Investor Deck Ma rc h 17 Ce rta in sta te me nts in this pre se - - PowerPoint PPT Presentation

Investor Deck

Ma rc h ‘ 17

2 Ce rta in sta te me nts in this pre se nta tio n a re fo rwa rd-lo o king a s de fine d in the Priva te Se c uritie s L itig a tio n Re fo rm Ac t o f 1995. Any sta te me nts c o nta ine d he re in (inc luding , b ut no t limite d to , sta te me nts to the e ffe c t tha t Spro uts F a rme rs Ma rke t, I nc . (the “Co mpa ny”) o r its ma na g e me nt "a ntic ipa te s," "pla ns," "e stima te s," "e xpe c ts," "b e lie ve s," o r the ne g a tive o f the se te rms a nd o the r simila r e xpre ssio ns) tha t a re no t sta te me nts o f histo ric a l fa c t sho uld b e c o nside re d fo rwa rd-lo o king sta te me nts, inc luding , witho ut limita tio n, sta te me nts re g a rding the Co mpa ny’ s e stima te d g ro wth, e xpe c te d re sults a nd fina nc ia l ta rg e ts. T he se sta te me nts invo lve c e rta in risks a nd unc e rta intie s tha t ma y c a use a c tua l re sults to diffe r ma te ria lly fro m e xpe c ta tio ns a s o f the da te o f this pre se nta tio n. T he se risks a nd unc e rta intie s inc lude , witho ut limita tio n, risks a sso c ia te d with the Co mpa ny’ s a b ility to suc c e ssfully c o mpe te in its inte nse ly c o mpe titive industry; the Co mpa ny’ s a b ility to suc c e ssfully o pe n ne w sto re s; the Co mpa ny’ s a b ility to ma na g e its ra pid g ro wth; the Co mpa ny’ s a b ility to ma inta in o r impro ve its c o mpa ra b le sto re sa le s a nd o pe ra ting ma rg ins; the Co mpa ny’ s a b ility to ide ntify a nd re a c t to tre nds in c o nsume r pre fe re nc e s; pro duc t supply disruptio ns; g e ne ra l e c o no mic c o nditio ns; a nd o the r fa c to rs a s se t fo rth fro m time to time in the Co mpa ny’ s Se c uritie s a nd E xc ha ng e Co mmissio n filing s. T he Co mpa ny inte nds the se fo rwa rd-lo o king sta te me nts to spe a k o nly a s o f the da te o f this pre se nta tio n a nd do e s no t unde rta ke to upda te o r re vise the m a s mo re info rma tio n b e c o me s a va ila b le , e xc e pt a s re q uire d b y la w. I n a dditio n to re po rting fina nc ia l re sults in a c c o rda nc e with GAAP, the Co mpa ny ha s pre se nte d E BI T DA fo r 2016 a nd fo r 2013-2015, a djuste d ne t inc o me a nd a djuste d E BI T

