision) benefit

    (3,320     17,731        (15,267     (19,912     (17,305     (22,950
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 4,861      $ (27,445   $ 19,500      $ 24,526      $ 20,448      $ 29,278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

           

Net income (loss) per share—basic(7)

  $ 0.08      $ (0.28   $ 0.16      $ 0.20      $ 0.16      $ 0.21   

Net income (loss) per share—diluted(7)

  $ 0.08      $ (0.28   $ 0.16      $ 0.19      $ 0.16      $ 0.20   

Weighted average shares outstanding—basic(7)

    64,350        96,954        119,427        125,510        125,510        142,019   

Weighted average shares outstanding—diluted(7)

    64,350        96,954        121,781        127,864        127,358        143,867   

Pro Forma Financial Measures:

           

Pro forma adjusted EBITDA(8)

        $ 147,340      $ 147,340      $ 147,340   

Pro forma adjusted EBIT(8)

        $ 106,967      $ 106,967      $ 106,967   

Pro forma adjusted net income(8)

        $ 39,996      $ 35,918      $ 44,748   

 

 

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    Thirteen weeks ended  
    April 1, 2012     March 31, 2013  
    Actual(2)     Pro Forma for
Sunflower
Transaction(3)
    Pro Forma for
Sunflower
Transaction
and April 2013
Refinancing(4)
    Pro
Forma
Sprouts
Farmers
Market,
Inc.(6)
    Actual     Pro Forma for
April 2013
Refinancing(5)
    Pro
Forma
Sprouts
Farmers
Market,
Inc.(6)
 
    (dollars in thousands, except per share data)  

Statements of Operations Data:

             

Net sales

  $ 375,720      $ 493,494      $ 493,494      $ 493,494      $ 573,694      $ 573,694      $ 573,694   

Cost of sales, buying and occupancy

    258,933        341,010        341,010        341,010        399,774        399,774        399,774   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    116,787        152,484        152,484        152,484        173,920        173,920        173,920   

Direct store expenses

    74,833        96,095        96,095        96,095        114,661        114,661        114,661   

Selling, general and administrative expenses

    17,087        22,469        22,469        22,469        16,724        16,724        16,724   

Store pre-opening costs

    511        1,791        1,791        1,791        1,714        1,714        1,714   

Store closure and exit costs

    123        160        160        160        775        775        775   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    24,233        31,969        31,969        31,969        40,046        40,046        40,046   

Interest expense

    (7,098     (10,308     (11,826     (8,236     (10,165     (11,952     (8,272

Other income

    24        49        49        49        133        133        133   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    17,159        21,710        20,192        23,782        30,014        28,227        31,907   

Income tax provision

    (7,613     (9,353     (8,761     (10,161     (11,897     (11,200     (12,635
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 9,546      $ 12,357      $ 11,431      $ 13,621      $ 18,117      $ 17,027      $ 19,272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Net income per share—basic(7)

  $ 0.09      $ 0.10      $ 0.09      $ 0.10      $ 0.14      $ 0.14      $ 0.14   

Net income per share—diluted(7)

  $ 0.09      $ 0.10      $ 0.09      $ 0.10      $ 0.14      $ 0.13      $ 0.13   

Weighted average shares outstanding—basic(7)

    110,000        124,960        124,960        141,469        125,969        125,969        142,478   

Weighted average shares outstanding—diluted(7)

    111,463        126,434        125,862        142,371        129,184        129,008        145,517   

Pro Forma Financial Measures:

             

Pro forma adjusted EBITDA(8)

    $ 45,054      $ 45,054      $ 45,054        $ 52,058      $ 52,058   

Pro forma adjusted EBIT(8)

    $ 35,320      $ 35,320      $ 35,320        $ 40,946      $ 40,946   

Pro forma adjusted net income(8)

    $ 15,351      $ 14,424      $ 16,615        $ 17,341      $ 19,586   
                      Thirteen weeks ended  
    Fiscal 2010     Fiscal 2011     Fiscal 2012     April 1,
2012
    March 31, 2013  

Pro forma comparable store sales growth(9)

    2.3     5.1     9.7     10.1     8.0

Pro forma stores at end of period

    129        138        148        141        154   

Other Operating Data:

         

Stores at beginning of period

    40        43        103        103        148   

Opened

    3        7        9        3        6   

Acquired(10)

           56        37                 

Closed

           (3     (1              

Stores at end of period

    43        103        148        106        154   

Gross square feet at end of period

    1,035,841        2,721,430        4,064,888        2,796,088        4,228,785   

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

    24,089        26,422        27,465        26,378        27,466   

 

 

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Balance Sheet Data:

        
     As of March 31, 2013  
     Actual      Pro Forma for
April 2013
Refinancing(11)
     Pro Forma
Sprouts Farmers
Market, Inc.(12)
 
     (in thousands)  

Cash and cash equivalents

   $ 100,795       $ 86,917       $ 86,917   

Total assets

     1,145,441         1,133,550         1,132,871   

Total capital and finance lease obligations, including current portion

     112,320         112,320         112,320   

Total long-term debt, including current portion

     425,063         717,905         475,251   

Total stockholders’ equity

     405,996         106,886         348,861   

 

