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INVESTOR DECK MAY 2015
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Forward-Looking Statements and Non-GAAP Financial Measures
Certain statements in this presentation are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Any statements contained herein (including, but not limited to, statements to the effect that Sprouts Farmers Market, Inc. (the “Company”) or its management “anticipates,” “plans,” “estimates,” “expects,” “believes,” or the negative of these terms and other similar expressions) that are not statements of historical fact should be considered forward-looking statements, including, without limitation, statements regarding the Company’s estimated growth, expected results and long-term financial targets. These statements involve certain risks and uncertainties that may cause actual results to differ materially from expectations as of the date of this presentation. These risks and uncertainties include, without limitation, risks associated with the Company’s ability to successfully compete in its intensely competitive industry; the Company’s ability to successfully open new stores; the Company’s ability to manage its rapid growth; the Company’s ability to maintain or improve its comparable store sales and operating margins; the Company’s ability to identify and react to trends in consumer preferences; product supply disruptions; general economic conditions; and other factors as set forth from time to time in the Company’s Securities and Exchange Commission filings. The Company intends these forward-looking statements to speak only as of the date of this presentation and does not undertake to update or revise them as more information becomes available, except as required by law.
In addition to reporting financial results in accordance with GAAP, the Company has presented adjusted net income, adjusted earnings per share and adjusted EBITDA. These measures are not in accordance with, or an alternative to GAAP. The Company’s management believes that these presentations provide useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses these measures for reviewing the financial results of the Company as well as a component of incentive compensation. The Company defines adjusted net income as net income excluding store closure and exit costs, one-time costs associated with its April 2011 combination (the “Henry’s Transaction”) with Henry’s Holdings, LLC (“Henry’s”) and its May 2012 business combination with Sunflower Farmers Market, Inc. (“the Sunflower Transaction,” and collectively, the “Transactions”), gain and losses from disposal of assets, IPO bonus, expenses incurred by the Company in its secondary public offerings and employment taxes paid by the Company in connection with options exercised in those offerings (“Public Offering Expenses”), the loss on extinguishment of debt and the related tax impact of those adjustments. The Company defines adjusted basic and diluted earnings per share as adjusted net income divided by the weighted average basic and diluted shares outstanding. The Company defines EBITDA as net income before interest expense, provision for income tax, and depreciation, amortization and accretion, and defines adjusted EBITDA as EBITDA excluding store closure and exit costs, one-time costs associated with the Transactions, gains and losses from disposal of assets, Public Offering Expenses, and the loss on extinguishment of debt.
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 the Company’s business, or as a measure of cash that will be available to meet the Company’s 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 the Company’s results as reported under GAAP. See the Appendix for reconciliation for these non-GAAP measures to the comparable GAAP measures.
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OVERVIEW OF SPROUTS
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Sprouts is Well Positioned to Meet the Needs of Today’s Health Conscious Consumers
Healthy grocery store that offers fresh, natural and organic foods at affordable prices
Broad consumer appeal
One of the largest and fastest growing natural and organic retailers
Industry leading results
Significant white space opportunity and strong new store economics
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Significant Growth Continues in the Natural & Organic Channel
Significant Market1
$620B U.S. Supermarket Sales
SFM Current Market Share: 0.5% / $3B
Natural & Organic: 14% / $89 bn
Our Potential Opportunity
Other, incl. Conventional Grocery: ~86% / ~$531 bn
SPINS projects annual growth in natural and organic sector of 9.3% through 2018
Pro Forma Net Sales2
($ in mm)
$2,967
$2,438
$1,991
$1,723
$1,490
$1,239
$1,059
2008
2009
2010
2011
2012
2013
2014
Sprouts is benefiting from consumers embracing the need for a healthy diet, attribute based shopping, and focus on value
¹ Source: Progressive Grocer 81st Annual Report, Natural foods Merchandiser 2013 market overview and SPINscan Natural and Specialty Gourmet proprietary data
2 Pro forma net sales reflect the net sales of our predecessor entity, Henry’s and Sunflower as if the Transactions had been consummated on the first day of fiscal 2008
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Sprouts is Changing the Way People Perceive And Shop for Fresh, Natural and Organic Foods
HEALTH
Sprouts has evolved from a specialty food store into a healthy grocery Store
Continue to benefit from consumers’ growing interest in eating healthier
SELECTION
Full-line healthy grocery store with more than 17,000 fresh, natural & organic products
Full selection of unique specialty items:
2400+ organic 2700+ gluten-free 2000+ non-GMO
VALUE
Produce prices significantly below competitors
Highly promotional—communicate our competitive prices week in and week out
Promote value across the store
SERVICE
Convenient, friendly and easy-to-shop
Trusted, knowledgeable and engaging customer service focused on educating customers
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Sprouts—A Healthy Grocery Store that Flips the Conventional Model
Value-leader in fresh produce (drives traffic)
Produce surrounded by a complete grocery offering
Differentiated assortment of high-quality, healthy foods
High standard private label
Fresh, natural & organic offering
Don’t sell most national branded packaged goods
Farmers market inspired, open store layout with low profile displays
Convenient, small-box: average 28k sq. ft.
