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TMCNet:  SPROUTS FARMERS MARKET, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[May 07, 2014]

SPROUTS FARMERS MARKET, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K filed February 27, 2014 with the Securities and Exchange Commission.


All dollar amounts included below are in thousands, unless otherwise noted.

Business Overview Sprouts Farmers Market, Inc. 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 171 stores in nine states as of March 30, 2014, we are one of the largest specialty retailers of natural and organic food in the United States.

The cornerstones of our business are fresh, natural and organic products at compelling prices (which we refer to as "Healthy Living for Less"), an attractive and differentiated shopping experience, and knowledgeable team members who we believe provide best-in-class customer service and product education.

Healthy Living For Less. The foundation of our value proposition is fresh, high-quality produce which we offer at prices we believe are significantly below those of conventional food retailers and even further below high-end natural and organic food retailers. We believe that by combining our scale in and self-distribution of produce, we ensure that our produce meets our high quality standards and can be delivered to customers at market leading prices. In addition, our scale, operating structure and deep industry relationships position us to consistently deliver "Healthy Living for Less." 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. Trial visits to our stores allow us to engage with customers while showcasing our complete grocery offering and differentiated retail format. We believe that over time, our compelling prices and product offering convert 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 easy-to-shop floor plans, a bright open-air atmosphere and low profile displays allowing customers to view the entire store upon entry. We design our stores to create a comfortable and engaging shopping experience supported by our well-trained and knowledgeable team members. We strive to be our customers' everyday market. We dedicate significant floor space in the center of our stores to our produce and bulk food departments which we merchandise in bountifully stacked crates and rows of self-service bins creating a farmers market environment. Produce and bulk foods at the center of the store are 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. Our passionate and well-trained team members engage customers throughout the entire store and provide them with product and nutritional education. As a result, we believe 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. Over time, we believe our customers become passionate about both Sprouts and eating healthy, and we experience growing sales as they shop Sprouts for a greater percentage of their grocery needs.

14-------------------------------------------------------------------------------- Table of Contents Outlook We are pursuing a number of strategies designed to continue our growth, including expansion of our store base, driving comparable store sales growth, enhancing our operating margins and growing the Sprouts brand. We intend to continue expanding our store base by pursuing new store openings in our existing markets, expanding into adjacent markets and penetrating new markets. We opened four stores and relocated one store during the first quarter of 2014. We expect to continue to expand our store base with 23-24 store openings planned in fiscal 2014, of which five have opened as of the date of this Quarterly Report on Form 10-Q. Although we plan to expand our store base primarily through new store openings, we may grow through strategic acquisitions if we identify suitable targets and are able to negotiate acceptable terms and conditions for acquisition. We intend to achieve 12% or more annual new store growth for at least the next five years.

We also believe we can continue to improve our comparable store sales growth by enhancing our core value proposition and distinctive customer-oriented shopping experience, as well as through expanding and refining our fresh, natural and organic product offerings, our targeted and personalized marketing efforts and our in-store education. We believe our operating margins will continue to benefit from scale efficiencies, enhanced information technology systems, continued cost discipline and enhancements to our merchandise offerings. We are committed to growing the Sprouts brand by supporting our stores, product offerings and corporate partnerships, including the expansion of innovative marketing and promotional strategies through print, digital and social media platforms, all of which promote our mission of "Healthy Living for Less." Our History In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona.

In 2010, we had 54 stores and reached over $620 million in net sales and approximately 3,700 team members. In April 2011, we partnered with investment funds affiliated with, and co-investment vehicles managed by, Apollo Management VI, L.P., and added 43 stores by merging with Henry's Holdings, LLC (referred to as "Henry's") and its Sun Harvest-brand stores. Our merger with Henry's brought us to 103 total stores located in Arizona, California, Colorado and Texas as of the end of 2011. In May 2012, we added another 37 stores through our acquisition of Sunflower Farmers Markets, Inc. (referred to as "Sunflower") and extended our footprint into New Mexico, Nevada, Oklahoma and Utah. On August 1, 2013, our common stock began trading on the NASDAQ Global Select Market and on August 6, 2013, we closed our initial public offering (referred to as our "IPO").

