What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-06-10 compared with 2020-03-11 · 223 added, 145 removed, 352 unchanged (51% of the section changed)

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Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:

the impact and duration of the COVID-19 outbreak;

our dependence on principal customers;

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the relatively low margins and economic sensitivity of our business;

the potential for disruptions in our supply chain or our distribution capabilities by circumstances beyond our control, including a health epidemic;

the potential for disruptions in our supply chain or our distribution capabilities by circumstances beyond our control, including a health epidemic (such as the recent outbreak of COVID-19, or the novel coronavirus);

the risk of interruption of supplies due to lack of long-term contracts, severe weather, work stoppages or otherwise;

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You should carefully review the risks described under “Part II.

Item 1A of our Annual Report on Form 10-K for the year ended August 3, 2019.

Risk Factors as well as any other cautionary language in this Quarterly Report, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.

Item 1A Risk Factors” of this Quarterly Report on Form 10-Q and under “Part I.

Item 1A Risk Factors” of our Annual Report on Form 10-K for the year ended August 3, 2019 as well as any other cautionary language in this Quarterly Report, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.

EXECUTIVE OVERVIEW

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In fiscal 2019, the acquisition of Supervalu accelerated our “build out the store” strategy, diversified our customer base, enabled cross-selling opportunities, expanded our market reach and scale, enhanced our technology, capacity and systems, and is expected to deliver significant synergies and accelerate potential growth.

We believe our significant scale and footprint will generate long-term shareholder value by positioning us to continue to grow sales of natural, organic, specialty, produce, conventional grocery and non-food products, including our Private Brands Business and professional services across our network.

We believe our significant scale and footprint will generate long-term shareholder value by positioning us to continue to grow sales of natural, organic, specialty, produce and conventional grocery and non-food products, including our Private Brands Business and professional services across our network.

We believe we will realize significant cost and revenue synergies from the acquisition of Supervalu by leveraging the scale and resources of the combined company, cross-selling to our customers, integrating our merchandising offerings into existing warehouses, optimizing our network footprint to lower our cost structure, and eliminating redundant administrative costs.

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We currently operate approximately 76 retail grocery stores acquired in the Supervalu acquisition.

We intend to thoughtfully and economically divest these stores, and, as described below, during the second quarter of fiscal 2020, we entered into agreements to sell 13 retail stores and closed six additional stores.

These stores are reported within discontinued operations in our Condensed Consolidated Financial Statements included in this Quarterly Report.

We intend to thoughtfully and economically divest these stores over the long-term;

however, as discussed below within Divestiture of Retail Operations, we have determined that we no longer expect to divest the Cub Foods business and the majority of the remaining Shoppers locations (collectively “Remaining Retail”) within one year.

Accordingly, we will present the Remaining Retail business within continuing operations beginning in the fourth quarter of fiscal 2020.

In our third quarter fiscal 2020 Condensed Consolidated Financial Statements included in this Quarterly Report, Remaining Retail is presented within Discontinued Operations, as the determination to change the plan of sale occurred subsequent to the end of the third quarter of fiscal 2020.

As described below we entered into agreements to sell 13 retail stores and closed six additional stores.

In the third quarter of fiscal 2020, we closed on the sale of 12 of these Shoppers stores.

We have been the primary distributor to Whole Foods Market for more than 20 years.

We continue to serve as the primary distributor to Whole Foods Market in all of its regions in the United States pursuant to a distribution agreement that expires on September 28, 2025.

COVID-19 Impact

Impact and Response

Consistent with our values, with the spread of COVID-19 and continuing impacts created by the virus, we remain focused on the safety and well-being of our associates, customers and end consumers and supporting our wholesale customers.

As COVID-19 spread in March 2020, shelter-in-place orders and national and state emergencies were issued in the U.S., our business was designated as an essential business to enable us to continue to serve our customers during the COVID-19 pandemic.

We experienced an initial surge in demand and sales in March and April of 2020 as consumers undertook efforts to stock their pantries and our related wholesale customer purchases surged.

During the initial spreading of the virus and implementation of shelter-in-place and restaurant closures, we experienced a surge in demand, which impacted fill and service rates and depleted inventory levels.

Based on historical purchasing levels, temporary customer supply allocation limits were put in place to ensure continued service to our wholesale customers’ locations, which were removed as we added capacity.

In response to the surge in demand, in the third quarter of fiscal 2020, we took immediate actions to respond to the pandemic, to support our associates’ safety and wellbeing, and maximize our logistics network to serve the communities we supply, while delivering operational and financial results.

These actions included:

hiring over 2,000 associates, and providing existing associates with temporary state of emergency wage increases and increased overtime to warehouse, driver and in-store associates;

implementing heightened associate safety protocols to keep our workforce healthy, including social distancing practices, implementing extensive safety protocols at our retail locations to protect associates and customers, and engaging additional professional cleaning companies in our facilities;

enhancing employee benefits, including wellbeing resources and covering COVID-19 testing expenses and providing coverage for COVID-19 illness or quarantine directed by the Company or a regulatory agency;

expanding warehouse operational hours and entering into service provider agreements to facilitate the transportation of our products to meet heightened demand and increase service levels;

donating over six million pounds of food and essential items to food banks across the country;

working with suppliers to prioritize the procurement and sale of high-volume stock-keeping units;

implementing enhanced high food safety standards for customers and consumers;

reassuring the public that the supply chain remains intact, and that food and essential products are available and safe.

We believe the Supervalu acquisition allowed us to better serve our wholesale customers’ needs and compete in the current environment by providing additional warehouse and transportation capacity, as well as providing a broader array of products to our customers.

As one of the largest wholesale grocery distributors in North America and in light of the continued expansion of our distribution network and build-out-the-store initiative, we believe we are well positioned to leverage our infrastructure in the current economic and social environment to continue to serve our customers and the communities in which they operate.

We experienced the following impacts from COVID-19 in the third quarter of fiscal 2020:

Our increase in sales in the third quarter was primarily driven by higher sales volume due to the increase in food-at-home expenditures from the economic impacts created by the COVID-19 pandemic, partially offset by previously lost business.

Gross Profit.

Gross profit rates were impacted negatively by mix shifts toward lower margin products and lower vendor promotions, which was partially offset by lower levels of inventory shrink.

Operating Expenses.

Operating expense rates were positively impacted by our ability to leverage fixed operating and administrative expenses, which were partially offset by incremental costs related to COVID-19, including the impact of temporary pandemic related incentives and additional costs for safety protocols and procedures at the Company’s distribution centers and retail stores.

When COVID-19 related health and safety requirements are eased, we expect these costs to subside.

These costs were necessary to protect our employees, product quality standards, and wholesale and retail customers.

We estimate we incurred approximately $20 million of incremental operating expenses within continuing operations related to our response to the pandemic and operating our business at a higher through-put capacity.

Operating Earnings.

Our business model drives sales leverage, and provided growth in operating earnings margin, as we leveraged the fixed and variable costs of our supply chain network and administrative expenses.

Despite incremental labor and operating costs, incremental volume through our distribution network and retail stores drove higher leverage on fixed facility costs, semi-variable costs and general and administrative expenses.

Working Capital and Liquidity

Reflecting the initial impact from the COVID-19 pandemic, working capital was reduced in the third quarter of fiscal 2020 by $214.5 million , as compared to the second quarter of fiscal 2020, which provided a strong source of cash flows from operating activities in the quarter.

The surge in demand during the quarter discussed above initially depleted inventory levels of continuing operations, which ended $109.2 million lower in the quarter compared to the second quarter of fiscal 2020.

Our Accounts payable fluctuated greatly during the quarter related to swings in Inventories, net, ending the quarter $253.4 million higher as compared to the second quarter of fiscal 2020, as we worked to respond to our customers’ modified purchase patterns and prioritize the procurement of high-volume stock-keeping units.

The elevated sales levels caused Accounts receivable, net to grow by $157.7 million as compared to the second quarter of fiscal 2020 due to higher sales.

In response to the potential impacts of the COVID-19 pandemic, we temporarily borrowed an additional $278.5 million on our $2.1 billion ABL Credit Facility, which we fully repaid in the third quarter of fiscal 2020.

These borrowings were made as a precautionary measure to increase our cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 pandemic.

We made additional net payments of $371.2 million on the ABL Credit Facility in the third quarter of fiscal 2020 to further reduce our debt.