Comfortable, easy to shop environment
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Reaching a Broad Base of Consumers Through Both Traditional and Digital Mediums
Broad Customer Demographics
Middle income and higher
Medium to above average education
Boomers, Gen-X, and rising Millennial demographic
Diverse ethnic backgrounds
Value conscious
Brand Awareness & Recognition
Strong marketing and pre-opening programs reaching customers through a variety of channels
More than 14 million weekly circulars
30+ annual promotions1
Digital & social platforms
Increasing word-of-mouth and grass-root efforts driving traffic
Over 1.1 million Facebook fans
Sprouts’ You Tube videos
¹ Represents actual promotions at each store during FY 2014.
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Sprouts’ Consumers are at Different Stages of
Adoption
Segment Description (1)
DIET FOLLOWERS
Follow a specific diet because they have to (medical reasons) or they want to (weight management / ingredient avoidance)
HEALTH
ENTHUSIAST
Do not follow a strict or specific diet, but health/wellness is important to them and a primary consideration when grocery shopping
HEALTH CURIOUS
Does not live the healthiest lifestyle, but is actively trying to improve and has a strong desire to learn more about both healthy living and eating
CONVENIENCE-FOCUSED
Shop at Sprouts primarily because it is close to their home or work and appreciate the convenience of the small-box and quick shopping experience
VALUE-FOCUSED
Are always looking for the best deals and actively price shopping. They like the low priced produce and the flier / promotions
¹ Company consumer insight study
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Sprouts Grows its Consumers’ Average Basket Size and the Stores’ Gross Margin
Over Time
TRAFFIC
Consumers Start with High Quality Produce
TRIAL
Then Shop an Increasing Number of Departments
TRANSITION
Over Time Make Sprouts Their Primary Grocery Store
TRUST
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Sprouts’ Main Competitor is the Traditional
Grocery Store
More than 50% of Sprouts’ consumers are coming from traditional grocers
Our average consumer’s monthly spending will increase nearly 3x from their initial experimentation phase
Significant opportunity to increase trial and basket size over time
Sprouts Origin of Consumer (1)
Other Club
Mass
Specialty
Traditional Grocery
59%
¹ Company consumer insight study
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1200 potential store count (1) and estimated 15+ Years of New Store Growth
Proven Concept: 205 stores in twelve states as of May 7, 2015
Sprouts’ footprint and near-term expansion covers high growth areas
Demographics allow for deep penetration in markets
Model works well in densely populated, urban areas as well as smaller metropolitan markets
Successful in “natural/lifestyle” markets and more “traditional” markets
Balanced unit growth with 70% coming from existing markets
14% unit growth for the near-term
Nevada
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82
California
Utah
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Arizona
29
Colorado
25
New Mexico
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Kansas
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Oklahoma
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Texas
34
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Missouri |
Arkansas
Tennessee
North Carolina
Louisiana
Georgia
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Mississippi
Alabama
South Carolina
Florida
Existing Market
Mid-Term Expansion Market Coming Soon
¹ Based on an assumed new store growth rate of 14% per year and research conducted by Buxton Company in 2012.
