Susannah Livingston - Vice President, Investor Relations and Communications Douglas Sanders - President and Chief Executive Officer Amin Maredia - Chief Financial Officer James Nielsen - Chief Operating Officer

Kelly Bania - BMO Capital John Heinbockel - Guggenheim Rupesh Parikh - Oppenheimer Scott Mushkin - Wolfe Research Edward Kelly - Credit Suisse Stephen Grambling - Goldman Sachs Joe Edelstein - Stephens Inc. Karen Short - Deutsche Bank Jason DeRise - UBS David Magee - SunTrust Robinson

Thank you, and good afternoon, everyone. We are pleased you have taken the time to join Sprouts on our fourth quarter and fiscal yearend 2013 earnings call.

Doug Sanders, President and Chief Executive Officer; Amin Maredia, Chief Financial Officer; and Jim Nielsen, Chief Operating Officer are also on the call with me today. Sprouts' Form 10-K, the earnings release announcing our fourth quarter and 2013 results and the webcast of this call can be accessed through the Investor Relations section of our website at sprouts.com.

During this call, management may make certain forward-looking statements, including statements regarding our future growth, product expansions, new store openings and 2014 expectations and guidance. These statements involve a number of risks and uncertainties that could cause actual results to differ materially.

For more information, please refer to the risk factors discussed in our filings with the Securities and Exchange Commission, along with the commentary and forward-looking statements at the end of our earnings release filed today. In addition, our remarks today include reference to non-GAAP measures.

For reconciliation of our non-GAAP measures to GAAP figures, please see the schedules in our earnings release. Lastly, in comparing our results to the comparable periods in 2012, we discussed the company's results on a pro forma basis as if our May 2012 acquisition of Sunflower Farmers Market, which we refer to as a Sunflower transaction, had occurred at the beginning of our 2012 fiscal year.

We believe these pro forma adjusted results provide a good basis to assess the operating and financial results and the performance of the combined company year-over-year. Let me now hand it over to Doug.

Thank you, Susannah. Good afternoon, everyone, and thanks for joining us today.

2013 has been an amazing year at Sprout, and we're very pleased to report another quarter of strong results and a terrific first year as a public company. To quickly hit the EPS for the fourth quarter, we reported adjusted diluted earnings per share of $0.07, a 75% growth in earnings from the same period in 2012.

On a GAAP basis, we reported EPS of $0.06 per share compared to $0.03 in the same period in 2012. The positive momentum driven by the everyday shoppers, growing demand for healthier food choices continue to generate strong topline growth for Sprouts.

Net sales grew 27% during the fourth quarter, thanks to improved same-store sales and the strong performance of our new stores opened in 2013. Our ability to attract a broad customer base was even more evident during this quarter, as we widen the gap within the industry.

The fourth quarter ended with an impressive same-store sales increase of 13.8% and 22.4% on a two-year stack basis, representing our 27 consecutive quarter of positive same-store sales growth. The 13.8% comp was laid more towards traffic growth during the quarter, where we saw an 8.5% increase in customer traffic and a 5% increase in basket size.

Now, this was obviously an exceptional quarter and it's important to understand the specific drivers of this performance. First, departmental sales in the Farmer Sunflower stores accelerated with fourth quarter comps in the high-teens.

The sales growth at these stores was driven by merchandising and promotional alignment established in late 2012 and improved operational execution we achieved throughout 2013. Second, we continue to see accelerating comp sales and states experiencing economic recovery, such as California and Nevada and Arizona.

And lastly, comp sales growth in our produce department outpaced our overall comp performance driven by strong promotions and sales growth in organic produce. The benefit from the Sunflower same-store sales, economic recovery and strong produce performance accounted for approximately 400 basis points of incremental comp sales during the quarter.

In addition to our strong comp sales performance, our efforts in innovation, marketing and operations continue to drive the Sprouts brand forward. Our private label program is delivering results, as we ended the year with our best quarter-to-date in same-store private label sales growth.

Our improved holiday offerings and marketing efforts resonated well with customers in the fourth quarter. Enhanced holiday sales were achieved through a wider assortment of holiday grocery items, special holiday gluten-free offering, new private label bake good and improved and expanded holiday meal offerings.

Fiscal 2013 ended with adjusted diluted earnings per share of $0.48 or 55% higher than 2012, and exceeded the guidance we provided last quarter of $0.45 to $0.46 per share. On a pro forma basis, net sales grew 22% for the year.

This was a result of 10.7% same-store sales growth and the addition of 19 new stores during the year. Our new stores continued to perform above expectations, growing new customers each week as the Sprouts brand continues to gain recognition.

For the full year, store traffic increased approximately 6% and the average basket size increased approximately 5%. These impressive top and bottomline numbers are record setting for Sprout, and I can't overemphasize the strong operational execution that drove our 2013 performance.