• DA. T

he se me a sure s a re no t in a c c o rda nc e with, a nd a re no t inte nde d a s a n a lte rna tive to , GAAP. T he Co mpa ny's ma na g e me nt b e lie ve s tha t the se pre se nta tio ns pro vide use ful info rma tio n to ma na g e me nt, a na lysts a nd inve sto rs re g a rding c e rta in a dditio na l fina nc ia l a nd b usine ss tre nds re la ting to the Co mpa ny’ s re sults o f o pe ra tio ns a nd fina nc ia l c o nditio n. I n a dditio n, ma na g e me nt use s the se me a sure s fo r re vie wing the fina nc ia l re sults o f the Co mpa ny, a nd ma y b e a c o mpo ne nt o f inc e ntive c o mpe nsa tio n. T he Co mpa ny de fine s E BI T DA a s ne t inc o me b e fo re inte re st e xpe nse , pro visio n fo r inc o me ta x, a nd de pre c ia tio n a nd a mo rtiza tio n, a nd de fine s a djuste d E BI T DA a s E BI T DA a s furthe r a djuste d to e xc lude sto re c lo sure a nd e xit c o sts, c o sts a sso c ia te d with a c q uisitio ns a nd inte g ra tio ns, g a ins a nd lo sse s fro m dispo sa l o f a sse ts, b o nuse s pa id to c e rta in e mplo ye e s in c o nne c tio n with the Co mpa ny’ s initia l pub lic o ffe ring (“I PO Bo nus”), e xpe nse s inc urre d b y the Co mpa ny in its se c o nda ry pub lic o ffe ring s a nd e mplo yme nt ta xe s pa id b y the Co mpa ny in c o nne c tio n with o ptio ns e xe rc ise d in tho se o ffe ring s (“Pub lic Offe ring E xpe nse s”) a nd the lo ss o n e xting uishme nt o f de b t. T he Co mpa ny de fine s a djuste d ne t inc o me a s ne t inc o me e xc luding sto re c lo sure s a nd e xit c o sts, c o sts a sso c ia te d with a c q uisitio ns a nd inte g ra tio ns, g a in a nd lo sse s fro m dispo sa l o f a sse ts, I PO Bo nus, Pub lic Offe ring E xpe nse s, the lo ss o n e xting uishme nt o f de b t a nd the re la te d ta x impa c t o f tho se a djustme nts. F

• r fisc a l ye a r 2016, suc h furthe r a djustme nts to ne t inc o me a nd E

BI T DA we re imma te ria l; thus o nly E BI T DA is pre se nte d. I n a dditio n to re po rting fina nc ia l re sults in a c c o rda nc e with g e ne ra lly a c c e pte d a c c o unting princ iple s, o r GAAP, we pro vide info rma tio n re g a rding Re turn o n I nve ste d Ca pita l (re fe rre d to a s “ROI C”) a s a dditio na l info rma tio n a b o ut o ur o pe ra ting re sults fo r 2014-2016. ROI C is a no n-GAAP fina nc ia l me a sure use d b y ma na g e me nt to e va lua te o ur inve stme nt re turns o n c a pita l a nd pro vide s a me a ning ful me a sure o f the e ffe c tive ne ss o f o ur c a pita l a llo c a tio n o ve r time . We de fine ROI C a s ne t o pe ra ting pro fit a fte r ta x (re fe rre d to a s “NOPAT ”), inc luding the e ffe c t o f c a pita lize d o pe ra ting le a se s, divide d b y a ve ra g e inve ste d c a pita l. T he se no n-GAAP me a sure s a re inte nde d to pro vide a dditio na l info rma tio n o nly a nd do no t ha ve a ny sta nda rd me a ning s pre sc rib e d b y

• GAAP. Use o f the se te rms ma y diffe r fro m simila r me a sure s re po rte d b y o the r c o mpa nie s. Be c a use o f the ir limita tio ns, no ne o f the se no n-

GAAP me a sure s sho uld b e c o nside re d a s a me a sure o f disc re tio na ry c a sh a va ila b le to use to re inve st in g ro wth o f the Co mpa ny’ s b usine ss,

• r a s a me a sure o f c a sh tha t will b e a va ila b le to me e t the c o mpa ny’ s o b lig a tio ns. E

a c h o f the se no n-GAAP me a sure s ha s its limita tio ns a s a n a na lytic a l to o l, a nd yo u sho uld no t c o nside r the m in iso la tio n o r a s a sub stitute fo r a na lysis o f the Co mpa ny’ s re sults a s re po rte d unde r

• GAAP. Ple a se se e the Appe ndix to this pre se nta tio n fo r a re c o nc ilia tio n o f the se no n-GAAP me a sure s to the c o mpa ra b le GAAP me a sure .