Note: Store count as of May 7, 2015
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Sprouts Succeeds Among Growing Competitive Markets
Case Study of a Sprouts Phoenix Location
($ in ‘000s)
Average Weekly Sales (1)
Wal-Mart opened
Target added P-Fresh
Whole Foods opened 2002
+10%
+10%
+4%
+7%
+7%
+3%
+11%
+30%
+15%
+1%
Trader Joe’s opened
Costco opened
Frys Marketplace re-opened
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Over this time period sales growth was 151%
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Not indicative of every store location. |
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Sprouts is Growing Responsibly
Responsible retailing for Sprouts is comprised of four main focus areas:
RESPONSIBLE OPERATIONS RESPONSIBLE BUILDING RESPONSIBLE NEIGHBOR RESPONSIBLE SOURCING
RESPONSIBLE OPERATIONS
Food Rescue Program –
Donated approximately 8.4 million lbs. of food in 2014
Cardboard and pallet recycling at all stores
Piloting composting at 46 stores
RESPONSIBLE BUILDING
LED lighting and retrofits in 2014
LEED equivalent in all new stores
Launched EMC motor/night curtains/anti-sweat control
Transcritical CO2 refrigeration pilot in GA
Energy retro commissioning
RESPONSIBLE NEIGHBOR
Donated almost $2M to non-profits and in scholarships
Established Sprouts Charitable
Foundation
Created more than 3000 jobs in
2014
Building health & wellness programs for team members
Promoted more than 20% of our team members in 2014
RESPONSIBLE SOURCING
Received Leaping Bunny certifications Working with vendors on Non-GMO Project certification
Developing produce traceability
& tracking requirements and Animal Welfare positions
Developing private label sustainability requirements
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BUSINESS & FINANCIAL PERFOMANCE
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Powerful Growth Business “ Results Driven
9%+ Natural and Organic Sector Growth
Compelling Store-Level Economics
Leverage Infrastructure for Scale and Growth
One of the Best White Space Opportunities in Retail
32 consecutive quarters of positive comp growth, 3 straight years of 9%+ comp sales growth
14% new store unit growth, strong new store productivity
Cumulative pro-forma EBITDA growth (organic growth) of more than 150% over the past three years
Deleveraged capital structure
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Balanced Sales Growth Across Comparable Store Sales Growth and New Store Openings
Pro Forma Net Sales1
($ in mm)
$2,967
$2,438
$1,991
$1,723
$1,490
$1,239
$1,059
2008 2009 2010 2011 2012 2013 2014
Pro Forma Comparable Store Sales Growth2
11.6%
2.6%
4.9%
2.3%
7.4%
5.1%
14.8%
9.7%
20.4%
10.7%
20.6%
9.9%
2009 2010 2011 2012 2013 2014
Prior Period Current Period Two-Year Stacked
History of Growth
¹ Pro forma net sales reflect the net sales of our predecessor entity, Henry’s and Sunflower as if the Transactions had been consummated on the first day of fiscal 2008.
2 “Comparable store sales growth” refers to the percentage change in our comparable store sales as compared to the prior comparable period. Pro forma comparable store sales growth is calculated including all stores acquired in the Transactions for all periods reported. Comparable store sales growth on a
“two-year stacked basis” is computed by adding the pro forma comparable store sales growth of the period referenced and that of the same fiscal period ended twelve months prior.
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Consistent Strong Sales Growth Continues
Net Sales
($ in mm)
$1,991
$2,438
$2,967
$723
$858
Pro Forma 2012 2013 2014 Q1 2014 Q1 2015
Note: Pro forma financial information on this slide gives effect to the Henry’s Transaction and the Sunflower Transaction for all periods presented.
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Two-Year Stacked Comps Remains Strong
Highlights
Q1 Comps impacted by:
Tightness in produce
Weather & labor challenges at the LA port
Produce deflation
19% Q1 2015 Sales Growth
10 new stores in opened in Q1 and 15 YTD, as of May 7, 2015
Continued growth in private label & specialty, attribute based products
Comparable Store Sales Growth1
20.8 %
12.8 %
20.3 %
9.5 %
19.2 %
9.0 %
22.3 %
8.5 %
17.6 %
4.8 %
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015
2-Year Stacked
1. “Comparable store sales growth” refers to the percentage change in our comparable store sales as compared to the prior comparable period.
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A History of Strong Earnings Performance
Adj. EBITDA¹
($ in mm)
$147
$195
$265
$78
$84
2012 2013 2014 Q1 2014 Q1 2015
Adjusted EBITDA Margin 7.4% 8.0% 8.9% 10.7% 9.8%
Adj. Net Income²
($ in mm)
$40
$67
$111
$35
$39
2012 2013 2014 Q1 2014 Q1 2015
Note: Financial information on this slide for fiscal 2012 gives pro forma effect to the Sunflower Transaction as if it had been consummated on the first day of fiscal 2012.