Components of Operating Results 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.

The first quarters of fiscal 2014 and 2013 were thirteen-week periods ended March 30, 2014 and March 31, 2013, respectively.

Net Sales We recognize sales revenue at the point of sale, with discounts provided to customers reflected as a reduction in sales revenue. Proceeds from sales of gift cards are recorded as a liability at the time of sale, and recognized as sales when they are redeemed by the customer. We do not include sales taxes in net sales.

We monitor our comparable store sales growth to evaluate and identify trends in our sales performance. 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 15 -------------------------------------------------------------------------------- Table of Contents 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 also include sales from relocated stores immediately after relocation. These practices may differ from the methods that other retailers use to calculate similar measures.

Net sales are affected by store openings and closings and comparable store sales growth. Factors that influence comparable store sales growth and other sales trends include: • general economic conditions and trends, including levels of disposable income and consumer confidence; • consumer preferences and buying trends; • our ability to identify market trends, and to source and provide product offerings that promote customer traffic and growth in average ticket; • the number of customer transactions and average ticket; • the prices of our products, including the effects of inflation and deflation; • opening new stores in the vicinity of our existing stores; • advertising, in-store merchandising and other marketing activities; and • our competition, including competitive store openings in the vicinity of our stores and competitor pricing and merchandising strategies.

Cost of sales, buying and occupancy and gross profit Cost of sales includes the cost of inventory sold during the period, including direct costs of purchased merchandise (net of discounts and allowances), distribution and supply chain costs, buying costs and supplies. Merchandise incentives received from vendors are reflected in the carrying value of inventory when earned or as progress is made toward earning the rebate or allowance, and are reflected as a component of cost of sales as the inventory is sold. Inflation and deflation in the prices of food and other products we sell may periodically affect our gross profit and gross margin. The short-term impact of inflation and deflation is largely dependent on whether or not we pass the effects through to our customers, which will depend upon competitive market conditions.

Occupancy costs include store rental, property taxes, utilities, common area maintenance, amortization of favorable and unfavorable leasehold interests and property insurance. Occupancy costs do not include building depreciation, which is classified as a direct store expense.

Our cost of sales, buying and occupancy and gross profit are correlated to sales volumes. As sales increase, gross margin is affected by the relative mix of products sold, pricing strategies, inventory shrinkage and improved leverage of fixed costs of sales, buying and occupancy.

Direct store expenses Direct store expenses consist of store-level expenses such as salaries and benefits, related equity-based compensation, supplies, depreciation and amortization for buildings, store leasehold improvements, equipment and other store specific costs. As sales increase, direct store expenses generally decline as a percentage of sales.

Selling, general and administrative expenses Selling, general and administrative expenses primarily consist of salaries and benefits costs, equity-based compensation, advertising and corporate overhead.

We charge third-parties to place advertisements in our in-store guide and newspaper circulars. We record consideration received from vendors in connection with cooperative advertising programs as a reduction to advertising costs when the allowance represents reimbursement of a specific and identifiable cost.

Advertising costs are expensed as incurred.

16-------------------------------------------------------------------------------- Table of Contents We expect our selling, general and administrative expenses will increase in future periods as a result of incremental share-based compensation, legal, accounting and other compliance-related expenses associated with being a public company and increases resulting from growth in the number of our stores.

Store pre-opening costs Store pre-opening costs include rent expense during construction of new stores and costs related to new store openings, including costs associated with hiring and training personnel and other miscellaneous costs. Store pre-opening costs are expensed as incurred.

Store closure and exit costs We recognize a reserve for future operating lease payments associated with facilities that are no longer being utilized in our current operations. The reserve is recorded based on the present value of the remaining non-cancelable lease payments after the cease use date less an estimate of subtenant income. If subtenant income is expected to be higher than the lease payments, no accrual is recorded. Lease payments included in the closed store reserve are expected to be paid over the remaining terms of the respective leases. Our assumptions about subtenant income are based on our experience and knowledge of the area in which the closed property is located, guidance received from local brokers and agents and existing economic conditions. Adjustments to the closed store reserve relate primarily to changes in actual or estimated subtenant income and changes in actual lease payments from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known, considering timing of new information regarding market, subleases or other lease updates. Changes in reserve estimates are classified as store closure and exit costs in the consolidated statements of operations.