Our unused credit under our ABL Credit Facility increased $329.7 million as of the end of the third quarter of fiscal 2020 compared to the second quarter of fiscal 2020.

We expect to continue to benefit from sales and margin growth as compared to historical periods while food-at-home expenditures as a percentage of total expenditures remains higher than recent historical precedent.

We also expect the favorable year-over-year sales, margin growth and cost leveraging to continue in the near term.

We expect fourth quarter of fiscal 2020 gross margin rate to be diluted as compared to last year driven by continued impacts of wholesale customer and product mix changes.

We continue to make progress to increase fill rates and service level as our and our vendors’ logistics capacity grows, which we expect will result in lower out of stock rates.

Trends in increased sales and gross margin benefits may lessen or reverse in the intermediate months if customers alter their purchasing habits.

In addition, as discussed below in the sections Impact of Inflation or Deflation and Other Factors Affecting our Business we could also be affected by changes in product mix and product category inflation changes, especially if the U.S.

and Canadian economies enter into and maintain an economic recession, and customers change their purchasing habits.

These potential developments could impact food-at-home expenditures and prompt consumers to trade down to lower priced product categories or change their purchasing habits in a manner that would impact our wholesale supply to our wholesale customers.

However, the expected benefits from food-at-home expenditures remaining elevated and those impacts benefiting our wholesale customers are expected to outweigh product mix changes and other factors as it pertains to our results of operations and cash flows.

The ultimate impact on our results is dependent upon the severity and duration of the COVID-19 pandemic, food-at-home purchasing levels, actions taken by governmental authorities and other third parties in response to the pandemic, each of which is uncertain, rapidly changing and difficult to predict.

Any of these disruptions could adversely impact our business and results of operations.

We could experience disruptions to our supply chain through the shutdown of one or more of our distribution centers or warehouses, the inability to transport products to serve our customers or the inability of our vendors and contract manufacturers to supply products to us.

In addition, the contraction of financial markets may impact our ability to execute transactions to dispose of or acquire real estate or distribution assets, including potential impacts to our ability to divest our retail operations.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 and contains significant business tax provision changes to the U.S.

tax code, including temporary expansion of the limitations to the deductibility of net operating losses and interest expense and the ability to treat qualified improvement property as eligible for bonus depreciation.

In addition, the CARES Act changed the required filing of our federal income tax return from May 2020 to July 2020, and allows remittances of employer FICA payments previously due March 2020 to December 2020 to be deferred until December 2021 and December 2022.

Prior to the application of the CARES Act, we had a deferred tax asset related to $203 million of federal net operating losses that were available for unlimited carryforward (but no carryback) pursuant to provisions of the 2017 Tax Cuts and Jobs Act, which permitted taxpayers to carryforward net operating losses indefinitely.

The CARES Act provides us the ability to carry these losses back at a 35% federal tax rate during the carry back periods, as opposed to the current 21% federal tax rate.

This resulted in a tax benefit of approximately $28.4 million , which we recorded in the third quarter of fiscal 2020.

This estimated tax benefit will be finalized in the fourth quarter of fiscal 2020 as the 2019 tax return due July 2020 is finalized.

The entire tax benefit associated with the net operating loss carry back has been recorded as a current tax receivable in the third quarter of fiscal 2020.

Distribution Center Network

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This transition and operational consolidation is expected to be completed during fiscal 2020, after which we expect to achieve synergies and cost savings by eliminating inefficiencies, including incurring lower operating, shrink and off-site storage expenses.

The optimization of the Pacific Northwest distribution network will also help deliver meaningful synergies contemplated in Supervalu acquisition.

This plan includes expanding the Ridgefield distribution center to enhance customer product offerings, create more efficient inventory management, streamline operations and incorporate greater technology to deliver a better customer experience.

The Ridgefield distribution center will deploy a warehouse automation solution that supports our slow-moving stock-keeping unit (SKU) portfolio.

The operational start-up of the Centralia, WA distribution center began in the fourth quarter of fiscal 2019 and continued to ramp-up in the first and second quarters of fiscal 2020.

The optimization of the Pacific Northwest distribution network will also help deliver meaningful synergies contemplated in the Supervalu acquisition.

This plan includes expanding the Ridgefield, WA distribution center to enhance customer product offerings, create more efficient inventory management, streamline operations and incorporate greater technology to deliver a better customer experience.

The Ridgefield distribution center will deploy a warehouse automation solution that supports our slow-moving stock-keeping unit portfolio.

The operational start-up of the Centralia, WA distribution center began in the fourth quarter of fiscal 2019 and is expected to be completed in the fourth quarter of fiscal 2020.

We ceased operations in our Tacoma, WA, Auburn, WA and Auburn, CA distribution centers and have transitioned to supplying customers served by these locations to our Centralia, WA, Ridgefield, WA and Gilroy, CA distribution centers.

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In connection with our consolidation of distribution centers in the Pacific Northwest, during the second quarter of fiscal 2020, we recorded a $10.6 million multiemployer pension plan withdrawal liability, under which payments will be made over a one-year period beginning in fiscal 2022.

On February 24, 2020, we executed a purchase option to acquire a distribution center facility with approximately 1.2 million square feet that is currently under construction.

Upon completion of the construction the purchase price of the facility will be determined.

The purchase of the distribution center may occur anytime between the fourth quarter of fiscal 2020 and the fourth quarter of fiscal 2022 pursuant to the landlord’s determination.

To support our continued growth within southern California, we began operating a newly leased facility with approximately 1.1 million square feet upon completion of its construction in the fourth quarter of fiscal 2020.

This facility provides significant capacity to service our customers in this market and provides us the future flexibility to potentially monetize existing owned facilities in the southern California market.

On February 24, 2020, we executed a purchase option to acquire the real property of a distribution center agreeing to pay approximately $156.9 million for the facility, subject to finalization.

We expect to engage a real estate partner to monetize the real property of this location, including through a sale-leaseback transaction that would ultimately reduce rents paid for this property from current rents, which we expect would occur on or before June 2022.

Distribution Center Sales

In the fourth quarter of fiscal 2019, we entered into an agreement to sell our Tacoma distribution center for $43.2 million related to our Pacific Northwest consolidation strategy, which we expect to close in fiscal 2020.

This facility is classified as held for sale within Prepaid expenses and other current assets of continuing operations on our Condensed Consolidated Balance Sheets .

In the fourth quarter of fiscal 2019, we entered into an agreement to sell our Tacoma, WA distribution center related to our Pacific Northwest consolidation strategy.

We closed on the sale in the fourth quarter of fiscal 2020 and received consideration of $42.3 million in the form of a $38.0 million note receivable and cash.

As of May 2, 2020, the facility is classified as held for sale within Prepaid expenses and other current assets of continuing operations on our Condensed Consolidated Balance Sheets .

As we consolidate our distribution networks, we may sell additional owned facilities or exit leased facilities.

In the third quarter of fiscal 2020, we sold a warehouse in Stockton, CA for $4.8 million.

Operating Efficiency

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Divestiture of Retail Operations

We have announced our intention to divest our retail businesses acquired as part of the Supervalu acquisition as soon as practical in an efficient and economic manner in order to focus on our core wholesale distribution business.

We have announced our intention to thoughtfully and economically divest our retail businesses acquired as part of the Supervalu acquisition as soon as practical in an efficient and economic manner in order to focus on our core wholesale distribution business.

We plan to maximize value as part of the divestiture process, including limiting liabilities and stranded costs associated with these divestitures.

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At this time, however, we are unable to make an estimate with reasonable certainty of the amount or type of costs and charges expected to be incurred in connection with the foregoing actions.

Our discontinued operations as of the end of second quarter of fiscal 2020 include Cub Foods and Shoppers disposal groups, and our historical results of discontinued operations include Hornbacher’s and Shop ‘n Save, which were divested in the second and third quarters of fiscal 2019, respectively.

Our discontinued operations as of the end of third quarter of fiscal 2020 include Cub Foods and Shoppers disposal groups, and our historical results of discontinued operations include Hornbacher’s and Shop ‘n Save, which were divested in the second and third quarters of fiscal 2019, respectively.

In addition, discontinued operations includes certain real estate related to historical retail operations.

