Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 1, ~~2017,~~2018, the registrant had ~~135,577,182~~127,086,822 shares of common stock, $0.001 par value per share, outstanding.

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the “Exchange Act”), including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses, and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2017, and our other filings with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the “Company,” “Sprouts,” ~~”Sprouts~~“Sprouts Farmers Market,” “we,” “us” and “our” refer to Sprouts Farmers Market, Inc. and, where appropriate, its subsidiaries.

	July 2, 2017		January 1, 2017		July 1, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	14,814	$	12,465	$	23,174		$	19,479
Accounts receivable, net		19,782		25,228		27,580			25,893
Inventories		218,404		204,464		250,564			229,542
Prepaid expenses and other current assets		23,409		21,869		28,696			24,593
Total current assets		276,409		264,026		330,014			299,507
Property and equipment, net of accumulated depreciation		681,065		604,660		776,323			713,031
Intangible assets, net of accumulated amortization		196,906		197,608		195,504			196,205
Goodwill		368,078		368,078		368,078			368,078
Other assets		7,751		5,521		13,850			4,782
Total assets	$	1,530,209	$	1,439,893	$	1,683,769		$	1,581,603
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	181,913	$	157,550
Accounts payable and other accrued liabilities					$	265,578		$	244,853
Accrued salaries and benefits		34,910		32,859		38,410			45,623
Other accrued liabilities		50,150		56,376
Current portion of capital and financing lease obligations		14,870		12,370		14,362			9,238
Total current liabilities		281,843		259,155		318,350			299,714
Long-term capital and financing lease obligations		124,749		117,366		121,647			125,489
Long-term debt		310,000		255,000		458,000			348,000
Other long-term liabilities		123,957		116,200		139,984			130,640
Deferred income tax liability		37,302		19,263		44,616			27,066
Total liabilities		877,851		766,984		1,082,597			930,909
Commitments and contingencies (Note 8)
Stockholders’ equity:
Undesignated preferred stock; $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding		—		—		—			—
Common stock, $0.001 par value; 200,000,000 shares authorized, 136,242,909 and 140,256,313 shares issued and outstanding, July 2, 2017 and January 1, 2017, respectively		136		140
Common stock, $0.001 par value; 200,000,000 shares authorized, 127,570,117 shares issued and outstanding, July 1, 2018; 132,823,981 shares issued and outstanding, December 31, 2017						126			132
Additional paid-in capital		609,461		597,269		636,445			620,788
Retained earnings		42,761		75,500
Accumulated other comprehensive income (loss)						3,702			(784	)
(Accumulated deficit) retained earnings						(39,101	)		30,558
Total stockholders’ equity		652,358		672,909		601,172			650,694
Total liabilities and stockholders’ equity	$	1,530,209	$	1,439,893	$	1,683,769		$	1,581,603

The accompanying notes are an integral part of these consolidated financial statements.

	Thirteen Weeks Ended						Twenty-six Weeks Ended						Thirteen Weeks Ended						Twenty-six Weeks Ended
	July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016			July 1, 2018			July 2, 2017			July 1, 2018			July 2, 2017
Net sales	$	1,183,975		$	1,031,643		$	2,314,620		$	2,024,884		$	1,321,693		$	1,183,975		$	2,608,889		$	2,314,620
Cost of sales, buying and occupancy		841,989			725,841			1,635,348			1,412,569			941,281			841,989			1,841,425			1,635,348
Gross profit		341,986			305,802			679,272			612,315			380,412			341,986			767,464			679,272
Direct store expenses		236,185			207,205			465,334			401,020			272,973			236,087			535,568			465,145
Selling, general and administrative expenses		38,189			30,922			70,357			61,818			43,437			38,189			84,884			70,357
Store pre-opening costs		4,141			4,213			7,599			8,179			2,275			4,141			5,595			7,599
Store closure and other costs														26			98			36			189
Income from operations		63,471			63,462			135,982			141,298			61,701			63,471			141,381			135,982
Interest expense		(5,100	)		(3,661	)		(9,838	)		(7,262	)		(6,544	)		(5,100	)		(12,609	)		(9,838	)
Other income		131			90			226			191			117			131			325			226
Income before income taxes		58,502			59,891			126,370			134,227			55,274			58,502			129,097			126,370
Income tax provision		(17,534	)		(22,682	)		(39,115	)		(50,811	)		(13,565	)		(17,534	)		(20,764	)		(39,115	)
Net income	$	40,968		$	37,209		$	87,255		$	83,416		$	41,709		$	40,968		$	108,333		$	87,255
Net income per share:
Basic	$	0.30		$	0.25		$	0.64		$	0.56		$	0.32		$	0.30		$	0.83		$	0.64
Diluted	$	0.29		$	0.25		$	0.62		$	0.55		$	0.32		$	0.29		$	0.82		$	0.62
Weighted average shares outstanding:
Basic		136,796			149,170			136,933			149,931			129,423			136,796			130,924			136,933
Diluted		139,493			151,498			139,847			152,322			130,012			139,493			131,949			139,847

The accompanying notes are an integral part of these consolidated financial statements.

Shares

Common
Stock

Additional
Paid In
Capital

Retained
Earnings

Total
Stockholders’
Equity

Balances at January 3, 2016

152,577,884

$
153

$
577,393

$
245,446

$
822,992

Net income

—

—

—

124,306

124,306

Issuance of shares under stock plans

666,841

—

2,740

—

2,740

Repurchase and retirement of common
stock

(13,242,483
)

(13
)

—

(294,252
)

(294,265
)
Excess tax benefit for exercise of options

—

—

3,737

—

3,737

Equity-based compensation

—

—

13,399

—

13,399

Balances at January 1, 2017

140,002,242

$
140

$
597,269

$
75,500

$
672,909

Net income

—

—

—

87,255

87,255

Issuance of shares under stock plans

1,692,542

2

5,953

—

5,955

Repurchase and retirement of common
stock

(5,887,264
)

(6
)

—

(119,994
)

(120,000
)
Equity-based compensation

—

—

6,239

—

6,239

Balances at July 2, 2017

135,807,520

$
136

$
609,461

$
42,761

$
652,358

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	July 1, 2018		July 2, 2017		July 1, 2018		July 2, 2017
Net income	$	41,709	$	40,968	$	108,333	$	87,255

Other comprehensive income, net of tax
Unrealized gain on cash flow hedging activities, net of income tax of $404, $0, $1,552 and $0		1,166		—		4,486		—
Total other comprehensive income	$	1,166	$	—	$	4,486	$	—

Comprehensive income	$	42,875	$	40,968	$	112,819	$	87,255

The accompanying notes are an integral part of these consolidated financial statements.

Twenty-six Weeks Ended

July 2, 2017

July 3, 2016

Cash flows from operating activities

Net income

$
87,255

$
83,416

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization expense

46,142

38,813

Accretion of asset retirement obligation and closed store reserve

94

176

Amortization of financing fees and debt issuance costs

231

231

Loss on disposal of property and equipment

356

57

Equity-based compensation

6,239

6,325

Deferred income taxes

18,039

13,590

Changes in operating assets and liabilities:

Accounts receivable

4,106

3,015

Inventories

(13,940
)

(23,731
)
Prepaid expenses and other current assets

(1,549
)

3,334

Other assets

(2,450
)

(4,961
)
Accounts payable

31,234

24,768

Accrued salaries and benefits

2,051

(2,038
)
Other accrued liabilities and income taxes payable

(6,238
)

(7,395
)
Other long-term liabilities

8,313

12,340

Cash flows from operating activities

179,883

147,940

Cash flows from investing activities

Purchases of property and equipment

(117,753
)

(85,081
)
Proceeds from sale of property and equipment

30

662

Purchase of leasehold interests

—

(491
)
Cash flows used in investing activities

(117,723
)

(84,910
)
Cash flows from financing activities

Proceeds from revolving credit facility

85,000

—

Payments on revolving credit facility

(30,000
)

—

Payments on capital and financing lease obligations

(2,068
)

(2,130
)
Cash from landlords related to financing lease obligations

1,325

—

Repurchase of common stock

(120,000
)

(124,265
)
Proceeds from exercise of stock options

5,932

2,053

Excess tax benefit for exercise of stock options

—

3,687

Cash flows used in financing activities

(59,811
)

(120,655
)
(Decrease) / Increase in cash and cash equivalents

2,349

(57,625
)
Cash and cash equivalents at beginning of the period

12,465

136,069

Cash and cash equivalents at the end of the period

$
14,814

$
78,444

Supplemental disclosure of cash flow information

Cash paid for interest

$
9,438

$
7,297

Cash paid for income taxes

19,595

28,575

Supplemental disclosure of non-cash investing and financing activities

Property and equipment in accounts payable

$
16,358

$
32,183

Property acquired through capital and financing lease obligations

9,774

4,655

	Shares			Common Stock			Additional Paid In Capital		(Accumulated deficit) Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balances at January 1, 2017		140,002,242		$	140		$	597,269	$	75,500		$	—		$	672,909
Net income		—			—			—		158,440			—			158,440
Other comprehensive income (loss)		—			—			—		—			(784	)		(784	)
Issuance of shares under stock plans		2,144,669			2			9,298		—			—			9,300
Repurchase and retirement of common stock		(9,696,819	)		(10	)		—		(203,382	)		—			(203,392	)
Equity-based compensation		—			—			14,221		—			—			14,221
Balances at December 31, 2017		132,450,092		$	132		$	620,788	$	30,558		$	(784	)	$	650,694
Net income										108,333						108,333
Other comprehensive income (loss)													4,486			4,486
Issuance of shares under stock plans		2,398,730			2			7,027								7,029
Repurchase and retirement of common stock		(7,692,571	)		(8	)				(177,992	)					(178,000	)
Equity-based compensation								8,630								8,630
Balances at July 1, 2018		127,156,251		$	126		$	636,445	$	(39,101	)	$	3,702			601,172

The accompanying notes are an integral part of these consolidated financial statements.

	Twenty-six Weeks Ended
	July 1, 2018			July 2, 2017
Cash flows from operating activities
Net income	$	108,333		$	87,255
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		53,829			46,142
Accretion of asset retirement obligation and closed store reserve		147			94
Amortization of financing fees and debt issuance costs		517			231
Loss on disposal of property and equipment		236			356
Equity-based compensation		8,630			6,239
Deferred income taxes		17,550			18,039
Changes in operating assets and liabilities:
Accounts receivable		(2,954	)		4,106
Inventories		(21,022	)		(13,940	)
Prepaid expenses and other current assets		(1,312	)		(1,549	)
Other assets		(6,745	)		(2,450	)
Accounts payable and other accrued liabilities		10,379			24,996
Accrued salaries and benefits		(7,154	)		2,051
Other long-term liabilities		10,674			8,313
Cash flows from operating activities		171,108			179,883
Cash flows from investing activities
Purchases of property and equipment		(103,936	)		(117,753	)
Proceeds from sale of property and equipment		1			30
Cash flows used in investing activities		(103,935	)		(117,723	)
Cash flows from financing activities
Proceeds from revolving credit facilities		140,000			85,000
Payments on revolving credit facilities		(30,000	)		(30,000	)
Payments on capital and financing lease obligations		(2,135	)		(2,068	)
Payments of deferred financing costs		(2,131	)		—
Cash from landlords related to capital and financing lease obligations		2,113			1,325
Repurchase of common stock		(178,000	)		(120,000	)
Proceeds from exercise of stock options		6,734			5,932
Other		(59	)		—
Cash flows used in financing activities		(63,478	)		(59,811	)
Increase in cash and cash equivalents		3,695			2,349
Cash and cash equivalents at beginning of the period		19,479			12,465
Cash and cash equivalents at the end of the period	$	23,174		$	14,814

Supplemental disclosure of cash flow information
Cash paid for interest	$	12,292		$	9,438
Cash paid for income taxes		12,291			19,595

Supplemental disclosure of non-cash investing and financing activities
Property and equipment in accounts payable	$	27,959		$	16,358
Property acquired through capital and financing lease obligations		7,452			9,774

The accompanying notes are an integral part of these consolidated financial statements.