Overview of Sprouts

PRO F ORMA NE T SAL E S1

4

• F

ull g ro c e ry sto re ro o te d in

fr e sh, natur al and or ganic foods a t va lue pric e s

• Br
• ad c o nsume r a ppe a l
• One o f the la rg e st a nd

faste st gr

• wing na tura l a nd
• rg a nic re ta ile rs with

sig nific a nt white spa c e

• I

ndustry le a ding re sults a nd

str

• ng ne w stor

e e c onomic s

Sprouts is Well Positioned to Meet the Needs of Today’s Consumer

$1,723 $1,991 $2,438 $2,967 $3,593 $4,046 2011 2012 2013 2014 2015 2016

($ in mm)

¹ Pro forma net sales reflect the net sales of our predecessor entity, Henry’s Holdings, LLC (“Henry’s”) and Sunflower Farmers Market, Inc. (“Sunflower”) as if our business combinations with these entities (the “Transactions”) had been consummated on the first day of fiscal 2011.

5

A Grocery Shopping Experience that Makes Healthy Living Easy & Affordable

Health Value Selection Engagement

SE L E CT ION VAL UE KNOWL E DGE ABL E SE RVICE & E NGAGE ME NT HE AL T H

6

• Pr
• duc e surro unde d b y a c omple te

g r

• c e r

y offe r ing

• Pro mo te va lue e ve r

yda y

• Diffe r

e ntia te d a ssor tme nt o f hig h-

q ua lity, he a lthy fo o ds:

• Do no t c a rry mo st na tio na l- b ra nde d

CPG ite ms

• F

re sh, na tura l a nd o rg a nic o ffe ring

• High standar

d Pr ivate L abe l r

• ote d in

quality and taste

• F

a rme rs ma rke t-inspire d ope n stor

e la yout with lo w pro file displa ys

• Conve nie nt, sma ll-b o x: 30k sq . ft.
• F

r ie ndly, e ng a g e d c ustome r se r vic e ,

e a sy to sho p e nviro nme nt

Sprouts – A Healthy Grocery Store that Flips the Conventional Model

7

• Spro uts’ fo o tprint

a nd ne a r-te rm e xpa nsio n c o ve rs hig h g ro wth a re a s

• De mo g ra phic s

a llo ws fo r de e p pe ne tra tio n in ma rke ts

• Mo de l wo rks we ll in de nse ly

po pula te d, urb a n a re a s a s we ll a s sma lle r me tro po lita n ma rke ts

• Suc c e ssful in “na tura l / life style ” ma rke ts

a nd mo re “tra ditio na l” ma rke ts

• Ba la nc e d unit g ro wth with 60% - 70% c o ming fro m

e xisting ma rke ts

• Will o pe n a ppro xima te ly 30 sto re s pe r ye a r

Years of New Store Growth

Existing Market Mid-Term Expansion Market

NM TX CO UT AZ NV CA 10 40 32 7 96 6 5 30 OK KS LA MO AR TN NC SC MS 5 3 4 13 4 AL GA FL

Near-Term Expansion Market

1

8

Reaching A Broad Base of Consumers Through Traditional & Digital Mediums

BROAD CUST OME R DE MOGRAPHICS

• Middle inc ome a nd hig he r
• Me dium to a bove a ve ra g e e duc a tion
• Bo o me rs, Ge n-X a nd rising Mille nnia l de mo g ra phic
• Dive rse e thnic b a c kg ro und
• Va lue c onsc ious

BRAND AWARE NE SS & RE ACH

• Distrib ute mo re tha t 16 million c irc ula rs e a c h we e k
• Re a c hing 1.5M unique dig ita l sub sc rib e rs
• L

a unc he d dig ita l c oupons in 2016

• Gro wing home de live ry with Ama zo n Prime No w

pa rtne rship

• I

nc re a sing g ra ss-ro o t e ffo rts a nd c o mmunity e ng a g e me nt to drive tra ffic

9

F

• llo ws a spe c ific die t b e c a use the y ne e d to (me dic a l re a so ns)
• r the y wa nt to (we ig ht ma na g e me nt / ing re die nt a vo ida nc e )

Sprouts’ Consumers are at Different Stages of Adoption

¹ Co mp a ny c o nsume r insig ht stud y

DIE T F OL L OWE R

Do e s no t fo llo w a stric t o r spe c ific d ie t, b ut he a lth / we llne ss is impo rta nt to the m a nd a prima ry c o nsid e ra tio n whe n g ro c e ry sho pping