Provision for income taxes Prior to our IPO, we were structured as a limited liability company, but we elected to be taxed as a corporation for income tax purposes. We are subject to federal income tax as well as state income tax in various jurisdictions of the United States in which we conduct business. Income taxes are accounted for under the asset and liability method.

On July 29, 2013, Sprouts Farmers Markets, LLC, a Delaware limited liability company, converted into Sprouts Farmers Market, Inc., a Delaware corporation.

The corporate conversion has not had a material impact on our results of operations, financial position or cash flows since we were treated as a corporation for income tax purposes prior to the conversion.

In September 2013, the Internal Revenue Service issued final regulations related to tangible property, which govern when a taxpayer must capitalize or deduct expenses for acquiring, maintaining, repairing and replacing tangible property.

The regulations are effective for tax years beginning January 1, 2014; however, early adoption is permitted. We have analyzed the impacts of the tangible property regulations, and have determined we are in compliance with the regulations. The adoption of the regulations did not have a significant effect on our consolidated financial statements.

Factors Affecting Comparability of Results of OperationsApril 2013 Refinancing In April 2013, we completed a transaction (referred to as the "April 2013 Refinancing") in which we refinanced our debt by entering into a new credit facility (referred to as the "Credit Facility") and made a distribution to our equity and option holders, as further discussed in Note 6 "Long-Term Debt" and Note 11 "Stockholders' Equity" to our consolidated financial statements included in this Quarterly Report on Form 10-Q. The Credit Facility provides for a $700.0 million term loan (referred to as the "Term Loan") and a $60.0 million senior secured revolving credit facility (referred to as the "Revolving Credit Facility"). The April 2013 Refinancing resulted in an increase in borrowings and reduction in interest rate commencing in April 2013.

17-------------------------------------------------------------------------------- Table of Contents Corporate Conversion On July 29, 2013, Sprouts Farmers Markets, LLC, a Delaware limited liability company, converted into Sprouts Farmers Market, Inc., a Delaware corporation. As part of the corporate conversion, holders of Class A and Class B units of Sprouts Farmers Markets, LLC received 11 shares of our common stock for each unit held immediately prior to the corporate conversion, and options to purchase units became options to purchase 11 shares of our common stock for each unit underlying options outstanding immediately prior to the corporate conversion, at the same aggregate exercise price in effect prior to the corporate conversion.

For the convenience of the reader and in accordance with GAAP in the case of the consolidated financial statements, except where the context otherwise requires, information in this Quarterly Report on Form 10-Q has been presented giving effect to the corporate conversion. The corporate conversion has not had a material impact on the comparability of our results of operation as a result of the corporate conversion, since we have been treated as a corporation for income tax purposes.

IPO On August 6, 2013, we completed our initial public offering of 21,275,000 shares of common stock of Sprouts Farmers Market, Inc., at a price of $18.00 per share.

We sold 20,477,215 shares of common stock, and certain stockholders sold the remaining 797,785 shares.

We received net proceeds from our IPO of $344.1 million, after deducting underwriting discounts and offering expenses. We used the net proceeds to repay $340.0 million of outstanding indebtedness under the Term Loan and the remainder for general corporate purposes.

Secondary Offerings On December 2, 2013, certain of our stockholders completed a secondary public offering of 19,550,000 shares of common stock, including 2,550,000 shares of common stock sold as a result of the exercise in full of the underwriters' option to purchase additional shares, at a price of $37.00 per share (referred to as the "December Secondary Offering").

On April 2, 2014, certain of our stockholders completed a secondary public offering of 17,250,000 shares of common stock, including 2,250,000 shares of common stock sold as a result of the exercise in full of the underwriters' option to purchase additional shares, at a price of $33.75 per share (referred to as the "April Secondary Offering").

We did not sell any shares in the December Secondary Offering or the April Secondary Offering.

18 -------------------------------------------------------------------------------- Table of Contents Results of Operations for Thirteen Weeks Ended March 30, 2014 and March 31, 2013 The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted.

