Sprouts Farmers Market, Inc. - FORM 8-K - EX-99.1

Attached files

file	filename
8-K - FORM 8-K - Sprouts Farmers Market, Inc.	d637710d8k.htm

Investor Deck

Exhibit 99.1

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. 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 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 diluted 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 together with the Henry’s Transaction, the “Transactions”), gain and losses from disposal of assets, the loss on extinguishment of debt

and the related tax impact of those adjustments. The Company defines adjusted diluted earnings per share as adjusted net income divided by

the weighted average diluted shares outstanding. The Company defines EBITDA as net income before interest expense, provision for income

tax, and depreciation and amortization, 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 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 measure to the comparable GAAP measures.

In addition, in comparing its results to the comparable periods of 2012, the Company has presented 2012 financial results on a pro forma

basis as if the Sunflower Transaction had occurred on the first day of the Company’s 2012 fiscal year. See the Appendix for unaudited

supplemental pro forma condensed consolidated financial information.

Benefitting from Long-Term Macro Trends

Sprouts growing at 7x U.S.

Supermarkets

2008-2012

CAGR:

2.4%

6.1%

8.6%

10.3%

17.1%

U.S.

Supermarkets

Vitamins &

Supplements

Natural &

Organic

Value

Health & Wellness

Greater focus on preventative health

Childhood obesity

Specialty diets (e.g., gluten-free)

Value

Increasingly cost-conscious consumers

Persistent shift in shopping behaviors

Sprouts makes healthy choices affordable

Source: Nutrition Business Journal.

Chart

data

represents

the

multiple

average

annual

U.S.

Grocery

sales

growth

(“CAGR”)

from

2008

through

2012

for

each

respective

category

entity.

Value

segment

defined

dollar

stores

(Dollar

General, Dollar Tree, Family Dollar). Source: Progressive Grocer (U.S. Supermarket Industry), Nutrition Business Journal (Vitamins & Supplements; Natural & Organic), and company filings (Value).

$600B U.S. Supermarket Industry

Natural & Organic Sales Projected to Grow

by 10% Annually Through 2020

Strong

Market

Opportunity

Sprouts

Outpacing

Relevant

Segments

Supported by Strong Macro Tailwinds

Sprouts has a Differentiated

Go-to-Market Strategy

Complete Natural &

Organic Offering

HEALTH

SELECTION

VALUE

SERVICE

An Engaged, Loyal Customer Base Leading to Strong Financial

Performance and Significant New Unit Growth Opportunity

Sprouts “Flips”

the Conventional

Grocery Store Model

Produce surrounded by

a complete grocery

offering

Differentiated

assortment of high-

quality, healthy

alternatives

Farmers market

inspired, open store

layout with low profile

displays

Convenient,

small-box:

25 –

28k sq. ft.

Comfortable, easy to

shop environment

Full grocery store

Produce is a common denominator among

customers

Supply chain system scalable to support growth

Focus on freshness, speed-to-market and value

Prices significantly below competitors drive trial

and traffic

Fresh Produce is at the Core of Sprouts’

Offering

Current Produce Distribution Centers

Produce

Sourced and Distributed

In-House

Local Sourcing,

Deep Industry Relationships

Regional Buying Model

Limited CapEx Required for

New Distribution

Centers

Reaching a Broad Base of Consumers in

Both Traditional and Digital Mediums

More than 10 million weekly circulars

Reinforces value offering

25+

annual

department

promotions

, which drive

transition to increased basket size and higher

margin

Digital platform for relevance today and tomorrow

Represents planned promotions at each store during FY 2013.

Sprouts Targets the Conventional

Supermarket Customer

Middle income and up

Educated

Wide spectrum of demographic and

ethnic makeups

Wanting to eat healthier, but not sure

how

Looking for value

Broad Customer Demographics

Densely populated, urban areas as well

as smaller metropolitan markets

•

Los Angeles and El Paso

“Natural / lifestyle”

markets and more

“traditional”

states

•

Colorado and Oklahoma

Successful in new as well as highly

competitive and penetrated markets

Draw Traffic in Variety of Markets

Sprouts

Proves That

Eating Healthy

Can Be

Affordable.