HE AL T H E NT HUSIAST

Do e s no t live the he a lthie st life style , b ut is a c tive ly trying to impro ve a nd ha s a stro ng d e sire to le a rn mo re a b o ut b o th he a lthy living a nd e a ting

HE AL T H CURIOUS

Sho ps a t Spro uts prima rily b e c a use it is c lo se to the ir ho me o r wo rk—a ppre c ia te s the c o nve nie nc e o f the sma ll-b o x a nd q uic k sho pping e xpe rie nc e

CONVE NIE NCE

• F

OCUSE D

Are a lwa ys lo o king fo r the b e st d e a ls a nd a c tive ly pric e sho pping —like s the lo w pric e d pro d uc e a nd the flye r pro mo tio ns

VAL UE

• F

OCUSE D

SE GME NT AT ION DE SCRIPT ION1

10

2016 Responsible Retailing Accomplishments

• 4 Main Focus Areas

RE SPONSIBL E SOURCING ZE RO WAST E * GHG RE DUCT ION HE AL T HY COMMUNIT IE S

Dive rte d o ve r 30M po unds o f F

• o d fro m

la ndfills thro ug h o ur F

• o d Re sc ue ,

Co mpo sting a nd Anima l F e e d Pro g ra ms Re c yc le d o ve r 70M po unds o f c a rdb o a rd sa ving a ppro x. 500k tre e s fro m b e ing c ut do wn In-sto re “Gre e n L e a de rs” e ng a g e d to imple me nt susta ina b ility pra c tic e s a t the sto re le ve l 39 Sto re s re c e ive d E PA Gre e n Chill Ce rtific a tio ns Pilo ting so la r a nd b a tte ry sto ra g e syste ms in se le c t Ca lifo rnia sto re s L E E D e q uiva le nt b uilding spe c s fo r a ll ne w sto re s L

• we r Glo b a l

Wa rming Po te ntia l (GWP) re frig e ra nt c o nve rsio ns Pub lic ly la unc he d o ur 501(c )(3) “Spro uts He a lthy Co mmunitie s F

• unda tio n”

Ra ise d mo re tha n $2.6M fo r no n-pro fits a nd c o mmunity pa rtne rs Cre a te d mo re tha n 4,350 jo b s 16% o f o ur te a m me mb e rs we re pro mo te d Suppo rte d mo re tha n 550 c o mmunity e ve nts De ve lo ping sta nda rds fo r susta ina b le se a fo o d, e thic a l so urc ing , pro duc t tra c e a b ility a nd fa ir tre a tme nt o f pe o ple a nd a nima ls Mo re tha n 3,350 Org a nic ite ms a c ro ss the sto re All Spro uts b ra nd e g g s we re tra nsitio ne d to c a g e fre e o r b e tte r a nd c o mmitte d to 100% c a g e fre e e g g a sso rtme nt fo r a ll b ra nds b y 2022

* Go a l b y 2020, 90% wa ste d ive rsio n ra te p e r E PA g uid e line s

Business & Financial Performance

12

9% Na tura l a nd Org a nic Se c to r Gro wth1

Powerful Growth Business – Results Driven

GROWTH RESULTS

One o f the Be st White Spa c e Oppor

tunitie s in Re ta il

He a lthy unit g ro wth ra te

1 SPI NS L L C p ro je c tio ns fo r na tura l a nd o rg a nic fo o d a nd sup p le me nt sa le s g ro wth thro ug h 2019

Compe lling Stor e -L e ve l E c onomic s Mid T e e ns Sa le s Gr

• wth

Str

• ng F

r e e Ca sh F low Ge ne ra tio n Busine ss Ong oing sha r e r e pur c ha se pro g ra m

2.6% 2.3% 5.1% 9.7% 10.7% 9.9% 5.8% 2.7%

11.6% 4.9% 7.4% 14.8%

20.4%

20.6% 15.7% 8.5%

2009 2010 2011 2012 2013 2014 2015 2016 Prio r Pe rio d Curre nt Pe rio d

T wo- Ye a r Sta c ke d

PRO F ORMA COMP ST ORE SAL E S GROWT H1

13

Maintaining Best in Class Comp Performance Through Deflationary Periods

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.