Thirteen weeks ended March 30, 2014 March 31, 2013 Unaudited Quarterly Consolidated Statement of Operations Data: Net sales $ 722,606 $ 573,694 Cost of sales, buying and occupancy 498,747 399,774 Gross profit 223,859 173,920 Direct store expenses 138,231 114,661 Selling, general and administrative expenses 22,479 16,724 Store pre-opening costs 947 1,714 Store closure and exit costs 533 775 Income from operations 61,669 40,046 Interest expense (6,467 ) (10,165 ) Other income 96 133 Income before income taxes 55,298 30,014 Income tax provision (21,565 ) (11,897 ) Net income $ 33,733 $ 18,117 Thirteen weeks ended March 30, 2014 March 31, 2013 Comparable store sales growth(1) 12.8 % 8.0 % Other Operating Data: Stores at beginning of period 167 148 Opened 4 6 Stores at end of period(2) 171 154 (1) See the explanation of "comparable store sales growth" above under "Components of Operating Results - Net Sales." (2) During the thirteen weeks ended March 30, 2014, we also relocated one store.

Comparison of Thirteen Weeks Ended March 30, 2014 to Thirteen Weeks Ended March 31, 2013 Net sales Thirteen weeks ended March 30, 2014 March 31, 2013 Change % Change Net sales $ 722,606 $ 573,694 $ 148,912 26 % Comparable store sales growth 12.8 % 8.0 % Net sales increased during the thirteen weeks ended March 30, 2014 as compared to the thirteen weeks ended March 31, 2013, primarily as a result of (i) sales growth at stores operated prior to March 31, 2013 and (ii) new store openings after March 31, 2013. Comparable store sales growth and new store openings during fiscal 2013 not yet reflected in comparable store sales growth contributed $81.3 million, or 55%, of the increase in net sales during the thirteen weeks ended March 30, 2014. Additionally, $67.6 million, or 45%, of the increase in net sales resulted from new store openings after March 31, 2013.

19 -------------------------------------------------------------------------------- Table of Contents Cost of sales, buying and occupancy and gross profit Thirteen weeks ended March 30, 2014 March 31, 2013 Change % Change Net sales $ 722,606 $ 573,694 $ 148,912 26 % Cost of sales, buying and occupancy 498,747 399,774 98,973 25 % Gross profit 223,859 173,920 49,939 29 % Gross margin 31.0 % 30.3 % 0.7 % Cost of sales, buying and occupancy increased during the thirteen weeks ended March 30, 2014 compared to the thirteen weeks ended March 31, 2013, primarily due to the increase in sales from new store openings and comparable store sales growth, as discussed above. Gross profit increased $45.0 million as a result of increased sales volume and $4.9 million as a result of increased margin. The 70 basis point increase in gross margin during the thirteen weeks ended March 30, 2014 was primarily driven by leverage in occupancy, utilities and buying costs.

We also experienced higher margins in produce, due to strong product quality and availability, and lower merchandise costs from vendor discounts in certain departments. These increases were partially offset by promotional activities.

Direct store expenses Thirteen weeks ended March 30, 2014 March 31, 2013 Change % Change Direct store expenses $ 138,231 $ 114,661 $ 23,570 21 % Percentage of net sales 19.1 % 20.0 % (0.9 )% 20 -------------------------------------------------------------------------------- Table of Contents Direct store expenses increased $23.6 million, primarily due to $13.3 million of direct store expenses related to stores opened since March 31, 2013. The remaining $10.3 million increase in direct store expenses is associated with stores operated prior to the thirteen weeks ended March 31, 2013. Direct store expenses, as a percentage of net sales, decreased 90 basis points primarily due to leverage in labor and depreciation, in addition to lower utilization of medical benefits.