(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) For the period from April 18, 2011 to May 28, 2012 our consolidated financial statements include the financial position, results of operations and cash flows of Henry’s and Sprouts Arizona. Commencing on May 29, 2012, our consolidated financial statements also 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 and the thirteen weeks ended April 1, 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 and the thirteen weeks ended April 1, 2012.
(5) The Pro Forma for April 2013 Refinancing information gives effect to pro forma adjustments to reflect our April 2013 Refinancing as if such transaction 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 the thirteen weeks ended March 31, 2013.
(6) The Pro Forma information for fiscal 2012 and the thirteen weeks ended April 1, 2012 includes the pro forma for Sunflower Transaction and April 2013 Refinancing information described in note 4 above. The Pro Forma information for the thirteen weeks ended March 31, 2013 includes the pro forma for April 2013 Refinancing information as described in note 5 above. Additionally, the Pro Forma information for fiscal 2012 and the thirteen weeks ended April 1, 2012 and March 31, 2013 gives effect to pro forma adjustments to reflect the issuance of 16,509,408 shares of common stock in this offering (excluding the remaining 1,192,807 shares of common stock being issued in this offering, which are deemed to have been used to pay underwriting discounts and offering expenses) and the application of $247.6 million of the proceeds to us from the sale of such shares by us to repay certain indebtedness under our Credit Facility as described in “Use of Proceeds” as if these events had occurred on the first day of fiscal 2012. This assumes net proceeds of this offering to us of $247.6 million (assuming no exercise of the underwriters’ option to purchase additional shares), based on an initial public offering price of $15.00 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 and the thirteen weeks ended April 1, 2012 and March 31, 2013.

 

   For the thirteen weeks ended March 31, 2013, a $1.00 increase in the assumed initial public offering price of $15.00 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 $19.4 million, and pro forma net income per share-basic of $0.14, and a $1.00 decrease in the assumed initial public offering price of $15.00 per share would have resulted in pro forma net income of $19.2 million and pro forma net income per share-basic of $0.13, 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 $19.2 million, and pro forma net income per share-basic of $0.14, assuming the assumed initial public offering price of $15.00 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 of one million in the number of shares offered by us, assuming no change in the assumed initial public offering price of $15.00 per share, would have resulted in pro forma net income of $19.4 million and pro forma net income per share—basic of $0.14. The above assumes that any resulting change in net proceeds increases or decreases the amount used to repay indebtedness.

 

 

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For fiscal 2012, a $1.00 increase in the assumed initial public offering price of $15.00 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 $29.7 million, and pro forma net income per share-basic of $0.21, and a $1.00 decrease in the assumed initial public offering price of $15.00 per share would have resulted in pro forma net income of $28.8 million and pro forma net income per share-basic of $0.20, 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 $28.9 million, and pro forma net income per share-basic of $0.20, assuming the assumed initial public offering price of $15.00 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 of one million in the number of shares offered by us, assuming no change in the assumed initial public offering price of $15.00 per share, would have resulted in pro forma net income of $29.7 million and pro forma net income per share—basic of $0.21. The above assumes that any resulting change in net proceeds increases or decreases the amount used to repay indebtedness.

(7) Pro forma net income per share (basic and diluted) gives effect to the items described in notes 3, 4, 5 or 6 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 and the thirteen weeks ended April 1, 2012 and March 31, 2013.
(8) 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 in assessing ongoing performance. Pro forma net income gives effect to the items described in notes 3, 4, 5 or 6 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.

 

 

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   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 and the thirteen weeks ended April 1, 2012 and March 31, 2013:

 

    Fiscal 2012     Thirteen Weeks Ended  
                      April 1, 2012     March 31, 2013  
          Pro Forma for     Pro Forma           Pro Forma for     Pro Forma           Pro Forma  
          Sunflower     Sprouts           Sunflower     Sprouts           Sprouts  
    Pro Forma for     Transaction and     Farmers     Pro Forma for     Transaction and     Farmers     Pro Forma for     Farmers  
    Sunflower     April 2013     Market,     Sunflower     April 2013     Market,     April 2013     Market,  
    Transaction     Refinancing     Inc.     Transaction     Refinancing     Inc.     Refinancing     Inc.  
    (dollars in thousands)  

Pro forma net income(a)

  $ 24,526      $ 20,448      $ 29,278      $ 12,357      $ 11,431      $ 13,621      $ 17,027      $ 19,272   

Add: Pro forma income tax provision

    19,912        17,305        22,950        9,353        8,761        10,161        11,200        12,635   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income before income taxes

    44,438        37,753        52,228        21,710        20,192        23,782        28,227        31,907   

Adjustments:

               

Costs associated with integration(b)

    17,120        17,120        17,120        3,025        3,025        3,025        (15     (15

Loss on extinguishment of debt(c)

    992        992        992        —           —           —          —           —     

Store closure and exit costs(d)

    2,214        2,214        2,214        160        160        160        775        775   

Loss on disposal of assets(e)

    1,953        1,953        1,953        117        117        117        7        7   

Pro forma adjusted income tax provision(f)

    (26,721     (24,114     (29,759     (9,661     (9,070     (10,469     (11,653     (13,088
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma adjusted net income

    39,996        35,918        44,748        15,351        14,424        16,615        17,341        19,586   

Pro forma interest expense, net

    40,250        46,935        32,460        10,308        11,826        8,236        11,952        8,272   

Pro forma adjusted income tax provision(f)

    26,721        24,114        29,759        9,661        9,070        10,469        11,653        13,088   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma adjusted EBIT

    106,967        106,967        106,967        35,320        35,320        35,320        40,946        40,946   

Pro forma depreciation, amortization and accretion

    40,373        40,373        40,373        9,734        9,734        9,734        11,112        11,112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma adjusted EBITDA

  $ 147,340      $ 147,340      $ 147,340      $ 45,054      $ 45,054      $ 45,054      $ 52,058      $ 52,058   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a reconciliation of pro forma net income to net income for fiscal 2012 and the thirteen weeks ended April 1, 2012 and March 31, 2013.
  (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 have been excluded from our pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income. In fiscal 2012 these consisted of 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. Store closure and exit costs in the thirteen weeks ended March 31, 2013 consisted of the costs to close the former Sunflower warehouse.
  (e) Loss on disposal of assets in fiscal 2012 and the thirteen weeks ended April 1, 2012 and March 31, 2013 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 for all periods presented 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. For fiscal 2012 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. 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.