These retail assets have been classified as held for sale as of the Supervalu acquisition date, and the results of operations, financial position and cash flows directly attributable to these operations are reported within discontinued operations in our Condensed Consolidated Financial Statements for all periods presented.

As of the acquisition date, retail assets and liabilities were recorded at their estimated fair value less costs to sell, and subsequent to the acquisition date, we review the fair value less costs to sell these disposal groups.

In the second quarter of fiscal 2020, we entered into agreements to sell 13 Shoppers stores and decided to close six locations.

During the second quarter of fiscal 2020, in aggregate between discontinued operations and continuing operations we incurred approximately $44.7 million of pre-tax aggregate costs and charges, consisting of $17.5 million of property and equipment and lease asset impairment charges related to impairment reviews on the remaining locations (as described below), $12.4 million of operating losses and transaction costs during the period of wind-down, $8.6 million of lease termination charges and losses on sale and $6.2 million of severance costs.

We expect to incur additional related costs and charges in the third quarter of fiscal 2020.

In the second quarter of fiscal 2020, we reviewed the recoverability of the remaining assets held for sale and assessed the remaining composition of the Shoppers disposal group based on updated fair values.

Based on the announced transactions and an updated impairment assessment, we recorded property and equipment, and operating lease asset impairment charges of $17.5 million for the remaining Shoppers assets, which is included above.

We continue to hold the remaining Shoppers stores and the Cub Foods business for sale.

We may incur additional costs and charges in the future related to Cub Foods or Shoppers if there are declines in their estimated fair values or if we incur additional wind-down or employee-related costs or charges.

In the second quarter of fiscal 2020, we entered into agreements to sell 13 Shoppers stores and decided to close six locations, and in the third quarter of fiscal 2020 we closed on the sale of 12 of these Shoppers stores.

During fiscal 2020 year-to-date, in the aggregate between discontinued operations and continuing operations we incurred approximately $57.3 million of pre-tax aggregate costs and charges related to Shoppers, consisting of $33.3 million of lease asset impairment and property and equipment charges, including lease termination charges and charges related to impairment reviews, $14.2 million of operating losses and transaction costs during the period of wind-down, $8.7 million of severance costs and $1.1 million of losses on sale of assets.

We may incur additional related costs and charges in the fourth quarter of fiscal 2020.

In the second and third quarter of fiscal 2020, we reviewed the recoverability of the remaining assets held for sale and assessed the remaining composition of the Shoppers disposal group based on updated fair values.

As of May 2, 2020, we held the remaining Shoppers stores and the Cub Foods business for sale.

Subsequent to the end of the third quarter of fiscal 2020, we determined it was no longer probable that a sale of Remaining Retail would occur within one year.

As a result, we determined we no longer met the criteria to classify Remaining Retail as discontinued operations.

In the fourth quarter of fiscal 2020, we expect to present Remaining Retail as held and used as part of continuing operations in our fiscal 2020 Consolidated Financial Statements based on this assessment.

This expected change in financial statement presentation will require us to restate the presentation and classification of Remaining Retail within our Consolidated Financial Statements for fiscal 2019, which will result in Remaining Retail’s results of operations, financial position, cash flows and related disclosures being within continuing operations.

In the fourth quarter of fiscal 2020, we expect to record an adjustment to the carrying value of certain long-lived assets, including property and equipment and intangible assets, to record the assets at the carrying amount at the acquisition date adjusted for any depreciation expense that would have been recognized had the assets been held and used as part of continuing operations since their acquisition date.

We estimate the adjustment to account for the incremental depreciation and amortization expense required to be recorded in the fourth quarter of fiscal 2020 will be approximately $48 million, which reflects an estimate of depreciation and amortization from the date of the Supervalu acquisition date through fiscal 2020 based on useful lives assigned to the underlying retail assets expected to be brought back into continuing operations.

As discussed in Note 3—Revenue Recognition , certain sales from the Wholesale segment to the retail discontinued operations are presented within Net sales.

In order to present Remaining Retail’s results of operations within continuing operations these Wholesale sales to retail discontinued operations will be eliminated upon consolidation, resulting in no consolidated effect on Net sales resulting from our Wholesale segment.

Remaining Retail’s net sales will be included in the Net sales line of the Consolidated Statement of Operations.

As discussed in Note 3—Revenue Recognition , we currently hold Shoppers stores for sale without an expectation of a supply agreement and therefore no Wholesale sales were recorded within continuing operations.

Within the restatement of our segment financial information, we expect to recognize Wholesale segment sales to the majority of the remainder of the Shoppers locations, which will be eliminated upon consolidation as described above.

Subsequent to the restatement of our Consolidated Financial Statements, we expect consolidated net sales, gross profit and operating expenses to increase compared to the current presentation, and expect our consolidated gross profit as a percentage of net sales to increase, which we expect will be partially offset by an increase in operating expenses as a percent of net sales.

We may incur additional costs and charges in the future related to the divesture of Remaining Retail if these locations are subsequently sold, indicators exist that the business may be impaired, or if we incur additional wind-down or employee-related costs or charges.

Supervalu Professional Services Agreements

In connection with the sale of Save-A-Lot on December 5, 2016, Supervalu entered into a services agreement (the “Services Agreement”) with Moran Foods, LLC (“Moran Foods”), the entity that operates the Save-A-Lot business.

In connection with the sale of Save-A-Lot on December 5, 2016, Supervalu entered into a services agreement (the “Services Agreement”) with Moran Foods, LLC, the entity that operates the Save-A-Lot business.

Pursuant to the Services Agreement, we provide certain technical, human resources, finance and other operational services to Save-A-Lot for a term of five years, on the terms and subject to the conditions set forth therein.

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Impact of Inflation or Deflation

We monitor product cost inflation and deflation and evaluate whether to absorb cost increases or decreases, and pass on pricing changes to our customers.

We experienced a mix of inflation and deflation across product categories during the second quarter of fiscal 2020.

In aggregate across all of our legacy businesses and taking into account the mix of products, management estimates our businesses experienced cost inflation in the low single digits in the second quarter of fiscal 2020.

We monitor product cost inflation and deflation and evaluate whether to absorb cost increases or decreases, or pass on pricing changes to our customers.

We experienced a mix of inflation and deflation across product categories during the third quarter of fiscal 2020.

In the aggregate across all of our legacy businesses and taking into account the mix of products, management estimates our businesses experienced cost inflation in the low single digits in the third quarter of fiscal 2020.

Cost inflation and deflation estimates are based on individual like items sold during the periods being compared.

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This trend paused during the 2008 recession, and then continued to increase.

In fiscal 2020, the COVID-19 impact has caused a significant increase in food-at-home expenditures as a percentage of total food expenditures.

We expect that food-at-home expenditures as a percentage of total food expenditures will remain higher than recent years during time periods that shelter-in-place orders exist until businesses are allowed to fully reopen and any related economic recession has ended.

We are also impacted by changes in food distribution trends to our wholesale customers, such as direct store deliveries and other methods of distribution.

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Business Performance Assessment and Composition of Condensed Consolidated Statements of Operations

Our net sales consist primarily of sales of conventional, natural, organic, specialty, and produce grocery and non-food products, and support services to retailers, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances, and professional services revenue.

Our net sales consist primarily of sales of natural, organic, specialty, produce and conventional grocery and non-food products, and support services to retailers, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances, and professional services revenue.

Net sales also include amounts charged by us to customers for shipping and handling and fuel surcharges.

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We believe Adjusted EBITDA is useful to investors and financial institutions because it provides additional understanding of factors and trends affecting our business, which are used in the business planning process to understand expected operating performance, to evaluate results against those expectations, and as the primary compensation performance measure under certain compensation programs and plans.

We believe Adjusted EBITDA is more reflective of factors that affect our underlying operating performance and facilitate operating performance comparisons of our business on a consistent basis over time.

We believe Adjusted EBITDA is reflective of factors that affect our underlying operating performance and facilitate operating performance comparisons of our business on a consistent basis over time.

Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool.

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(in thousands)

February 1, 2020

January 26, 2019

February 1, 2020

January 26, 2019

April 27, 2019

Cost of sales

Operating expenses

Goodwill and asset impairment charges

Goodwill and asset impairment (adjustment) charges

Restructuring, acquisition and integration related expenses

Operating loss

Operating income (loss)

Other expense (income):

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Total other expense, net

Loss from continuing operations before income taxes

Income (loss) from continuing operations before income taxes

Benefit for income taxes

Net loss from continuing operations

Net income (loss) from continuing operations

Income from discontinued operations, net of tax

Net loss including noncontrolling interests

Net income (loss) including noncontrolling interests

Less net (income) loss attributable to noncontrolling interests

Net loss attributable to United Natural Foods, Inc.

