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9. (9 points) Calculate the following profitability ratios for the current year and give a one sentence description of each result. a. Profit Margin Ratio b. Rate of return on Total Assets c. Return on Common Stockholders' Equity (ROE) 10. (6 points) Calculate the following solvency ratios for the current year and give a one sentence description of each result. a. Debt to assets ratio b. Debt to Equity ratio- (total liabilities/total equity) b. Times Interest Earned Ratio 11. (2 points) Calculate the free cash flow of the company for the most current year (Hint: use the formula given in the book on page 17-17) FOR QUESTIONS 13-15: LOOK AT THE NOTES TO THE FINANCIAL STATEMENTS (beginning on page 6) 13. (1 Point) In what state did Sprouts Farmers Market, Inc. incorporate? ASSETS Current assets: Cash and cash equivalents Accounts receivable, net Inventories SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Prepaid expenses and other current assets Total current assets Property and equipment, net of accumulated depreciation Operating lease assets, net Intangible assets, net of accumulated amortization Goodwill Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:: Accounts payable and accrued liabilities Accrued salaries and benefits Current portion of capital and financing lease obligations Current portion of operating lease liabilities Current portion of finance lease liabilities Total current liabilities Long-term capital and financing lease obligations Long-term operating lease liabilities Long-term debt and finance lease liabilities Other long-term liabilities Deferred income tax liability December 29, 2019 December 30, 2018 S 85,314 S 1,588 15,713 40,564 275,979 264,366 10,833 27,323 387,839 333,841 741,508 766,429 1,028,436 185,395 194,803 368,078 368,078 11,727 12.463 $ 2,722,983 S 1,675,614 261,326 48,579 253,969 48.603 7,428 106.153 754 416,812 310.000 119,642 1,078,927 549.419 453,000 41,517 153,377 54,356 50,399 2,141,031 1,086,418 Total liabilities Commitments and contingencies (Note 19 Stockholders' equity Undesignated preferred stock 50.001 par value 10,000,000 shares authorized, no shares issued and outstanding Common stock, 50 001 par value, 200,000,000 shares authorized 117 543,668 shares issued and outstanding, December 29, 2019 124,975,691 shares issued and outstanding, December 30, 2018 Additional paid-in capital 117 Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders equity Total Sabilities and stockholders' equity 670,966 (4,682) (64.449) 124 657 140 1.134 (69 202) 501.952 589 196 52722.983 1.675.614 SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales $ 5,634,835 December 29, 2019 Year Ended December 30, 2018 December 31, 2017 $ 5,207,336 $ 4,664,612 Cost of sales 3,740,017 3,459,861 3,097,582 Gross profit Selling, general and administrative expenses Store closure and other costs Income from operations Interest expense, net Other income 1,894,818 1,747,475 1,567,030 1,549,707 1,404,443 1,245,640 Depreciation and amortization (exclusive of depreciation included in cost of sales) 120,491 108,045 94,194 7,260 12,076 1,126 217,360 222,911 226,070 21,192 27,435 320 Net income Income before income taxes Income tax provision Nel income per share: 196,168 195,796 46,539 37,260 21,177 625 205,518 47,078 149,629 S 158,536 S 158,440 Basic S 1.25 5 1.23 $ 1.17 Diluted $ 1.25 $ 1.22 S 1.15 Weighted average shares outstanding Basic 119,368 128,827 135 169 Diluted 119,742 129,776 137.884 Page SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) Net income Other comprehensive income (loss), net of tax Unrealized gain (losses) on cash flow hedging activities, net of income tax of ($2.012), 5663, and ($271) Total other comprehensive income (loss) Comprehensive income December 29, 2019 149,629 Year Ended December 30, 2018 158,536 December 31, 2017 158,440 (5.816) (5.816) 1,918 (784) 1,918 (784) 143,513 S 160,454 157,656 SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Shares Common stock Additional Paid-in Capital (Accumulated Deficit) Retained Earnings Accumulated Other Comprehensive Income (Loss) Total stockholders Equity Balances at January 1, 2017 Net income Other comprehensive income (loss) Issuance of shares under stock plans 140,002,242 $ 140 S 597,200 $ 75,500 $ 158,440 672,900 158,440 (784) (784) 2,144,000 2 9,298 9,300 Repurchase and retirement of common stock (0.608,810) Share-based compensation (10) 14.221 (203,382) (203,392) 14,221 Balances at December 31, 2017 132.450.092 S 132 $ 620,788 $ Net income 30,558 158,530 (784) S 650,604 158,536 Other comprehensive income (loss) 1.918 1.918 Issuance of shares under stock plans Repurchase and retirement of 3.227,093 (11.090.595) (11) 21,843 common stock 21,840 (258,296) (258,307) Share-based compensation 14.512 14,512 Balances at December 30, 2018 124,581,100 $ 124 $ 657.140 $ Net income (80,202) $ 149,029 1,134 $ 589,195 149,829 Other comprehensive income (loss) Issuance of shares under stock plans Repurchase and retirement of common stock Share-based compensation impact of adoption of ASC 842 related to leases Balances at December 29, (5,816) (5.816) 822.500 T 4877 (7.960.358) (176,302) 8.940 4.878 (176.310) 8.049 2019 11,426 11.426 117,452,918 S 117 S 870.966 $ (64,449) S (4,682) S 581,952 Pa SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Year Ended December 25, 2018 December 30, 2018 December 31, 2017 Cash flows from operating activities. Net income Adjustments to reconcile net income to net cash provided by operating activities S 149.629 $ 158,536 158.440 