What changed in this filing

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Item 1A. Risk Factors

2020-09-29 compared with 2019-10-01 · 128 added, 87 removed, 315 unchanged (41% of the section changed)

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Strategic and Operational Risks

We depend heavily on our principal customers and our success is heavily dependent on our principal customers’ ability to grow their business.

Whole Foods Market accounted for a substantial percentage of our net sales in fiscal 2019 .

We depend heavily on our principal customers and our success is heavily dependent on our principal customers’ ability to maintain and grow their business.

Whole Foods Market, a subsidiary of Amazon.com, Inc., accounted for approximately 18% of our net sales in fiscal 2020.

We serve as the primary distributor of natural, organic, and specialty non-perishable products, and also distribute certain specialty protein, cheese, deli items, and products from health, beauty, and supplement categories to Whole Foods Market in all of its regions in the United States under the terms of our distribution agreement, which expires on September 28, 2025.

Our ability to maintain a close, mutually beneficial relationship with Whole Foods Market, which was acquired by Amazon.com, Inc.

in August 2017, is an important element to our continued growth.

Our ability to maintain a close, mutually beneficial relationship with Whole Foods Market is an important element to our continued growth.

The loss or cancellation of business from Whole Foods Market, including from increased self-distribution to its own facilities, closures of its stores, reductions in the amount of products that Whole Foods Market sells to its customers, or our failure to comply with the terms of our distribution agreement with Whole Foods Market could materially and adversely affect our business, financial condition, or results of operations.

Similarly, if Whole Foods Market is not able to grow its business, including as a result of a reduction in the level of discretionary spending by its customers or competition from other retailers, or if Whole Foods Market diverts purchases from us beyond minimum amounts it is required to purchase under our distribution agreement, our business, financial condition, or results of operations may be materially and adversely affected.

Additionally, given the growth acceleration we experienced in fiscal 2018, if Whole Foods Market were to only purchase the minimum purchase amounts under our agreement with them, it would negatively impact our financial results.

financial condition, or results of operations may be materially and adversely affected.

Additionally, given the continued growth in sales to Whole Foods Market that we have experienced since fiscal 2018, if Whole Foods Market were to only purchase the minimum purchase amounts under our agreement with them, it would negatively impact our financial results.

In addition to our dependence on Whole Foods Market, we are also dependent upon sales to our supermarket customers for both natural and conventional products.

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The grocery business is intensely competitive, and the recent and ongoing consolidation within the grocery industry is expected to result in increased competition, including from some competitors that have greater financial, marketing, and other resources than we do.

Consumers also have more choices than conventional grocery purchases, including independent retailers we do not supply and e-commerce solutions, which reduces the demand for products supplied by our wholesale customers.

Consumers also have more choices for conventional grocery purchases, including independent retailers we do not supply and e-commerce solutions, which reduces the demand for products supplied by our wholesale customers.

We cannot provide assurance that we will be able to compete effectively against current and future competitors.

Our ability to compete successfully will be largely dependent on our ability to provide quality products and services at competitive prices.

Bidding for contracts or arrangements with customers, particularly within the supernatural and supermarkets channels, is highly competitive.

Bidding for contracts or arrangements with customers or potential customers, particularly within the supernatural and supermarkets channels, is highly competitive.

Our competition comes from a variety of sources, including other distributors of natural and conventional products, as well as specialty or independent grocery and mass market grocery distributors and retail customers that have their own distribution channels.

Mass market grocery distributors in recent years have increased their emphasis on natural and organic products and are now competing more directly with our natural and organic product offerings, which are higher margin than conventional product offerings.

The higher margin on natural and organic product offerings could be affected by changes in the public’s perception of the benefits of natural and organic products compared to similar conventional products.

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We cannot assure you that our current or potential competitors will not provide products or services comparable or superior to those provided by us or adapt more quickly than we do to evolving industry trends or changing market requirements.

It is also possible that alliances among competitors may develop and that competitors may rapidly acquire significant market share or that certain of our customers will increase distribution to their own retail facilities.

Increased competition may result in price reductions, reduced gross margins, lost business and loss of market share, any of which could materially and adversely affect our business, financial condition, or results of operations.

The continuing consolidation of retailers in the natural products industry, the growth of supernatural chains, and increased closures of conventional grocery locations may reduce our profit margins in the future as more customers qualify for greater volume discounts, and as we experience pricing pressures from suppliers and retailers.

Sales to customers within our supernatural and supermarkets channels generate a lower gross margin than do sales to our independents channel customers.

For example, in fiscal 2020, we were negatively impacted by the consolidation in the natural products industry with bankruptcies of three of our natural retailer customers.

In addition, while natural product retailers have performed well through the COVID-19 pandemic, there is no assurance that increased volume at these customers will be sustained over the long-term.