These results are a direct reflection of the exceptional teams we have within our stores, distribution centers and support office, and their commitment to help our customers eat well, live better and spend less. Throughout 2013, we brought forward the best merchandise offering in the history of Sprouts, while maintaining our affordable prices that set us apart from the competition.

This expanded offering in areas such as organic produce, raw and vegan foods, deli, bakery and private label successfully broadened our customer appeal and drove success across all stores, including our remodeled stores and new stores opened in 2013. The tailwinds created as the everyday consumer embraces a healthier diet are reflected in our strong customer traffic and growing brand awareness.

Our promotional marketing programs also played a key role in our success in 2013. This year all stores, including the former Sunflower stores participated in more than 30 store-wide promotions that we regularly offer at Sprouts.

These successful programs drive customer traffic and reinforce our value proposition that's been synonymous with the Sprouts brand since day one. As our unit growth expands, so does the Sprouts brand, and the additional exposure resulting from our public offering has continued to position our brand for growth.

We ended the year with a 167 stores and each new store opening brings more opportunities for greater customer engagement, education and loyalty. As we got the pace in 2014, our dedication to grow the company is no less ambitious.

Product innovation, improving the customer experience, and new store growth remain our top priorities. We have plans to further enhance our product offerings, especially when it comes to specialty, organic, non-GMO and local products.

We'll continue to expand our private label offering, which currently features more than 1,400 items, and in 2014 we're focused on unique signature products that can only be found at Sprouts. We'll also continue to reinvest in our stores with at least 15 store remodels during the year, mainly focused in the Texas region.

And of course, we will reinforce our value image by maintaining our competitive pricing structure and promotional strategies, which we communicate to our customers weekly through our print, social, and digital channels. We also want to address the California drought situation.

Our produce team is in continuous dialogue with our growers in and outside of California, and we believe that if the drought conditions persist into the summer, we can expect some tightness in certain categories, but we do not expect a significant issue for 2014. It's important to remember that we deal with weather events, including freezes, downpours and droughts throughout the season, but our supplier relationships on the local, national and international level enable us to secure the volume of produce necessary to support our business.

Of the nearly 60 sites we have approved for the coming years, we plan to open 22 to 24 new locations in 2014, representing 13% to 14% unit growth. And by the end of the year, we will be operating in 10 states across the country.

Today, we've opened three new stores, including our first new store in Kansas in early January. All of these stores are performing well and our reception by the Kansas market has been impressive.

Our next new market is Atlanta, where we'll be opening four new stores starting this summer. As we always stated, our unit growth will be very balanced, and in 2014 we'll open new stores in nine of our 10 states with less than 25% of these new openings in new markets.

And finally, we will continue to invest in our future growth by enhancing our teams and deepening our bench within each region. This will allow us to serve our existing and new stores, as we expand our regions to the Southeast.

With the best people, best products and best prices, we're confident that 2014 is going to be another successful year for Sprouts. With that, I'll turn the call over to Amin, to cover our financial result in greater detail and our 2014 guidance.

Thank you, Doug, and good afternoon, everyone. During the fourth quarter, we exceeded our expectations and built on our momentum to deliver strong results.

Following Doug's discussions on the sales drivers, let met start with gross profit. For the fourth quarter, gross profit increased 28% to $174 million over the same period in 2012.

Gross margin rate as a percentage of sales increased 10 basis points to 28.6%. This improvement was driven primarily by leveraging occupancy cost and was partially offset by lower merchandise margins from increased holiday promotions.

We remain excited about our ability to pass on savings to our customers, while leveraging gross margin. Direct store expenses were $129 million for the quarter.

We continue to leverage on variable labor during the quarter. However, direct store expenses as a percentage of sales increased 30 basis points, driven primarily by a healthcare cap reimbursement credit recorded in 2012, which did not repeat in 2013.

Selling, general and administrative expenses were $22 million for the quarter. SG&A during the quarter included $2 million of secondary offering expenses.

In the fourth quarter of 2012, SG&A included $4.1 million of acquisition and integration cost related to the Sunflower transaction. Excluding these items, SG&A decreased as a percentage of sales by 40 basis points, mainly as a result of leverage in corporate overhead and store level advertising cost.

Adjusted EBITDA for the fourth quarter totaled $38 million, up 31% over the same period in 2012. This increase was driven by higher sales, the resulting operating leverage, yielding EBITDA margin expansion of 20 basis points.

Adjusted net income for the fourth quarter totaled $11.4 million, an improvement of 119% compared to 2012. This increase was driven by strong business performance as well as a reduction in interest expense from the prior year.

For the full year 2013, gross profit increased 23% to $725 million. The gross margin rate for the full year was 29.7% or an increase of 20 basis points from 2012.