Sprouts Farmers Market, Inc., a Delaware corporation, through its subsidiaries, operates as a healthy grocery store that offers fresh, natural and organic food through a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, beer and wine, natural body care and household items catering to consumers’ growing interest in health and wellness. The “Company” is used to refer collectively to Sprouts Farmers Market, Inc. and unless the context otherwise requires, its subsidiaries.

The accompanying unaudited consolidated financial statements include the accounts of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission in instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company's financial position, results of operations and cash flows for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The information included in these consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the fiscal year ended ~~January 1,~~December 31, 2017 (“fiscal year ~~2016”~~2017”) included in the Company’s Annual Report on Form 10-K, filed on February ~~23, 2017.~~22, 2018.

The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. The fiscal year ending December ~~31, 2017~~30, 2018 (“fiscal year ~~2017”~~2018”) ~~is a 52-week year,~~ and fiscal year ~~2016 was a~~2017 are 52-week ~~year.~~years. The Company reports its results of operations on a 13-week quarter, except for 53-week fiscal years.

Certain reclassifications of amounts reported in prior periods have been made to conform with the current period presentation.

~~The Company has one reportable and one operating segment, healthy grocery stores.~~

2. ~~Recently Issued~~Summary of Significant Accounting ~~Pronouncements~~Policies

The Company has adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” in the first quarter of fiscal year 2018, with a date of initial application of January 1, 2018, using the modified retrospective approach. Comparative information presented has not been adjusted and continues to be reported under ASC 605.

The Company applied ASC 606 to all of its contracts with customers. As a result of the adoption, there is no impact to any financial statement line item, and the Company has recorded no impact to opening retained earnings as of January 1, 2018.

The Company does not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current period from performance obligations satisfied in previous periods, any contract performance obligations, or any material costs to obtain or fulfill a contract as of July 1, 2018. The Company had a net gift card liability balance of $7.6 million as of July 1, 2018 and $13.1 million as of December 31, 2017. During the twenty-six weeks ended July 1, 2018, the Company recognized $12.0 million in sales related to gift cards redeemed by customers.

Revenue is recognized at the point of sale. The Company’s performance obligations are satisfied upon the transfer of goods to the customer, at the point of sale, and payment from customers is also due at the time of sale. Proceeds from the sale of gift cards are recorded as a liability at the time of sale, and recognized as sales when they are redeemed by the customer and the performance obligation is satisfied by the Company.

The nature of goods the Company transfers to customers at the point of sale are inventories, consisting of merchandise purchased for resale.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” ASU No. 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business; less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for the Company for its fiscal year 2017. Adoption of the guidance took place prospectively during 2017, and the adoption did not have a material effect on the Company’s consolidated financial statements or disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718).” This update involves several aspects of the accounting for share-based transactions, including the income tax consequences, classification of awards as either equity or liabilities, how to account for forfeitures, and classification on the statement of cash flows. The amendments in this update are effective for the Company for its fiscal year 2017. As a result of the adoption, the Company recognized excess tax benefits related to the exercise of options in its income tax provision during the twenty-six weeks ended July 2, 2017 (see Note 11). Prior to the adoption, these items were recorded in Additional Paid-in Capital. The Company has elected to prospectively apply the amendments related to classifying cash flows related to excess tax benefits as an operating activity. During 2017, excess tax benefits were classified as an operating activity on the consolidated statement of cash flows, along with other income tax cash flows. The Company has made a policy election to account for forfeitures as they occur. This election was adopted using a modified retrospective approach resulting in no cumulative effect on retained earnings at the beginning of the period. Prior to the adoption, forfeitures were accounted for using an estimated forfeiture rate.

In May 2014, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU~~Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, and estimating the amount of variable consideration to include in the transaction price attributable to each separate performance obligation. Subsequent to the initial standards, the FASB has also issued several ASUs to clarify specific revenue recognition topics. ~~This guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted.~~ The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective approach. As noted above, there is ~~currently evaluating the potential~~no impact ~~of this guidance and does not expect this ASU~~ to ~~materially impact the Company’s consolidated~~any financial ~~statements.~~

In February 2016, the FASB issued ASU No. 2016-02, “Leases (ASC 842).” ASU No. 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than twelve months. Recognition, measurement and presentation of expenses will depend on classificationstatement line item as a ~~finance or operating lease. The new guidance also requires certain additional quantitative and qualitative disclosures. This guidance will be effective for~~result of the ~~Company for its fiscal year 2019, with early~~ adoption, ~~permitted,~~ and the Company ~~is currently evaluating the potential~~has recorded no impact to opening retained earnings as of ~~this guidance.~~January 1, 2018. The ~~adoption~~Company has added additional disclosures of ~~this ASU is expected to result~~disaggregated revenue by type in ~~a material increase to the Company’s consolidated balance sheets for right-of-use assets and lease liabilities.~~Note 13, “Segments.”

In March 2016, the FASB issued ASU No. 2016-04, “Liabilities-Extinguishments of Liabilities (Subtopic 405-20): Recognition of breakage for certain prepaid stored-value products.” ASU No. 2016-04 provides a narrow scope exception to the guidance in Subtopic 405-20 to require that stored-value breakage be accounted for consistently with the breakage guidance in Topic 606. The amendments in this update contain specific guidance for derecognition of prepaid stored-value product liabilities, thereby eliminating the current and potential future diversity. ~~This~~The guidance ~~will be~~was effective for the Company for its fiscal year ~~2018, with early adoption permitted.~~2018. The Company ~~does not expect~~adopted this ~~ASU~~guidance using the modified retrospective approach. As noted above, there is no impact to ~~materially~~any financial statement line item as a result of the adoption, and the Company recorded no impact ~~the Company’s consolidated financial statements.~~to opening retained earnings as of January 1, 2018.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update provides clarifications on the cash flow classification for eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. Adoption of this guidance took place during the first quarter of fiscal year 2018, using the retrospective transition method, and the adoption had no impact on the Company’s consolidated financial statements or disclosures.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this update provide guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in Topic 718. Adoption of this guidance took place prospectively in fiscal year 2018, and the adoption did not have an impact on the Company’s consolidated financial statements or disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (ASC 842).” ASU No. 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than twelve months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The new guidance also requires certain additional quantitative and qualitative disclosures. This guidance will be effective for the Company for its fiscal year ~~2018,~~2019, with early adoption ~~permitted. The~~permitted, and the Company is currently evaluating the potential impact of this guidance. The adoption of this ASU is expected to result in a material increase to the Company’s consolidated balance sheets for right-of-use assets and lease liabilities.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this update eliminate the second step of the goodwill impairment test and provide that an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The guidance will be effective for the Company for its fiscal year 2020, with early adoption permitted. The Company ~~is currently evaluating the potential impact of this guidance.~~

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this update provide guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in Topic 718. ~~The guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company~~ does not expect this ASU to materially impact the Company’s consolidated financial statements.

No other new accounting pronouncements issued or effective during the twenty-six weeks ended July ~~2, 2017~~1, 2018 had, or are expected to have, a material impact on the Company’s consolidated financial statements.

The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with GAAP. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the impairment analysis of goodwill, indefinite-lived intangible assets and long-lived assets.

The following tables present the fair value hierarchy for the Company’s financial assets and liabilities measured at fair value on a recurring basis as of July 1, 2018 and December 31, 2017:

July 1, 2018	Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	458,000	$	—	$	458,000
Total liabilities	$	—	$	458,000	$	—	$	458,000

Interest rate swap asset	$	—	$	4,990	$	—	$	4,990
Total assets	$	—	$	4,990	$	—	$	4,990

December 31, 2017	Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	348,000	$	—	$	348,000
Interest rate swap liability		—		1,064		—		1,064
Total liabilities	$	—	$	349,064	$	—	$	349,064

The Company’s interest rate swaps are considered Level 2 in the ~~valuation of store closure~~hierarchy and ~~exit costs.~~

~~The determination of fair values of certain tangible and intangible assets for purposes~~are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of the ~~Company’s goodwill impairment evaluation as described above was based upon a step zero assessment. Closed facility reserves are recorded at net present value to~~yield curve on floating interest rates, which is readily available on public markets.

Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and other accrued liabilities and, accrued salaries and benefits approximate fair value ~~which is classified as Level 3 in~~because of the ~~hierarchy. The estimated~~short maturity of those instruments. Based on comparable open market transactions, the fair value of the ~~closed~~long-term debt approximated carrying value as of July 1, 2018 and December 31, 2017.

On March 27, 2018, the Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), as borrower, entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) to amend and restate the Company’s existing senior secured credit facility, ~~reserve is calculated based on~~dated April 17, 2015 (the “Former Credit Facility”). The Amended and Restated Credit Agreement provides for a revolving credit facility with an initial aggregate commitment of $700.0 million, an increase from $450.0 million from the ~~present value of~~Former Credit Facility, which may be increased from time to time pursuant to an expansion feature set forth in the ~~remaining lease payments~~Amended and ~~other charges using a weighted average cost of capital, reduced by estimated sublease rentals. The weighted average cost of capital was estimated using~~Restated Credit Agreement.

~~information from comparable companies~~Concurrently with the closing of the Amended and ~~management’s judgment related~~Restated Credit Agreement, all commitments under the Former Credit Facility were terminated, resulting in a $0.3 million loss on early extinguishment of debt, recorded in interest expense during the first quarter of fiscal year 2018. The loss was due to the ~~risk~~write-off of a proportional amount of deferred financing costs associated with the ~~operations of the stores.~~

Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued salaries and benefits and other accrued liabilities approximate fair value because of the short maturity of those instruments. Based on open market transactions comparable to theFormer Credit Facility ~~(as defined~~as the result of certain banks exiting the Amended and Restated Credit Agreement in ~~Note 4, “Long-Term Debt”),~~connection with the ~~fair value of~~refinancing. No amounts were outstanding under the ~~long-term debt approximates carrying value~~Former Credit Facility as of July ~~2, 2017 and January~~ 1, ~~2017. The Company’s estimates of the fair value of long-term debt were classified as Level 2 in the fair value hierarchy.~~

On April 17, 2015, the Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), as borrower, entered into a credit agreement that provides for a revolving credit facility with an initial aggregate commitment of $450.0 million (the “Credit Facility”), which may be increased from time to time pursuant to an expansion set forth in the Credit Facility. The Credit Facility replaced the Company’s existing senior secured credit facility, dated April 23, 2013.2018.

The Company capitalized debt issuance costs of ~~$2.3~~$2.1 million related to the refinancing which combined with the remaining $0.7 million debt issuance costs for the Former Credit Facility, ~~which~~ are being amortized on a straight-line basis to interest expense over the five-year term of the Amended and Restated Credit ~~Facility.~~Agreement.