Sales to chain customers generate a lower gross margin than do sales to our independents channel customers.

Many of these customers, including our largest customer, have agreements with us that include volume discounts.

As the amounts these customers purchase from us increase, the price that they pay for the products they purchase is reduced, putting downward pressure on our gross margins on these sales.

To compensate for these lower gross margins, we must increase the amount of products we sell or reduce the expenses we incur to service these customers.

To compensate for these lower gross margins, we must increase the dollar value of products we sell or reduce the expenses we incur to service these customers.

If we are unable to reduce our expenses as a percentage of net sales, including our expenses related to servicing this lower gross margin business, our business, financial condition, or results of operations could be materially and adversely impacted.

We are transforming our business and have engaged, and may continue to engage in, acquisitions and divestitures and other strategic initiatives, and may encounter difficulties integrating acquired businesses or divesting businesses or assets and may not realize the anticipated benefits of our acquisitions and divestitures, including, in particular, our recent acquisition of Supervalu.

We have engaged in, and could potentially continue to pursue, strategic transactions and initiatives as we transform our business.

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The processes of integrating Supervalu, Unified and AG Florida may be disruptive to our business operations and may distract our management team from their day-to-day responsibilities.

There can also be no assurance that we will be able to successfully integrate Supervalu, Unified, and AG Florida to achieve the operational efficiencies, including synergistic and other benefits of the acquisitions.

Our ability to achieve the expected benefits of these acquisitions, and in particular the Supervalu acquisition, will depend on, among other things, our ability to effectively execute on our business strategies, retain customers and suppliers on terms similar to those in place with the acquired businesses, achieve desired operating efficiencies and sales growth, optimize delivery routes, coordinate administrative and distribution functions, integrate management information systems, expand into new markets to include markets of the acquired business, retain and assimilate the acquired businesses’ employees, and maintain our financial

and internal controls and systems as we expand our operations.

There can also be no assurance that we will be able to successfully complete the integration of Supervalu, Unified, and AG Florida to achieve the operational efficiencies, including synergistic and other benefits of the acquisitions.

Our ability to achieve the expected benefits of acquisitions, and in particular the Supervalu acquisition, will depend on, among other things, our ability to effectively execute on our business strategies, retain customers and suppliers on terms similar to those in place with the acquired businesses, achieve desired operating efficiencies and sales growth, optimize delivery routes, coordinate administrative and distribution functions, integrate management information systems, expand into new markets to include markets of the acquired business, retain and assimilate the acquired businesses’ employees, and maintain our financial and internal controls and systems as we expand our operations.

Achieving the anticipated benefits of acquisitions also depends on the adequacy of our implementation plans and the ability of management to oversee and operate effectively the combined operations.

To realize the anticipated benefits of the Supervalu acquisition, our business must be successfully combined with Supervalu.

We could fail to realize the anticipated benefits for a variety of reasons, including failure to manage relationships with Supervalu’s customers and suppliers, revenue attrition in excess of anticipated levels, potential incompatibility of distribution and logistics operations and systems, failure to leverage the increased scale of the combined company quickly and effectively, difficulties integrating and harmonizing financial reporting systems, loss of key employees, failure to effectively coordinate sales and marketing efforts to communicate the capabilities of the combined company, and failure to execute efficient distribution of our spectrum of product offerings.

The integration of the businesses that we acquired, and in particular Supervalu, might also cause us to incur unforeseen costs, which would lower our future earnings and would prevent us from realizing the expected benefits of these acquisitions.

We could fail to realize the anticipated benefits for a variety of reasons, including failure to leverage the increased scale of the combined company quickly and effectively, difficulties integrating information technology systems, failure to effectively coordinate sales, procurement, and marketing efforts to communicate the capabilities of the combined company, and failure to execute an efficient integrated distribution network incorporating our spectrum of product offerings.

The integration of Supervalu and other businesses that we have acquired might also cause us to incur unforeseen costs, which would lower our future earnings and would prevent us from realizing the expected benefits of these acquisitions.

Any of the businesses we acquired may also have liabilities or adverse operating issues, including some that were not discovered before the acquisition, and our indemnity for such liabilities may also be limited or nonexistent.

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There can be no assurance that we will be able to (i) identify buyers for the retail business of Supervalu on favorable terms or at all, (ii) effectively retain employees and conduct business at the stores within the retail business while we seek to identify buyers for these operations, or (iii) effectively minimize liabilities and stranded costs associated with the disposal of these operations, including surplus property and management of remaining obligations under real estate leases.

If we are unable to divest Supervalu’s retail grocery business, or realize less net proceeds from the divesture than we anticipate, we may not be able to reduce our indebtedness

as planned and will incur higher interests costs as a result.