Deflationary Period Deflationary Period

2016 impa c te d b y sig nific a nt

• ve ra ll

de flationar y

a nd

pr

• motional

e nvir

• nme nt

ADJUST E D NE T INCOME

2

ADJUST E D E BIT DA1

14

A History of Strong Earnings Performance

¹ Se e the Ap p e nd ix to this p re se nta tio n fo r a re c o nc ilia tio n o f E BI T DA a nd a d juste d E BT I DA to ne t inc o me . F

• r 2016, a d justme nts to E

BI T DA we re imma te ria l; thus o nly E BI T DA is p re se nte d . ² Se e the Ap p e nd ix to this p re se nta tio n fo r a re c o nc ilia tio n o f a d juste d ne t inc o me to ne t inc o me . F

• r 2016, a d justme nts to ne t inc o me we re imma te ria l; thus, o nly ne t inc o me is

p re se nte d .

$195 $265 $294 $294 2013 2014 2015 2016 $67 $111 $131 $124 2013 2014 2015 2016 ($ in mm) ($ in mm)

Adjusted E BI T DA Margin

8.0% 8.9% 8.4% 7.3%

Diluted EPS

$0.48 $0.72 $0.84 $0.83

Diluted EPS Growth

55% 50% 17%

• 1%

(3) (3)

HIST ORIC ST ORE COUNT

15

Plan to Open Approximately 30 Stores Per Year

167 191 217 253

2013 2014 2015 2016

NE T CASH PROVIDE D BY OPE RAT IONS

16

Strong Cash Flow Generation

$161 $181 $240 $254

2013 2014 2015 2016 ($ in mm)

CAP E X SPE ND

17

Cap Ex Focused on Unit Growth, Sales Initiatives & Infrastructure

$47 $69 $47 $95 $10 $10 $20 $15 $11 $20 $26 $45 $8 $9 $11 $12

2013 2014 2015 2016

Ne w Sto re s I nfra struc ture Sa le s I nitia tive s & Re mo de ls Ma inte na nc e

$76 $167 $104 $108

($ in mm)

No te : Ca p E x is ne t o f la nd lo rd re imb urse me nts

18

Compelling New Store Economics

Ave ra g e sq ft. sto re size Ne t Ca sh I nve stme nt1 F irst Ye a r Sa le s I nitia l Sa le s Gro wth o ve r 3 to 4 ye a rs

¹ I nc lud e s sto re b uild -o ut (ne t o f c o ntrib utio ns fro m la nd lo rd s), inve nto ry (ne t o f p a ya b le s) a nd c a sh p re -o p e ning e xp e nse s.

30k $3.3M

~$12 - $14M

20% - 30%

Pre -T a x Ca sh-o n-Ca sh Re turns o f 35% to 40% within 3 to 4 ye a rs

ROIC (1)

19

Strong Return on Invested Capital (ROIC)

9.3% 9.5% 8.9%

2014 2015 2016

ROIC including effect of capitalized leases ROIC excluding effect of capitalized leases

12.1%

¹ ROI C is a no n-GAAP me a sure tha t we d e fine a s ne t o p e ra ting p ro fit a fte r ta xe s d ivid e d b y a ve ra g e inve ste d c a p ita l. ROI C e xc lud ing e ffe c t o f c a p ita lize d le a se s a d d s b a c k the c a p ita lize d o p e ra ting le a se inte re st to NOPAT a nd is c a lc ula te d b y the hyp o the tic a l c a p ita liza tio n o f o ur o p e ra ting le a se s, using e ig ht time s o ur tra iling twe lve mo nths re nt e xp e nse a nd a n inte re st ra te fa c to r o f se ve n p e rc e nt. Se e the Ap p e nd ix to this p re se nta tio n fo r a re c o nc ilia tio n o f ROI C to ne t inc o me .