The improvement in margin for the full year was driven by leverage in occupancy and buying cost. This was partially offset by, first, lower margins in produce driven by inflation in certain commodity items, when compared to the exceptional produce growing season we had in 2012.

And second, lower margins in vitamins and supplements, as a result of mark downs from merchandise alignment during 2013. Direct store expense for the full year were $496 million.

DSE included a loss on disposition of assets of $400,000 in 2013 and $1.4 million in 2012. Excluding these items, direct store expenses as a percentage of sales increased 10 basis points, as we utilized the leverage in payroll to invest in store level compensation and to fund increased healthcare cost.

Selling, general and administrative expenses were $82 million for the year. SG&A for the year included $2 million of secondary offering expenses and $3.2 million of bonus paid concurrently with our IPO.

For 2012, SG&A included $17 million of acquisition and integration cost related to the Sunflower transaction, $600,000 on loss on disposition of assets and a $2.7 million legal settlement charge. Excluding these items, SG&A decreased as a percentage of sales by 40 basis points mainly as a result of leverage in payroll and store advertising cost.

Driven by leverage and margin and SG&A, adjusted EBITDA for 2013 totaled $195 million, up 33% from the prior year and EBITDA margin rate expanded by 60 basis points to 8%. Adjusted EBIT for the year totaled $148 million, up 38% as we continue to leverage depreciation and amortization cost throughout the year.

Adjusted net income for the year totaled $67 million, a 68% growth. The strong increase in adjusted net income is a reflection of the exceptional business performance and the reduction in interest rate from our April 2013 refinancing.

Moving to balance sheet and liquidity. We continue to fund organic growth in the business through our operating cash flows.

We generated cash flows from operations of $161 million for 2013 and invested $87 million in capital expenditures, primarily for new stores. In addition to the principal amortization paid during the fourth quarter, we voluntarily paid down an additional $40 million on our debt, and as a result ended 2013 with a balance on our term loan of $318 million.

As a result of this debt pay down, our yearend net debt to adjusted EBITDA leverage ratio excluding leases was 1.2x. We ended the year with cash and cash equivalents of $78 million and $53 million available under our undrawn revolving credit facility.

As this past year has proven, Sprouts continues to maintain significant liquidity and generate strong cash flows to self-fund our future growth. Our strong performance this past year gives us a high level of confidence, as we enter 2014.

With the strong tailwinds of the natural and organic sector, momentum in our business across geographies and vintages, and our focused 2014 business goal that Doug discussed earlier, our 2014 guidance is as follows. Net sales growth target of 16% to 18%, driven by 13% to 14% unit growth and same-store sales growth range of 7% to 8%, both of which are above our long-term guidance of 6% comp sales growth and 15% sales growth.

Adjusted EBITDA growth range of 17% to 20%, adjusted net income growth of 30%-plus and adjusted diluted earnings per share range of $0.58 to $0.60. We expect CapEx will be in the $110 million to $120 million range, funded from cash flow from operations.

A few additional items to note on our guidance. First, we expect our 13% to 14% unit growth to be weighted in the second and third quarters of the year.

We plan to open four stores during the first quarter and the remaining 18 to 20 stores during the second and third quarter. Second, we expect same-store sales growth to be strong across the year, but more so in the first half, as we will cycle higher comps in the back half of 2014.

Third, EPS guidance assumes a weighted average share count of approximately 154 million shares for 2014 compared to a weighted average share count of 140 million for 2013, driven primarily by shares issued during the IPO. Fourth, our CapEx guidance for 2014 is higher due to a strong store opening schedule during the first quarter of 2015, which will drive higher CapEx in Q4 of 2014.

Fifth, we continue to benefit on cash tax payments due to the deductibility of the difference between the strike price and exercise price as employees exercise options. Sixth, for the year, we expect to have approximately $24 million in interest expense, including capital lease interest, OID amortization and other interest expense.

One last item to note, the EBITDA growth and associated leverage is slightly impacted by increased cost from the Southeast expansion and higher healthcare cost from the Affordable Care Act. These two items which are embedded in our guidance, impact adjusted EBITDA margins by approximately 20 basis points.

As we are nearly two months into the year, let me specific speak to the first quarter of 2014. We continue to experience strong momentum in sales for the first quarter of 2014.

We have opened three new stores to date during this quarter and the stores are performing very well. We are forecasting same-store sales growth of 10.5% to 11.5% for the first quarter of 2014, which equates to a two-year stack same-store sales growth of 19% to 20%.

In conclusion, our strong results for 2013 and our expectations for 2014, demonstrate the confidence that we have in the factor momentum, our operations team, our store expansion capabilities and the growing awareness of the Sprouts brand across the country. With that, we would like to open up the call for questions.

Operator?

I guess first question just on same-store sales, as you think about that 7% to 8% outlook for the year, what's the kind of underlying factor for the slightly above average in same-stores sales outlook? You talked a little bit about the Sunflower strengths, but what do you think is kind of the underlying factor, as you look out over the next year?