Our inability to complete or realize the projected benefits of planned and/or future divestitures could have a material adverse effect on our business, financial condition, or results of operations.

If we are unable to divest Supervalu’s retail grocery business or realize fewer net proceeds from the divesture than we anticipate, we may not be able to reduce our indebtedness as planned and will incur higher interests costs as a result.

Our failure to efficiently or competitively operate our retail grocery business in the interim may negatively impact the amount of net proceeds we receive from the divestiture.

Our inability to complete

or realize the projected benefits of planned and/or future divestitures could have a material adverse effect on our business, financial condition, or results of operations.

We may have difficulty managing our growth.

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We cannot assure you that our existing personnel, systems, procedures and controls will be adequate to support the future growth of our operations.

Our inability to manage our growth effectively could have a material adverse effect on our business, financial condition, or results of operations, or other operational challenges are addressed in a timely manner.

Our inability to manage our growth effectively could have a material adverse effect on our business, financial condition, or results of operations.

Our future growth is limited in part by the size and location of our distribution centers.

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In addition, if we do not refine and improve our systems continually or if we are unable to effectively improve our systems without disruption, including any information technology migration to a cloud environment, we may not be able to reduce costs, increase sales and services, effectively manage inventory and procurement processes, or effectively manage customer pricing plans.

As a result, our operating margins may stagnate or decline, which could adversely affect the price of our stock.

As a result, our operating margins may stagnate or decline, which could adversely affect the price of our common stock.

Our wholesale distribution business could be adversely affected if we are not able to affiliate new customers, increase sales to existing customers or retain existing customers, or if our wholesale customers fail to perform.

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The inability to attract new customers or the loss of existing customers to a competing wholesaler or due to retail closure, vertical integration by an existing customer converting to self-distribution, or industry consolidation may negatively impact our sales and operating margins.

Our success also relies in part on the financial success and cooperation of our wholesale customers.

Our success also depends in part on the financial success and cooperation of our wholesale customers.

These wholesale customers manage their businesses independently and, therefore, are responsible for the day-to-day operation of their stores.

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While we seek to obtain security interests and other credit support in connection with the financial accommodations we extend, such collateral may not be sufficient to cover our exposure.

Additionally, we sometimes enter into wholesale customer support arrangements to guaranty or subsidize real estate obligations, which make us contingently liable in the event our wholesale customers default.

Additionally, in the past we have entered into wholesale customer support arrangements to guaranty or subsidize real estate obligations, which make us contingently liable in the event our wholesale customers default.

If sales trends or profitability worsen for wholesale customers, their financial results may deteriorate, which could result in, among other things, lost business for us, delayed or reduced payments to us or defaults on payments or other liabilities owed by wholesale customers to us, any of which could adversely impact our financial condition and results of operations, as well as our ability to grow our wholesale business.

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We manage these programs to maintain or improve our margins and increase sales.

A reduction or change in promotional spending by our suppliers (including as a result of increased demand for natural and organic products) could have a significant impact on our profitability.

Recently, we have experienced a reduction in promotional spending and payment of slotting fees for new products by our suppliers as a result of the COVID-19 pandemic, and we may experience further reductions or changes in promotional spending (including as a result of increased demand for natural and organic products) which could have a significant impact on our profitability.

We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices, and recently we have experienced a higher than anticipated level of vendor out-of-stocks, which may expose us to reduced fill rates with our customers, resulting in higher costs, fees, or penalties, and therefore lower margins.

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Although our purchasing volume can provide benefits when dealing with suppliers, suppliers may not provide the products needed by us in the quantities and at the prices requested.

For example, we have experienced, and continue to experience, higher than usual levels of out-of-stocks leading to reduced fill rates during the COVID-19 pandemic.

We are also subject to delays caused by interruption in production and increases in product costs based on conditions outside of our control.

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In that case, our business, financial condition or results of operations could be materially and adversely affected.

We have experienced losses due to the uncollectability of accounts receivable in the past and could experience increases in such losses in the future if our customers are unable to timely pay their debts to us.

We have experienced losses due to the uncollectability of accounts and notes receivable in the past and could experience increases in such losses in the future if our customers are unable to timely pay their debts to us.

Certain of our customers have from time to time experienced bankruptcy, insolvency, or an inability to pay their debts to us as they come due.

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Significant customer bankruptcies could further adversely affect our revenues and increase our operating expenses by requiring larger provisions for bad debt.

For example, we incurred significant bad debt expense in the second quarter of fiscal 2020 as a result of three customer bankruptcies.

In addition, even when our contracts with these customers are not rejected, if customers are unable to meet their obligations on a timely basis, it could adversely affect our ability to collect receivables.

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Consequently, the ability of such businesses to repay their obligations to us may deteriorate, and in some cases this deterioration may occur quickly, which could materially and adversely impact our business, financial condition, or results of operations.