The Amended and Restated Credit ~~Facility~~Agreement also provides for a letter of credit subfacility and a $15.0 million swingline facility. Letters of credit issued under the Amended and Restated Credit ~~Facility~~Agreement reduce ~~the~~its borrowing ~~capacity of the Credit Facility.~~capacity. Letters of credit totaling ~~$24.8~~$27.0 million have been issued as of July ~~2, 2017,~~1, 2018, primarily to support the Company’s insurance programs.

Obligations under the Amended and Restated Credit ~~Facility~~Agreement are guaranteed by the Company and all of its current and future wholly-owned material domestic subsidiaries (other than the borrower), and are secured by first-priority security interests in substantially all of the assets of the Company and its subsidiary guarantors, including, without limitation, a pledge by the Company of its equity interest in Intermediate Holdings.

Loans under the Amended and Restated Credit ~~Facility~~Agreement initially bear interest at ~~the Company’s option, either at adjusted~~ LIBOR plus 1.50% ~~per annum, or a base rate plus 0.25%~~ per annum. The interest rate margins are subject to adjustment pursuant to a pricing grid based on the Company’s total ~~gross~~net leverage ratio, as ~~defined~~set forth in the Amended and Restated Credit ~~Facility.~~Agreement. Under the terms of the Amended and Restated Credit ~~Facility,~~Agreement, the Company is obligated to pay a commitment fee on the available unused amount of the commitments between 0.15% to 0.30% per annum, also pursuant to a pricing grid based on the Company’s total net leverage ratio.

The interest rate on approximately 55% of outstanding debt under the Amended and Restated Credit ~~Facility commitments equal~~Agreement is fixed, due to ~~0.20% per annum.~~certain floating to fixed swaps implemented in December 2017 (see Note 11, “Derivative Financial Instruments”).

Outstanding letters of credit under the Amended and Restated Credit ~~Facility~~Agreement are subject to a participation fee of 1.50% per annum and an issuance fee of 0.125% per annum.

The Amended and Restated Credit ~~Facility~~Agreement is scheduled to mature, and the commitments thereunder will terminate on ~~April 17, 2020,~~March 27, 2023, subject to extensions as set forth ~~in the Credit Facility.~~therein.

The Company may ~~repay~~prepay loans and permanently reduce commitments under the Amended and Restated Credit ~~Facility~~Agreement at any time in agreed-upon minimum principal amounts, without premium or penalty (except LIBOR breakage costs, if applicable).

During fiscal year ~~2016,~~2017, the Company borrowed ~~$105.0~~$153.0 million under the Former Credit Facility to be used in connection with the Company’s $250.0 million share repurchase program (see Note 9, “Stockholders’ Equity”) and made a total of ~~$10.0~~$60.0 million of principal payments; resulting in total outstanding debt under the Former Credit Facility of ~~$255.0~~$348.0 million at ~~January 1,~~December 31, 2017. ~~During the thirteen weeks ended July 2, 2017, the Company borrowed $25.0 million and did not make any principal payments.~~ During the twenty-six weeks ended July ~~2, 2017,~~1, 2018, the Company borrowed ~~$85.0~~an additional $140.0 million primarily for share repurchases and made a total of $30.0 million of principal payments; resulting in total outstanding debt under the Amended and Restated Credit ~~Facility~~Agreement of ~~$310.0~~$458.0 million as of July ~~2, 2017. The Company has used borrowings under the Credit Facility to assist with its share repurchase programs (see Note 9).~~1, 2018.

The Amended and Restated Credit ~~Facility~~Agreement contains financial, affirmative and negative covenants. The negative covenants include, among other things, limitations on the Company’s ability to:

Each of these covenants is subject to customary and other agreed-upon exceptions.

In addition, the Amended and Restated Credit ~~Facility~~Agreement requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed ~~3.00~~3.25 to 1.00 and minimum interest coverage ratio not to be less than 1.75 to 1.00. Each of these covenants is tested on the last day of each fiscal ~~quarter.~~quarter, starting with the fiscal quarter ended July 1, 2018.

The Company was in compliance with all applicable covenants under the Amended and Restated Credit ~~Facility~~Agreement as of July ~~2, 2017.~~1, 2018.

On April 17, 2015, Intermediate Holdings, as borrower, entered into the Former Credit Facility that provided for a revolving credit facility with an initial aggregate commitment of $450.0 million, subject to an expansion feature set forth therein. The Former Credit Facility also provided for a letter of credit subfacility and a $15.0 million swingline facility.

The Former Credit Facility was scheduled to mature, and the commitments thereunder were scheduled to terminate, on April 17, 2020.

Loans under the Former Credit Facility bore interest, at the Company’s option, either at adjusted LIBOR plus 1.50% per annum, or a base rate plus 0.50% per annum. The interest rate margins were subject to adjustment pursuant to a pricing grid based on the Company’s total gross leverage ratio, as defined in the Former Credit Facility. Under the terms of the Former Credit Facility, the Company was obligated to pay a commitment fee on the available unused amount of the commitments equal to 0.20% per annum.

The following is a summary of closed store reserve activity during the twenty-six weeks ended July ~~2, 2017~~1, 2018 and fiscal year ~~2016:~~2017:

~~The Closed Store Reserve is included in Other accrued liabilities and Other long-term liabilities in the consolidated balance sheets.~~ Usage relates to lease payments made during the ~~period~~periods for closed stores. ~~Adjustments are recorded in Direct store expenses in the consolidated statements of operations.~~

On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, which changed various corporate income tax provisions within the existing Internal Revenue Code. The most significant changes that impacted the Company were the reduction in the corporate federal income tax rate from 35% to 21% and 100% bonus depreciation for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.

Under the guidance set forth in the SEC's Staff Accounting Bulletin No. 118 (“SAB 118”), the Company may record provisional amounts for the impact of the Tax Act. In 2017, the Company had substantially completed the measurement and made a provisional and reasonable estimate of the effects of the Tax Act on its existing deferred tax balances. The final impact of the Tax Act may differ due to changes in interpretations and assumptions the Company has made and guidance that may be issued. In accordance with SAB 118, future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and finalized. As of July 1, 2018, the Company has not made any changes to the provisional and estimated amounts.

The Company’s effective tax rate decreased to 24.5% for the thirteen weeks ended July 1, 2018 from 30.0% for the thirteen weeks ended July 2, 2017 ~~and July 3, 2016 was 30.0% and 37.9%, respectively. The decrease~~primarily due to the enactment of the Tax Act as disclosed above offset by a lower amount of excess tax benefits related to the exercise of stock options recognized in the income tax provision.

The Company’s effective tax rate isdecreased to 16.1% for the twenty-six weeks ended July 1, 2018 from 31.0% for the twenty-six weeks ended July 2, 2017 primarily ~~related~~due to the enactment of the Tax Act as disclosed above, and the recognition of excess tax benefits related to the exercise ~~or vesting~~ of ~~equity-based awards~~stock options in the income tax provision. ~~See ASU 2016-09, Compensation – “Stock Compensation (Topic 718)” under Recently Adopted Accounting Pronouncements (Note 2).~~

The Company’s effective tax rate for the twenty-six weeks ended July 2, 2017 and July 3, 2016 was 31.0% and 37.9%, respectively. The decrease in the effective tax rate is primarily related to recognition of excess tax benefits related to the exercise or vesting of equity-based awards in the income tax provision. See ASU 2016-09, Compensation – “Stock Compensation (Topic 718)” under Recently Adopted Accounting Pronouncements (Note 2).

Excess tax benefits associated with share-based payment awards are recognized as income tax expense or benefit in the ~~income statement.~~statements of income. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur.

The income tax benefits resulting from ~~equity-based~~excess tax benefits of share-based payment awards were $0.2 million and $4.4 million for the thirteen weeks ended July 1, 2018 and July 2, ~~2017.~~2017, respectively. The income tax benefits resulting from ~~the equity-based awards for the thirteen weeks ended July 3, 2016 were $0.1 million and recorded in Additional Paid-in Capital.~~

~~The income~~excess tax benefits ~~resulting from equity-based~~of share-based payment awards were $11.4 million and $8.2 million for the twenty-six weeks ended July 1, 2018 and July 2, ~~2017. The income tax benefits resulting from equity-based awards for the twenty-six weeks ended July 3, 2016 were $3.7 million and recorded in Additional Paid-in Capital.~~2017, respectively.

A member of the Company’s board of directors is an investor in a company that is a supplier of coffee to the Company for resale. During the thirteen weeks ended July ~~2, 2017~~1, 2018 and July ~~3, 2016,~~2, 2017, purchases from this supplier were ~~$2.7~~$0.3 million and $2.7 million, respectively. During the twenty-six weeks ended July ~~2, 2017~~1, 2018 and July ~~3, 2016,~~2, 2017, purchases from this supplier were ~~$5.4~~$2.6 million and ~~$5.2~~$5.4 million, respectively. As of July 2,1, 2018, the Company had no accounts payable due to this vendor and as of December 31, 2017, ~~and July 3, 2016,~~ the Company had recorded accounts payable ~~due to this vendor~~ of ~~$0.8 million and $0.9 million, respectively.~~$0.7 million.

The Company’s former Executive Chairman of the Board, who retired from this position in February 2017, has been the chief executive officer, an equity investor, and lender to a technology supplier to the Company. During the thirteen weeks ended July ~~2, 2017~~1, 2018 and July ~~3, 2016,~~2, 2017, purchases from this supplier and its predecessors were ~~$2.1~~$1.4 million and ~~$2.5~~$2.1 million, respectively. During the twenty-six weeks ended July 1, 2018 and July 2, 2017, ~~and July 3, 2016,~~ purchases

from this supplier and its predecessors were ~~$3.7~~$2.6 million and ~~$3.8~~$3.7 million, respectively. As of July 2,1, 2018 and December 31, 2017, ~~and July 3, 2016,~~ the Company had recorded accounts payable due to the supplier of ~~$0.3~~$0.1 million and ~~$0.7~~$0.1 million, respectively.

The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters that are believed to best serve the interests of the Company’s stakeholders. The Company’s primary contingencies are associated with self-insurance ~~obligations.~~obligations and litigation matters. Self-insurance liabilities require significant judgment and actual claim settlements and associated expenses may differ from the Company’s current provisions for loss.

On March 4, 2016, a complaint was filed in the Superior Court for the State of Arizona against the Company and certain of its directors and officers on behalf of a purported class of purchasers of shares of the Company’s common stock in the Company’s underwritten secondary public offering which closed on March 10, 2015 (the “March 2015 Offering”). The complaint purports to state claims under Sections 11, 12 and 15 of the Securities Act of 1933, as amended, based on an alleged failure by the Company to disclose adequate information about produce price deflation in the March 2015 Offering documents. The complaint seeks damages on behalf of the purported class in an unspecified amount, rescission, and an award of reasonable costs and attorneys’ fees. ~~On March 24, 2016, the Company removed the action~~After removal to federal court, the plaintiff sought remand, which the court granted in ~~the District of Arizona. On~~ March ~~24, 2017, the federal court in the District of Arizona remanded the case to state court.~~ On April 21, 2017, the Company filed a Notice of Appeal of the federal court decision to remand the case. On May 16, 2017, the Plaintiff filed a Motion to Dismiss Appeal in the Ninth Circuit Court of Appeals, which is fully briefed and under consideration.2017. On May 25, 2017, the Company filed a Motion to Dismiss in the Superior Court for the State of Arizona, which ~~is also fully briefed.~~ the court granted in part and denied in part by order entered August 30, 2017. The Company ~~intends~~answered the complaint on September 28, 2017. The parties are engaged in discovery at this time. The Company will continue to defend this case vigorously, but it is not possible at this time to reasonably estimate the outcome of, or any potential liability from, the case.

