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Sprouts Farmers Market sales grow 15 percent in 2017

Sprouts Farmers Market reported strong earnings for the year as it expanded into new markets and maintained an impressive rate of store openings. Comparable store growth, though, seems in line with the natural products industry story for the year.

Sprouts Farmers Market Inc. (Nasdaq:SFM) today reported results for the 13-week fourth quarter and 52-week year ended Dec. 31, 2017. The company also announced that its Board of Directors has authorized the company to repurchase, on a discretionary basis, up to an additional $350 million of its outstanding common stock through December 2019.

Fourth-quarter highlights:

  • Net sales of $1.1 billion; a 16 percent increase from the same period in 2016.
  • Comparable store sales growth of 4.6 percent and two-year comparable store sales growth of 5.3 percent.
  • Net income of $40 million; a 133 percent increase from the same period in 2016.
  • Diluted earnings per share of 29 cents; a 142 percent increase from the same period in 2016.
  • Excluding the non-cash benefit of $18.7 million related to the enactment of the Tax Cuts and Jobs Act (1), diluted earnings per share of 16 cents; a 33 percent increase from the same period in 2016.

Fiscal year 2017 highlights:

  • Net sales of $4.7 billion; a 15 percent increase from the same period in 2016.
  • Comparable store sales growth of 2.9 percent and two-year comparable store sales growth of 5.6 percent.
  • Net income of $158 million; a 27 percent increase from the same period in 2016.
  • Diluted earnings per share of $1.15; a 39 percent increase from the same period in 2016.
  • Excluding the non-cash benefit of $18.7 million related to the enactment of the Tax Cuts and Jobs Act (1), diluted earnings per share of $1.01; a 22 percent increase from the same period in 2016.
  • Repurchased 9.7 million common shares in fiscal 2017 for a total investment of $203 million.

“Sprouts’ position of strength continues to grow, demonstrated by 4.6 percent comparable store sales growth for the fourth quarter of 2017 and exceptional EPS growth of 22 percent for the year,” said Amin Maredia, chief executive officer of Sprouts Farmers Market. “This is an exciting time for Sprouts, as we continue to capitalize on our differentiations of health and value while expanding on our opportunities in product innovation, in-store and digital customer experiences, team member development and technology initiatives to drive operational efficiencies.”

Fourth quarter 2017 financial results

  • Net sales for the fourth quarter of 2017 were $1.1 billion, a 16 percent increase compared to the same period in 2016. Net sales growth was driven by a 4.6 percent increase in comparable store sales and strong performance in new stores opened.
  • Gross profit for the quarter increased 17 percent to $324 million, resulting in a gross profit margin of 28.4 percent, an increase of 20 basis points compared to the same period in 2016. This improvement was primarily driven by cycling a heightened promotional environment in the fourth quarter of 2016, in addition to leverage from increased comparable store sales.
  • Direct store expense (“DSE”) for the quarter increased 17 percent to $248 million, or 21.6 percent of sales, compared to 21.4 percent in the same period in 2016.  This deleverage is primarily driven by higher benefit costs and depreciation, partially offset by labor productivity improvement.
  • Selling, general and administrative expenses (“SG&A”) for the quarter increased 8% to $38 million, or 3.3 percent of sales, compared to 3.6 percent in the same period in 2016. This primarily reflects cycling the costs in 2016 associated with our former Executive Chairman of the Board’s retirement and higher bonus expense.
  • Net income for the quarter was $40 million and diluted earnings per share was 29 cents. During the fourth quarter of 2017 we recorded $18.7 million of income tax benefit related to the Tax Cuts and Jobs Act (1). Excluding this benefit, net income was $21 million, a 24 percent increase compared to net income for the same period in 2016 and diluted earnings per share was 16 cents, an increase of 4 cents or 33 percent, as compared to diluted earnings per share for the same period in 2016. This increase was driven by higher sales and margins, a lower effective tax rate, and fewer shares outstanding due to our repurchase program.

Fiscal year 2017 financial results

  • Net sales for the fiscal year 2017 were $4.7 billion, a 15 percent increase compared to 2016.  Net sales growth was driven by a 2.9 percent increase in comparable store sales and strong performance in new stores opened. 
  • Gross profit for the year increased 14 percent to $1.4 billion, resulting in a gross profit margin of 28.9 percent, a decrease of 30 basis points compared to 2016. This primarily reflects the competitive environment earlier in the year as well as higher occupancy costs, partially offset by leverage from increased comparable store sales.
  • DSE for the year increased 16 percent to $963 million, or 20.6 percent of sales, compared to 20.5 percent in 2016.  This primarily reflects higher benefit costs and depreciation, partially offset by labor productivity improvement and operating efficiencies.
  • SG&A for the year increased 17 percent to $148 million, or 3.2 percent of sales, compared to 3.1 percent in 2016.  This primarily reflects higher bonus expense due to improved company performance.
  • Net income for the year was $158 million and diluted earnings per share was $1.15. During the fourth quarter of 2017 we recorded $18.7 million of income tax benefit related to Tax Cuts and Jobs Act (1). Excluding this benefit, net income was $140 million, a 12 percent increase compared to net income for 2016 and diluted earnings per share was $1.01, an increase of 18 cents or 22 percent, as compared to diluted earnings per share for 2016.  This increase was driven by higher sales and margins, a lower effective tax rate, and fewer shares outstanding due to our repurchase program.

Growth and development

During the fourth quarter of 2017, we opened 3 new stores, all in California. For fiscal 2017, we opened 32 new stores which resulted in a total of 285 stores in 15 states as of December 31, 2017.

Leverage and Liquidity

We generated cash from operations of $310 million in fiscal 2017 and invested $186 million in capital expenditures net of landlord reimbursement, primarily for new stores. In addition, we repurchased 9.7 million shares of common stock for a total investment of $203 million in fiscal 2017. We ended the year with a $348 million balance on our revolving credit facility, $28 million of letters of credit outstanding under the facility, $19 million in cash and cash equivalents, and $127 million available under our current share repurchase authorization.  Subsequent to the end of the year and through February 20, 2018, we have repurchased 1.2 million shares of common stock for a total investment of $30 million. Our Board of Directors has authorized us to repurchase, on a discretionary basis, up to an additional $350 million of our outstanding common stock through December, 2019 for an aggregate authorization of $447 million.

2018 outlook

With the savings from the Tax Cuts and Jobs Act (1), we will be investing $10 million, or approximately one third of our tax savings in team member wages and benefits.  The following provides information on our guidance for 2018:

Net sales growth: 11.5 percent to 12.5 percent.
Unit growth: Approximately 30 stores
Comparable store sales growth: 2.5 percent to 3.5 percent.
Diluted earnings per share: $1.22 to $1.28.
Effective tax rate: 19 percent to 20 percent (2).
Capital expenditures: $165 million to $170 million (net of landlord reimbursements).
 
Footnotes

(1)
The legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and lowers U.S. corporate income tax. The estimated fourth quarter 2017 impact of the Tax Act was a benefit to income tax expense of $18.7 million. The final impact of the Tax Act may differ from these estimates due to, among other things, changes in interpretations and assumptions made by Sprouts, additional guidance that may be issued by the U.S. Department of the Treasury, and actions that Sprouts may take.  For a reconciliation of net income and diluted earnings per share to net income and diluted earnings per share excluding the one-time benefit of the Tax Act, see the Non-GAAP Financial Measures table below.
 
(2)
The lower effective tax rate is due to the Tax Act and the 2017 change in accounting standards related to the recognition of excess tax benefits for stock-based compensation and the associated effect of actual and estimated option exercises for the year.

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