Our business strategy of increasing our sales of fresh, perishable items, which we accelerated with our acquisitions of Tony’s, Global Organic and Nor-Cal and which should be facilitated by the Supervalu acquisition, may not produce the results that we expect.

A key element of our current growth strategy is to increase the amount of fresh, perishable products that we distribute.

We believe that the ability to distribute these products that are typically found in the perimeter of our customers’ stores, in addition to the products we have historically distributed, will differentiate us from our competitors and increase demand for our products.

We accelerated this strategy with our acquisitions of Tony’s, Global Organic/Specialty Source, Inc.

and related affiliates, and Nor-Cal, and most importantly Supervalu.

If we are unable to grow this portion of our business and manage that growth effectively, our business, financial condition, or results of operations may be materially and adversely affected, or we may not be able to fully realize the benefits of the Supervalu acquisition.

We face risks related to labor relations, labor costs, and the availability of qualified labor.

As of August 3, 2019, approximately 4,800 of our 19,000 employees (approximately 25.3% ) were covered by 46 collective bargaining agreements, including agreements under negotiation, which expire through April 2023, including 37 collective bargaining agreements assumed in our acquisition of Supervalu.

As of August 1, 2020, approximately 11,800 of our 28,300 employees (approximately 42%) were covered by 51 collective bargaining agreements, including agreements under negotiation, which expire through August 2026, including 37 collective bargaining agreements assumed in our acquisition of Supervalu.

If we are not able to renew these agreements or are required to make significant changes to these agreements that are unfavorable to us, our relationship with these employees may become fractured, work stoppages could occur or we may incur additional expenses which could have a material adverse effect on our business, financial condition, or results of operations.

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Recruiting and retention efforts, and actions to increase productivity, may not be successful, and we could encounter a shortage of qualified labor in the future.

Such a shortage could potentially increase labor costs, reduce profitability or decrease our ability to effectively serve customers.

Such a shortage could potentially increase labor

costs, reduce profitability or decrease our ability to effectively serve customers.

We are undertaking efforts to automate certain functions of our business.

If we are unable to realize our efforts to improve labor efficiency through automation, or increase productivity and efficiency through other methods, including as a result of delays in executing our business transformation and integration efforts, we may be more susceptible to labor shortages than our competitors.

If we are unable to realize the anticipated benefits of our efforts to improve labor efficiency through automation or to increase productivity and efficiency through other methods, including as a result of delays in executing our business transformation and integration efforts, we may be more susceptible to labor shortages than our competitors.

Disruptions to our or third-party information technology systems, including cyber-attacks and security breaches, and the costs of maintaining secure and effective information technology systems could negatively affect our business and results of operations.

The efficient operation of our businesses is highly dependent on computer hardware and software systems, including customized information technology systems.

Additionally, our businesses increasingly involve the receipt, storage and transmission of sensitive data, including personal information about our customers, employees, and vendors and our proprietary business information.

We also share information with vendors.

Information systems are vulnerable to not functioning as designed and to disruptions and security breaches by computer hackers and cyber terrorists.

Although we continue to take actions to strengthen the security of our information technology systems, these measures and technology may not adequately anticipate or prevent security breaches in the future or we may not be able to timely implement these measures and technology.

Cyber-attacks are rapidly evolving and becoming increasingly frequent, sophisticated and difficult to detect.

The failure to promptly detect, determine the extent of, appropriately respond to, and contain a significant data security attack or breach of our systems or any third-party systems used by us could have a material adverse impact on our business, financial condition, or results of operations.

We could also lose credibility with our customers and suffer damage to our reputation and future sales, including through negative publicity and social media.

In addition, the unavailability of the information systems or failure of these systems or software to perform as anticipated for any reason and any inability to respond to, or recover from, such an event, could disrupt our business, impact our customers and could result in decreased performance, increased overhead costs and increased risk for liability, causing our business and results of operations to suffer.

As a merchant that accepts debit and credit cards for payment, we are subject to the Payment Card Industry Data Security Standard (“PCI DSS”), issued by the PCI Council.

Additionally, we are subject to PCI DSS as a service provider, which is a business entity that is not a payment brand directly involved in the processing, storage or transmission of cardholder data.

PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data.

By accepting debit cards for payment, we are also subject to compliance with American National Standards Institute data encryption standards and payment network security operating guidelines.

The cost of complying with stricter privacy and information security laws, standards and guidelines, including evolving PCI DSS standards, and developing, maintaining, and upgrading technology systems to address future advances in technology, could be significant and we could experience problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems.

Failure to comply with such laws, standards, and guidelines, or payment card industry standards such as accepting Europay, MasterCard and Visa (EMV) transactions, could have a material adverse impact on our business, financial condition, or results of operations.