On November 4, 2015, the Company’s board of directors authorized a $150 million common stock share repurchase program, which was completed during the second quarter of 2016. On September 6, 2016, the Company’s board of directors authorized a $250 million common stock share repurchase program, which was completed during the first quarter of 2017. On February 20, 2017, the Company’s board of directors authorized a new $250 million common stock share repurchase program. The following table outlines the common stock share repurchase programs authorized by the ~~Board,~~Company’s board of directors from time to time, and the related repurchase activity and available authorization as of July ~~2, 2017.~~1, 2018.

The shares under the Company’s repurchase programs may be purchased on a discretionary basis from time to time prior to the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. The board’s authorization of the share repurchase programs does not obligate the Company to acquire any particular amount of common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time. The Company has used borrowings under its Former Credit Facility and Amended and Restated Credit Agreement to assist with the repurchase programs ~~authorized on September 6, 2016 and February 20, 2017~~ (see Note 4)4, “Long-Term Debt”).

Share repurchase activity under the Company’s repurchase programs for the periods indicated was as ~~follows:~~follows (total cost in thousands):

Shares purchased under the Company’s repurchase programs were subsequently retired.

The computation of net income per share is based on the number of weighted average shares outstanding during the period. The computation of diluted net income per share includes the dilutive effect of share equivalents consisting of incremental shares deemed outstanding from the assumed exercise of options, assumed vesting of restricted stock units (“RSUs”), assumed vesting of performance stock awards (“PSAs”), and assumed vesting of restricted stock awards (“RSAs”).

A reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is as follows (in thousands, except per share amounts):

	Thirteen Weeks Ended				Twenty-six Weeks Ended				Thirteen Weeks Ended				Twenty-six Weeks Ended
	July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016		July 1, 2018		July 2, 2017		July 1, 2018		July 2, 2017
Basic net income per share:
Net income	$	40,968	$	37,209	$	87,255	$	83,416	$	41,709	$	40,968	$	108,333	$	87,255
Weighted average shares outstanding		136,796		149,170		136,933		149,931		129,423		136,796		130,924		136,933
Basic net income per share	$	0.30	$	0.25	$	0.64	$	0.56	$	0.32	$	0.30	$	0.83	$	0.64
Diluted net income per share:
Net income	$	40,968	$	37,209	$	87,255	$	83,416	$	41,709	$	40,968	$	108,333	$	87,255
Weighted average shares outstanding - basic		136,796		149,170		136,933		149,931		129,423		136,796		130,924		136,933
Dilutive effect of equity-based awards:
Assumed exercise of options to purchase shares		2,428		2,289		2,693		2,321		314		2,428		561		2,693
RSUs		102		8		103		44		68		102		179		103
RSAs		112		—		75		—		73		112		145		75
PSAs		55		31		43		26		134		55		140		43
Weighted average shares and equivalent shares outstanding		139,493		151,498		139,847		152,322		130,012		139,493		131,949		139,847
Diluted net income per share	$	0.29	$	0.25	$	0.62	$	0.55	$	0.32	$	0.29	$	0.82	$	0.62

For the thirteen weeks ended July 1, 2018, the computation of diluted net income per share does not include 1.1 million options and 0.4 million RSUs as those awards would have been antidilutive. For the thirteen weeks ended July 2, 2017, the computation of diluted net income per share does not include 1.6 million options, 0.1 million RSUs, and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards.

For the ~~thirteen~~twenty-six weeks ended July ~~3, 2016,~~1, 2018, the computation of diluted net income per share does not include ~~1.3~~1.1 million options ~~0.1 million RSUs,~~ and 0.1 million PSAs as those awards would have been antidilutive or were ~~unvested~~ performance ~~awards.~~

awards with performance conditions net yet deemed met. For the twenty-six weeks ended July 2, 2017, the computation of diluted net income per share does not include 1.9 million options and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards. ~~For~~

The Company entered into an interest rate swap agreement in December 2017 to manage its cash flow associated with variable interest rates. This forward contract has been designated and qualifies as a cash flow hedge, and its change in fair value is recorded as a component of other comprehensive income and reclassified into earnings in the ~~twenty-six weeks ended~~same period or periods in which the forecasted transaction occurs. The forward contract consists of five cash flow hedges. To qualify as a hedge, the Company needs to formally document, designate and assess the effectiveness of the transactions that receive hedge accounting.

The notional dollar amount of the five outstanding swaps was $250.0 million at July ~~3, 2016,~~1, 2018 and December 31, 2017, respectively, under which the ~~computation~~Company pays a fixed rate and received a variable rate of ~~diluted net income per share does not include 1.3 million options, 0.1 million RSUs, 0.2 million RSAs,~~interest (cash flow swap). The cash flow swaps hedge the change in interest rates on debt related to fluctuations in interest rates and ~~0.1 million PSAs as those awards would~~each have a length of one year and mature annually from 2018 to 2022. These interest rate swaps have been ~~antidilutive or were unvested performance awards.~~designated and qualify as cash flow hedges and have met the requirements to assume zero ineffectiveness. The Company reviews the effectiveness of its hedging instruments on a quarterly basis.

The counterparties to these derivative financial instruments are major financial institutions. The Company evaluates the credit ratings of the financial institutions and believes that credit risk is at an acceptable level.

The gain or loss on these derivative instruments is recognized in other comprehensive income, net of tax, with the portion related to current period interest payments reclassified to interest expense on the Consolidated Statements of Income.

During the twenty-six weeks ended July 2, 2017, the Company did not record accumulated other comprehensive income. The following table presents the changes in accumulated other comprehensive income for the twenty-six weeks ended July 1, 2018.

Amounts reclassified from accumulated other comprehensive income (loss) are included within interest expense on the Consolidated Statements of Income.

The Company has one reportable and one operating segment, healthy grocery stores.

In accordance with ASC 606, the following table represents a disaggregation of revenue for the thirteen and twenty-six weeks ended July 1, 2018 and July 2, 2017.

The Company categorizes the varieties of products it sells as perishable and non-perishable. Perishable product categories include produce, meat, seafood, deli, bakery, floral and dairy and dairy alternatives. Non-perishable product categories include grocery, vitamins and supplements, bulk items, frozen foods, beer and wine, and natural health and body care.

The Company’s board of directors adopted, and its equity holders approved, the Sprouts Farmers Market, Inc. 2013 Incentive Plan (the “2013 Incentive Plan”). The 2013 Incentive Plan became effective July 31, 2013 in connection with the Company’s initial public offering and replaced the 2011 Option Plan (as defined below) (except with respect to outstanding options under the 2011 Option Plan). The 2013 Incentive Plan serves as the umbrella plan for the Company’s ~~equity-based~~stock-based and cash-based incentive compensation programs for its directors, officers and other team ~~members.~~members, including RSUs, PSAs, and RSAs. On May 1, 2015, the Company’s stockholders approved the material terms of the performance goals under the 2013 Incentive Plan for purposes of Section 162(m) of the Internal Revenue Code.

The aggregate number of shares of common stock that may be issued to team members and directors under the 2013 Incentive Plan may not exceed 10,089,072. Shares subject to awards granted under the 2013 Incentive Plan which are subsequently forfeited, expire unexercised or are otherwise not issued will not be treated as having been issued for purposes of the share limitation. As of July ~~2, 2017,~~1, 2018, there were ~~3,757,776~~ 3,702,588stock awards outstanding and ~~5,796,037~~5,166,645 shares remaining available for issuance under the 2013 Incentive Plan.

In May 2011, the Company adopted the Sprouts Farmers Markets, LLC Option Plan (the “2011 Option Plan”) to provide team members or directors of the Company with options to acquire shares of the Company. The Company had authorized 12,100,000 shares for issuance under the 2011 Option Plan. Options may no longer be issued under the 2011 Option Plan. As of July ~~2, 2017,~~1, 2018, there were ~~2,430,497~~266,529 options outstanding under the 2011 Option Plan.

During the twenty-six weeks ended July ~~2, 2017,~~1, 2018, the Company granted the following ~~equity-based~~stock-based compensation awards:

The Company uses the Black-Scholes option pricing model to estimate the fair value of options at grant date. Options vest in accordance with the terms set forth in the grant letter and vary depending on if they are time-based or performance-based.

Time-based options granted prior to fiscal year 2016 generally vest ratably over a period of 12 quarters (three years), and time-based options granted in fiscal year 2016 vest annually over a period of three years. No options have been granted subsequent to 2016.

The fair value of RSUs is based on the closing price of the Company’s common stock on the grant date. RSUs generally vest annually over a period of two or three years from the grant date.

PSAs granted in fiscal year 2015 are restricted shares that were subject to the Company achieving certain earnings per share performance targets, as well as additional time-vesting conditions. The fair value of PSAs is based on the closing price of the Company’s common stock on the grant date. ~~During the twenty-six weeks ended July 3, 2016, the~~The performance conditions with respect to 2015 earnings per share targets were deemed to have been met, and all PSAs have vested. During the ~~PSAs will vest 50 percent at each~~twenty-six weeks ended July 1, 2018, 20,595 of the ~~second~~2015 PSAs were vested, and ~~third anniversary of the grant date. During~~during the twenty-six weeks ended July 2, 2017, 21,050 of the 2015 PSAs were vested. ~~No PSAs vested during the twenty-six weeks ended July 3, 2016.~~

PSAs granted in fiscal year 2016 are restricted shares that are subject to the Company achieving certain earnings before interest and taxes (“EBIT”) performance targets on an annual and cumulative basis over a three-year performance period, as well as additional time-vesting conditions. ~~The fair value of these PSAs is based on the closing price of the Company’s common stock on the grant date.~~ The EBIT target ~~resets annually~~ for each of the three years during the performance period is based on a percentage increase over the previous year’s actual EBIT, with each annual performance tranche ~~independent~~measured independently of the previous and next ~~tranche.~~tranche. Cumulative performance is based on the aggregate annual performance ~~targets.~~and

is measured against a cumulative performance target. Payout of the performance shares will either be 0% or range from 50% to 150% of the target number of shares ~~granted.~~granted, depending upon goal achievement. If the performance conditions are met, ~~PSAs~~the applicable number of performance shares is subject to cliff ~~vest~~vesting on the third anniversary of the grant ~~date.~~ date (March 2019). The ~~Company’s board of directors determined that the~~ performance ~~targets for the fiscal year~~conditions with respect to 2016 ~~tranche~~and 2017 EBIT were not ~~met and 30,981 performance shares were not earned.~~met.

PSAs granted in ~~fiscal year~~March 2017 ~~are restricted shares that are~~were subject to the Company achieving certain earnings per share performance targets ~~as well as additional time-vesting conditions.~~during 2017. The ~~fair value of PSAs~~criteria is based on ~~the closing price~~a range of performance targets in which grantees may earn between 10% and 150% of the ~~Company’s common stock on~~base number of awards granted. During the ~~grant date. If~~thirteen weeks ended April 1, 2018, the performance conditions ~~are~~with respect to 2017 earnings per share were deemed to have been met, and the PSAs will vest ~~50 percent at each~~50% on the second anniversary of the ~~second~~grant date (2019) and 50% on the third anniversary of the grant ~~date.~~date (2020).