 

(9)

Pro forma 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 pro forma comparable store sales growth. See “Selected

 

 

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Consolidated Historical and Pro Forma Financial and Other Data” for a reconciliation of pro forma net sales to net sales and a presentation of pro forma comparable store sales growth for fiscal 2008 through fiscal 2012 and the thirteen weeks ended April 1, 2012 and March 31, 2013.

(10) 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.
(11) The Pro Forma for April 2013 Refinancing Transaction balance sheet data as of March 31, 2013 gives effect to pro forma adjustments to reflect our April 2013 Refinancing as if such transactions had occurred on March 31, 2013. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such unaudited pro forma condensed consolidated balance sheet data.
(12) The Pro Forma balance sheet data as of March 31, 2013 includes the pro forma for April 2013 Refinancing information described in note 11 above, and also gives effect to pro forma adjustments to reflect the issuance of 16,509,408 shares of common stock in this offering (excluding the remaining 1,192,807 shares of common stock being issued in this offering, which are deemed to have been used to pay underwriting discounts and offering expenses) and the application of $247.6 million of the proceeds to us from the sale of such shares by us to repay certain indebtedness under our Credit Facility as described in “Use of Proceeds”, as if these events had occurred on March 31, 2013. This assumes net proceeds of this offering to us of $247.6 million (assuming no exercise of the underwriters’ option to purchase additional shares), based on an initial public offering price of $15.00 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 $15.00 per share (the midpoint of the price range set forth on the front cover of this prospectus) would not result in a change in cash and cash equivalents and would increase (decrease) total assets by $0.1 million, total long-term debt by ($16.4) million and total stockholders’ equity by $16.3 million, in each case assuming no exercise of the underwriters’ option to purchase additional shares and 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 front cover of this prospectus, would not result in a change in cash and cash equivalents and would increase (decrease) total assets by an insignificant amount, total long-term debt by ($13.9) million and total stockholders’ equity by $13.9 million, in each case assuming no exercise of the underwriters’ option to purchase additional shares and assuming the initial public offering price of $15.00 per share (the midpoint of the price range set forth on the front cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The above assumes that any resulting change in net proceeds increases or decreases the amount used to repay indebtedness.

 

 

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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. Although we plan to expand our store base primarily through new store openings, we may grow through strategic acquisitions. Our ability to grow through strategic acquisitions will depend upon our ability to identify suitable targets and negotiate acceptable terms and conditions for their acquisition, as well as our ability to obtain financing for such acquisitions, integrate the acquired stores into our existing store base and retain the customers of such stores. 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

 

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planned for 2013 and approximately 20 store openings planned for 2014, and we intend 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 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:

 

  Ÿ  

general economic conditions;

 

  Ÿ  

slowing in the natural and organic retail sector;

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

increased competitive activity;

 

  Ÿ  

price changes in response to competitive factors;

 

  Ÿ  

possible supply shortages;

 

  Ÿ  

consumer preferences, buying trends and spending levels;

 

  Ÿ  

product price inflation and deflation;

 

  Ÿ  

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

 

  Ÿ  

cycling against any year of above-average sales results;

 

  Ÿ  

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

 

  Ÿ  

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

 

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short-term due to the effect of store opening costs and lower sales and contribution to overall 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 both our pro forma net sales in fiscal 2012 and our net sales in the thirteen weeks ended March 31, 2013. 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:

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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 the success of our marketing and merchandising efforts and our ability to provide a consistent, high-

 

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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 March 31, 2013, we operated 69 stores in California, making California our largest market representing 45% of our total stores and 46% of our net sales in the thirteen weeks ended March 31, 2013. We also have store concentration in Arizona, Colorado and Texas, operating 24, 23 and 24 stores in those states, respectively, and representing 46% in the aggregate of our net sales in the thirteen weeks ended March 31, 2013. 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% and 23% of our total purchases in fiscal 2012 and the thirteen weeks ended March 31, 2013, respectively. 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 for any new stores we

 

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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% and 5% of our total purchases in fiscal 2012 and the thirteen weeks ended March 31, 2013, respectively, 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. In connection with the January 2013 breach, in addition to replacing the affected card terminals for a total cost of approximately $170,000, we engaged a nationally recognized cybersecurity firm to investigate the incident. The costs associated with the investigation, and any penalties assessed by our credit card vendors, are covered by our insurance policy, subject to our insurance deductible of $100,000. 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

 

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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.

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

 

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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 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.

 

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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 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

 

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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 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 March 31, 2013, 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 $475.3 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

 

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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 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;

 

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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;

 

  Ÿ  

limiting our ability to borrow additional funds; and

 

  Ÿ  

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:

 

  Ÿ  

incurring additional indebtedness;

 

  Ÿ  

making certain investments;

 

  Ÿ  

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

 

  Ÿ  

paying dividends, making distributions, or redeeming capital stock;

 

  Ÿ  

entering into transactions with our affiliates; and

 

  Ÿ  

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.

 

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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, 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

 

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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 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 March 31, 2013, we had goodwill of approximately $368.1 million, which represented 32% 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:

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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;

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

short selling of our common stock by investors;

 

  Ÿ  

additions or departures of key personnel;

 

  Ÿ  

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

 

  Ÿ  

regulatory or political developments;

 

  Ÿ  

changes in accounting principles or methodologies;

 

  Ÿ  

litigation and governmental investigations;

 

  Ÿ  

acquisitions by us or by our competitors; and

 

  Ÿ  

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 143,658,944 shares of common stock outstanding after this offering (or 146,433,944 shares if the underwriters’ option to purchase additional shares is exercised in full). 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. In addition, participants in the directed share program described under “Underwriting—Directed Share Program” who purchase more than $1.0 million of common stock will be subject to similar restrictions during the 25-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 and 25-day restricted periods referred to in the preceding two sentences 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, subject to various exceptions, until October 31, 2014 (subject to a potential extension of up to 90 days). 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 $16.42 in net tangible book value per share (or $16.13 if the underwriters’ option to purchase additional shares is exercised in full), based on an assumed initial public offering price of $15.00 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

 

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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.”