Our business strategy of increasing our sales of fresh, perishable items, which we accelerated with our acquisition of Supervalu and our prior acquisitions of Tony’s, Global Organic and Nor-Cal, may not produce the results that we expect.

A key element of our current growth strategy is to increase the amount of fresh, perishable products that we distribute.

We accelerated this strategy with our acquisition of Supervalu and, before that, our acquisitions of Tony’s, Global Organic/Specialty Source, Inc.

and related affiliates, and Nor-Cal.

Increases in healthcare, pension, and other costs under the Company’s and multiemployer benefit plans could adversely affect our financial condition and results of operations.

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return on assets held in plans;

changes in actuarial valuations, estimates, assumptions or calculations used to determine our benefit obligations for certain benefit plans, which require the use of significant estimates, including the discount rate, expected long-term rate of return on plan assets, mortality rates and the rates of increase in compensation and healthcare costs;

of increase in compensation and healthcare costs;

for multiemployer plans, the outcome of collective bargaining and actions taken by trustees who manage the plans;

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We expect that increases of unfunded liabilities of these plans would result in increased future payments by us and the other participating employers over the next few years.

Any changes to our pension plans that would impact associates covered by collective bargaining agreements will be subject to negotiation, which may limit our ability to manage our exposure to these plans.

A significant increase to funding requirements could adversely affect our financial condition, results of operations, or cash flows.

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Our ability to decrease costs and increase profits, as well as our ability to serve customers most effectively, depends on the reliability of our technology platform.

We use software and other technology systems, among other things, to generate and select orders, to load and route trucks and to monitor and manage our business on a day-to-day basis.

We use software and other technology systems, among other things, to receive, generate and select orders, to load and route trucks and to monitor and manage our business on a day-to-day basis.

Failure to have adequate computer systems across the enterprise and any disruption to these computer systems could adversely impact our customer service, decrease the volume of our business, and result in increased costs negatively affecting our business, financial condition, or results of operations.

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Moreover, as we implement information technology enhancements, disruptions in our business may be created (including disruption with our customers), which may have a material adverse effect on our business, financial condition, or results of operations.

The efficient operation of our businesses is highly dependent on computer hardware and software systems, including customized information technology systems.

We also share information with vendors.

Information systems are vulnerable to not functioning as designed and to disruptions and security breaches by computer hackers and cyber terrorists.

Cyber-attacks are rapidly evolving and becoming increasingly sophisticated and difficult to detect.

We could also lose credibility with our customers and suffer damage to our reputation and future sales, including through negative publicity and social media.

As a merchant that accepts debit and credit cards for payment, we are subject to the Payment Card Industry Data Security Standard (“PCI DSS”), issued by the PCI Council.

Additionally, we are subject to PCI DSS as a service provider, which is a business entity that is not a payment brand directly involved in the processing, storage or transmission of cardholder data.

PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data.

By accepting debit cards for payment, we are also subject to compliance with American National Standards Institute data encryption standards and payment network security operating guidelines.

We have a significant service relationship with Save-A-Lot, and the wind-down of our relationship with Save-A-Lot could adversely impact our results of operations.

We have provided significant support services to Save-A-Lot since we divested it in December 2016.

We will lose a significant amount of revenue and corresponding operating earnings as a result of this wind down.

We have been executing on our plan to reduce costs, grow our sales and enhance our margins over the past several years, but we may not be able to grow sales quickly enough, further eliminate costs or enhance margins to fully mitigate the lost revenue as the services agreement unwinds.

Failure to execute on our services offering and growth strategy, including making the necessary capital investments for that growth while managing additional cost reductions, could further adversely impact our results of operations.

Our large professional services agreement with Save-A-Lot provides certain rights for the customers.

The services agreement will typically include a fixed term but provide the customer certain termination rights, including in the event of our material breach, and may give the customer certain termination and monetary rights with respect to specified services or service categories in the event we do not perform to

agreed-upon minimum levels of service.

The services agreement will also generally require us to indemnify the customer against third-party claims arising out of the performance of the services under the agreement.

Termination of services agreements, in whole or in part, and in particular the services agreement with Save-A-Lot, could adversely affect our business or results of operations.

Changes in the military commissary system or decreases in governmental funding could negatively impact the sales and operating performance of our military business.

Our wholesale segment sells and distributes grocery products to military commissaries and exchanges in the United States.

The commissary system has experienced material changes as the Defense Commissary Agency has looked to reduce the level of governmental funding required for the system, including to lower prices from suppliers and to offer its own private-label products.

The military food distribution industry already has narrow operating margins making economies of scale critical for distributors.

These changes could have an adverse impact on the sales and operating performance of our military business.