PSAs granted in March 2018 are subject to the Company achieving certain EBIT performance targets for the 2020 fiscal year. The criteria is based on a range of performance targets in which grantees may earn 0% to 200% of the base number of awards granted. If performance conditions are met, the applicable number of performance shares will vest on the third anniversary of the grant date (2021).

The fair value of RSAs is based on the closing price of the Company’s common stock on the grant date. ~~RSAs granted prior to January 1, 2017 will vest either ratably over a seven quarter period, beginning on December 31, 2016 or cliff vest on June 30, 2018. RSAs granted in fiscal year 2017 will~~Outstanding RSA grants vest annually over ~~a period of~~ three ~~years from the grant date.~~

In connection with the appointments of the Company’s Chief Executive Officer and President & Chief Operating Officer in August 2015, the Compensation Committee of the Company’s Board of Directors approved a grant of stock options to purchase 1,200,000 and 500,000 shares of the Company’s common stock at an exercise price of $20.98 per share to these officers, respectively (the “August 2015 Options”) pursuant to the 2013 Incentive Plan. The August 2015 Options, taken together with other options granted under the 2013 Incentive Plan to such officers during 2015, exceeded the limit of 500,000 shares which may be granted pursuant to stock options and stock appreciation rights per calendar year to each participant under the 2013 Incentive Plan by 733,439 shares in the case of the Company’s Chief Executive Officer and 33,439 shares in the case of the Company’s President & Chief Operating Officer (the “Excess Options”). Accordingly, the Company has determined, and these officers have acknowledged, that the grants of the Excess Options were null and void.

In order to satisfy the original intent with respect to these individuals’ compensation, on May 23, 2016, the Compensation Committee granted to the Company’s Chief Executive Officer and President & Chief Operating Officer under the 2013 Incentive Plan options to purchase 386,496 and 33,439 shares of the Company’s common stock at an exercise price of $24.48 per share, respectively, and 215,251 and 2,601 RSAs, respectively. The Company recognized compensation expense of $1.0 million during the thirteen week period and $2.0 million during the twenty-six week period ended July 2, 2017 related to the options and RSAs granted. The Company recognized $0.4 million in each of the thirteen and twenty-six week periods ended July 3, 2016 related to the options and RSAs granted.

Equity-based compensation expense was reflected in the consolidated statements of ~~operations~~income as follows:

	Thirteen Weeks Ended						Twenty-six Weeks Ended						Thirteen Weeks Ended						Twenty-six Weeks Ended
	July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016			July 1, 2018			July 2, 2017			July 1, 2018			July 2, 2017
Cost of sales, buying and occupancy	$	266		$	264		$	512		$	482		$	307		$	266		$	576		$	512
Direct store expenses		387			359			748			676			396			387			724			748
Selling, general and administrative expenses		3,140			3,045			4,979			5,167			3,959			3,140			7,330			4,979
Equity-based compensation expense before income taxes		3,793			3,668			6,239			6,325			4,662			3,793			8,630			6,239
Income tax benefit		(1,419	)		(1,394	)		(2,334	)		(2,403	)		(1,198	)		(1,419	)		(2,218	)		(2,334	)
Net equity-based compensation expense	$	2,374		$	2,274		$	3,905		$	3,922		$	3,464		$	2,374		$	6,412		$	3,905

The following equity-based awards were outstanding as of July ~~2, 2017~~1, 2018 and ~~January 1,~~December 31, 2017:

~~As of July 2, 2017, total unrecognized compensation expense related to outstanding equity-based awards was as follows:~~

~~As of July 2, 2017, the total remaining weighted average recognition period related to outstanding equity-based awards was as follows:~~

~~During the twenty-six weeks ended July 2, 2017 and July 3, 2016, the Company received $5.9 million and $2.1 million, respectively, in cash proceeds from the exercise of options.~~

~~12.~~As of July 1, 2018, total unrecognized compensation expense and remaining weighted average recognition period related to outstanding equity-based awards was as follows:

During the twenty-six weeks ended July 1, 2018 and July 2, 2017, the Company received $6.7 million and $5.9 million, respectively, in cash proceeds from the exercise of options.

Subsequent to July ~~2, 2017~~1, 2018, and through August ~~2, 2017,~~1, 2018, the Company repurchased an additional ~~0.7~~0.6 million shares of common stock for ~~$15.5~~$13.5 million. The Company borrowed an additional $15.0 million under its Credit Facility that was utilized in these repurchases, and made a $10.0 million principal payment, resulting in total outstanding debt under the Credit Facility of $315.0 million as of August 2, 2017.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and related notes that are 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 for the 2017 fiscal year, February ~~23, 2017~~22, 2018 with the Securities and Exchange Commission. All dollar amounts included below are in thousands, unless otherwise noted.

Sprouts Farmers Market operates as a healthy grocery store that ~~offers~~specializes in fresh, natural and organic products at prices that appeal to everyday grocery shoppers. Based on the belief that healthy food should be affordable, Sprouts’ welcoming environment and knowledgeable team members continue to drive its growth. Sprouts offers a complete shopping experience that includes an array of fresh produce ~~bulk foods,~~in the heart of the store, a deli with prepared entrees and side dishes, The Butcher Shop, The Fish Market, an expansive vitamins and supplements ~~packaged groceries, meat~~department and ~~seafood, deli, baked goods, dairy products, frozen foods, body care and natural household items catering to consumers’ growing interest in health and wellness.~~more. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. With ~~274~~301 stores in 1517 states as of July ~~2, 2017,~~1, 2018, we are one of the largest specialty retailers of fresh, natural and organic food in the United States. As of August 1, ~~2017,~~2018, we have grown to ~~278~~305 stores in 1517 states.

At Sprouts, we believe healthy living is a journey and every meal is a choice. 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 featuring a broad selection of innovative healthy products, and knowledgeable team members who we believe provide best-in-class customer engagement and product education.

In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding in 2002 through July ~~2, 2017,~~1, 2018, we continued to open new stores while successfully rebranding 43 Henry’s Farmers Market and 39 Sunflower Farmers Market stores added in 2011 and 2012, respectively, through acquisitions to the Sprouts ~~banner (referred to as the “Transactions”).~~banner. These three businesses all trace their lineage back to Henry’s Farmers Market and were built with similar store formats and operations including a strong emphasis on value, produce and service in smaller, convenient locations. The consistency of these formats and operations was an important factor that allowed us to rapidly and successfully rebrand and integrate each of these businesses under the Sprouts banner and on a common platform.

We are pursuing a number of strategies designed to continue our growth, including expansion of our store base, continuing positive comparable store sales 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. 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 open 32approximately 30 new stores in ~~2017,~~2018, of which 2520 have opened through August 1, ~~2017,~~2018, and approximately 30 new stores per year for the near term.

We also believe we can continue to deliver positive 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 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.

Results of Operations for Thirteen Weeks Ended July ~~2, 2017~~1, 2018 and July ~~3, 2016~~2, 2017

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						Thirteen weeks ended
	July 2, 2017			July 3, 2016			July 1, 2018			July 2, 2017
Unaudited Consolidated Statement of Operations Data:
Unaudited Quarterly Consolidated Statement of Income Data:
Net sales	$	1,183,975		$	1,031,643		$	1,321,693		$	1,183,975
Cost of sales, buying and occupancy		841,989			725,841			941,281			841,989
Gross profit		341,986			305,802			380,412			341,986
Direct store expenses		236,185			207,205			272,973			236,087
Selling, general and administrative expenses		38,189			30,922			43,437			38,189
Store pre-opening costs		4,141			4,213			2,275			4,141
Store closure and other costs								26			98
Income from operations		63,471			63,462			61,701			63,471
Interest expense		(5,100	)		(3,661	)		(6,544	)		(5,100	)
Other income		131			90			117			131
Income before income taxes		58,502			59,891			55,274			58,502
Income tax provision		(17,534	)		(22,682	)		(13,565	)		(17,534	)
Net income	$	40,968		$	37,209		$	41,709		$	40,968

Weighted average shares outstanding		136,796			149,170			129,423			136,796
Dilutive effect of equity-based awards		2,697			2,328
Diluted effect of equity-based awards								589			2,697
Weighted average shares and equivalent shares outstanding		139,493			151,498			130,012			139,493
Diluted net income per share	$	0.29		$	0.25		$	0.32		$	0.29

Comparison of Thirteen Weeks Ended July ~~2, 2017~~1, 2018 to Thirteen Weeks Ended

Net sales during the thirteen weeks ended July ~~2, 2017~~1, 2018 totaled ~~$1.2~~$1.3 billion, increasing ~~15%~~12% over the same period of the prior fiscal year. Sales growth was ~~primarily~~ driven by ~~solid~~strong performance in new stores ~~opened.~~opened and a 2.0% increase in comparable store sales. Comparable stores contributed approximately ~~86%~~88% of total sales for the thirteen weeks ended July ~~2, 2017~~1, 2018 and approximately ~~88%~~86% for the same period of the prior fiscal year.

Gross profit increased during the thirteen weeks ended July ~~2, 2017~~1, 2018 compared to the thirteen weeks ended July ~~3, 2016~~2, 2017 by ~~$36.2~~$38.4 million, of which ~~$44.7~~$39.8 million was as a result of increased sales volume, partially offset by ~~$8.5~~$1.4 million related to decreased margin rate. ~~This~~The deleverage is primarily ~~reflects the impact of modest cost inflation coupled with the ongoing competitive environment, and higher occupancy costs.~~driven by slightly lower merchandise margins.

Direct store expenses for the thirteen weeks ended July ~~2, 2017~~1, 2018 increased ~~$29.0~~$36.9 million, including ~~$26.3~~$24.6 million related to stores opened after July ~~3, 2016,~~2, 2017, and ~~$2.7~~$12.3 million related to stores ~~operated~~operating prior to the same period in ~~2016.~~2017. Direct store expenses, as a percentage of net sales, ~~decreased 20~~increased 80 basis points. This deleverage is primarily ~~reflects our strategic focus on labor productivity improvement~~driven by planned wage investments funded by the savings from the legislation commonly referred to as the Tax Cuts and ~~operating efficiencies, partially offset by~~Jobs Act (the “Tax Act”) as well as increased healthcare costs and higher ~~benefit costs.~~depreciation expense associated with store growth.

The increase in selling, general and administrative expenses ~~included~~primarily relate to a ~~$2.6~~$3.1 million increase in compensation ~~expenses,~~expense, a ~~$1.7~~$1.3 million increase in advertising ~~expenses, a $1.0~~and $0.8 million ~~increase in regional expenses, and $2.0 million of increases in other corporate expenses, commensurate with store growth.~~ to support our strategic technology investments.