¹ See the Appendix to this presentation for a reconciliation of adjusted EBTIDA to net income.
² See the Appendix to this presentation for a reconciliation of adjusted net income to net income.
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Compelling Unit Economics
Target New Store Economics
Store Size
Net Cash Investment¹ First Year Sales Initial Sales Growth
Average 28k square feet
$2.8 million
~$10 to $12 million 20-30% over 3 to 4 years
Pre-Tax Cash-on-Cash Returns of 35%-40% within 3-4 years
¹ Includes store build-out (net of contributions from landlords), inventory (net of payables) and cash pre-opening expenses.
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Aggressive Long-Term Financial Targets
Unit Growth
Comparable Store Sales Growth Total Sales Growth EBIT Growth Net Income Growth
~14% 6%+ ~15%
17 – 20%
20%+
Note: These targets are forward-looking statements, are subject to significant business, economic, regulatory and competitive risks, uncertainties and contingencies, many of which are beyond the control of the Company and its management, and are based upon assumptions with respect to future decisions, which are subject to change. Actual results will vary and those variations may be material. For discussion of some of the important factors that could cause these variations, see the Forward-Looking Statements disclaimer to this presentation, as well as the risks and uncertainties described under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28 2014 and the Company’s other filings with the Securities and Exchange Commission. Nothing in this presentation should be regarded as a representation by any person that these targets will be achieved, and the Company undertakes no duty to update its targets.
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Why Sprouts is a Compelling Investment
Authentic Fresh, Natural and Organic Food Offering at Great Value
Fast Growing Segment of the U.S. Supermarket Industry with Strong Macro Tailwinds
Significant New Store Growth Opportunity Supported by Broad Demographic
Appeal
Proven and Replicable Store Model with Compelling Unit Economics
Resilient Business Model Delivering Strong Financial Performance and Strong Comparable Store Sales Growth
Passionate Team with a Customer-Focused Culture
Significantly lower prices
9% CAGR to $135B in 2018
1,200 potential stores (6x current base)
Target 35% – 40% cash-on-cash returns
9.9% 1-year & 20.6% 2-year comps in 2014
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APPENDIX: SUPPLEMENTAL MATERIALS
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Appendix
The following table shows a reconciliation of adjusted net income and adjusted EBITDA to net income and adjusted earnings per share to net income per share for the thirteen and fifty-two weeks ended Decmeber28, 2014 and December 29, 2013:
Thirteen Weeks Ended Fifty-Two Weeks Ended
December 28, December 29, December 28, December 29,
2014 2013 2014 2013
Net income $ 17,743 $ 9,280 $ 107,692 $ 51,326
Income tax provision 9,270 5,563 66,414 32,741
Net income before income taxes 27,013 14,843 174,106 84,067
Store closure and exit costs (a) 332 381 725 2,051
Costs associated with acquisitions and integration (b) — -(15)
Loss on disposal of assets (c) 93 13 1,181 412
IPO bonus ( d) ——3,183
Secondary offering expenses including employment taxes on options exercises (e) 218 2,014 2,557 2,014
Loss on extinguishment of debt (f)—1,039 1,138 18,721
Adjusted income tax provision (g)(9,491)(6,855)(68,551)(43,010)
Adjusted net income 18,165 11,435 111,156 67,423
Interest expense, net 5,914 6,851 25,057 37,185
Adjusted income tax provision (g) 9,491 6,855 68,551 43,010
Adjusted earnings before interest and taxes (EBIT) 33,570 25,141 204,764 147,618
Depreciation, amortization and accretion 19,789 12,593 60,612 47,539
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) $ 53,359 $ 37,734 $ 265,376 $ 195,157
Adjusted Net Income Per Share
Net income per share—basic $ 0.12 $ 0.06 $ 0.72 $ 0.38
Per share impact of net income adjustments $—$ 0.02 $ 0.02 $ 0.12
Adjusted net income per share—basic $ 0.12 $ 0.08 $ 0.74 $ 0.50
Net income per share—diluted $ 0.11 $ 0.06 $ 0.70 $ 0.37
Per share impact of net income adjustments $ 0.01 $ 0.01 $ 0.02 $ 0.11
Adjusted net income per share—diluted $ 0.12 $ 0.07 $ 0.72 $ 0.48
(a) Store closure and exit costs represents reserves established for closed stores and facilities, adjustments to those reserves for changes in expectations for sublease or actual subleases or settlements with landlords. Ongoing expenses related with the closed facilities are also included.