Additionally, our military business faces competition from large national and regional food distributors, as well as smaller food distributors, and the military commissaries and exchanges face competition from low-cost retailers.

Our insurance and self-insurance programs may not be adequate to cover future claims.

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Any such estimates and actuarial projection of losses is subject to a considerable degree of variability.

Among the causes of this variability are changes in benefit levels, medical fee schedules, medical utilization guidelines, severity of injuries and accidents, vocation rehabilitation and apportionment and unpredictable external factors affecting inflation rates, discount rates, rising healthcare costs, litigation trends, legal interpretations, benefit level changes, and actual claim settlement patterns.

If actual losses incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in our consolidated financial statements.

If we suffer a substantial loss that exceeds our self-insurance reserves and any excess insurance coverage, the loss and attendant expenses could harm our business, financial condition, or results of operations.

We have purchased stop-loss coverage from third parties for certain employee healthcare plans, which limits our exposure above the amounts we have self-insured.

Impairment charges for goodwill or other long-lived assets could adversely affect the Company’s financial condition and results of operations.

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Our debt agreements contain restrictive covenants that may limit our operating flexibility.

Our debt agreements, including the loan agreement (the “ABL Loan Agreement”) related to our $2,100 million asset-based revolving credit facility (the “ABL Credit Facility”) entered into on August 30, 2018 and the term loan agreement (the “Term Loan Agreement”) related to our $1,950.0 million term loan facility (the “Term Loan Facility”) entered into in October 2018, contain financial covenants and other restrictions that limit our operating flexibility, limit our flexibility in planning for or reacting to changes in our business.

These restrictions may prevent us from taking actions that we believe would be in the best interest of our

business if we were not subject to these limitations and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted.

Our debt agreements, including the loan agreement (the “ABL Loan Agreement”) related to our $2,100 million asset-based revolving credit facility (the “ABL Credit Facility”) entered into on August 30, 2018, as amended, and the term loan agreement (the “Term Loan Agreement”) related to our $1,950.0 million term loan facility (the “Term Loan Facility”) entered into in October 2018, contain financial covenants and other restrictions that limit our operating flexibility and limit our flexibility in planning for or reacting to changes in our business.

These restrictions may prevent us from taking actions that we believe would be in the best interest of our business if we were not subject to these limitations and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted.

In addition, our ABL Loan Agreement and Term Loan Agreement require that we comply with various financial tests and impose certain restrictions on us, including among other things, restrictions on our ability to incur additional indebtedness, create liens on assets, make loans or investments, or pay dividends.

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We anticipate that capital expenditures will continue to be, and acquisitions may be, important to our growth in the future.

As a result, increases in the cost of capital available to us, which could result from volatility in the credit markets, downgrades of our credit ratings, or the Company not being in compliance with restrictive covenants under our debt agreements, or our inability to access additional capital to finance acquisitions and capital expenditures through borrowed funds could restrict our ability to grow our business organically or through acquisitions, which could have a material adverse effect on our business, financial condition, or results of operations.

As a result, increases in the cost of capital available to us, which could result from volatility in the credit markets, downgrades of our credit ratings, or our not being in compliance with restrictive covenants under our debt agreements, or our inability to access additional capital to finance acquisitions and capital expenditures through borrowed funds could restrict our ability to grow our business organically or through acquisitions, which could have a material adverse effect on our business, financial condition, or results of operations.

In addition, our profit margins depend on strategic investment buying initiatives, such as discounted bulk purchases, which require spending significant amounts of working capital up-front to purchase products that we then sell over a multi-month time period.

Therefore, increases in the cost of capital available to us or our inability to access additional capital through borrowed funds at economic terms could restrict our ability to engage in strategic investment buying initiatives, which could reduce our profit margins and have a material adverse effect on our business, financial condition, or results of operations.

We have a significant service relationship with Save-A-Lot, and the wind-down of our relationship with Save-A-Lot could adversely impact our results of operations.

We have provided significant support services to Save-A-Lot since Supervalu divested it in December 2016.

We will lose a significant amount of revenue and corresponding operating earnings as a result of the wind-down of our large professional services agreement with Save-A-Lot, which agreement is scheduled to expire in December 2021.

Our services agreement with Save-

A-Lot provides certain rights for the customers.

The services agreement will also generally require us to indemnify the customer against third-party claims arising out of the performance of the services under the agreement.

Termination of services agreements, in whole or in part, and in particular the services agreement with Save-A-Lot, could adversely affect our business or results of operations.

Changes in the military commissary system or decreases in governmental funding could negatively impact the sales and operating performance of our military business.

Our wholesale segment sells and distributes grocery products to military commissaries and exchanges in the United States.

The military food distribution industry already has narrow operating margins making economies of scale critical for distributors.

These changes could have an adverse impact on the sales and operating performance of our military business.