12.7% 12.3%

$26 $294 $80 2015 2016 YT D 2017

SHARE RE PURCHASE S T HROUGH 2/ 10/ 17

• Utilize str
• ng fr

e e c ash flo w to self fund unit gr

• wth and ac hie ve str

ategic objec tives

• Ne t de bt/ E

BI T DA inc r e ase d fr

• m .5x in 2015 to 1.3x in 2016
• Maintain net debt/ E

BIT DA in the r

ange o f 1.2x to 1.5x

• Pre se rve fina nc ia l fle xib ility fo r o ppo rtunistic g ro wth pro spe c ts
• $255 millio n dra wn a s o f 1/ 1/ 2017 o n $450 millio n c re dit fa c ility
• On-going shar

e r epur c hase pr

• gr

am

• Re purc ha se d 18 millio n sha re s fro m Se pt. 2015 to F

e b . 2017 (12% o f flo a t)

• Anno unc e d a ne w two -ye a r $250M sha re re purc ha se a utho riza tio n o n 2/ 23/ 17

20

Financial Priorities – Capital Structure

21

Authentic Fresh, Natural & Organic Food Offering at Great Value Fastest Growing Segment

• f the U.S. Supermarket

Industry with Strong Macro Tailwinds Significant New Store Growth Opportunity Supported by Broad Demographic Appeal Compelling Business Model with Strong Cash Generation & Ongoing Share Repurchase Program Driving Shareholder Value Passionate Team with a Customer-Focused Culture Strong Management Team with a Diverse Retail Background

Why Sprouts is a Compelling Investment

Appendix:

Supplemental Materials

23

Management Team with Grocery & Retail Experience

Amin Mar e dia Jim Nie lse n Br ad L ukow Dan Sande r s Dan Br uni T e d F r umkin Shawn Ge nsc h Br andon L

• mbar

di

Chie f E xe c utive Offic e r 6 Ye a rs with Sprouts Pre side nt & Chie f Ope ra ting Offic e r 6 Ye a rs with Sprouts Chie f F ina nc ia l Offic e r 1Ye a r with Sprouts Chie f Ope ra tions Offic e r 2 Ye a rs with Sprouts Chie f Informa tion Offic e r 2 Ye a rs with Sprouts Chie f De ve lopme nt Offic e r 5 Ye a rs with Sprouts Chie f Ma rke ting Offic e r 2 Ye a rs with Sprouts Chie f Huma n Re sourc e s & L e g a l Offic e r 5 Ye a rs with Sprouts

24

Appendix

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NON-GAAP MEASURE RECONCILIATION (UNAUDITED) (IN THOUSANDS) The following table shows a reconciliation of EBITDA to net income for the fifty-two weeks ended January 1, 2017:

Fifty-two Weeks Ended January 1, 2017 Net income 124,306 $ Income tax provision 74,286 Interest expense, net 14,791 Earnings before interest and taxes (EBIT) 213,383 Depreciation, amortization and accretion 80,723 Earnings before interest, taxes, depreciation and amortization (EBITDA) 294,106 $

25

Appendix

The following table shows a reconciliation of adjusted net income and adjusted EBITDA to net income for the Company’s 2013, 2014 2015, and 2016 fiscal years:

Note: Footnotes on the following page.