Net income (loss) attributable to United Natural Foods, Inc.

Adjusted EBITDA

The following table reconciles Adjusted EBITDA to Net loss from continuing operations and to Income from discontinued operations, net of tax.

The following table reconciles Adjusted EBITDA to Net income (loss) from continuing operations and to Income from discontinued operations, net of tax .

13-Week Period Ended

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(in thousands)

February 1, 2020

January 26, 2019

February 1, 2020

January 26, 2019

Net loss from continuing operations

Adjustments to continuing operations net loss:

April 27, 2019

Net income (loss) from continuing operations

Adjustments to continuing operations net income (loss):

Total other expense, net

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Restructuring, acquisition and integration related expenses (2)

Goodwill and asset impairment charges (2)

Goodwill and asset impairment (adjustment) charges (3)

Note receivable charges (4)

Inventory fair value adjustment (5)

Legal (settlement income) reserve charge (5)

Legal reserve charge, net of settlement income (6)

Adjusted EBITDA of discontinued operations (7)

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Adjustments to discontinued operations net income:

Less net income attributable to noncontrolling interests

Less net (income) loss attributable to noncontrolling interests

Total other expense, net

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Adjusted EBITDA of discontinued operations (7)

Fiscal 2020 includes the tax benefit from the CARES Act, which includes the impact of tax loss carrybacks to 35% tax years allowed under the CARES Act.

Primarily reflects expenses resulting from the acquisition of Supervalu, including severance costs, store closure charges, and acquisition and integration expenses.

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Reflects reserves and charges for notes receivable issued by the Supervalu business prior to its acquisition to finance the purchase of stores by its customers.

Reflects a non-cash charge related to the step-up of acquired Supervalu inventory as part of purchase accounting.

Reflects income received to settle a legal proceeding, a charge to settle a legal proceeding, and a charge related to our assessment of legal proceedings.

Adjusted EBITDA of discontinued operations excludes rent expense of $11.0 million and $12.4 million in the second quarters of fiscal 2020 and 2019 , respectively, and $23.5 million and $13.3 million in fiscal 2020 and 2019 year-to-date , respectively, of operating lease rent expense related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations, as we expect to remain primarily obligated under these leases.

Reflects a non-cash charge related to the step-up of inventory values as part of purchase accounting.

Reflects a charge to settle a legal proceeding and a charge related to our assessment of legal proceedings, net of income received to settle a legal proceeding.

Income from discontinued operations, net of tax and Adjusted EBITDA of discontinued operations excludes rent expense of $8.9 million and $11.6 million in the third quarters of fiscal 2020 and 2019 , respectively, and $32.5 million and $24.3 million in fiscal 2020 and 2019 year-to-date , respectively, of operating lease rent expense related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations, as we expect to remain primarily obligated under these leases.

Due to these GAAP requirements to show rent expense, along with other administrative expenses of discontinued operations within continuing operations, we believe the inclusion of discontinued operations results within Adjusted EBITDA provides investors a meaningful measure of total performance.

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Customer Channel

January 26, 2019 (1)

February 1, 2020 (1)

April 27, 2019 (1)

May 2, 2020 (1)

% of Net Sales

January 26, 2019 (1)

April 27, 2019 (1)

% of Net Sales

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Refer to Note 3—Revenue Recognition in Part 1, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding adjustments to net sales by customer channel.

Second Quarter Variances

Our net sales for the second quarter of fiscal 2020 decreased approximately $0.01 billion , or 0.2% , to $6.14 billion from $6.15 billion for the second quarter of fiscal 2019 .

Net sales to our supermarkets channel decreased by approximately $49 million , or 1.2% , for the second quarter of fiscal 2020 , compared to the second quarter of fiscal 2019 , and represented approximately 63% and 64% of ou r total net sales for the second quarter of fiscal 2020 and 2019 , respectively.

The decrease in supermarkets net sales is primarily due to sales declines from lost customers, lower sales to smaller existing customers, and lower sales due to store closings, partially offset by increases in sales to larger and new customers.

Whole Foods Market is our only supernatural customer, and net sales to Whole Foods Market for the second quarter of fiscal 2020 increased by approximately $110 million , or 10.0% , as compared to the second quarter of fiscal 2019 , and accounted for approximately 20% and 18% of our total net sales for the second quarter of fiscal 2020 and 2019 , respectively.

The increase in net sales to Whole Foods Market is pri marily due to growth in new product categories, and increased sales to existing and new stores.

Third Quarter Variances

Our net sales for the third quarter of fiscal 2020 increased approximately $0.71 billion , or 11.8% , to $6.67 billion from $5.96 billion for the third quarter of fiscal 2019 .

Net sales to our supermarkets channel increased by approximately $566 million , or 15.3% , for the third quarter of fiscal 2020 , compared to the third quarter of fiscal 2019 , and represented approximately 64% and 62% of ou r total net sales for the third quarter of fiscal 2020 and 2019 , respectively.

The increase in supermarkets net sales is primarily due to an increase in demand for center store and natural products driven by customers response to the COVID-19 pandemic, partially offset by lower sales from previously lost customers and stores prior to the pandemic.

Whole Foods Market is our only supernatural customer, and net sales to Whole Foods Market for the third quarter of fiscal 2020 increased by approximately $177 million , or 16.1% , as compared to the third quarter of fiscal 2019 , and accounted for approximately 19% and 18% of our total net sales for the third quarter of fiscal 2020 and 2019 , respectively.

The increase in net sales to Whole Foods Market is pri marily due to increased sales to existing locations and the economic impacts of the COVID-19 pandemic.

Net sales within our supernatural channel do not include net sales to Amazon.com, Inc.

in either the current period or the prior period, as these net sales are reported in our other ch annel.

Net sales to our independents channel decreased by approximately $44 million , or 6.5% , for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019 , and represented approximately 10% and 11% of our total net sales for the second quarter of fiscal 2020 and 2019 , respectively.

The decrease in independents net sales is primarily due to lost customers, and lower sales from existing customers and store closings.

Net sales to our other channel decreased by approximately $28 million , or 6.3% , for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019 , and represented approximately 7% and 7% of our total net sales for the second quarter of fiscal 2020 and 2019 , respectively.

The decrease in other net sales is primarily due to lower military sales.

Net sales to our independents channel decreased by approximately $23 million , or 3.3% , for the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 , and represented approximately 10% and 12% of our total net sales for the third quarter of fiscal 2020 and 2019 , respectively.

The decrease in independents net sales is primarily due to previously lost customers and store closings, partially offset by strong sales growth in existing customer sales driven by the response to the COVID-19 pandemic.

Net sales to our other channel decreased by approximately $15 million , or 3.3% , for the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 , and represented approximately 7% and 8% of our total net sales for the third quarter of fiscal 2020 and 2019 , respectively.

The decrease in other net sales is primarily due to lower sales to foodservice customers and lower military sales from the resignation of certain business, partially offset by e-commerce sales growth.

Year-to-Date Variances

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Net sales for fiscal 2020 year-to-date included incremental Supervalu net sales from the first quarter of fiscal 2020 of approximately $3.08 billion .

Excluding the incremental first quarter of fiscal 2020 Supervalu net sales, net sales increased $63 million , or 0.7% , which was driven primarily by our supernatural channel.

Excluding the incremental first quarter of fiscal 2020 Supervalu net sales, net sales increased $768 million , or 5.1% , which was driven primarily by incremental sales resulting from the COVID-19 pandemic and continued growth in our supernatural channel.

Net sales to our supermarkets channel for fiscal 2020 year-to-date increased by approximately $3,356 million , or 39.2% , from fiscal 2019 year-to-date , and represented approximately 63% and 57% of our total net sales for fiscal 2020 and 2019 year-to-date , respectively.

The increase in supermarkets net sales is primarily due to an increase of $2,813 million from incremental first quarter of fiscal 2020 net sales attributable to the acquired Supervalu business with the remaining decrease of $23 million , or 0.5% due to sales declines from lost customers, lower sales to smaller existing customers, and lower sales due to store closings, partially offset by increases in sales to larger and new customers.

