Prior to a public offering of stock, companies are required to disclose events or uncertainties, including any known trends, that may cause a change in future financial figures. The complaint for this securities class action alleges that Sprouts Farmers Market, Inc. compiled offering documents that did not meet this requirement and violated of the Securities Act of 1933.
The class for this action is all buyers of the common stock of Sprouts pursuant to the Offering Documents issued for its secondary public offering, which closed on or about March 10, 2015.
Sprouts runs a chain of over 200 grocery stores in thirteen states that specialize in fresh produce and natural and organic products. The company claims that about 25% of its revenue comes from produce.
On February 25, 2015, less than two weeks before the offering, Sprouts issued a press release on the company’s results for the fourth quarter and full year of 2014 and offered guidance for between 5% and 6% growth for the first quarter of 2015 and between 6% and 7% for the full year of 2015.
The company’s Form 10-K, filed three days later, mentioned risk factors, saying, in part, “Food deflation could reduce sales growth and earnings…” It also said, “In the first half of fiscal 2012, we experienced produce price deflation, which contributed to higher gross margins…” and warned that “we may experience periodic effects on sales, gross profit and gross margins as a result of changing prices…”
The problem, according to the complaint, is that no discussion was offered of current trends.
When the company filed its offering documents for its March 6 to March 10 offering, it incorporated this filing by reference. The offering was successful, with over 15,000,000 shares sold at $35.30 per share.
However, on May 7, 2015, the company issued a press release announcing disappointing results for the first quarter of 2015. In a conference call, the company’s Executive Chairman said that the company “began experiencing accelerating produce deflation in mid-February, which increased significantly throughout March.”
The company’s CFO confirmed that “produce is 25% of our business” and said that “we started to see a tremendous amount of deflation. In February, we saw huge deflation in certain categories…”
On August 6, 2015, the company issued a press release with disappointing second-quarter 2015 results. The complaint says that Sprouts reduced its full-year guidance by 18%, to between 4% and 5%, blaming the reduction on deflation, not just in produce but in pork and chicken as well.
In response to this news, the company’s stock price fell by more than 11%, to close at $20.77—well below the $35.30 offering price.
The complaint claims that at the time of the offering, Sprouts was already experiencing the deflation that caused the disappointing results and should have disclosed it to investors.