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 85.1% of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares. In particular, the Apollo Funds will beneficially own, in the aggregate, approximately 45.4% of our outstanding common stock. These amounts compare to approximately 12.3% of our outstanding common stock represented by the shares sold by us in this offering, also assuming no exercise of the underwriters’ option to purchase additional shares. 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:

 

  Ÿ  

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

 

  Ÿ  

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;

 

  Ÿ  

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

 

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  Ÿ  

prohibiting our stockholders from acting by written consent, thereby requiring stockholder action to be taken at an annual or special meeting of stockholders;

 

  Ÿ  

prohibiting our stockholders from calling special meetings of stockholders, which may delay the ability of our stockholders to force consideration of a proposal or the ability of holders controlling a majority of our capital stock to take any action, including the removal of directors;

 

  Ÿ  

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;

 

  Ÿ  

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

 

  Ÿ  

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

 

  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

 

  Ÿ  

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 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.

 

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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 $247.6 million (or $287.0 million if the underwriters’ option to purchase additional shares is exercised in full), assuming an initial public offering price of $15.00 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 $15.00 per share would increase (decrease) the net proceeds to us from this offering by $16.7 million (or $19.4 million if the underwriters’ option to purchase additional shares is exercised in full), 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 $14.2 million (or $16.3 million if the underwriters’ option to purchase additional shares is exercised in full), assuming the assumed initial public offering price of $15.00 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 $247.6 million of the net proceeds from this offering to repay borrowings under the Term Loan portion of our Credit Facility. As of June 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 any 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 11 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 11 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 March 31, 2013:

 

  Ÿ  

11,435,611 outstanding Class A units and 16,125 Class B units of Sprouts Farmers Markets, LLC will convert into an aggregate of 125,969,096 shares of our common stock; and

 

  Ÿ  

outstanding options to purchase 1,053,132 Class B units of Sprouts Farmers Markets, LLC will become options to purchase an aggregate of 11,584,452 shares of our common stock, with exercise prices ranging from $1.09 to $6.92.

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.

For the convenience of the reader, except as the context otherwise requires, all information included in this prospectus is presented giving effect to the corporate conversion.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2013:

 

  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 sale by us of 17,702,215 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share (assuming no exercise of the underwriters’ option to purchase additional shares), 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 (ii) 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 March 31, 2013  
     Actual      Pro Forma for
April 2013
Refinancing(1)
     Pro Forma
As Adjusted(2)
 
     (in thousands, except share data)  

Cash and cash equivalents

   $ 100,795       $ 86,917       $ 86,917   
  

 

 

    

 

 

    

 

 

 

Capital and finance lease obligations, including current portion

   $ 112,320       $ 112,320       $ 112,320   

Long-term debt, including current portion

     425,063         717,905         475,251   

Stockholders’ equity:

        

Undesignated preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding, actual, pro forma for April 2013 Refinancing and pro forma as adjusted

                       

Common stock, $0.001 par value; 200,000,000 shares authorized, actual, pro forma for April 2013 Refinancing and pro forma as adjusted; 125,969,096 shares issued and outstanding, actual and pro forma for April 2013 Refinancing; 143,671,311 shares issued and outstanding, pro forma as adjusted

     126         126         144   

Additional paid-in capital

     396,604         106,760         354,383   

Retained earnings/(accumulated deficit)

     9,266                 (5,666
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

     405,996         106,886         348,861   
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 943,379       $ 937,111       $ 936,432   
  

 

 

    

 

 

    

 

 

 

 

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

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) additional paid-in capital by $16,729, decrease (increase) long-term debt by $16,729 and increase (decrease) total stockholders’ equity by $16,347, assuming no exercise of the underwriters’ option to purchase additional shares and 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

 

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cover of this prospectus, would increase (decrease) additional paid-in capital by $14,175, decrease (increase) long-term debt by $14,175 and increase (decrease) total stockholders’ equity by $13,852, assuming no exercise of the underwriters’ option to purchase additional shares and assuming the initial public offering price of $15.00 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 above assumes that any resulting change in net proceeds increases or decreases the amount used to repay indebtedness.

The outstanding as adjusted share information in the table above is based on 125,969,096 shares of our common stock outstanding as of March 31, 2013, assuming the corporate conversion occurred on March 31, 2013, and excludes the following:

 

  Ÿ  

11,584,452 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2013 at a weighted average exercise price of $3.01 per share; and

 

  Ÿ  

10,089,072 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 deficit of our common stock as of March 31, 2013 was $146.7 million, or a deficit of $1.16 per share. Historical net tangible book value (deficit) is the amount of our total tangible assets less our total liabilities. Historical net tangible book value (deficit) 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 125,969,096 shares of our common stock and the conversion of all outstanding options to purchase units into options to purchase an aggregate of 11,584,452 shares of our common stock in the corporate conversion.

The pro forma net tangible book deficit of our common stock as of March 31, 2013 was $445.8 million, or a deficit of $3.54 per share. Pro forma net tangible book deficit and pro forma net tangible book deficit per share give effect to (i) the corporate conversion and (ii) the April 2013 Refinancing.