Selling, general and administrative expenses Thirteen weeks ended March 30, 2014 March 31, 2013 Change % Change Selling, general and administrative expenses $ 22,479 $ 16,724 $ 5,755 34 % Percentage of net sales 3.1 % 2.9 % 0.2 % The increase in selling, general and administrative expenses included $1.4 million of secondary offering expenses including related payroll taxes, $1.2 million of corporate payroll expense, $0.9 million of bonus expense, $0.5 million of advertising expense and increases related to IT initiatives, consulting and regional expenses due to increased store count. Selling, general and administrative expenses increased as a percentage of net sales during the thirteen weeks ended March 30, 2014 primarily due to the secondary offering expenses discussed above. Excluding this item, selling, general and administrative expenses as a percentage of sales were relatively consistent.

Store pre-opening costs Store pre-opening costs were $0.9 million for the thirteen weeks ended March 30, 2014 and $1.7 million for the thirteen weeks ended March 31, 2013. Store pre-opening costs in the thirteen weeks ended March 30, 2014 included $0.9 million related to opening four stores and relocating one store during that period and $0.1 million associated with stores opening during the next quarter.

Store pre-opening costs in the thirteen weeks ended March 31, 2013 included $1.0 million related to opening six stores during that period and $0.7 million for stores opened in the next quarter.

Store closure and exit costs Store closure and exit costs for the thirteen weeks ended March 30, 2014 included costs related to the relocation of one store and ongoing expenses related to prior closures. Store closure and exit costs for the thirteen weeks ended March 31, 2013 consisted primarily of costs to close a former Sunflower warehouse and adjustments to sublease estimates for stores and facilities already closed.

21 -------------------------------------------------------------------------------- Table of Contents Interest expense Interest expense decreased to $6.5 million for the thirteen weeks ended March 30, 2014 from $10.2 million for the thirteen weeks ended March 31, 2013.

The decrease in interest expense is due to the lower principal balance of our Term Loan, the repayment of higher interest debt in the April 2013 Refinancing, the repayment of the senior subordinated notes and the interest rate reduction under our Credit Facility in conjunction with our IPO.

Income tax provision Income tax provision increased to $21.6 million for the thirteen weeks ended March 30, 2014 from $11.9 million for the thirteen weeks ended March 31, 2013, primarily related to an increase in income before income taxes. Our effective income tax rate decreased to 39.0% in the thirteen weeks ended March 30, 2014 from 39.6% in the thirteen weeks ended March 31, 2013 due to an increase in tax credits and charitable contributions.

Net income Thirteen weeks ended March 30, 2014 March 31, 2013 Change % Change Net income $ 33,733 $ 18,117 $ 15,616 86 % Percentage of net sales 4.7 % 3.2 % 1.5 % Net income growth was attributable to strong business performance driven by comparable store sales growth and resulting operating leverage, strong performance of new stores opened, and reduced interest expense.

22-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources The following table sets forth the major sources and uses of cash for each of the periods set forth below, as well as our cash and cash equivalents at the end of each period: Thirteen weeks ended March 30, 2014 March 31, 2013 Cash and cash equivalents at end of period $ 149,048 $ 100,795 Cash provided by operating activities $ 76,266 $ 63,424 Cash used in investing activities $ (18,189 ) $ (27,290 ) Cash provided by (used in) financing activities $ 13,319 $ (2,550 ) Since inception, we have financed our operations primarily through cash generated from our operations, private placements of our equity and borrowings under our current and former credit facilities. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures primarily for opening new stores, remodels and maintenance capital expenditures, and debt service. We believe that our existing cash and cash equivalents, and cash anticipated to be generated by operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including new store openings, maintenance capital expenditures at existing stores, store initiatives and other corporate capital expenditures and activities. Our cash and cash equivalents position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.

Operating Activities Net cash provided by operating activities increased $12.9 million to $76.3 million for the thirteen weeks ended March 30, 2014 compared to $63.4 million for the thirteen weeks ended March 31, 2013. The thirteen weeks ended March 30, 2014 includes the impact of stores opened since March 31, 2013. In addition to the increase in the number of stores we operate, we leveraged occupancy, buying, utilities and fixed direct store expenses through higher comparable store sales growth.

Investing Activities Net cash used in investing activities decreased to $18.2 million for the thirteen weeks ended March 30, 2014 compared to $27.3 million for the thirteen weeks ended March 31, 2013. The decrease in cash used for investing activities is primarily related to timing of payments on capital expenditures for new store openings, store remodels and maintenance capital expenditures.