Lifestyle

Transition

Trial

Sprouts Grows its Share of Consumers’

“Food Retail Wallet”

Consumers Start with High Quality

Produce

Over Time Make Sprouts Their Primary

Grocery Store

Then Begin Shopping in an Increasing

Number of Departments

Increasing Average Basket Size and Gross Margin Over Time

Estimated 15+ Years of New Store

Growth

Potential U.S. Store Count¹

1 Based on an assumed new store growth rate of 12% per year and research conducted by Buxton Company in 2012.

Proven Concept: 167 stores in eight states

Strong performance across all markets, demographics and real estate venues

Opened 19 stores in 2013 with 12% unit growth going forward

Demographics allow for deep penetration in markets

300

Existing

Markets

~1,200

7.2x

1.8x

167

Mississippi

Washington

Oregon

Nevada

Utah

Colorado

New

Mexico

Arizona

California

Oklahoma

Texas

Louisiana

Arkansas

Missouri

Kansas

Tennessee

North

Carolina

Georgia

South

Carolina

Alabama

Florida

Existing Market

Target Near Term New Market

Sprouts’

Consistent Growth in

Competitive Markets

Case Study of a Sprouts Phoenix Location

Broad Appeal Makes Sprouts a Formidable Competitor

1 Not indicative of every store location.

Whole Foods

opened 2002

Wal-Mart

opened

Trader Joe’s

opened

Frys

Marketplace

re-opened

Target added

P-Fresh

Costco

opened

+1%

+15%

+30%

+11%

+3%

+7%

+4%

+7%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013 YTD

($ in ‘000s)

Why Sprouts is a Compelling Investment

Authentic 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 Management Team with a Customer

Focused Culture

Business & Financial

Performance

A Powerful Long-Term Growth Engine

High, balanced sales growth

Margin expansion in existing stores

Operating leverage from scale and infrastructure

Deleverage capital structure

Long-Term Net Earnings Growth

Target of 20%+

10%+

Natural /

Organic Sector

Growth

Consistent Store

Performance

Across

Geographies

and Vintages

Comp Growth

and Margin

Expansion in

Existing Stores

Compelling

Store-Level

Economics

One of the Best

White Space

Opportunities

in the Public

Markets

Leverage

Infrastructure

for Scale and

Growth

History of Organic Growth

Balanced Sales Growth Across Comparable Store Sales Growth and New Store Openings

($ in mm)

$1,059

$1,239

$1,490

$1,723

$1,991

2008

2009

2010

2011

2012

2.6%

2.3%

5.1%

9.7%

11.6%

4.9%

7.4%

14.8%

2009

2010

2011

2012

Prior Period

Current Period

¹ “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 reflects

comparable store sales growth calculated as if the Henry’s Transaction and the Sunflower Transaction had been consummated on the first day of fiscal 2007. 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.

² Pro forma net sales reflect the net sales of our predecessor entity and Sunflower as if the Henry’s Transaction and Sunflower Transaction had been consummated on the first day of fiscal 2008.

Pro Forma Comparable Store Sales Growth

Pro Forma Net Sales

Compelling Unit Economics

Includes store build-out (net of contributions from landlords), inventory (net of payables) and cash pre-opening expenses.

Store Size

25 –

28k sq. ft.

Net

Cash

Investment

$2.8 million

First Year Sales

~$10 –

$12 million

Initial Sales Growth

20-30% over 3 –

4 years

Target New Store Economics

Pre-Tax Cash-on-Cash Returns

35%-40% within 3-4 years

Momentum

Continued through Q3

Net sales for 2012 YTD are pro forma net sales, reflecting the net sales of Sunflower as if the Sunflower Transaction had been consummated on the first day of fiscal 2012.

“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 reflects

comparable

store

sales

growth

calculated

the

Sunflower

Transaction

had

been

consummated

the

first

day

fiscal

2012.