Depreciation and amortization expense Operating lease ausel amortization Store closure and other costs 122,804 110.749 96.987 81,842 4,113 4.115 Share-based compensation Deferred income taxes Other non-cash items 8.949 14.512 14.221 (216) 23.333 7.003 4,136 1,482 2,006 Changes in operating assets and liabilities Accounts receivable 36.062 (7.066) (4,920) Inventories (11.612) (34.824) (25,079) Prepaid expenses and other current assets 19.208 (2.908) (2.733) Other assets (1.275) (5.086) (114) Accounts payable and other accrued liabilities 25.009 4.366 39.344 Accrued salaries and benefits 295 3,039 12,764 Operating lease abilities Other long-term liabilities Cash flows from operating activities Cash flows from Investing activities Purchases of property and equipment Proceeds from sale of property and equipment Cash flows used in investing activities Cash flows from financing activities Proceeds from revolving credit facilities Payments on revolving credit facilities Payments on capital and financing lease obligations Payments on finance lease kabiities Payments of deferred financing costs Cash from landlord related to capital and ancing lease obligations (00.002) 578 24.731 10.066 356.210 294.379 309.667 (183.232) (177,083) (190.824) (163.232 (177.082 (190.594 205.405 233,000 (180,405) (126.000) (4.517) 153.000 (60.000) (4.192) (690) (2.131) 3.643 1.325 (176.310) Repurchase of common stock 4.878 (2307) 21.343 (203.392) 5.300 Proceeds from exercise of stock options (319) 159) Other Cash flow's used in financing activities (67 441) (134 520 (101 959) Cash, cash equivalents and restricted cash at beginn Increase (Decrease) in cash, sash equivalents, and restricted ch of the period 84.637 (17.231) 7.014 2248 19.479 12.465 66.705 2.248 19.479 Cash, cash equivalents, and restricted cash at the Supplemental disclosure of cash flow Information 20.293 27.006 S 20.759 Cash paid for interest 44.637 15.527 33.475 Cash paid for income taxes Supplemental disclosure of non-cash investing and financing activities Property and equipment in accounts payable 10.616 S 12.001 S 17.309 9.001 23.32 Property acquired through capital and financing inane obligat SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business 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, baked goods, dairy products, frozen foods, beer and wine, natural body care and household items catering to consumers' growing interest in health and wellness. As of December 29, 2019, the Company operated 340 stores in 22 states. For convenience, the "Company" is used to refer collectively to Sprouts Farmers Market, Inc. and, unless the context requires otherwise, its subsidiaries. The Company's store operations are conducted by its subsidiaries. 2. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries in accordance with accounting principles generally accepted in the United States of America (GAAP). All material intercompany accounts and transactions have been eliminated in consolidation. The Company has one reportable and one operating segment, healthy grocery stores. 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 following is a breakdown of the Company's perishable and non-perishable sales mix Perishables Non-Perishables 2015 2018 2017 57.7% 42.3% 67.5% 58.0% 42.5% 42.0% All dollar amounts are in thousands, unless otherwise indicated. Certain prior period amounts have been reclassified to conform with the current year presentation 3. Significant Accounting Policies Fiscal Years The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. Fiscal year 2010 ended on December 29, 2010 and included 52-weeks Fiscal year 2018 ended on December 30, 2018 and included 52- weeks, fiscal year 2017 ended on December 31, 2017 and included 52-weaks Fiscal years 2019, 2018, and 2017 are referred to as 2019, 2018, and 2017, respectively Significant Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions Such estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and labilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's critical accounting estimates include, but are not limited to inventory valuations. lease assumptions, self-insurance reserves impairment of long-lived assets. fair values of share-based awards and derivatives, and income taxes. Actual results could differ from those estimates Cash and Cash Equivalents The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. The Company's cash and cash equivalents are maintained at financial institutions in the United States of America. Deposits in transit includes sales through the end of the period, the majority of which were paid with credit and debit cards and settle within a few days of the sales transactions. The amounts due from banks for these transactions at each reporting date were as follows: Due from banks for debit and credit card transactions Restricted Cash As Of December 23, 2015 December 30, 2018 $ 49.405 5 52.806 Restricted cash relates to the Company's defined benefit plan forfeitures and the Company's healthcare plan benefits of approximately $1.5 million and $0.7 million as of December 29, 2010 and December 30, 2018, respectively, and is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Accounts Receivable Accounts receivable primarily represents billings to vendors for scan, advertising and other rebates, and billings to landlords for tenant allowances. Accounts receivable also includes receivables from the Company's insurance carrier for payments expected to be made in excess of self-insured retentions. The Company provides an allowance for doubtful accounts when a specific