The increase in supermarkets net sales is primarily due to an increase of $2,813 million from incremental first quarter of fiscal 2020 net sales attributable to the acquired Supervalu business and a net increase of $543 million , or 6.3% primarily driven by growth in sales to existing customers, including the demand for center store and natural products driven by customers response to the COVID-19 pandemic, partially offset by lower sales from previously lost customers and stores prior to the pandemic.

Net sales to Whole Foods Market for fiscal 2020 year-to-date increased by approximately $371 million , or 11.5% , as compared to the prior fiscal year’s comparable period, and accounted for approximately 19% and 21% of our total net sales for fiscal 2020 and 2019 year-to-date , respectively.

The increase in ne t sales to Whole Foods Market is primarily due to growth in new product categories, and increased sales to existing and new stores.

The increase in ne t sales to Whole Foods Market is primarily due to increased sales related to the COVID-19 pandemic, growth in new product categories, and increased sales to existing and new stores prior to the pandemic.

Net sales to our independents channel decreased by approximately $58 million , or 2.8% , during fiscal 2020 year-to-date compared to fiscal 2019 year-to-date , and accounted for 11% and 14% of our total net sales for fiscal 2020 and 2019 year-to-date , respectively.

The decrease in independents net sales includes an increase of $24 million from incremental first quarter of fiscal 2020 net sales attributable to the acquired Supervalu business, with the remaining decrease of $59 million , or 4.4% being primarily due to lost customers, and lower sales from existing customers and store closings .

The decrease in independents net sales includes an increase of $24 million from incremental first quarter of fiscal 2020 net sales attributable to the acquired Supervalu business, with the remaining decrease of $82 million , or 4.0% being primarily due to lost customers, and lower sales from existing customers and store closings, partially offset by strong sales growth in existing customer sales driven by the response to the COVID-19 pandemic .

Net sales to our other channel increased by approximately $176 million , or 15.3% , during fiscal 2020 year-to-date compared to fiscal 2019 year-to-date , and represented approximately 7% and 8% of our total net sales for fiscal 2020 and 2019 year-to-date , respectively.

The increase in other net sales is primarily due to an increase of $240 million from incremental first quarter of fiscal 2020 net sales attributable to the acquired Supervalu business, partially offset by a decrease of $64 million , or 5.6% , primarily due to lower sales to foodservice customers and lower military sales from the resignation of certain business, partially offset by e-commerce sales growth.

Cost of Sales and Gross Profit

Our gross profit increased $13.7 million , or 1.8% , to $775.5 million for the second quarter of fiscal 2020 , from $761.8 million for the second quarter of fiscal 2019 .

Our gross profit as a percentage of net sales increased to 12.63% for the second quarter of fiscal 2020 compared to 12.39% for the second quarter of fiscal 2019 .

Gross profit for the second quarter of fiscal 2019 included a $8.6 million inventory charge related to the step-up of acquired Supervalu inventory.

The increase in gross margin rate was primarily driven by lower inbound freight expense.

Included in gross margin for the second quarter of fiscal 2020 was inventory shrink expense of approximately $4.2 million , or 7 basis points as a percent of net sales, associated with customer bankruptcies.

Our gross profit increased $68.0 million , or 8.6% , to $856.5 million for the third quarter of fiscal 2020 , from $788.6 million for the third quarter of fiscal 2019 .

Our gross profit as a percentage of net sales decreased to 12.85% for the third quarter of fiscal 2020 compared to 13.22% for the third quarter of fiscal 2019 .

The decrease in gross margin rate was primarily driven by a mix shift toward lower margin conventional products and lower levels of vendor funding, partially offset by lower levels of inventory shrink.

Our gross profit increased $440.4 million , or 22.4% , to $2,403.0 million for fiscal 2020 year-to-date , from $1,962.7 million for fiscal 2019 year-to-date .

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Operating Expenses

Operating expenses decreased $1.1 million , or 0.1% , to $750.8 million , or 12.23% of net sales, for the second quarter of fiscal 2020 compared to $751.9 million , or 12.23% of net sales, for the second quarter of fiscal 2019 .

Operating expenses for the second quarter of fiscal 2020 included $28.9 million of customer bankruptcy bad debt expense.

In addition, Operating expenses for the second quarter of fiscal 2020 included $1.5 million of surplus property depreciation expense.

Operating expenses as a percent of net sales was approximately flat to last year, with higher bad debt expense approximately offset by lower employee-related costs, outbound freight expense and depreciation expense.

Total operating expenses also included share-based compensation expense of $4.9 million and $10.4 million for the second quarter of fiscal 2020 and 2019 , respectively.

Operating expenses increased $36.7 million , or 5.0% , to $774.4 million , or 11.61% of net sales, for the third quarter of fiscal 2020 compared to $737.7 million , or 12.37% of net sales, for the third quarter of fiscal 2019 .

Operating expenses for the third quarter of fiscal 2020 included $1.4 million of surplus property depreciation expense.

The decrease in Operating expenses as a percent of net sales was driven by leveraging fixed operating and administrative expenses and the benefit of synergy and integration efforts, partially offset by incremental costs related to COVID-19, including the impact of temporary pandemic-related incentives and additional costs for safety protocols and procedures at the Company’s distribution centers.

Total operating expenses also included share-based compensation expense of $12.8 million and $9.3 million for the third quarter of fiscal 2020 and 2019 , respectively.

Operating expenses increased $447.9 million , or 24.2% , to $2,300.6 million , or 12.22% of net sales, for fiscal 2020 year-to-date compared to $1,852.8 million , or 12.37% of net sales, for fiscal 2019 year-to-date .

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In addition, Operating expenses in fiscal 2020 year-to-date included $12.5 million of notes receivable charges, $6.6 million of surplus property depreciation expense and a $1 million legal reserve charge.

The increase in operating expenses, as a percent of net sales, was driven by higher bad debt, occupancy and depreciation expenses, partially offset by the mix impact from the acquired Supervalu business and lower employee costs, including the impact of cost synergies.

The decrease in operating expenses, as a percent of net sales, was driven by fixed and variable expense leveraging and the mix impact from the acquired Supervalu business and lower employee costs, including the impact of cost synergies, partially offset by higher bad debt, occupancy and depreciation expenses.

Total operating expenses also included share-based compensation expense of $21.3 million and $27.8 million for fiscal 2020 and 2019 year-to-date , respectively.

Goodwill and Asset Impairment Charges

Goodwill and asset impairment charges of $370.9 million were recorded in the second quarter of fiscal 2019 , which was attributable to a portion of the goodwill recorded from the Supervalu acquisition, compared to no charges in the second quarter of fiscal 2020.

Goodwill and Asset Impairment (Adjustment) Charges

A goodwill impairment adjustment of $38.3 million was recorded in the third quarter of fiscal 2019 , which was attributable to changes in the preliminary fair value of net assets, which affected the initial goodwill resulting from the Supervalu acquisition.

Goodwill and asset impairment charges of $425.4 million were recorded for fiscal 2020 year-to-date , which reflects $421.5 million from an impairment charge on the remaining goodwill attributable to the U.S.

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Restructuring, Acquisition and Integration Related Expenses

Restructuring, acquisition and integration related expenses were $29.7 million for the second quarter of fiscal 2020 , which included $15.4 million of integration costs primarily related to a multiemployer pension plan withdrawal obligation, $13.6 million of closed property reserve charges and costs primarily related to lease asset impairments on surplus properties and Shoppers store lease exits and $0.7 million of restructuring costs.

Expenses incurred were $47.1 million for the second quarter of fiscal 2019 , which included $19.5 million of closed property reserve charges related to the divestiture of retail banners, $18.1 million of employee related costs and charges due to severance, settlement of outstanding equity awards and benefits costs, and approximately $9.5 million of other acquisition and integration related costs.

Restructuring, acquisition and integration related expenses were $43.9 million for fiscal 2020 year-to-date and primarily included $24.7 million of integration costs including a multiemployer pension plan withdrawal obligation and a charge for an off-site storage contract, $16.7 million of closed property reserve charges and costs primarily related to lease asset impairments on surplus properties and Shoppers store lease exits and $2.5 million of restructuring costs.