	Thirteen weeks ended												Thirteen weeks ended
	July 2, 2017			July 3, 2016			Change			% Change			July 1, 2018			July 2, 2017			Change			% Change
Attributable to 2016 store openings		—			4,213			(4,213	)
Attributable to 2017 store openings		2,786			—			2,786						—			4,141			(4,141	)
Attributable to planned 2017 store openings		1,355			—			1,355
Attributable to 2018 store openings														1,517			—			1,517
Attributable to planned 2018 store openings														758			—			758
Total store pre-opening costs	$	4,141		$	4,213		$	(72	)		(2	)%	$	2,275		$	4,141		$	(1,866	)		(45	)%
Percentage of net sales		0.3	%		0.4	%		(0.1	)%					0.2	%		0.3	%		(0.1	)%

Store pre-opening costs in the thirteen weeks ended July 1, 2018 included $1.5 million related to opening 7 stores during the thirteen weeks ended July 1, 2018 and $0.8 million associated with stores expected to open subsequent to July 1, 2018. Store pre-opening costs in the thirteen weeks ended July 2, 2017 included $2.8 million related to opening 13 stores during the thirteen weeks ended July 2, 2017 and $1.3 million associated with stores expected to open subsequent to July 2, 2017. Store pre-opening costs in the thirteen weeks ended July 3, 2016 included $2.5 million related to opening 12 stores during that period and ~~$1.7~~$1.3 million associated with stores opened subsequent to quarter end.

Store closure and other costs were insignificant in the thirteen weeks ended July 1, 2018 and July 2, 2017.

The increase in interest expense is due to the higher principal balance on ~~the Credit Facility for borrowing to support our share repurchase program,~~long-term debt combined with ~~the~~ slightly higher interest ~~rate on our Credit Facility~~rates for the thirteen weeks ended July ~~2, 2017.~~1, 2018.

Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:

Income tax provision decreased to $13.6 million for the thirteen weeks ended July 1, 2018 from $17.5 million for the thirteen weeks ended July 2, 2017 from $22.7 million for the thirteen weeks ended July 3, 2016, primarily related to the recognition of excess tax benefits related to the exercise or vesting of equity-based awards in the income tax provision and a decrease in income before taxes.2017. Our effective income tax rate decreased to 24.5% in the thirteen weeks ended July 1, 2018 from 30.0% in the thirteen weeks ended July 2, 2017 ~~from 37.9% in the thirteen weeks ended July 3, 2016~~ primarily related to ~~recognition~~the effects of the Tax Act partially offset in part by a lower excess tax benefits related to the exercise ~~or vesting~~ of ~~equity-based awards in the income tax provision. See ASU 2016-09, Compensation – “Stock Compensation (Topic 718)” under Recently Adopted Accounting Pronouncements (Note 2).~~stock options.

Net income as a percentage of net sales decreased, ~~slightly~~primarily driven by higher compensation expenses due to ~~lower gross margin and higher selling, general and administrative expenses partially offset~~planned wage investments funded by ~~a lower effective tax rate.~~the savings from the Tax Act.

The increase in diluted earnings per share of ~~$0.04~~$0.03 was driven by ~~the increase in~~higher net income ~~as well as~~and fewer diluted shares outstanding compared to the prior year, due primarily to the share repurchase program.

Results of Operations for Twenty-six Weeks Ended July ~~2, 2017~~1, 2018 and July ~~3, 2016~~2, 2017

	Twenty-six Weeks Ended						Twenty-six weeks ended
	July 2, 2017			July 3, 2016			July 1, 2018			July 2, 2017
Unaudited Consolidated Statement of Operations Data:
Unaudited Quarterly Consolidated Statement of Income Data:
Net sales	$	2,314,620		$	2,024,884		$	2,608,889		$	2,314,620
Cost of sales, buying and occupancy		1,635,348			1,412,569			1,841,425			1,635,348
Gross profit		679,272			612,315			767,464			679,272
Direct store expenses		465,334			401,020			535,568			465,145
Selling, general and administrative expenses		70,357			61,818			84,884			70,357
Store pre-opening costs		7,599			8,179			5,595			7,599
Store closure and other costs								36			189
Income from operations		135,982			141,298			141,381			135,982
Interest expense		(9,838	)		(7,262	)		(12,609	)		(9,838	)
Other income		226			191			325			226
Income before income taxes		126,370			134,227			129,097			126,370
Income tax provision		(39,115	)		(50,811	)		(20,764	)		(39,115	)
Net income	$	87,255		$	83,416		$	108,333		$	87,255

Weighted average shares outstanding		136,933			149,931			130,924			136,933
Dilutive effect of equity-based awards		2,914			2,391
Diluted effect of equity-based awards								1,025			2,914
Weighted average shares and equivalent shares outstanding		139,847			152,322			131,949			139,847
Diluted net income per share	$	0.62		$	0.55		$	0.82		$	0.62

Comparison of Twenty-six Weeks Ended July ~~2, 2017~~1, 2018 to Twenty-six Weeks Ended

Net sales during the twenty-six weeks ended July ~~2, 2017~~1, 2018 totaled ~~$2.3~~$2.6 billion, increasing ~~14%~~13% over the same period of the prior fiscal year. Sales growth was primarily driven by solid performance in new stores opened. Comparable stores contributed approximately ~~86%~~88% of ~~total~~net sales for the twenty-six weeks ended July ~~2, 2017~~1, 2018 and approximately ~~88%~~86% for the same period of the prior fiscal year.

Gross profit increased during the twenty-six weeks ended July ~~2, 2017~~1, 2018 compared to the twenty-six weeks ended July ~~3, 2016~~2, 2017 by ~~$67.0~~$88.2 million, ~~of which $86.7 million was~~primarily as a result of increased sales ~~volume, partially offset by $19.7 million related to decreased~~volume. Gross margin ~~rate. This primarily reflects~~was relatively consistent with the ~~ongoing competitive environment, as well as higher occupancy costs.~~prior year.

Direct store expenses for the twenty-six weeks ended July ~~2, 2017~~1, 2018 increased ~~$64.3 million, including $41.4 million related to stores opened after July 3, 2016, and $22.9 million related to stores operated prior to the same period in 2016.~~$70.4 million. Direct store expenses, as a percentage of net sales, increased 3040 basis points. This deleverage is primarily ~~reflects higher payroll and benefit costs, in part due to deleverage of fixed costs~~driven by planned wage investments funded by the savings from the Tax Act, as well as increased depreciation expense associated with ~~lower comparable~~new store ~~sales growth, partially offset by other operating efficiencies.~~and strategic initiatives.

The increase in selling, general and administrative expenses ~~included~~primarily reflects a ~~$2.6~~$7.8 million increase in compensation expense, ~~a $2.0~~$3.0 million increase in advertising, $2.1 million to support ~~growth, a $2.0 million increase in regional expense~~strategic technology investments and ~~$1.9 million of~~other less significant increases in other corporate expenses, commensurate with ~~store growth.~~sales growth and improved company performance.

	Twenty-six weeks ended												Twenty-six weeks ended
	July 2, 2017			July 3, 2016			Change			% Change			July 1, 2018			July 2, 2017			Change			% Change
Attributable to 2016 store openings		—			8,179			(8,179	)
Attributable to 2017 store openings		6,178			—			6,178						—			7,599			(7,599	)
Attributable to planned 2017 store openings		1,421			—			1,421
Attributable to 2018 store openings														4,329			—			4,329
Attributable to planned 2018 store openings														1,266			—			1,266
Total store pre-opening costs	$	7,599		$	8,179		$	(580	)		(7	)%	$	5,595		$	7,599		$	(2,004	)		(26	)%
Percentage of net sales		0.3	%		0.4	%		(0.1	)%					0.2	%		0.3	%		(0.1	)%

Store pre-opening costs in the twenty-six weeks ended July 1, 2018 included $4.3 million related to opening 16 stores during the twenty-six weeks ended July 1, 2018 and $1.3 million associated with stores expected to open subsequent to July 1, 2018. Store pre-opening costs in the twenty-six weeks ended July 2, 2017 included $6.2 million related to opening 21 stores during the twenty-six weeks ended July 2, 2017 and $1.4 million associated with stores expected to open subsequent to July 2, 2017. Store pre-opening costs in the twenty-six weeks ended July 3, 2016 included $5.7 million related to opening 23 stores during that period and ~~$2.5~~$1.4 million associated with stores opened subsequent to quarter end.

Store closure and other costs were insignificant in the twenty-six weeks ended July 1, 2018 and July 2, 2017.

	Twenty-six weeks ended									Twenty-six weeks ended
	July 2, 2017		July 3, 2016		Change		% Change			July 1, 2018		July 2, 2017		Change			% Change
Long-term debt										$	6,183	$	3,614	$	2,569			71	%
Capital and financing leases	$	5,680	$	5,339	$	341		6	%		5,725		5,680		45			1	%
Long-term debt		3,614		1,461		2,153		147	%
Deferred financing costs / Original issuance discount		231		231		—		0	%
Deferred financing costs											517		231		286			124	%
Other		313		231		82		35	%		184		313		(129	)		(41	)%
Total Interest Expense	$	9,838	$	7,262	$	2,576		35	%	$	12,609	$	9,838	$	2,771			28	%

The increase in interest expense is due to the higher principal balance ~~on the Credit Facility for borrowing to support our share repurchase program~~of long-term debt combined with ~~the~~ slightly higher interest ~~rate~~rates on our Former Credit Facility for the ~~thirteen~~twenty-six weeks ended July ~~2, 2017.~~1, 2018.

Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:

Income tax provision decreased to $20.8 million for the twenty-six weeks ended July 1, 2018 from $39.1 million for the twenty-six weeks ended July 2, 2017 from $50.8 million for the twenty-six weeks ended July 3, 2016, primarily related to the recognition of excess tax benefits related to the exercise or vesting of equity-based awards in the income tax provision and a decrease in income before taxes.2017. Our effective income tax rate decreased to 16.1% in the twenty-six weeks ended July 1, 2018 from 31.0% in the twenty-six weeks ended July 2, 2017 ~~from 37.9% in the twenty-six weeks ended July 3, 2016~~ primarily related to ~~recognition~~the effects of the Tax Act and higher excess tax benefits related to the exercise ~~or vesting~~ of ~~equity-based awards~~options in the income tax provision. ~~See ASU 2016-09, Compensation – “Stock Compensation (Topic 718)” under Recently Adopted Accounting Pronouncements (Note 2).~~

Net income increased $21.1 million as a ~~percentage~~result of ~~net~~increased sales, ~~decreased~~ due to solid new store performance and lower ~~gross margin and higher payroll expenses~~tax rate due to the Tax Act, partially offset by ~~a lower effective tax rate.~~wage investments.

The increase in diluted earnings per share of ~~$0.07~~$0.20 was driven by the increase in net income as well as fewer diluted shares outstanding compared to the prior year, due to the share repurchase program.

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we provide information regarding Return on Invested Capital (referred to as “ROIC”) as additional information about our operating results. ROIC is a non-GAAP financial measure and should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital and provides a meaningful measure of the effectiveness of our capital allocation over time.

We define ROIC as net operating profit after tax (referred to as “NOPAT”), including the effect of capitalized operating leases, divided by average invested capital. 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. It is important to understand the methods and the differences in those methods used by other companies to calculate their ROIC before comparing our ROIC to that of other companies.