Pro forma as adjusted net tangible book value (deficit) gives effect to (i) the April 2013 Refinancing, (ii) the sale by us of 17,702,215 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share (assuming no exercise of the underwriters’ option to purchase additional shares), 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” (assuming no exercise of the underwriters’ option to purchase additional shares). As of March 31, 2013, our pro forma as adjusted net tangible book deficit would have been $203.8 million, or a deficit of $1.42 per share. This represents an immediate increase in pro forma net tangible book value of $2.11 per share to our existing stockholders and an immediate dilution of $16.42 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

       $15.00   

Historical net tangible book value per share as of March 31, 2013

     (1.16  

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

     (2.37  

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

     2.11     
    

 

 

 

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

       (1.42
    

 

 

 

Dilution per share to new investors purchasing shares in this offering

     $ 16.42   
    

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the pro forma as adjusted net tangible book value after this offering by $0.11 per share and the dilution to new investors by $0.11 per share, assuming no exercise of the underwriters’ option to purchase additional shares and 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 $0.11 per share and decrease (increase) the dilution to investors participating in this offering by $0.11 per share, assuming no exercise of the underwriters’ option to purchase additional shares and assuming the initial public offering price of $15.00 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.

 

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The table below summarizes as of March 31, 2013, 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 (assuming no exercise of the underwriters’ option to purchase additional shares) at an assumed initial public offering price of $15.00 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 Cash Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     125,969,096         87.7   $ 211,476,000         44.3   $ 1.68   

New investors

     17,702,215         12.3     265,533,225         55.7     15.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     143,671,311         100.0   $ 477,009,225         100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) total consideration paid by new investors by $17.7 million and increase (decrease) the percent of total consideration paid by new investors by 1.5%, assuming no exercise of the underwriters’ option to purchase additional shares and 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 $15.0 million and increase (decrease) the percent of total consideration paid by new investors by 1.3%, assuming no exercise of the underwriters’ option to purchase additional shares and assuming the initial public offering price of $15.00 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 86.0% 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 20,477,215 shares, or 14.0% of the total number of shares of our common stock outstanding after this offering.

The discussion and tables above are based on 125,969,096 shares of our common stock outstanding as of March 31, 2013, assuming the corporate conversion occurred on March 31, 2013, and exclude the following:

 

  Ÿ  

11,584,452 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2013 at a weighted average exercise price of $3.01 per share; and

 

  Ÿ  

10,089,072 shares of common stock reserved for future issuance under our Incentive Plans.

If all of these options were exercised, then our existing stockholders, including the holders of these options, would own 88.6% and our new investors would own 11.4% of the total number of shares of our common stock outstanding upon the closing of this offering (assuming no exercise of the underwriters’ option to purchase additional shares). In such event, the total consideration paid by our existing stockholders, including the holders of these options, would be approximately $246.3 million, or 48.1%, the total consideration paid by our new investors would be $265.5 million, or 51.9%, the average price per share paid by our existing stockholders would be $1.79, and the average price per share paid by our new investors would be $15.00.

 

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Table of Contents

SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA

The following tables set forth our selected historical 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. Historical statements of operations data for the thirteen weeks ended April 1, 2012 and March 31, 2013 and historical balance sheet data as of March 31, 2013 have been derived from our unaudited consolidated financial statements which are included elsewhere in this prospectus. These statements, in the opinion of management, include all adjustments (inclusive of normal recurring adjustments) necessary for a fair statement. 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. Apollo held a controlling interest in Henry’s former parent prior to the Henry’s Transaction and continued to hold a controlling interest in the Company afterwards. Due to Apollo’s continued controlling interest, the Henry’s Transaction resulted in Henry’s financial statements becoming the financial statements of the Company, followed immediately by the acquisition by the Company of the Sprouts Farmers Market business. As a result, the Company was determined to be the accounting acquirer, effective April 18, 2011. 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 pro forma information for fiscal 2012 and the thirteen weeks ended April 1, 2012 and March 31, 2013, 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 and the thirteen weeks ended April 1, 2012 and March 31, 2013. 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.(6)
 
    (dollars in thousands, except per share 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      $ 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        1,403,158   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

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

Direct store expenses

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

Selling, general and administrative expenses

    26,520        23,506        23,277        58,528        86,364        91,611        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        5,218   

Store closure and exit costs

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

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

Interest expense

    (202     (582     (681     (19,813     (35,488     (40,250     (46,935     (32,460

Other income

    444        343        295        358        562        649        649        649   

Loss on extinguishment of debt

                                (992     (992     (992     (992
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    6,131        8,319        8,181        (45,176     34,767        44,438        37,753        52,228   

Income tax (provision) benefit

    (2,466     (3,346     (3,320     17,731        (15,267     (19,912     (17,305     (22,950
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 3,665      $ 4,973      $ 4,861      $ (27,445   $ 19,500      $ 24,526      $ 20,448      $ 29,278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

               

Net income (loss) per share—basic(7)

  $ 0.06      $ 0.08      $ 0.08      $ (0.28   $ 0.16      $ 0.20      $ 0.16      $ 0.21   

Net income (loss) per share—diluted(7)

  $ 0.06      $ 0.08      $ 0.08      $ (0.28   $ 0.16      $ 0.19      $ 0.16      $ 0.20   

Weighted average shares outstanding—basic(7)

    64,350        64,350        64,350        96,954        119,427        125,510        125,510        142,019   

Weighted average shares outstanding—diluted(7)

    64,350        64,350        64,350        96,954        121,781        127,864        127,358        143,867   

Pro Forma Financial Measures:

               

Pro forma adjusted EBITDA(8)

            $ 147,340      $ 147,340      $ 147,340   

Pro forma adjusted EBIT(8)

            $ 106,967      $ 106,967      $ 106,967   

Pro forma adjusted net income(8)

            $ 39,996      $ 35,918      $ 44,748   

 

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Table of Contents
    Thirteen weeks ended  
    April 1, 2012     March 31, 2013  
  Actual(2)     Pro Forma for
Sunflower
Transaction(3)
    Pro Forma for
Sunflower
Transaction
and April 2013
Refinancing(4)
    Pro Forma
Sprouts
Farmers
Market,
Inc.(6)
    Actual     Pro Forma for
April 2013
Refinancing(5)
    Pro Forma
Sprouts
Farmers
Market,
Inc. (6)
 
    (dollars in thousands, except per share data)  