Restructuring, acquisition and integration related expenses were $10.4 million for the third quarter of fiscal 2020 , which included $8.4 million of closed property reserve charges and costs primarily related to lease asset impairments, $1.5 million of restructuring costs and $0.6 million of integration costs.

Expenses incurred were $19.4 million for the third quarter of fiscal 2019 , which included $12.3 million of employee related costs and charges due to severance, settlement of outstanding equity awards and benefits costs, and $6.1 million of other acquisition and integration related costs and $1.1 million of closed property reserve charges related to the divestiture of retail banners.

Restructuring, acquisition and integration related expenses were $54.4 million for fiscal 2020 year-to-date and primarily included $25.3 million of integration costs including a multiemployer pension plan withdrawal obligation, $25.1 million of closed property reserve charges and costs primarily related to lease asset impairments on surplus properties and Shoppers store lease exits and $4.0 million of restructuring costs.

Expenses incurred in fiscal 2019 year-to-date were $134.6 million and primarily included $66.4 million of employee related costs due to change-in-control payments made to satisfy outstanding equity awards, severance costs, and benefits costs, $47.5 million of other acquisition and integration related costs, and $20.6 million closed property reserve charges related to the divestiture of retail banners.

We expect to incur additional integration and restructuring costs throughout fiscal 2020 related to our operational and administrative restructuring to achieve cost synergies and supply chain efficiencies of continuing operations.

We may incur additional integration and restructuring costs through the remainder of fiscal 2020 related to our operational and administrative restructuring to achieve cost synergies and supply chain efficiencies of continuing operations.

In addition, further restructuring costs may be incurred related to the divestiture of retail operations.

Operating Loss

Reflecting the factors described above, operating loss decreased $403.1 million to $5.1 million for the second quarter of fiscal 2020 , from $408.1 million for the second quarter of fiscal 2019 .

The operating loss decrease was primarily driven by non-recurrence of the second quarter of fiscal 2019 goodwill impairment charge and by lower restructuring, acquisition and integration related expenses.

Operating Income (Loss)

Reflecting the factors described above, operating income increased $2.0 million to $71.7 million for the third quarter of fiscal 2020 , from $69.7 million for the third quarter of fiscal 2019 .

The operating income increase was primarily driven by an increase in gross profit and lower restructuring, acquisition and integration related expenses, partially offset by the goodwill impairment adjustment.

Reflecting the factors described above, operating loss increased $20.1 million , to an operating loss of $377.4 million for fiscal 2020 year-to-date , from $357.3 million for fiscal 2019 year-to-date .

The increase in operating loss was primarily driven by the increase in goodwill impairment charges and increases in operating expenses in excess of gross profit increases, partially offset by lower restructuring, acquisition and integration related expenses.

The operating loss for the second quarter and year-to-date of fiscal 2020 includes $11.9 million and $24.4 million , respectively, of operating lease rent expense and $1.4 million and $3.7 million , respectively, of depreciation and amortization expenses related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations, as we expect to remain primarily obligated under these leases.

The operating loss for the third quarter and year-to-date of fiscal 2020 includes $9.1 million and $33.5 million , respectively, of operating lease rent expense and $0.9 million and $4.6 million , respectively, of depreciation and amortization expenses related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations, as we expect to remain primarily obligated under these leases.

In addition, continuing operations operating loss includes certain retail related overhead costs that are related to retail but are required to be presented within continuing operations.

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(in thousands)

February 1, 2020

January 26, 2019

February 1, 2020

January 26, 2019

April 27, 2019

Net periodic benefit income, excluding service cost

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Net periodic benefit income, excluding service costs reflects the recognition of expected returns on benefit plan assets in excess of interest costs.

Net periodic benefit income for the second quarter of fiscal 2020 and fiscal 2020 year-to-date includes a $10.3 million non-cash pension settlement charge from the lump sum pension settlement offering completed in the second quarter of fiscal 2020.

Net periodic benefit income for fiscal 2020 year-to-date includes a $10.3 million non-cash pension settlement charge from the lump sum pension settlement offering completed in the second quarter of fiscal 2020.

Fiscal 2019 year-to-date net periodic benefit income reflects a partial year due to the acquisition of Supervalu near the end of the first quarter of fiscal 2019.

The decrease in interest expense on long-term debt in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019 was primarily due to lower average debt balances outstanding.

The increase in interest expense on long-term debt for fiscal 2020 year-to-date compared to fiscal 2019 year-to-date was primarily due to an increase in average outstanding debt driven by Supervalu acquisition financing.

Interest on finance and direct financing leases for fiscal 2020 year-to-date primarily reflects lease obligations related to retail stores of discontinued operations acquired in the Supervalu acquisition, but for which GAAP requires the expense to be included within continuing operations, as we expect to remain primarily obligated under these leases until settlement with the respective landlords.

The decrease in interest expense on long-term debt in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 was primarily due to lower average amounts of outstanding debt and lower average interest rates.

Interest on finance and direct financing leases primarily reflects lease obligations related to retail stores of discontinued operations acquired in the Supervalu acquisition, but for which GAAP requires the expense to be included within continuing operations, as we expect to remain primarily obligated under these leases until settlement with the respective landlords.

Beginning in the third quarter of fiscal 2020, interest on financing leases includes interest related to a distribution center for which we executed a purchase option with a delayed purchase provision.

Benefit for Income Taxes

The effective income tax rate for continuing operations was a benefit of 35.5% compared to a benefit of 20.2% on pre-tax losses for the second quarter of fiscal 2020 and 2019, respectively.

The change in the effective income tax rate for the second quarter of fiscal 2020 was primarily driven by a tax benefit on the impairment of goodwill and a tax benefit on the release of unrecognized tax positions that both occurred in the second quarter of fiscal 2019 but did not recur in the second quarter of fiscal 2020.

The tax provision included $0.2 million of discrete tax benefit and $77.0 million of discrete tax benefit, for the second quarter of fiscal 2020 and fiscal 2019, respectively.

The discrete tax benefit for the second quarter of fiscal 2019 was primarily due to a tax benefit of approximately $68.4 million related to the goodwill impairment charge, as well as a tax benefit related to unrecognized tax positions of approximately $8.7 million .

The effective income tax rate for continuing operations was a benefit of 38.7% compared to a benefit of 32.4% on pre-tax income for the third quarter s of fiscal 2020 and 2019 , respectively.

The change in the effective income tax rate for the third quarter of fiscal 2020 was primarily driven by a tax benefit recorded on net operating loss deferred tax assets in the third quarter of fiscal 2020 in connection with the CARES Act, discussed above.

The tax provision included $26.9 million and $3.2 million of discrete tax benefit for the third quarter of fiscal 2020 and fiscal 2019 , respectively.

The discrete tax benefit for the third quarter of fiscal 2020 was primarily due to a tax benefit of approximately $28.4 million driven by a tax benefit recorded on net operating loss deferred tax assets in the third quarter of fiscal 2020 in connection with the CARES Act, discussed above.

The effective income tax rate for continuing operations was a benefit of 21.5% compared to a benefit of 22.8% on pre-tax losses for fiscal 2020 year-to-date and fiscal 2019 year-to-date, respectively.

The decrease in the effective income tax benefit rate was primarily driven by a tax benefit of approximately $8.7 million recorded in fiscal 2019 for the release of unrecognized tax positions that did not recur in fiscal 2020.

The decrease in the effective income tax benefit rate was primarily driven by a tax benefit of approximately $8.3 million recorded in fiscal 2019 for the release of unrecognized tax positions that did not recur in fiscal 2020, as well as a goodwill impairment benefit of approximately $72.2 million recorded in fiscal 2019 compared to a goodwill impairment benefit of approximately $66.4 million recorded in fiscal 2020.

In addition, effective income tax rate for fiscal 2020 includes a benefit of approximately $28.4 million related to revaluation of net operating loss deferred tax assets in connection with the CARES Act.

Income from Discontinued Operations, Net of Tax

The results of operations for the second quarter of fiscal 2020 reflect net sales of $613.7 million for which we recognized $162.7 million of gross profit and Income from discontinued operations, net of tax of $2.1 million .

As noted above, pre-tax income for the second quarter of fiscal 2020 from discontinued operations excludes $11.9 million of operating lease rent expense related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations.

The results of operations for the third quarter of fiscal 2020 reflect net sales of $667.0 million for which we recognized $187.8 million of gross profit and Income from discontinued operations, net of tax of $37.2 million .