account is determined to be uncollectible. Inventories Inventories consist of merchandise purchased for resale, which are stated at the lower of cost or net realizable value. The cost method is used for distribution center and store perishable department inventories by assigning costs to each of these items based on a first-in, first-out (FIFO) basis (net of vendor discounts) The Company's non-perishable inventory is valued at the lower of cost or net realizable value using weighted averaging, the use of which approximates the FIFO method The Company believes that all inventories are saleable and no allowances or reserves for obsolescence were recorded as of December 29, 2010 and December 30, 2018 Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization. Expenditures for major additions and improvements to facilities are capitalized, while maintenance and repairs are charged to expense as incurred. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of income. Depreciation expense, which includes the amortization of assets recorded as finance leases, is computed using the straight-line method over the estimated useful lives of the individual assets. Terms of leases used in the determination of estimated useful lives may include renewal options if the exercise of the renewal option is determined to be reasonably certain The following table includes the estimated useful lives of certain of the Company's asset classes: Computer hardware and software Furniture, fixtures and equipment Leasehold improvements Buildings 3 to 5 years 7 to 20 years up to 15 years 40 years Store development costs, which include costs associated with the selection and procurement of real estate sites, are also included in property and equipment. These costs are included in leasehold improvements and are amortized over the remaining lease term of the successful sites with which they are associated. Self-Insurance Reserves The Company uses a combination of insurance and self-insurance programs to provide for costs associated with general liability, workers' compensation and team member health benefits. Liabilities for self-insurance reserves are estimated through consideration of various factors, which include historical claims experience, demographic factors, severity factors and other actuarial assumptions. Amounts expected to be recovered from insurance companies are included in the liability, with a corresponding amount recorded in accounts receivable. Goodwill and Intangible Assets Goodwill represents the cost of acquired businesses in excess of the fair value of assets and liabilities acquired. The Company's indefinite-lived intangible assets consist of trade names related to "Sprouts Farmers Market" and liquor licenses. The Company also holds intangible assets with finite useful lives consisting of the "Sunflower Farmers Market" trade name. The trade name related to "Sunflower Farmers Market" meets the definition of a defensive intangible asset and is amortized on a straight-line basis over an estimated useful life of 10 years from the date of its acquisition by the Company Goodwill and indefinite-lived intangible assets are evaluated for impairment on an annual basis during the fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Our impairment evaluation of goodwill consists of a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Our qualitative assessment considered factors including changes in the competitive market, budget-to-actual performance. trends in market capitalization for us and our peers. turnover in key management personnel and overall changes in macroeconomic environment. If this qualitative assessment indicates it is more likely than not that the estimated fair value of a reporting unit exceeds its carrying value, no further analysis is required and goodwill is not impaired. Otherwise, we compare the estimated fair value of the asset to its carrying amount with an impairment loss recognized for the amount, if any, by which carrying value exceeds estimated fair value. Our impairment evaluation for our indefinite-lived intangible assets consists of a qualitative assessment similar to that for goodwill. If our qualitative assessment indicates it is more likely than not that the estimated fair value of an indefinite-lived intangible asset exceeds its carrying value, no further analysis is required and the asset is not impaired. Otherwise, we compare the estimated fair value of the asset to its carrying amount with an impairment loss recognized for the amount, if any, by which carrying value exceeds estimated fair value The Company has determined its business consists of a single reporting unit, healthy grocery stores. The Company has had no goodwill impairment charges for the past three fiscal years. See Note 8, intangible Assets and Note 9. "Goodwill" for further discussion. 05 Impairment of Long-Lived Assets The Company assesses its long-lived assets, including property and equipment, right-of-use assets and finite-lived intangible assets, for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. These events primarily include current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in the market value of an asset or a decision to close or relocate a store. The Company groups and evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which independent identifiable cash flows are available. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the future undiscounted cash flows expected to be generated by that asset group. Our impairment analysis contains management assumptions about key variables including sales growth rate, gross margin, payroll and other controllable expenses. If impairment is indicated, a loss is recognized for any excess of the carrying value over the estimated fair value of the asset group. The fair value of the asset group is estimated based on the discounted future cash flows using a discount rate commensurate with the related risk or comparable market values, if available. In 2019, the Company recorded an impairment loss as part of the normal course of business primarily related to the write-down of leasehold improvements. In fiscal year 2018, the Company recorded an impairment loss related to leasehold improvements, furniture, fixtures and equipment due to the closure of two stores. There were no impairment charges in 2017. These charges are recorded as a component of Store closure and other costs in the accompanying consolidated statement of income. Deferred Financing Costs The Company capitalizes certain fees and costs incurred in connection with the issuance of debt. Deferred financing costs are amortized to interest expense over the term of the debt using the effective interest method. For the Amended and Restated Credit Agreement and Former Credit Facility (as defined in Note 13, "Long-Term Debt and Finance Lease Liabilities), deferred financing costs are amortized on a straight-line basis over the term of the facility. Upon prepayment, redemption or conversion of debt, the Company accelerates the recognition of an appropriate amount of financing costs as loss on extinguishment of debt. The current and noncurrent portions of deferred financing costs are included in prepaid expenses and other current assets and other assets, respectively, in the accompanying consolidated balance sheets. Leases The Company leases all stores, distribution centers, and administrative offices. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease assets, current portion of operating lease liabilities and noncurrent portion of operating lease liabilities in the Company's fiscal year 2019 consolidated balance sheet. Finance leases are included in property, plant, equipment, net, current portion of finance lease liabilities, and long-term debt and finance lease liabilities in the Company's fiscal year 2019 consolidated balance sheet. Operating lease payments are charged on a straight-line basis to rent expense, a component of selling, general and administrative expenses, over the lease term and finance lease payments are charged to interest expense and depreciation and amortization expense using a debt model over the lease term. The Company's lease assets represent a right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Lease assets and liabilities and the related rent expense are recognized at the lease commencement date (date on which the Company gains access to the property) based on the estimated present value of lease payments over the lease term, net of landlord allowances expected to be received. The Company accounts for the lease and non-lease components as a single lease component for all current classes of leases. Most of the Company's lease agreements include variable payments related to pass-through costs for maintenance, taxes, and insurance. Additionally, some of the Company's lease agreements include rental payments based on a percentage of retail sales over contractual levels. These variable payments are not included in the measurement of the lease liability or asset and are expensed as incurred. As most of the Company's lease agreements do not provide an implicit rate, the Company uses an estimated incremental borrowing rate, which is derived from third-party information available at the lease commencement date, in determining the present value of lease payments. The rate used is for a secured borrowing of a similar term as the lease. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to twenty years or more. The exercise of lease renewal options is at the Company's sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less (short-term leases) are not recorded on the balance sheet. The Company does not currently have any material short- term leases. Additionally, the Company's lease agreements do not contain any residual value guarantees or material restrictive covenants. The Company subleases certain real estate to third parties, which have all been classified as operating leases. The Company recognized sublease income on a straight-line basis. Fair Value Measurements The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with ASC 820. This framework establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value: Level 1: Quoted prices for identical instruments in active markets. 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 valuation of derivative instruments, impairment analysis of goodwill, intangible assets, and long-lived assets. Impairment losses related to store-level assets are calculated using significant unobservable inputs including the present value of future cash flows expected to be generated using a risk-adjusted market based weighted-average cost of capital, comparable store sales growth assumptions, and third party property appraisal data. Therefore, these inputs are classified as a level 3 measurement in the fair value hierarchy. Cash, cash equivalents and restricted cash, 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 Derivative Financial Instruments The Company records derivatives at fair value. The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the Company reflects the change in fair value of the derivative