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NON-GAAP MEASURE RECONCILIATION (UNAUDITED) (IN THOUSANDS) Fifty-two Weeks Ended Fifty-Three Weeks Ended Fifty-Two Weeks Ended Fifty-Two Weeks Ended January 1, 2017 January 3, 2016 December 28, 2014 December 29, 2013 Net income 124,306 $ 128,991 $ 107,692 $ 51,326 $ Income tax provision 74,286 77,002 66,414 32,741 Net income before income taxes 198,592 205,993 174,106 84,067 Store closure and exit costs (a)

• 1,802

725 2,051 Costs associated with acquisitions and integration (b)

• (15)

Loss on disposal of assets (c)

• 1,521

1,181 412 IPO bonus (d)

• 3,183

Secondary offering expenses including employment taxes on options exercises (e)

• 335

2,557 2,014 Loss on extinguishment of debt (f)

• 5,481

1,138 18,721 Adjusted income tax provision (g) (74,286) (80,418) (68,551) (43,010) Adjusted net income 124,306 134,714 111,156 67,423 Interest expense, net 14,791 17,707 25,057 37,185 Adjusted income tax provision (g) 74,286 80,418 68,551 43,010 Adjusted earnings before interest and taxes (EBIT) 213,383 232,839 204,764 147,618 Depreciation, amortization and accretion 80,723 69,256 60,612 47,539 Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) 294,106 $ 302,095 $ 265,376 $ 195,157 $

26

Appendix

(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 gains and 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 because management believes they do not directly reflect the ongoing performance of its store operations. (f) Loss on extinguishment of debt for the fifty-three weeks ended January 3, 2016 represents expenses the company recorded in connection with its April 2015 refinancing including write-off of deferred financing costs and original issue discounts associated with the former credit agreement. For the fifty-two weeks ended December 28, 2014, loss on extinguishment of debt represents the write-

• ff of deferred financing costs and original issue discounts related to unscheduled repayment of debt. For the fifty-two weeks ended

December 29, 2013, loss on extinguishment of debt represents expenses the company recorded in connection with its April 2013 refinancing, including write-off of deferred financing costs and original issue discounts associated with the former credit agreement, and the write-off of deferred financing costs and original issue discounts due to the August 2013 pay down of debt using proceeds from the company’s IPO. 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. (g) Adjusted and 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 periods presented. The company has excluded these items from its adjusted income tax provision because management believes they do not directly reflect the ongoing performance

• f its store operations and are not reflective of its ongoing income tax provision.

27

Appendix

The following table shows a reconciliation of ROIC for the Company’s 2014, 2015 and 2016 fiscal years: SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NON-GAAP MEASURE RECONCILIATION (UNAUDITED) (IN THOUSANDS)

2016 2015 (1) 2014 Net income 124,306 $ 128,991 $ 107,692 $ Interest expense, net of tax (2) 9,876 11,296 16,364 Net operating profit after tax (NOPAT) 134,182 $ 140,287 $ 124,056 $ Total rent expense, net of tax (2) 65,886 55,250 45,386 Estimated depreciation on capitalized operating leases, net of tax (2) (28,990) (24,310) (19,970) Estimated interest on capitalized operating leases, net of tax (2) (3) 36,896 30,940 25,416 NOPAT, including effect of capitalized operating leases 171,078 $ 171,227 $ 149,472 $ Average working capital 77,273 148,368 109,590 Average property and equipment 546,652 472,189 398,330 Average other assets 584,945 583,943 589,337 Average other liabilities (121,724) (103,714) (73,761) Average invested capital 1,087,146 $ 1,100,786 $ 1,023,496 $ Average estimated asset base of capitalized operating leases 838,200 704,802 582,916 Average invested capital, including the effect of capitalized operating leases 1,925,346 $ 1,805,588 $ 1,606,412 $ ROIC 12.3% 12.7% 12.1% ROIC, including the effect of capitalized operating leases 8.9% 9.5% 9.3%

(1) Fiscal 2015 includes 53 weeks. (2) Net of tax amounts are calculated using the effective tax rate for the period presented. (3) Operating leases are capitalized as part of the ROIC calculation to control for differences in capital structure between us and our competitors. Capitalized operating lease interest represents this adjustment to NOPAT and is calculated by the hypothetical capitalization of our operating leases, using eight times our trailing twelve months rent expense and an interest rate factor of seven percent. Operating leases are determined as the trailing twelve months’ rent expense times a factor of eight. Invested capital reflects a trailing twelve-month average. As numerous methods exist for calculating ROIC, our method may differ from methods used by other companies to calculate their ROIC.