As we look out to 2014, and we mentioned, the first two months, the year has started off to a strong start and we expect first quarter comp sales in the range of 10.5% to 11%, which puts us at 18%, 19%, two-year stack. Consistent with that, in 2013 our comp sales were 10.7% for the full year and with a 17% to 18% range, that also puts us on 18% to 19% two-year stack.

A couple of things, as Doug mentioned, the strength of the Sunflower separation in comps that we've seen over the last few months, we would expect that to settle down in the back half of the year. The second item is in several economies like California and Nevada, we've seen extremely strong comps in 2013, and as we move through 2014, we're anticipating those comps to settle down to the extent that they remain strong then that would position us for a higher comp range.

And then on the increased holiday promotions, maybe can you talk a little bit about the impact that you think those had on both comps and merchandise margins during the quarter? And were they more proactive or reactive, and what was the timing of those during the quarter?

We look at it as about 20 basis points of investment we put into promotions for the holiday period and it was a planned investment, obviously as we look at the execution of the holiday, not only the new private-label. We know we really focused on laying-in out really, really good holiday plan for our stores and communicate it well.

We had enhanced marketing materials and then great execution of stores. We really came across and put a little investment in price and it just get that momentum.

So it was planned, it was 20 basis points.

And then one last one, if I could just squeeze one more in. What kind of occupancy leverage should we expect in 2014 with a 7% to 8% comp?

With the 7% to 8% comp we would generally see about a 15 basis points to 20 basis points occupancy leverage in that range. And generally what we see is very strong leverage in this case, in our pre-2013 vintages.

And then of course the 2014 vintages were here we're going to be opening 22 to 24 stores. The occupancy on those new stores will weigh down the overall occupancy cost.

But on a blended basis across the entire portfolio, we would see about a 15 basis points to 20 basis points leverage.

So a couple of things, the guidance seems to imply a moderation in initial productivity, right. And then I assume that's more conservatism than in any change in the mix of new stores or a change in the environment, is that fair?

Generally, I think that would be true. The only other change in environment is Southeast being our new market.

We know we'll continue to invest fairly heavily in the market overall, in terms of both pricing as well as just anticipating what we would expect productivity to be in that market. As we have talked about before, new markets tend to take a little bit longer to mature and we would anticipate something similar in the Southeast.

And then when you look at new unit growth, so 13% to 14% this year. Have you thought how high is that in terms of what growth can the organization digest effectively?

Is it more than that, is it that? I don't know what work you've done on that, but have you given that some thought?

We've looked at it obviously from a growth perspective and from what can the company handle today. We're very, very comfortable with the 13% to 14% that we've put out there.

Obviously, as the company continues to grow and we continue to build an infrastructure, we'll continue to monitor that as we move forward. But what we're comfortable with today is the 13% to 14%.

And then lastly, when you think about the price gap versus whether its conventionals or Whole Foods, it is a wide price gap today. What's your thought process on the maintenance of that price gap?

Is there an overwhelming desire to maintain the gap you have today, reopen it if they were to make some price investments, how do you guys think about that?

We always stay true to the 25% on the produce side, it's something obviously on a weekly price check, we stay within that. We found that that is the sweet spot for us, so if the conventionals are out there investing, then we'll invest as well, but we see that as the sweet spot for produce is 25% below our competitors.

So when you look at grocery, dairy, frozen, that's less visible, so that could lapse a little bit or no?

Really, John, it's dependent upon markets, I mean obviously we've had this conversation before. So depending on the market and the proximity of our competitors, the investments are different by market.

But overall, we obviously manage this on a weekly basis and look at the price sensitive items and feel very comfortable with the current strategy that we have, and really reinforces our value model, so I don't see anything different looking forward.

My first question has to do with real estate. So if you guys continue to expand towards Atlanta, how does the availability of real estate compare to maybe some of your existing markets in California and Arizona?

And also are you seeing more favorable real estate costs in some of these newer markets?

The real estate availability in the Southeast is more plentiful than what we're seeing in the California market at this time. Obviously, there is a lot of white space in the country as a whole as far as what we do, but we definitely are seeing real estate availability in the Southeast.

From a cost perspective, it's been pretty stable. We're not seeing any material shifts in cost.

Remember, as a company, we only operated nine states today, so there is quite a bit of opportunity for us from a growth perspective, and we see the Southeast as a avenue for that growth for the next several years.

And Rupesh, one thing I would add is, in 2014 we're continuing to open stores in all markets. In fact this year we'll be opening stores in nine of our 10 states, Georgia being the 10 state that we're going to open in this year.

So we're opening stores across all of our markets.

And one last question. Just in terms pre-opening cost, should we expect higher cost if you go to Atlanta just in terms of pre-opening line?