Comparable

store

sales

growth

“two-year

stacked

basis”

computed

adding

the

pro

forma

comparable

store

sales

growth

the

period

referenced

and

that

the

same

fiscal

period

ended

twelve

months

prior.

($ in mm)

Opened 7 new stores, met annual target of 19 openings

Over 24% net sales growth in Q3 compared to 2012

Continued double-digit comp growth on a 1-year and 2-year stacked basis

Highlights

Net Sales

Pro Forma Comparable Store Sales Growth²

Robust Earnings Growth

Adj. EBITDA¹

Adj. Net Income²

($ in mm)

% Margin

6.3%

8.3%

Note:

Financial

information

this

slide

for

fiscal

2012

gives

pro

forma

effect

the

Sunflower

Transaction

had

been

consummated

the

first

day

fiscal

2012.

See the Appendix to this presentation for a reconciliation of adjusted EBTIDA to net income.

See the Appendix to this presentation for a reconciliation of adjusted net income to net income.

$7.5

$19.5

2012 Q3

2013 Q3

$32.2

$52.6

2012 Q3

2013 Q3

Strong Balance Sheet and Liquidity

Represents

the

midpoint

estimated

capital

expenditures

range

$70mm to $75mm for 2013, net of estimated landlord tenant improvement allowances of $11mm. New store capital expenditures

calculated as typical store buildout (net of contributions from landlords) of approximately $2.4mm multiplied by the 19 stores expected to be opened in 2013.

Ample liquidity going forward

supported by $60mm undrawn

revolver and $92mm of cash on hand

Solid free cash flow generation with

ability to self-fund organic growth

Capitalization

At Sep. 29,

2013

Revolver ($60mm)

Term Loan

360

Capital and Financing Leases

120

Total Debt

$480

Cash

Net Debt

$388

Net Debt /

LTM Q3 2013 Adj. EBITDA

2.1x

•

$143mm 2013 YTD operating cash

flow

•

$73mm

2013E

capital

expenditures

•

Generate significant free cash flow

after investing in new stores and

infrastructure

2013 Financial Targets

Unit Growth

19 New Stores

Comparable Store Sales Growth

9.0% -

9.5%

Total Sales Growth

20% -

21%

Adjusted EBITDA

$188M -

$192M

Adjusted Net Income

$63M -

$65M

Adjusted Diluted EPS

$0.45 -

$0.46

Capital Expenditures (net of landlord reimbursements)

$70M -

$75M

Long-Term Financial Targets

Unit Growth

~12%

Comparable Store Sales Growth

6%+

Total Sales Growth

~15%

EBIT Growth

17-20%

Net Income Growth

20%+

Conclusion and Q&A

Authentic 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 Management Team with Customer

Focused Culture

Significantly lower prices

10% CAGR to $98B in

2020

10% CAGR to $98B in

2020

1,200 potential stores

(7.2x current base)

1,200 potential stores

(7.2x current base)

Target 35-40% cash-on-

cash returns

Target 35-40% cash-on-

cash returns

20% 2-year comps

Appendix: Supplemental

Materials

Non-GAAP Reconciliation

(a)

See “Unaudited Supplemental Pro Forma Condensed Consolidated Financial

Information” for a reconciliation of pro forma net income to net income for the thirteen

and thirty-nine weeks ended September 30, 2012.

(b)

adjusted EBITDA, and from adjusted and pro forma adjusted net income. In fiscal 2013

these costs included the costs related to the closure of a former Sunflower warehouse

facility and adjustments to sublease assumptions on other properties. In fiscal 2012

these consist primarily of the costs to close a Sunflower administrative facility following

the Sunflower Transaction.

(c)

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 pro forma adjusted EBITDA and pro forma 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. The Company does not expect to incur material

expenses associated with integration of the Sunflower and Henry’s Transactions in fiscal

2013.

(d)

connection with the disposal of property and equipment. The Company excludes gains

and losses on disposals of assets from its adjusted and pro forma adjusted EBITDA and

adjusted and pro forma 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. The loss recorded in fiscal 2012 primarily

relates to the loss on the sale leaseback of a store property.