Statements of Operations Data:

             

Net sales

  $ 375,720      $ 493,494      $ 493,494      $ 493,494      $ 573,694      $ 573,694      $ 573,694   

Cost of sales, buying and occupancy

    258,933        341,010        341,010        341,010        399,774        399,774        399,774   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    116,787        152,484        152,484        152,484        173,920        173,920        173,920   

Direct store expenses

    74,833        96,095        96,095        96,095        114,661        114,661        114,661   

Selling, general and administrative expenses

    17,087        22,469        22,469        22,469        16,724        16,724        16,724   

Store pre-opening costs

    511        1,791        1,791        1,791        1,714        1,714        1,714   

Store closure and exit costs

    123        160        160        160        775        775        775   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    24,233        31,969        31,969        31,969        40,046        40,046        40,046   

Interest expense

    (7,098     (10,308     (11,826     (8,236     (10,165     (11,952     (8,272

Other income

    24        49        49        49        133        133        133   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    17,159        21,710        20,192        23,782        30,014        28,227        31,907   

Income tax provision

    (7,613     (9,353     (8,761     (10,161     (11,897     (11,200     (12,635
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 9,546      $ 12,357      $ 11,431      $ 13,621      $ 18,117      $ 17,027      $ 19,272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Net income per share—basic(7)

  $ 0.09      $ 0.10      $ 0.09      $ 0.10      $ 0.14      $ 0.14      $ 0.14   

Net income per share—diluted(7)

  $ 0.09      $ 0.10      $ 0.09      $ 0.10      $ 0.14      $ 0.13      $ 0.13   

Weighted average shares outstanding—basic(7)

    110,000        124,960        124,960        141,469        125,969        125,969        142,478   

Weighted average shares outstanding—diluted(7)

    111,463        126,434        125,862        142,371        129,184        129,008        145,517   

Pro Forma Financial Measures:

             

Pro forma adjusted EBITDA(8)

    $ 45,054      $ 45,054      $ 45,054        $ 52,058      $ 52,058   

Pro forma adjusted EBIT(8)

    $ 35,320      $ 35,320      $ 35,320        $ 40,946      $ 40,946   

Pro forma adjusted net income(8)

    $ 15,351      $ 14,424      $ 16,615        $ 17,341      $ 19,586   

 

    Fiscal
2008(1)(9)
    Fiscal
2009(1)
    Fiscal
2010(1)
    Fiscal
2011(1)
    Fiscal
2012(2)
    Thirteen weeks
ended
 
              April 1,
2012(2)
    March 31,
2013
 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma comparable store
sales growth(10)

    9.0     2.6     2.3     5.1     9.7     10.1     8.0

Pro forma stores at end of period

    87        109        129        138        148        141        154   

Other Operating Data:

             

Stores at beginning of period

    36        36        40        43        103        103        148   

Opened

           4        3        7        9        3        6   

Acquired(11)

                         56        37                 

Closed

                         (3     (1              

Stores at end of period

    36        40        43        103        148        106        154   

Gross square feet at end of period

    837,630        949,627        1,035,841        2,721,430        4,064,888        2,796,088        4,228,785   

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

    23,268        23,741        24,089        26,422        27,465        26,378        27,466   

 

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Table of Contents
    As of  
    January 4,
2009(1)
    January 3,
2010(1)
    January 2,
2011(1)
    January 1,
2012
    December 30,
2012
    March 31, 2013  
                                  Actual     Pro Forma for
April 2013
Refinancing
(12)
    Pro Forma
Sprouts
Farmers
Market,
Inc.(13)
 
    (in thousands)  

Balance Sheet Data

               

Cash and cash equivalents

  $ 3,921      $ 6,232      $ 4,918      $ 14,542      $ 67,211      $ 100,795      $ 86,917      $ 86,917   

Total assets

    191,653        220,818        232,636        761,646        1,103,236        1,145,441        1,133,550        1,132,871   

Total capital and finance lease obligations, including current portion

    5,311        7,967        8,248        75,409        107,639        112,320        112,320        112,320   

Total long-term debt, including current portion

                         294,764        426,544        425,063        717,905        475,251   

Total stockholders’ equity

    140,300        157,932        156,660        267,453        386,755        405,996        106,886        348,861   

 

(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) For the period from April 18, 2011 to May 28, 2012 our consolidated financial statements include the financial position results of operations and cash flows of Henry’s and Sprouts Arizona. Commencing on May 29, 2012, our consolidated financial statements also 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 and the thirteen weeks ended April 1, 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 and the thirteen weeks ended April 1, 2012.
(5) The Pro Forma for April 2013 Refinancing information gives effect to pro forma adjustments to reflect our April 2013 Refinancing as if such transaction 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 the thirteen weeks ended March 31, 2013.
(6) The Pro Forma information for fiscal 2012 and the thirteen weeks ended April 1, 2012 includes the pro forma for Sunflower Transaction and April 2013 Refinancing information described in note 4 above. The Pro Forma information for the thirteen weeks ended March 31, 2013 includes the pro forma for April 2013 Refinancing information as described in note 5 above. Additionally, the Pro Forma information for fiscal 2012 and the thirteen weeks ended April 1, 2012 and March 31, 2013 gives effect to pro forma adjustments to reflect the issuance of 16,509,408 shares of common stock in this offering (excluding the remaining 1,192,807 shares of common stock being issued in this offering, which are deemed to have been used to pay underwriting discounts and offering expenses) and the application of $247.6 million of the proceeds to us from the sale of such shares by us to repay certain indebtedness under our Credit Facility as described in “Use of Proceeds” as if these events had occurred on the first day of fiscal 2012. This assumes net proceeds of this offering to us of $247.6 million (assuming no exercise of the underwriters’ option to purchase additional shares), based on an initial public offering price of $15.00 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 and the thirteen weeks ended April 1, 2012 and March 31, 2013.