No. Generally, we might spend a little bit more on pre-opening in new markets, because we advertise higher, our training cost are a little bit higher and that was similar to the investment we made in Houston.

And so similar to what we did in Houston this year, we would expect in 2014 we will invest more dollars than we typically would on average for the four stores that we open in Georgia this year.

Just want to poke your guidance a little bit more. I mean it seems like to me that you are projecting a little bit of a slowdown in that stack comp, which you've been running 20 or north of 20.

And I was just wondering, are we building in some conservatism, just don't know the environment? And then on the EBITDA line, are we building some conservatism for Atlanta?

And just to give you a flavor on that, because it seems like you are building in a little bit of slowdown as we look through the year?

I think the way we think about this year is that one area that we might perhaps anticipate visibility is that Sunflower stores, which as mentioned had been comping very strong, much stronger than the overall comp. As Doug mentioned, Sunflower comps were in the high-teens this past quarter, so we've seen a widening gap in the Sunflower stores.

So we would expect that, as we get into the back half of the year, we would lapse that. And so to the extent that we continue to see the brand awareness drive more and more traffic to the stores, I think that would add upside to the model.

I think that the economies we've seen in California and Nevada for two straight years and then Texas for three years now, very strong comps. So we are anticipating a flattening.

And so again if the traffic continues to generate at the level that it has been, then we would anticipate upside. In terms of EBITDA margin, that's a great question.

We're leveraging very well in our pre-2013 vintages. And so the two areas at which EF margins, if you will, as we're increasing the number of new stores with 13% to 14% growth, 22 to 24 stores, as you are aware that in the first couple of years our new stores have a lower EBITDA margin, so that weighs on the overall EBITDA margin.

And as I also mentioned earlier, the Southeast expansion and the increased healthcare cost from the Affordable Care Act impact our EBITDA margin by about 20 basis points. So with all that said, embedded in our numbers is 10 basis points to 20 basis points of EBITDA margin expansion overall as a business from the 8% mark to the 8.1%, 8.2% mark.

Then I had one, I get the question all the time, I know I have talked to you guys offline about it. The drought in California, 45% of your sales in produce, walk us through again how you handle it, will be helpful?

Well, a couple of things to remember is in the conversations that we've had in the past, if you remember our distributed buying model obviously gives us a lot of flexibility. And keeping in mind that produce is a global business, so we have strong relationships with growers both the local, regional, national and international level to make sure that we can supply the produce that we need for our business.

And again, coming back to the produce business as a whole, every year we battle some type of weather, whether it's a freeze, whether it's a downfall, whether it's a drought, so this anything that's uncommon in the produce business. I mean, again, when you go back to our distributed buying model, we feel confident that we'll be able to supply the volume of produce necessary for our business just because of the relationships we have throughout the country and internationally.

And just looking back at Q4, the performance we had in Q4 in produce, obviously we had some citrus gaps and some cooking gaps as well, but the flexibility of our buying team, the relationships, as Doug mentioned, drove really, really strong comp for produce. Obviously, we've done this historically and we will deal with this on an ongoing basis.

Let me just start with Sunflower, and I was hoping that you could drive maybe a little bit more color on what you've been doing in these stores and that acceleration in the comp. And to put a little perspective on an item, and if it's possible to sort of talk about the sales productivity of those stores relative to the core Sprouts stores as it relates to framing whether there is additional opportunity there?

I think Jim and I both will tackle this one. So from the Sunflower perspective, as we put the companies together, obviously, our goal is to take the best parts of all three companies, whether it's Henry, Sprouts or Sunflower and build one really complete model that expanded our offering in several categories.

And that's what we accomplished as we went through the mergers. So what you're seeing in the Sunflower stores is basically the products alignment in the additional offering that we put into the stores, in addition to improved marketing, improved promotions, improved operational execution at store levels.

So you're really seeing the byproduct of that in the back half, really starting in the back half of 2013 and continuing into the first half of 2014. So Jim, you can probably expand it a little bit more.

Yes. I mean I just got the same thoughts as Doug.

I mean if you've been in those stores, I don't know if you were there pre/post, I mean the operations team has done a fantastic job of really try that execution in service levels. We did apply some more service in departments like vitamins as well as the meat department, we saw nice results there.

Improved the quality of produce and produce's comps for Sunflower are outpacing the Sprouts comps. And then the unique promotions that we had, we talked about them before, Amin talked about it, the 33 unique promotions, they were not doing historically, so they got a nice benefit there as well.

Well, I guess the question is sort of like, you talk about the comps in those stores are sort of normalizing in the back half of the year, does that mean you expect the produce of either stores is sort of then elevated to the level of core by then?

I think what we really saw is late, late in the third quarter or starting in the middle, but late in the third quarter more so, we started seeing widening of sales across categories, and particularly in categories that Jim mentioned, where we added assortments as well as invested in training, et cetera. And so we've seen that margin continue to widened through the yearend and remain strong in the first quarter.