(e)

presented represents the income tax provision and 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 the thirty-nine weeks ended September 30, 2012,

this amount was further adjusted to reflect a $1.8 million reduction in pro forma income

tax provision for the effects of certain items related to the Sunflower Transaction. Of the

adjustment, $2.2 million relates to the tax effects of $3.3 million and $2.9 million of

non-deductible transaction costs incurred by the Company 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. The

Company has excluded these items from its pro forma 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.

Store

closure

and

exit

costs

have

been

excluded

from

adjusted

and

pro

forma

Costs

associated

with

acquisitions

and

integration

represent

the

costs

Gain/Loss

disposal

assets

represents

the

gains

and

losses

recorded

Pro

forma

adjusted

and

adjusted

income

tax

provision

for

all

periods

Pro Forma Reconciliation

SPROUTS FARMERS MARKET, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Thirteen Weeks Ended September 30, 2012

(in thousands, except per share amounts)

Pro Forma Reconciliation

SPROUTS FARMERS MARKET, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Thirty-nine Weeks Ended September 30, 2012

(in thousands, except per share amounts)

Pro Forma Reconciliation

SPROUTS FARMERS MARKET, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

1. Basis of Presentation and Description of Transactions

Effective May 29, 2012, the Company acquired all of the outstanding common and preferred stock of Sunflower in the Sunflower

Transaction, a transaction accounted for as a business combination, which was financed through the issuance of debt and 14.9 million shares of

common stock.

The historical Sprouts Farmers Market, Inc. results of operations for the thirteen and thirty-nine weeks ended September 30, 2012 are

derived from its unaudited consolidated financial statements for the periods then ended. The historical Sunflower results of operations for the

period January 1, 2012 to May 28, 2012, were derived from the Sunflower pre-combination unaudited financial statements. Certain amounts from

the Sunflower pre-combination unaudited financial statements have been reclassified to conform to the Company’s presentation.

2. Pro Forma for Sunflower Transaction

The historical results of operations have been adjusted to give pro forma effect to events that are (i) directly attributable to the

Sunflower Transaction, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results, as if the Sunflower

Transaction occurred on the first day of fiscal 2012 (referred to as “Pro Forma Adjustments for Sunflower Transaction”). Below is a description

of the types of adjustments represented in the Sunflower Fiscal Period Alignment and Sunflower Transaction Adjustments columns.

Sunflower Fiscal Period Alignment - Sunflower’s fiscal 2012 commenced one day earlier than the Company’s fiscal 2012. Pro forma

adjustments for Sunflower Fiscal Period Alignment reflect the pro forma impact of deducting one day from the historical Sunflower results of

operations.

Cost of Sales, Buying and Occupancy – Adjustments attributable to the application of acquisition accounting including straight-line rent

adjustments and adjustments to the amortization of favorable lease intangible assets and unfavorable lease liabilities.

Direct Store Expenses – Adjustments to historical Sunflower depreciation related to changes in value and estimated useful lives of

property plant and equipment.

Selling, General and Administrative Expenses – Adjustments related to Sunflower Transaction fees recorded by both Sprouts and

Sunflower, accelerated share-based compensation recorded by Sunflower, adjustments to depreciation related to changes in value and estimated

useful lives of property, plant and equipment and amortization of the Sunflower trade name.

Interest Expense – Adjustments related to the reversal of historical Sunflower interest expense, incremental interest expense related to

the proceeds from additional term loan and senior subordinated notes that were used to effectuate the transaction and interest related to Sunflower

capital and financing lease obligations.

Income Tax Provision – Adjustment to the income tax provision for the items listed above.

Net income per share – Net income per share has been adjusted to reflect those items listed above and the change in weighted average

shares outstanding – basic and diluted as described below.

Weighted average shares outstanding – basic and diluted – The weighted average shares outstanding basic and diluted have been

adjusted for the effect of the additional shares issued in the Sunflower Transaction.

Sprouts Farmers Market, Inc. - FORM 8-K - EX-99.1 - December 3, 2013

Attached files

Sprouts Farmers Market, Inc. Reports