As noted above, pre-tax income for the third quarter of fiscal 2020 from discontinued operations excludes $9.1 million of operating lease rent expense related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations.

In addition, store closure charges related to leases are recorded within continuing operations.

Discontinued operations included $8.1 million of restructuring expenses primarily related to store closures charges and expenses related to exited locations, and asset impairment charges related to store exits and impairment reviews discussed above.

Net sales and gross profit of discontinued operations increased $26.9 million and $10.9 million , respectively, for the third quarter of fiscal 2020 as compared to last year primarily due to an increase in identical store sales results driven by the impacts of the COVID-19 pandemic, which was partially offset by the lower store base operating in the third quarter of fiscal 2020 compared to last year.

The results of operations for fiscal 2020 year-to-date reflect net sales of $1,891.5 million for which we recognized $520.3 million of gross profit and Income from discontinued operations, net of tax of $64.3 million .

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Discontinued operations included $40.3 million of primarily related to store closures charges and expenses, and asset impairment charges related to exited locations.

Net sales and gross profit of discontinued operations increased $477.8 million and $137.9 million , respectively, for the fiscal 2020 year-to-date as compared to last year primarily due the incremental twelve weeks of discontinued operations and an increase in identical store sales resulting driven by the impacts of the COVID-19 pandemic, which was partially offset by the lower store base operating during fiscal 2020 year-to-date compared to last year.

Refer to the section above Executive Overview—Divestiture of Retail Operations and to Note 18—Discontinued Operations in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional financial information regarding these discontinued operations.

Net Loss Attributable to United Natural Foods, Inc.

Reflecting the factors described in more detail above, we incurred a net loss attributable to United Natural Foods, Inc.

of $30.7 million , or $0.57 per diluted common share, for the second quarter of fiscal 2020 , which included the after-tax effects of restructuring, acquisition and integration related expenses and customer bankruptcy charges, compared to net loss of $341.7 million , or $6.72 per diluted common share, for the second quarter of fiscal 2019 .

Net Income (Loss) Attributable to United Natural Foods, Inc.

Reflecting the factors described in more detail above, net income attributable to United Natural Foods, Inc.

was $88.1 million , or $1.60 per diluted common share, for the third quarter of fiscal 2020 , compared to net income of $57.1 million , or $1.12 per diluted common share, for the third quarter of fiscal 2019 .

Reflecting the factors described in more detail above, we incurred a net loss attributable to United Natural Foods, Inc.

of $414.6 million , or $7.77 per diluted common share, for fiscal 2020 year-to-date primarily due to goodwill impairment charges, compared to net loss of $361.0 million , or $7.12 per diluted common share, for fiscal 2019 year-to-date .

As described in more detail in Note 12—Share-Based Awards in Part I, Item I of this Quarterly Report on Form 10-Q, we granted restricted stock units and performance share units representing a right to receive an aggregate of 5.8 million shares of common stock under our 2020 Equity Incentive Plan.

We have approximately 3.0 million additional shares authorized for issuance and registered with the SEC for the issuance in order to satisfy replacement award and option issuance obligations.

In fiscal 2020, we may issue additional shares to fund replacement award obligations in full, issue shares to partially fund the obligations, or utilize cash on hand to fund the obligations.

of $326.5 million , or $6.10 per diluted common share, for fiscal 2020 year-to-date , compared to net loss of 303.9 million , or $5.99 per diluted common share, for fiscal 2019 year-to-date , primarily due to goodwill impairment charges.

As described in more detail in Note 12—Share-Based Awards in Part I, Item I of this Quarterly Report on Form 10-Q, in the second quarter of fiscal 2020, we granted restricted stock units and performance share units representing a right to receive an aggregate of 5.8 million shares of common stock under our 2020 Equity Incentive Plan.

As described in more detail within Note 13—Share-Based Awards in Part II, Item 8 of the Annual Report on Form 10-K, in fiscal 2019 we issued approximately 2.0 million shares of common stock, of which 0.3 million shares were issued through the third quarter of fiscal 2019, to fund the settlement of time-vesting replacement award obligations from the Supervalu acquisition, which has had a dilutive effect on our weighted average earnings per share as compared to last year.

During the third quarter of fiscal 2020, the Company issued approximately 1.1 million shares of common stock at an average market price of $11.12 per share for $12.2 million of cash.

Proceeds from these issuances were used to fund settlement of replacement award obligations.

As of May 2, 2020, we have approximately 1.7 million additional shares authorized for issuance and registered with the SEC in order to satisfy replacement award and option issuance obligations.

LIQUIDITY AND CAPITAL RESOURCES

Unused available credit under our revolving line of credit was $824.1 million as of February 1, 2020 , which decreased $95.0 million from $919.2 million as of August 3, 2019 , primarily due to the funding of scheduled maturities due under our Term Loan Facility with borrowings under the ABL Credit Facility and other net increases in ABL Credit Facility borrowings.

Total liquidity as of May 2, 2020 was $1.21 billion and was comprised of the following:

Unused credit under our revolving line of credit was $1,153.9 million as of May 2, 2020 , which increased $234.7 million from $919.2 million as of August 3, 2019 , primarily due to net payments made on the ABL Credit Facility as cash flow generated from the business was utilized to reduce outstanding debt.

Cash and cash equivalents was $56.4 million as of May 2, 2020 , which increased $14.1 million from $42.4 million as of August 3, 2019 .

We paid the remaining maturities under our 364-day Term Loan Facility in the first quarter of fiscal 2020, and as a result, we have no material scheduled maturities due until fiscal 2024, although prepayments may be required upon the occurrence of specified events as discussed in Note 9—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our total debt increased $29.5 million to $2,936.0 million as of February 1, 2020 from $2,906.5 million as of August 3, 2019 , primarily related to the additional borrowings under the ABL Credit Facility to fund inventory build in excess of accounts payable and increases in accounts receivable.

Our total debt decreased $345.6 million to $2,560.9 million as of May 2, 2020 from $2,906.5 million as of August 3, 2019 , primarily related to net payments made on the ABL Credit Facility and our 364-day Term Loan Facility payment.

Scheduled debt maturities are expected to be $7.6 million for the remainder of fiscal 2020 and payments to reduce finance lease obligations are expected to be approximately $3.3 million for the remainder of fiscal 2020.

Proceeds from

the sale of properties mortgaged and encumbered under our Term Loan Facility are required to, and will be, used to make additional Term Loan Facility payments.

We expect to be able to fund near-term debt maturities through fiscal 2023 with internally generated funds, proceeds from the asset sales or borrowings under the ABL Credit Facility.

Cash and cash equivalents decreased $2.3 million to $40.1 million as of February 1, 2020 from $42.4 million as of August 3, 2019 .

Working capital increased $1.4 million to $1,460.4 million as of February 1, 2020 from $1,459.0 million as of August 3, 2019 , primarily due to lower current maturities of long-term debt and inventory build in excess of accounts payable increases, which were partially offset by the adoption of the new lease standard, which resulted in a decrease in working capital from the recognition of a new liability for the current portion of operating lease liabilities, which was $131.3 million as of February 1, 2020 .

Proceeds from the sale of any properties mortgaged and encumbered under our Term Loan Facility are required to, and will, be used to make additional Term Loan Facility payments.

We expect to be able to fund near-term debt maturities through fiscal 2023 with internally generated funds, proceeds from asset sales or borrowings under the ABL Credit Facility.

Working capital decreased $213.1 million to $1,245.9 million as of May 2, 2020 from $1,459.0 million as of August 3, 2019 , primarily due to an increase in accounts payable resulting from inventory being sold through faster than payments are made to vendors, the adoption of the new lease standard from the recognition of a new current portion liability for operating leases, the payment of a current maturity under the Term Loan Facility and inventory reductions, offset in part by increases in accounts receivable.

Sources and Uses of Cash

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Long-Term Debt

During fiscal 2020 year-to-date, we borrowed a net $107.2 million under the ABL Credit Facility and repaid $82.9 million of scheduled maturities under the Term Loan Facility.

During fiscal 2020 year-to-date, we repaid a net $264.0 million under the ABL Credit Facility and repaid $87.4 million of scheduled maturities under the Term Loan Facility.