So based on what we see now, we would expect for the benefit to continue to relap in some time in the third quarter.

And a question on first quarter comps, the Easter shift, does that have much of an impact on sales shifting from Q1 into Q2?

No. Easter, based on the calendar, Easter doesn't really have a big impact, if I think I understood well the question.

It's not a material sales shift. The momentum has continued to remain strong.

I think the strong holiday promotions, Jim talked about, give some really extra leverage in the fourth quarter. But still in this quarter as we said, overall the businesses staying quite strong in double-digits comps and we're expecting the quarter to come in at 10.5% to 11.5%, which is well above our long-term guidance and what we're seeing in the overall place today.

And then last question for your. CapEx guidance probably a little bit higher I guess than what we had modeled.

Could you maybe speak to that a little bit and talk about maybe the breakout or sort of new stores maintenance, distribution corporate to sort of how that shakes out?

As we said, it's about $110 million to $120 million. The biggest difference is really we have a very strong pipeline for new stores today.

And we anticipate opening strong number of stores probably the double-digit number of stores in Q1. In Q1 of 2013, and as a result, we'll probably end up spending $25 million of capital in Q4 of 2014 and that number is really about $20 million higher than what we spend in Q4 of 2013 for new stores.

In terms overall breakdown from a CapEx perspective, the new stores are roughly about -- new stores as well as some revenue enhancing CapEx is about $90 million of our overall spend. And then we have an incremental about $7 million to $8 million of spend for remodels on top of that; and then again, supply chain, corporate infrastructure and store IT initiatives would be another $5 million to $7 million; and lastly, R&M CapEx would be in the $7 million to $8 million.

Just quickly to follow-up. Does that basically open a door for maybe some acceleration and square footage growth in '15?

I think right now we continue to think that the 13% to 14% growth is about the right range and up from the 12% range. So in terms of overall for 2015, as Doug mentioned earlier, the key for us is continuing to see our operational execution, continuing to see our customer service force and we monitor them on a fairly monthly basis.

And as we feel comfortable with our teams out there executing and ensuring that the customer experience is high then we'll continue to revisit that number every six to 12 months. But I think at this point 13% to 14% is a good assumption for '15 and beyond.

I guess just a follow-up on the capital allocation questioning here. Given that free cash flow that you are generating, how do you start thinking about debt levels at this point, you did pay down some right now, it just seems like you have some excess as we move forward in the '14 and '13?

While we're sitting here today, as we mentioned, we anticipate interest expense to be around $24 million for the year. So what I would say is that we're always looking for a best piece of capital with revenue enhancement capital, remodel capital and we're seeing some good results in both of those to deploy those there first.

And currently we're expecting in the range of $50 million to $70 million of incremental debt pay down during the year, but we continue to look at all uses of capital with 4% interest rate and our debt levels being at 1.2x or net debt to EBITDA ratio. We feel fairly comfortable with our current levels, but we'll continue to pay down some debt as we go along in time.

And then another question, I mean just given the strength in comps and where overall productivity is right now, do you really feel like you've reached saturation in any of your markets?

We haven't reached saturation in any of our markets at this point. If you go back to some of the earlier discussions we've had, we still have a lot of opportunity for growth in existing markets.

And that blend us well to more in a balanced approach that we talk about for expansion, where we always say, we want to continue to grow in existing markets and have that underwrite the success of the new market. So again, we haven't reached saturation point in any of our existing markets at this point.

Just a follow-up a bit on the capital allocation and also questions about the store remodels. I am curious, given the success you've already had with that, what is perhaps holding you back from taking on more remodels during the year?

Yes. If you recall that Sprouts' overall our average age of our store is about eight years.

So basically, we started our remodel program in 2013 for the first time, but we remodel 15 stores primarily in the Arizona area. And so the way we think about remodels is twofold, we look at the age of our stores as well as the store condition themselves.

And then we try to cluster our remodels in areas, because when we remodel, we also bring in additional products and additional offerings to the store, and we try to ensure that the offerings that we bring are consistent in a particular market. For example, when we did our remodels in 2013, we did them across Phoenix, because we wanted to make sure that our stores were fairly consistent with some of the products throughout the store.

So really when we look out, we don't feel like we are behind in any way or there is any large opportunities to do a map scale remodel simply because the average age of Sprouts is only eight years old.

And we did it in the first set of remodels we got a nice bump, because some of stores of the Sprouts are a little bit older, so they didn't have some of the element. So there was big enhancement in deli, bakery, grocery, frozen, and then of course we tied it altogether with brand-new decor that's reflected in the new prototype.

So some of that as we get down the road with some of the remodels will already be in place, so if I don't get that higher return on some of those, so we have to be obviously a bit more strategic.