Economic Risks

Pandemics or disease outbreaks, such as the COVID-19 pandemic, may disrupt our business, including among other things, increasing our costs, impacting our supply chain, and driving change in customer and consumer demand for our products, and could have a material adverse impact on our business.

The outbreak of COVID-19 in the United States and Canada had sudden and significant impacts on our industry, including increased demand for the products we distribute as consumers began pantry loading and the consumption of food at home increased due to social distancing and stay-at-home orders.

We have continued to experience elevated demand as consumers continue to eat at home rather than at restaurants, school or work.

While our independent customers have performed well through the COVID-19 pandemic, there is no assurance that increased volume at these customers will be sustained over the long-term.

The increased wholesale customer and end-consumer demand may decrease relative to current levels if and when the need for social distancing, quarantine or isolation measures decreases, and we are unable to predict when and to what extent that may occur.

These measures have also had an adverse impact on the economies of North America.

The ultimate impact of COVID-19 on our business and the economy, and the duration thereof, is uncertain.

Our business may be negatively impacted as a result of the COVID-19 pandemic.

For example, we have incurred, and expect to continue to incur, increased costs, including:

labor costs resulting from overtime, paid sick leave, or leaves of absence;

costs associated with safety measures throughout our facilities, including enhanced sanitation, social distancing practices, such as partitions, decals, pre-shift temperature screenings, and the provision of personal protective equipment to our associates;

costs associated with evaluating and piloting additional safety measures;

and other operating costs due to short-term significant increases in demand spikes.

In addition, we provided our associates with temporary state of emergency wage increases and increased overtime to warehouse, driver, and in-store associates during the peak of the pandemic, and may reinstitute that benefit in the future.

If there were a rapid reduction in demand for the products we distribute, and we were unable to sufficiently reduce these costs, our results may be negatively impacted.

We have experienced higher than usual levels of out-of-stocks leading to reduced fill rates, which may result in higher costs, fees, or penalties.

We have experienced temporary facility closures due to the time required for increased sanitation procedures, and we may experience future facility closures due to outbreaks of COVID-19, reduced workforce or government mandates.

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.

We have experienced declines in certain of our channels as a result of changes in consumer purchasing habits related to COVID-19, including reductions in food service, bulk snacks, seeds and nuts, and international categories.

Changes in consumer purchasing habits, including potential reduced sales to our wholesale customers in the future due to a shift back to food away from home, which may be accelerated following the development and distribution of a vaccine, may negatively impact our results.

Further, the pandemic has accelerated the consumer shift to e-commerce and new ways to purchase food, including increased restaurant and other delivery options, which may negatively impact demand at our retail grocery customers, and which trends may continue beyond the cessation of social distancing practices.

In addition, our business could be negatively impacted by reduced workforces due to illness or other restrictions related to COVID-19;

a shortage of qualified labor to support meeting increased demand;

any failure of third parties on which we rely, including our suppliers, contract manufacturers, contractors and external business partners to meet their obligations to us, or significant disruptions in their ability to do so;

or diversion of management’s attention, including

if any key employee becomes ill, and resources primarily focused on reducing operating expenses being redirected.

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.

We cannot predict the duration of the impact of COVID-19 or any related policies, such as stay-at-home orders or business or school closures.

Our inventory and sales levels have stabilized to higher than pre-COVID-19 levels.

If there were a rapid reduction in demand for the products we distribute, our results and cash flows may be negatively impacted if we are unable to monetize working capital.

Any of the foregoing factors, or other effects of the COVID-19 pandemic that are not currently foreseeable, could materially increase our costs, negatively impact our sales and damage the Company’s financial condition, results of operations, cash flows and its liquidity position, possibly to a significant degree.

Our efforts to manage and mitigate these factors may be unsuccessful, and the effectiveness of these efforts depends on factors beyond our control.

The ultimate impact of the COVID-19 pandemic on our business will depend on many factors, including, among others, the duration of social distancing, quarantine or isolation measures and whether additional waves of COVID-19 will affect the United States and Canada, our ability and the ability of our suppliers to continue to operate manufacturing facilities and maintain the supply chain without material disruption, and the extent to which macroeconomic conditions resulting from the pandemic and the pace of the subsequent recovery may impact consumer eating and purchasing habits.

We cannot predict the duration or scope of the disruption.

Therefore, the ultimate financial impact cannot be reasonably estimated at this time.

Our high level of debt makes us more sensitive to the effects of economic downturns and could adversely affect our business.

To finance the acquisition of Supervalu, we incurred or assumed approximately $3.5 billion of indebtedness, including indebtedness incurred to refinance Supervalu’s and our then existing debt.

To finance the acquisition of Supervalu, we incurred or assumed significant indebtedness, including indebtedness incurred to refinance Supervalu’s and our then existing debt, and as of August 1, 2020, we had approximately $2.50 billion of long-term debt outstanding.