The Company excludes store closure and exit costs from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believes these costs do not directly reflect the ongoing performance of its store operations.
(b) Costs associated with acquisitions and integration represent the costs to integrate the combined businesses resulting from the Sunflower and
Henry’s Transactions. These expenses include professional fees and severance, which the Company excludes from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of the Company’s operating results because management believes these costs do not directly reflect the ongoing performance of its store operations.
(c) Loss on disposal of assets represents the losses recorded in connection with the disposal of property and equipment. The Company excludes losses on disposals of assets from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believes these costs do not directly reflect the ongoing performance of its store operations.
(d) IPO bonus represents the bonuses paid to certain employees in connection with the Company’s initial public offering. The Company excludes the IPO bonus from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believes these costs do not directly reflect the ongoing performance of its store operations.
(e) Secondary offering expenses including employment taxes on options exercises represents expenses the Company incurred in its secondary public offerings and employment taxes paid by the Company in connection with options exercised in those offerings. The Company has excluded these items from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believes these costs do not directly reflect the performance of its store operations.
(f) Loss on extinguishment of debt represents the write-off of deferred financing costs and original issue discounts and expenses related to the refinancing or unscheduled repayment of debt. The Company has excluded this item from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believes these costs do not directly reflect the performance of its store operations.
(g) Adjusted income tax provision for all periods presented represents the income tax provision plus the tax effect of the adjustments described in notes (a) through (f) above based on statutory tax rates for the period. The Company has excluded these items from its adjusted income tax provision because management believes they do not directly reflect the ongoing performance of its store operations and are not reflective of its ongoing income tax provision.
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Appendix
The following table shows a reconciliation of adjusted net income and adjusted EBITDA to net income and adjusted earnings per share to net income per share for the thirteen weeks ended March 29, 2015 and March 30, 2014:
Thirteen Weeks Ended
March 29, 2015 March 30, 2014
Net income $ 37,467 $ 33,733
Income tax provision 23,301 21,565
Net income before income taxes 60,768 55,298
Store closure and exit costs (a) 1,229
Loss on disposal of assets (b) 271 727
Secondary offering expenses including employment taxes on options exercises (c) 335 1,404
Adjusted income tax provision (d)(24,005)(22,604)
Adjusted net income 35,358
Interest expense, net 5,863 6,466
Adjusted income tax provision (d) 24,005 22,604
Adjusted earnings before interest and taxes (EBIT) 68,466 64,428
Depreciation, amortization and accretion 15,875 13,035
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) $ 84,341 $ 77,463
Adjusted Net Income Per Share
Net income per share—basic $ 0.25 $ 0.23
Per share impact of net income adjustments $—$ 0.01
Adjusted net income per share—basic $ 0.25 $ 0.24
Net income per share—diluted $ 0.24 $ 0.22
Per share impact of net income adjustments $ 0.01 $ 0.01
Adjusted net income per share—diluted $ 0.25 $ 0.23
(a) Store closure and exit costs represents reserves established for closed stores and facilities, adjustments to those reserves for changes in expectations for sublease or actual subleases or settlements with landlords. Ongoing expenses related with the closed facilities are also included. The Company excludes store closure and exit costs from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believes these costs do not directly reflect the ongoing performance of its store operations.
(b) Loss on disposal of assets represents the losses recorded in connection with the disposal of property and equipment. The Company excludes losses on disposals of assets from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believes these costs do not directly reflect the ongoing performance of its store operations.
(c) Secondary offering expenses including employment taxes on options exercises represents expenses the Company incurred in its secondary public offerings and employment taxes paid by the Company in connection with options exercised in those offerings. The Company has excluded these items from its adjusted EBITDA and adjusted net income to provide period-to-period comparability of its operating results because management believes these costs do not directly reflect the performance of its store operations.
(d) Adjusted income tax provision for all periods presented represents the income tax provision plus the tax effect of the adjustments described in notes (a) through (c) above based on statutory tax rates for the period.
The Company has excluded these items from its adjusted income tax provision because management believes they do not directly reflect the ongoing performance of its store operations and are not reflective of its ongoing income tax provision.
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Thank you!