Can you give us a sense for how many remodels you might expect to do in 2015? I know that's looking out a little bit further, but if you're looking to continue with that 13% to 14% store expansion, I am just curious also, as it would relate then to the store remodels?

Yes. The store remodels are going to stay pretty consistent.

We're looking probably anywhere from 12 and 15 stores again, similar to last year and in 2014.

And then I had also recently seen an article about new distributions warehouse for you in North Texas, in the Dallas area. Do you feel that your distribution needs are being met in your other existing markets or do you need to upgrade to a larger facility to support the continued expansion?

That's supply chain capacity, something we've been focused on probably the last two years. We expanded the Arizona facility last year in 2013 and we'll expand the Texas facility, which will obviously support our continued expansion in the near-term into the Southeast as well.

So from a capacity standpoint, the expansion in Texas will be in good shape.

And as far as California, we saw at least three or five years of runway for all DCs, and we actually are moving our DC guys at 3PL, but we're move to a bigger facility here and probably towards tail end of the year. So lots of runway in all three DCs, once we open the Dallas DC.

And at what point would you need to potentially open a DC in the Southeast to support that growth behind Atlanta?

Yes, we're looking probably for a Southeast distribution center, probably late 2015, early 2016.

One of the nice things to recall is that we don't need self-distribute produce, which is about 500 to 600 SKUs, so the average DC expansion net of landlord allowances are typically $2 million to $3 million. So it's not a large capital investment for us.

Just a couple of questions, back to the drought for a second. So you guys mentioned that there maybe some kind of supply noise I guess, not really so much to say constraints.

But I would think that there may be some benefits from just from that supply constraint, as it relates to the potential for inflation in produce. So can you maybe talk to that a little bit?

Historically, we see a little bit of retail inflation. We're able to pass it through and there is some benefit.

But if you see a kind of hyperinflation, it actually becomes more of determent to us, and we need to start to sell less products where it kind of equals it out. So there could be a small benefit it really depends upon how type of supply gets, and right now it's too early to tell.

And these are just our real crops. I think we got to remember that.

And this is really, really affecting probably 80 of our stores. So it's really too early to tell as far as the level of impact, and we'll disclosed that next time.

And then was there any embedded inflation assumption in your guidance for next year?

No.

Relatively modest inflation, so no heightened inflation in produce, Karen. And then, we are seeing a little bit of inflation in certain bulk items, in certain dairy and cheese products, so those we've incorporated, but overall not on the produce side.

And then just turning to operating expenses in general, obviously you have expenses related to new store openings. But are there any I guess areas that you need to focus on to build out to you infrastructure in terms of operating expense investments that you plan on doing in fiscal '14 and anything to talk to there?

Karen, I think we've been very systematic over the last two, three years in pushing on scale at infrastructure in different parts of the organization. And similarly this year we'll tackle a couple of areas, where we want to, on the supply chain side as well as some on the technology side.

We'll be rolling out our new website here fairly shortly. So we've been doing some work around that and some continued investments behind there.

But we've been very balanced and systematic and forward looking around investments in various areas of the business. And we've not been shy in investing in the infrastructure and we'll continue to do so for the foreseeable future as we keep growing the business.

Nothing I would call out that would be of magnitude.

And then, I guess a last question. Obviously, I mean you've had unbelievable success so far in terms of your comp and obviously building brand equity.

But any kind of color on how you think about further brands building, I guess customer or cultural awareness as you continue to grow into new markets, any thoughts there?

Well, from the branding side, obviously we've invested pretty heavily over the last several months in developing a new digital platform, which we'll be launching in the first phase of that, which is in the website in the coming days. And so from a customer engagement standpoint, we've been really focused on obviously improving our customer engagement in the store.

And then outside the store from the social media side and we have a really good partnership with the guys at Salesforce.com. We've been working in partnership with them to increase our social engagement in across all the digital platforms.

On the inside from the operational execution and customer service, we've been focused on that. And from the outside, obviously the social engagement as well, the digital, and the new website, new mobile app, that should be coming out later this year.

I guess I want to drill in a little bit more about the new store productivity, but maybe first for some of these more recent classes, the new store productivity has been very good. Now that we're further into the life of those classes, do you have any better guess if this has been accelerating the evolution of your consumers or do you think there is a bigger upside for maturity for these stores?

Jason, I would probably say a couple of things is, when we look at the 2013 new store productivity, two thing as you know, a lot of the stores that we opened in 2013 were in our existing markets. And then second, our new store productivity also benefited in 2013.

In 2012, we opened a number of stores in northern California, which was a near-market for us and those stores have not come into our comp base or were not in our comp base for the full year. So that also drilled new store productivity.

And so what I will say is that we are seeing sort of much better productivity than average in stores where we're branded well. And so as we continue to, we really like the markets where we're branded well and those stores tend to open up at a much higher rate than the typical 75% per share productivity.