Our leverage, and any increase therein, could have important potential consequences, including, but not limited to:

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Our operations are sensitive to macroeconomic conditions.

The grocery industry is sensitive to national and regional economic conditions and the demand for the products that we distribute may be adversely affected from time to time by economic downturns that impact consumer spending, including discretionary spending, as well as general trends impacting the grocery retail business.

Future economic conditions such as employment levels, business conditions, housing starts, interest rates, inflation rates, energy and fuel costs, and tax rates could reduce consumer spending or change consumer purchasing habits.

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We do not enter into fuel hedge contracts for speculative purposes.

We have in the past, and may in the future, periodically enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements at fixed prices.

As of August 3, 2019, we had no forward diesel fuel commitments.

We periodically enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements at fixed prices.

We also maintain a fuel surcharge program which allows us to pass some of our higher fuel costs through to our customers.

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Disruption of our distribution network or to the operations of our customers could adversely affect our business.

Damage or disruption to our distribution capabilities due to weather, including extreme or prolonged weather conditions, natural disaster, fire, terrorism, pandemic, strikes, product recalls or safety concerns generally, crop conditions, availability of key commodities, regulatory actions, disruptions in technology, the financial and/or operational instability of key suppliers, performance by outsourced service providers, transportation interruptions, labor supply or stoppages or vendor defaults or disputes, or other

reasons could impair our ability to distribute our products.

Damage or disruption to our distribution capabilities due to weather, including extreme or prolonged weather conditions, natural disaster, fire, civil unrest, terrorism, pandemic, strikes, product recalls or safety concerns generally, crop conditions, availability of key commodities, regulatory actions, disruptions in technology, the financial and/or operational instability of key suppliers, performance by outsourced service providers, transportation interruptions, labor supply or stoppages or vendor defaults or disputes, or other reasons could impair our ability to distribute our products.

For example, we have both distribution centers and retail stores

in cities and states where civil unrest has led to extensive property damage.

Further civil unrest and damage to our real and personal property, or our customers’ locations, could have an adverse impact to our business.

To the extent that we are unable, or it is not financially feasible, to mitigate the likelihood or potential impact of such events, or to manage effectively such events if they occur, there could be an adverse effect on our business, financial condition or results of operations.

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Accordingly, laws and regulations affecting the importation and taxation of goods, including duties, tariffs and quotas, or changes in the enforcement of those laws and regulations could adversely impact our financial condition and results of operations.

In addition, we are required to comply with laws and regulations governing export controls, and ethical, anti-bribery and similar business practices such as the Foreign Corrupt Practices Act.

Our Canadian operations are similarly subject

to extensive regulation, including the English and French dual labeling requirements applicable to products that we distribute in Canada.

In addition, we are required to comply with laws and regulations governing export controls, and ethical,

anti-bribery and similar business practices such as the Foreign Corrupt Practices Act.

Our Canadian operations are similarly subject to extensive regulation, including the English and French dual labeling requirements applicable to products that we distribute in Canada.

The loss or revocation of any existing licenses, permits, or approvals or the failure to obtain any additional licenses, permits, or approvals in new jurisdictions where we intend to do business could have a material adverse effect on our business, financial condition, or results of operations.

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During the past several years, the United States healthcare industry has been subject to an increase in governmental regulation and audits at both the federal and state levels.

For example, Supervalu received an administrative subpoena issued by the Drug Enforcement Administration requesting, among other things, information on the company’s pharmacy policies and procedures generally, as well as the production of documents that are required to be kept and maintained pursuant to the Controlled Substances Act and its implementing regulations.

For example, in 2019, the Company settled with the Drug Enforcement Administration alleged violations of the Controlled Substances Act relating to an administrative subpoena received by Supervalu that requested, among other things, information on the company’s pharmacy policies and procedures generally, as well as the production of documents that are required to be kept and maintained pursuant to the Controlled Substances Act and its accompanying regulations.

Additionally, the Patient Protection and Affordable Care Act made several significant changes to Medicaid rebates and to reimbursement.

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While we generally seek contractual indemnification and insurance coverage from our suppliers, we might not be able to recover these significant costs from our suppliers.

We may be subject to liability, which could be substantial, because of actual or alleged contamination in products manufactured or sold by us, including products sold by companies before we acquired them.

be subject to liability, which could be substantial, because of actual or alleged contamination in products manufactured or sold by us, including products sold by companies before we acquired them.

In addition, if we were to manufacture or distribute foods that are or are perceived to be unsafe, contaminated, or defective, it may be necessary for us to recall such products, or we may recall products that we determine do not satisfy our quality standards.

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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-K

Item 1A. Risk Factors