Rolling Four Quarters Ended

July 2, 2017

July 3, 2016 (4)

(dollars in thousands)

Net income (1)

$
128,145

$
143,619

Interest expense, net of tax (2)

9,971

9,502

Net operating profit after tax (NOPAT)

$
138,116

$
153,121

Total rent expense, net of tax (2)

75,148

60,010

Estimated depreciation on capitalized operating leases, net of tax (2)

(33,065
)

(26,405
)
Estimated interest on capitalized operating leases, net of tax (2) (3)

42,083

33,605

NOPAT, including effect of capitalized operating leases

$
180,199

$
186,726

Average working capital

25,019

118,062

Average property and equipment

613,244

501,691

Average other assets

578,201

586,795

Average other liabilities

(139,642
)

(113,065
)
Average invested capital

$
1,076,822

$
1,093,483

Average estimated asset base of capitalized operating leases

905,823

764,655

Average invested capital, including the effect of capitalized
operating leases

$
1,982,645

$
1,858,138

ROIC

12.8
%

14.0
%
ROIC, including the effect of capitalized operating leases

9.1
%

10.0
%

	Rolling Four Quarters Ended
	July 1, 2018			July 2, 2017
	(dollars in thousands)
Net income (1)	$	179,517		$	128,145
Income Tax Adjustment for Tax Act (2)		(18,693	)		—
Interest expense, net of tax (3)		18,494			9,971
Net operating profit after tax (NOPAT)	$	179,318		$	138,116

Total rent expense, net of tax (3)		99,246			75,148
Estimated depreciation on capitalized operating leases, net of tax (3)		(43,668	)		(33,065	)
Estimated interest on capitalized operating leases, net of tax (3) (4)		55,578			42,083
NOPAT, including effect of capitalized operating leases	$	234,896		$	180,199

Average working capital		12,820			25,019
Average property and equipment		719,968			613,244
Average other assets		572,645			578,201
Average other liabilities		(180,038	)		(139,642	)
Average invested capital	$	1,125,395		$	1,076,822

Average estimated asset base of capitalized operating leases		1,028,071			905,823
Average invested capital, including the effect of capitalized operating leases	$	2,153,466		$	1,982,645

ROIC		15.9	%		12.8	%
ROIC, including the effect of capitalized operating leases		10.9	%		9.1	%

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 (in thousands):

We have generally financed our operations principally through cash generated from operations and borrowings under our credit facilities. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures primarily for opening new stores, remodels and maintenance, repurchases of our common stock and debt service. We believe that our existing cash and cash equivalents, and cash anticipated to be generated from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months, and we may continue to use borrowings under our Amended and Restated Credit ~~Facility~~Agreement as discussed in Note 4, “Long-Term Debt” to fund our share repurchase programs. Our future capital requirements will depend on many factors, including new store openings, remodel and maintenance capital expenditures at existing stores, store initiatives and other

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.

Cash flows from operating activities ~~increased $32.0~~decreased $8.8 million to $171.1 million for the twenty-six weeks ended July 1, 2018 compared to $179.9 million for the twenty-six weeks ended July 2, ~~2017 compared to $147.9 million for the twenty-six weeks ended July 3, 2016.~~2017. The decrease in cash flows from operating activities ~~came from net income adjusted primarily for non-cash expenses~~is a result of ~~depreciation and amortization, deferred income taxes, equity-based compensation and~~ changes in working ~~capital.~~capital, partially offset by higher net sales and pretax income reflecting higher gross profit due to store and sales growth and higher noncash depreciation and amortization.

Cash flows provided byby/(used in) operating activities from changes in working capital was ~~$21.5~~($22.1) million in the twenty-six weeks ended July 1, 2018, compared to $15.7 million in the twenty-six weeks ended July 2, 2017, compared to $5.3 million in the twenty-six weeks ended July 3, 2016. The increase in cash flows from operating activities for changes in working capital in the twenty-six weeks ended July 2, 2017, compared to the twenty-six weeks ended July 3, 2016, was primarily due to less cash used for accounts payable and inventory. 2017.

Cash flows used in investing activities were $117.7 million, and $84.9 million for the twenty-six weeks ended July 2, 2017 and the twenty-six weeks ended July 3, 2016, respectively. The increase in cash flows used in investing activities is primarily due to additional purchases of property and equipment, due to the addition of 34 stores in the last twelve months. Cash flows used in investing activities consist primarily of capital expenditures in new stores, including leasehold improvements and store equipment, capital expenditures to maintain the appearance of our stores, sales enhancing initiatives and other corporate investments. Cash flows used in investing activities were $103.9 million, and $117.7 million, for the twenty-six weeks ended July 1, 2018 and July 2, 2017, respectively.

We expect capital expenditures to be in the range of ~~$155~~$165 - ~~$165~~$170 million in fiscal ~~2017,~~2018, including expenditures incurred to date, 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 Amended and Restated Credit ~~Facility.~~Agreement.

Cash flows used in financing activities were $63.5 million for the twenty-six weeks ended July 1, 2018 compared to $59.8 million for the twenty-six weeks ended July 2, ~~2017 compared to $120.7 million for~~2017. During the twenty-six weeks ended July ~~3, 2016.~~ 1, 2018, cash flows used in financing activities primarily consisted of $178.0 million for stock repurchases, partially offset by $110.0 million of net borrowings on our credit facilities, and $6.7 million in proceeds from the exercise of stock options.

During the twenty-six weeks ended July 2, 2017, cash flows used in financing activities primarily consisted of $120.0 million for stock repurchases, ~~$30.0 million in payments on our Credit Facility, $2.0 million cash paid for capital and financing lease obligations,~~ partially offset by ~~$85.0~~$55.0 million of net borrowings on the Former Credit Facility, ~~$5.9 million in proceeds from the exercise of stock options~~ and ~~$1.3 million of cash received from landlords related to financing lease obligations.~~

During the twenty-six weeks ended July 3, 2016, cash flows used in financing activities consisted of $124.3 million for stock repurchases and $2.1 million cash paid for capital and financing lease obligations, partially offset by $3.7 million of excess tax benefits from the exercise of stock options and $2.0$5.9 million in proceeds from the exercise of stock options.

Long-term debt increased ~~$150.0~~$110.0 million to ~~$310.0~~$458.0 million as of July ~~2, 2017,~~1, 2018, compared to ~~July 3, 2016~~December 31, 2017. The increase is due to net borrowings under our credit facilities primarily ~~related to borrowings to fund~~used for our share repurchase programs.

See Note 4, “Long-Term Debt” of our unaudited consolidated financial statements for a description of our Amended and Restated Credit ~~Facility.~~Agreement and our Former Credit Facility (each as defined therein).

~~On November 4, 2015, our~~Our board of directors ~~authorized a $150 million common stock~~from time to time authorizes share repurchase program, which was completed during the second quarter of 2016. On September 6, 2016, our board of directors authorized a $250 million share repurchase program for our common stock, which was completed during the first quarter of 2017. On February 20, 2017, our board of directors authorized a new $250 million share repurchase programprograms for our common stock. The following table outlines the share repurchase programs authorized by ~~the Board,~~our board, and the related repurchase activity and available authorization as of July ~~2, 2017.~~1, 2018.

The shares under ~~the~~our repurchase programs may be purchased on a discretionary basis from time to time prior to the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. ~~The~~Our board’s authorization of the share repurchase programs does not obligate usour Company to acquire any particular amount of common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time. We have used borrowings under our ~~Credit Facility~~credit facilities to assist with the repurchase ~~program authorized on September 6, 2016 and February 20, 2017.~~programs (see Note 4, “Long-Term Debt” of our unaudited consolidated financial statements).

Share repurchase activity under our repurchase programs for the periods indicated was as ~~follows:~~follows (total cost in thousands):

Subsequent to July ~~2, 2017~~1, 2018 and through August ~~2, 2017,~~1, 2018, we repurchased an additional ~~0.7~~0.6 million shares of common stock for ~~$15.5~~$13.5 million.

We are committed under certain capital leases for the rental of certain land and buildings and certain operating leases for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates through ~~2035.~~2034.

The following table summarizes our lease obligations as of July ~~2, 2017,~~1, 2018, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

Payments Due by Period

Total

Less Than
1 Year

1-3 Years

4-5 Years

More Than
5 Years

(in thousands)

Capital and financing lease obligations (1)

$
144,370

$
16,735

$
33,328

$
31,432

$
62,875

Operating lease obligations (1)

1,554,677

134,345

291,475

278,339

850,518

Totals

$
1,699,047

$
151,080

$
324,803

$
309,771

$
913,393

	Payments Due by Period
	Total		Less Than 1 Year		1-3 Years		4-5 Years		More Than 5 Years
	(in thousands)
$700.0 million Credit Agreement (1)	$	458,000		—		—	$	458,000		—
Interest payments on $700.0 million Credit Agreement (2)		73,150		16,843		34,880		21,427		—
Capital and financing lease obligations(3)		127,652		16,711		31,802		27,561		51,578
Operating lease obligations(3)		1,627,699		150,036		321,965		300,014		855,684
Totals	$	2,286,501	$	183,590	$	388,647	$	807,002	$	907,262

We have other contractual ~~purchase~~ commitments ~~and debt,~~ which were presented under Contractual Obligations in our Annual Report on Form 10-K for the fiscal year ended ~~January 1, 2017. There~~December 31, 2017, and for which there have not been material changes ~~to our contractual purchase commitments~~ since that filing through July ~~2, 2017. As of July 2, 2017, the outstanding balance on the Credit Facility was $310.0 million, as discussed in Note 4 to the unaudited consolidated financial statements.~~1, 2018.

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

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, including among other things weather conditions, product supply and geopolitical conditions (including tariffs), 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, as well as our competitors’ responses. Although we may experience periodic effects on sales, gross profit, gross margins and cash flows 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.

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 derivatives, 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 twenty-six weeks ended July ~~2, 2017.~~1, 2018. 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 ~~January 1,~~December 31, 2017.

See Note 2, ~~“Recently Issued~~“Summary of Significant Accounting ~~Pronouncements”~~Policies” 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.

Item 3. Quantitative and ~~Qualitativ~~eQualitative Disclosures About Market Risk.

As described in Note 4, “Long-Term Debt” to our unaudited consolidated financial statements located elsewhere in this Quarterly Report on Form 10-Q, we have aan Amended and Restated Credit ~~Facility~~Agreement that bears interest at a rate based in part on LIBOR. Accordingly, we are exposed to fluctuations in interest rates. Based on the ~~$310.0~~$458.0 million principal outstanding under our Amended and Restated Credit ~~Facility~~Agreement as of July ~~2, 2017,~~1, 2018, each hundred basis point change in LIBOR would result in a change in interest expense by ~~$3.1~~$4.6 million annually.We have entered into an interest rate swap agreement in December 2017 to manage our cash flow associated with variable interest rates. The notional dollar amount of the five outstanding swaps at December 31, 2017 and July 1, 2018 was $250.0 million under which we pay a fixed rate and received a variable rate of interest (cash flow swap). Taking into account the interest rate swaps, based on the $458.0 million principal outstanding under our Amended and Restated Credit Agreement as of July 1, 2018, each hundred basis point change in LIBOR would result in a change in interest expense by $2.1 million annually.

This sensitivity analysis assumes our mix of financial instruments and all other variables will remain constant in future periods. These assumptions are made in order to facilitate the analysis and are not necessarily indicative of our future intentions.

We do not enter into derivative financial instruments for trading purposes (see Note 11, “Derivative Financial Instruments” of our unaudited consolidated financial statements).

We maintain a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures under the Exchange Act as of July ~~2, 2017,~~1, 2018, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

During the quarterly period ended July ~~2, 2017,~~1, 2018, there were no changes in our internal controls over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

From time to time we are a party to legal proceedings, including matters involving personnel and employment issues, product liability, personal injury, intellectual property and other proceedings arising in the ordinary course of business, which have not resulted in any material losses to date. Although management does not expect that the outcome in these proceedings will have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we could incur judgments or enter into settlements of claims that could materially impact our results.