So as we go in time, every opportunity we get to open new stores in branded markets, we aggressively look to do that. So those are the couple of drivers.

Doug, do you want to add anything else here.

And to just stack on to that I think, what we saw last year was obviously the success of the improvements we made to the model, all the different offerings that we brought in, the expanded offerings, the improvements we made, pretty much across the store as we put the three banners together. So we definitely saw that success across the new stores, in new market and in existing markets, and one year doesn't make a trend.

So obviously as those stores continue to mature over the next year or two we'll definitely find out if we've just created a step function or if we've accelerated the maturity of the stores.

And then in terms of the guidance. I guess the guidance implies roughly a 75% new store productivity.

And I think one of the first questions was about that you're building in conservatism for Atlanta, but I mean we're talking about four stores and the rest are evenly spreads. So I don't know, I mean unless you've just kind of assuming like doomsday scenarios for Atlanta, I can't imagine that the average works out to be 75%.

So I guess again, as it just being conservative, because it's this idea that we're just now sure how these stores are actually maturing in 2013, just could have been a one-off?

I think it's all of the things that Doug and I mentioned a minute ago. And as we sort of go in time and I think if we see a couple of vintages, which are just starting overall higher, then I would say that we've got good types of data to suggest that.

We would have a step function, as Doug mentioned, in our model and it's not really 75%, and it's 80% or 85% productivity or higher, but at this point we felt that it will be pretty mature to look at one vintage and assume otherwise.

And one last question, just wanted to shift gears. As your company evolves, have you noticed the change in who your core customers, has it evolved as well, because obviously you're bringing in people that are new to the category and you mature them through the store.

But I guess in your older stores, are you finding that evolution continues beyond sort of that five-year path to getting them up to the vitamins physic like continue beyond that than just really become fully converted and they are not even interested in the conventional produce anymore and they want something higher. Have you found that to be the case that there is even a bigger up-selling opportunity?

Well, I think obviously the customer is evolving. The industry is growing.

The customer has a demand for healthier food choices, it's growing and it's growing across demographics. So we've always been very, very focused on the middle income, everyday grocery customer, and I think they're starting to see the growth in natural organic really focused in that sector, if you will.

And then on top of that with the improvements that we made to our model to add additional offerings that we brought in. You're seeing the appeal of our brand in our offering extending beyond just the middle income customer to probably to the upper middle income customer, if you will.

When you look at the growth categories that really, really took off last year, organic was very big, raw food is very big, vegan products are very big. I mean you definitely see the growth in the categories, we were really focused on, but you're definitely seeing the growth in that channel itself and the transition of the customer, and say, healthier food choices.

Now is there upside into that? Obviously, as a customer continues to mature through the trial and the transitions process, absolutely.

I think we're definitely seeing a maturing of the customers in our more mature markets, probably capturing a greater portion of that basket. And you're seeing it in the traffic growth and in the basket growth.

When you break down the basket, what's fascinating about the basket, if you look at what's really driving that is department mix improvements with grocery, dairy, deli, bakery are driving that as well as the item mix improvements, where you're seeing people shift up, as Doug had mentioned, raw food and organics which have a higher average selling price. And then there is actually a little bit more items in the basket.

So really and almost no inflation and average is pretty fascinating and to see how the consumer shift.

Just two quick questions, one is the conventional players have been very positive about this category as well it seems in the past year. In your more mature markets, are you seeing a noticeable difference in the level of competition you get from those guys, are they doing anything more effectively than in the past?

And we're seeing them obviously expand their offering, we're seeing that really. I think the conventional that does it best is Kroger.

So we're seeing an expanded offering. But what we're not seeing is negative a result as to our stores in our neighborhood.

So when you look at it, and I think what's really helping us is they are helping with the awareness and we truly are the destination. So we've seen them add variety, but they still can't for our consumer completely compliment their pure shopping experience for natural.

So while we've seen them take a shift, we haven't seen that impact our business. And in fact, in some cases it's helped our business.

And secondly, what are you seeing with the supplements and vitamins relative to the rest of your mix, are you happy with that performance right now?

The environmental supplement continues to be a great department for Sprouts. Obviously, we dedicate a tremendous amount force base and service behind that department and grow that category.

On a two-year stack basis, it's probably the fastest growing category that we have within the store. Now, we obviously this year are seeing a little bit of softness, because we're cycling a very, very strong cold and flu season from last year, which obviously impacts that category.

But overall, still a lot of growth in the category and it's a category that we from an offering standpoint and from a focus and from a knowledgeable staff standpoint, invest heavily and it takes that to grow that customer.

I think most importantly it provides a really strong mould around our business too.

Thanks everyone for joining us today. And we look forward to speaking with you on our next call.

Thank you.