instrument in its financial statements. A derivative qualifies for hedge accounting if at inception, the derivative is expected to be highly effective in offsetting the underlying hedged cash flows, and the Company fulfills the hedge documentation standards at the time it enters into the derivative contract. The Company designates its hedge based on the exposure it is hedging. For qualifying cash flow hedges, the Company records changes in fair value in other comprehensive income (OCI) The Company releases the derivative's gain or loss from OCI to match the timing of the underlying hedged item's effect on earnings The Company reviews the effectiveness of its hedging instruments quarterly. The Company recognizes changes in the fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. The Company discontinues hedge accounting for any hedge that is no longer evaluated to be highly effective. The Company does not enter into derivative financial instruments for trading or speculative purposes, and it monitors the financial stability and credit standing of its counterparties in these transactions. Share-Based Compensation The Company measures share-based compensation cost at the grant date based on the fair value of the award and recognizes share-based compensation cost as expense over the vesting period. As share-based compensation expense recognized in the consolidated statements of income is based on awards ultimately expected to vest, the amount of expense has been reduced for actual forfeitures as they occur. The Company uses the Black-Scholes option-pricing model to determine the grant date fair value for each option grant. The Black-Scholes option-pricing model requires extensive use of subjective assumptions. See Note 28, "Share-Based Compensation for a discussion of assumptions used in the calculation of fair values. Application of alternative assumptions could produce different estimates of the fair value of share-based compensation and, consequently, the related amounts recognized in the accompanying consolidated statements of income. The grant date fair value of restricted stock units (RSUS"). performance share awards (PSAs), and restricted stock awards (RSAS) is based on the closing price per share of the Company's stock on the grant date. The Company recognizes compensation expense for time-based awards on a straight-line basis and for performance-based awards on the graded-vesting method over the vesting period of the awards. Revenue Recognition The Company's performance obligations are satisfied upon the transfer of goods to the customer, which occurs 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 Company's gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage" Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions and was not material in any period presented. Gift card liability, net inet of estimated breakage Balance as of December 30, 2018 14.020 Gift Cards issued During Current Period But Not Redeemed Revenue Recognized From Beginning Liability Balance as of December 29, 2015 11.720 (10.450) 15.902 The nature of goods the Company transfers to customers at the point of sale are inventories, consisting of merchandise purchased for resale. 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 December 29, 2019 Cost of Sales Cost of sales includes the cost of inventory sold during the period, including the direct costs of purchased merchandise (net of discounts and allowances), distribution and supply chain costs, supplies and depreciation and amortization for distribution centers and supply chain related assets. The Company recognizes vendor allowances and merchandise volume related rebate allowances as a reduction of inventories during the period when eamed and reflects the allowances as a component of cost of sales as the inventory is sold. The Company's largest supplier accounted for approximately 40%, 34% and 34% of total purchases during 2019, 2018, and 2017. respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses primarily consist of salaries, wages and benefits costs, share-based compensation. occupancy costs (including rent, property taxes, utilities, common area maintenance and insurance), advertising costs, buying cost, pre- opening and other administrative costs. The Company charges certain vendors to place advertisements in the Company's in-store guide and circulars under a cooperative advertising program. The Company records rebates received from vendors in connection with cooperative advertising programs as a reduction to advertising costs when the allowance represents a reimbursement of a specific incremental and identifiable cost. Advertising costs are expensed as incurred. Advertising expense, net of rebates, was $57.2 million, 350.2 million and $42.3 million for 2019, 2018. and 2017, respectively. Depreciation and amortization Depreciation and amortization expense (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company's deferred tax assets are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. Realization of the deferred tax assets is principally dependent upon achievement of projected future taxable income offset by deferred tax liabilities. Changes in recognition or measurement are reflected in the period in which the judgment occurs. The Company files income tax returns for federal purposes and in many states. The Company's tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three years, following the tax year to which those filings relate. The Company's U.S. federal income tax return for the fiscal year ended December 31, 2017, is currently