On March 4, 2016, a complaint was filed in the Superior Court for the State of Arizona against our company and certain of our directors and officers on behalf of a purported class of purchasers of shares of our common stock in our underwritten secondary public offering which closed on March 10, 2015 (the “March 2015 Offering”). The complaint purports to state claims under Sections 11, 12 and 15 of the Securities Act of 1933, as amended, based on an alleged failure by our company to disclose adequate information about produce price deflation in the March 2015 Offering documents. The complaint seeks damages on behalf of the purported class in an unspecified amount, rescission, and an award of reasonable costs and attorneys’ fees. ~~On March 24, 2016, we removed the action~~After removal to federal court, the plaintiff sought remand, which the court granted in ~~the District of Arizona. On~~ March 24, 2017, the federal court in the District of Arizona remanded the case to state court. On April 21, 2017, we filed a Notice of Appeal of the federal court decision to remand the case. On May 16, 2017, the Plaintiff filed a Motion to Dismiss Appeal in the Ninth Circuit Court of Appeals, which is fully briefed and under consideration.2017. On May 25, 2017, weour company filed a Motion to Dismiss in the Superior Court for the State of Arizona, which ~~is also fully briefed.~~the court granted in part and denied in part by order entered August 30, 2017. Our company answered the complaint on September 28, 2017. The parties are engaged in discovery at this time. We intend to defend this case vigorously, but it is not possible at this time to reasonably estimate the outcome of, or any potential liability from, the case.

In April 2016, four complaints were filed, two in the federal courts of California, one in the Superior Court of California and one in the federal court in the District of Colorado, each on behalf of a purported class of our current and former team members whose personally identifiable information (referred to as “PII”) was inadvertently disclosed to an unauthorized third party that perpetrated an email “phishing” scam against one of our team members. The complaints allege we failed to properly safeguard the PII in accordance with applicable law. The complaints seek damages on behalf of the purported class in unspecified amounts, attorneys’ fees and litigation expenses. In June 2016, a motion was filed before the Judicial Panel on Multidistrict Litigation (referred to as “JPML”) to transfer and consolidate all four of the cases to the federal court in the District of Arizona. The JPML granted the motion on October 6, 2016. On ~~March 6,~~May 24, 2017, ~~we filed a~~the JPML granted our motion to stay proceedings in the case pending a U.S. Supreme Court ruling ~~which is likely to be dispositive~~ on the question of whether ~~the~~ arbitration agreements like those signed by each of the named plaintiffs are ~~enforceable; that motion was granted on~~enforceable. On May ~~24, 2017.~~21, 2018, the Supreme Court issued its opinion in Epic Systems Corp. v. Lewis and upheld enforceability of arbitration agreements containing class action waivers, like the ones the named plaintiffs signed in this matter. Subsequent to the stay, it remains to be seen what strategy plaintiffs will pursue following Epic Systems. We intend to defend these cases vigorously, but it is not possible at this time to reasonably estimate the outcome of, or any potential liability from, the cases.

Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should carefully consider the risks and uncertainties referenced below, together with all of the other information in this Quarterly Report on Form 10-Q, including our consolidated financial statements and related notes. Any of those risks could materially and adversely affect our business, operating results, financial condition, or prospects and cause the value of our common stock to decline, which could cause you to lose all or part of your investment.

There have been no material changes to the Risk Factors described under “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2017.

The following table provides information about our share repurchase activity during the ~~thirteen~~twenty-six weeks ended July ~~2, 2017.~~1, 2018.

Period (1)

Total number
of shares
purchased

Average
price paid
per share

Total number of
shares purchased
as part of publicly
announced plans
or programs

Approximate dollar
value of shares
that may yet be
purchased under
the plans or
programs

April 3, 2017 - April 30, 2017

—

—

—

$
250,000,000

May 1, 2017 - May 28, 2017

449,035

$
23.45

449,035

$
239,470,000

May 29, 2017 - July 2, 2017

1,338,293

$
22.02

1,338,292

$
210,000,000

Period (1)	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Approximate dollar value of shares that may yet be purchased under the plans or programs
April 2, 2018 - April 29, 2018		43,505	$	22.75		43,505	$	42,620,000
April 30, 2018 - May 27, 2018		3,010,127	$	21.83		3,010,127	$	326,910,000
May 28, 2018 - July 1, 2018		1,309,530	$	21.61		1,309,530	$	298,610,000

~~Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

Emerging growth company	☐


		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.		1

	Consolidated Balance Sheets as of July 2,1, 2018 (unaudited) and December 31, 2017 ~~and January 1, 2017 (unaudited)~~	1

	Consolidated Statements of ~~Operations~~Income for the thirteen and twenty-six weeks ended July ~~2, 2017~~1, 2018 and July ~~3, 2016~~2, 2017 (unaudited)	2

	Consolidated Statements of Comprehensive Income for the thirteen and twenty-six weeks ended July 1, 2018 and July 2, 2017 (unaudited)	3

	Consolidated Statements of Stockholders’ Equity for the twenty-six weeks ended July ~~2, 2017~~1, 2018 (unaudited) and the year ended ~~January 1,~~December 31, 2017 ~~(unaudited)~~	34

	Consolidated Statements of Cash Flows for the twenty-six weeks ended July ~~2, 2017~~1, 2018 and July ~~3, 2016~~2, 2017 (unaudited)	45

	Notes to Unaudited Consolidated Financial Statements	56

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations.~~Operations.		1720

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		3033

Item 4. Controls and Procedures.		3033

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.		3134

Item 1A. Risk Factors.		3134

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		3235

Item 6. Exhibits.		3235

Signatures		3336

Effective date	Expiration date	Amount authorized		Cost of repurchases		Authorization available		Expiration date	Amount authorized		Cost of repurchases		Authorization available
November 4, 2015	November 4, 2017	$	150,000	$	150,000	$	—	November 4, 2017	$	150,000	$	150,000	$	—
September 6, 2016	December 31, 2017	$	250,000	$	250,000	$	—	December 31, 2017	$	250,000	$	250,000	$	—
February 20, 2017	December 31, 2018	$	250,000	$	40,000	$	210,000	December 31, 2018	$	250,000	$	250,000	$	—
February 20, 2018								December 31, 2019	$	350,000	$	51,400	$	298,600

	Thirteen Weeks Ended
	July 1, 2018				July 2, 2017
Perishables	$	773,332	58.5	%	$	700,683	59.2	%
Non-Perishables		548,361	41.5	%		483,292	40.8	%
Net Sales	$	1,321,693	100.0	%	$	1,183,975	100.0	%

	Twenty-six Weeks Ended
	July 1, 2018				July 2, 2017
Perishables	$	1,505,935	57.7	%	$	1,350,118	58.3	%
Non-Perishables		1,102,954	42.3	%		964,502	41.7	%
Net Sales	$	2,608,889	100.0	%	$	2,314,620	100.0	%

Grant Date	RSUs		PSAs		RSAs		RSUs		PSAs
March 2017		325,406		148,944		288,746
May 2017		21,820		—		—
March 2018								451,951		126,098
May 2018								54,913		2,756
Total:		347,226		148,944		288,746		506,864		128,854
Weighted-average grant date fair value	$	18.50	$	18.11	$	18.11	$	24.83	$	25.10
Weighted-average exercise price		—		—		—		—		—

			As of
Facility	Maturity	Interest Rate	July 1, 2018		December 31, 2017
Senior secured debt
$700.0 million Credit Agreement	March 27, 2023	Variable	$	458,000	$	—
Former Credit Facility	April 17, 2020	Variable		—		348,000
Total debt				458,000		348,000
Long-term debt			$	458,000	$	348,000

	Twenty-six Weeks Ended			Fiscal Year Ended			Twenty-six Weeks Ended			Fiscal Year Ended
	July 2, 2017			January 1, 2017			July 1, 2018			December 31, 2017
Beginning balance	$	1,083		$	2,017		$	811		$	1,083
Additions		—			—			—			—
Usage		(281	)		(998	)		(213	)		(492	)
Adjustments		187			64			73			220
Ending balance	$	989		$	1,083		$	671		$	811


	Cash Flow Hedges
Balance at December 31, 2017	$	(784	)
Other comprehensive income, net of tax
Unrealized gain on cash flow hedging activities, net of income tax of $1,552		4,486
Total other comprehensive income		4,486
Balance at July 1, 2018	$	3,702

	As of
	July 2, 2017
Options	$	4,729
RSUs		8,026
PSAs		2,487
RSAs		7,173
Total unrecognized compensation expense	$	22,415

	~~As of~~
	~~July 2, 2017~~
~~Options~~		~~1.2~~
~~RSUs~~		~~1.9~~
~~PSAs~~		~~1.9~~
~~RSAs~~		~~2.2~~

	Unrecognized compensation expense		Remaining weighted average recognition period
Options	$	587		0.7
RSUs		13,953		2.0
PSAs		4,698		1.6
RSAs		2,915		1.7
Total unrecognized compensation expense at July 1, 2018	$	22,153

	Rolling Four Quarters Ended
	July 2, 2017			July 3, 2016 (4)
	(dollars in thousands)
Net income (1)	$	128,145		$	143,619
Interest expense, net of tax (2)		9,971			9,502
Net operating profit after tax (NOPAT)	$	138,116		$	153,121

Total rent expense, net of tax (2)		75,148			60,010
Estimated depreciation on capitalized operating leases, net of tax (2)		(33,065	)		(26,405	)
Estimated interest on capitalized operating leases, net of tax (2) (3)		42,083			33,605
NOPAT, including effect of capitalized operating leases	$	180,199		$	186,726

Average working capital		25,019			118,062
Average property and equipment		613,244			501,691
Average other assets		578,201			586,795
Average other liabilities		(139,642	)		(113,065	)
Average invested capital	$	1,076,822		$	1,093,483

Average estimated asset base of capitalized operating leases		905,823			764,655
Average invested capital, including the effect of capitalized operating leases	$	1,982,645		$	1,858,138

ROIC		12.8	%		14.0	%
ROIC, including the effect of capitalized operating leases		9.1	%		10.0	%

~~Exhibit~~ ~~Number~~		~~Description~~

~~31.1~~		~~Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~

~~31.2~~		~~Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~

~~32.1~~		~~Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~

~~32.2~~		~~Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~

~~101.INS~~		~~XBRL Instance Document~~

~~101.SCH~~		~~XBRL Taxonomy Extension Schema Document~~

~~101.CAL~~		~~XBRL Taxonomy Extension Calculation Linkbase Document~~

~~101.DEF~~		~~XBRL Taxonomy Extension Definition Linkbase Document~~

~~101.LAB~~		~~XBRL Taxonomy Extension Label Linkbase Document~~

~~101.PRE~~		~~XBRL Taxonomy Extension Presentation Linkbase Document~~

		~~SPROUTS FARMERS MARKET, INC.~~

~~Date: August 3, 2017~~	~~By:~~	~~/s/ Bradley S. Lukow~~
	~~Name:~~	~~Bradley S. Lukow~~
	~~Title:~~	~~Chief Financial Officer~~
		~~(Principal Financial Officer)~~

Exhibit Number		Description

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

		SPROUTS FARMERS MARKET, INC.

Date: August 2, 2018	By:	/s/ Bradley S. Lukow
	Name:	Bradley S. Lukow
	Title:	Chief Financial Officer
		(Principal Financial Officer)