 

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For the thirteen weeks ended March 31, 2013, a $1.00 increase in the assumed initial public offering price of $15.00 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 $19.4 million, and pro forma net income per share-basic of $0.14, and a $1.00 decrease in the assumed initial public offering price of $15.00 per share would have resulted in pro forma net income of $19.2 million and pro forma net income per share-basic of $0.13, 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 $19.2 million, and pro forma net income per share-basic of $0.14, assuming the assumed initial public offering price of $15.00 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 of one million in the number of shares offered by us, assuming no change in the assumed initial public offering price of $15.00 per share, would have resulted in pro forma net income of $19.4 million and pro forma net income per share—basic of $0.14. The above assumes that any resulting change in net proceeds increases or decreases the amount used to repay indebtedness.

For fiscal 2012, a $1.00 increase in the assumed initial public offering price of $15.00 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 $29.7 million, and pro forma net income per share-basic of $0.21, and a $1.00 decrease in the assumed initial public offering price of $15.00 per share would have resulted in pro forma net income of $28.8 million and pro forma net income per share-basic of $0.20, 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 $28.9 million, and pro forma net income per share-basic of $0.20, assuming the assumed initial public offering price of $15.00 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 of one million in the number of shares offered by us, assuming no change in the assumed initial public offering price of $15.00 per share, would have resulted in pro forma net income of $29.7 million and pro forma net income per share—basic of $0.21. The above assumes that any resulting change in net proceeds increases or decreases the amount used to repay indebtedness.

(7) Pro forma net income per share (basic and diluted) gives effect to the items described in notes 3, 4, 5 or 6 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 and the thirteen weeks ended April 1, 2012 and March 31, 2013.
(8)

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, 5 or 6 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.

 

 

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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 and the thirteen weeks ended April 1, 2012 and March 31, 2013:

 

    Fiscal 2012     Thirteen Weeks Ended  
                      April 1, 2012     March 31, 2013  
    Pro Forma
for
Sunflower
Transaction
    Pro Forma
for
Sunflower
Transaction
and
April 2013
Refinancing
    Pro Forma
Sprouts
Farmers
Market,
Inc.
    Pro Forma
for
Sunflower
Transaction
    Pro Forma
for
Sunflower
Transaction
and
April 2013
Refinancing
    Pro Forma
Sprouts
Farmers
Market,
Inc.
    Pro Forma
for
April 2013
Refinancing
    Pro Forma
Sprouts
Farmers
Market,
Inc.
 
    (dollars in thousands)  

Pro forma net income(a)

  $ 24,526      $ 20,448      $ 29,278      $ 12,357      $ 11,431      $ 13,621      $ 17,027      $ 19,272   

Add: Pro forma income tax provision

    19,912        17,305        22,950        9,353        8,761        10,161        11,200        12,635   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income before income taxes

    44,438        37,753        52,228        21,710        20,192        23,782        28,227        31,907   

Adjustments:

               

Costs associated with integration(b)

    17,120        17,120        17,120        3,025        3,025        3,025        (15     (15

Loss on extinguishment of debt(c)

    992        992        992        —          —          —          —          —     

Store closure and exit costs(d)

    2,214        2,214        2,214        160        160        160        775        775   

Loss on disposal of assets(e)

    1,953        1,953        1,953        117        117        117        7        7   

Pro forma adjusted income tax provision(f)

    (26,721     (24,114     (29,759     (9,661     (9,070     (10,469     (11,653     (13,088
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma adjusted net income

    39,996        35,918        44,748        15,351        14,424        16,615        17,341        19,586   

Pro forma interest expense, net

    40,250        46,935        32,460        10,308        11,826        8,236        11,952        8,272   

Pro forma adjusted income tax provision(f)

    26,721        24,114        29,759        9,661        9,070        10,469        11,653        13,088   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma adjusted EBIT

    106,967        106,967        106,967        35,320        35,320        35,320        40,946        40,946   

Pro forma depreciation, amortization and accretion

    40,373        40,373        40,373        9,734        9,734        9,734        11,112        11,112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma adjusted EBITDA

  $ 147,340      $ 147,340      $ 147,340      $ 45,054      $ 45,054      $ 45,054      $ 52,058      $ 52,058   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a reconciliation of pro forma net income to net income for fiscal 2012 and the thirteen weeks ended April 1, 2012 and March 31, 2013.
  (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 have been excluded from our pro forma adjusted EBITDA, pro forma adjusted EBIT and pro forma adjusted net income. In fiscal 2012 these consisted of 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. Store closure and exit costs in the thirteen weeks ended March 31, 2013 consisted of the costs to close the former Sunflower warehouse.
  (e) Loss on disposal of assets in fiscal 2012 and the thirteen weeks ended April 1, 2012 and March 31, 2013 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.

 

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  (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.
(9) In fiscal 2008, two stores in California were relocated in close proximity to the original store locations. These stores are not reflected as either opened or closed in the period.
(10) Pro forma 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 pro forma comparable store sales growth. A reconciliation of pro forma net sales to net sales and a presentation of pro forma 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
    Thirteen Weeks Ended  
              April 1, 2012     March 31, 2013  
    (dollars in thousands)  

Net sales—actual

  $ 441,056      $ 487,693      $ 516,816      $ 1,105,879      $ 1,794,823      $ 375,720      $ 573,694   

Pro forma adjustments(a)

    617,732        751,677        973,543        616,776        196,140        117,774          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net sales

  $ 1,058,788      $ 1,239,370      $ 1,490,359      $ 1,722,655      $ 1,990,963      $ 493,494      $ 573,694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma comparable store sales growth(b)

    9.0     2.6     2.3     5.1     9.7     10.1     8.0

 

  (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) Pro forma comparable store sales growth is calculated as if the Transactions had been consummated on the first day of fiscal 2007.