Capital expenditures consist primarily of investments in new stores, including leasehold improvements and store equipment, annual maintenance capital expenditures to maintain the appearance of our stores, sales enhancing initiatives and other corporate investments.

We expect capital expenditures of $110 million to $120 million in fiscal 2014, net of estimated landlord tenant improvement allowances, primarily to fund investments in new stores, remodels, maintenance capital expenditures and corporate capital expenditures. We expect to fund our capital expenditures with cash on hand, cash generated from operating activities and, if required, borrowings under our Credit Facility.

Financing Activities Net cash provided by financing activities was $13.3 million for the thirteen weeks ended March 30, 2014 as compared to cash used in financing activities of $2.6 million for the thirteen weeks ended March 31, 2013. The increase in cash provided by financing activities of $15.9 million is related to $14.8 million 23 -------------------------------------------------------------------------------- Table of Contents of excess tax benefits from the exercise of stock options, a $1.0 million decrease in payments on leases and debt and a $0.5 million increase in cash from the exercise of stock options. These increases in cash provided by financing activities were partially offset by a $0.4 million decrease in cash from landlords related to financing lease obligations.

Long-Term Debt and Credit Facilities See Note 6 "Long-Term Debt" of our unaudited consolidated financial statements for a description of the April 2013 Refinancing and our Credit Facility.

Contractual Obligations We are committed under certain capital leases for the rental of certain buildings and land and certain operating leases for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates through 2032.

The following table summarizes our lease obligations as of March 30, 2014, and the effect such obligations are expected to have on our liquidity and cash flow in future periods: Payments Due by Period Less Than More Than Total 1 Year 1-3 Years 4-5 Years 5 Years (in thousands) Capital and financing lease obligations(1) $ 156,055 $ 14,499 $ 29,633 $ 30,018 $ 81,905 Operating lease obligations(1) 978,198 77,905 177,385 175,124 547,784 Totals $ 1,134,253 $ 92,404 $ 207,018 $ 205,142 $ 629,689 (1) Represents estimated payments for capital and financing and operating lease obligations as of March 30, 2014. Capital and financing lease obligations and operating lease obligations are presented gross without offset for subtenant rentals. We have subtenant agreements under which we will receive $0.6 million for the period of less than one year, $1.6 million for years one to three, $1.4 million for years four to five, and $2.6 million for the period beyond five years.

We have other contractual commitments and debt, which were presented under Contractual Obligations in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013, and for which there have not been material changes since that filing.

Off-Balance Sheet ArrangementsWe do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities.

Impact of Inflation Inflation and deflation in the prices of food and other products we sell may periodically affect our sales, gross profit and gross margin. The short-term impact of inflation and deflation is largely dependent on whether or not the effects are passed through to our customers, which is subject to competitive market conditions.

Food inflation and deflation is affected by a variety of factors and our determination of whether to pass on the effects of inflation or deflation to our customers is made in conjunction with our overall pricing and marketing strategies. Although we may experience periodic effects on sales, gross profit and gross margins as a result of changing prices, we do not expect the effect of inflation or deflation to have a material impact on our ability to execute our long-term business strategy.

24 -------------------------------------------------------------------------------- Table of Contents Seasonality Our business is subject to modest seasonality. Our average weekly sales fluctuate throughout the year and are typically highest in the first half of the fiscal year. Produce, which contributes approximately 25% of our net sales for the thirteen weeks ended March 30, 2014, is generally more available in the first six months of our fiscal year due to the timing of peak growing seasons.

Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. Our estimates include, but are not limited to, those related to inventory, lease assumptions, self-insurance reserves, sublease assumptions for closed stores, goodwill and intangible assets, impairment of long-lived assets, fair values of equity-based awards and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

There have been no substantial changes to these estimates or the policies related to them during the thirteen weeks ended March 30, 2014. For a full discussion of these estimates and policies, see "-Critical Accounting Estimates" in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013.

Recently Issued Accounting PronouncementsSee Note 2 to our accompanying unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.

We have determined that all other recently issued accounting standards will not have a material impact on our financial statements, or do not apply to our operations.

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