under examination by the Internal Revenue Service The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits as part of income tax expense. Cost of Sales Cost of sales includes the cost of inventory sold during the period, including the direct costs of purchased merchandise (net of discounts and allowances), distribution and supply chain costs, supplies and depreciation and amortization for distribution centers and supply chain related assets. The Company recognizes vendor allowances and merchandise volume related rebate allowances as a reduction of inventories during the period when eamed and reflects the allowances as a component of cost of sales as the inventory is sold. The Company's largest supplier accounted for approximately 40%, 34% and 34% of total purchases during 2019, 2018, and 2017. respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses primarily consist of salaries, wages and benefits costs, share-based compensation. occupancy costs (including rent, property taxes, utilities, common area maintenance and insurance), advertising costs, buying cost, pre- opening and other administrative costs. The Company charges certain vendors to place advertisements in the Company's in-store guide and circulars under a cooperative advertising program. The Company records rebates received from vendors in connection with cooperative advertising programs as a reduction to advertising costs when the allowance represents a reimbursement of a specific incremental and identifiable cost. Advertising costs are expensed as incurred. Advertising expense, net of rebates, was $57.2 million, 350.2 million and $42.3 million for 2019, 2018. and 2017, respectively. Depreciation and amortization Depreciation and amortization expense (exclusive of depreciation included in cost of sales) primarily consists of depreciation and amortization for buildings, store leasehold improvements, and equipment. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company's deferred tax assets are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. Realization of the deferred tax assets is principally dependent upon achievement of projected future taxable income offset by deferred tax liabilities. Changes in recognition or measurement are reflected in the period in which the judgment occurs. The Company files income tax returns for federal purposes and in many states. The Company's tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three years, following the tax year to which those filings relate. The Company's U.S. federal income tax return for the fiscal year ended December 31, 2017, is currently under examination by the Internal Revenue Service The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits as part of income tax expense. Share Repurchases The Company has elected to retire shares repurchased to date. Shares retired become part of the pool of authorized but unissued shares. The Company has elected to record purchase price of the retired shares in excess of par value directly as a reduction of retained earnings. Net Income per Share Basic net income per share is calculated by dividing net income by the weighted average number of shares outstanding during the fiscal period. Diluted net income per share is based on the weighted average number of shares outstanding, plus, where applicable, shares that would have been outstanding related to dilutive options, PSAS, RSAs, and RSUs. Comprehensive Income Comprehensive income consists of net income and the unrealized gains or losses on derivative instruments that qualify for and have been designated as cash flow hedges, for all periods presented. Recendy Adopted Accounting Pronouncements Leases 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 financing or operating lease. The Company adopted the standard as of December 31, 2018, the first day of fiscal year 2019. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, permits companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs. The Company did not elect the hindsight practical expedient. The adoption of the standard resulted in the recognition of operating lease assets and liabilities of approximately $1.0 billion and $1.1 billion, respectively, as of December 31, 2018, including recognition of operating lease assets and liabilities for certain third-party operated distribution center locations. Included in the measurement of the new lease assets and liabilities is the reclassification of balances historically recorded as deferred rent and unfavorable and favorable leasehold interests. Additionally, the Company recognized a cumulative effect adjustment, which increased retained earnings by $11.4 million, net of tax. This adjustment was driven by the derecognition of approximately $114.0 million of lease obligations and $102.6 million of net assets related to leases that had been classified as financing lease obligations under the former failed-sale leaseback guidance, and are now classified as operating leases as of the transition date. This reclassification also resulted in the recognition of rent expense beginning December 31, 2018, which was previously reported as interest expense under the former failed sale-leaseback guidance. Lastly, the adoption of this standard resulted in a change in naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases. The adoption of this standard did not have any impact on the Company's liquidity or cash flows. Refer to Note 7, "Leases", for additional information related to the Company's updated lease accounting policy

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