 

(11) 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.
(12) The Pro Forma for April 2013 Refinancing Transaction balance sheet data as of March 31, 2013 gives effect to pro forma adjustments to reflect our April 2013 Refinancing as if such transactions had occurred on March 31, 2013. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such unaudited pro forma condensed consolidated balance sheet data.
(13) The Pro Forma balance sheet data as of March 31, 2013 includes the pro forma for the April 2013 Refinancing information described in note 12 above, and also gives effect to pro forma adjustments to reflect the issuance of 16,509,408 shares of common stock in this offering (excluding the remaining 1,192,807 shares of common stock being issued in this offering, which are deemed to have been used to pay underwriting discounts and offering expenses) and the application of $247.6 million of the proceeds to us from the sale of such shares by us to repay certain indebtedness under our Credit Facility as described in “Use of Proceeds” as if these events had occurred on March 31, 2013. This assumes net proceeds of this offering to us of $247.6 million (assuming no exercise of the underwriters’ option to purchase additional shares), based on an initial public offering price of $15.00 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 $15.00 per share (the midpoint of the price range set forth on the front cover of this prospectus) would not result in a change in cash and cash equivalents and would increase (decrease) total assets by $0.1 million, total long-term debt by ($16.4) million and total stockholders’ equity by $16.3 million, in each case assuming no exercise of the underwriters’ option to purchase additional shares and 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 front cover of this prospectus, would not result in a change in cash and cash equivalents and would increase (decrease) total assets by an insignificant amount, total long-term debt by ($13.9) million and total stockholders’ equity by $13.9 million, in each case assuming no exercise of the underwriters’ option to purchase additional shares and assuming the initial public offering price of $15.00 per share (the midpoint of the price range set forth on the front cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The above assumes that any resulting change in net proceeds increases or decreases the amount used to repay indebtedness.

 

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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 the thirteen weeks ended April 1, 2012 and March 31, 2013 and the unaudited pro forma condensed consolidated balance sheet as of March 31, 2013 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 (in the case of fiscal 2012 and the thirteen weeks ended April 1, 2012 only) (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  

the issuance of 16,509,408 shares of common stock in this offering (excluding the remaining 1,192,807 shares of common stock being issued in this offering, which are deemed to have been used to pay underwriting discounts and offering expenses) and the application of $247.6 million of the proceeds to us from the sale of such shares by us to repay certain indebtedness as described in “Use of Proceeds” (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 and the thirteen weeks ended April 1, 2012 reflects the Sunflower Transaction, the 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 statement of operations for the thirteen weeks ended March 31, 2013 gives pro forma effect to the April 2013 Refinancing and the Pro Forma Offering as if they occurred on January 2, 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 March 31, 2013.

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

 

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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 March 31, 2013, 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 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 MARKET, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Fiscal Year Ended December 30, 2012

(in thousands, except per share amounts)

 

    Historical
Sprouts
Farmers
Market,
Inc.(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      $        $ 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                 1,403,158   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Gross profit

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

Direct store expenses

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

Selling, general and administrative expenses

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

Store pre-opening costs

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

Store closure and exit costs

    2,155        59                        2,214                 2,214                 2,214   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Income from operations

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

Interest expense

    (35,488     (2,019     14        (2,757     (2)(d)        (40,250     (6,685     (3)(a)        (46,935     14,475        (4)(a)        (32,460

Other income

    562        88        (1              649                 649                 649   

Loss on extinguishment of debt

    (992                            (992              (992              (992
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Income before income taxes

    34,767        4,950        (57     4,778          44,438        (6,685       37,753        14,475          52,228   

Income tax (provision) benefit

    (15,267     (2,796     14        (1,863     (2)(e)        (19,912     2,607        (3)(b)        (17,305     (5,645     (4)(b)        (22,950
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Net income

  $ 19,500      $ 2,154      $ (43   $ 2,915        $ 24,526      $ (4,078     $ 20,448      $ 8,830        $ 29,278   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Per Share Information:

                       

Net income—basic

  $ 0.16              (2)(f)      $ 0.20          (3)(c)      $ 0.16          (4)(c)      $ 0.21   

Net income—diluted

  $ 0.16              (2)(f)      $ 0.19          (3)(c)      $ 0.16          (4)(c)      $ 0.20   

Weighted Average Shares:

                       

Basic

    119,427              (2)(f)        125,510          (3)(c)        125,510          (4)(c)        142,019   

Diluted

    121,781              (2)(f)        127,864          (3)(c)        127,358          (4)(c)        143,867   

 

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

 

55


Table of Contents

SPROUTS FARMERS MARKET, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Thirteen Weeks Ended April 1, 2012

(in thousands, except per share amounts)

    Historical
Sprouts
Farmers
Market,

Inc.(1)
    Historical
Sunflower(1)
    Pro Forma
Adjustment for
Sunflower
Transaction(2)
    Notes     Pro Forma for
Sunflower
Transaction
    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)
 

Net sales

  $ 375,720      $ 117,774      $ —           $ 493,494      $ —           $ 493,494      $        $ 493,494   

Cost of sales, buying and occupancy

    258,933        82,366        (289     (2 )(g)      341,010        —             341,010                 341,010   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Gross profit

    116,787        35,408        289          152,484        —             152,484                 152,484   

Direct store expenses

    74,833        21,184        78        (2 )(h)      96,095        —             96,095                 96,095   

Selling, general and administrative expenses

    17,087        6,203        (821     (2 )(i)      22,469        —             22,469                 22,469   

Store pre-opening costs

    511        1,280        —             1,791        —             1,791                 1,791   

Store closure and exit costs

    123        37        —             160        —             160                 160   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Income from operations

    24,233        6,704        1,032          31,969        —             31,969                 31,969   

Interest expense

    (7,098     (1,341     (1,869     (2 )(j)      (10,308     (1,518     (3 )(d)      (11,826     3,590