Refer to Note 9—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for a detailed discussion of the provisions of our credit facilities and certain long-term debt agreements and additional information.

Our Term Loan Agreement does not include any financial maintenance covenants.

Our ABL Loan Agreement subjects us to a fixed charge coverage ratio (as defined in the ABL Loan Agreement) of at least 1.0 to 1.0 calculated at the end of each of our fiscal quarters on a rolling four quarter basis when the adjusted aggregate availability (as defined in the ABL Loan Agreement) is less than the greater of (i) $235.0 million and (ii) 10% of the aggregate borrowing base.

Our ABL Loan Agreement subjects us to a fixed charge coverage ratio (as defined in the ABL Loan Agreement) of at least 1.0 to 1.0 , calculated at the end of each of our fiscal quarters on a rolling four quarter basis, when the adjusted aggregate availability (as defined in the ABL Loan Agreement) is ever less than the greater of (i) $235.0 million and (ii) 10% of the aggregate borrowing base.

We have not been subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement, including through the filing date of this Quarterly Report.

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Interest rate swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures.

As of February 1, 2020 , we had an aggregate of $2.10 billion of notional debt hedged through pay fixed and receive floating interest rate swap contracts to effectively fix the LIBOR component of our floating LIBOR based debt at fixed rates ranging from 0.926% to 2.959% , with maturities between May 2020 and October 2025 .

The fair value of these interest rate derivatives represents a total net liability of $87.0 million and are subject to volatility based on changes in market interest rates.

As of May 2, 2020 , we had an aggregate of $2.09 billion of notional debt hedged through pay fixed and receive floating interest rate swap contracts to effectively fix the LIBOR component of our floating LIBOR based debt at fixed rates ranging from 0.454% to 2.959% , with maturities between May 2020 and October 2025 .

The fair values of these interest rate derivatives represents a total net liability of $140.4 million and are subject to volatility based on changes in market interest rates.

See Note 8—Derivatives in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

From time to time, we enter into fixed price fuel supply agreements and foreign currency hedges.

As of February 1, 2020 , we had fixed price fuel contracts outstanding and foreign currency forward agreements outstanding.

As of May 2, 2020 , we had fixed price fuel contracts outstanding and foreign currency forward agreements outstanding.

Gains and losses and the outstanding net asset from these arrangements are insignificant.

Capital Expenditures

Our capital expenditures for fiscal 2020 year-to-date were $84.6 million , compared to $80.1 million for fiscal 2019 year-to-date, an increase of $4.5 million .

Fiscal 2020 year-to-date includes capital expenditures for distribution center expansions of approximately $30 million (primarily the Ridgefield expansion), new distribution centers of approximately $13 million , and information technology, equipment and other.

We do not expect to spend more than 1.0% of net sales on capital expenditures in fiscal 2020 .

Our capital expenditures for fiscal 2020 year-to-date were $118.2 million , compared to $137.0 million for fiscal 2019 year-to-date, a decrease of $18.8 million .

Fiscal 2020 year-to-date includes capital expenditures for distribution center expansions of approximately $33 million (primarily the Ridgefield, WA expansion), new distribution centers of approximately $21 million , and information technology, equipment and other.

We estimate we will spend approximately $190 million for fiscal 2020.

Fiscal 2020 capital spending is expected to include projects that optimize and expand our distribution network and our technology platform.

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(in thousands)

February 1, 2020

January 26, 2019

Net cash used in operating activities of continuing operations

April 27, 2019

Net cash provided by operating activities of continuing operations

Net cash used in investing activities of continuing operations

Net cash provided by financing activities of continuing operations

Net cash (used in) provided by financing activities of continuing operations

Net cash flows from discontinued operations

Effect of exchange rate on cash

Net (decrease) increase in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents, at beginning of period

Cash and cash equivalents at end of period

The increase in net cash used by operating activities of continuing operations was primarily due to higher amounts of cash utilized in fiscal 2020 year-to-date related to inventory acquisition and credit extension.

In fiscal 2019 year-to-date, we acquired Supervalu with seasonally high levels of inventory and accounts receivable and in fiscal 2020 year-to-date received cash from the decrease in inventory.

These increases in cash uses were offset in part by decreases from cash payments made in fiscal 2019 year-to-date for assumed liabilities and the payment of transaction costs from the Supervalu acquisition, including transaction-related expenses, accrued employee costs, and restructuring costs associated with reductions in force.

The increase in net cash provided by operating activities of continuing operations was primarily due to higher amounts of cash provided in fiscal 2020 year-to-date related to working capital benefits from the sell through of inventory and collection of receivables faster than payments were made on accounts payable related to inventory.

In fiscal 2019 year-to-date, we benefited from the reduction of the seasonally high levels of inventory and accounts receivable at the time of the Supervalu acquisition;

however, these cash inflows were offset in part by decreases from cash payments made in fiscal 2019 year-to-date for assumed liabilities and the payment of transaction costs from the Supervalu acquisition, including transaction-related expenses, accrued employee costs, and restructuring costs associated with reductions in force.

The decrease in net cash used in investing activities of continuing operations was primarily due to $2,282.3 million of cash paid to purchase Supervalu in fiscal 2019 year-to-date, partially offset by $149.7 million of less cash received from the sale of property and equipment, primarily due to cash received from the sale and leaseback of two distribution centers in fiscal 2019 year-to-date, one of which was a short-term lease related to the exit of that facility.

The decrease in net cash provided by financing activities of continuing operations was primarily due to fiscal 2019 year-to-date borrowings on long-term debt to finance the Supervalu acquisition, and a net decrease in cash provided by the revolving credit facility borrowings of $924.8 million , which was driven by borrowings to finance the Supervalu acquisition and changes in net borrowings for operating and investing activities.

These decreases in cash provided by financing activities, were offset in part by $64.5 million fiscal 2019 year-to-date payments for debt issuance costs, and a decrease in payments of long-term debt and finance lease obligations of $620.0 million .

The decrease in net cash provided by financing activities of continuing operations was primarily due to fiscal 2019 year-to-date borrowings on long-term debt to finance the Supervalu acquisition, and a net decrease in cash provided by the revolving credit facility borrowings of $1,270.9 million , which was driven by borrowings to finance the Supervalu acquisition in fiscal 2019 year-to-date, offset in part by net payments made in fiscal 2020 year-to-date from operating activities cash flows in excess of investing activities.

These decreases in cash provided by financing activities, were offset in part by a decrease in payments of long-term debt and finance lease obligations of $625.0 million driven by the repayment of acquired senior notes in fiscal 2019 year-to-date and $62.6 million of payments for debt issuance costs in fiscal 2019 year-to-date.

Net cash flows from discontinued operations primarily include operating activity cash flow from operating income of the retail disposal groups.

The decrease in net cash flows from discontinued operations investing activities for fiscal 2020 year-to-date compared to fiscal 2019 year-to-date reflect higher proceeds received in fiscal 2019 year-to-date related to the sale of retail locations, including Hornbacher’s, than proceeds received in fiscal 2020 year-to-date, including proceeds from the sale of a former dedicated retail distribution center and retail stores.

The increase in net cash flows from discontinued operations is primarily due to cash flows generated from operations in fiscal 2020 year-to-date as a result of higher earnings, inventory sell through and an increase in accounts payable, which was partially offset by higher proceeds received in fiscal 2019 year-to-date related to the sale of retail locations, including Hornbacher’s, than proceeds received in fiscal 2020 year-to-date, including proceeds from the sale of a former dedicated retail distribution center and retail stores.

On October 6, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $200.0 million of our outstanding common stock.

The repurchase program is scheduled to expire upon our repurchase of shares of our common stock having an aggregate purchase price of $200.0 million .

We did no t purchase any shares of our common stock in fiscal 2020 and 2019 year-to-date.

As of February 1, 2020 , we have $175.8 million remaining authorized under the share repurchase program.

We did no t purchase any shares of our common stock in fiscal 2020 and 2019 year-to-date pursuant to the share repurchase program.

As of May 2, 2020 , we have $175.8 million remaining authorized under the share repurchase program.

We do not expect to purchase shares under the share repurchase program during fiscal 2020.

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Guarantees and Contingent Liabilities

We have outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of February 1, 2020 .

We have outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of May 2, 2020 .

We are contingently liable for leases that have been assigned to various parties in connection with facility closings and dispositions.

32 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis